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from abroad lent readily, which spurred lending at the four big domestic banks, including Westpac. Real-estate prices soared, and a crop of highflying entrepreneurs emerged, including Perth businessman Alan Bond, with his flagship Bond Corp. Holdings Ltd. By the early 1990s, a recession had pricked the asset bubbles. Mr. Bond's empire collapsed, owing creditors $ 10 billion, and he now is in jail for corporate misdeeds. Regulators say troubled debt now amounts to 1% of the outstanding loans of all banks in Australia, down sharply from a 1992 peak of 10%.

Before the 1980s crisis, the science of assessing credit risk “just didn't exist” in Australian banking, says Les Phelps, executive general manager of the nation's bank regulator. In its wake, banks such as Westpac moved to implement a better risk-management system and provide greater disclosure, and regulators added staff, increased the frequency of bank visits, and standardized and tightened definitions of such things as troubled assets.

“After the disasters of the cowboy era, everybody got religion,” says Mr. Joss, who recently left Westpac to become dean of Stanford University's business school. ""Corporate balance sheets are much healthier in Australia today than they were six or eight years ago.” As both equity and debt capital got scarcer, Australian companies had to manage resources better, something that Asian companies must learn to do, he says. The government, too, is in better financial shape today, having recorded a budget surplus, excluding asset sales, last year and predicting another surplus for the fiscal year ending in June.

As a result, Australia was better prepared than some other economies when Thailand's 1997 devaluation set off a chain reaction that turned growth in Asia into recession. Not surprisingly, the Australian dollar fell, losing 25% of its value as. the crisis deepened. The currency, which had been at 80 U.S. cents in late 1996, weakened to 74 cents after Thailand devalued, and touched bottom at 55 cents after Russia's default and devaluation in August 1998.

Inside the Australian central bank, however, policy makers concluded that the country's dollar would have to stay weak for at least six months before a resulting rise in import prices would stoke inflation. Betting correctly that the currency would rebound, the bank, unlike many of its counterparts, didn't tighten monetary policy, though it spent US$2.5 billion, 20% of its hard-currency hoard, to buy the Australian dollar in an effort to stem selling that was deemed mostly “speculative.” Its wager paid off; the Australian dollar has been hovering around 63 Ú.S. cents, and inflation has been steady at around 1.6%.

Central bank chief Ian Macfarlane remains cautious, however. “We had been expecting a noticeable slowdown, and we still are," he says. “But it will be a slowing off a much higher basis than we formerly thought.”

What happened in New Zealand, which also overhauled its economy in the 1980s, underscores the importance of Mr. Macfarlane's policy decision. New Zealand's central bankers had been tightening monetary policy through the end of 1996 to cool inflationary pressures, and began easing in early 1997. But partly out of fear that the weakening New Zealand dollar would stir up inflation, It didn't ease quickly enough-and a recession ensued.

“We'd probably have eased more if we'd actually had a realistic understanding” of the magnitude of both the Asian crisis and a drought that hurt local agricultural production, says Donald Brash, New Zealand's central banker. Still, Mr. Brash thinks that because of the time it takes for such changes to affect an economy, monetary policy would have needed to be “much easier in 1996" to stop New Zealandwhose economy now is growing again—from sliding into recession in early 1998.

But propelling a capitalist economy forward takes more than strong banks and central bankers who are prepared to risk a weakening currency. It also takes businesses that can and do respond when the world around them changes.

For years, Australian businesses and workers had struggled to cope with the dismantling of policies that, in the government's view, were restraining the Australian economy. Tariff barriers protecting Australian industries were stripped away. The rigid national wage-setting structure that had governed pay has moved toward a productivity-based system of labor agreements reached at individual, companies. Air travel, electricity and telecommunications have been opened to competition.

The changes were painful and controversial, but the resulting flexibility now is yielding benefits.

Take, for example, Zip Heaters (Aust) Pty. Ltd., Sydney, which makes instant water heaters for hot drinks. Like many other Australian manufacturers, Michael Crouch, chairman of the closely held company, which employs about 200, decided in the mid-1980s to look outside Australia to build his business. Zip now exports to about 20 countries, deriving 65% of its earnings from overseas. Indeed, Mr. Crouch boasts that several world leaders, including British Prime Minister Tony Blair, use Zips; Mr. Blair's office wouldn't comment, citing a standing policy.


