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                                                       Calendar No. 602
105th Congress                                                   Report
                                 SENATE

 2d Session                                                     105-346
_______________________________________________________________________


 
  THE FINANCIAL REGULATORY RELIEF AND ECONOMIC EFFICIENCY ACT OF 1998

                               __________

                              R E P O R T

                                 OF THE

                     COMMITTEE ON BANKING, HOUSING,

                           AND URBAN AFFAIRS

                          UNITED STATES SENATE

                              to accompany

                                S. 1405





               September 24, 1998.--Ordered to be printed


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                 ALFONSE M. D'AMATO, New York, Chairman

PHIL GRAMM, Texas                    PAUL S. SARBANES, Maryland
RICHARD C. SHELBY, Alabama           CHRISTOPHER J. DODD, Connecticut
CONNIE MACK, Florida                 JOHN F. KERRY, Massachusetts
LAUCH FAIRCLOTH, North Carolina      RICHARD H. BRYAN, Nevada
ROBERT F. BENNETT, Utah              BARBARA BOXER, California
ROD GRAMS, Minnesota                 CAROL MOSELEY-BRAUN, Illinois
WAYNE ALLARD, Colorado               TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming             JACK REED, Rhode Island
CHUCK HAGEL, Nebraska

                    Howard A. Menell, Staff Director

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                    Philip E. Bechtel, Chief Counsel

                       Douglas R. Nappi, Counsel

              Lendell W. Porterfield, Financial Economist

             Martin J. Gruenberg, Democratic Senior Counsel

                       George E. Whittle, Editor



                            C O N T E N T S

                              ----------                              
                                                                   Page
Introduction.....................................................     1
Purpose and Summary..............................................     1
History of the Legislation.......................................     2
Purpose and Scope of the Legislation.............................     3
    Title I--Improving Monetary Policy and Financial Institution 
      Management Practices.......................................     3
    Title II--Streamlining Activities of Institutions............     8
    Title III--Streamlining Agency Actions.......................     9
    Title IV--Miscellaneous......................................    10
    Title V--Technical Corrections...............................    11
Section-by-Section Analysis......................................    12
    Section 101. Payment of Interest on Reserves at Federal 
      Reserve Banks..............................................    12
    Section 102. Interest on Business Checking Accounts..........    12
    Section 103. Repeal of Savings Association Liquidity 
      Provision..................................................    12
    Section 104. Repeal of Thrift Dividend Notice Requirement....    12
    Section 105. Reduction of Regulatory Requirements for Thrift 
      Investments in Service Companies...........................    12
    Section 106. Elimination of Thrift Multi-State Multiple 
      Holding Company Restrictions...............................    12
    Section 107. Removal of Prohibition on Savings and Loan 
      Holding Company Acquiring a Non-Controlling Interest in 
      Another SLHC of Thrift.....................................    13
    Section 108. Repeal of Deposit Broker Notification to FDIC...    13
    Section 109. Uniform Regulations Governing Extensions of 
      Credit to Executive Officers...............................    13
    Section 110. Expedited Procedures for Certain Reorganizations    13
    Section 111. National Bank Directors.........................    13
    Section 112. Permit National Banks to Merge or Consolidate 
      with Subsidiaries or Other Nonbank Affiliates..............    13
    Section 113. Loans on or Purchases by Institutions of Their 
      Own Stock; Affiliations....................................    14
    Section 114. Depository Institution Management Interlocks....    14
    Section 115. Modify Treatment of Purchased Mortgage Servicing 
      Rights in Tier 1 Capital...................................    14
    Section 116. Cross Marketing Restriction on Limited--Purpose 
      Banks......................................................    14
    Section 117. Divestiture Requirement.........................    15
    Section 201. Updating Authority for Community Development 
      Investments................................................    15
    Section 202. Repeal Section 11(m) of the Federal Reserve Act.    15
    Section 203. Business Purpose Credit Extensions..............    15
    Section 204. Affinity Groups.................................    15
    Section 205. Fair Debt Collection Practices..................    16
    Section 206. Restriction on Acquisitions of Other Insured 
      Depository Institutions....................................    16
    Section 207. Mutual Holding Companies........................    16
    Section 208. Call Report Simplification......................    16
    Section 301. Elimination of Duplicative Disclosure of Fair 
      Market Value of Assets and Liabilities.....................    16
    Section 302. Payment of Interest in Receiverships with 
      Surplus Funds..............................................    16
    Section 303. Repeal of Reporting Requirement on Differences 
      in Accounting Standards....................................    16
    Section 304. Agency Review of Competitive Factors in Bank 
      Merger Act Filings.........................................    17
    Section 305. Elimination of SAIF Special Reserves............    17
    Section 401. Alternative Compliance Methods for Advertising 
      Credit Terms...............................................    17
    Section 402. Positions of Board of Governors of Federal 
      Reserve System on the Executive Schedule...................    17
    Section 403. Consistent Coverage for Individuals Enrolled in 
      a Health Plan Administered by the Federal Banking Agencies.    17
    Section 404. Federal Housing Finance Board...................    18
    Section 405. Reports by Indenture Trustee....................    18
    Section 501. Technical Correction Relating to Deposit 
      Insurance Funds............................................    18
    Section 502. Rules for Continuation of Deposit Insurance for 
      Member Banks Converting Charters...........................    18
    Section 503. Amendments to the Revised Statutes..............    19
    Section 504. Conforming Change to the International Banking 
      Act........................................................    19
Changes in Existing Law (Cordon Rule)............................    19
Regulatory Impact Statement......................................    19
Cost Estimate....................................................    20


                                                       Calendar No. 602
105th Congress                                                   Report
                                 SENATE

 2d Session                                                     105-346
_______________________________________________________________________


  THE FINANCIAL REGULATORY RELIEF AND ECONOMIC EFFICIENCY ACT OF 1998
                                _______
                                

               September 24, 1998.--Ordered to be printed

_______________________________________________________________________


Mr. D'Amato, from the Committee on Banking, Housing, and Urban Affairs, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 1405]

    The Committee on Banking, Housing, and Urban Affairs, to 
which was referred the bill (S. 1405), having considered the 
same, reports favorably thereon with an amendment and 
recommends that the bill as amended do pass.

