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Public Hearing on the Financial Services Roundtable's Petition For Rulemaking to Preempt Certain State Laws
May 24, 2005

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Panel 2

MR. KROENER: Thank you Tom. We will go immediately to our next panel. All right. Welcome. We have a distinguished panel of state banking commissioners and superintendents. Superintendent Taylor, you're up first. Welcome.

MS. TAYLOR: Thank you. Thank you very much. First, it may not be clear from my testimony here so I want to get this on the record up front. I fully agree with Mr. Muckenfuss, but -- and I would urge the FDIC to go ahead and do a rule making because I think that the worst thing that could possibly happen is to continue in this era of uncertainty and certainty's a lot better than uncertainty in this concept.

Anyway, good morning. I am Diana Taylor, Superintendent of Banks for the State of New York. I would like to thank Chairman Powell and the FDIC for giving the public the opportunity to comment on the financial services roundtable petition with regard to the OCC preemption and to offer views on the general and specific issues listed by the FDIC.

I'm not going to discuss the substance of the petition, particularly. The point I want to make before this body is that we have a fundamental problem in the world of financial regulation and we need to solve it before serious damage is done to our financial system.

I do not believe that adopting the roundtable's proposals will cure what is wrong with our system. With respect to the very imminently qualified and justifiably worried authors of that petition, I fully support their concerns, but I can't support the proposed solution.

I do believe that it addresses the underlying -- I do not believe that it addresses the underlying problem, which is that the banking world has changed and we are all trying to deal with those changes with unilateral actions.

The effect of those one-sided moves have been to push the system out of balance and barring the OCC's preemption order with another similar action, I think will make the situation worse.

I am just one of 200 or so U.S. regulators of the financial services industry. There are 50 state banking regulators, 50 state insurance regulators, 50 of the various bodies that the states make responsible for the securities business and then there are the federal regulators, the SCC, the OCC, the FRB and the OTS not to mention this body, the FDIC.

It's a given that we all agree on what the regulators' -- our regulators' basic purpose is and that is to make sure that the financial backbone of our country is safe and sound and to provide a level playing field and to protect consumers.

The question is how do we do that in the most efficient and effective manner. The follow up question, of course, is the dual banking system as we know it the best that we can do, and if so, can it be structured better in light of the new powers that Congress has granted to the banks over the last few years.

I will tell you that I think the dual banking system is worth fixing and protecting, but not unless we can update it in a way that make sense for the financial system as a whole. The reality is that the OCC will not roll back the rules it has made and here is why we should not rush in to try to fix this without due deliberation.

I'm not sure it can be so easily fixed, especially because each interested party definition affects us different. What does need to happen is that all of us all together need to address the imbalance that is effecting our regulatory system, the related entities, and the nation's consumers.

How do we do this? We do this by working together, by having public discussions such as this. We have to recognize that we regulators might be part of the problem. We've created such a maze of rules and regulations and law makers have created such a maze of laws and threats of additional rule making and laws that banks and consumers are confused.

There are professionals in the banking industry at this point with titles such as executive vice president for regulatory risk. We, the regulators, have become an element of risk.

A number of factors have brought us to this path, but at their base is the law. Legislation, for example, Riegle-Neal I and II and Grimm-Leach-Bliley forms the basis of the regulation that dictates what financial institutions can and cannot do and where and how they can do it.

The effects of Sarbanes-Oxley are being felt by everyone and in the middle of all of this, we have state legislatures passing laws dealing with regulators and confused banks. I'm going to spare you of some of the middle of this.

Now we have a situation where one group of financial institutions is subject to only the loosest of guidelines while the others, those that are state chartered, must follow the rules that vary markedly from state to state and the consumer has no idea at all what to expect in terms of disclosures, fees, and other important issues.

This is as a result of entities involved doing what they all think is right for their particular constituencies. The OCC protecting the interest of the national chartered banks, the state legislatures trying to protect their voters from various service providers who would sell them products that might not be in their best interest.

But let me remind you that the OCC preemption goes even further to the operating subsidiaries of national banks. This gives us cause for concern in the mortgage and money service business areas.

What self-respecting profit driven financial services business will not want to be owned by a national bank if they can avoid state oversight. The real problem is going to be based on -- the real solution, I'm sorry, is going to be based on honest assessment of where we are now, the regulators and the financial services industry, and what we all realistically see as our goals.

A solution I don't think is to compound what the OCC started by giving every state the right to preempt every other state. We must seek to maintain a system where the laws and regulations are reasonable and consistent and where if they are followed, one is not so constrained as to be able to conduct business.

If consumers must be protected, they must know what to expect when they walk through the door of a bank no matter what the charter or which state the banking entity calls home.

Therefore, it is critical that a means be crafted to establish national standards regarding financial entities and their parent banking organizations along with a very clear understanding of who is responsible for what.

The FDIC has made a great start towards reaching our shared goal of a rational and comprehensive approach. The difficulty is in complexities surrounding the regulation of financial services by opening up this public discussion of the issue.

No one person or entity can solve the problem by themselves. Everyone involved must have a say and be part of the solution. This is not a problem that we can solve parochially or with localized legislative band-aids.

A strong national standard will create the level playing field for the banking industry. Furthermore, mortgage bankers and brokers and money service businesses should not be permitted to hide behind the skirt of national banks.