Before the Asian crisis, Zip was exporting about 10% of its output to Asia. That figure has been halved, but Zip has shifted its focus to the buoyant British market, where Mr. Crouch says sales have more than offset the Asian slump.

Over the past five years, deregulation has cut his business costs_helping trim 20% off Zip's energy bills, for example. But Mr. Crouch credits Australia's low interest rates-Australian companies can borrow at about 5% to 6%-and its flexible exchange rate as the biggest factors in his company's favor. “I can't emphasize enough how important that has been to Australian manufacturers,” he adds.

Mr. OXLEY. I thank the gentleman.
The gentleman from Oklahoma, Mr. Largent.
The gentleman from Illinois, Mr. Shimkus.
The gentleman from New York, Mr. Lazio.

Mr. LAZIO. Just briefly, Mr. Chairman. I want to thank you for the wonderful work you did last year for removing the H.R. 10. This is another significant opportunity for the committee to step forward and to affirm the evolution of the marketplace. I think in many ways that is exactly what H.R. 10 is. We are affirming the evolution of the marketplace. The demand is driving the integration of financial services, and if there is any doubt about that, certainly the Citigroup merger was a reaffirmation of the fact that there is enormous demand for risk products through the insurance affiliates, securities products to fulfill the hunger for the capital needs throughout the world, and banking products which in many ways are defying our ability to define them in pure terms. What is a derivative? What is a mortgage-backed security? It is partly a risk instrument, partly an investment instrument; certainly in many ways a security instrument.

So I want to compliment you, Mr. Chairman, and I want to compliment Chairman Greenspan for his constructive and sustained efforts both in the Banking Committee and Commerce Committee. This has developed into an important partnership and has brought us to where we are on the verge of providing the framework for the 21st century for our American financial services enterprises to thrive throughout the world and to meet the demand in insurance and securities and banking.

Mr. OXLEY. I thank the gentleman.
[Additional statements submitted for the record follow:)


FROM THE STATE OF ARIZONA Thank you Mr. Chairman. I am pleased that Federal Reserve Chairman Greenspan is able to join us today to discuss financial services modernization, an issue that has become a perennial topic for this committee.

I am an ardent supporter of financial modernization and believe this legislation is necessary to allow America's banking and financial services to compete in the global market. Financial services legislation is needed to repeal the Depression-era banking laws created in response to a decade of financial loss, the crash of the stock market, and numerous bank closures. These laws, including the Bank Holding Company Act and the Glass-Steagall Act, separated banking and insurance activities, and banking and securities activities, respectively:

It was believed that banks, whose main function is to protect the customer's financial holdings, should not engage in risk-oriented financial services such as securities and insurance. At the time, this separation of activities was expected to prevent future bank failures incorrectly attributed to involvement in securities. In fact, many bank failures during this era were not a direct result of securities activity but rather this mishandling of deposits by the banks themselves. Mr. Glass recognized this and attempted to repeal his own legislation only one year later.

There is now widespread consensus that banks, securities firms, and insurance companies should be afforded the opportunity to consolidate their services to provide

customers one-stop shopping for financial products. However, I share Chairman Greenspan's reservations about allowing these services to be provided through an operating subsidiary of a bank holding company.

Although the banking laws of the 1930's may have been misguided in their attempts to rectify the economic crisis that existed, I believe the financial services legislation approved by the this subcommittee should provide consumers protection against any future financial crisis. This can best be achieved through affiliates of a financial holding company. A financial holding company provides multiple financial services to consumers while separating the high risk securities and insurance activities from the federally insured banking activity.

Furthermore, if we are to maintain the current regulatory standards over banking, securities and insurance products, functional regulation must be a key component of financial services legislation. Specifically, the regulation of securities by the Securities and Exchange Commission and the regulation of insurance products by state insurance agencies is vital to providing consumers the most sound financial services available.