                              INTRODUCTION

    On July 30, 1998, the Senate Committee on Banking, Housing, 
and Urban Affairs (the ``Committee'') ordered to be reported S. 
1405, the ``Financial Regulatory Relief and Economic Efficiency 
Act of 1998,'' a bill to provide for improved monetary policy 
and regulatory reform in financial institution management and 
activities, to streamline financial regulatory agency actions, 
to provide for improved consumer credit disclosure, and for 
other purposes. The Committee reports the bill favorably with 
an amendment in the nature of a substitute, and recommends that 
the bill as amended do pass.

              PURPOSE AND SUMMARY OF NEED FOR LEGISLATION

    The purpose of this legislation is to strengthen our 
nation's financial institutions, to increase their ability to 
compete and to lower the costs of credit to consumers. The 
Committee recognizes the trend of increased dependency on 
credit among consumers, as well as a marked increase in 
consumer debt burden. Thus, the Committee believes it is 
necessary to do everything possible to lower the regulatory 
costs that increase the price of credit. As such, this 
legislation is intended to allow financial institutions to 
devote more resources to the business of lending and less to 
the bureaucratic maze of compliance with unnecessary 
regulations. This, in turn, should permit institutions to 
provide financial services at the best possible price to 
consumers.
    Senators Shelby and Mack have worked to reduce the 
regulatory burden on financial institutions in an effort to 
reduce the costs of credit to consumers since the 102nd 
Congress, when they introduced S. 1129, the Regulatory 
Efficiency for Depository Institutions Act. In the 103rd 
Congress, Senators Shelby and Mack introduced S. 265, the 
Economic Growth and Regulatory Paperwork Reduction Act of 1993. 
Portions of S. 265 were included in Title III of the Riegle 
Community Development and Regulatory Improvement Act of 1994. 
Congress passed into law S. 650, the Economic Growth and 
Regulatory Paperwork Reduction Act of 1995, which continued 
Senators Shelby and Mack's efforts to streamline an over 
regulated financial industry. S. 1405 is simply the latest bill 
to ensure the regulatory framework that governs the financial 
industry is as unambiguous and efficient as possible. A key 
difference of this legislation from years past, is that S. 1405 
provides the Federal Reserve with an additional tool in which 
to conduct monetary policy. The Committee believes this 
additional authority will, in the long run, benefit consumers 
in the form of price stability, or low inflation.

                       HISTORY OF THE LEGISLATION

    On November 7, 1997, S. 1405, the ``Financial Regulatory 
Relief and Economic Efficiency Act'' was introduced by Senators 
Shelby and Mack and referred to the Committee. The bill was 
cosponsored by Senator D'Amato, the Chairman of the Committee 
on Banking, Housing, and Urban Affairs, Senators Faircloth, 
Bryan, Grams, Kerry, Bennett, Gramm, Hagel, Allard, Enzi and 
Moseley-Braun.
    The Committee held two hearings on this legislation. At the 
first hearing, on March 3, 1998, the Committee received 
testimony from Hon. Laurence Meyer, Governor of the Federal 
Reserve Board; Mr. Rex Hammock, Chairman of Hammock Publishing, 
on behalf of the National Federation of Independent Business; 
Mr. Neil Mahoney, President and Chief Executive Officer of 
Woronoco Savings Bank; and Mr. Edward Furash, Chairman of 
Furash and Company.
    At the second hearing, on March 10, 1998, the Committee 
received testimony from Hon. Laurence Meyer, Governor of the 
Federal Reserve Board; Hon. John D. Hawke, Under Secretary for 
Domestic Finance of the Department of the Treasury; Hon. Andrew 
Hove, Acting Chairman of the Federal Deposit Insurance 
Corporation; Hon. Ellen Seidman, Director of the Office of 
Thrift Supervision; Mr. Edward Leary, Commissioner of Financial 
Institutions of Utah, on behalf of the Conference of State Bank 
Supervisors; Mr. Steven A. Yoder, Executive Vice President and 
General Counsel of AmSouth Bank of Alabama, on behalf of the 
American Bankers Association; Ms. E. Lee Beard, President and 
Chief Executive Officer of First Federal Savings & Loan of 
Hazleton, PA, on behalf of America's Community Bankers; Mr. 
Joseph S. Bracewell, Chairman and Chief Executive Officer of 
Century National Bank, on behalf of the Independent Bankers 
Association of America; Ms. Margot Saunders, Managing Attorney 
for the National Consumer Law Center; and Mr. Frank Torres, 
Legislative Counsel for the Consumers Union.
    On July 30, 1998, the Committee met in Executive Session to 
consider S. 1405. The Committee considered and adopted, without 
objection, an amendment in the nature of a substitute that was 
offered by Senator Shelby. This amendment incorporated 
amendments that other Committee Members offered and that were 
agreed to on a bipartisan basis. Senator Shelby's amendment 
made changes to S. 1405 regarding: customer affinity groups; 
non-controlling investments to Savings and Loan holding 
companies; ``haircuts'' for net capital regulations on mortgage 
servicing rights; the Savings Association Insurance Fund (SAIF) 
special reserves; and struck language affecting the Federal 
Home Loan Bank System, anti-tying provisions, brokered 
deposits, and the Truth in Lending Act. The Committee rejected 
an amendment offered by Chairman D'Amato prohibiting banks from 
double charging for automatic teller machine withdrawals by a 
vote of 7-11. Senators D'Amato, Sarbanes, Dodd, Kerry, Bryan, 
Boxer and Moseley-Braun voted in favor of the amendment. 
Senators Gramm, Shelby, Mack, Faircloth, Bennett, Grams, 
Allard, Enzi, Hagel, Johnson and Reed voted against the 
amendment. Senator Hagel withdrew his amendment to modernize 
the Federal Home Loan Bank System.
    The Committee ordered S. 1405 reported to the Senate by a 
voice vote.