State regulators and lawmakers should be able to protect their consumers. We must sort this out for the good of all. It's time for all of us to step back and remember why we are here as regulators, to protect the safety and soundness of the banking system, make sure the consumers are treated fairly and to ensure an atmosphere in which our institutions can operate efficiently and effectively.

This is not about any one regulator; it is about the viability and health of the system as a whole. The system that has helped make our country so strong, the financial center of the world is worth it and we all need to work together to bring it back in to balance. Thank you.

MR. KROENER: Thank you. Commissioner Sorrell.

COMMISSIONER SORRELL: Thank you Mr. Kroener. Good morning. I'm David Sorrell, Commissioner of the Georgia Department of Banking and Finance. In my position I'm responsible for regulating 275 banks with assets over $200 billion. Eleven of those banks currently operate interstate.

Many others have talked to me about their intentions of looking at the interstate operation of their institutions. The Utah Commissioner of Financial Institutions has expressed to me Utah's support for the Georgia testimony. I am pleased to add G. Edward Leery as an additional signer for the Georgia position.

I would like to thank the FDIC for proposing a public hearing on this important issue. It is a matter of major importance to the dual banking system and I also thank the financial roundtable for petitioning the FDIC on this issue.

I am here today to express our department's support for the roundtable's petition for FDIC rule making in areas that we feel will provide interstate banking parity for insured state banks.

Our department knows the downside risk of this rule making is interpreted preemption of state law, however, we are deeply concerned regarding the competitive and balance that has been created between the interstate state charter and the national charter because of the recent preemption of state laws by the Office of the Comptroller of the Currency.

Several states have instituted legal action regarding the preemption of their state laws. We believe that our views on parity reflects support of the actions taken by these states, several of which are currently under appeal.

Georgia too has litigated preemption issues to enforce state law. However, our concerns remain focused on maintaining the viability and competitiveness of the state charter, especially one that operates in the interstate stakings, a banking environment.

In doing so, the strength and viability of the dual chartering assistance for all banks is maintained. I will address the petition in three ways. First, by making some general observations of the environment and the current environment in this area.

Two, by addressing the general questions the FDIC asked to be addressed by the public and three, finally by commenting on the roundtable's petition's main rule making request.

First, some general observations about the current environment. First, the dual banking system is out of balance because of the broad OCC rule making of 2004 that preempted most state laws as they relate to the activities of the national banks and their subsidiaries.

Secondly, most banks in Georgia do not want the OCC preemption rolled back, but they want the state charter to have parity with the federal charter. In other words, they want the dual banking system rebalanced.

Thirdly, the FDI Act and FDIC of authority over the activities of state chartered banks and their subsidiaries, FDI Act Sections 24, 27 and 46. Fourth, banking is actively conducted today on an interstate basis with the business model constantly changing.

Fifth, this is an interstate banking issue. The FDI Act has been modified to address interstate banking issues for state chartered banks. Finally, in the observations, interstate banking should be chartered neutral to bring the maximum benefit to the economy.

Some of the general questions that FDIC asked to be addressed by the public. Is the rule making necessary to preserve the dual banking system? FDIC rule making would reestablish order to preserve the functioning dynamic dual banking system by allowing state banks and their subsidiaries the opportunity to compete on par with the activities of their federal counterparts and meeting the banking needs of this country.

If the imbalance is allowed to continue, we have preserved a dual banking system that has the state charter at a competitive disadvantage with less power and effectiveness.

The impact on consumers. Consumers would continue to be protected by home state law and federal law in area where host state law had been properly preempted.

If the level of federal law protection needs to be changed, Congress can change it for the entire system. Perhaps, the EGRPRA study can focus on establishing a federal minimum level of consumer protection to all financial entities operating in that product or activity area.

States understandably concerned about consumer protection minimum standards. What are the implications for state banking regulation and the states legitimate interest on business conducted within their borders?

States would still regulate the activities of the interstate state chartered bank for safety, soundness and compliance with home state law and federal law.

The Georgia Legislature, since the federal preemption of the Georgia Fair Lending Act has looked at proposed consumer protection laws put forth in that body to determine the possibility of federal preemption if that law were enacted.

I believe this is a good review for states to undertake before passing consumer legislation. State banking organizations could operate under a uniform set of laws to conduct their activities with more safety and soundness focused on those activities regardless of the bank's chosen structure. The states are obviously not prohibited from passing more restrictive consumer protective legislation.

Another question, do petition measures achieve competitive balance? Time will tell. The request by the petitioner would in my opinion rebalance the dual banking system more completely.

It would cover for interstate state chartered banks and their subsidiaries, all activities under home state and federal law, which would be known quantities to the state chartered institution similar to the national bank treatment and conditions. We cannot roll back the reality that there is a fully functioning interstate banking system today.

Are there alternative mechanisms that can be used? Congress obviously has the authority to pass additional law to reestablish parity in the dual banking system.

But arguably, Congress has already empowered FDIC, through the FDI Act, to respond to this imbalance. If you want to rebalance the dual system -- banking system forever, federal preemption is neutralized by treating equally both state and national banks that operate in an interstate banking environment through federal law.

States also can pass a law allowing parity on an intrastate basis for state banks not operating interstate. Then a bank, regardless of the charter, preserving that choice of charter is able to compete on par with institutions to serve its customers the best it can.

