NR 97-21

                          ORAL STATEMENT

                         Eugene A. Ludwig
                   Comptroller of the Currency

                            Before the

                         Subcommittee on
                 Capital Markets, Securities and
                 Government Sponsored Enterprises

           Committee on Banking and Financial Services
                  U.S. House of Representatives

                          March 5, 1997


Mr. Chairman and members of the Subcommittee, I welcome this
opportunity to offer my views on financial modernization.  I
commend you and your colleagues for exploring this important issue.
I have a prepared statement that I would like to submit for the
record.  I would like to summarize the key points in that statement.

Over the past several decades, Congress has considered numerous
proposals to modernize the laws that govern financial services in
this country.  For various reasons, all these efforts have been
unsuccessful, and as a result, our nation's banks continue to
operate under an antiquated legal and regulatory framework.

This year we have a real opportunity to correct that problem.
Consumers, communities, and the American economy stand to gain a
great deal from meaningful reform.  To achieve that reform, however,
we must move beyond debating how to shuffle the boxes into
which we have tried to cram banks, insurance companies, securities
firms and other financial service providers.

Rather, we need to take a fresh look at the entire legal framework
governing financial services.  Our goal should be to promote  a
vigorously competitive financial marketplace, while safeguarding
the safety and soundness of our financial institutions, fair access
to financial services, and vital consumer protections.

In an age of rapidly changing communications and computer
technology, banks and other financial competitors must have the
flexibility to serve an evolving economy and changing consumer
needs.

This is not just an academic argument.  Government restrictions on
financial institutions that are not clearly justified by safety and
soundness or other public policy concerns hurt the long-term health
of our financial institutions.  Equally important, these restrictions
hurt small banks in particular and the ability of all financial institutions
to meet the needs of consumers, poor people, and small businesses.

Simply stated, absent clearly demonstrable public policy concerns,
it is not government's business to tell financial services
providers how to structure their business.

Obviously, one relevant policy concern is the safety and soundness
of our nation's financial institutions.  Over the past 15 years,we have l
earned through hard experience that effective supervision is our most important tool  to ensure bank safety and soundness. In fact, many -- including myself -- believe that banking problems in the past 15 years resulted from outdated legal restrictions on bank activities, which
pressured banks to take increasingly greater risks or become excessively concentrated in those lines of business that were available to them.

With that experience in mind, a consensus has developed that banks
must be permitted to broaden their activities.  But old habits and
old ways of thinking die hard.  There is no consensus on how banks
should be permitted to structure those activities.

Some argue that banks must be forced to use holding company
affiliates rather than subsidiaries to avoid giving banks an unfair
competitive advantage.  They contend that banks benefit from a kind
of subsidy through federal deposit insurance and participation in
the payments system and discount window, whereas bank holding
companies are less likely to benefit to the same extent.  This
argument simply doesn't stand up to analysis.

First, the best evidence is that no net subsidy exists.  While
banks gain some benefit from deposit insurance and participation
in the payments system and discount window, they are also subject
to significant regulatory burdens, including compliance costs,
examination fees, deposit insurance premiums, FICO bond payments,
and the obligation to hold a portion of their deposits in sterile
reserves.

The FFIEC estimates the cost of regulatory burden for the banking
industry to be at least $9 billion per year -- even without
considering the cost of deposit insurance, foregone interest on
sterile reserves, and interest payments on FICO bonds.  This $9
billion translates into about 30 basis points -- 30 cents for every
$100.  These costs more than offset any net benefit from the safety
net that banks might enjoy -- which, in the case of deposit
insurance, our economists estimate to be about 4 basis points.

Bank behavior is consistent with the economic analyses that show
there is no net subsidy.  If a subsidy existed, we would expect
banks to take full advantage of it in the way they structure their
operations today.  But that's not the case.  Where banks have a
clear choice of how to structure their non-banking operations,
there is no clear pattern.  Banks currently conduct activities such
as mortgage banking and data processing sometimes through a holding
company affiliate, sometimes directly in the bank, and sometimes
in a bank subsidiary.

Nor do banks fund themselves as if a subsidy exists.  If bank-issued debt
is subsidized, we would expect banks to issue all their debt at the bank
level.  Yet many companies issue debt at the holding company level, and sometimes then downstream the funds to the bank.

If insured deposits give banks a significant funding advantage, one
would expect to see uniform reliance on them to raise funds.  In
fact, less than 60 percent of commercial bank assets are backed by
domestic deposits, and foreign deposits range from zero to 61
percent of liabilities at the ten largest banks.

Further, if a funding subsidy existed, we would expect banks to
dominate markets where they are competitors.  In fact, exactly the
opposite is true.  Over the past half century, banks have lost
market share in core banking services, and they certainly do not
dominate new markets for non-traditional bank activities.

Proponents of the funding subsidy argument argue that requiring
banks to provide new services through holding company affiliates
limits the benefits of the subsidy and promotes a more level
playing field.  I disagree.   Even if there were a subsidy, a bank
could pass it up to the holding company to fund an affiliate just
as easily as it could pass it down to fund a subsidiary.

Containment of any theoretical subsidy depends not on where we
place new activities in the financial organization chart, but on
the restrictions we impose on transfers between a bank and its
subsidiaries or affiliates and on vigilant  supervision.  We could
restrict transfer of any subsidy to a bank subsidiary just as
effectively as to a holding company affiliate.

