Mr. KERRY. Mr. President, I express my genuine appreciation to all the members of the Senate Banking Committee for their hard work, commitment and dedication to resolving the tough and contentious issues surrounding the conference report that we are considering today. It is no exaggeration to suggest that this conference report represents more than 15 years of hard work and perseverance in tackling one of the most important issues in the new economy.
I support the conference report. However, I do so with some reservations about the way the final product was developed and because it does not include a number of important consumer protection provisions. For example, the legislation will pre-empt important state legislation prohibiting certain predatory lending practices that result in poor, vulnerable, elderly homeowners being bilked out of thousands of dollars or, in some cases, losing their homes.
However, I believe enactment of financial modernization is a critical first step toward breaking down barriers to allow financial services companies to provide better services at lower costs to consumers and to help insure American dominance of global finance in the 21st Century.
As we all know, breaking down the walls that separate commercial banking from the insurance and securities industries is of enormous importance to the future of the financial services industry, which has undergone an immense transformation in recent years. Dramatic changes in technology along with historic mergers, consolidations, and acquisitions have reordered the structure of the financial services industry and made the statutory distinctions that have existed in the law until today less and less relevant in the real world.
As a result of these changes, large corporations have begun bypassing traditional financial institutions and accessing capital markets directly. Many large corporations now meet their funding needs by issuing commercial paper, rather than by borrowing from banks. Banks and thrifts are also experiencing increased competition from non-banking institutions that offer a range of financial products and services. During this time, commercial banks have been unable to provide consumers with a number of important financial products and services.
The conference report that the Senate is considering today repeals the Glass-Steagall Act, which has separated banks from securities firms since the 1930s. It also repeals a similar provision that has separated banking and insurance. It will permit the creation of new financial holding companies that could offer banking, insurance, securities and other financial products.
I am very pleased that the Treasury Secretary Summers and Federal Reserve Bank Chairman Alan Greenspan have come to an agreement on the operating subsidiary issue that was included in the conference report. Banks will now be able to choose the corporate structure under which to conduct new non-banking activities--either through an operating subsidiary or through an affiliate. The bill would allow operating subsidiaries to engage in merchant banking activities, but only if the Federal Reserve and the Treasury jointly agree that the activity is permissible. A bank would have to be well capitalized and well managed after deducting its equity investment in an operating subsidiary from its capital in order to take advantage of these new activities. I believe that this compromise will let banks choose their own operating structure and will help maintain safety and soundness in our financial system.
The operating subsidiary provisions also include language that would retain state authority over state chartered bank subsidiaries. Section 121(d)(1) of the final bill provides that nothing in Section 46(d) supersedes the current authority of the FDIC over bank subsidiary activities under Section 24 of the Act. The provision recognizes that, consistent with current and proposed rules of the FDIC, investment authorities of state-chartered bank subsidiaries are not to be restricted to any greater extent that those authorized for a state bank itself. More particularly, in several states, including Massachusetts, state banks have a long history of exercising limited authority to invest in common stocks either directly or through wholly-owned subsidiaries. The FDIC has acknowledged and approved such investment authority through so-called investment subsidiaries. It is my understanding that the newly added Section 46(d) acknowledges and preserves that authority and does not contemplate imposition of additional regulatory requirements or impediments.
I am also glad that the conference report will permit financial institutions to engage in merchant banking activities. This will allow banks to invest in small companies for the purpose of appreciating and ultimately reselling the investment. The merchant banking provisions limit the day-to-day management of companies by financial institutions and the duration of the investment. I am hopeful that these new powers will allow banks to provide more capital for small businesses, which have been leading contributors to the economic growth of our country.
The conference report includes an important limitation on banking and commerce which eliminates the ability of commercial firms to form new unitary thrifts unless they had owned or had applied to own a unitary thrift by May 4, 1999. Under the conference report, current unitary thrift holding companies and their savings association subsidiaries would be able to continue their normal activities. However, future sales of unitary thrift holding companies would not be allowed to commercial firms. Sales would be limited only to financial holding companies.
