Federal Deposit
Insurance Corporation

Testimony of John G. Finneran, Jr
Executive Vice President
Capital One Financial Corporation
May 24, 2005

I want to thank the FDIC for this opportunity to provide additional testimony regarding the Financial Services Roundtable’s proposed rulemaking to provide interstate banking parity for insured state chartered banks. My name is John Finneran. I serve as the Executive Vice President of Corporate Reputation and Governance for Capital One Financial Corporation, based nearby in McLean, Virginia.

Capital One strongly supports the petition filed by the Financial Services Roundtable and we urge the FDIC to adopt the Roundtable’s proposed rule. We believe that such rulemaking will provide state chartered banks with vital parity to compete with their national bank counterparts and thereby offer consumers greater choice, competition and innovation in the supply of consumer financial services.

Capital One is a bank holding company whose principal subsidiaries, Capital One Bank, Capital One, F.S.B., and Capital One Auto Finance, Inc., offer a variety of consumer lending and deposit products. Capital One’s subsidiaries collectively had 49.1 million accounts and $81.6 billion in managed loans outstanding as of March, 2005. Capital One is a Fortune 500 company and, through its subsidiaries, is one of the largest providers of MasterCard and Visa credit cards in the world.

When our recent acquisition of Hibernia Corporation closes later this year, Capital One will conduct its banking business under three separate charters: a state member bank, a federal thrift and 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 began as a division of Signet Bank, a state member bank based in Richmond, Virginia. As a result of the long standing relationship between Signet and the Virginia Bureau of Financial Institutions, as well as between Signet and the Federal Reserve Bank of Richmond, Capital One chose to retain its state charter after its spin-off in 1994. Operating a credit card bank through a state charter was unusual – even more so now that only two major issuers, Capital One and Discover, continue to operate primarily through state charters.

Continuing development of the regulatory regime applicable to national banks under the National Bank Act has given national banks a significant advantage in operating multistate and national scale lending businesses. The unintended result is a destabilizing competitive imbalance in our dual banking system which threatens the highly successful system we have built and nurtured for well over a century.

It is 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 that the Roundtable’s proposed rule does that.

It is important to keep the current proposal in the appropriate context. Despite claims to the contrary, the proposed rule does not represent a unilateral extension of the preemption rights of state banks. Instead, it is responsive solely to the rights currently enjoyed by national banks. This proposal is first and foremost about parity, certainty and uniformity of regulation. It seems an entirely reasonable proposition that what is appropriate with respect to the interstate activities of national banks should also be appropriate for state banks operating interstate.

State banks must contend with national banks not only from a competitive business standpoint, but also with a dizzying patchwork of additional state and local laws and regulations in crafting any national lending program or even a modest multi-state program. The application of these laws and regulations is often unclear and frequently contradictory. For example, some states have adopted the position that out-of-state banks may not lend into their states without procuring a license and, in some instances, maintaining a physical presence in the state itself. Even with respect to interest rate exportation principles, state chartered banks lending pursuant to Section 27 of the Federal Deposit Insurance Act must contend with states that have elected to opt out of such rate exportation. National banks are not forced to contend with such issues.

In addition, these laws create significant additional complexity and often mandate expensive technological and systems modifications, a multiplicity of forms and procedures and increased training and compliance oversight to implement, often for the purpose of complying with laws and regulations that are similar in intent but different in every detail. For example, many states have required 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 greater customer confusion regarding what disclosures are relevant to what customer.

For anyone who might dismiss the negative consequences of such duplicative and unnecessary disclosures, we note that the Federal Reserve has embarked on an ambitious and much-needed effort to reevaluate the quality and efficacy of consumer disclosures under Regulation Z. An oft-observed challenge for regulators, consumers and the industry is how to disclose a multiplicity of complex, but vitally important concepts, ranging from interest rates to customer identification procedures, in the limited space provided on marketing materials, loan applications and periodic billing statements. Duplicative or unnecessary verbiage can overwhelm more relevant information, thus diminishing the understanding of consumers.

Despite significant recent focus and efforts, neither the National Conference of Commissioners on Uniform State Laws or the Conference of State Bank Supervisors have been able to bring a sufficient level of national uniformity for state banks engaged in providing multistate or national consumer financial services. Where such successes have occurred, they have typically been achieved at the federal level. Witness the balance between national business uniformity and consumer protection for consumer credit information represented by the Fair and Accurate Credit Transactions Act of 2003. Congress has similarly expressed its desire for the uniformity and parity that is embodied in the Roundtable’s proposed rule. Now it is up to the regulatory agencies to implement that desire.

Make no mistake, these hearings come at a critical time for state chartered institutions. Over the past decade the number of state bank charters has steadily decreased, a trend that will only accelerate given the current state of our regulatory framework. Over the past decade, the number of state chartered banks has declined by more than 20%, and state chartered savings institutions by more than 40%. In the last year, JP Morgan Chase, the largest remaining state chartered bank merged with Bank One, and chose the latter’s national charter. Washington Mutual has recently announced that it is consolidating its state chartered thrift into its federal thrift. As noted earlier, only two of the top 10 credit card issuers operate principally through state charters; national banks today hold approximately 75% of the U.S. managed bankcard loans.¹

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. Is a single banking regulator in the best interests of the banking system, the individual states or their consumers? Or a bifurcated system where all large institutions are regulated solely at the federal level, and smaller institutions are predominantly left to the states? We believe not.

And for those who believe that the benefits of this petition are limited to major banks, we note that the rule provides the same benefits for any institution that operates in two or more states.

The diversity of regulatory approaches has spurred significant innovation for all banks, including national banks. This diversity of choice and opportunity is a key reason that Capital One, and many other institutions, choose to retain multiple charters. The 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 modifications to Regulation 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 rules, as well as to the Federal Reserve’s taking a more expansive approach of non-banking activities for bank affiliates.²

While the opportunities presented by multiple charters are significant, the costs of managing and operating more than one insured depository institution are significant, as well. Multicharter financial services companies must continually conduct a cost-benefit analysis of maintaining such a complex structure. We are concerned that at a time when all agree that costs, particularly those relating to regulatory compliance and corporate governance, are increasing, the benefits of the state charter are decreasing.

The proposed rulemaking represents an urgently needed equitable solution to the competitive challenge presented by the rights and powers of national banks under the regulatory regime as 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 call of the critics of this rule and do nothing. Time will resolve this issue for us and quickly relegate our dual banking system to the history books. If, on the other hand, you feel, as we do, that our dual banking system is worth preserving then immediate action is needed.

As more fully outlined in the petition, we believe that Congress has long intended to put state banks in a position of parity with national banks. In fact, Congress has repeatedly intervened over the past quarter century to restore the competitive equilibrium of the dual banking system. These efforts can be traced back to providing state banks with exportation authority in 1980 under Marquette as part of Section 27 of the Federal Deposit Insurance Act, to the applicable law parity provided in the 1997 amendments to Riegle-Neal, to, most recently, the important parity provisions in the Gramm-Leach-Bliley Act of 1999. Congress has provided a strong basis for banking parity; now it is up to the regulators to play their role in the bank regulatory system by implementing the framework Congress has established.

For the reason detailed in the petition, we believe that the FDIC does have clear regulatory authority to adopt the proposed rules and implement the broad historic Congressional mandate for banking parity. Regulatory action is justified where inaction would lead to uncertainty and possibly unintended and illogical outcomes. For example, if the 1997 amendments to Riegle-Neal are not clarified in the manner described in the petition, a national bank with a large physical presence and clear nexus to a host state would be able to utilize the laws of its home state while a state bank with no physical presence and only limited interstate contacts with the host state, would not. Certainly, such disparate treatment of state banks was not intended by Congress in passing this landmark piece of legislation directed at putting state banks on more equal footing with their national bank competitors.

Today, national banks have substantial clarity regarding the laws governing 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 in our dual banking system. The future of that system is in your hands.

Thank you for allowing me to testify before you today on this important issue. I would be happy to address any questions you may have.