Remarks by John D. Hawke, Jr. Comptroller of the Currency before the Women in Housing and Finance Washington, D.C. April 19, 1999 There's an old Persian fable about three noblemen who keep stumbling upon wondrous surprises. In the course of their travels together, they find themselves -- unexpectedly, of course -- on the paradise island of Serendip. As the author John Barth explains, "you don't reach Serendip by plotting a course for it. You have to set out in good faith for elsewhere and lose your bearings serendipitously." History is full of happy accidents and unpredicted outcomes. Christopher Columbus discovered the New World instead of an alternate route to Asia. Alexander Graham Bell was working on a hearing aid for his wife when he hit upon the idea for the telephone. And Women in Housing and Finance, which began twenty years ago as a group of five professional women networking at lunch, is today an organization of men and women, more than 700 strong, who have become a major force on the local and national scene. I congratulate you on your anniversary. Serendipity has also played an important role in the evolution of our financial system. When Congress created the national banking system in 1863, it didn't intend for state and national banks to coexist as they do today. Indeed, it was Congress's original expectation -- and fervent wish -- that the national charter would be so attractive that it would soon drive all others from the field. When market forces failed to do the job, Congress sought to provide the necessary push in the form of a tax on state banks. But that didn't work either, and neither did various other proposals down through the years to unify the bank charter. Like the cat with nine lives, the state banks survived and the dual banking system flourished. Not coincidentally, so has our nation's economy. With hindsight, it's clear that attempts to suppress dual banking were both futile and ill-advised. Our system of charter and supervisory options may not conform to any predetermined model of bureaucratic organization. It may lack simplicity and well-defined, orderly lines of authority. But it does reflect fundamental values cherished by Americans: competition, federalism, and freedom of choice. It seems to me, in other words, that the dual banking system has persisted as an institution, despite its complexities and despite efforts to eradicate it, because it's an authentic reflection of what we believe -- and what we practice -- as a people. Balancing supervisory authority between Washington and the states has contributed to a responsive, innovative, and stable banking system capable of accommodating the full diversity of our economic life -- a system that's the envy of the world. One reason the system has thrived is that, after coming to a belated appreciation of its value, Congress intervened at critical intervals to maintain a healthy balance and to ensure that the state and national bank charters kept pace with one another. Through legislation, Federal regulators and national banks obtained the authority to match innovations and incentives coming from their state counterparts. For example, in response to urgent pleas from the Comptroller of the Currency, Congress in 1927 passed the McFadden Act, granting national banks branching powers roughly equivalent to those already enjoyed by many state banks. And it relaxed other legal restrictions -- such as those barring national banks from offering safe deposit boxes and making most real estate loans -- that were eroding the value of the national bank franchise. At the same time, Congress has been cautious about encroaching on the authority of the states to charter and empower banks. For example, excepting only insurance underwriting, the states have been left free to allow their banks to engage in activities not permissible for national banks so long as the FDIC determines the activity would not pose a significant risk to the insurance fund. Let me add that this process has not been a one-way street. Many states have enacted "wild card" statutes -- laws that allow state-chartered banks to exercise powers available to national banks. Nor -- despite what some critics say -- has the process been a "race to the bottom. " Back in early 1960s, under Comptroller James J. Saxon, the OCC concentrated on upgrading the qualifications and skills of its examination force. This led to calls from state bankers and action by state supervisors to match these improvements. The quality of examinations improved significantly on both sides, and the whole dual banking system emerged the stronger for it. In short, what former Federal Reserve Board chairman Arthur Burns called -- in memorable if misleading terms -- "a competition in laxity" between state and Federal banking authorities -- has actually been a textbook case of federalism in action. The competitive tension between state and national authority has produced a safe and sound banking system, an efficient and effective supervisory regime, and regulatory structures capable of adapting to the demands of an evolving marketplace. The point is that, while the dual banking system today is healthy and strong, it requires care and feeding to keep it that way. History shows that the absence of needed legislation -- or the enactment of the wrong kind of legislation -- can do it real harm. We happen to be at one of those critical crossroads when Congress seems to be moving toward action on comprehensive banking legislation. I'm concerned, however, that some of the current legislative proposals would upset the balance between state and national banks in the context of the dual banking system. Last year's version of H.R. 10, for example, contained a profusion of provisions that would have discriminated--wholly unjustifiably--against national banks, and some of the most ardent proponents of financial modernization continue to urge Congress to impose discriminatory restrictions on national banks. You have all heard the arguments about the pros and cons of operating subsidiaries. Some have argued that Congress should deprive national banking organizations of the ability to choose the format that suits their needs best in the name of containing some ethereal and elusive "subsidy." On the other hand, the FDIC -- the agency with the greatest interest in preserving the safety and soundness of banks -- has consistently made the point that the op sub advances safety and soundness, by allowing banks to diversify their income streams and to husband their resources, rather than forcing revenue and capital out of the bank to benefit Fed-regulated holding companies. I don't want to embroil you again in the esoterica of op subs. But I do want to focus on the impact on the dual banking system of the position proposed by the anti-op sub camp. First of all, for some reason, this camp seems to be