Building this fence around financial firms to keep them largely isolated from joint ownership with commerce and industry is an extremely important safeguard in this legislation. My first priority as member of the Senate Banking Committee is to maintain the safety and soundness of our financial system to insure that American taxpayer funds are not necessary to bail out our financial institutions. However, we are now in an era in which banks and other firms are becoming ``too big to fail'' where the government will intervene if its collapse would cause a major harm to the economy. With the enactment of this legislation, banks, insurance and securities conglomerates will grow even larger and more intertwined. The failure of any one of these new conglomerates could disrupt our financial system and risk a taxpayer-funded bailout that would dwarf the savings and loan payout. For example, recently the Federal Reserve Bank felt compelled to rescue the Long Term Capital, a hedge fund, even though it was not a federally insured bank.
That is why I strongly supported including a provision that would have required large banks to back some portion of their assets with subordinated debt. Holders of this type of debt would have a strong incentive to monitor each financial institution's level of risk to protect their investment. This approach could also serve as an early warning signal for regulators of banks that are engaged in risky activities. Unfortunately, this requirement was reduced to only a study. I will be working with my colleagues and with federal regulators to address this problem in the future.
I am also very disappointed that the conference report does not include acceptable language regarding mutual insurance companies. Many States currently have laws that restrict the hostile take over of a mutual insurance company that has recently converted to a stock insurer. However, the conference report allows these state laws to be preempted ``so long as such restriction does not have the effect of discriminating, intentionally or unintentionally, against an insured depository institution or an affiliate thereof *.*.*.'' I believe that this language, as currently written, would allow only banks whose takeover attempts were denied by a state insurance commissioner to litigate. The ability to litigate would not be extended to any other potential acquisitor.
This law means that any state restriction of a banking organization's attempts to takeover a demutualizing insurance company could be construed by a court as discrimination against the bank. I believe that this could lead to costly and time consuming litigation for every insurance company that attempts demutualization. Further, if a court were to fail to interpret the word ``discrimination'' narrowly, this new language could essentially end the important state preemption provision only in cases where a bank is the proposed acquisitor. It would not allow other potential acquisitors to litigate.
I am also very concerned about the provision included in the conference report that will allow mutual insurance companies to redomesticate to another state and reorganize into a mutual holding companies or stock companies. I believe that this provision will allow some mutual insurance companies to move to states without adequate consumer protections and could endanger policyholders during a conversion from mutual to stock form.
I am pleased, however, that the conference report includes the PRIME Act, which will provide an opportunity to lend a helping hand to those in need of financial aid and technical assistance so that they can fulfill their personal, family, and community responsibilities. Microenterprise development has
given many a chance to break the cycle of poverty and welfare and move toward individual responsibility and financial independence.
Specifically, the PRIME Act authorizes funding for technical assistance to give microentrepreneurs access to information on developing a business plan, record-keeping, planning, financing and marketing, which are crucial to small business development.
For example, PRIME would augment funds for valuable programs run by Working Capital, located in Massachusetts and a recipient of a Presidential Award for Excellence in Microenterprise Development in 1997. Working Capital currently offers a number of valuable programs to its microenterprise customers which could be augmented by additional funding under PRIME such as providing business credit to microentrepreneurs and providing business education and training on how to draw up business plans and prepare financial projections. These programs instruct microentrepreneurs on how to use these tools in managing their businesses. This type of assistance is crucial to the development of our low-income communities and throughout the United States.
I very much appreciate that the conference report includes a provision to repeal the Savings Bank Provisions in the Bank Holding Company Act. Section 3(f) was added to the Bank Holding Company Act in 1987 to provide a special grant of authority to savings banks, but court decisions and Federal Reserve Board interpretations now make it restrictive for many Massachusetts banks. Repeal of this provision will bring the treatment of Massachusetts savings banks in line with that of other financial institutions.
