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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 5

MR. KROENER: Good afternoon. We have for our final panel, Panel 5. We have Carl Jones, Chairman and CEO of Regions Financial Corporation. Welcome. John Finneran, Executive Vice President, General Counsel, Capital One. Substituting for Mark Furlong, as I announced earlier, we have John Presley, Senior Vice President of Marshall & Iisley.

We have James Roselle, Associate General Counsel of Northern Trust Company, and accompanying as counsel for Mr. Roselle, is it? Who are you accompanying?

MR. MUCKENFUSS: The group.

MR. KROENER: Accompanying as counsel to the group to assist is Chuck Muckenfuss returning from the first panel. Welcome all of you. Mr. Jones, go right ahead.

MR. JONES: Well, thank you. I think the operative word was the final panel. Everybody else just thanks you for this whole process. I guess I should thank you for staying for this final panel. But I do think that this whole process does allow us at least to get the issues on the table, to hear the differing perspectives on what should or should not be done.

We appreciate the opportunity to be a part of that. My company is a member of the financial service roundtable. Of course the roundtable is the one that started this process with filing a petition. That petition was not filed lightly.

We really think that the matters addressed are critical, critical to the continued existence of the dual banking system that this country's known for a hundred years. We think that that ought to be a significant objective of the FDIC also is to preserve and maintain the dual banking system.

We would like to think that in this country you could make the choice of a federal charter or a state charter sort of based on business needs, without it being tilted one way or the other by sort of a disparity of power of the charter. So we appreciate the opportunity to talk with you about it a little bit.

Maybe I should tell you just a little bit about our company and why we are interested. We have grown over the years, mostly through acquisitions, and we're now in 15 states.

We are one of the 15 largest financial service companies in the country that generally operate in the Southeast, Texas and the Midwest. I like to think that our businesses -- we would call home state; we would call Alabama home state for banking and trust business. For our insurance businesses, we call Louisiana and Arkansas home states.

For mortgage banking we call Tennessee, North Carolina and Georgia home states. For our broker dealer operations, we call Tennessee home state. But that's part of our whole philosophy of taking care of our communities and our customers. Is we want to be a part of the local community, of the local state.

So hence, a state charter for us sort of fits our philosophy. We think it's our ability to take care of our customers and build relationships as opposed to just being transaction oriented.

Currently, we got both a national charter and a state charter. If you look back over our history that would probably be the situation most anytime you looked at it because we would be in the process of acquiring something.

Right now we're in the process of merging Union Planters, which also is one of the largest banks in the country, with the old regions to form the new regions. Union Planters has a national bank charter.

But over the last nine months we have spent a lot of time sort of examining the merits and benefits and pitfalls of both charters, and how they would apply to us. We come down on the side of, we're going to collapse the federal charter into the state charter, and go forward with our 15 states and 1300 branches as a state chartered member bank.

We really don't believe right now that the federal charter or national charter has any more value to this than a state charter. Primarily because our State Banking Department has done the only job of working some compacts with the other 14 states that we're in, and that's working at this point and for the foreseeable future.

But we think we are worried about the rules adopted by the OCC last year. They went beyond what the individual home state regulators can do on their own to empower their state chartered banks to remain competitive.

We've reached a point now in this country where almost 80 percent of the banking assets are national banks. We really think that unless the FDIC steps in and helps with this balance, we're going to end up with 95 percent of the banking assets being national bank chartered. You're not going to have a dual banking system at that point. You've got two very unequal banking systems.

So my little remaining time here, let me try to make a few points. First, the goal of this petition is not to seek preemption, and I've heard a lot about that today.

But the two words I like to think of is parity and clarity. Host state law would continue to apply in all areas where our services, to the same extent as host state law would apply to national banks, parity.

But where federal law applies solely to national banks, then home state law would apply equally to state chartered banks in those same areas, clarity. I really think parity and clarity are the key words.

Secondly, the proposed rules promote competition among banks and regulators. I think the competition, a little healthy competition that makes us all better. Consequently, we end up serving our customers better. Customers really should be indifferent as to whether they are doing business with a state bank or a national bank.

Third point, the preservation of the dual banking system, I think protects customers. We think Congress has spoken on this issue, and we think the FDIC does have authority to give regulatory meaning to existing law.

I think duality does require parity. Parity promotes competition by getting properly priced products into the market in real time. Competition promotes maximum consumer benefit through choice.

The marketplace is really a great place if you have parity and you have competition. Well, another key point is that states do cooperate now under national compact.

But I guess what worries us a little bit about the horizon is what if those state superintendents' change and personalities change? Those compacts start deteriorating. We think that the FDIC needs to be ready, willing and able to sort of referee, clarify, step in and ensure that that parity continues.

My final point is that operating a multi state bank business is not the same as operating a nationwide bank under a uniform interstate plan. Banks like us, we do have a choice right now as to what kind of charter.

That choice should be available to the bank based on its business needs, customer needs, and not simply because of an unbalanced regulatory situation. So I guess my key takeaways are we think of healthy regulatory attention between the federal regulators in the various states is appropriate.

We need a strong national bank regulator, an equally strong regulatory system for state charter banks operating in interstate commerce. For a hundred years, state regulators, FDIC and the Federal Reserve Board have properly regulated state banks.

The proposed petition really just enhances that historical effectiveness. We think preservation and maintenance of the historic dual banking system is the best means available to ensure banks remain competitive on a local and national basis. That consumer choice is preserved.