                    PURPOSE AND SCOPE OF LEGISLATION

    The bill, as ordered reported by the Committee, contains 
five Titles that substantially amend a number of banking laws. 
The provisions in these Titles remove unnecessary and 
burdensome regulations that provide no supervisory benefit to 
the regulators, but serve only to increase the operational cost 
of financial institutions. Each provision has been analyzed and 
reviewed to ensure no negative impact on the safety and 
soundness of the financial system.

Title I: Improving Monetary Policy and Financial Institution Management 
        Practices

    Title I is designed to assist the Federal Reserve Board 
(the Board) in conducting monetary policy and financial 
institutions in managing their business activities. Two 
provisions, interest on reserves and interest on business 
checking accounts, specifically address recent technological 
developments that have negatively impacted the Federal 
Reserve's ability to maintain a stable federal funds market. 
Additional provisions repeal outdated laws, cut bureaucratic 
red tape and allow institutions to commit more resources to the 
business of lending and less to the regulatory maze of 
compliance.
    Banks are required to maintain a reserve balance of ten 
percent of all transaction deposits above a certain threshold. 
The reserve requirement can be satisfied with vault cash or 
with balances held at Federal Reserve Banks. However, the 
balances maintained at Federal Reserve Banks do not receive any 
payment of interest from the Federal Reserve. Banks have long 
complained about the reserve requirement and contend that the 
requirement is nothing more than a tax. As a result, a key 
strategy for banks is to minimize the balance at Federal 
Reserve Banks and reduce the amount of deposits that require 
reserves.
    While the Board has used the reserve requirement to control 
the growth of M1 in the past, the Board now focuses on the 
price of reserves (the federal funds rate) to implement 
monetarypolicy. In testimony before the Senate Banking 
Committee, Federal Reserve Board Governor Laurence Meyer testified that 
reserve requirements continue to play a critical role in the 
implementation of monetary policy. Mr. Meyer said:

          First, [reserve requirements] provide a predictable 
        demand for the total reserves that the Federal Reserve 
        needs to supply through open market operations in order 
        to achieve a given federal funds rate target. Second, 
        because required reserve balances must be maintained 
        only on an average basis over a two-week period, 
        depositories have some scope to adjust the daily 
        balances they hold in a manner that helps stabilize the 
        federal funds rate.1
---------------------------------------------------------------------------
    \1\ Testimony of Laurence H. Meyer, Governor, Federal Reserve 
Board, S. 1405 Hearings, March 3, 1998. (Hereinafter ``Meyer 
Testimony'.)

    Banks also hold balances as a precautionary measure to 
protect themselves from potential overdrafts with the Federal 
Reserve System. An overdraft is essentially a loan or an 
extension of credit--a practice discouraged by the Federal 
Reserve. Such precautionary demands distort the pricing 
function of the federal funds rate and therefore make it 
difficult for the Federal Reserve to determine the quantity of 
---------------------------------------------------------------------------
reserves to supply. According to Governor Meyer:

          In the absence of reserve requirements, or if reserve 
        requirements were very low, the daily demand for 
        balances at Reserve Banks would be dominated by these 
        precautionary demands, and as a result, the federal 
        funds rate could often diverge markedly from its 
        intended level.2
---------------------------------------------------------------------------
    \2\ Meyer Testimony, supra, note 1.

    Recent financial market innovations have reduced required 
reserve balances from $28 billion in 1993 to approximately $9 
billion in 1997. The most recent innovation used to avoid the 
reserve requirement is the computerized retail sweep account. 
It avoids the reserve requirement by sweeping consumer 
transaction deposits into personal savings accounts--accounts 
that are not subject to reserve requirements.
    The Federal Reserve Board fears that the proliferation of 
retail sweep accounts will jeopardize their ability to control 
the federal funds rate and therefore lead to substantial rate 
volatility. If this were to occur, all money market 
participants (bankers, securities dealers, mutual funds, etc.) 
would suffer an increase in the cost of doing business due to 
the unnecessary and significant increase in risk.
    Governor Meyer testified that the Federal Reserve Board 
needs the authority to compete directly with the retail sweep 
accounts by offering interest on reserves. This additional 
monetary tool would provide incentives for market participants 
to unwind many of the sweeps and significantly increase the 
level of transaction deposits.
    Another provision, intended to relieve the consumer demand 
for sweep accounts, removes the current prohibition on banks, 
thrifts, and nonmember banks from paying interest on demand 
deposits. The current prohibition on interest on demand 
deposits dates back to 1933, when it was believed that country 
banks would deposit their excess funds into money center banks 
in order to fund speculation in the stock market. Thus, monies 
needed to be loaned to farmers would be diverted to Wall Street 
for speculation instead of ``productive'' uses in rural areas. 
Governor Meyer questioned whether such rationale was ever 
valid, and assured the Committee that rationale was absolutely 
not valid today.
    Banks, especially small banks, are actually at a 
competitive disadvantage due to the 65 year old price control. 
One witness, Edward Furash, an established management and 
strategic consultant in the financial services industry 
testified:

        [the payment of interest on business checking accounts] 
        will significantly improve the ability of the banking 
        system to restore its competitiveness with the capital 
        markets through pricing clarity and product 
        simplification, while at the same time reduce bank risk 
        by reducing the need to engage in sweep accounts and 
        complex balance sheet manipulations to match capital 
        markets interest rates.3
---------------------------------------------------------------------------
    \3\ Testimony of Edward Furash, Chairman, Furash & Company, S. 1405 
Hearings, March 3, 1998.

