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Public Hearing on Preemption Petition

The (Regulatory) World Out of Balance

The (Regulatory) World Out of Balance

Good morning. I am Diana Taylor, Superintendent of Banks for the State of New York.

Thank you, Chairman Powell, 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 am not going to discuss the substance of the petition 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.

Adopting the Roundtable's proposals will not cure what is wrong with our system. With respect to the very smart and justifiably worried authors of this petition, I support their concerns but I cannot support the proposed solution. 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 that change with unilateral actions. The effect of those one-sided actions has been to push the system out of balance. We should acknowledge that answering the OCC's pre-emption order with another, similar action will make the situation worse.

I am just one of two hundred or so US regulators of the financial services industry. There are 50 state banking regulators, 50 state insurance regulators, 50 of the various bodies that states make responsible for the securities business, and then there are the federal regulators – SEC, OCC, FRB and OTS, not to mention this body, the FDIC. It is a given that we all agree on what the regulator's basic purpose is – to make the financial backbone of our country safe and sound, 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 we can do? 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, but not unless we can update it in a way that makes sense for the financial system as a whole.

You are familiar with the CSBS – the Conference of State Banking Supervisors. My state is a member. CSBS is a very effective advocate and lobbyist for state regulators across the country. They do a terrific a job representing some very diverse interests. Recently, they held a Webcast to ask the state regulators' opinions on the Roundtable petition and its proposals. It should not surprise you to hear that there was not a single question to which the state regulators were unanimous in their response and on many there was profound disagreement. Except one. The states all agreed that what the OCC did was bad for the dual banking system and harmful for consumers. Let me amend that – they agreed it was harmful, but not the extent to which it was harmful.

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 it without due deliberation. I am not sure that it can be so easily "fixed" especially because each interested party's definition of "fixed" is different. What does need to happen is for all of us – all together – to address the imbalance that is affecting our regulatory system, the regulated entities and the nation's consumers. It is not a question of creating a counterbalance. We need to seek a balancing point, not a tipping point, that the various parties can agree is the center. A point of reference to which regulators look to do their jobs, that provides the states a framework in which to protect their interests as defined by their legislatures and sets limits within which banks can do business safely, soundly and as freely as is reasonably possible.

How do we do that? By working together. We have to recognize that we regulators are part of the problem. We have created such a maze of rules and regulations and threats of additional rulemaking that banks and consumers are confused. There are professionals in the banking industry with titles such as "EVP for Regulatory Risk". Since when did we, the regulators, become a risk factor for our domestic banks?

As we all know the OCC action that precipitated this hearing has had a fundamental effect on the balance of regulation in this country. For one, it has made all of us, especially at the state level, think about our role as regulators and how we should seek to address the issues the financial industry faces. The Roundtable states in their petition that their goal is to establish parity between state-chartered banks and national banks in interstate activities and operations. I agree this is a worthy goal. But by what means do we establish parity for state chartered banks and what effect will it have on our nation's banking system and the banking public? And parity to what standard? Further, how do we do this without throwing things even further out of whack?

To set the stage: I submit that even before the OCC issued its pre-emption order our system was out of equilibrium. The solution the Comptroller envisioned to correct this disparity solved the national bank part of the problem but tipped the system's balance even farther from the center. To be fair – we at the state level were all part of creating the initial imbalance because we tried to answer our constituents' needs without considering how the rest of the system was being affected. I will address this more fully in a short while.

A number of factors have brought us to this pass, but at their base is the law. Legislation (for example, Reigle-Neal One and Two and Gramm Leach Bliley) forms the basis of the regulation that dictates what financial institutions can and can not 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 this you have state legislatures passing laws, dueling regulators and confused banks.

Over the last ten years, the banking industry has exploded in many new directions, with multi-state operations, mergers, acquisitions and many, many new and complicated products. Law makers and regulators, in a race to keep up, did what they do best, passed laws and wrote regulations in an effort to keep abreast of the latest and greatest banking innovations.

Everyone is trying to do the right thing from their point of view. The problem is the 'right' thing is being done by many entities and what is right for one is not necessarily right for the whole. It should be understood from the very start that each, whether acting on the state level or national stage, intends to be part of the solution, to make things better for their constituents, to be not part of the problem. Every one of us wants to do good – or at least do something right that helps to solve a particular regulatory, consumer or legal issue.

The OCC preemption of state consumer protection laws is an example of this dynamic in action. Here you have a situation where, from a certain point of view, one set of interests (consumer groups abetted by state legislatures) went too far to do good in protecting consumers, another stepped in to balance them out (the OCC) and unintended consequences ensued. It is hard to imagine a more contentious state of affairs!

State legislatures have always worked overtime to protect consumers. Many of these consumer protection laws were and are good, sensible advances in the face of the changing industry. Others are the focus of debate. But, as happens when well-intentioned legislators work overtime, things can get out of kilter. The state consumer protection laws were written and passed with the best of intentions – to protect consumers from products that might not be in their best interest. We have all heard the horror stories of hardworking people refinancing their homes to pay for needed repairs, or medical expenses or school for their children, only to lose everything to a predatory lender.