Congress has already spoken on this issue. I think the law is clear that parity is to be preserved in the dual banking system. Congress has set up the FDIC to be the agency best suited to work with the states in this mission.

So I urge you to act with all deliberate speed. Analyze all the comments you've received today and others that will come. Start the formal rulemaking process. Again, we appreciate the opportunity to visit with you today.

MR. KROENER: Thank you. Mr. Finneran, welcome back.

MR. FINNERAN: Thank you, Mr. Kroener. It's good to be back. I too want to thank the FDIC for the opportunity to provide testimony regarding the financial services' roundtable proposed rulemaking to provide interstate banking parity for insured state chartered banks.

Again, my name is John Finneran, and I serve as the Executive Vice President and General Counsel for Capital One Financial Corporation, which is based nearby here in McLean, Virginia.

Capital One strongly supports the petition filed by the roundtable, and we urge the FDIC to adopt the rule as -- we believe that such a rulemaking will provide state chartered banks with vital parity to compete with their national bank counterparts.

Thereby, offer consumers greater choice, competition and innovation in the supply of consumer financial services. Capital One is a bank holding company who has three principal subsidiaries. Capital One Bank, which is a Virginia State chartered Federal Reserve member bank.

As a federal thrift, Capital One FSB, and it has a finance company headquartered in Texas, Capital One Auto Financing. Together they offer a variety of consumer lending and deposit products. Capital One subsidiaries collectively had 49 million customer accounts. Over 81 billion dollars in managed loans outstanding as of March 31, 2005.

Capital One is a Fortune 500 company, and through its subsidiaries is one the largest providers of MasterCard and Visa credit cards in the world.

With our recent acquisition of Hibernia Corp., when our recent acquisition of Hibernia Corporation closes later this year, Capital One will conduct its banking businesses under three separate charters. The state member bank, the federal thrift, and with Hibernia, a national bank.

For that reason, we feel particularly well qualified to speak with you today regarding the state of the dual banking system. Because of our history, Capital One is a strong supporter of the state banking system.

Capital One's business began in a division of Signet Bank, which was a Virginia State member bank based in Richmond. As a result of a long standing relationship between Signet and the Virginia Bureau of Financial Institutions, as well as between Signet and a federal regulator, the Federal Reserve Bank of Richmond.

Capital One chose to retain its state charter after its spin off in 1994. Continuing development of the regulatory regime, applicable to the national banks under the National Bank Act, however, has given national banks a significant advantage in operating multi state and national scale lending businesses.

The unintended result is a destabilizing, competitive imbalance in our dual banking system. Which we believe threatens the highly successful system that this country has built and nurtured for well over a century.

And it's that imbalance that we urge you to address. The continued vitality of the American dual banking system compels a pragmatic solution to restore equilibrium in interstate banking and national uniformity.

We believe the roundtable's proposal does just that. State banks of course must contend with national banks from a competitive business standpoint.

State banks also have to contend with a patchwork of additional state and local laws and regulations in crafting any national lending program or even a -- multi state program.

It's the application of these laws and regulations soft and unclear, and frequently contradictory. For example, some states have adopted the position that out of state banks may not lend it to their states without procuring a license.

In some instances, maintaining the physical presence in the state itself. Even with respect to interest rate exportation principles, state chartered banks lending pursuant to Section 27 of the FDI Act must address the laws of those states that have elected to opt out of such rate exportation. National banks of course do not have to contend with these issues.

In addition, these laws create significant additional complexity, and often mandate expensive, technological insistence modifications and multiplicity of forms and procedures, increased training and compliance oversight to implement, often for the purpose of complying with laws and regulations that are similar intent, but very different in detail.

For example, many states that require disclosures that are similar in purpose, but different in mandated verbiage from other states.

Some states require disclosures that are arguably inapplicable, due to the rights of state banks, to export certain terms from their home states. The result is greater cost, greater complexity, and often greater customer confusion regarding what disclosures are relevant to that particular customer. This hearing, we think, comes at a critical time for state chartered institutions.

Over the past decade a number of state banks have elected to convert to a national bank charter, a trend that will only accelerate given the current state of the regulatory framework.

Many state banks that have spent decades developing productive and mutually positive relationships with their regulators will now be forced to consider abandoning those relationships and surrender their charters simply to remain competitive.

The diversity of regulatory approaches has spurred significant innovation for all banks including national banks. This diversity of choice and opportunity is the key reason that Capital One and many other institutions choose to retain multiple charters.

State banking charter has been particularly instrumental in driving such innovation including NOW accounts, which began with state banks and played an important role in subsequent modifications to Reg Q.

The broader securities and insurance powers provided to state banks, which were a precursor to the OCC's developing the operating subsidiary and promulgating its Part 5 rule as well as to the Federal Reserve's taking a more expansive approach of non-banking activities for bank affiliates prior to the enactment of Gram-Leach-Bliley.

The proposed rulemaking represents an urgently needed equitable solution to a competitive challenge presented by the rights and powers of national banks under the regulatory regime is currently interpreted.

A clear choice now exists. If you do not believe in the merits of a dual banking system, then you should embrace the calls of the critics of this rule and do nothing. Time will resolve this issue for us, and quickly relegate our dual banking system to its history books.