Those who advance the subsidy argument point to the small bond
rating differential between bank debt and holding company debt as
evidence of the alleged funding advantage.  But Standard and Poor's
and Moody's, the rating agencies responsible for this difference,
don't agree.  They say the rating difference reflects the ability
of the federal banking agencies to limit payments from the bank to
the holding company in times of distress rather than a bank safety
net benefit.

Taken to its logical conclusion, the subsidy argument is not just
an argument against giving financial firms the freedom to determine
their own corporate structure.  It is an argument against financial
modernization itself.  Those who make this argument themselves
suggest that there would be no way to prevent at least some benefit
associated with the purported subsidy from leaking to the holding
company and its affiliates.  Thus, in order to truly prevent banking companies from enjoying an unfair advantage, it would be necessary
to confine banks and all their affiliates to a narrow
range of activities.

But we should not let an unsupported hypothesis that banks enjoy
a subsidy dissuade us from pursuing financial modernization.  And
we should not let an unsupported hypothesis dissuade us from
adhering to a fundamental principle that should underlie
modernization:  Financial institutions need the freedom to manage
their activities and structure their operations in a way that best
suits their needs and the needs of their customers.  Allowing these
institutions to engage in new activities on the one hand but
imposing an artificial structure on the other will impede rather
than promote safety and soundness.  It will not limit any more
effectively their use of the alleged subsidy, even if the subsidy
actually existed.  And it will impose substantial costs and
inefficiencies on the financial services industry that limit the
industry's ability to prosper, to serve America's consumers and
communities, and to compete in the global marketplace.

Forcing all financial institutions into a single structure, such
as the bank holding company, would certainly increase costs for
small banks -- in some cases so much that the activities would not
be profitable.  It would deprive all banks of  potential sources
of earnings that could help them weather economic downturns.  And
it would shrink the assets and earnings available to the bank to
meet its obligation under the Community Reinvestment Act to serve
the needs of all its customers, including low- and moderate-income
customers and small businesses.

In the absence of compelling public policy concerns, there is no
justification for government depriving individual institutions of
the freedom to choose how to provide financial services.  There is
every reason for government to leave these decisions to the
discretion of private sector financial institutions.  The result
will be strong, healthy, well-diversified financial institutions
that can weather economic downturns and continue to provide
financial support to the nation's economy and financial services
to the nation's businesses, communities and citizens.

                              # # # For Release Upon Delivery
March 5, 1997
10:00 a.m.

                           TESTIMONY OF
                         EUGENE A. LUDWIG
                   COMPTROLLER OF THE CURRENCY

                            Before the

                         SUBCOMMITTEE ON
                 CAPITAL MARKETS, SECURITIES AND
                GOVERNMENT SPONSORED ENTERPRISES
                              of the
           COMMITTEE ON BANKING AND FINANCIAL SERVICES
                              of the
                  U. S. HOUSE OF REPRESENTATIVES

                          March 5, 1997

Statement required by 12 U.S.C. 250: 

The views expressed herein are those of the Office of the
Comptroller of the Currency and do not necessarily represent the
views of the President.  Mr. Chairman and members of the Subcommittee,
I welcome this opportunity to offer my views on financial modernization. 
I commend your efforts to explore this important issue. 

When we consider that the framework established with the Glass
Steagall Act has endured for over six decades, we must recognize
that any action this Congress takes to reshape the landscape of the
financial services industry could be similarly durable.  Therefore,
as we develop a plan for financial modernization, it is important
to proceed thoughtfully. 

Over the past several decades, Congress has looked at numerous
modernization proposals, but has not acted for a variety of
reasons.  As a consequence, our Nation's banks continue to be
constrained by an antiquated legal and regulatory framework.
Consumers, communities, and the American economy have a great deal
to gain from meaningful reform of that antiquated framework.  We
will not achieve those gains, however, unless we move beyond
debating how to shuffle the boxes into which we attempt to carve
up various parts of the financial services industry.  After sixty
years of laws and regulations that have remained frozen while a
dynamic market has been driven by technological change, we need a
broad reconsideration of the legal framework to promote a robust
competitive marketplace, while maintaining safety and soundness,
fair access to financial services, and vital consumer protections.


In creating a new paradigm for the financial services industry,
Congress must recognize that, just as financial innovation in our
free market economy and interconnected world could not be stopped
by the Glass Steagall Act in 1993, it cannot and should not be
prevented now.  On the contrary, change in the financial markets
today is occurring at a much more rapid pace than at almost any
other time in our history.  If our banks and nonbank providers are
to serve the public, compete globally, and be safe and sound in
this dynamic environment, they must have the flexibility to serve
an evolving economy and changing consumer needs.  As advances
Iincommunications and computer technology continue to increase
competition in international financial services markets, we cannot
afford governmentally imposed burdens that impede competition and
create inefficiencies but serve no public policy purpose.

In my testimony, I first will describe five principles that should
guide financial modernization:  maintaining safety and soundness,
providing fair access and consumer protection, promoting
competition, protecting the role of community banks, and ensuring
that financial firms have the flexibility to organize and operate
their business as they choose.

An important point emerges in the consideration of those
principles:  The government should not constrain the activities
that financial services firms undertake or the way they structure
their businesses without a compelling public policy reason.  Every
financial services firm is unique, and the communities in which
firms operate are different.  Business executives know their firms'
strengths and weaknesses and their operating environments far
better than any lawmaker or regulator.  The best business talents
cannot operate most efficiently and effectively without flexibility
to adapt to their organizations' characteristics and environment.
A one-size-fits-all structure imposed by the government stifles
ingenuity and reduces efficiency.  Banking companies, in
particular, should not be forced to conduct new activities in one
particular way.  Instead, they should have the option of conducting
activities through a bank subsidiary as well as through a holding
company affiliate.