This ultimately gives the consumers and the banks more options and better products. What is the negative impact of the FDIC adopting a preemptive regulation? I believe the positives of rebalancing the dual banking system for all banks operating interstate outweigh any possible negatives.

Some argue that there will be a race to the bottom and state banks will gravitate to states with little or no consumer protection. I find that argument leaves out the myriad of federal consumer protection laws that already protect every consumer financial products.

Some say the preemption of their own state laws cannot be tolerated. Their state laws are already preempted for national bank subsidiaries operating in their states, why not have parity for interstate state banks subsidiaries, level the playing field.

If the courts or Congress roll back the OCC preemption of 2004, so be it. Both the federal and state charter should be equally impacted. The state and national system of interstate banking should be in equilibrium to best serve all those banks' customers and to maintain true choice in the system.

Does the petition undermine the states' legitimate interest? The states have a legitimate interest in how banks conduct business within their borders. Does that legitimate interest apply equally to interstate, state banks and national banks? Yes, it should.

The OCC preemption of state laws with their broad rule making in 2004 undermined this legitimate interest. The petitioners' request is not the undermining vehicle. That vehicle has already driven through the state law system.

The petitioners' request asks for like entities, interstate, state and national banks, to be treated the same, to protect the system that has served the states in this country well for over 140 years.

Would state banks benefit if the FDIC Act were to act positively on the petition request? Yes. The dual banking system and the choice it provides would be rebalanced. State banks, operating or planning to operate interstate outside of branches are able to execute their business plans the same as a national bank operating interstate.

The major overlay of consumer protection laws are known to the bank and will be enforced by home state and federal bank regulators. Did Congress intend to provide comprehensive parity as stated by the petition?

The testimony given in the 1997 amendment to Riegle-Neal provides full support for maintaining a viable and functioning dual banking system for the benefit of the banks and the benefit of the country.

This amendment to the Riegle-Neal Act of '94 was codified in Section 24 of the FDI Act. The FDIC has been empowered by Congress to make sure the banks in the country are safe and sound in order to maintain confidence in the banking system.

The FDIC, through the FDIC Improvement Act of 1991 was given authority to determine what activities state banks and their subsidiaries, through Sections 24 and 46, could safely and soundly conduct.

In hindsight, the only thing that was not discussed in the Riegle-Neal Amendment in '97 was conducting activities on an interstate basis outside of a branch. I believe if activities rather than branches had been discussed then, we would not be here today since there would be no petition and no imbalance in the dual banking system.

Federal preemption, in effect, would be neutralized in interstate banking. Is there a need for clarification on what law applies to interstate operations of the state banks? By law, a rule there obviously is a need for clarification as the system stands today.

Clarification will produce certainty. The National Banking Act was clarified by rule. If institutions have certainty, all parties benefit. The interstate banking system operates today across the country. Clarity of law promotes the safety and soundness of banks.

Specifically and the petition's specific request, we feel the FDIC has clear authority to make rules on one, parity for interest rate exportation, and two, equality for state and national banks and the activities conducted in other states.

Rule making clarifies and answers questions. It helps avoid costly misunderstanding. To the extent FDIC can, it should also reestablish parity for state bank OPSUBS with national bank OPSUBS on interest rate exportation as established by Section 27 of FDI Act.

Bank OPSUBS are examined with the bank and affect the safety and soundness of the bank since they have a direct liability effect on that bank. Federal treatment of OPSUBS should be consistent regardless of chartered to facilitate the safety and soundness standards of activities conducted in an OPSUB.

This treatment would focus safety and soundness and consumer protection attention to that OPSUB as it should be. FDIC through Sections 24 and 46 has responsibility for the scope of activities of a state bank and its subsidiaries.

They're primarily responsible for the safety and soundness of the entire banking system as a result of the deposit insurance fine. Parity for the activities of banks and their subsidiaries is a natural extension for the FDIC and its overview of providing safety and soundness to the U.S. banking system.

No insured bank should be left behind in its ability to safely and soundly compete. Some comments about the FDIC's role in protecting the dual banking system. Since the FDIC Improvement Act of 1991, bank and bank subsidiary activities have been governed by federal law, the National Banking Act and the FDI Act, Sections 24 and 46.

The FDIC Improvement Act established the natural bias to Congress of allowing the OCC to approve national banks to conduct new activities; activities beyond those of a national bank or subsidiary require FDIC permission.

The states' functioning as a laboratory of change in banking is now governed by permission from the FDIC under Sections 24 and 46. The FDIC needs to look at their mission and decide if the mission is just to be reactive and not proactive to banking safety and soundness issues.

Activities of state banks and their subsidiaries are definitely safety and soundness issues. It is important for this nation's banking system as it has been for 140 years to have a viable alternative to federal charters.

The natural consequence of the lack of preemption parity is expected to be a system with large national banks and small state banks. The relative size and importance of the two groups will ultimately adversely affect the smaller state system.

The dual banking system will lose the dynamic forces that make the system work; banks will lose choice, a very valuable item. The FDIC states in every statement that it was created by Congress to maintain the public confidence, safety and soundness.

The FDIC has been very successful in executing this purpose. This petition asks the FDIC to adopt rules addressing five different areas regarding state banks, interstate parity with national banks.

This is a federal issue and it needs a federal response. I urge the FDIC to give clear direction to the petitioners' request for rule making. If the FDIC concludes it cannot adopt rules to clarify and correct this imbalance in the dual banking system, it should recommend these issues to Congress to clarify and correct this imbalance.