If on the other hand, you feel as we do, then the dual banking system is worth preserving, then immediate action is needed. For the reasons detailed in the petition, we believe that the FDIC does have clear regulatory authority to adopt the proposed rules, and implement the broadest door of congressional mandate for banking parity.

Today national banks have substantial clarity regarding rules covering their interstate activities.

As a result, national banks are more efficient and competitive. Any critic who doubts this assertion need only look at the continued flight of state banks to federal charters.

We urge you to exercise your clear authority to adopt parallel rules for state banks, and restore the historic equilibrium to our dual banking system, and the future of that system is in your hands. Thank you for allowing me to testify before you today, and be happy to address any questions that you might have.

MR. KROENER: Thank you. Mr. Presley.

MR. PRESLEY: Good afternoon. I too would like to thank the FDIC for allowing us to be here today. My name is John Presley. I am Senior Vice President and Chief Financial Officer for Marshall & Iisley Corporation.

Marshall & Iisley Corporation is a diversified national financial services company with over 41 billion in assets headquartered in Milwaukee, Wisconsin.

And M&I, Marshall & Iisley Bank is the corporation's lead bank. M&I Bank has assets of approximately 35 billion. It is the largest bank headquartered in Wisconsin. The bank operates approximately 48 interstate branches in Minnesota and Arizona, and delivers business in consumer banking products and services to customers on a nationwide basis.

M&I Bank's history dates back almost a 160 years to its organization in 1847 as a private bank, the year before Wisconsin was admitted to the union. M&I Bank started being regulated as a Wisconsin State charter bank in 1888.

M&I has continued as a state chartered bank since that time, and has been regulated during this period by the Wisconsin Department of Financial Institution and its predecessor agencies.

The bank has had and continues to have excellent relationships with its state regulator. I'm here today to testify in favor of the petition for rulemaking that has been submitted to the FDIC for consideration.

Our bank believes strongly that the FDIC should adopt the proposed rulemaking, and should act expeditiously in order to prevent the further migration of larger banking organizations out of the state system and into the national banking system.

If the FDIC fails to act to give state banks like M&I the interstate competitive parity that we need to compete with national bank, then it is an alarming, but real consequence that the dual banking system, as it has existed for more than a century, simply will not survive. Instead the present system of bank regulations stands at risk of being forever altered.

With smaller community and interstate banks dominating the state system in money center, regional and banks with multi state operations being regulated almost exclusively by the OCC.

M&I Bank is an excellent example of how the marketplace for delivery of financial services has changed since Congress passed the Riegle-Neal Interstate Banking Act of 1994.

Our bank's growth in the delivery of interstate products and services over the last decade illustrates why this rulemaking has such importance for state banks. When Riegle-Neal was passed in 1994, M&I Bank operated branches only in Wisconsin.

Today, in addition to almost 200 branches in Wisconsin, M&I Bank also operates 48 branches in Arizona, and Minnesota. Less than half of our corporation's revenues in the first quarter of 2005 stemmed from Wisconsin banking operations compared with over 70 percent four years ago.

Our bank is evolving into a multi state financial services delivery unit. But we are often unable, as a result of state laws, to deliver or integrate these products and services on a consistent uniform platform.

National banks and federal thrifts do not share the structural impediment because of federal preemption of state laws. To compete fairly with federally chartered banks, state banks like M&I must be better able to integrate their product offerings by using a uniform platform that does not have to change for every state.

This result will not be possible, however, unless the FDIC adopts the principles set forth in the petition for rulemaking, and passes new regulations to preempt certain state laws. Thereby allowing state chartered banks to compete on a level playing field with national banks and federal thrifts.

Let me say a few words about the dual banking system, and why the continuance of this system of banking regulation bears such importance.

Over the past century, state legislatures and state banking regulators have often been at the forefront of important innovations in the delivery of banking services, and in the enactment of strong consumer protection laws.

Without continuing a system of dual banking regulation, where banks with interstate operations have a real viable choice to remain as a state charter, it is likely in our opinion that these successful state experiments in innovations in financial services will decrease dramatically.

What will remain is a banking system in the United States where innovation and change will become almost exclusively the province of federal banking regulators. And the role traditionally played by states will be diminished or lost.

What are some examples of these previous state driven innovations? One example was the authorization of the banks to pay interest on NOW accounts.

A key development in the banking industry in the 1970s, and an important new checking product for customers at the time. The State of Massachusetts first authorized NOW accounts for banks.

Another example comes from our state, Wisconsin, which in the 1970s adopted this nation's most comprehensive consumer credit protection statute, the Wisconsin Consumer Act.

Wisconsin continues to be the only state in the country where, because of the Consumer Act, an auto loan creditor is unable to repossess a car after default. But must instead proceed to court to obtain a repossession order.

No other state protects consumers in this way nor has the OCC ever enacted a similar consumer protection measure to be followed by national banks. My point here is simply that state legislative actions affecting financial services under the dual banking system have often directly benefited consumers.

I have also some concrete examples of how, as a state charter bank, M&I must operate with less efficiency and uniformity than a comparable situated national bank. Accordingly, why this rulemaking is so critical to our bank.

M&I Bank through a subsidiary operates an indirect automobile finance business through approximately 1800 auto dealers located in 17 states.

Because this business is not structured as a national bank or an operating subsidiary of one, we must comply with different licensing filing and examination requirements in each of the states in which we have operations.

In addition, we must spend considerable cost and effort on a regular and continuous basis, determining applicable state credit disclosure requirements in order to remain in compliance with these separate state laws.