Forcing activities into a holding company affiliate will lead banks
either to shrink or to take on greater risks to maintain earnings,
and the result will be destabilized hollow banks.  Markets for
banking services will be less competitive, and fewer resources will
be available to banks to meet community needs.  Bank customers will
face higher fees, reduced services, and fewer choices.  The many
sectors of the economy that depend on community banks will be
denied the benefits of modernization.  And, in a world in which
financial institutions compete globally, and money can move rapidly
anywhere, cost disadvantages due to excessive regulation may cause
financial activities to move off-shore, weakening U.S. financial
services institutions. 

In the last part of my testimony, I will address the recent argument
that federal deposit insurance, the availability of the discount window,
discount window, and access to the payment system provide a subsidy
to banks that necessitates mandating a holding company structure.
I attach an OCC Economics Working Paper on bank organizational form
and the risks of expanded activities, which demonstrates that the
holding company affiliate structure is not superior to the bank
subsidiary approach for maintaining safety and soundness and
protecting the deposit insurance fund. 
Principles of Financial Modernization

Although it is unquestionably in the public interest to permit
banks to compete fully on a level playing field with nonbank
financial institutions, it is essential that the efforts to
modernize our financial laws be grounded by sound principles.  In
my view, modernization that does not adhere to the following five
principles will do more harm than good.

Maintaining Safety and Soundness

First and foremost, financial modernization must ensure the safety
and soundness of the banking system.  Historically, the federal
government has relied on the banking system to achieve several
important policy goals.  These goals include maintaining the
stability and integrity of the payments system; creating a safe
haven for small savers; providing an adequate flow of credit to
homeowners, small businesses, and farmers; protecting consumers;
and ensuring appropriate investment in local communities.  If the
banking system does not remain vibrant, safe, and sound, the
ability to attain these goals will be threatened.

Effective supervision is the most important tool we have to ensure
the safety and soundness of the banking system.(1) 
Supervisors need to fully understand the risks and combinations of
risks that banks are taking, particularly as banks move into new
or non-traditional lines of business.  In 1995, the OCC adopted
Supervision by Risk, a forward-looking approach that identifies and
focuses our examination resources on those areas that pose the
greatest risk to the bank.  Under Supervision by Risk, our
examiners assess the quantity of risk exposure across the entire
spectrum of a bank's activities and bank management's ability to
identify, measure, monitor, and control risk.  In addition, OCC
examiners and economists monitor developments in the industry and
assess risk by gathering information from examinations, surveys,
reports, and industry comparisons with nonbank competitors.  We
continually review and update our examination procedures to ensure
that our examiners have up-to-date methods for assessing the risks
involved with the various bank products and are able to identify
and respond to risk.

However, effective supervision, by itself, is not enough to
guarantee a safe and sound banking industry.  Ensuring that banks
have the flexibility to adapt to changes in the marketplace is also

                     
(1) Research on the banking crisis of the late 1980s and early 1990s underscores the importance of bank supervision.  See, for example, Joe Peek and Eric Rosengren, "The Use of Capital Ratios to Trigger Intervention in Problem Banks:
Too Little, Too Late," New England Economic Review, Sept/Oct. 1996, who find that because prompt corrective action is based on a lagging indicator of a bank's financial health, it is likely to trigger intervention in problem banks
only after they have been identified by examiners who rely on far more
information than the capital ratio.


critical.  Unnecessary restrictions on banks' activities are likely
to increase their risk profiles for two reasons.  First, as the
opportunities for profit in banks' core lines of business decline
with changes in the marketplace, banks are pressured to take
greater risk within those areas to maintain profitability.  Second,
banks may become excessively concentrated in those lines of
business that are available to them.  Losses in commercial real
estate and agricultural lending in the 1980s are compelling
testimony to the dangers of excessive risk taking and
concentrations in particular market segments.

Access to Financial Services and Consumer Protection

The second principle for financial modernization is that reform
should promote broader access to financial services for all
consumers.  Banks play a special and vital role in the development
and prosperity of all communities, particularly those encompassing
lower- and middle-income Americans.  In addition to providing
credit and other basic consumer financial services, banks often
serve as the primary source of economic development financing and
investment in these neighborhoods.  One potential outcome of
financial modernization is that the "haves" of our society benefit
while the "have nots" are left farther behind.  It is incumbent on
us, as we pursue the modernization of our financial services
industry, to guard against making that possibility a reality.
Financial modernization must not reduce incentives for institutions
to provide broad consumer access to financial services and credit
to all sectors of our society. 

Ensuring fair access also means ensuring the protection of
consumers who use banking services.  New bank activities may offer
customers greater convenience and greater choice, but banks must
take appropriate steps to inform their customers so they can make
intelligent decisions.  Proper disclosures are critical because
customers must understand what products are FDIC-insured, and what
risks they are assuming.  In addition, bank employees must follow
appropriate and fair sales practices when marketing and selling
these products. 

