That brings me, finally, to the question of equivalent tax treatment. It is true that under some circumstances broker/dealers can suffer a disallowance of the interest incurred to carry tax-exempt bond inventories. This has no effect on the underwriting process, for reasons I have described. Even with respect to secondary market activities, analysis may show that the disparity is more apparent than it is real. We know, for example, that in the bank-eligible municipal markets there has been a longstanding practice of establishing joint accounts between banks and broker/dealers for

the sharing of market risk and joint distribution of securities. In these joint accounts banks share banks share with broker/dealers whatever benefits may be available from the tax treatment of bank funding costs. Also, it appears

that many broker/dealer firms have organized their affairs to provide that the carrying of all or a portion of a tax-exempt inventory is allocated to non- or low-interest cost funds such as equity capital. Moreover, the relative impact of the theoretical tax disparity clearly will vary depending on relative effective income tax rates of various banks and broker/dealers.

The fact is that there has been no in-depth analysis of the financial and competitive implications of the income tax treatment of bank dealers and nonbank dealers. To the extent that the information for such analysis is available, the Treasury Department has the data. It would be helpful if Treasury undertook a comprehensive and detailed analysis of the issue.

If an authoritative study shows that there is a significant financial advantage accorded to bank dealers, then, unquestionably, that disparity should be removed. For the benefit of the state and local government issuers of municipal obligations, we believe that equity of treatment should be achieved by according to broker/dealer firms the same tax treatment which

is available to banks.

85-952 0-81-67

In urging that the Treasury undertake such an analysis, we wish to make it indelibly clear that we do not believe that action on the authority for commercial banks to underwrite revenue bonds should await the completion of such a study. Whether or not we find a quantifiable difference in carrying costs by reason of differences in tax treatment, it is abundantly apparent from the empirical record of competition in the general obligation market that this difference has had no material impact on competition between banks and broker/dealer firms.

For these reasons, our initial analysis leads us to think that the Treasury suggestion of a separately capitalized subsidiary may be unnecessarily cumbersome, as well as disadvantageous for Federal and municipal issuers. This is especially so in light of the nature of the additional underwriting authority involved. What we are talking about, after all, is updating the law to reflect the changes that have taken place in state and local finance and simply to restore the ability of banks to compete fully in the municipal securities market. The compelling public need, as you will hear in more detail from the next panel, is to bring to state and local governments the benefits of the broadest possible competition for underwriting their revenue bonds without further delay. We should not let a debate about the mechanics deflect us from that goal.

Thank you.

The CHAIRMAN. Thank you, Mr. Schneider.

Mr. Kremer?

EDWARD J. KREMER, MEMBER, INDEPENDENT INSURANCE AGENTS OF AMERICA, ACCOMPANIED BY TOM WILSON

Mr. KREMER. Thank you. I am Edward Kremer, president of Hanna & Kremer Insurance Agency. I am accompanied by our Washington counsel, Mr. Thomas Wilson.

The remarks I offer today are made on behalf of not only IIAA but also the Major Insurance Producers Association of the United States, including the National Association of Professional Insurance Agents, National Association of Life Underwriters, and the National Association of Casualty and Surety Agents.

We understand the enormous complexity of this legislation and the far-reaching changes the bill would engender in the way financial services are organized and distributed. You have undertaken a difficult and laudable task.

We will attempt this morning to focus our remarks on the question of credit-related insurance tie-ins, title VI, only and hope that our testimony will help in sorting out the many other issues these hearings encompass. IIAA and the other groups for which I'm speaking today have long been concerned with the continuing attempts of huge bank holding companies to enter the insurance business. The basis of that concern is the inherent and anticompetitive power of financial institutions to direct the sale of insurance by virtue of their control over credit transactions.

We testified before this committee on May 6 in support of H.R. 2255 and S. 207, identical bills that embody the same bank holding company insurance prohibition which is contained in title VI of S. 1720, the legislation currently before you.

In the interest of saving time, we will not repeat what we said just four months ago, except to say that the case for curtailing bank holding company insurance activities is even stronger today than it was during the two previous Congresses. You may recall that a prohibition similar to that in title VI of S. 1720 passed the House of Representatives last year by 333 to 25 and was unanimously reported out of this committee.

Our case may be simply stated. It remains a fact of life, supported by numerous academic and legislative studies, court findings and financial and consumer regulatory agency reports that the combination of credit and insurance, (1), unfairly constricts the consumer's ability to choose the best insurance terms and service, free from the influence of credit and (2), unfairly competes against other sellers in the insurance market, who have no powers to extend or withhold credit.