opposed to op subs only where they apply to newly authorized financial activities conducted by national banks. Despite concerns about spreading the alleged "subsidy" and their claim that op subs generally are incompatible with safety and soundness, they have not proposed to apply a similar blanket prohibition to state-chartered banks. They seem willing to accept a structure in which the states are left relatively free to permit new activities for state banks, subject only to the FDIC determination that no risk is presented to the insurance fund, while flatly prohibiting comparable new activities for national bank subsidiaries. How can we explain this inconsistency? Political realism -- to put the best light on it -- is one possibility. The 50 state banking systems constitute a formidable political force that would surely mobilize in opposition to any overt proposal that op subs for state banks should be outlawed in the manner proposed for national banks. But any apparent advantage for state banks may be short lived. If those who want to put national banks in an organizational straitjacket succeed in doing so -- ostensibly in the name of curtailing the spread of some "subsidy" -- how long do you think it would be before someone got the idea of applying the same limits to state banks? After all, if a subsidy exists, and if the op sub presents a safety and soundness issue, it's hard to see what rationale would support legislation that arbitrarily allows some banks to own subsidiaries but not others, based on the source of their charter. Please don't misunderstand me. I am not by any means suggesting that limits should be placed on state bank op subs. I am in favor of freedom of choice -- a fundamental principle of the dual banking system -- for state as well as national banks. The states have, with the concurrence of the FDIC, authorized a variety of activities for state- chartered banks, and I think they should be permitted to do so. My point is simply that the states cannot be complacent in the face of proposals to restrict the activities of national banks. To paraphrase John Donne, the bell tolls for them, too. While the debate on this issue has focussed on those proposals that would explicitly discriminate against national banks, opponents of the op sub have, to be fair to them, selectively proposed that Congress should do additional damage to the dual banking system by cutting back on some of the powers of state banks through a new expansion of Glass- Steagall. Despite the fact that a foundation stone of financial modernization legislation has been the repeal of provisions of Glass-Steagall, those opposed to op subs have actually tried to extend the reach of section 21 of Glass-Steagall. Section 21 as it now exists prohibits a deposit-taking institution from engaging in securities underwriting in the same entity. It does not reach relationships with affiliates -- sister companies or subsidiaries -- that might engage in securities activities. Those relationships have been governed by sections 20 and 32, the very sections everyone agrees ought to be repealed. The consequence of extending section 21, as the anti-op sub forces have proposed, would be to outlaw securities activities for all bank subsidiaries -- state and national alike. Unlike sections 20 and 32, section 21 is not limited in its reach to member banks of the Federal Reserve System. This would effectively nullify the existing power of state banks to engage through subsidiaries in securities underwriting -- an activity the FDIC has already found not to pose a risk to the insurance fund. Why, it should be asked, more than 65 years after Glass-Steagall was enacted; at a time when it is almost universally regarded as obsolete and eminently repealable; at a time when section 20 affiliates of member banks have engaged in securities underwriting under Federal Reserve jurisdiction for a number of years without apparent problems, should it be deemed necessary to prohibit the same securities activities for bank subsidiaries, state and national alike? More to the point, why should Congress accept such a proposal to cut back on powers that a number of states have already granted to their banks? To put the kindest face on it, this proposal is not only retrogressive, but quite inconsistent with a decent respect for the dual banking system. Once again, state banks should take care that they know for whom the bell tolls. There are other gratuitous ways in which various versions of the legislation would do violence to the dual banking system. For example, in some versions of financial modernization legislation, national banks and their subsidiaries would be barred from selling title insurance, while state banks and their subsidiaries could continue to sell title insurance. In addition, while a majority of states currently permit state banks to act as agents for the sale of insurance, with no restrictions on the size of the locality in which they operate, all the pending versions of financial modernization legislation would perpetuate the archaic "place of 5,000" limit on the ability of national banks to act as insurance agents. I'm sure there are some state banks that might welcome and support these provisions. It's hard not to feel like a winner when you come out ahead of the other guy. But I believe state banks and their supervisors would be terribly shortsighted if they ignored the implications of these discriminatory provisions. Once the precedent is established of accepting anticompetitive provisions -- whether they involve operating subsidiaries, product restrictions, activity limits, or discrimination among types of banks -- everyone is fair game. For more than a century, the fortunes of state and national banks have been inextricably linked. That is still true today. State banking interests should keep in mind that our strength has traditionally also been their strength and vice versa. Competition can be inconvenient and even painful in the short term, but its long term benefits are incalculable. Without the competition we provide each other, without the stimulus we generate to improve and innovate, we may all be threatened with stagnation. And that's not in the interests of the American people. At the outset of my remarks, I suggested that the remarkable resilience of the dual banking system over the years derives from the fact that it's a true expression of our national character. Above all, we Americans are a pragmatic people; we embrace what works. The dual banking system is around today not because it was part of anyone's master plan, but because it's helped us attain our goal of a buoyant, prosperous economy. We should think twice -- or three times -- before enacting legislation that would cause profound injury to an institution that has been so instrumental in helping us achieve our national success. Thank you.