    Removing the prohibition of the payment of interest on 
business checking accounts would also give small, community 
banks a better chance to compete. According to Cornelius 
---------------------------------------------------------------------------
Mahoney, Chairman of America's Community Bankers:

          Restrictions on [business checking accounts] make 
        community banks less competitive in their ability to 
        serve the financial services of many business 
        customers. * * * [T]he quandary is that if community 
        banks don't offer sweep accounts * * * their business 
        customers are likely to leave. The problem is that 
        sweep accounts are expensive and can be very labor 
        intensive, especially for smaller 
        institutions.4
---------------------------------------------------------------------------
    \4\ Testimony of Cornelius Mahoney, Chairman, America's Community 
Bankers, S. 1405 Hearings, March 3, 1998.

    Sweep accounts are not only labor intensive and expensive 
for banks. According to the National Federation of Independent 
Business (NFIB)--an association representing over 600,000 small 
business owners--sweep accounts impose costs on small business 
as well: 5
---------------------------------------------------------------------------
    \5\ Senator Shelby also submitted a letter dated March 2, 1998 into 
the record from the U.S. Chamber of Commerce in favor of removing the 
prohibition of interest on business checking accounts. ``* * * the U.S. 
Chamber supports your legislation to remove restrictive regulations on 
the ability of financial institutions to offer interest bearing 
checking accounts. By allowing for more open competition, your 
legislation offers an important opportunity to small business owners to 
establish a more complete relationship with their financial service 
providers.''

          We soon found that the sweep account resulted in a 
        flood of paper from the bank: each day a reconciliation 
        statement letting us know how the money had been 
        shifted around. And, because this is done via the mail, 
        there is always a two-to-three day delay in information 
        flow so we never have an accurate, up-to-the-minute 
        view of the flow of funds among our banking accounts. * 
        * * [sweep accounts] are a bookkeeping nightmare for a 
        small business * * * 6
---------------------------------------------------------------------------
    \6\ Testimony of Rex Hammock, Member, National Federation of 
Independent Business, S. 1405 Hearings, March 3, 1998.

    While the benefits of removing the price control seem 
evident, not all witnesses agreed. The most widely known 
opponent of the removal of the prohibition, First Union 
Corporation,7 was invited to testify on the matter, 
but chose not to appear in person. In written testimony, First 
Union Corporation, testified:
---------------------------------------------------------------------------
    \7\ See ``First Bigfoot Bank,'' Forbes, March 23, 1998, pp. 44-45. 
This article documents First Union's interest in maintaining the 
prohibition against the payment of interest on business checking 
accounts.

          Small banks could become less profitable, less 
        competitive, more susceptible to takeover and more 
        sensitive to interest rate changes and economic cycles, 
        possibly adversely impacting the safety and soundness 
        of the banking industry when the next recession 
        occurs.8
---------------------------------------------------------------------------
    \8\ Testimony of First Union Corporation, S. 1405 Hearings, March 
3, 1998. (Hereinafter ``First Union Testimony''.)

    The Committee was not convinced by this argument. In fact, 
the Independent Bankers Association of America (``IBAA'') 
surveyed its members in 1997 and found that 71 percent of its 
members favored the payment of interest on reserves and the 
interest on business checking.9 In addition, the 
Committee received letters from the Comptroller of the 
Currency, the Chairman of the Federal Deposit Insurance 
Corporation, and the Director of Office of Thrift Supervision 
all stating that permitting the payment of interest on business 
checking accounts would not threaten the stability of the 
banking system or cause supervisory concerns, but instead, 
would improve overall institution efficiency.
---------------------------------------------------------------------------
    \9\ ``IBAA Survey on Interest-Bearing Commercial Transaction 
Accounts,'' 1997.
---------------------------------------------------------------------------
    First Union continued:

          The competitive need for an interest bearing 
        corporate product is diminishing rapidly since already 
        over 300 banks have corporate sweep account 
        capabilities and the number is rising 
        rapidly.10
---------------------------------------------------------------------------
    \10\ First Union Testimony, supra, note 8.

    The Committee also dismissed this argument since 300 banks 
represent less than three percent of all banks and thrifts 
nationwide (300/10,783=2.8%).
    Responding to concerns identified by the American Bankers 
Association and the Independent Bankers Association of America, 
such as the Year 2000 problem and repricing of services, the 
Committee did include a transition period with regard to the 
removal of the prohibition on interest on corporate demand 
deposits. Upon enactment of S. 1405, banks would be allowed to 
offer a 24-transaction reservable money market account until 
January 1, 2001 at which time the 1933 interest prohibition 
would be repealed in its entirety. Thus, starting January 1, 
2001, banks would be permitted--not mandated--to offer interest 
on business checking accounts.
    Governor Meyer of the Federal Reserve Board echoed the 
Committee's perspective on both interest on reserves and 
business checking accounts:

          These legislative proposals are important for 
        economic efficiency: Unnecessary restrictions on the 
        payment of interest on demand deposits and reserve 
        balances distort market prices and lead to economically 
        wasteful efforts to circumvent them.11
---------------------------------------------------------------------------
    \11\ Meyer Testimony, supra, note 1.