In summary, we believe that the intent of federal law, including the FDIC Improvement Act, the Riegle-Neal Act of '94, the Riegle-Neal Amendment of '97, is to maintain the competitive balance between the state and the national charter.

The FDI Act has been amended by each of these congressional acts. The Gramm-Leach-Bliley Act also acts to maintain the competitive balance in the dual banking system and therefore affects it.

By taking the actions proposed by the financial roundtable and their petition the FDIC board will provide consistency between activities conducted through a bank branch and other activities and will reflect the market realities that have occurred in the industry.

We believe that a dual charter exists and it effectively prevents interstate banks from choosing a state charter because of competitive inequality does not serve the interest of banking industry or consumers.

We are appreciative of the opportunity for public input in this matter before the banking system and we do believe the FDIC has authority to reestablish parity in the dual banking system. Thank you very much.

MR. KROENER: Thank you. Secretary Heinemann.

SECRETARY HEINEMANN: Thank you very much Mr. Kroener. My name's Lorrie Keating Heinemann and I'm Secretary of the Department of Financial Institutions in the State of Wisconsin. We currently regulate 231 state chartered banks, 287 credit unions and over 80,000 security representatives.

First of all, thank you for the opportunity to testify before you. I am here in support of the financial services roundtable petition to provide regulatory parity to state chartered financial institutions.

State chartered financial institutions are a strong part of Wisconsin's economy. We have 274 banks in our state and 231 of those are state chartered. We believe this speaks to the high level of service our banks receive from the Wisconsin Department of Financial Institutions.

I'm going to cover four key areas today. First of all, the importance of a competitive dual banking system in our state, the innovation that has developed out of the state charter, our role in consumer protection in our state at the local level and then also congressional intent as it relates to the dual banking system.

First, the importance of competitive dual banking systems. We have submitted testimony to Congress before regarding our strong opposition to the sweeping unilateral preemption by charter granting federal banking agencies.

Since the preemption of our state laws and our oversight threatens to undermine the integrity of the dual banking system. Charter choice for banks serves as an important check and balance system that insures the regulatory approaches at both the state and federal levels.

The contributions of the dual banking system has made for the strength and resilience of our economy are well documented. If other developed countries are to provide an example, centralized banking systems could be a detriment to community banking, small business, the consumer and our economy.

For example, the difficulties experienced by the Japanese Banking System which were overburdened by non-performing loans exacted a serious toll among lost Japanese economic growth.

Given the importance of the competitive dual banking system and the increasing reality of broad federal preemption, we urge the FDIC to adopt the rules to provide parity between state chartered banks and national banks conducting interstate activities.

We believe that these rules are a step towards maintaining the competitiveness of our state charter. A competitive equality deemed necessary by Congress when they passed Riegle-Neal II in 1997.

We do not, however, believe that this is in the best long-term solution as we do think that the future of the dual banking system will need to be addressed by Congress as much in previous testimonies.

Second, innovation. As mentioned by John Allison earlier, one of the main benefits of the dual banking system is that states, given separate regulatory powers, have been able to act as laboratories of innovation for financial institutions that they regulate.

It is much easier to try a new concept out on a smaller scale than to attempt to work out the details for 50 states. Therefore, we have been able to innovate and implement new ideas in a more efficient manner.

A great and recent example of this in our state is the creation of the universal bank certification. Universal bank certification gives parity to Wisconsin's financial institutions.

The creation of this certification was very important because it was a recognition on the part of the Wisconsin Legislature that there needed to be competitive parity for state chartered commercial banks in our state.

We are here today to again discuss parity, only this time not just for our banks and savings institutions in Wisconsin, but it's also to regain parity for state chartered banks with national banks across the nation.

Can there be a more important question for the health and vitality of the nation's banking system as a whole? Without large and strong state chartered institutions there will be no good impetus for state innovation. This we also believe will be a loss to the industry as a whole.

Third, Wisconsin's consumer protection tradition. We are fortunate in Wisconsin to have a long and progressive tradition of consumer protection. One of our unique laws is the Wisconsin Consumer Act which governs consumer credit transactions.

This law has benefited the Wisconsin consumers and our economy for over 30 years. Allowing Wisconsin's state chartered banks to operate under laws serves to benefit all of those customers that they serve around the country as well.

We understand that there may be concerns that if the FDIC does adopt the suggested rules, this will precipitate the race to the bottom and possibly weaken innovative consumer protection laws. We simply do not agree.

First and foremost, state regulators and state legislators are in the business of protecting the citizens of their states. This is one of the key reasons why state regulators and attorneys generals continue to oppose federal preemption so vigorously.

State consumer protection laws apply to a multitude of financial service providers and not only to banks and financial institutions. These consumer protection laws are not going to be eliminated if state chartered banks are given parity to nationally charted banks.

Examples that you may hear regarding a race to the bottom such as credit card banks are just too narrow to be comparable in this case. They're discussing the very basics of how banking organizations will be able to function and operate.

Considerations that are important to the efficient and profitable operations of these banks will determine where they will be located, not what state has the weakest consumer protection laws.

One of the main points of the financial services roundtable petition is to allow state chartered banks the ability to operate with a single set of laws as is allowed for national banks.

If home state consumer protection laws will be the single platform for our Wisconsin banks and for their customers in other states we certainly support this application of parity.