None of these same costs, task or program inefficiencies are required for a national bank or a federal thrift offering the same financial product as we do in these markets.

As a second example of the inefficiencies that are inherent in the current regulatory structure, M&I Bank offers retail, home equity loans and lines of credit in more than 38 states through a large network of mortgage brokers and other wholesale originators.

However, because of the many different state laws regulating mortgage lending, we are unable to use a consistent delivery platform, and must tailor our loan and disclosure documents individually for each state.

Again, this is a considerable expense, and an inefficiency that national banks competing with our loan products need not bear.

This difference in treatment poses a serious burden in our ability to compete fairly with other types of depository institutions. As set forth in detail in the petition, we believe existing law provides sufficient authority for the FDIC to promulgate the rules proposed in the petition.

The legislative history behind the 1997 amendment for Riegle-Neal also underscored that Congress intended the legislation to preserve the existing dual banking system.

Representative Roukema, who introduced the 1997 amendment, stated on the House floor that the essence of this legislation is to provide parity between state chartered banks and national banks.

This legislation is critical to the survival of the dual banking system. A strong state banking system is necessary for the economic well-being of the individual states, and for innovation and financial institutions.

Similarly, representative LaFalce from New York noted that the 1997 Riegle-Neal amendments, that the bill's passage is vital to maintain the dual banking system.

It's the dual banking system that has helped ensure that our U.S. banking industry has remained strong and competitive. These comments by representative LaFalce echo those made at the time by a number of other senators and representatives from both political parties. To conclude my remarks, M&I Bank fully supports the petition for rulemaking. We urge the FDIC to move quickly in enacting these proposals to improve competition in financial services, and to maintain the present quality and dynamic balance of our country's dual banking system.

Should the FDIC fail to promulgate these rules, you will send a message to M&I and other state chartered institutions that simply state that we must become a national bank if we wish to compete on an interstate basis. Thank you for the opportunity to present the views of M&I Bank on this subject.

MR. KROENER: Thank you. Mr. Roselle.

MR. ROSELLE: Thank you, Mr. Kroener. I guess as the last speaker I bear a special responsibility to try to be brief. I'll try to --

MR. KROENER: You have the same amount of time as all the other ?-

MR. ROSELLE: I will do my best. Let me just make a few points at the outset if I could. First, I certainly want to add my thanks to those of others to the FDIC for providing this forum.

I think it's been a very important way for many different constituencies to be heard and to present their views, and I commend them all to your attention.

Obviously, we have a certain point of view in as much as we support the petition. But it's very important that action be taken in certain respects to try to correct what's happened over the last few years.

I think even the opponents of the petition would acknowledge the national banks now enjoy a clear competitive advantage over state banks. Parity does not exist, and the parity that was envisioned by Congress and Riegle-Neal II and Gramm-Leach-Bliley, simply hasn't been realized.

One can point to various reasons for that. But I think the opponents of both, the supporters would acknowledge that truth. I think it's also clear that state banks now continue to labor under confusion and often conflicting state laws when we try to do business across state lines.

Time is running out for the dual banking system. I think you've heard that many times. I've seen it certainly every day in Illinois.

Previously, I used to work at Bank One, and when we merged with J.P. Morgan, the decision to go to a state -- to a national charter was a very easy one given all of the benefits that a national charter right now provides.

More recently, the second largest state bank in Illinois, Harris Bank has decided to convert to a national charter. So we see it already.

I think the pressure will build on Northern Trust and others to try to make the appropriate decision to be competitive in our marketplace.

So time is running out, and as I think it's been said before, inaction will lead to continued deterioration of the dual banking system. I'd like to tell you just a little bit about Northern to put it in context.

We have a background somewhat similar to what you've heard before. We've always preferred to operate with our lead bank under a state charter and with supervision by the Federal Reserve.

But obviously, competitive pressure has now forced us to look ever more carefully at the various alternatives to operate efficiently in an interstate, and, in fact, in a global marketplace.

For a multi bank holding company headquartered in Chicago, Northern Trust is a leading provider of investment management, asset and fund administration. Fiduciary and banking solutions for corporations, institutions and individuals nationally and worldwide. We have a growing network of 83 offices in 17 states.

We have international offices in six countries. As of March 31st of this year, on a consolidated basis, Northern had assets under custody of 2.6 trillion, it's growing at about 20 percent a year. Assets under investment management of close to 600 billion dollars.

Due to the current regulatory environment, we conduct our banking operations primarily through three different charter types. Our primary bank, the Northern Trust Company, was organized in 1889 as an Illinois State chartered bank headquartered in Chicago.

We now also conduct banking activities through four national charters and one federal thrift charter. We have national banks headquartered in Arizona, Florida, California and Texas, and they operate through 52 offices in those states plus one office in Colorado.

We also formed in 1998 a federal savings bank called Northern Trust Bank, FSB that's headquartered in Michigan and has offices in 12 states.

We at Northern are committed to building a national and a global franchise for our key businesses to better serve our clients, and provide attractive returns for our shareholders.

It's simply suboptimal, both economically and organizationally, for Northern to have to do business across state lines through different banking charters, primarily to avoid confusing business qualification rules or conflicting state laws.

Moreover, many of our customers prefer to do business with the Northern Trust Company as the largest and most credit worthy institution in our group.

