ECONOMIC IMPUCATIONS OF THE "TOO BIG TO FAIL" POLICY HEARING BEFORE THE SUBCOMMITTEE ON ECONOMIC STABILIZATION OF THE COMMITTEE ON BANKING, FINANCE AND UEBAN AFFAIKS HOUSE OF KEPRESENTATIVES ONE HUNDRED SECOND CONGRESS FIRST SESSION MAY 9, 1991 Printed for the use of the Committee on Banking, Finance and Urban Affairs Serial No. 102-31 For sale by the U.S. Government Printing Office Superintendent of Documents, Congressional Sales Office, Washington, DC 20402 ISBN 0-16-035335-1 HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS HENRY B. GONZALEZ, Texas, Chairman FRANK ANNUNZIO, Illinois CHALMERS P. WYLIE, Ohio STEPHEN L. NEAL, North Carolina JIM LEACH, Iowa CARROLL HUBBARD, JR., Kentucky BILL McCOLLUM, Florida JOHN J. LAFALCE, New York MARGE ROUKEMA, New Jersey MARY ROSE OAKAR, Ohio DOUG BEREUTER, Nebraska BRUCE F. VENTO, Minnesota THOMAS J. RIDGE, Pennsylvania DOUG BARNARD, JR., Georgia TOBY ROTH, Wisconsin CHARLES E. SCHUMER, New York ALFRED A. (AL) McCANDLESS, California BARNEY FRANK, Massachusetts RICHARD H. BAKER, Louisiana BEN ERDREICH, Alabama CLIFF STEARNS, Florida THOMAS R. CARPER, Delaware PAUL E. GILLMOR, Ohio ESTEBAN EDWARD TORRES, California BILL PAXON, New York GERALD D. KLECZKA, Wisconsin JOHN J. DUNCAN, JR., Tennessee PAUL E. KANJORSKI, Pennsylvania TOM CAMPBELL, California EUZABETH J. PATTERSON, South Carolina MEL HANCOCK, Missouri JOSEPH P. KENNEDY II, Massachusetts FRANK D. RIGGS, California FLOYD H. FLAKE, New York JIM NUSSLE, Iowa KWEISI MFUME, Maryland RICHARD K. ARMEY, Texas PETER HOAGLAND, Nebraska CRAIG THOMAS, Wyoming RICHARD E. NEAL, Massachusetts CHARLES J. LUKEN, Ohio BERNARD SANDERS, Vermont MAXINE WATERS, California LARRY LAROCCO, Idaho BILL ORTON, Utah JIM BACCHUS, Florida JAMES P. MORAN, Virginia JOHN W. COX, JR., Illinois TED WEISS, New York JIM SLATTERY, Kansas GARY L. ACKERMAN, New York SUBCOMMITTEE ON ECONOMIC STABILIZATION THOMAS R. CARPER, Delaware, Chairman JOHN J. LAFALCE, New York THOMAS J. RIDGE, Pennsylvania MARY ROSE OAKAR, Ohio BILL PAXON, New York BRUCE F. VENTO, Minnesota MEL HANCOCK, Missouri PAUL E. KANJORSKI, Pennsylvania JIM NUSSLE, Iowa ELIZABETH J. PATTERSON, South Carolina RICHARD ARMEY, Texas PETER HOAGLAND, Nebraska CRAIG THOMAS, Wyoming CHARLES J. LUKEN, Ohio JAMES P. MORAN, Virginia (II) CONTENTS Page Hearing held on: May 9, 1991 1 Appendix: May 9, 1991 65 WITNESSES THURSDAY, MAY 9, 1991 Brandon, William H., Jr., president, First National Bank of Phillips County, Helena, AR, American Bankers Association 48 Clarke, Robert L., Comptroller of the Currency, Office of the Comptroller of the Currency 5 Ely, Bert, president, Ely & Company, Inc., Alexandria, VA 50 Finch, Johnny C, General Acconutig Office, Director of Planning and Report­ ing, General Accounting Division, accompanied by Craig Simmons and Steve Swaim 36 Glauber, Robert R., Under Secretary of the Treasury for Finance, Department of the Treasury 6 Kaufman, George G., Professor of Finance and Economics, Loyola University of Chicago, Chicago. IL 52 LaWare, John, Governor, Board of Governors of the Federal Reserve System... 9 Seidman, L. William, Chairman, Federal Deposit Insurance Corporation 3 Wright, Howard L., Director of Regulatory Matters, Office of Financial Mar­ kets, Arthur Anderson & Company, Member, The Committee for Responsi­ ble Financial Reform 54 APPENDIX Prepared statements: Carper, Hon. Thomas R 66 Ridge, Hon. Thomas J 68 Brandon, William H., Jr., with attachment 147 Clarke, Robert L 96 Ely, Bert , 218 Finch, Johnny C 131 Glauber, Robert R 102 Kaufman, George G < 191 LaWare, John v. Ill Seidman, L. William 69 Wright, Howard W 202 ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD American Bankers Association, Washington, DC., paper entitled "A Response to the Concerns About Final Settlement Payment Approach" 163 Chicago Clearing House Association, News Release, "Chicago Bankers Oppose Too Big Too Fail" dated April 26,1991 214 Ely, Bert, oral statement "Abandoning Too-Big-To-Fail: The Impossible Dream" 216 (in) ECONOMIC IMPLICATIONS OF THE "TOO BIG TO FAIL" POLICY THURSDAY, MAY 9, 1991 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING, FINANCE AND URBAN FINANCE, SUBCOMMITTEE ON ECONOMIC STABILIZATION, Washington, DC, The subcommittee met, pursuant to call at 10:05 a.m., in room 2128, Rayburn House Office Building, Hon. Thomas R. Carper [chairman of the subcommittee] presiding. Present: Chairman Carper, Representatives Vento, Patterson, Hoagland, Luken, Moran, Ridge, Hancock, Nussle, and Thomas. Also Present: Representative McCandless. Chairman CARPER. Welcome to each of you here with us today. The Democratic Caucus of the full House of Representatives is having a session this morning. I think it deals with the confirma­ tion of a subcommittee chairman or a committee chairman, and we will be joined probably during the next hour by most of the Demo­ crats on the panel: We have already been joined by a number of our