Again, the importance of our banks operating under a single set of laws supervised by one state regulator will be crucial to their success and their ability to be competitive across state lines.

Fourth, congressional impact. We're requesting that the FDIC consider commencing a full rule making process to adopt the concept of the petition.

This will result in the full implementation the Riegle-Neal Interstate Banking and Branching Efficiency Act as envisioned by the U.S. Congress. The intent of Riegle-Neal is to maintain a competitive, responsive, safe and sound banking system with then which a state chartered bank can operate on a multi-state basis.

The intent is to have a system of seamless supervision that state chartered banks are not disadvantaged because they've chosen a state charter. For example, we are currently dealing with a situation in Wisconsin for one of our multi-state chartered banks is being assessed fees by another state they have branches in.

This is contrary to the nationwide cooperative agreement that the states agreed upon in 1996. This state is clearly not allowed under federal preemption to assess to a nationally chartered institution with branches in their state.

Although we have worked with our colleagues in an effort to recognize that their actions are contrary to both the provisions in Riegle-Neal and the nationwide cooperative agreement, it remains an issue.

The FDIC's rule making to establish parity for state chartered banks would further clarify Riegle-Neal and the excessive practices by some state regulators. This would be a great benefit to the dual banking system and the financial market place as a whole.

Keep in mind that Wisconsin has a very successful record of regulating multi-state institutions. We have several very fine institutions that operate on a multi-state basis and as the home state regulator, we have held firmly to the principles of the nationwide cooperative agreement.

As a host state regulator we stand willing and able and have assisted other states in their regulatory efforts while recognizing the home state predominant rule.

We believe that Congress intended to allow state chartered multi-state banks to operate on a uniform platform of laws with one regulator to serve as the single point of contact. By creating this uniform platform we can provide seamless regulation for financial institutions and maintain a competitive dual banking system.

In conclusion, I know that everyone here in this room today is well aware of the statistics relating to the state charter being the choice for de novo banks. De novos choose the state charter because these banks grow and prosper with their local regulators as their partners and they look for opportunities coming over the horizon.

Sometimes this horizon is the border of our neighboring states. Why should these banks have to change their charter that they have been successful with or the way they do business simply because they have stepped over a line on the map.

The Wisconsin Department of Financial Institutions strongly supports the protection of the dual banking system and it's requesting that the FDIC commence rule making to insure state chartered banks with multi-state locations have parity with their nationally chartered counterparts.

Again, I would like to thank the FDIC, financial services roundtable, and my colleagues who are the hearing today for making this discussion possible. We look forward to continuing to work with you to ensure we restore equilibrium between state and nationally chartered banks so we can preserve the strength of the dual banking system. Thank you.

MR. KROENER: Thank you. Deputy Superintendent Reed. Welcome.

DEPUTY SUPERINTENDENT REED: Thank you. I'm Trabo Reed. I'm Deputy Superintendent of the Alabama Banking Department. We regulate 127 banks with $155 billion in total assets that operate in 15 different states, soon to be 19 states.

These banks range in size from $13 million to companies of $84 billion. We have a wide range of experience with interstate branching and banking issues. These -- this experience includes almost weekly exercise in addressing activities by our banks and the application of federal home and host state law to those activities.

In my general comments here I want to focus on some selective questions that we think are very important in this petition and we think they should be addressed up front.

First I want to say we appreciate the opportunity to come talk about parity for state chartered banks and the FDIC addressing the issue. Our department supports the petition.

The important questions among them is one, the first one, is there really an issue, a problem that needs to be addressed and like my counterparts, I agree that the OCC preemption has caused a critical competitive disadvantage for state chartered interstate banks.

Our banks want to remain state chartered. They don't want to be -- convert to national banks, but their business plans, their markets therein change and with every new market, with every new activity in which they engage they have to go through a process of determining which charter works best for those plans and markets.

With the national charter right now, we believe that our banks see more certainty in one set of rules. The greatest problem for our banks is that lack of certainty and that's one of the reasons it's important for the FDIC to act on this petition.

We believe that this petition is the most important issue before the FDIC. We think that it will determine the future of the dual banking system. We need to take steps to restore parity for interstate banks.

If you don't rebalance the dual banking system, state chartered banks aren't going to have a place in what in our view is an evolving nationwide banking system.

It's going to deny interstate banks a choice of charter, and we think a system where a choice is denied harm is done to small, large, national and state banks.

Third issue or question is does the FDIC have the authority to act on this petition and is this the proper venue for addressing these questions.

We believe the FDIC has the authority and is the proper place to address the issues, if not the only place to address the issues other than Congress.

The FDIC should be the arbiter of our interstate questions. It's your law to interpret. Riegle-Neal I, Riegle Neal II are both co-defined in the FDI Act. We haven't had an authoritative source for interpretation or guidance on interstate questions.

As state regulators we've been improvising out there. With Secretary Heinemann's example, I can give you plenty of other examples where something -- a compromise was made which clearly in our opinion violated federal law in Riegle-Neal II.

In other cases where neither, and this is the more prevalent case, neither the host state or the home state knows exactly what is preempted and how Riegle-Neal II applies to that. That's why we're asking the FDIC to step in to a role of arbiter of these questions.

It's very important that we can get answers. Fourth -- our fourth question that we think needs to be addressed up front is what is the real question before the FDIC.

