total depository institution deposits, rather than by 80% as contained in the proposed legislation. This change should lift an unnecessary burden from small institutions.

International Banking Facilities

The Administration favors the establishment of domestic international banking facilities free from FDIC deposit insurance and assessment; however, we believe the debate concerning the assessment of foreign deposits for FDIC insurance has merit and should continue.

Insurance Activities of Bank Holding Companies

We

The Administration opposes the restriction of bank holding company insurance activities as contained in S. 1720. believe this would be an anticompetitive move contrary to our objective of equal treatment for all financial institutions.

Technical Provisions

There are several provisions of S. 1720 that are more technical in nature and can best be developed by the Congress and the regulatory agencies. Where we have special concerns regarding these provisions we will communicate our views at a later date.

Mr. Chairman, in closing I would like to thank the Committee again for offering me this opportunity to present the Treasury Department's and the Administration's views on issues relating to the financial system, issues about which I feel very strongly. I would also like to thank you, Mr. Chairman, for all of the work you have done in arranging these hearings and preparing this legislation. We would like to work closely with the Congress to secure passage of this legislation.

Mr. Chairman, that concludes my testimony. I will be pleased to answer any questions the Committee may have.

The CHAIRMAN. Thank you, Mr. Secretary.

I welcome your comments as far as going beyond this legislation. To be more specific about that, to a general review of Glass-Steagall and McFadden. That is something that I stated before, that it is not possible to get into that general review this year. I do intend to do that right after the first of the year, at the start of the second session of the 97th Congress. I'm pleased that the administration will be ready at that time to submit their comments and be prepared to testify on a much broader review of Glass-Steagall and McFadden.

So I appreciate your testimony on that.

Mr. Secretary, this past Friday afternoon, you announced that DIDC would consider postponing the half percent increase in the passbook account rates. I welcome that statement by the administration. I am one who participated in the creation of H.R. 4986 and the 6-year phaseout of Reg Q. I was one who favored a faster phaseout than the 6 years that we provided, however, when we did set up DIDC, the statement of the managers and the conversation at that time with regard to safety and as rapidly as economic conditions warrant.

So although I still favor the continued deregulation and as fast a phaseout as possible, I did feel that the timing of the 50 basis point increase was not helpful to the thrift institutions. It increased their cost of money without really giving them any additional competitiveness. A difference between 5 and 6 certainly didn't make them competitive with money market funds.

So I was going to question you at great length on that activity. I am sure you have preempted the entire committee from asking you many questions on that by your statement of Friday. I think I can speak for at least a majority of the committee, that we are pleased with your statement and the activity that you propose to take in that area.

Would you like to make any comments at this point?

CROSS CURRENTS IN THE ALL SAVERS CERTIFICATES

Secretary REGAN. Thank you, Mr. Chairman. I might explain just a little bit my thinking and why the change of mind, at least temporarily. First of all, there are an awful lot of cross currents going on in the market for all savers certificates and other deposits, that I don't think anyone in the country understands at the present moment. I have tried to contact leading thrift institutions as well as commercial banks, and many of their industry organizations. And no one yet has a good handle on how much of this is new money. We were quite surprised that at least initially a lot of this money was not coming out of money market funds. That was contrary to expectations of most of us as to what the source of these funds would be.

Therefore, it seemed prudent to back off on any change in passbook ceiling rates until we find out where the all saver certificates money actually is coming from. If, indeed, a great deal of it is coming from passbook savings, then there is no need for this increase in the ceiling rate, because it will not suffice to accomplish our purpose, which is to make passbook savings more competitive

with current market rates, so that they will not flow out of the institutions.

The facts remain that the thrift institutions on their liability side have to be free to compete for money in an inflationary period at or about current rates.

We have other meetings of the DIDC coming up. December is the next meeting. We can again review this subject. As we have a firmer grasp on what is going on, we can better decide whether or not we want to increase the passbook ceiling rate. Therefore, it was my suggestion to the other members of the DIDC that at least for now it was best, not to put the increase into effect on November 1. The CHAIRMAN. You do intend to have a special meeting of DIDC then?

Secretary REGAN. No, that will be by notation vote. We've already started circulating papers on this to get the necessary signatures and votes from the DIDC members.

The CHAIRMAN. But at this point you do expect that the change will take place or at least the deferral?

Secretary REGAN. Well, assuming that everyone, except myself, votes the same way, it would come out three to two the other way. The CHAIRMAN. It appeared that your vote switch was the only one necessary, in light of the other vote.

Mr. Secretary, my concern with DIDC also has been centered on the complexity of proposals which in my view has led to confusion among officers and employees of depository institutions and among depositors. DIDC has cut a rather wide swath restricting premiums and finder's fees, as well as proposing various phaseout schedules and new titles of certificates. So I am wondering if you could also urge DIDC in your future meetings to simplify the manner in which the phaseout will occur. I mean we centralize on the issue of passbook savings. There are a lot of other procedures that I think have been overly complex. Do you have any comments on that? Secretary REGAN. Well, what we are attempting to do in DIDC is to try to set a long-range deregulation schedule and then allow the thrifts to stay on that schedule rather than to start and stop or have just a short-term solution not know what the long-term implications of that short-range solution might be. I would like to see us stay on the schedule. I think in most cases we are on schedules that will allow the institutions to plan their own futures. I hope that when this legislation that we're discussing now, S. 1720, is passed, and depository institutions get additional asset powers that they know where they're going to be on the liability side of their balance sheets at the same time.