Republican col­ leagues, including Mr. McCandless, who is sitting in today, though not a member of our subcommittee. We welcome him. I want to thank my fellow members of our subcommittee and our witnesses for joining us here today to discuss the economic implica­ tions of the too-big-to-fail policy and proposed legislative changes to this policy. Bank failures occurred at a record level in the 1980's. In the last 3 years alone, close to 600 banks have failed or received assistance, and this trend is not likely to significantly change in the near future. Yet, not all of these failed institutions have been resolved in the same manner. While deposit insurance protection has been routinely extended to insured depositors when large banks fail, such protection has not always been afforded to uninsured depositors when small banks fail. This policy of protecting uninsured depositors in large bank fail­ ures in order to prevent adverse effects on the financial system and the macro economy is commonly referred to as the too-big-to-fail doctrine. While some argue that the policy has been important in main­ taining a stable financial system in our country, it has resulted in inequitable treatment of depositors and banks, increased costs to (l) 2 the bank insurance fund, increased taxpayer exposure, and market discipline. For those reasons, the too-big-to-fail policy is one of the most con­ troversial issues in the banking community today. It presents Members of the House and Senate Banking Committees with one of the thorniest problems to resolve as we debate bank reform this year. Congress' ultimate goal should be to reform the banking industry in a way that will restore vitality to the banking industry, benefit consumers and avoid another taxpayer bailout. To reach that goal, the too-big-to-fail issue must be resolved. I commend Chairman Gonzalez and Chairman Annunzio for begin­ ning to address the too-big-to-fail issue in H.R. 2094, but I believe that important questions still remain unanswered. The purpose of today's hearing is to review in detail the econom­ ic justifications for a too-big-to-fail policy, and the economic impli­ cations of proposed changes to this policy. We have a full plate before us today, with a number of witnesses scheduled to testify. I will save all of you from a long opening statement at this point, and just say that I look forward to hearing from each of our distin­ guished panel of witnesses. Having said that, I will defer to any of our colleagues who have an opening statement. Please. Mr. NUSSLE. Thank you, Mr. Chairman, and thank you for the opportunity to participate in an important debate on the too-big-to- fail policy. I also want to thank the distinguished members of the panel for coming before the subcommittee. I realize my duties in Congress are two-fold. First, I have the in­ terests of Iowa to consider, but I also have a national responsibility to work for sound national policies. Quite frankly, I have a concern that too-big-to-fail policy is neither. Is it good policy and is it good for Iowa? I come from a small town in Iowa with a population of 5,000, some say, when everyone is there visiting relatives and friends, and the communities sur­ rounding my town are not much bigger. The current situation with too-big-to-fail banks is, in some peo­ ple's opinions, unfair to Iowa bankers who run the healthiest banks in the Nation, and who are paying deposit insurance premiums which go to cover uninsured deposits. We now have an opportunity to fix this inequity in the banking system via the proposed banking reform legislation. I am encour­ aged by the Treasury's proposal for early intervention into trou­ bled banks to solve the problem before the question arises about covering those uninsured deposits. However, I am troubled with the legislation the way it is now. I am afraid that limiting deposit insurance for individuals, while too- big-to-fail policy is still intact, will drive deposits out of Iowa banks and into big city banks. And when loan making authority is taken from local bank officials, community needs are not given the same consideration as the bottom line. In closing, I want to reiterate my strong desire to see the bank­ ing industry nursed back to wellness, but I ask that it not be done at the expense of Iowa banks and those small community banks that we find in towns like the town I come from. Thank you, Mr. Chairman. 3 Chairman CARPER. Thank you, Mr. Nussle. Any other opening statements? Mr. THOMAS. Thank you, Mr. Chairman. This is the first time I have been on this subcommittee. I appreci­ ate very much your talking about this subject. Chairman CARPER. We are always glad to have another at-large representative here. Mr. THOMAS. Yes, there aren't many of us, are there? I probably have heard more about this than most any of the other several items we talk about from the banks in Wyoming, so I look forward to this hearing.