The Honorable James A. Leach
Chairman, Committee on Banking and Financial Services
U.S. House of Representatives
2186 Rayburn House Office Building
Washington D.C. 20515-6050

Dear Chairman Leach:

The Treasury Management Association (TMA) is pleased to offer its views on the issue of financial services reform.  The Committee on Banking and Financial Services is advancing important legislation in this area based on H.R. 1062, the Financial Services Competitiveness Act of 1995 which you introduced -- and H.R. 814, the Depository Institution Affiliation Act sponsored by Representative Baker (R-LA) and others.  We believe it is both prudent and timely to proceed with modernization of the financial industry.

The TMA represents approximately 7,500 treasury professionals who on behalf of over 3,000 corporations and other organizations are significant customers of the nation's financial system.  Our members have responsibility for banking relationships, investments, credit, payments and cash management.  Organizations represented by our members are drawn generally from the Fortune 1000 and the largest of the middle market companies.  They have an active interest and a sizable stake in proposed changes to the financial industry.  Therefore, we offer a brief statement capsulizing our objectives for financial industry reform.

The Treasury Management Association supports reform of the financial services industry as an important step in creating a global business environment that is favorable to the competitive environment of U.S. business.

These reforms should be crafted to meet two key objectives - the development of free and open competition within the financial services industry, and the preservation of the safety and soundness of the banking system.

Free and Open Competition Within the Financial Services Industry

Efficiency and innovation in the development and delivery of products and services are hallmarks of a healthy and competitive business environment.  These benefits will be directly realized by users of financial products and services by enhancing the ability of financial service providers to compete freely.  Less expensive and more creative product offerings, delivered more efficiently to the customer, will result from increased competition.

Over time, the legal and regulatory environment has allowed diverse entrants into the financial services industry.  This has often been accomplished through technical loopholes and special legal provisions.  The resulting patchwork pattern of services provided is often materially-affected by geographic location, the most recent court decision, or regulatory fiat. This has led to the creation of somewhat limited and less efficient organizations which offer an inconsistent array of services in an uneven competitive arena.

We believe that restrictions that favor any particular industry or market segment with respect to its ability to engage in financial services activities should be eliminated in support of the goal of free and open competition framed by far-sighted legislation.  Allowing business to engage in a broader array of financial services activities will further strengthen the industry through diversification and stability in earnings.

Preservation of the Safety and Soundness of the Banking System

Access by depository institutions to the U.S. payment system, to special borrowing arrangements with the Federal Reserve and to the offering of insured deposit accounts, represents a unique franchise of the banking industry that must be protected from any additional risk as a result of reforms.  The Government must stand firm in its resolve to apply the banking "safety net" only to depository institutions and not to their parent or affiliate companies during times of stress.

Regulatory oversight authority should rest in a federal commission comprised of various financial industry functional regulators.  When the commission believes a problem exists in a financial organizational unit which may pose a threat to the safety and soundness of an insured depository institution, the commission would direct the problem to the appropriate functional regulator.

Adequate structural firewalls and regulations are critical to protect the health of our banking system.  Insured bank deposits must be shielded from activities that present an inappropriate level of risk or conflict of interest.  Lending supported by the use of insured deposits or discount borrowings from the Federal Reserve should be restricted when impacting transactions with affiliated units of financial services providers. Strict rules regarding the capital requirements of depository institutions and the monitoring of compliance with these regulations must be an integral part of any reform legislation.

Finally, the Association finds attractive the concept of a structure which would allow uninsured wholesale financial institutions to forego retail banking activities and federally insured deposits.  This approach would provide an alternative structure to house higher risk financial activities not appropriate to federally insured institutions.  Additionally, the uninsured wholesale financial institution would provide an attractive option to bank customers who choose not to participate in the mandated deposit insurance system.

In summary, the TMA supports a legislative approach which includes the following elements:

• Financial service organizations may offer an unrestricted range of financial services and products;
   
• Financial service companies may be owned by any type of business or industry entity;
   
• Financial service company activities would be subject to a functional regulatory environment;
   
• Structural firewalls and regulatory oversight would be required for depository institutions;
   
• Uninsured wholesale financial institutions would be a permitted option within the financial services structure.

We hope that this vision of financial industry reform objectives is helpful to your deliberations.  Our goal is to promote an open and competitive financial services industry, offering increased and alternative distribution of financial services at fair prices, while ensuring the safety and soundness of the nation's financial system.

Sincerely,

/s/ Thomas D. Logan, CCM
Treasurer, Basic American, Inc., and
Chair, Government Relations Committee
Treasury Management Association

/s/ Donald Manger
President & CEO
Treasury Management Association

cc:
Members of the Committee on Banking and Financial Services of the House of Representatives