Promoting Competition

The third principle is that financial modernization should promote
competition and increase efficiency within the financial services
industry as a whole -- including banks, securities firms, and
insurance companies alike.  This increased competition should
benefit consumers and businesses through lower costs, increased
access, improved services and greater innovation.   The increased
access to financial services should in turn spur economic
development.  Indeed, recent experience with interstate branching
and banking offers persuasive evidence that removing restrictions
that unnecessarily inhibit competition can promote efficiency and
lower costs to consumers. (2)

Nonbank providers of financial products and services also are
likely to benefit from an expanding market and from the innovation
spurred by competition.  Years ago, the securities industry raised
concerns about bank sales of mutual funds.  However, as banks have
established a foothold in mutual fund sales, the market for mutual
funds has continued to grow.  Although the dramatic increase in the
mutual fund market is due to a variety of factors, I believe bank
involvement in this market has helped the industry reach a broader
customer base and thereby has promoted greater access for consumers
to the securities markets.


Role of Community Banks

The fourth principle is that financial modernization must not
impede community banks from competing in a changing financial
services landscape.  Community banks are a critical part of the
financial services marketplace because they profitably serve the
needs of small businesses and farms and the Nation's small, rural

                    
(2)Economists analyzing the effect of removing geographic restrictions on the
banking system have found that banks have become more cost efficient following
entry by out-of-state banks.  Adkisson, J. Amanda, and Donald R. Fraser, "The
Effect of Geographical Deregulation on Bank Acquisition Premiums," Journal of
Financial Services Research 4: 45-155, 1990; Calem, Paul S. and Leonard I.
Nakamura, "Branch Banking and the Geography of Bank Pricing," Federal Reserve
Board, working paper 95-25, 1995; Laderman, Elizabeth S. and Randall J. Pozdena,
"Interstate Banking and Competition: Evidence from the Behavior of Stock
Returns," Federal Reserve Bank of San Francisco, Economic Review no.2: 32-47,
1991; Savage, Donald T., "Interstate Banking: A Status Report," Board of
Governors, Federal Reserve Bulletin 79: 601-630, 1993; DeYoung, Robert, Iftekhar
Hasan, and Bruce Kirchoff, "Out-of-State Entry and the Cost Efficiency of Local
Commercial Banks," Draft Working Paper, Office of the Comptroller of the
Currency, 1997.  Entry by out-of-state banks can also be a catalyst for new
banks to enter local markets.  Thomas, Christopher R., "The Effect of Interstate
Banking on Competition in Local Florida Banking Markets," Working paper,
University of South Florida, 1991.  Research also indicates that expansion
through branch banking leads to lower prices.  Laderman and Pozdena, 1991;
Marlow, Michael L, "Bank Structure and Mortgage Rates: Implications for
Interstate Banking," Journal of Economics and Business, pp. 135-142, 1982;
Calem, Paul S. and Leonard I. Nakamura, "Branch Banking and the Geography of
Bank Pricing," Federal Reserve Board, Working paper 95-25, 1995.

communities.(3)  Even in the globalized economy of the 21st
century, our small businesses and farms and small communities will
have a continuing need for the services that community banks
provide. 

Many community bankers are concerned that they will be
disadvantaged because financial modernization proposals have been
biased in favor of structures and activities that are economical
or possible only for larger institutions.  We must not impose
unnecessary structural requirements that would effectively preclude
community banks and the customers they serve from reaping the
benefits of modernization.

Flexible Corporate Structure

The fifth principle is that financial modernization must ensure
that financial services providers have the flexibility to choose,
consistent with safety and soundness, the organizational form that
best suits their business plans.  This principle is essential
because it is necessary for the full attainment of the other four
principles. 

Significant benefits flow from allowing this choice.  The strength
of our economy is built on the individual decisions made by
thousands upon thousands of independent entrepreneurs, each with
different visions of the future.  Permitting choice, in and of
itself, adds value.  Businesses have different strengths,
weaknesses, strategies, and cultures.  Those who operate these
businesses day-to-day know better than the government how to
organize themselves to operate most efficiently and effectively.
Absent a convincing public policy reason, it is not government's
role to tell financial services firms how to structure their
business.

Today, banking companies have two basic options for conducting new
banking activities outside the bank -- the holding company
affiliate approach and the bank subsidiary approach.  Safety and
soundness and other public policy goals can be achieved under
either option, and firms should be free to choose the approach that
they believe will best suit their business objective.

Choice in organizational form clearly supports safety and
soundness.  Changes in the marketplace are making traditional
lending and deposit taking less profitable and increasing the
                   
(3) According to June 1995 Call Report data, small banks (under $1 billion in
assets) provided 62 percent and 66 percent of the number and volume,
respectively, of the smallest business loans (under $100,000).

importance of non-traditional, off-balance sheet products and
services.(4)  Imposing unnecessary constraints that force a bank
to offer new products and services only through a holding company
affiliate will limit the bank's ability to respond to changes in
the marketplace, and impose unnecessary costs that limit the bank's
ability to compete.   Either the assets and income stream of the
bank itself will dwindle away, or the bank will feel pressure to
reach ever farther out on the risk curve to attract capital and to
remain in business.  In either case, what will result is a
destabilized hollow bank.  This hollow bank will be less safe and
sound and will charge higher fees, reduce levels of service, offer
fewer choices to customers, and be unable to serve our communities
and the broader financial needs of its customers. 