We believe it's simply one of parity. We believe that there's other questions that you can get sidetracked on that you can't answer in the context of this petition. We think they're important questions, they're important concerns and opinions to look at, but the real question here is parity and we ask that that be the overriding focus of your deliberations.

Other questions that we have are what are these important issues that you can't really address in the context of this petition. Two of them are the OCC preemption and this consumer protection question or a race to the bottom in terms of consumer protections.

We think clearly that the FDIC can't deal with the OCC preemption that that's an issue that will be decided through action or lack of action by Congress or the courts.

In terms of the race to the bottom, we believe that you're working within a framework as stated in Riegle-Neal II that says where host state law is preempted for national banks, home state law applies.

We think that the rule making has to be conducted within that framework of law. Race to the bottom, we think is a potential problem. We would request the FDIC gauge delaying a decision on parity over concerns over potential problem versus addressing parity up front and addressing the real problem we see of the widening imbalance in the dual banking system.

Our final question that we think should be addressed up front are what are the really important requests in this petition. To us the really important request, the important issues that you can do something about are activities versus activities with branches.

On activities, we believe that Congress clearly intended to look at this -- Congress clearly intended for state chartered banks to be a part of he nationwide banking system.

We also believe that Congress did not intend for state chartered banks to be limited to a branch delivery system. However that nationwide banking system evolved, we believe it was Congress' intent that state chartered banks be part of that system.

As far as subsidiaries, we realize that that is the major part of the controversy with the OCC preemption, but if your focus is on parity, then the question becomes should a state bank subsidiary be treated differently than a national bank subsidiary. We think not.

Again, I'd like to thank the FDIC for taking up these serious issues. We believe that a decision is needed; we believe it's time critical. We also believe that a decision not to act will decide the future of the dual banking system just as much as any decision you make on these questions.

We urge you to address the issues raised in the petition as soon as possible. Thank you.

MR. KROENER: Thank you. Mr. Murton?

MR. MURTON: Question for Ms. Taylor. If I understood you properly you were talking about the sweeping changes in the banking and financial services industry and that you support the petition, but don't think that that will address the underlying problem.

I was curious about what the answer then is. Is it some kind of major regulatory reform, is that what you were hinting at or suggesting?

MS. TAYLOR: Actually, to clarify further, I don't necessarily support the petition itself. I support your acting on it and making a ruling on it because I think that will be a catalyst for other action.

I think there is some fundamental forces in the regulatory arena that financial services that have changed over the last ten years or so. We're not operating in that same system we used to and banks used to operate not only within their own state, but within their own county within their own state.

Now we're in a world of derivatives and international banking and all the rest of it and new products coming out all the time. There has been a melding of insurance and securities and banking as a result of some of the recent statutory actions that Congress has taken.

So there have been some fundamental changes in the financial industry itself and I don't think that our system of regulation or how we regulate has particularly kept up with that, which is the nature of the beast.

So I think that it's time for everybody to step back and say, okay, what is it that we're supposed to be doing. Are regulators just supposed to be looking at the safety and soundness of the banking system? Are regulators supposed to be concerned about consumer protection or is that for somebody else to do?

Should the large international banks that just -- I mean we've been affected by this more than anybody else, immediately after the OCC preempted state -- issued its ruling, HSBC and JP Morgan left our state, which was kind of a shock to me have to start as banking superintendent at the time. It was a wakeup call to exactly what we're dealing with.

But, should the large banks like that be regulated under one set of regulations or by one entity in the state, the smaller community banks be regulated somewhere else.

Where should the enforcement take place? I don't know the answers to these questions, but I think that one thing that we're doing here, which is so important, is we're opening these issues up to public discussion.

Because what's happened so far is the OCC, by itself has completely changed, and you've heard everybody who has -- all six people who have testified so far have mentioned the word balance and imbalance. The system is out of kilter.

If we think that the dual banking system is something that's important to preserve, somebody has to do something because if nobody does anything, it's going to radically change without anybody having a hand in doing it other than the OCC preempting state laws -- lending laws.

MR. KROENER: Mike.

MR. ZAMORSKI: What I thought I heard several of you say is either under the notion of parity or preventing the race to the bottom that you would want FDIC to at least provide or prescribe some minimum consumer regulations if not credential standards.

Is that what I heard correctly or the implication at some point? Okay. How does that, if that's the case, how does that interact with the -- how would that inhibit or support the states' goal of being an innovator in future changes if you have FDIC prescribing or some federal entity prescribing the laws, how do you get innovation?

How do those interact? That's one of the main purposes of dual banking system is for the states to serve as the cauldrons of creativity and such.

MR. REED: You can act stronger at the state level. You think -- we weren't one of the ones that really said you need to have consumer protections as part of addressing this petition. We said preserve parity first and then take up that issue, don't delay the preserving of parity.

But if you are going to have a fit nationwide banking system we think that the rules have to be at the federal level and the rules on consumer protection have to be. But if states want to add something stronger just like states don't make due with just truth and lending and they have other rules now, but they can still have further rules.

COMMISSIONER SORRELL: Mr. Zamorski, I certainly made the statement that -- and some people think Georgia was the poster child for federal preemption because of the Georgia Federal Lending Act and that being an act that was preempted by the OCC.

It has changed an outlook in our legislature. It has certainly changed our banking industry and the legislators, as I've mentioned in testimony, do look at the proposed consumer protection laws that are being looked at in the legislative session to make sure that they feel like those would withstand a federal preemption.