Operating through a state charter continues to present incremental cost and legal risk that would not be inherent in a national bank charter or a federal thrift, will find it increasingly unattractive to retain our state charter rather than convert to a national charter.

We've always enjoyed good relationships with each of our state and federal supervisors. In particular, we found the Illinois Department of Financial and Professional Regulation to be highly competent and responsive as a supervisor and a regulator.

We've also benefited from the highly professional supervisory staff at the Federal Reserve.

We would like to continue these relationships, and frankly, we see no reason why our firm should be disadvantaged because our primary supervisors are the Illinois Department of Financial and Professional Regulation and the Federal Reserve rather than the OCC.

It should also be noted that the certainty provided to our national banks and our FSB, through the preemption and other rules and regulations of the OCC and the OTS, make it increasingly attractive for us to engage in interstate activities through these charters rather than deal with the risk and uncertainty of engaging in these activities through our state chartered bank.

The above description of our banking charters illustrates just some of the complexities we have to deal with in connection with interstate activities, and some of the increased costs that result from having to maintain multiple charters.

In our view, if the FDIC were to adopt a rule providing interstate banking parity for insured state banks with respect to national banks and federal thrifts, it would considerably ease the legal risk in regulatory cost that now exists for Northern, and we believe it would result in greater convenience for our customers and consumers more generally.

Let me just give you a few examples to illustrate some of the difficulties we face doing business across state lines through a state chartered bank. First, with respect to fiduciary activities, the Illinois Fiduciary Act permits Northern to conduct fiduciary activities in another state as long as those are permissible for state -- for trust institutions chartered in that state. Provided the activities are not prohibited by Illinois authorities.

But when we conduct fiduciary activities in other states or when we seek to do so, it's often not clear whether we're required to register, obtain a license or otherwise qualify as a fiduciary.

This uncertainty can have a real adverse impact, not only on our ability to accept a fiduciary appointment, but also on clients that want to use our services.

In cases in which applicable law is not clear, we've had to enter into these fiduciary appointments through a different legal entity, usually one of our national banks or the FSB.

This uncertainty has led to greater complexity and increased costs. It's also confusing to our customers who are increasingly mobile or have more than one home, and can't understand why Northern Trust may not be permitted to deliver services from our home state into other states through a single, legal entity and a uniform, legal standard.

In addition, probate judges and other judicial officials in the host states are called on to make decisions from time to time concerning qualifications of executors or trustees in those states.

Given the current lack of certainty and lack of clarity as to whether or not a state bank is properly qualified to take on a fiduciary appointment in the host state, many judicial officials tend to favor either a local state bank or a national bank for those appointments, and may not feel an out of state, state bank is qualified to take on the appointment.

Contrast this result with the clarity with which national banks are able to conduct the same activities. The National Banking Act provides essentially the same rights for national banks to conduct fiduciary activities interstate that are contained in the Illinois law.

But the OCC, through regulation and interpretation has provided clarity that state banks can conduct those activities nationally on the same basis as banks located in the host state.

This degree of certainty articulated by a federal regulator creates an advantage for national banks in conducting these activities compared with state chartered banks.

Lending activities present some of the same difficulties. I mention in my written testimony laws that exist in Oklahoma and Alabama. These are just a couple of examples that clearly discriminate against out of state, state banks.

In Oklahoma, for example, the Uniform Commercial Credit Code provides that no person can engage in the business of making a supervised loan in Oklahoma, unless the person is a supervised financial organization or has obtained a license to operate in the state.

The law defines a supervised financial organization as a bank or other financial institution organized or chartered in Oklahoma or the United States. We don't qualify on that basis.

Moreover, the penalty for making a loan in violation of the Oklahoma statute could be that the loan can be declared void, and the debtor would be released from any obligation to pay.

In my view that presents, not only difficult issues for us doing business, but safety and soundness issues that I would think the FDIC and other federal regulators would be concerned about.

Obviously, the OCC has taken steps to provide clarity of treatment to prevent that kind of disparate impact for national banks through the regulatory process. We believe it's incumbent on the FDIC to adopt rules that would also implement the congressional mandate in Riegle-Neal II and Gramm-Leach-Bliley that would provide parity of treatment for state banks.

I'd like to just make two brief points concerning the petition itself. First of all, I think as it's been said before, the petition is essentially a request for parity of treatment, so that we have a single set of laws that govern our key banking activities across state lines.

We view the petition as a means for state banks to have a clear mechanism for determining what the applicable law would be to these activities.

The result will be that we'll be in the same competitive position as national banks and federal thrifts when we engage in these activities. Second, the petition does not seek to exempt state chartered banks from the provisions of appropriate laws that protect consumers and communities.

The petition only seeks clarification that the applicable law relating to interstate banking activities is that of the home state if national banks have that same privilege.

Consumers and other affected parties would continue to have the same rights and remedies with respect to state chartered banks that they now have with respect to national banks.

I'd like to just say a few brief words about consumer protection issues because obviously those are of great concern to many people. We're aware that many groups oppose the petition out of a concern that somehow consumer rights will be -- will lose out.

I would say that Northern Trust, and I think I probably speak for many other banks as well that are state chartered, are committed to fair dealings with all consumers.

We've observed the same high standards in our dealings with consumers, whether we carry out the activity in our state bank, our national banks or our FSB. I would add that Illinois has enacted a range of laws designed to protect consumers and deter unfair consumer practices.