Again, I thank Chairman Greenspan for appearing before this subcommittee today and I commend Chairman Bliley and Chairman Oxley for their leadership on this issue. As a new member of the House Commerce Committee, I look forward to addressing H.R. 10, the Financial Services Act of 1999, more closely and creating a reform package that will provide consumers comprehensive and affordable financial services.


FROM THE STATE OF WISCONSIN Mr. Chairman and Democratic Ranking Member Dingell, I appreciate the opportunity to submit opening remarks for today's hearing on H.R. 10, the Financial Modernization Act.

Nearly 70 years has passed since Congress enacted laws governing the financial services industry. Although these laws have served our country well for many years, no one could have envisioned the global and technologically sophisticated financial marketplace that exists today.

The financial services marketplace is evolving at a fast and furious pace, and the complexity of services offered by financial institutions challenges the capacity of the existing regulatory structure to meet market needs while safeguarding consumers.

After many years of debate on this issue, I hope that this Congress will enact a financial modernization bill that will benefit consumers while ensuring that our financial services industry can operate efficiently, competitively and securely in the 21st century.

H.R. 10 is now before this committee. As we move this legislation forward, I hope that the members of this committee will not lose sight of the needs of local communities, especially underserved urban and rural neighborhoods. In our pursuit to modernize the financial services system, we need to make sure it works for all communities.

As we all know, the future of our local communities, and the Community Reinvestment Act (CRA) in particular, has been a key issue in legislative efforts to overhaul our nation's outdated laws governing the financial services industry.

I am very pleased that the House Banking Committee reported out a bill that preserves CRÅ and expands it to cover the new wholesale financial institutions established in H.R. 10. CRA has proven to be necessary and effective. This law has channeled over $680 billion in reinvestment dollars for home loans, small business development and economic revitalization programs in low-income urban and rural neighborhoods across our country.

I thank Chairman Alan Greenspan for being here today, and I also want to take this opportunity to applaud him for his testimony about the success of CRA before the House Banking Committee in February. To quote Mr. Greenspan, CRA nas "very significantly increased the amount of credit that's available in the communities, and if one looks at the detailed statistics, some of the changes have really been quite profound.”

I would also be remiss if I did not say that I am appalled by Senator Gramm's attempt to scale back CRA, and limit its impact. The bill that Senator Gramm pushed through the Senate Banking Committee would exempt more than 60% of all banks nationwide, and almost 75%c in Wisconsin. I strongly oppose this legislation, and will oppose any bill that weakens CRA.

As this committee meets once again to consider a rewrite of our nation's financial services laws, we have an opportunity to preserve and expand CRA. Although I understand that it will be difficult to push through any changes that would expand CRA-like obligations to insurance.companies, securities firms, mortgage firms and other financial companies allowed to affiliate with banks, I still plan to pursue these issues.

These issues are very important to address because H.R. 10 would permit the unprecedented conglomeration of banks, securities firms, and insurance companies. These huge financial conglomerates would be allowed to shift their activities from banks to ČRA-exempt affiliates and subsidiaries. Therefore, banks would have fewer resources to make home and small business loans to low- and moderate income communities.

Mr. Chairman and Mr. Dingell, I sent over three proposals to the Democratic staff a few weeks ago that I hope you will consider including in the financial modernization markup vehicle you present to the members of this committee. They seek to ensure that community reinvestment keeps pace with the major structural changes that would occur in the banking and broader financial services industry as a result of H.R. 10.

I would like to submit copies of each of these proposals for the record along with my written testimony. Two of the proposals were offered by Rep. Luis Guiterrez during the House Banking Committee markup of H.R. 10. One concerns a data disclo sure requirement for insurance company affiliates of banks, and the other expands CRA to non-bank affiliates that make loans or engage in banking activities.

The third proposal is one that I offered during a Banking Committee markup of H.R. 10 in the 105th Congress. It passed in committee as an amendment to H.R. 10, but was not in the version of H.R. 10 that came up for a floor vote. It would establish an Advisory Council on Community Revitalization that would make recommendations to Congress on how to meet the capital and credit needs of underserved communities in the wake of financial modernization.