If, on the other hand, banks have the ability to choose to conduct
newly authorized financial activities in bank subsidiaries, the
result will be stronger and more stable institutions.  U.S. banks
have, for many years, successfully engaged in a variety of
financial services abroad in their overseas branches and in bank
subsidiaries.  Under longstanding authority of the Federal Reserve
Act and other banking laws and regulations, these institutions can
engage in equity underwriting, as well as dealing and investing in
corporate debt securities.  Overseas subsidiaries outperformed the
domestic operations of their companies in each year from 1990
through 1995.

In addition, banks in most G-10 countries,(5) with the notable
exceptions of the United States and Japan, have been engaging in
a broad range of financial services activities, including
                   
(4) Businesses are increasingly bypassing banks and accessing the capital
markets directly.  As an illustration, banks' share of nonfinancial corporate
debt declined from 28 percent in 1975 to 21 percent in 1995.  Banks are facing
competition not only from nonbank financial services companies, such as GE
Capital, Merrill Lynch and General Motors Acceptance Corporation to name a few,
but also from firms that traditionally have not offered financial services, such
as telecommunications and computer companies.  Banks also face greater
competition for retail funding, as consumers have a growing array of
alternatives for their savings.  Mutual funds have become the preferred savings
option for millions of households.  Last year for the first time, total mutual
fund assets surpassed total deposits of the commercial banking system.  As of
the third quarter of 1996, net assets of mutual funds were $3.4 trillion
compared with $3.1 trillion in deposits in FDIC-insured commercial banks.

(5) The G-10, or Group of Ten, includes the governments of nine countries and
the central banks of two others for a total of 11 members.  The members are the
governments of Belgium, Canada, France, Italy, Japan, the Netherlands,
Switzerland, the United Kingdom, the United States, and the central banks of
Germany and Sweden.

underwriting and brokering securities, and insurance, directly in
the bank or in direct subsidiaries of the bank. (6)  This broader
range of activities has not impaired bank safety and soundness.
On the contrary, foreign bank supervisors have told me that income
from non-traditional activities has been a key support for the
safety and soundness of certain banks during periods of financial
stress.

The bank subsidiary approach may have the added advantage of
reducing risk to the government in its role to preserve the
stability of the banking system and to insure deposits.  Earnings
from new activities in a bank subsidiary lowers the probability of
bank failure.  The lower probability of failure results from the
fact that the bank subsidiary's earnings are available to support
the bank in times of distress, but not vice versa.  The bank's
ability to support its subsidiary in times of distress is limited
to its investment in the subsidiary.  Furthermore, the
diversification benefits associated with the conduct of new
activities in a subsidiary can result in a reduction in the
volatility of consolidated bank earnings.(7)  There is a reduced
probability of bank failure which improves the stability of the
banking system, and reduces the potential need to draw upon the
deposit insurance fund to resolve failed institutions. 

Failure to provide the organizational flexibility to conduct new
activities in a bank subsidiary will deprive community banks, and
hence the consumers, small businesses and farms that depend on
those banks, of an essential alternative in an increasingly
competitive marketplace.  Requiring smaller banks to operate under
a cumbersome holding company structure to conduct critical
activities may impose costs and create inefficiencies that make
these activities unprofitable.  These same costs and inefficiencies
may not prevent larger banks from engaging in new activities, but
they will reduce the benefits that consumers would receive from a
less constrained, more efficient marketplace. 
                 

(6)Because of the organizational flexibility that other countries give their
financial services companies, forcing U.S. banks into a holding company
structure is particularly problematic as the financial services marketplace is
increasingly globalized.  A number of U.S. banks have expressed concern that the
holding company approach may disadvantage U.S. banks as they compete with
universal banks, which enjoy the cost advantages of being able to structure
their activities in whatever manner they find most efficient.

(7) See, for example, Peter S. Rose, "Diversification of the Banking Firm," The
Financial Review, vol. 24 (May 1989), pp. 251-280.

Recent experience with intrastate and interstate branching
demonstrates the efficiency gains and consumer benefits of
organizational flexibility.  Research on intracompany mergers finds
that choice of organizational form is an important determinant of
the efficiency of a company's operations.  These mergers enable
banking organizations to streamline their operations and better
serve their customers.(8) 

Finally, organizational flexibility is critical to ensuring fair
access to financial services.  Just as forcing new activities
outside the bank and its subsidiaries impairs safety and soundness,
forcing activities into holding company affiliates has adverse
implications for community reinvestment.  As more activities are
forced out of the bank, fewer resources are available to support
the bank's Community Reinvestment Act (CRA) activities.  By
contrast, earnings from a bank subsidiary flow up to the bank and
remain available for CRA activities.  In addition, regulators
consider the assets of a bank subsidiary when they assess the
capacity of the bank to serve its community.

The Safety Net

On the other side of these powerful arguments in favor of allowing
financial services providers the flexibility to choose their
organizational form, stands a newly minted argument that government
must restrict product innovation to holding company affiliates
because banks are uniquely subsidized.  As I understand this
unfolding argument, the subsidy takes the form of a lower weighted
average cost of funds due to bank access to the federal safety
net.(9)  The proponents of this view assert that this supposed
subsidy may be down-streamed to bank subsidiaries, but is unlikely
to be up-streamed to holding company affiliates.  As a result, they
declare that the bank holding company structure is superior to the
bank subsidiary approach for containing the transfer of the alleged
                       

(8) Robert DeYoung and Gary Whalen, "Is a Consolidated Banking Industry a More Efficient Banking Industry", OCC Quarterly Journal, September, 1994.