Illinois authorities receive and evaluate complaints that consumers may have about financial institutions. We don't believe there's any evidence to support the notion that consumers are going to be less protected if the FDIC adopts the rulemaking as requested in the petition.

Moreover, it's our experience that consumers generally shop for banking products based on price and service, and would not normally expect different rules to apply, depending on whether the financial institution they deal with is federally or state chartered.

We see no benefit to consumers from perpetuation of an environment in which national banks can benefit from preemption of certain host state laws when they conduct business in those states.

But out of state banks have to bear the risk of violating host state laws when they conduct those same activities or stay out of that marketplace, which in turn leads to lower competition, less choice for the consumer.

In any case, Northern believes that consumers deserve to be fairly treated and with respect. We encourage the FDIC to work with state and federal authorities to develop uniform high standards to deal with predatory lending and other abusive practices.

We encourage the FDIC to take into consideration steps that have already been taken by the CSBS to provide for means of cooperation among supervisors with respect to consumer protection, safety and soundness.

We would also note that just as the OCC has authority to deal with abusive practices that certain national banks may engage in, we believe the FDIC also has the authority to deal with abusive practices of insured banks to the extent those practices may not be adequately dealt with by state bank regulators or by other federal authorities.

We are aware that preemption has sparked an emotional debate over the extent to which a single national standard should apply to certain banking and practices or whether host states should be free to adopt their own standards.

On balance, Northern favors a single standard for many business practices, such as qualification to do business, privacy and lending standards.

Because increasingly, banking is becoming a truly national business, and the potential for different standards to apply in each state are not beneficial for banks or consumers. We believe application of the home states law to a bank's interstate activities provides both fairness and clarity to the bank and its customers.

This petition does not require the FDIC to make a judgment about the merits of the preemption. We simply request the FDIC to provide the same benefits to state banks that are provided to national banks and federal thrifts, so we can be fully competitive in the interstate marketplace.

With that, I think I'll cease my comments. I appreciate again the opportunity to present our comments to you, and would be happy to answer any questions you might have.

MR. KROENER: Thank you. Start our questioning with Mr. Bovenzi. Okay.

MR. BOVENZI: Let me just follow up on the last set of comments that were being made about consumer protection. We've heard a lot about how this can help reduce inefficiencies, provide clarity, give parity with respect to one set of rules.

Probably the biggest concern we have heard today is whether, even if we have legal authority, we should move forward as a policy matter because moving forward might put consumers in a worse position if there are 50 home states in a competition and laxity.

What should the FDIC do about that? I address the question to everybody and your comments about working with others to develop some standards. Congress may not want to act anytime soon. Should we -- what options do we have to address that or should we be addressing that? Or is that a well placed word?

MR. ROSELLE: I would -- it's a very difficult issue, and I think one that deserves a lot of thought. I would expect that in any sort of advanced notice of rulemaking, you could receive many comments on the kinds of protections that might be appropriate. I think I would encourage the FDIC, at this point, to adopt rules similar to what the OCC has adopted in terms of their own rulemaking.

By that I mean, some of the rules that pertain to predatory lending and things of that sort. It seems to me that the FDIC has the authority as the insurance body, and as a regulator to put in place standards that would govern state chartered banks in all respects. I think to the extent that they could be harmonized with what the OCC has done with national banks, I think that would serve the marketplace well.

I would also encourage the dialogue to continue with the CSBS and other organizations to consider whether uniform state laws or other standards might also be appropriate.

I would also just add that there have been a lot statements about rush to the bottom and how consumers will lose out in this kind of process. I just don't see it. I don't think there's been any evidence that since the OCC issued their preemption order that national banks have been anymore abusive in terms of pay day lending or predatory lending.

I don't think there's a great deal of evidence that state banks have been abusive in that respect either, at least from the people that I've spoken to from some of the State Banking Commissions.

So I think some empirical evidence about who is actually engaging in predatory practices would be worthwhile to figure out who's doing it, and what's the best way to try to prevent those practices across a wide range of the industry?

Because I think you'll find that a lot of the unregulated entities are the ones that are engaging in these practices, not the ones that are regulated by either state or federal supervisors.

MR. PRESLEY: I agree with Mr. Roselle, and I would further it by saying that M&I is operated in Wisconsin, which is arguably a very consumer friendly lending state. Up until 2001, as I mentioned in my testimony, that's where we primarily did business. We're more looking at this as an opportunity to compete on an equal level.

We would contend that we would more, as opposed to rush to the bottom, rush to the top, and if we could have Wisconsin law in other states, but just be -- having the ability to compete on an equal basis is our primary concern.

MR. FINNERAN: I would echo the comments that the gentleman on my right made, just to add that. I think also missing from this debate so far is the fact that at least most of us in the consumer business truly are focused on our customer.

If we are mistreating our customer, we're not going to have that customer very long, and we're not going to be in business for very long if we were to engage in the kinds of practices that have been alluded to this morning or this afternoon.

I think that again, the fundamental thing that we're looking for is parity. I think all of us believe, certainly Capital One believes that we can compete on a level playing field with everybody else in the industry, and through that competition we'll -- if it is truly uniform and level set, consumers will benefit in the end through rigorous competition, the provision of services.

MR. JONES: I guess I need to just add my two cents worth, which I don't disagree with anything that they've said. But I just remind you that it's a very competitive marketplace out there.