    In addition to allowing banks to offer interest on business 
checking, the Act repeals a number of outdated statutory 
mandates that do little to ensure safety and soundness or any 
other public policy goal. Specifically, Title I removes a 
number of regulatory restrictions on thrifts and their holding 
companies that will allow thrifts to compete with other 
financial service providers in a safe and sound manner. The 
bill would repeal the dated statutory mandate for liquid assets 
and give the regulator greater flexibility in establishing the 
proper liquidity requirements; this would give thrifts 
equitable treatment with banks, that do not have statutory 
liquidity requirements. Section 105 of the bill would repeal 
the current geographic restriction on thrift investments in 
---------------------------------------------------------------------------
service corporations. As one witness testified:

        section 105(a) would permit savings associations to 
        engage in a wide range of joint venture opportunities * 
        * * including community development projects. For many 
        savings associations, this would be a more efficient 
        way of engaging in such activities and wouldprovide a 
benefit to communities and consumers * * * .12
---------------------------------------------------------------------------
    \12\ Testimony of E. Lee Beard, President and CEO, First Federal 
Savings & Loan Association of Hazleton, testifying on behalf of 
America's Community Bankers, March 10, 1998, pp 3-4 (Hereinafter ``ACB 
Testimony'').

    This Title also makes a number of changes that will give 
financial institution management greater flexibility in the 
day-to-day management of corporate activities. For instance, 
Section 111 of S. 1405 will give national banks greater 
discretion in establishing the size of, and the procedures for 
electing, Boards of Directors. Section 113 will allow banks to 
purchase and hold their own stock (a basic power under 
corporate law). Section 113 will also allow banks to take their 
own stock as additional collateral in ``work-out'' situations; 
this will provide lenders with greater security against default 
and can only enhance the safe and sound operations of a lender. 
The Committee believes that these existing regulatory 
limitations on such basic corporate decisions hinders 
managerial flexibility, and promotes cumbersome business 
operations. By doing this, such regulations deny shareholders 
of earnings and increase the price of financial services for 
consumers, without any countervailing public policy benefit.
    Other provisions in this Title are intended to provide 
greater discretion in corporate governance, particularly 
corporate structure reorganization such as the adoption of a 
holding company format, or the merger of affiliated 
institutions within a holding company format. The Committee 
realizes that there are legitimate public policy goals that 
require continued regulatory involvement. Accordingly, the 
provisions such as Section 110 and 112 of this bill will 
facilitate expeditious restructuring while retaining a role for 
legitimate regulatory oversight. The Committee believes that 
management is best-positioned to make informed decisions 
regarding corporate restructuring. Clearly, management should 
be permitted to implement these decisions as cheaply and 
efficiently as possible--in such a way that both shareholders 
and customers can enjoy the full benefit of the efficiencies 
that can be achieved through restructuring.
    Finally, Title I repeals several restrictions that the 
Competitive Equality Banking Act of 1987 (CEBA) imposed on so-
called ``limited purpose'' financial institutions. When these 
restrictions were imposed, they were intended to be temporary; 
CEBA was intended as a stop-gap measure, to ensure 
``competitive equality'' until comprehensive financial 
modernization legislation could be enacted. Eleven years later, 
as Congress continues to wrestle with a myriad issues relating 
to financial modernization, the ``temporary'' restrictions 
continue to apply.13
---------------------------------------------------------------------------
    \13\ See, Sen. Rep. No.19, 100th Cong., 1st Sess. (1987) pp. 492-
494; cf., P.L. 100-86, Sec. 203.
---------------------------------------------------------------------------
    CEBA institutions have been frozen in place, operating 
under restrictive limitations on their activities. Further, any 
unintended breach of any of these restrictions triggers the 
divestiture requirements under current law. In recognition of 
the burden imposed on these institutions, Title I includes a 
number of provisions that relax the restrictions and draconian 
penalties of CEBA. The Committee believes that these provisions 
will permit the CEBA institutions to compete fairly with 
traditional financial institutions, and provide consumers with 
greater choices, and ultimately, lower prices.