The CHAIRMAN. The Chairman of the National Credit Union Administration is a member of DIDC. The new proposed chairman was before this committee on Friday, and although they are a part of DIDC, they're not subject to DIDC's decisions. I asked him on Friday whether he felt that it was fair for them to be able to participate in a decision like setting the depository accounts at 6 percent and yet go right out and set theirs at 12, if there wasn't some conflict there. He declined to answer, as not having yet been sworn in as Chairman of NCUA.

I would ask you that question. Do you think the NCUA Chairman ought to be a member of DIDC, and if he is, should he not

perhaps be a nonvoting member, like the Comptroller of the Currency?

Secretary REGAN. I haven't reflected on that, Mr. Chairman. It seems to me, as a top-of-the-head answer, that his views are appropriate to that committee. He understands the problem from a different angle. I would hate to think that a member of that committee was voting only from a narrow parochial point of view and trying to hold down competition for his own particular phase of the industry. I would think that the new Chairman could give an unbiased vote in the committee.

CREATE A LEVEL PLAYING FIELD

The CHAIRMAN. Mr. Secretary, at this point I would like a general response. Referring to your opening statement-you and I have talked about this many times, the overall need for attempting to create a level playing field. How do you see the financial services industry evolving in this country over the years ahead, given all that has transpired recently, the money market funds, over $150 billion, all the mergers that I talked about in my opening statement, the American Express-Shearson, Prudential-Bache, and so on. How you feel that is going to evolve, and what do you believe the consequences would be for commercial banks and thrift institutions, if Congress fails to act to increase their competitiveness, as we are attempting to start that process now?

Secretary REGAN. Well, Mr. Chairman, first of all, I have to say that we have to remember that financial people are the same as manufacturers or anyone else. They are ingenious about coming up with new products, products that either there is a demand for or for which a demand can be created. I think that that will continue, not only in the 1980's and 1990's, but with new electronic advances, these new products will probably change even faster. Some of these laws that we are considering today were fashioned in an era when they never heard of advanced electronics, either for computers or for communications or for transfer of funds.

I think that we now know that that process cannot be slowed down. If we don't do something for the banks and the thrift institutions, they're going to be unnecessarily held back and other institutions are going to come in and take their place.

A thought comes to mind that we might look at the transportation industry to see what happened there, where the railroads thought they were just in the business of running railroads, and other modes of transportation came in and superseded them, trucking and the airlines. And as a result, many of our great railroads ended up in a great deal of trouble.

I think the same thing could happen in the financial services industry, if we don't keep the main portions of it, the banks and the thrift institutions, in a position where they can compete effectively. I don't think there is any way that you can slow down the ingeniousness of others in the financial services industry. I don't think you would want to, even if you could. And unless you are prepared to say that the banks have had it, you are going to have to do many of the things that are not only in S. 1720, but the successive steps in years ahead, in order to keep them competitive.

And when you look at it, who is the chief beneficiary of all of this? It has to be the consumer. You get corporations of this size that are competing, and that necessarily means better service, it means faster service, it should mean cheaper service. And to the extent that the consumer is the beneficiary I think the Nation is better off.

The CHAIRMAN. Mr. Secretary, my time is up on this round. I would like to thank you for your general support of the legislation. I will look forward to working with you on the mechanics of it and changing it. I would also share your view that the market is changing so rapidly. I believe Congress would be irresponsible to sit back and do nothing and not attempt to recognize these traumatic changes that are taking place in the marketplace.

So I do thank you for the administration's support in general of this legislation. Senator Cranston?

Senator CRANSTON. Thank you very much, Mr. Chairman. Welcome, Mr. Secretary.

QUESTION WISDOM OF DIDC

Like many others, I'm very pleased that you had second thoughts about the November 1 passbook ceiling increase and decided to delay that proposal. That action does lead to questions about the wisdom of the validity of the structure of the DIDC, I think. The passbook rate increase, as I understand it, has been repeatedly considered and turned down by the DIDC, due to the earnings problems of the thrifts, the earnings problems have deteriorated since that first decision was made not to have an increase, and although you have now reversed it, I would like to ask what information you and other members of the Board had that caused you to vote for that in the first place.

Secretary REGAN. I was convinced at that time that something had to be done to stanch the flow of funds out of the thrift institutions. They were losing funds out of passbook savings rapidly. The reason had to be that they were not paying competitive interest rates, and while there was a certain basic amount that probably would stay in the institutions, gradually most of it would erode, as more and more people came to realize that 52 percent or 5 percent does not compete effectively with 15 percent. And in an effort to make them more competitive, I wanted to take the first step, however small. And a half a percentage point increase was a small step in that direction of making them more competitive in interest.

rates.

We have been told that the money for all savers certificates is not coming out of the money market funds to the extent that we initially assumed it would. Later this may turn out to be a false blip or something of that nature, but at least the initial indications are that in the first week of all savers, money market funds increased rather than decreased.

To put it mildly, I'm confused as to what is going on there. I can find no one who has made any detailed study of where the money is coming from. So we decided, "We can always revisit this question. We are going to have further meetings of the DIDC, so let's back off now to see what is going on and find out if most of that