All of us that are regulated entities, I think are trying to do the right thing. We want to keep that customer, not for just this transaction, but for the long term and build a relationship, and you don't do that if one hand's tied behind your back, and you don't do that if you don't think of the customer's best interest as you go through the whole process of serving a customer.

So I think your problem, if there's a problem, is with the unregulated entities. Parity and clarity is what we're looking for.

MR. BOVENZI: Thank you.

MR. JONES: Preserve the dual banking system and the competitive nature of free enterprise system.

MR. KROENER: Mike. Mr. Zamorski.

MR. ZAMORSKI: Yes, I think there's some overlap here, Mr. Presley, you talked about for parity having a uniform platform, and that that could be achieved by FDIC passing laws to preempt certain state regulations.

Or passing regulations preempts certain state laws. What would you -- what are the principle state laws you would -- under that scenario you would like to see dealt with?

MR. PRESLEY: As we think we're new to this in terms of being interstate. We've just since 2001 have branched outside of our state lines, and had to deal with any other state laws other than Wisconsin.

The virtue of the fact that our revenues are starting to really diversify as seen in our first quarter that for the first time, less than 50 percent of our income or revenues came from Wisconsin.

So as being new to this, it would be for hard for us to go state any one particular law that we would like to see uniform. But we would just like to see a set of rules in which we could compete with and live with. I don't think we're so much concerned with the individual rules or want to tailor to what the rules are or tell us what they are, and let us comply with those so that we can compete on a parity basis.

MR. ZAMORSKI: I have one other, it's very broad. We had at least one example by one of the panelists of the safety and soundness issue that's arisen because of parity concerns.

Any of the other panelists think of any other safety and soundness concerns that arise as a result of the discussions we've had here today, like the parity and the -- anything that really jumps out that we should be concerned with as we go down the assessment process or the results of this.

MR. JONES: Nothing jumps out to me on safety and soundness. But if we should see a concern arising in that arena, then, I mean, we would have to consider national charter. But there's nothing right now that's a concern. MR. ZAMORSKI: Sometimes we've had an internal discussion where anytime you have costs you can't cover, there's some -- and you can't pass them on. There's some you have to -- you may find yourself in a position where you've got to climb on that risk limb to some extent, maybe not to an excessive extent, and that can cause safety and soundness problems in extreme cases. But that's how -- as a general discussion, that's how we tended to view that internally.

MR. ROSELLE: I think that's right. I think I would say this, larger institutions that can afford to have a lot of lawyers and set up additional charters, whether they be national or federal or otherwise.

I think and probably research and deal with these issues, I think you may have safety and soundness issues come up where you have banks that decide that rather than go to the expense of researching something or setting up a different charter, you're going to go ahead and do something even though they're not sure about it, and they trick themselves into violating a host state law.

They think it's going to be the same law that exists in their home state and they're wrong, and nowadays there an awful lot of lawyers willing to take any case. I think that banks, as they go to enforce loan obligations or otherwise, will often come up against arguments that perhaps they didn't do something right in the host state.

I think that sort of lack of clarity, which I think has been referred to before, is really what has driven our bank and others to do a large part of interstate business through national or federal charters rather than the state charter, because we can't afford to take the chance that we're wrong.

We're less concerned about a state bank supervisor coming after us than we are, either an attorney general doing something or even more so than that, trying to enforce a loan and finding that defenses are raised that even if you win, are very expensive to get resolved.

MR. KROENER: Mr. Murton.

MR. MURTON: Maybe going to Mr. Finneran's clear choice, which was if you don't believe in the merits of a dual banking system, then you should embrace the call of the critics in this room and do nothing, and that for -- obviously, for an agency like the FDIC, the dual banking system, we have always supported it, in government institutions in general, there's a long tradition of interest in self preservation, and not always admirable.

But I think people perhaps on the earlier panel might put the choice a little differently, saying the question is whether the benefits of the dual banking system that we envision in the future, under this rulemaking, would outweigh the potential cost to the consumer.

It's not necessarily from your organizations, but from the rules that might result from different states being able to export their rulemaking. So how do you -- and they also did not seem very persuaded that competition is fully benefiting consumers lately. Economists like to think that it does.

MR. FINNERAN: Mr. Murton, I really look at it as two separate issues. The issue that is really before the FDIC today is the issue of parity. Just to put the state banks on the same level playing field as the national banks.

The reason for the statement of urgency is, as Mr. Roselle more articulately described. States are voting or banks are voting with their feet by shifting from the state charter to the national charter.

I think in the absence of doing anything, the case has become much more compelling for those of us who are -- truly do have a national business. That the balance is clearly tipping.

The national bank charter is a more advantageous and more efficient way to do business than the state bank charter. I think that's going to be a loss to the overall banking industry if that develops.

Because if you end up with just small community banks who elect to be state banks, and everybody who has a significant multi state or national business in national banks, we will, in fact, have one federal regulator overseeing all of that business.

As consumer lending continues to consolidate across all of the asset classes, you wonder where is the benefit of having a number of different agencies really familiar with the operations of those lending businesses.

Understand what the policy choices are for the future, not only in the safety and soundness area, but also in the consumer protection area. Right now you have a situation where I think the OCC and the FED and the FDIC all come at a problem from a slightly different perspective.

As you folks know, there are lot of debates at the FFIEC about how to resolve things and what direction to take.