Title II: Streamlining Activities of Institutions

    Title II of the bill makes a number of changes in the 
federal banking laws that are necessary to allow financial 
institutions to pursue new business strategies. This Title 
amends provisions that do not have significant safety-and-
soundness or consumer-protection implications, but have 
inhibited the development of new business lines or new means of 
delivering financial products. The Committee's intent in 
permitting these incremental changes in the business authority 
of various financial institutions is to enhance consumer choice 
and create greater opportunities for competition among market 
participants. The Committee believes that expanding choices and 
creating greater competition within the industry will 
ultimately benefit consumers of financial services through 
lower prices and development of products that best respond to 
the needs of consumers.
    For instance, Section 201 of the bill, which was prepared 
with the cooperation of the Office of Thrift Supervision (OTS) 
staff, will update the community development investment 
authority of thrifts to parallel the authority of national 
banks. The current provisions are outdated and inflexible, and 
minimize the opportunity for thrifts to make important 
investments in the community. Currently, Federal savings 
associations ``are limited in their ability to fully serve 
their low- and moderate-income communities.'' 14 
Director Seidman of the OTS testified that this Section would, 
``replace obsolete statutory cross-references with the same 
statutory language that currently defines the types of 
community development investments that can be made by national 
banks.'' 15
---------------------------------------------------------------------------
    \14\ Ms. E. Lee Beard, President & CEO, First Federal Bank, on 
behalf of America's Community Bankers, prepared testimony before the 
House Banking Committee, July 16, 1998.
    \15\ Testimony of Ellen Seidman, Director, Office of Thrift 
Supervision, S. 1405 Hearings, March 10, 1998.
---------------------------------------------------------------------------
    Section 203 will allow so-called ``credit card banks'' to 
offer credit cards for business-purposes. Clearly, these 
institutions have the capacity to compete in the credit card 
market, and thereby help to lower the cost of these products to 
the public. Nevertheless, these institutions have been unable 
to offer such credit cards because of the technical confines of 
the Truth In Lending Act (``TILA''), under which such cards 
qualify as ``commercial credit.''
    In connection with various types of retail loan and deposit 
programs, financial institutions have traditionally established 
relationships with what are known as ``affinity groups,'' for 
thepurpose of offering the members of such groups various 
financial products and services. The affinity group's endorsement 
serves to increase the members'' awareness of the financial 
institution. The exemption provided by Section 204 will facilitate 
payments by lenders to affinity groups for a narrow range of real 
estate lending transactions. Only those ``federally related mortgage 
loans'' (as defined in the Real Estate Settlement Procedures Act 
(``RESPA'')), for which the loan proceeds are not used to acquire the 
real property securing the loan, are exempt from the restrictions of 
Section 8 of RESPA.
    In order to qualify for this exemption, a lender must also 
provide a direct benefit to the borrower from the endorsement. 
To be consistent with the intent of this provision, such 
benefit must be tangible, substantive and provided as part of 
the consummation of the loan agreement, either as a discount or 
reduction of settlement costs or fees or as a binding promise 
to provide some other benefit during the term of the loan. 
Other benefits that would be appropriate under this provision 
would include rate or fee reductions on other financial 
services or merchandise. All such benefits would necessarily be 
negotiated with, and approved by, the endorsing affinity group 
on behalf of its members. In general, the value of the ``direct 
financial benefit'' under this section will be dictated by 
competition in the marketplace for the endorsements from 
affinity groups.
    Section 205 clarifies the law with regard to unfair 
practices and the verification period of the Fair Debt 
Collection Practices Act (``FDCPA''), without jeopardizing any 
of the consumer protections of that Act. In addition, this 
section addresses the current conflict in law between the 
Higher Education Act and the FDCPA.

Title III: Streamlining Agency Actions

    The third Title of this bill is intended to streamline 
operations of various Federal financial regulators. The 
provisions in this Title will allow regulators to focus their 
energies on their primary responsibilities: that is, to ensure 
safety-and-soundness of the nation's banking system by 
identifying, monitoring and addressing risks to the financial 
industry. This Title will eliminate redundant regulatory 
reports regarding topics such as regulatory accounting 
standards and the antitrust implications of mergers. In both 
these instances the law is not being altered to eliminate 
reporting requirements, but rather to do away with redundant 
reporting requirements. Changes like these will not impact 
meaningful public policy goals that these reports were intended 
to further. But they will allow regulators to focus on the 
achievement of these and other important goals and minimize 
wasted man hours on the preparation, review and approval of 
redundant reports.
    Other provisions of this Title are intended to allow 
regulators to cut extraneous costs.16 For instance 
Section 301 will limit the number of occasions that the 
Affordable Housing Advisory Board must meet, and eliminate 
attendant costs of these meetings by eliminating the 
requirement that these meetings be held at different locations 
through out the country.
---------------------------------------------------------------------------
    \16\ Section 306 of the bill as introduced has been eliminated. 
This provision eliminated the Thrift Depositor Protection Oversight 
Board. This provision was eliminated from this bill because it was 
contained in S.318, the Home Owners Protection Act of 1998, which was 
enacted into law on July 29, 1998 (P.L. 105-216).
---------------------------------------------------------------------------
    Section 307 eliminates the SAIF (Savings Association 
Insurance Fund) Special Reserve Fund (the Fund) that was 
established in 1996 primarily for budget-scoring purposes. This 
change is supported by the Federal Deposit Insurance 
Corporation and the Office of Thrift Supervision. Current law 
would require Congress to take the $800 million of excess 
reserves (above the statutory 1.25 percent reserve ratio) to 
fund the Special Reserve Fund. This, however, would subject 
insured institutions to the risk of significant insurance 
premium increases since the $800 million in excess funds serves 
as a buffer or cushion, should the Fund ever be drawn upon for 
failing institutions. Such a situation could, once again, lead 
to a disparity in the BIF (Bank Insurance Fund)-SAIF insurance 
premium. Congress spent a great deal of time and effort in 1996 
to address this disparity, and the Committee believes that 
situation should be avoided if at all possible.

