Your statement proposes requiring a bank to form a holding company, as we have been discussing at quite great length here, and charter a separate subsidiary of that holding company for the bank to be able to offer mutual funds to its customers. Getting into the one bank holding company issue, this would be a significant expense for a smaller bank. Do you see any possibility to enable a smaller bank to act at least as an agent for a mutual fund, without incurring this expense and at the same time, without creating an unfair competitive advantage or undue additional risk for the FDIC? In other words, I'm looking at a mechanism that we might explore. I don't expect a final answer from you today, but hope to explore the concept primarily for the smaller institutions.

Secretary REGAN. I think that is a possibility, Senator. A bank below a certain size might be able to conduct securities business in some method other than through a bank holding company. I'm suggesting the use of a bank holding company primarily by the larger banks. It has been my experience that the large or mediumsize bank that would want to get into the underwriting of these particular types of issues probably would want to engage in other types of securities activities as time goes on. I am proposing the holding company approach for the long range future.

For a small bank in a small town wanting to get into a syndicate merely to underwrite a particular revenue bond or offer a money market fund, there should be some way to do so other than through a holding company.

The CHAIRMAN. Well, I would like to work with you on that issue because I think, as many people know, many of the smaller banks, particularly the independent banks, are not too enthralled with the one-bank holding company idea.

Secretary REGAN. I understand.
The CHAIRMAN. Senator Proxmire?

RECONSTITUTING THE DIDC

Senator PROXMIRE. Mr. Secretary, as one of the authors of the phaseout, I sympathize with the dilemma that you are in. We had no idea, of course, that we would have anything like the economic conditions we have. We certainly didn't visualize the terrific rise in interest rates and what that would do to the financial institutions. We did try to stress at that time that the phaseout should take into full account the safety and soundness of the institutions involved under those circumstances, and I realize that it is difficult for you to answer, perhaps. What would you think of our reconstituting DIDC to drop the presence of Treasury as well as the NCUA, and have it include only the Fed, the FDIČ, and the Home Loan Bank Board as the agencies that provide liquidity insurance for the financial system and have a direct stake?

Secretary REGAN. I will speak for Treasury, primarily. We have a point of view that is worth listening to and Treasury also, of course, is part of the regulating system, since the Comptroller of the Currency reports to the Secretary of the Treasury and he is a regulator. Therefore, I think we have as much interest in the work of the DIDC as anyone. In addition, the Treasury has a broad point of view on what is going on in the financial markets. I think Treasury should have a representative on the committee.

Senator PROXMIRE. Well, I sympathize with that, but at the same time it just seems to me that Treasury has the kind of independent voice there, but they don't have the same concern for the safety and soundness. And that is, of course, one of the center points of that legislation.

Secretary REGAN. If I might demur from that, I think Treasury is every bit as concerned with the financial soundness of the banking system, whether it be thrifts or commercial banks, and I think that we are pretty sensible about that responsibility. It may be that some people think I am a bit of a firebrand and might want to deregulate a little bit faster than others, but nonetheless I think we do proceed with deliberate caution.

Senator PROXMIRE. Well, let me just go over some of the other points that not only the half percent increase in passbook rate, which I think, as the chairman pointed out obviously isn't going to make the savings and loans any more competitive with the 15 percent interest; 6 percent interest, if anything, would call attention to the people who have money with the savings and loans and make them aware of the fact that sure, they're getting 6 percent now, but for heaven's sake, they're foolish not to get 15 percent. But the other provisions, changing the 6-month MMC index effective November 1, I understand the cost of that to S. & L.'s will be $300 million, creating an IRA/Keogh wildcard. And the cost of that, it is argued, could be as bad as both the MMC index change and the passbook rate, allowing the payment of brokerage fees on all savers certificates so that the S. & L.'s have to pay brokerage fees.

I wonder if those don't do serious damage to the savings and loans. After all, we passed this with the idea that we were going to be evenhanded, and I thought we were giving savings and loans an opportunity. I wanted them to have a chance to compete more effectively, and that was the reason we passed this legislation. These decisions by DIDC, it seems to me, make it very difficult, especially in aggregate.