I think that will ultimately get lost if you end up with one system, so that's the danger I see. I think in time will determine the issue unless the FDIC acts now to at least preserve the status quo and give companies like Capital One at least the ability to weigh those benefits and say, you know what, it's not so compelling, the state mentoring still is a viable option in which to do a national business.

MR. ROSELLE: I think there are different ways of looking at what's beneficial to consumers. I think it's easy to point to some of the practices that credit card companies and others perhaps carry on.

I think many people can reasonably disagree or criticize some of those practices. That's not really the point of this hearing. But we do have a scheme in place. We have Regulation Z. We have various other ways in which those practices are governed.

For better or worse, Congress decided that disclosure was a good way to provide some support for consumers. We also have a system now that, because of the scheme, whether it's good or bad, credit is more available to consumers in this country than anywhere else in the world. That may give them the opportunity to buy homes that they couldn't have bought otherwise. It may also let them get into trouble more easily than they might in other countries.

But I think it's been vibrant for this economy to have credit relatively freely available. There is a price to that, and I think people can debate whether some practices are correct or abusive or not. But I think we can look at the consumer credit availability in this country as being very beneficial for the economy and for most consumers.

MR. JONES: Can I add that there's some other constituencies out there you might benefit, like communities, like commercial customers who also have interstate operations. At least the way we're looking at it as a state chartered bank, we can serve those communities better because we've put jobs in those communities.

We can serve those communities better because we buy from vendors in those communities. So there's a community impact here that needs to be considered also.

Then the larger commercial customers who operate in multi states, they're looking for choice and competition. So the dual banking system provides that. I think there -- consumers are important, sure.

We all want consumers as continuing customers. But we also want the community to be a customer. We want commercial accounts to be customers. So I just think some competition and maintenance of the dual banking system sort of helps you serve all those constituents.

MR. KROENER: Each of your institutions operates in an interstate or a multi state pattern of one sort or another. I would -- you've heard -- it's been raised on a number of panels today. There's some statutory questions about whether on FDIC rulemaking would extend to your institution.

Generally, would extend to situations where you had a branch outside your home state in another host state. Or whether it was a branch like or some form of physical presence, a lone production office, a representative office, whatever.

To what extent, as you conduct your operations, do you conduct them through branches as distinct from other types of physical presence, and as distinct from no physical presence whatsoever?

Or another way, another take on that question is, if we were to pass a rule that only shifted the law where you had a branch presence in a host state, would that materially address some of the imbalances that you testified to? Maybe we'll start with Mr. Jones.

MR. JONES: In our case, probably 70 percent of our revenues come out of our branch system. We have broker dealers in our branches. We have mortgage bankers in our branches. We have trust officers in our branches. So that's a big part of our operation, the way we are configured.

MR. KROENER: Mr. Finneran.

MR. FINNERAN: It would be a step, but a small step if that were the result. Clearly, for Capital One, until we complete the Hibernia acquisition, almost all of our business is done without physical presence.

I think what I guess I would urge the FDIC to do is look forward to the way banking services are being delivered. I'm not going to sit here and tell you today that it's all going to be direct, because if that were the case, we wouldn't have decided to buy Hibernia Corporation.

But as we look at the world, you have to meet customers where they are, and I think that's a different answer for different types of products. Clearly, credit cards have almost entirely gone direct, with some exceptions. Auto lending is a combination of direct and point of sale where the dealers are. Small business is still largely done through branches and through local communities.

So whether -- when you look at the whole panoply of consumer lending out there, I think you find a different answer for different types of products. The world will continue to evolve, but it will never be entirely direct or through branches, at least in our view. So if you limited your rule to just the branches, you would solve a sliver of the problem, but not the entire issue that needs to be addressed that creates a parity.

MR. PRESLEY: For M&I you would solve a slightly bigger problem, but still it would be small because we only operate branches in really four states.

We have wholesale lending operations in a number of states, and we also have relationships with a number of correspondent banks in which we might do over lines with in even more states. So I agree with Mr. Finneran, you would be solving a small problem, but it still would not be very large for us.

MR. KROENER: Mr. Roselle.

MR. ROSELLE: I would agree also. We -- until we have full nationwide branching, it's still difficult to put branches everywhere we want to be. So that's why we set up our FSB. I think it would be unfortunate to limit the rulemaking to physical branches in another state.

It would have the anomalous effect that I think was mentioned before, of providing some clarity for branch banks that operate in the state, but really no clarity for banks that operate from their home state.

When, in fact, logically, you'd think that it would be easier to get to the point of saying that home state law should apply to activities that are interstate, that are carried on by the bank from its own jurisdiction.

So I would say that it would be important for our institution that the FDIC rule go far enough to provide protection or clarity at least, not just for physical branches, but for activities more generally.

I think that really comports best with the -- certainly the legislative intent that appears to be correct and evident in Riegle-Neal II as well as Gramm-Leach-Bliley.

MR. KROENER: Thank you. Any more questions? All right, I want to thank these witnesses, and I want to thank all the witnesses today. Those that are still in the room, and those that have had to leave. Your full statements will be entered in the record.

As I said, there will be a transcript. We will leave the record open so people can clarify or submit supplemental comments if they wish, and we've prepared time. We'll continue to receive comments from others and post them on our web site.

I thank you all, and declare the hearing's concluded. Thank you.

(Whereupon, the above-entitled matter was concluded at 4:48 p.m.)

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Last Updated 7/15/2005

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