Title IV: Miscellaneous

    Title IV's provision address Truth In Lending Act 
(``TILA'') disclosures and a number of governance issues 
relating to Federal agencies under the Committee's 
jurisdiction. Section 401 simplifies the advertisement 
requirements under truth-in-lending. The Committee recognizes 
that TILA provides important consumer protections, but also 
contains a number of onerous disclosure requirements of 
marginal use to consumers. The Committee is also cognizant of 
ongoing efforts between various stakeholders to produce a TILA/
RESPA reform package. This attempt to create a comprehensive 
harmonization of TILA and RESPA has been ongoing for several 
years with no tangible results. Nevertheless, the Committee 
does not want to disturb this process; accordingly, the 
Committee has refrained from far-reaching TILA disclosure 
modifications in this bill.
    One change that the Committee did believe deserved 
immediate attention was retained. Section 401 will simplify the 
disclosures that are required at the end of radio and 
television advertisements for consumer credit. Currently, 
advertisers are required to provide so much detailed 
information at the end of an advertisement that the disclosure 
is little more than a garbled exercise in speed-reading. 
Section 401 would allow credit advertisers, at their option, to 
provide an abbreviated disclosure of essential terms of the 
credit agreement, along with an ``1-800'' number that the 
consumer may call for more detailed information. This provision 
also establishes requirements for the 1-800 service that will 
make sure that consumers who use it will obtain complete TILA 
disclosures at no long-distance charge. The Committee believes 
that by simplifying the on-air disclosure to those basic terms 
that allow comparison shopping, and by providing the consumer 
with the opportunity to obtain further disclosure free-of-
charge and in a more deliberate manner, the consumer will 
benefit from more meaningful information.America's Community 
Bankers supports this Section testifying they ``[believe] that the 
simplicity of providing basic rate information, giving a toll free 
number, and making further information available upon request will 
significantly reduce regulatory burden of creditors while enhancing the 
consumer's ability to comprehend the credit product being 
advertised.''17
---------------------------------------------------------------------------
    \17\ ACB Testimony, supra, note 11.
---------------------------------------------------------------------------
    Another important provision in this Title is Section 402, 
which will raise the salaries of the entire Board of Governors 
of the Federal Reserve Board. Currently the Chairman of the 
Federal Reserve is paid less than a Presidential Cabinet Member 
and less than some of the staff at the Federal Reserve Board. 
The Committee realizes that individuals are not drawn to 
service on the Federal Reserve Board by the salary. 
Nevertheless, the Committee believes that this gesture is an 
appropriate means of acknowledging a Chairman's tremendous 
responsibility and service in what has been described as ``one 
of the world's toughest jobs.'' 18 During his tenure 
at the Federal Reserve, Chairman Greenspan has provided cool 
and deliberate guidance for our nation's economy. Realizing 
that inflation represents the single greatest threat to our 
country's long-term economic viability, Chairman Greenspan has 
dedicated a tremendous amount of time and effort to controlling 
inflation. He has provided the stability and leadership that is 
responsible for the unprecedented economic growth that the U.S. 
economy has enjoyed since the last recession ended in 
1991.19
---------------------------------------------------------------------------
    \18\ The Economist, May 9, 1998.
    \19\ See, e.g., Congressional Research Services, Current Economic 
Conditions and Selected Forecasts, CRS Report to Congress, Rep. No. 96-
963E (Gail Makinen, August 4, 1998).
---------------------------------------------------------------------------
    The bill would also transfer the health insurance coverage 
of retirees and certain employees of the Federal Reserve System 
and the Federal Deposit Insurance Corporation to the Federal 
Employees Health Benefits program. This provision is supported 
by both the Federal Reserve and the FDIC. Consolidating these 
two insurance programs should reduce costs to the Federal 
government by increasing the pool of covered individuals 
(thereby reducing risk).
    Section 404 of this bill will remove the condition that at 
least one member of the Federal Housing Finance Board be a 
``Community Representative.'' This condition has existed since 
the Board was created in 1989, and the Committee believes that 
it is responsible for the fifth seat on the Board going 
unfilled.

Title V: Technical Corrections

    This Title is comprised of technical corrections to the 
Deposit Insurance Funds Act, Federal Deposit Insurance Act, 
Economic Growth and Regulatory Paperwork Reduction Act and the 
International Bank Act.

                      SECTION-BY-SECTION ANALYSIS

Section 101. Interest on reserves

    This provision would allow the Federal Reserve to pay 
interest on reserve balances maintained at a Federal Reserve 
bank at a rate no greater than the federal funds rate. Recent 
developments in technology (sweep accounts) have allowed banks 
to decrease their reserve deposits, which could cause an 
increase in interest rate volatility. Interest on reserves 
would decrease this potential volatility and assist the central 
bank in conducting monetary policy.

Section 102. Interest on business checking accounts

    This provision allows depository institutions to offer 
negotiable order of withdrawal accounts to all businesses.

Section 103. Repeal of savings association liquidity provision

    This section repeals the 1950 statute requiring savings 
associations to hold liquid assets in an amount no less than 
four percent to ten percent of their total demand deposits and 
borrowing payable within one year. Commercial banks and state 
savings banks are not subject to a similar requirement. The 
liquidity of these institutions is monitored through the 
examination process pursuant to flexible safety and soundness 
guidelines.

Section 104. Repeal of thrift dividend notice requirement

    This provision would repeal the statutory requirement 
imposed on savings association subsidiaries of SLHCs to provide 
the OTS with 30-days notice of the payment of any dividend. The 
current provision applies only to savings associations owned by 
SLHCs. No similar provision applies to savings associations 
controlled by individuals, bank holding companies or even 
national banks owned by holding companies.

Section 105. Reduction of regulatory requirements for thrift 
        investments in service companies

    This amendment removes the geographic and ownership 
limitations on investments in first-tier service companies and 
imposes, instead, the activity-based limitations found in OTS 
regulations. In addition, it changes the term ``service 
corporation'' to ``service company'' to make consistent with 
the change made last year in Public Law 104-208 with regard to 
banks.

Section 106. Elimination of thrift multi-state multiple holding company 
        restriction imposed on SLHCs

    Currently, a bank holding company may own thrift 
subsidiaries in separate states, but asavings and loan holding 
company may not, unless one of three exemptions is applicable. An SLHC 
can own a subsidiary out of state if it buys the thrift in a 
neighboring state and then merges it with an in-state subsidiary. The 
provision would eliminate the existing multi-state multiple restriction 
imposed on thrift holding companies allowing them the choice of whether 
to merge or not to merge.

