E. Gerald Corrigan, President, Federal Reserve Bank of New York
Statement by E. Gerald Corrigan, President, Federal Reserve Bank of New York, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, May 15, 1991.
I am delighted to have this opportunity to appear before you to discuss again certain aspects of the ongoing efforts to reform and modernize the banking and financial system of the United States. In discussing these issues with you, I have, in words that Yogi Berra is alleged to have uttered, a sense of "deja vu all over again." What I mean by that, of course, is that we have been discussing these issues for years. But now the time has come to act--a sentiment that I know is widely shared among the members of this committee.
You have asked me to respond to several questions on the banking and commerce issue. While those questions are covered in the opening section of this statement, I have also included several observations on other aspects of the reform process as a whole, many of which bear on issues that I have discussed with this committee on earlier occasions.
In considering the specific question of banking and commerce as well as the larger question of reform of the banking system, it seems clear to me that the Congress is faced with a very difficult dilemma. On the one hand, the need for progressive reform is urgent, to put it mildly. On the other hand, the need for caution is equally strong, since so very much is at stake not only for the well-being of our financial system over time but also for the health and vitality of the economy at large. Striking the proper balance between progressive change and caution is not easy, but that goal is within reach. I might note at the outset that in my judgment permitting commercial firms to control banks fails on both counts. It is neither progressive nor cautious.
Banking and Commerce
As the committee knows, several weeks ago I appeared before the House Subcommittee on Telecommunications and Finance to discuss the banking-commerce question. At that time I submitted a rather lengthy statement. While I am sensitive to the appearance of placing before this committee what may be viewed as a rerun, I have attached to this statement that earlier testimony.(1) Even without the benefit of that lengthy statement, it will, I am sure, come as no surprise to you when I repeat my strong opposition to arrangements that would permit commercial firms to control banking institutions.
While that opposition is steadfast in current circumstances, I also have said on many occasions--including before this committee--that I am not opposed to providing a measure of greater flexibility in this area so long as the protections against control are not violated or threatened. In addition, I believe that the basic ground rules associated with passive investments in banking institutions are badly in need of clarification. In part, this need for clarification arises because the proliferation of new capital market instruments has made it very difficult to administer the existing rules in a setting in which there is a large gray area between investments of less than 5 percent for which control is presumed not to exist and investments of 25 percent or more for which control is presumed to exist. Of course, if such clarifications are made regarding passive investments in banking organizations, logic would suggest that the same ground rules should govern passive investments by bank holding companies in firms whose scope of activities fall outside the "closely related" test in the Bank Holding Company Act.
With that suggestion in mind, let me now turn to the specific questions posed by the committee regarding controlling investments in banking institutions by commercial firms.
1. Would allowing commercial firms to acquire and control banks bolster the capital base of the banking industry?
The answer to this question is unclear. Whether or not the capital base of the banking industry would be increased depends on several factors, including the nature of the investments, their size, how they are financed and, very importantly, whether the "added" capital results from double-leveraging of the existing capital base of the commercial firms making the investments. …