(9) The safety net was created as a public policy effort to provide citizens
of the United States with a stable banking system.  Other public policy
decisions have resulted in Federal benefits to other industries, just as other
industries face significant regulatory costs like the banking industry.  For
example, insurance companies have several significant tax benefits, including
the fact that owners of whole life insurance policies can defer taxes on the
accumulation of value without paying an annual tax.  In addition, when the
insured individual dies, generally there is no income tax paid on the insurance
benefits.

subsidy, which must be contained to avoid giving banks a
competitive advantage over other financial services firms.  This
argument is simply wrong and would provide a flawed basis for
designing public policy.

The subsidy argument against organizational choice is incorrect for
two reasons.  First, the best evidence is that banks do not benefit
from any net subsidy because they pay substantial costs in exchange
for their access to the safety net, costs which all available
evidence suggests outweigh any safety net benefit.  Second, the
argument rests on the unsupported assertion that the holding
company structure can contain the alleged subsidy better than the
operating subsidiary approach.

The safety net has three components: access to the Federal Reserve
discount window, final settlement of payments transferred on
Fedwire, and federal deposit insurance.  In recent years, a number
of measures have had the effect of reducing any gross subsidy
arising from discount window access and participation in the
payments system.  For example, the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) tightened the terms
under which a bank can access the discount window.  FDICIA also
expanded access to the discount window to securities firms under
limited situations.  In 1988, the Federal Reserve began imposing
net debit caps on banks' daily Fedwire overdrafts.  Furthermore,
the Federal Reserve started charging fees for daylight overdrafts
in April 1994.(10)

Regarding deposit insurance,(11) preliminary OCC research has found
that the gross subsidy stemming from federal deposit insurance is
roughly 4 basis points (4 cents for every $100).  That amount,   

                   

(10) The Federal Reserve could further adjust its charges for daylight
overdrafts to better reflect the market value of the Fedwire settlement
guarantee it provides.  Moreover, in time, as technological improvements impact
the payments system, real-time settlement and other advances will decrease the
subsidy received from daylight overdrafts.

(11) Changes have also reduced any subsidy from mis-priced deposit insurance.
In particular, FDICIA mandated risk-related deposit insurance premiums to
require such premiums to be based on the financial institution's perceived level
of risk to the insurance fund.  In this way, deposit insurance pricing has begun
to emulate practices employed by the market.  As a result, the benefit from
underpriced deposit insurance, which is higher for less healthy institutions,
is reduced.  FDICIA also required the FDIC to resolve failed banks at the least
cost to the deposit insurance funds.  Finally, the regulatory agencies have
adopted minimum capital standards and tied capital requirements to risk.


however, is more than offset by the corresponding costs that banks
bear, estimates of which range on the order of 22 to 30 basis
points.(12)

Some of these costs are more easily measured than others, but they
are all very real.  They include assessments for examination by
Federal and state regulators, forgone interest on sterile reserves,
interest on FICO bonds, deposit insurance premiums, and the myriad
costs of regulation.(13)  Indeed, Congressional concern over
whether regulatory costs are excessive has been the focus of
several hearings and much Congressional testimony in the last five
years.(14)

Even more persuasive than estimates of the costs and benefits is
the fact that banks do not behave as though there is a subsidy.
If banks benefited from a subsidy, one would expect them to conduct
their business in a way to exploit fully that subsidy.  We do not
see such skewed behavior. 

For example, if bank-issued debt were subsidized, one would expect
to see banking organizations issue debt exclusively at the bank
level.  Instead, one finds a mix of bank and holding company debt

                  

(12) According to OCC calculations, the median gross subsidy stemming solely
from deposit insurance was roughly 4 basis points for the top 50 banking
companies in the U.S. as of June 30, 1996.  This value is derived using a
standard option pricing model.  Using the lower bound of the estimate of the
regulatory cost burden on banks contained in the 1992 FFIEC study (six percent
of noninterest expenses), the median value of the implied net deposit insurance
subsidy for these banks is in the range of a negative 18 to 26 basis points.
In other words, rather than a subsidy, there is a net cost to banks of 18 to 26
basis points.  It is important to note that these are conservative estimates
that do not include costs associated with maintaining required reserves or
interest payments on FICO bonds, which were issued in 1989 to cover costs
associated with failures in the thrift industry.

(13) Banks are subject to a number of regulations, including operational
limitations for safety and soundness reasons, as well as for consumer
protection.  There are entry and exit requirements, and regulations on
geographic and product expansion.  Banks are examined on a regular basis for
safety and soundness, compliance, fiduciary activities, and information systems.

(14) Since 1991, when Congress directed the FFIEC to identify unnecessary
regulatory burdens imposed on depository institutions, Congress has held
approximately a dozen hearings on this topic.
issuances.(15)  Also, if the deposit insurance subsidy were
important, we would expect to see nearly uniform reliance by banks
on insured deposits.  In fact, less than sixty percent of
commercial bank assets are supported by domestic deposits, and we
observe significant differences in how banks fund themselves.  For
the ten largest commercial banks, as of September 1996, domestic
deposits range from 5 percent of liabilities to 90 percent.
Foreign deposits at those banks, which are not insured, compose up
to 61 percent of liabilities.(16)

Likewise, if banks benefited from a subsidy not available to the
holding company, one would expect to see activities located in bank
subsidiaries rather than in bank holding company affiliates, when
such a choice is permissible.  Again, real world evidence provides
no indication that a subsidy exists.  For example, banks can locate
their mortgage banking operations in a bank, a bank subsidiary, or
in an affiliate of a holding company.  Of the top twenty bank
holding companies, six conduct mortgage banking operations in a
holding company affiliate, nine conduct mortgage banking activities
in the bank or bank subsidiaries, and five conduct mortgage lending
through a combination of the bank and holding company.  Similarly,
the table below demonstrates that other activities -- such as
consumer finance, leasing and data processing -- are found in both
holding company affiliates and bank subsidiaries.