I would also like to submit for the record a copy of a proposal that I finished drafting yesterday. It simply calls on the federal financial regulatory agencies to conduct a study to examine the impact that H.R. 10 would have on the Community Reinvestment Act if enacted. If the regulators determine that the law has had an adversarial impact on CRA, they would have the authority to issue regulations addressing the problem. This proposal is not controversial, and makes common sense. As you may know, the Banking Committee approved version of H.R. 10 already includes a provision requiring a study on the impact H.R. 10 would have on small financial institutions.

I hope that every member of this committee will support the preservation of CRA, and will strongly consider the proposals I have submitted for consideration today. They will help ensure that in our effort to update our antiquated banking laws and bring the U.S. financial services system into the 21st century that we do not leave our communities behind.

Mr. OXLEY. We now turn to our sole witness for today, the Honorable Alan Greenspan, the Chairman of the Fed.

Mr. Greenspan, again, welcome back to the committee, and thank you for your good work in this and many other areas. STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD

OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. GREENSPAN. Thank you very much, Mr. Chairman. I would particularly like to thank the committee for the invitation that gives me the opportunity to present the views of the Federal Reserve on the current version of H.R. 10. Last year I testified at length before this committee on many of the issues related to your deliberations on this legislation. In the interest of time, I thought it might be best if I limit my formal comments to the critical issue of whether the important new powers being contemplated are exercised in a financial services holding company through a nonbank affiliate or in a bank through its subsidiary.

Let me be clear. We at the Federal Reserve strongly support the new powers that would be authorized by H.R. 10. We believe that these powers, however, should be financed essentially in the competitive marketplace and not financed by the sovereign credit of the United States. This requires that the new activities be permitted through holding companies and prohibited through banks. To do otherwise is potentially a step backward to greater Federal subsidization and eventually to more regulation to contain the subsidies. I and my colleagues accordingly are firmly of the view that the long-term stability of U.S. financial markets and the interests of the American taxpayer would be better served by no financial modernization bill rather than one that allows the proposed new activities to be conducted by the bank as proposed by H.R. 10. In that regard, we join Congressman Dingell in his remarks with respect to that issue.

Government guarantees of the banking system provide banks with a lower average cost of capital than would otherwise be the case. The subsidized cost of capital is achieved through lower market risk premiums on both insured and uninsured debt and through lower capital than would be required by the market if there were no government guarantees. The lower cost of funding gives banks a distinct competitive advantage over nonbank financial competitors.

Under H.R. 10, the subsidy that the government provides to banks as a byproduct of the safety net would be directly transferable to their operating subsidiaries to finance powers not currently permissible to the bank or its subsidiaries. We should be clear how the subsidy would link directly to an operating subsidiary. Because of the subsidy, the funds a bank uses to invest the equity of its subs are available to the bank at a lower cost than that of any other potential investor, save the U.S. Government. Thus, operating subsidiaries under H.R. 10 could conduct new securities, merchant banking and other activities with a government subsidized competitive advantage over independent firms that conduct the same activity.

H.R. 10 does not contain provisions that effectively curtail the transfer of the subsidy to operating subsidiaries or address this competitive imbalance. The provisions of H.R. 10 that would require the deduction of such investments from the regulatory capital of the bank, after which the bank must still meet the regulatory definition of “well-capitalized,” attempt but fail to limit the amount of subsidized funds that an individual bank can invest in its subsidiaries. What matters is not regulatory capital, but actual or economic capital. The vast majority of banks now hold significantly more capital than regulatory definitions of "well-capitalized” require. This capital is not "excess” in an economic sense that is somehow available for use outside the bank. It is the actual amount required by the market for the bank to conduct its own activities. Thus, deductions from regulatory capital would in no way inhibit the transfer of the subsidy from the bank to the subsidiary.

Some have argued that the subsidy transference to the subsidiaries of banks is no different from the transfer of subsidized bank dividends through the holding company parent to holding company affiliates. The direct upstreaming of dividends by a bank to its holding company parent that in turn invests the proceeds in subsidiaries of the holding company, while legally permissible, in fact does not occur. The empirical evidence indicates that, on net, at the largest organizations that is, over $1 billion in assets—there has

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