Mr. President, I also want to emphasize that although I strongly believe that we have to take this first step to toward modernizing our banking industry and although I will support this conference report, I remain committed to strengthening and improving consumer privacy protections and to encouraging greater community investment by financial institutions.
I believe that we can and must do more to safeguard the financial privacy of every American. Every American deserves to control his or her personal financial information. I am concerned that the changes in technology and in the marketplace have diminished every American's ability to safeguard his or her personal financial privacy. The conference report gives customers of financial services companies only limited control over their personal financial information. Customers will now have the right to object to their institutions' sharing their financial data with third parties and will require these institutions to provide notice to customers when they disclose financial information within an affiliate. Fortunately, the conference report does not preempt stronger state privacy laws.
I want to note for the RECORD that I supported stronger privacy protections that would have given every customer the right to see what financial information would be shared with affiliates or third parties. I also supported an opt-in standard for consumers whose financial institution provides their personal financial information to unaffiliated third parties. This provision was supported by 26 state Attorneys General and many others. I will be working with my distinguished colleagues including the Senator from Maryland Mr. SARBANES, as well as Senators BRYAN, SHELBY and others to work on strengthening safeguards to protect the privacy of every American.
All throughout the consideration of this legislation, from the very first meetings of the Banking Committee, through floor consideration and the conference negotiations, Congressional Democrats and the Administration have insisted that the Community Reinvestment Act must be allowed to grow and adapt to the new circumstances being created for the financial industry. Despite the most aggressive, uninformed, and sustained attack on that important law I have ever witnessed, I am happy to say that the new law will reflect this important goal.
The new law established that, as a precondition for any bank to exercise any of the new powers authorized by this legislation, either de novo or through a merger or acquisition, a bank must have a satisfactory CRA rating. This test will be applied each time a bank seeks to take engage in a new activity, so that a bank will have to, as a practical matter, both have and maintain a satisfactory CRA rating to take advantage of the new law. Prior to this agreement, a bank could start up a securities affiliate without any regard to its CRA rating, so this new law is clearly a step forward. That is why Reverend Jesse Jackson and the Local Initiatives Support Corporation (LISC) support the CRA provisions in the bill.
I understand and share the concerns of some of my colleagues who believe that the conference report does not go far enough. Certainly, the alternative that and my fellow Democrats supported would have been more acceptable. However, I believe that this legislation clearly meets the objective of ensuring that CRA remains a central part of every financial institution's operations into the next century.
The conference report would also require certain agreements between a bank and community groups made in connection with CRA to be fully disclosed and would reduce the frequency of CRA compliance exams for certain banks with less than $250 million in assets.
I am concerned that further attempts to weaken the Community Reinvestment Act will occur during the 106th Congress. Let me be absolutely clear: I will strongly oppose any attempts to weaken CRA in any manner whatsoever. CRA is a fundamental tool to insure that all creditworthy Americans, regardless of the neighborhood they live in, regardless of their race or circumstances, have access to the bank loans that are needed to buy a home or start a business. It is a law that breathes life into the rhetoric we all use extolling the virtues of equal opportunity. We cannot and must not return to the days of poverty and desperation borne of bank redlining in too many communities across the nation.
This conference report is far from perfect, but few compromises ever are. A product that represents more than 15 years of hard work and the debates of literally hundreds of individuals and disparate constituencies could hardly represent a perfect product to every side. This report is no different. But I will tell you, and I think almost all of us would agree that in the American system of free enterprise the interests of consumers and industry are best served if we permit competition as long as that competition is fair and does not give any industry or player an advantage over another. I believe that this legislation is an important step in facilitating that competition and it meets that test by allowing every American access to a broader group of financial services at a lower cost. We have a historic chance to provide meaningful financial services reform. I will support the conference report and I urge my colleagues to support it as well. And, remembering as I think we all should, that this legislation represents not an endpoint but a starting point, I would respectfully suggest that we all focus in the months and years ahead on the potential role this Senate can play in helping to create the environment in which financial services work to the best advantage of every American. Our goal should be nothing less.
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