COURT FINDINGS

It is the old company store monopoly in a new guise. Several new elements have recently been injected into the financial institutions insurance debate. In September the U.S. Court of Appeals for the Eighth Circuit vacated an order of the Federal Reserve Board approving an insurance agency application of Mercantile Bancorporation, the largest banking institution in the State of Missouri. In its opinion, the court made clear that the presentations that

Mercantile made to the Board in support of its application did not begin to satisfy the requirements of the public benefit test contained in section 4(c)(8) of the Bank Holding Company Act.

The court also chastized the Board for using the fact that the Mercantile application was de novo rather than an acquisition of a going concern to create a presumption that the public benefits requirement of the Bank Holding Company Act were satisfied and ordered a hearing on the factual issues raised by IIAA. The court's opinion provides independent verification that the dangers that IIAA and other interested groups have been alleging for many years is real, not imaginery.

The court specifically entertained the possibility that bank holding company insurance activities could produce harmful anticompetitive effects as a result of coercive and voluntary tieing. The court also recognized the possibility that bank holding company sales of insurance could create conflicts of interest and put the consumer in a position where he would pay more money for his insurance and receive less service in connection with it.

The action of the court also underscored the continuing, indeed, the apparently unending controversy that surrounds the bank holding company insurance issue. A controversy that only Congress has the power to end.

More recently the Federal Reserve Board took up the question of whether it should initiate a rulemaking proceeding to permit bank holding companies to sell renewal insurance, insurance that would be sold after the loan or other financial relationship was terminated. Such a regulation would represent a dramatic expansion of the current insurance authority of banks and bank holding companies. You, Mr. Chairman, and several other members of this committee, provided the Board with letters expressing the view that an expansion of the Board's insurance regulation at this time would be inadvisable. Those letters and the fact of these hearings and similar hearings scheduled in the House, induced the Board to postpone further consideration of this renewal insurance issue for 6 months.

Nevertheless, the fact that the Board would even entertain the possibility of declaring renewal insurance to be closely related to banking showed the inclination of the Board with, of course, the constant and spirited urgings of large bank holding companies to strain the limits of bank holding company nonbanking authority. That inclination can only be restrained if Congress enacts an explicit statutory line that separates banking from insurance activities.

The Board's attempt to expand its insurance regulation is particularly ironic in the light of the September 18, 1981, report of the General Accounting Office dealing with the Board's oversight of bank holding company nonbank acitivities. That report should prove sober reading for any legislator who takes the time to become familiar with it. GAO figures indicate that bank holding companies that engage in nonbanking activities run the risk of becoming problems about 15 times greater than those that do not undertake nonbanking activities.

Treasury Secretary Regan, who just this past Monday advocated before your committee the holding company mode for banks and

thrifts to expand into newer financial services might profitably ponder the GAO report. The fact is, and virtually every study that has examined the question verifies this, bank holding companies simply do not perform nonbanking activities either efficiently or well.

The GAO report concludes that the Federal Reserve Board does not maintain adequate information on bank holding company nonbanking activities by individual companies or for the industry as a whole. We are, therefore, gratified to see title VI included in S. 1720. Bank holding companies continue by a wide margin to be the dominant source of credit in our economy. As such, any attempt by Congress to separate the sale of insurance from credit extension must at least begin by amending the Bank Holding Company Act of 1956 in the way suggested by title VI.

At the same time, given some of the other things that S. 1720 would accomplish, title VI does not go far enough. The problem we see with S. 1720 arises out of the fact that banks and bank holding companies on the one hand and savings and loan holding companies and service corporations on the other, have different degrees of authority to engage in insurance activities. While Federal savings and loan associations are not permitted to engage in insurance directly, by regulation they are permitted to sell insurance through their service corporations. Savings and loan holding companies that own only one savings and loan association are permitted to engage in insurance activities of every kind. While multiple savings and loan holding companies may not underwrite insurance, they can pursue any kind of insurance agency activity.

Title I of S. 1720 would, among other things, expand the financial powers of Federal savings and loan associations to approximate those of national banks. As a consequence, in order to preserve the longstanding separation between the banking and the insurance business and in order to make S. 1720 internally consistent, it is necessary to adjust the insurance powers of Federal savings and loan holding companies and service corporations to reconcile those powers with the insurance authorities of banks and bank holding companies. Only in that way, will a level playing field for which bankers have been clamoring for many years, be maintained in the context of S. 1720.

At the appropriate time we will be prepared to present to the committee specific language that we believe will reconcile the insurance authority of thrift institutions affected by S. 1720 with the insurance limitations contained in title VI of the bill and the National Bank Act.

Chairman Volcker of the Federal Reserve Board recently told a gathering of bankers, "traditional separation between bankng and commerce rests on concepts that concentration of economic power can be dangerous, that the potential for conflicts of interests in a service so vital as the extension of capital and credit should be minimized, and that there is a special public interest in the safety and soundness of our banks."

He concluded, therefore, that such separation is "fundamentally valid". That separation must be preserved, notwithstanding the temptation that might be presented by short term economic forces.