Now that certainly does not prevent, as in the most recent legislature, certain laws to protect the consumers from being passed that are more strict and certainly could fall within a federal preemption.

But our legislature is looking at that system because they know that we operate within that system.

SECRETARY HEINEMANN: I'd like to address that as well, Mr. Zamorski. Wisconsin has very strong consumer laws through the Wisconsin Consumer Act, some of the strongest in the nation.

We feel very strongly that our laws actually for our multi-state banks, banks that have operations in other states that our laws would pass in to those states and we feel that that adds another level.

Our legislature, as well, focuses on, for example, we recently passed a creditor lending law that was a little bit stricter than the national, but using the national laws as a standard and then addressing some of the issues, having the ability to address the certain abuses that were happening within our state.

We were able to make them a little bit stronger. We worked very closely with the banks to do that and we were able to implement new predatory lending laws.

So I think it's important that the states still have the ability to add their own customization to laws, but when you have the OCC preempting you and you have your banks going to other states and the OCC has kind of created an unlevel playing field, we have to ensure that our states have the same benefits -- our state chartered banks have the same benefits in a host state that a nationally chartered bank does.

We are not experiencing that now with some of the other states, that they are putting our state chartered banks at a disadvantage. Really causing some of our large state chartered banks to take a look at their business model and see what is a better charter for them to have, a state charter or a national charter.

We feel very strongly that we'd like them to have the ability to continue to be competitive with our state charter across state lines.

MS. TAYLOR: I would like to add to that also. I think just to build on what Secretary Heinemann said. It also goes to enforcement and how those laws and regulations are enforced.

Under the OCC preemption we have no ability at all to enforce any of our laws and that is especially important in our state also because it goes not only to banks themselves, obviously, but to the mortgage industry and the money service business.

This, we feel is a very serious problem because at this point the federal format or the federal framework of laws for money service businesses is somewhat non-existent.

MR. KROENER: Mr. Bovenzi?

MR. BOVENZI: This question, I guess, is for anybody other than Superintendent Taylor. Is there anything in the petition that any of you don't support if we're issuing rule making?

MR. REED: There were a couple of things. We support the petition in its entirety and what it's trying to do. There were a couple of suggestions that are about where the FDIC would join with the home state regulator to determine when a host state law was preempted.

We think that -- that's what we're asking you to do is deal with federal law and we as a home state don't want to determine when a law is preempted. If there is a question we can't work out with the host state, we want to be able to come to you for that resolution on what federal law is.

There was another suggestion that you could provide some rule making to determine what law applied if home state law was silent, where a host state law had been preempted.

I guess our position on that was if you can follow the policy that home state law applies when there's preemption for national banks, it's up to the home state to either exercise authority to address that or not if you're piloting that, that concept.

We don't think home state law is ever silent. We believe that you either got the authority to provide a rule to address is -- to address the host state law that's been preempted or we don't and in the case silence doesn't authorize them.

MR. BOVENZI: Did either -- anybody want to add anything?

COMMISSIONER SORRELL: Well, I would say that FDIC inaction, I think, is the most problematic for our state and I believe other states on this. It's a situation that as time continues we need solutions, the bank needs solutions, the banking system needs solutions.

If we -- if FDIC decides that they cannot find all of the solutions for all of the requests in the petition, certainly you said, in your public comment material, that you could give no answer, you could give a partial answer to certain parts of the petition, you can reject the entire petition and so forth.

But I think decision making is the point that we need to move forward with because then, the whole system in its entirety can move forward.

MR. BOVENZI: So would everybody on the panel agree then if our general counsel looked at this and said, FDIC doesn't have the authority to issue a broad rule it would be a very narrow rule that rule making is preferable to not doing anything just to get some clarity?

SECRETARY HEINEMANN: Actually, I agree with rule making and actually to respond to your previous question as to whether or not we support this in entirety for the state of Wisconsin. We certainly support the rule making -- moving forward with the rule making.

Obviously the details of those rules could be interpreted in many different ways. This is when we rule make at our state level. So, we are definitely in support of the major key issues of financial services roundtable.

We think it's important that home state law does apply across state lines and we are in support of the interpretation of the laws that were put forth by Congress and we believe that this is in support of that.

MR. BOVENZI: Okay. Thank you.

MS. TAYLOR: Can I just add something?

MR. BOVENZI: Yes.

MS. TAYLOR: I'm sorry. I think that actually -- and Superintendent Sorrell said it best in his testimony and he said that the clarity of law protects the safety and soundness of banks and I think that he said it very well. So, I think the rule making would help in that regard.

MR. KROENER: I would like to ask, because it has come up again and again and I think it is subject to perhaps some different perspectives. One of the things that was raised in the earlier testimony and is mentioned in some of your testimony is the possibility of what has been characterized as a race to the bottom. That is to say, the absence of consumer protection.

I think you heard the testimony in support of the petition mention the ample ways that the FDIC has in dealing this, but the one that was mentioned was actually restricting charter switching, which is not something that I'm not sure I drag very easily out of the legal authority we have.

But, it suggests that there may be a problem there and Secretary Heinemann, when you testified you indicated that Wisconsin has added important supplemental protections that are part of the history.