                    

(15) Some have argued that the small bond rating differential between bank debt
and holding company debt, which under current market conditions results in bank
borrowing costs that are 4 to 7 basis points lower than bank holding company
borrowing costs, is evidence of a subsidy.  That view is incorrect.  The two
primary rating agencies, Standard and Poor's and Moody's, explain that the
rating difference is due to the ability of the federal banking agencies to limit
payment to the bank from the holding company.  They also note that there is
little reason to believe that the safety net plays a substantive role in the
ratings differential between banks and holding companies.  There are other
reasons bank debt may be rated more highly than its parent's, such as that a
bank holding company is dependent on its subsidiaries' earnings power.

(16)Call Report data as of September 1996.
    Most Common Nonbank Affiliates of Bank Holding Companies
and Subsidiaries of Banks: 1996 (17)

Type of Nonbank Subsidiary    Number of Subsidiaries,  Number of
                         Bank Holding Companies        Subsidiaries,
                                                       Banks

Consumer finance                         318                      124
Leasing personal or                      191                      365
         real property
Mortgage banking                        129                      201
Data processing                            123                       96
Insurance agency or                      72                       74
       brokerage services (18)
Commercial finance                        46                       39


Other evidence also argues against the existence of any meaningful
subsidy for banks.  In offering many of the activities shown in the
table above, banks compete side-by-side with nonbank providers.
If banks had a competitive advantage they should dominate over
other providers.  However, in many fields nonbank providers have
a bigger market share than banks.(19)  In addition, if banks had
a competitive advantage, one would expect to see abnormal profits
and growth in market share or other evidence of an unlevel playing
field.(20)  In fact, bank profits, while strong in recent years,
are not disproportionately higher than other competitors in the
financial services industry.(21)

                   

(17) Data as of September 30, 1996.  Includes all direct subsidiaries of the
bank or holding company.  All banks in this analysis were members of holding
companies.  Source: Federal Reserve Board National Information Center.

(18)Insurance agency or brokerage services related to credit insurance.

(19) As of December 1996, two out of the top five largest mortgage servicing
companies are nonbanks.  Source: Inside Mortgage Finance.

(20) In its 1987 ruling, "Order Approving Activities of Citicorp, J.P. Morgan,
and Bankers Trust to Engage in Limited Underwriting and Dealing in Certain
Securities, Legal Developments," the Federal Reserve Board stated, "the Board
notes that banks do not dominate the markets for bank-eligible securities,
suggesting that the alleged funding advantages for banks are not a significant
competitive factor." 

(21) According to data presented in the Property/Casualty Fact Book published
by the Insurance Information Institute, banks, on average, had a lower annual
rate of return than diversified financial services firms for the period 1984
through 1993, the last year for which comparable data are available.


Also, banks' market share, measured by income-based data, has
remained flat.(22)  There simply is no evidence of a subsidy.(23)

The second flaw in the argument regarding the safety net subsidy
is that there is no evidence that the bank holding company
structure is more effective than the bank subsidiary approach for
restricting the transference of the alleged subsidy.  Proponents
of the holding company affiliate approach note that bank profits
have not been channeled up through the holding company and back
down to affiliates in the past.  No one can know if this is
actually true.  Since money is fungible, no one can determine
definitively the source of the affiliates' funds.  Furthermore, if
broader activities are permitted to affiliates through financial
modernization legislation, past behavior may well prove irrelevant.
As the range of activities that bank holding companies could
conduct increases, there will be greater incentive to use bank
profits to fund activities of nonbank affiliates. 

Containment of any theoretical subsidy will depend not on where we
place new activities in the financial organization chart but on the
restrictions imposed on transfers between a bank and its
subsidiaries or affiliates and on supervision.  Restrictions can
be fashioned to limit transfer of any subsidy to a bank subsidiary
as effectively as a holding company affiliate. 

In fact, under current rules, the bank subsidiary structure may
provide better protection against extending the supposed subsidy
beyond the bank.  The OCC's Part 5 regulation imposes on
transactions between a bank and a bank subsidiary engaged, as
                 

(22) George Kaufman and Larry Mote, "Is Banking a Declining Industry?  A
Historical Perspective," Economic Perspectives, Federal Reserve Bank of Chicago
(May/June 1994), pp 2-21.

(23) Although proponents of the holding company affiliate structure point to the
fact that banking companies have lower equity ratios than finance companies as
evidence of a subsidy, the difference in equity ratios does not support that
conclusion.  First, banks do not uniformly have lower equity-to-asset ratios
than their nonbank competitors.  Large finance companies and some large
insurance companies, on average, have higher equity-to-asset ratios than large
bank holding companies.  In contrast, most large brokerage firms are more
leveraged than large bank holding companies.  In any event, to make meaningful
comparisons of equity-to-asset ratios, one needs information about the risk
profiles of the institutions being compared.  For example, two institutions
could be engaged in very different lines of business, resulting in distinct risk
profiles.  One institution would have a higher equity to asset ratio, because
it holds much riskier assets in its portfolio than the other institution.
Merely comparing the institutions' equity ratios is insufficient.

principal, in an activity not permitted for the bank the same
limitations as those applied by sections 23A and 23B of the Federal
Reserve Act to transactions between a bank and its holding company
affiliates.  These limitations apply to investments by a bank in
an operating subsidiary and therefore limit investments to 10
percent of the bank's capital.

