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Attachement to testimony of Chairman Alan Greenspan
H.R. 10, the Financial Services Act of 1998
Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate
June 17, 1998

Attachment 2
Executive Summary H.R. 10

On May 13, 1998, the House of Representatives passed H.R. 10, the Financial Services Act of 1998. This attachment presents an executive summary of H.R. 10.

I. Expanded Powers for Qualifying Bank Holding Companies

  • Repeal of Current Restrictions on Affiliations (Sections 101 and 102). H.R. 10 would repeal those provisions of the Glass-Steagall Act and the Bank Holding Company ("BHC") Act that restrict the ability of bank holding companies to affiliate with securities firms and insurance companies.

  • Financial Holding Companies (Section 103). Bank holding companies that qualify as a "financial holding company" could engage in a broad array of financially-related activities including--
    • Securities underwriting and dealing;
    • Insurance agency and insurance underwriting activities;
    • Merchant banking activities;
    • Any activity in the United States that the Board has found to be usual in connection with banking overseas; and
    • Any other activity that the Board determines to be financial in nature or incidental to financial activities.

    • Criteria to be an FHC. To qualify as a financial holding company, each depository institution subsidiary of the bank holding company must (i) be well capitalized and well managed; (ii) maintain at least a satisfactory CRA rating; and (iii) have a demonstrable record of providing low-cost basic banking services.

    • Failure to Continue to Meet Criteria. An FHC that fails to continue to meet any of the qualifying criteria must divest or terminate its newly authorized financial activities (e.g. merchant banking or insurance or securities underwriting activities) unless the FHC returns to qualified status within certain time periods, typically 180 days.

  • Banking and Commerce (Section 103). H.R. 10 would not permit an FHC to mix banking and commerce (i.e. there would be no commercial "basket"). The bill would permit a company that becomes an FHC through the acquisition of a bank to retain those commercial activities it held as of September 30, 1997, for 10 years after enactment provided that the company at all times derives at least 85 percent of its revenue from financial activities. The Board may extend this 10-year divestiture period for up to an additional 5 years on a case-by-case basis.

  • Elimination of Application Requirements. FHCs may engage de novo, or acquire a company engaged, in any permissible financial activity without the Board's prior approval. The company must provide the Board notice within 30 days after commencing a permissible nonbanking activity or acquiring a permissible nonbanking company.

  • Engaging in Innovative Activities Without Prior Board Review. FHCs may engage in, and acquire companies engaged in, activities that the company reasonably believes are financial in nature (even if the Board has not yet reviewed the activity) so long as the Board has not determined that the activities are not financial. FHCs could not derive more than 5 percent of their revenue from activities conducted under this authority, or have more than 5 percent of their assets or capital devoted to such activities. This authority is designed to allow FHCs to respond quickly to changes in the financial services marketplace and to engage in developing activities without a prior approval process.

  • Prudential Safeguards (Section 114). H.R. 10 authorizes the Board to adopt rules governing relationships between depository institutions and their holding company affiliates if the Board finds that such rules are consistent with the public interest and Federal law. The Board must regularly review any safeguards adopted and modify or eliminate outdated or unnecessary safeguards.

II. Permissible Bank and Operating Subsidiary Activities

  • Holding Company Model. H.R. 10 requires that newly authorized principal activities (e.g. insurance and securities underwriting and merchant banking) be conducted through a nonbank subsidiary of a holding company and not through a subsidiary of an insured bank.

  • Municipal Securities Activities (Section 181). H.R. 10 would allow national banks directly to underwrite and deal in all types of municipal securities.

  • Financial Agency Activities (Section 121). H.R. 10 would authorize subsidiaries of national banks to engage in any financial agency activity, including those listed in H.R. 10 as well as any financial agency activity permitted for FHCs, if the national bank and its depository institution affiliates are well capitalized, well managed and have at least a satisfactory CRA rating. Under this authority, a subsidiary of a national bank could engage in general insurance agency activities nationwide.

  • Other Subsidiaries Prohibited (Section 121). H.R. 10 prohibits subsidiaries of national banks from engaging as principal in any activity that a national bank cannot conduct directly (e.g. insurance underwriting, securities underwriting and dealing, merchant banking, and real estate investment and development). This prohibition would not apply to subsidiaries that a national bank is expressly authorized to control by Federal law, such as Edge Act corporations, small business investment corporations and community development corporations.

  • Parity of Treatment for State Banks (Section 121). H.R. 10 would prohibit subsidiaries of state banks from underwriting bank-ineligible securities. (Subsidiaries of state banks already are prohibited from engaging in insurance underwriting and merchant banking activities.)

III. Umbrella Supervision

  • Board Authority (Section 111). H.R. 10 provides that the Board would be the umbrella supervisor of bank holding companies, including FHCs and WFI holding companies. Under the so-called "Fed-lite" provisions of the bill, the Board would have the authority to require reports from and examine bank holding companies or their subsidiaries, subject to certain limitations.

    • H.R. 10 limits the Board's ability to obtain reports from, examine, or take enforcement action against a functionally regulated subsidiary of a bank holding company, such as a securities broker-dealer or insurance company subsidiary.

    • The Board also is required to defer to the SEC with respect to the interpretation and enforcement of the Federal securities laws, and to state insurance authorities with respect to the interpretation and enforcement of state insurance laws.

    • The Board may not require that an insurance company or broker-dealer subsidiary of a bank holding company provide funds or assets to an affiliated depository institution if the appropriate state insurance authority or the SEC, respectively, determines that the transfer would have a material adverse effect on the financial condition of the insurance company or broker-dealer. (Section 113)

  • Holding Company Capital. The Board would retain the authority to establish consolidated capital adequacy guidelines for all bank holding companies, including FHCs. The Board may not impose capital adequacy requirements on a broker-dealer or insurance company subsidiary of a bank holding company that is in compliance with the capital requirements of its appropriate functional regulator.

IV. Wholesale Financial Institutions

  • New Type of Financial Institution (Section 136). H.R. 10 would authorize the establishment of wholesale financial institutions. WFIs would be prohibited from accepting retail or FDIC-insured deposits, but would have access to the discount window and the payments system.

    • The Board would have supervisory authority for WFIs as would the OCC for nationally chartered WFIs and the state banking authorities for state-chartered WFIs. All WFIs would be subject to the CRA.

  • WFI Holding Companies (Section 131). The Board would serve as the umbrella supervisor of WFI holding companies, and would have similar supervisory authority (reporting and examination) over WFI holding companies as for FHCs. WFI holding companies could not own an insured bank or savings association, other than certain limited-purpose institutions (e.g. a credit card bank).

    • A company that becomes a WFI holding company could retain indefinitely any commercial holdings that the company held as of the date of enactment. Otherwise, WFI holding companies would generally be subject to the same activity and affiliation restrictions applicable to FHCs (i.e. they could engage in, or acquire companies engaged in, only financial activities).

    • The Board may adopt only risk-based capital requirements for WFI holding companies (i.e. no leverage ratio), and must focus any capital requirements on the use by WFI holding companies of debt and other liabilities to fund capital investments in subsidiaries ("double leverage").

V. Insurance Activities of National Banks

  • Agency Activities (Section 121). National banks could continue to engage directly in insurance agency activities in any location with a population of 5,000 or less. National banks also could engage in general insurance agency activities through a subsidiary in any location.

    • For a period of 5 years after the date of enactment, a national bank could commence insurance agency activities in a new state (either directly or through a subsidiary) only by purchasing an existing insurance agency in the state that has been licensed for at least 2 years. (Section 305)

  • Existing Principal Activities (Section 304). National banks also could continue to provide as principal any insurance product that they were authorized to provide as principal as of January 1, 1997. (National banks would be prohibited from providing annuities as principal.)

  • Title Insurance (Section 306). H.R. 10 permits any national bank that is currently engaged in the sale or underwriting of title insurance to continue that activity. H.R. 10 also authorizes any national bank to sell title insurance as agent if state banks located in the same state were authorized to sell title insurance as agent as of January 1, 1997.

    • If a national bank has an affiliate or subsidiary that engages in insurance underwriting, however, the national bank may not engage directly in underwriting or selling title insurance (the activity must be conducted in the affiliate), except the bank may sell title insurance as agent to the extent permitted as of January 1, 1997, for state banks located in the same state.

  • Future Products (Section 304). H.R. 10 establishes a complex procedure for determining whether financial products developed in the future are banking products that may be underwritten by a national bank, or are insurance products that may not be provided by a national bank as principal. In general, national banks would be prohibited from underwriting a product that is classified as insurance by state law unless the product qualifies as a "traditional banking product" and the product does not qualify for special tax treatment as insurance under the IRS Code.

    • Federal courts would be directed to resolve disputes concerning future products without giving "unequal deference" to the positions of the OCC or state insurance authorities.

  • Interplay of Federal and State Law (Section 104). H.R. 10 would preempt any state law that "prevents or significantly interferes" with the ability of an insured depository institution to (1) affiliate with another institution, where the affiliation is permitted by Federal law, or (2) engage in any activity, either directly or in conjunction with an affiliate, that is permissible under Federal law.

    • Bank Insurance Sales and Solicitation Activities. H.R. 10 specifically adopts the Barnett decision, by name, governing the applicability of state law to the insurance sales or solicitation activities of insured depository institutions. The bill also provides that a state law governing insurance sales and solicitations will not be deemed to "prevent or significantly interfere" with the insurance sales and solicitation activities of an insured depository institution if the law is no more restrictive than a specified, existing Illinois statute. (See Appendix A to the attached memorandum for a summary of this Illinois statute.)

  • Consumer Protection Regulations (Section 308). H.R. 10 directs the Federal banking agencies to jointly publish, to the extent appropriate, consumer protection regulations governing the retail sale of insurance products by, or on the premises of, insured depository institutions and WFIs.

VI. Bank Securities Activities

  • Broker-Dealer Registration (Sections 201 and 202). H.R. 10 would repeal the blanket exemption provided banks from the definitions of "broker" and "dealer" in the securities laws. Banks could avoid registering as a broker or dealer only if they limited their securities activities to those permitted under the bill.

    • Exempted Transactions. As a general matter, the bill would allow banks to continue to engage, without registering as a broker or dealer, in securities transactions in connection with their traditional banking activities, including transactions effected in connection with their trust, custody and safekeeping operations. H.R. 10 would also allow banks to engage in up to 500 retail brokerage transactions per year without registering as a broker or dealer.

    • Future Products (Section 206). Banks also could offer and sell, without registering as a broker or dealer, new financial products that are developed in the future unless the SEC determines after a formal rulemaking process that the product is a security.

  • Consumer Protections and Complaint Mechanism (Section 204). H.R. 10 requires that the Federal banking agencies jointly promulgate, after consultation with the SEC, regulations governing the retail sale of securities by insured depository institutions and their affiliates (other than an SEC-registered broker-dealer). The regulations must impose sales practice requirements that are substantially similar to the Rules of Fair Practice of the NASD. The Federal banking agencies also must jointly establish, after consultation with the SEC, procedures for receiving and investigating consumer complaints arising from securities transactions with banks, including a procedure for referring fraud-related complaints to the SEC.

VII. Other Significant Aspects of the Legislation

  • Unitary Thrift Holding Companies (Section 401). H.R. 10 would close the unitary thrift holding company loophole as of March 31, 1998. Companies that apply to acquire a thrift after that date could engage only in financial activities. Existing unitary thrift holding companies would be grandfathered and could continue to engage in any type of financial or commercial activity.

  • Federal Home Loan Bank System. H.R. 10 would significantly expand the ability of the FHLB System to make advances to commercial banks by (i) eliminating restrictions that require FHL Banks to focus their lending on institutions that meet the Qualified Thrift Lender Test, and (ii) relaxing the membership requirements for insured depository institutions. H.R. 10 would also revise the governing structure of the FHLB System.

  • Redomestication of Mutual Insurers. H.R. 10 would allow mutual insurance companies to change their state of incorporation for the purpose of reorganizing into a stock insurer with a mutual holding company. H.R. 10 would also preempt any state law that impedes the redomestication of a mutual insurer or that discriminates against a mutual insurer that has changed its state of incorporation.

  • National Association of Registered Agents and Brokers. H.R. 10 would create a new National Association of Registered Agents and Brokers ("NARAB") to establish uniform criteria for the qualification, training, and continuing education of insurance agents and brokers. Insurance agents and brokers that meet the requirements established by NARAB could sell insurance in any state.

  • CRA Study. H.R. 10 requires the Secretary of the Treasury to conduct a study concerning the impact of the bill on the CRA and to report the study's findings and recommendations to the Congress within 2 years of enactment. The Treasury must consult with the Federal banking agencies and the SEC in conducting the study and preparing the report to Congress.

  • GAO Studies and Reports. H.R. 10 requires that the General Accounting Office: (1) submit an annual report to Congress on market concentration in the financial services industry and the impact of such concentration on consumers; (2) submit a report to Congress within 6 months of enactment on the projected impact of the bill on banks and other financial institutions that have less than $100 million in total assets; and (3) study the benefits of establishing a uniform limit on the fees that may be imposed in connection with the acquisition of financial products.


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Last update: June 17, 1998, 11:00 AM