But under existing law now, and if we go forward it -- codified by our rule, isn't it true that there would be or there could be the possibility of branch institutions in Wisconsin from other states that would not be subject to the Wisconsin rules, but would be subject to only the federal law or the federal law in, whatever, another state may have supplemented its law and wouldn't those be different?

So you would have consumers in Wisconsin dealing with local institutions and I don't limit this to Wisconsin, the same thing could be true in Georgia, in New York. Isn't this a problem where maybe, at least underestimating and thinking about we should go the full extent of our legal authority to pass those broader rules possibly?

It seems to me something that is like -- we're going to hear some more about this this afternoon, I've actually looked at some of the testimonies coming this afternoon and it looks to be a serious problem or at least a serious issue that we would have to deal with in going forward with this sort of rule making you suggest.

I throw that out as a question to all the panelists.

SECRETARY HEINEMANN: We'll I'd certainly be happy to answer that. We are already operating under that condition right now where we have subsidiaries of national banks that have locations in our state and certainly OCC has preempted our ability to influence a lot of our laws, consumer protection laws in those regards.

We currently give them the 800 number for the OCC and wish them the best of luck in their resolution when we get a call in or a complaint. So, we are already operating under those rules.

What we're talking about is really just making sure that our state chartered banks maintain their competitiveness when they go across state lines. We recently had one of our large banks, the third largest bank that was state chartered acquired by a Michigan State chartered bank.

We certainly are going to honor Michigan's laws if we're asked to come in and assist with examination, geographic issues that we have. We are certainly willing to help, but we do not feel that we can impose Wisconsin laws on a Michigan State chartered bank, but we will honor the home state laws of Michigan.

So we are already operating under that situation with the nationally chartered banks in our state and we are happy to work together. Their regulators would like us to do so, but where we don't have direct regulatory authority, we simply refer them to the correct agencies.

MR. KROENER: Others of you?

COMMISSIONER SORRELL: I think ours is similar. We would go one step further with a complaint regarding a national bank or a national bank subsidiary. We ask that complainer to get back with us if they're not satisfied with the answer that they received or no answer from the authority.

Then we again, communicate with the authority. The 1996 Nationwide Cooperative Agreement among the states, which all states adopted, communication, cooperation, coordination were the three keys words as I know you're aware.

That still works. We -- all of us at this table, I know, have our banks operating in multiple states and we have other state regulators calling us or calling our personnel constantly about issues and we do communicate, cooperate and coordinate.

There are exceptions, but for the foremost, I would say most of that is working very well and certainly saying that the home state is the single point of contact and it's worked well for a number of years.

But now the interstate banking system is in full array. We have an actively functioning interstate banking system and certainly that communication, cooperation and coordination would be aided by a certainty and the clarity of that institution operating with a state charter, operating multi-state or interstate and that certainty being known by their -- it would mitigate legal risk, it would to a degree mitigate some reputation risks that is effective and I, for one, think it's a safety and soundness concern that is there, because it's certainly a legal risk.

MR. KROENER: Okay. Anyone else?

MR. REED: Those are the -- the rules now for bank branches are what we're talking about that if you apply them somehow to subsidiaries and all bank activities, rather than activities of branches, is going to cause this massive race to the bottom.

I don't think we've seen it for bank branches or for activities conducted through branches and I'm wondering that that extension is going to cause that more massive a shift than what banks really do which is the majority of their business through branches.

We think that a race to the bottom -- it depends on where you are, whether you want to -- if -- is it just a states' rights or turf issue or do you -- is it a real consumer protection problem.

If you're an Alabama resident are you going to be worse off when Superintendent Taylor's bank comes in with their consumer protection laws. That's a good question and I think we can find the answer to that.

So it depends on your perspective, but that's the framework which Congress has put in place, that home state law governs. If there are abuses, if we do find problems, we think that it's federal regulators or just Congress can put in a federal level of consumer protections to address those things. But right now, we're talking about potential problems.

MR. KROENER: Let me ask one more question before we conclude. A lot of you had indicated the importance of certainty. As regulators and as lawyers we're used to dealing within somewhat uncertain environments.

In fact, the rule we're talking about here would be a rule that in its broadest form would establish parity with the national banks, but to the extent that there is a lack of certainty as to precisely what is preempted under the national banking rules and it requires further elaboration and interpretation, wouldn't that uncertainty be equally applicable to state banks under this rule.

So you're not really going to -- you're going to create a level playing field, but I'm not sure you're going to, at the end of the day, have certainty. Indeed, there could be court decisions that would affect the OCC rules and pro tanto that would then affect on FDIC rules put in to place. Do any of you care to comment?

COMMISSIONER SORRELL: I don't think any of us said absolute certainty. That is something we know, the interpretations can always create that. But, operating in a system where there is not as much certainty is less advantageous.

MR. REED: We had said it was parity up or down, that the banks wanted one set of rules, it's not necessarily is it the most lax set of rules or is it the OCC rules, they just want one set.

COMMISSIONER SORRELL: But parity may be different than certainty.

MR. KROENER: All right. With that, let us conclude this panel. We will now take a break. We will take -- we will resume at ten minutes after 11:00 by the clock that I can see through to the next room, which is 17 minutes from now. We will have the full time for the next panel; just shorten the lunch by ten minutes. Thank you.

(Whereupon, the above-entitled matter went off the record at 10:53 a.m. and resumed at 11:15 a.m.)

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Last Updated 8/11/2011

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