Furthermore, the OCC's regulation permits only well capitalized
banks to make such investments.  On the other hand, neither
sections 23A and 23B nor any comparable restrictions apply to
payment of dividends by a bank to its holding company, and banks
need only be adequately capitalized to pay dividends without
restrictions.  Thus, as long there are adequate earnings, there is
no limit on the amount of funds an adequately capitalized bank can
upstream to the holding company to capitalize a holding company
affiliate, but there is a limit on the amount of funds a bank can
downstream to a subsidiary.

Indeed, proponents of the holding company approach themselves
suggest that there would be no way to prevent at least some benefit
associated with the subsidy they assert that banks enjoy from
leaking to its holding company and affiliates.  Thus, if one
accepts the argument that banks benefit from a subsidy, and that
this advantage should not be used in the marketplace, the logical
conclusion is to reject financial modernization altogether and to
limit banks and all of their affiliated companies to a narrow range
of activities.

Fortunately, in light of the evidence, this counterproductive
approach is not necessary.  In fact, there is no sound public
policy reason to limit a banking company from engaging in a wide
range of financial activities or to constrain its choice of
corporate structures for conducting those activities.

Conclusion 

Financial modernization is long overdue, and it is too important
to be sacrificed to an unsupported hypothesis that banks benefit
from a unique subsidy.  Instead, financial services reform must be
guided by sound principles:  maintaining safety and soundness,
furthering fair access and consumer protection, promoting
competition, protecting the role of community banks, and ensuring
that financial services firms have the flexibility to organize in
a way that makes business sense.  Any reform enacted by this
Congress is likely to be with us for many decades to come.  In an
increasingly competitive and global financial system, American
consumers, their communities, and our economy cannot afford another
half century of unnecessary burdens on the financial services
industry.  I urge you to build a new legal framework that gives the
financial services industry the flexibility it needs to evolve with
a changing economy and changing consumer needs.

THE NON-FUNCTIONING OF GOVERNMENT THAT LED TO THE FINANCIAL IMPLOSION OF THE UNITED STATES AND A WORLDWIDE RECESSION DUE TO MASSIVE MONETARY MANIPULATION AND FRAUD FOR THE GAIN OF JUST A FEW ON A SCALE THE WORLD HAS NEVER KNOWN, TO THE SHAME OF CAPITALISM AS WELL AS THE REPUTATION OF THE U.S., HAS LEFT THE UNITED STATES IN A CONDITION FAR WORSE THAN ANY TERRORIST ORGANIZATION COULD DO.

PERHAPS INNOVATION SHOULD REPLACE REPETITION, AND MORALITY REPLACE IMMORALITY IN THE HALLS OF LEGISLATURES AND BOARDROOMS.  IT HAS NEVER WORKED, AND IS NOT WORKING NOW.  THE WORLD IS WATCHING.
                                                              - Thomas Alcott

TWO HUGE BANKING SYSTEM FAILURES IN THE LAST 20 YEARS.  WE HAVE BECOME AS UNSTABLE AS THE THIRD WORLD COUNTRIES OF THE FIRST 60 YEARS OF THE 20TH CENTURY.

IF YOU HAVE HAD A BAD EXPERIENCE WITH A BANK OR LOAN SERVICER or government agency - ANY OF THEM - LET US KNOW

           800 562-6776

opppps !

..IT SEEMS "WELLS" WHO OPERATES AMERICAS SERVICING COMPANY OUT OF THE HEADQUARTERS OF WELLS FARGO HOME MORTGAGE, INC AND CLAIMS ASC IS A DBA OF IT'S MORTGAGE COMPANY - WHICH ALSO
OPERATES OUT OF THE SAME BUILDING AS WELLS ITSELF, NEGLECTED TO REGISTER EVEN ITS WELLS FARGO HOME MORTGAGE, INC. OPERATIONS WITH THE O.C.C. - EXCEPT IN HAWAII.

IS THIS ANY WAY TO RUN A BANK...OR THE O.C.C ????  ASK YOUR PRIVATE LAWYER, YOUR STATE ATTORNEY GENERAL, SECRETARY OF STATE, AND THE U.S. DEPARTMENT OF JUSTICE WHAT RAMIFICATIONS THIS MAY HAVE FOR YOU..... and file complaints with all, as well as with the F.T.C.,  and that this operation falls under 'FTC v Select Portfolio'..... who apparently Wells took over

                              Corporate Decision #2001-26
                                                    October 2001
                                                                

September 7, 2001                                             

Mr. Eugene A. Ludwig
Managing Partner
Promontory Financial Group, LLC
1201 Pennsylvania Avenue, NW, #617
Washington, DC 20004

We know now that the OCC has failed miserably
in ensuring the soundness of the United States
banking system, while ensuring the enrichment
of well placed individuals, both here and abroad.

But this letter should prove fascinating as to
how well they enable, and quickly, certain select
individuals, such as former Comptroller Eugene
Ludwig and his interests: