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Public Hearing on Preemption Petition

Testimony of Lorrie Keating Heinemann, Secretary Wisconsin Department of Financial Institutions at the Federal Deposit Insurance Corporation Petition for Rulemaking to Preempt Certain State Laws Public Hearing
May 24, 2005
Washington D.C.

Thank you for the opportunity to testify before you on this important matter. I am here today 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 and we are proud of the work they do in our communities. We have 274 banks in our state, and 231 of those are state-chartered. We believe this speaks to the high-quality service these banks receive from the Wisconsin Department of Financial Institutions.

A Competitive Dual Banking System
We have submitted testimony to Congress regarding our strong opposition to the sweeping, unilateral preemption by charter-granting federal banking agencies. Extensive 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 checks and balance system that ensures the regulatory approaches at both the state and federal levels are reasonable. The contributions that the dual banking system has made to 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 businesses, the consumer and the economy. For example, the difficulties experienced by the Japanese banking system, which was overburdened by nonperforming loans, exacted a serious toll in lost Japanese economic growth.1

Given the importance of a competitive dual banking system and the increasing reality of broad federal preemption, we urge the FDIC to adopt rules to provide parity between state-chartered banks and national banks conducting interstate activities. We believe these rules are necessary to maintain the competitiveness of the state charter; a competitive equality deemed necessary by Congress when they passed Riegle-Neal II in 1997.

One of the main benefits of the dual banking system is that the states, given separate regulatory powers, have been able to act as laboratories of innovation for the financial institutions 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 more quickly on our smaller platforms. Often times, these ideas migrate across the country.

One great and recent example of this, that we are especially proud of in Wisconsin, is the creation of a Universal Bank certification. Universal Bank certification is a gateway to opportunity for Wisconsin's financial institutions. The creation of the Universal Bank certification was so important because it was a recognition on the part of the Wisconsin legislature that there needed to be competitive parity for commercial banks, savings banks, and savings and loan associations for the health and vitality of the industry as a whole in the state.

We are here today to again discuss parity, only this time it is not for banks and savings institutions in Wisconsin only; it is 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 believe, will be a loss to the industry as a whole.

Wisconsin's Consumer Protection Tradition
We are fortunate in Wisconsin to have a long and progressive tradition of consumer protection that balances the business needs of financial institutions while protecting Wisconsin's consumers. One of those unique laws is the Wisconsin Consumer Act, which governs consumer credit transactions. This law has benefited Wisconsin consumers and our economy for over 30 years. Allowing Wisconsin state-chartered banks to operate under Wisconsin laws will serve to benefit all of the customers they serve around the country.

We understand there may be concerns that if the FDIC does adopt the suggested rules, this will precipitate a race to the bottom and possibly weaken innovative consumer protection laws like Wisconsin's Consumer Act. We do not agree. First and foremost, state regulators and state legislators are in the business of protecting the citizens of their states. Why do you think the state regulators and attorneys general have fought federal preemption so vigorously?

State consumer protection laws apply to a multitude of financial service providers and not only to banks. These consumer protection laws are not going to be stripped away at a whim on the unrealistic hope of some state becoming a banking Mecca. Examples that you may hear on the notion of a race to the bottom, such as credit card banks and others, are just too narrow to be analogous here. We are 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 organizations will determine where they will be located, not what state has lax 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 wholeheartedly support this application of parity.

Congressional Intent
We are requesting that the FDIC consider commencing a full rule-making process to adopt the concepts in the petition. This will result in the full implementation of the Riegle-Neal Interstate Banking and Branching Efficiency Act as envisioned by the United States Congress. The intent of Riegle-Neal is to maintain a competitive, responsive, safe and sound banking system within which a state-chartered bank can operate on a multi-state basis. The intent is to have a system of "seamless supervision" so that state-chartered banks are not disadvantaged because they have chosen a state charter rather than a national charter.

For instance, we are currently dealing with a situation in Wisconsin where one of our multi-state, 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 fees on a nationally-chartered institution with branches in its state. Although we have worked with our colleagues in an effort to recognize that their actions are contrary both to the provisions in Riegle-Neal and the Nationwide Cooperative Agreement, it remains a problem. The FDIC's rulemaking to establish parity for state-chartered banks would further clarify Riegle-Neal and end the excessive practices by some state regulators. This would be a great benefit to the dual banking system and the financial marketplace as a whole.

Don't let me leave you with the wrong impression. 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 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's predominant role.

The real purpose of this petition is to allow state-chartered multi-state banks to operate on a uniform platform of laws and regulations with one regulator to serve as a single point of contact. The hope is that by creating a uniform platform, we can provide seamless regulation to our financial institutions, thereby fulfilling the Congressional intent of Riegle-Neal and maintaining a competitive dual banking system.

Let me conclude with one final thought. Everyone in this room today is well aware of the statistics relating to the charter choice of de novo banks. By far and away the charter of choice is a state charter. I have previously discussed some of the reasons why that choice is made. De novo banks grow and prosper and look for opportunities coming over the horizon. Sometimes, that horizon is the border of the neighboring state. Why should these banks have to change the charter that they have been successful with or the way they do business, simply because they have stepped over a line on a map?

In conclusion, the Wisconsin Department of Financial Institutions strongly supports the protection of the dual banking system by supporting the FDIC's rulemaking to ensure state chartered banks with multi-state locations have parity with their nationally chartered counterparts.

Again, I would like to thank the FDIC, the Financial Services Roundtable and everyone at the hearing today for making this discussion possible. We look forward to continuing to work with you to ensure the strength of our dual banking system.

1, September 8, 2003

Last Updated 05/24/2005

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