Not every state approached this sort of problem with the same vision. In some cases, the resulting laws required little extra effort from banks – regardless of charter. Some required a great deal. The point of fact is that each required something different. As a result, interstate banking, which is a relatively new concept, has become very complicated. This was an unintended and unanticipated consequence of the consumer protection movement that engendered a disastrous result and is a causative factor in our being here today. But not the only cause.

Despite the fact that Congress had wisely provided a mechanism for the OCC to turn aside individual pieces of law they saw as onerous, the Comptroller decided to bypass this safety mechanism. As we are all well aware, the OCC solution was to issue sweeping regulations that preempt almost all state depository and lending laws that apply to national banks and their operating subsidiaries. Further it shields all national banks – and their subsidiaries – from oversight, inspection and enforcement actions by any state authority, including the state attorneys general.

From the OCC point of view, the new regulations are merely the next natural step in that agency's interpretation of the National Bank Act, the Riegle-Neal Interstate Banking and Branching Efficiency Act, and Gramm-Leach-Bliley. From the point of view of the national banks, this made eminent sense. Even those of us at the state level agreed that the patchwork effect of the 50 different laws was, in fact, a problem. Still, the OCC's unilateral solution made a lot of people very, very unhappy. From the states' point of view, the OCC's preemption usurps the powers of the Congress, stifles the rights of the states to protect their citizens, and threatens the dual banking system. And consumers have been left out in the cold.

At the same time, state regulators, parochial as we can be, see clearly that technological advances have changed the delivery of financial products. Many large banks and some small banks look less like the old commercial bank operating in one community and more like the diversified financial services providers operating nationwide – to say nothing of worldwide. We also appreciate the fact that the largest financial services providers need to see more coordinated regulation and want to be able to easily realize their plans to create a nationwide financial marketplace. This is good for the banks, and it is good for the public, their customers.

The action of the OCC is understandable from their point of view, and very good for the nationally chartered banks, their customers, but it has upset the balance of the dual banking regulatory system as we know it, and as it is currently constituted. 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.

This leaves us all with a crazy quilt pattern indeed. Worse, from bank to bank, the consumer has no idea at all of what to expect in terms of disclosures, fees and other important issues. This is as a result of the entities involved doing what they think is right for their particular constituencies: the OCC protecting the interests of the nationally chartered banks; the state legislatures trying to protect their voters from rapacious 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 services businesses area. What self-respecting, profit driven financial services business will not want to be owned by a national bank if they can then avoid state oversight?

Under the current OCC rules, operating subsidiaries of nationally chartered banks, including MSBs, may ignore any state licensing or other regulatory requirement. This is clearly an untenable situation. I believe the ideal solution would be for the OCC to rescind its preemption. But, as I said in the beginning of my testimony, that is not going to happen. The real solution is going to be based on an honest assessment of where we are now – the regulators and the financial services industry – and what we realistically see as our goals. The solution is not to compound what the OCC started, by giving every State the right to pre-empt every other state.

It is balance that has kept our system functioning so effectively all these years. That is what the balance of power among the branches of government is all about. This equilibrium has been maintained by legislators, and regulators (the executive), and the judiciary, each performing their discreet functions in harmony. Congress and state legislatures passed laws that were designed to protect the life, liberty and pursuit of happiness of their citizens. Regulators interested in the safety and soundness of the financial system supervised institutions to make sure that they were well managed, sufficiently capitalized for the risks they took, had the systems set up to ensure compliance with all of our rules and regulations and could detect malfeasance in their organizations. The Justice Department kept all participants on the straight and narrow.

In that stable environment everybody worked in concert to create a balanced environment in which our financial institutions could operate efficiently and effectively to serve their customers. 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 unable to conduct business. Yet 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 toward reaching our shared goal of a rational and comprehensive approach to difficulties and complexities surrounding the regulation of financial services by opening up a discussion of the issue. No one person or entity can solve the problem by themselves. Everyone involved must have a say and be a part of the solution. This multi-party, multi-level discussion must continue!

We have a set of circumstances that no one is really happy with, with the possible exception of the OCC. Questions are being raised as to what the future of the dual banking system might be. We need to be brave and forward looking enough to ask the question: does it still make sense in this day and age to have a dual banking system? Should it be constructed differently? You already know my answer – but I am willing to entertain yours.

This is not a problem that we can solve parochially or with localized legislative Band-Aids. Mr. Chairman, a strong national standard will create the level playing field for the banking industry. Furthermore, mortgage bankers and brokers and MSBs should not be permitted to hide behind the skirts of national banks. State regulators and laws should be able to protect their consumers. We must sort this out for the good of all.

It is time for all of us to step back and remember why we are here: we are here, as regulators, to protect the safety and soundness of the banking system; make sure consumers are treated fairly; and 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 need to all work together to bring it back into balance.

Last Updated 05/24/2005

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