Secretary REGAN. Well, again, this is a good-news, bad-news situation. If we keep restrictions on their money market certificates, if we keep restrictions on what they can pay for IRA and Keogh accounts and, on the other hand, other financial institutions are free to offer instruments that are the equivalent of what depository institutions can offer but have much more attractive rates of interest, certainly money will flow out of the thrifts and banks.

Senator PROXMIRE. What advantage do they get out of paying brokerage fees?

Secretary REGAN. Well, many of the large brokerage firms have made arrangements with thrift institutions to collect funds for them and to send the funds to the institutions. The thrift institutions are not in touch with a wide variety of customers to get new money for their All Savers accounts. The brokerage firms on Wall Street are finding their own customers who want to go into All Savers Certificates, who might not have heard of them, and are encouraging them to do so. The brokerage firms are acting as a collection agency.

Senator PROXMIRE. The representatives of the savings and loan, or the expert regulators, the Home Loan Bank Board, they favor this brokerage fee?

Secretary REGAN. The S. & L.'s actually wanted this brokerage service and the Federal Home Loan Bank Board staff had no objection.

Senator PROXMIRE. They did support it?

Secretary REGAN. They did support it.

Senator PROXMIRE. Well, I wonder if they still would. I doubt it, from what I've heard. But anyway, let me ask one other question because I think this is really the fundamental problem we have here. The thrifts are very important to all of us, of course, and we want to do all we can to preserve them. I think they are very important institutions, certainly in all of our States. At the same time, the reason for the thrifts is to support housing, and I wonder if this legislation that is before us today wouldn't, in effect, just walk away from that special function that thrifts have performed very well over the last many years and create a situation in which home buyers and homebuilders just wouldn't have a financial institution which would provide the kind of service that thrifts have in the past at the price they have in the past with the expertise they have in the past.

SACRIFICE TAX ADVANTAGES

Secretary REGAN. Well, at the risk of being repetitious, Senator, I am convinced that they would not immediately turn away from the housing industry and get into those other powers. Look at what they would do if they were to do that. First of all, they would sacrifice many of their tax advantages. You know the tax situation of thrifts as well as I do, so I won't bother to review that but the more they get into other asset powers, the less tax advantage they would have.

Second, most of the people within the thrift industry-management and the like-are primarily concerned with the housing industry. I don't think they are going to turn their backs on the industry immediately and walk away from it. At the same time, we are encouraging commercial banks to come back into the housing market which they have abandoned over the past few years. I think the combination will give as much money to the housing industry as it could possibly want, when the price of money gets to where the housing industry can use it.

Frankly what's wrong with the housing industry at this point is price, the price of money. It is too high to make profits in building houses, but as soon as we can get interest rates down, then I think the housing industry

Senator PROXMIRE. Well, of course, you're absolutely right. The fundamental problem is the interest rates right now. But I am just afraid when that problem is gone, that we will have lost much of the great advantage to housing that savings and loans provided. I was disturbed-you are an extraordinarily articulate and intelligent man, I think one of the ablest people in the administration without any question, but you said immediately turn away-you wouldn't expect them to immediately turn away and immediately abandon the expertise they have in housing. The implication was

that they would turn away eventually but not immediately. That is not a very happy future for a housing industry.

Secretary REGAN. I will withdraw the adverb. I would put it this way-I don't think they will turn their backs on the industry. I think that the major activities of the thrift industry will still be in the housing area. Look what we're doing for them, allowing them to go into real estate. A great many of the savings and loan association people have told me that if they could take a piece of the action, this would encourage them to go into it even more. I think that since we are giving them that power in S. 1720 it will encourage them to stay in the industry. So I don't think you need to fear that, Senator.

Senator PROXMIRE. Well, I hope you're right.

Thank you, Mr. Chairman.

The CHAIRMAN. Mr. Secretary, I would just interject at this point, in response to Senator Proxmire's question, this is the Banking, Housing and Urban Affairs Committee, and so we do have great concern for housing. But what I see taking place, Mr. Chairman, and I share some of your fears of making these changes, but unless we do, I see no S. & L. industry left, literally. And I think the alternative is we have got to try some other means or there isn't going to be housing money available because the thrifts are not going to be in the business anymore.

On the other hand, I think what the Secretary said is true, that housing demand is so tremendous, there is no lack of people who want to buy houses. It is their inability to qualify for loans in order to purchase those houses. If the interest rates come down, I don't think we will be able to build houses rapidly enough. I think the industry will be there to respond if they are still healthy. If we can keep them healthy in the meantime, they are going to respond to that demand. I think we have got to proceed with some of these restructuring changes to make them competitive for the future and get those interest rates down, and then that demand for housing is going to be overwhelming, in my opinion.

Senator Schmitt?

Senator SCHMITT. Thank you, Mr. Chairman.

Mr. Secretary, it's good to be with you today and listen to you with a great deal of interest, and I hope that I'm getting educated at the same time. I've always found, as Senator Garn knows, that the Banking Committee may be the most educational committee that I sit upon, probably because I know the least about the subject. But I am concerned, Mr. Secretary, that as we attempt to level the playing field through deregulation, which I fully support, that we are building mountains on that playing field by other actions that are outside the jurisdiction of this committee for the most part.

For example, if the all savers certificate does represent not only an allocation of credit but also the use of the Tax Code to establish certain interest rates, and in another area which I have expressed my concern before this committee just recently, loan guarantees, we further allocate credit-one measure just was approved by the Congress by not vetoing it just the other day, and that is the TOSCO loan guarantee for $1.125 billion. I'm sorry I couldn't find a

way to force the Senate to vote on that. I couldn't. Nevertheless, it is a major allocation of credit and it is one of many.

CAPPING LOAN GUARANTEES

I understand that the question of loan guarantees, that the administration hopes to cap loan guarantees. Could you expand on that a little bit, to see if this one mountain may not grow any higher than it has in the past?

Secretary REGAN. Well, like you, Senator, we in the administration are concerned about the use of Government guarantees. We think that Government guarantees need to be cut back and cut back sharply, because they put certain agencies in competition, not only with Treasury but with private borrowing, for the amount of credit that is available. We think that if there is a justifiable economic reason, these agencies should be able to go ahead on their own without a Government guarantee to get the money. If there isn't any justifiable reason for the funds, then what's the sense of putting a Government guarantee behind the security. We are working with the Office of Management and Budget to see which of these guarantees we can cap, eliminate, or cut back sharply. And I think that, within a matter of weeks, you will be seeing the results of our efforts.

Senator SCHMITT. Could we expect to see the synfuels loan guarantees reevaluated in that operation?

sir.

Secretary REGAN. We are taking a very careful look at that, yes,

Senator SCHMITT. Do you recall the level of credit allocations for loan guarantees that occurred in fiscal 1981?

Secretary REGAN. It is about $48 billion net new guarantees. It's going to be about the same in 1982, unless we cap it.

Senator SCHMITT. Do you recall the level of credit allocation that has occurred through low-interest loans in fiscal 1981?

Secretary REGAN. We can get you that number for the record. [The following information was received from the Treasury Department:]

Direct loans made at below market interest rates equaled over $64 billion in fiscal 1981 and the subsidy involved was over $16 billion.

Senator SCHMITT. But it is in the $50 billion range?

Secretary REGAN. Yes, it is. There is quite a subsidy in there. Senator SCHMITT. And again, without congressional action, that presumably would continue in fiscal 1982.

Secretary REGAN. Yes, but that's another area that Treasury and OMB are working on to cut back as much as possible. It is a very sensitive area, politically, as you know.

Senator SCHMITT. There's no question. But it does, does it not impact the issues that we're talking about today, and that is, what are the capabilities of the thrift institutions to provide capital for other purposes?

Secretary REGAN. Oh, yes. Because there is only a certain pool of funds within the United States that is available for capital allocation. I recall some figures, Senator, that might be of interest to you. It used to be that the Federal Government took 16 to 20 percent of all the credit in the United States. Currently, the Feder