Section 107. Removal of prohibition on SLHC acquiring a non-controlling 
        interest in another SLHC or thrift

    This provision would allow a savings and loan holding 
company to acquire a five to twenty-five percent non-
controlling interest of another SLHC or savings association, 
subject to the approval of the Director of OTS.

Section 108. Repeal of deposit broker notification to FDIC

    The section simply repeals the requirement of brokers to 
file a written notice (not a filing) with the FDIC before the 
deposit broker solicits or places any deposit with an insured 
depository institution so brokers cannot mislead consumers.

Section 109. Uniform regulations governing extensions of credit to 
        executive officers

    This provision would adopt a single common regulation--
Regulation O, 12 C.F.R. Part 215--to apply to loans for 
executive officers of all insured institutions.

Section 110. Expedited procedures for certain reorganizations

    This section would expedite the reorganization of a 
national bank into a bank holding company by permitting 
national banks, with two-thirds approval of its shareholders of 
the bank and the Comptroller, to reorganize into a subsidiary 
of a bank holding company without first forming the phantom 
bank.

Section 111 (a). Increase the one year term for national bank directors 
        and allow banks to have staggered board of directors

    This provision would permit national banks to elect their 
directors for terms of up to three years in length, and would 
permit these directors to be elected on a staggered basis in 
accordance with regulations issued by the OCC, so that only 
one-third of the board of directors is elected each year.

Section 111 (b). Removal of upper limitation on number of board of 
        directors

    This provision would permit the Comptroller to remove the 
limitation on the number of board members, currently 25, in 
order to allow a bank more flexibility in determining the 
composition of its board. The lower limit of five would remain.

Section 112. Permit national banks to merge or consolidate with 
        subsidiaries or other nonbank affiliates

    This section would permit a national bank, upon approval of 
the Comptroller and pursuant to regulations, to merge or 
consolidate with its subsidiaries or nonbank affiliates without 
providing for an increase in powers for the national bank.

Section 113 (a) & (b). Repeal prohibition on a national bank's 
        purchasing or holding its own shares

    This provision would repeal the prohibition on a bank 
owning or holding its stock but retain the prohibition on 
making loans or discounts on the security of the banks own 
shares. This amendment would codify an OCC interpretation and 
eliminate any confusion about the authority of national banks 
to take legitimate corporate actions to reduce capital or 
otherwise acquire their own shares.

Section 113 (c). Clarification of the Bank Holding Company Act

    This provision amends an unintended consequence of section 
2615 of the Omnibus Consolidated Appropriations Act for FY 1997 
(P.L. 104-208), which inadvertently conflicts with another 
provision of federal law (12 U.S.C. Sec. 2279aa-4).

Section 114. Depository institution management interlocks

    Section 205(8)(A) of the Depository Management Interlocks 
Act of 1978 (DIMIA) permits a diversified savings & loan 
holding company to request the Office of Thrift Supervision to 
permit it to have on its Board an outside director of a non-
affiliated institution. This provision expands the authority of 
the OTS, so that it may approve ``dual service'' for not only 
outside directors, but also management officials, so long as it 
does not result in ``a monopoly or substantial lessening of 
competition in financial services in any part of the United 
States.'

Section 115. Modify treatment of purchased mortgage servicing rights in 
        tier 1 capital

    The provision authorizes the appropriate Federal banking 
agencies to jointly simplify capital calculations by not 
requiring banks or thrifts to distinguish between types of 
mortgage servicing rights. This would allow regulators to value 
marketable mortgage servicing assets in capital determinations 
up to 100% of their fair market value rather than the current 
level which is limited to 90% of fair market value.

Section 116 (a). Crossmarketing restriction on limited-purpose banks

    This provision would repeal the current crossmarketing 
restriction, allowing CEBA banks to crossmarket their products 
and services with the products and services of affiliates.

Section 116 (b). Restriction on daylight overdrafts

    This provision would expand ``permissible overdrafts'' to 
include overdrafts incurred by affiliates that incidentally 
engage in financial services activities, if the overdraft is 
within the restrictions imposed by Section 23A and 23B of the 
Federal Reserve Act.

Section 116 (c). Activities limitations

    This provision repeals the restriction which prohibited 
limited-purpose banks from engaging in activities they were not 
engaged in prior to March 5, 1987. Limited-purpose banks would 
still be prohibited from both accepting demand deposits and 
engaging in the business of commercial lending (i.e. a limited-
purpose bank can do one or the other, but not both).

Section 117. Divestiture requirement

    This section would modify the provision of CEBA which 
requires divestiture of a limited-purpose bank in the event the 
bank or its owner fails to remain qualified for the CEBA 
exception. The amendment allows limited-purpose bank owners to 
avoid divestiture by promptly correcting the violation (within 
180 days of receipt of notice from the FRB) that would 
otherwise lead to divestiture and implementing procedures to 
prevent similar violations in the future.

Section 201. Updating the authority for thrift community development 
        investments

    This provision would replace obsolete language with regard 
to the investment of a savings association in real estate or 
loans secured by real estate in concordance with title I 
(Community Development Block Grant program--CDBG) of the 
Housing and Community Development Act of 1974, with the same 
statutory language that currently defines the types of 
community development investments that can be made by national 
banks and state member banks.

Section 202. Repeal section 11(m) of the Federal Reserve Act

    Repeals the limitation on the amount of stocks and bonds 
member banks may hold as collateral for a loan. Also eliminates 
arbitrary 15 percent capital limit under current law.

Section 203. Business purpose credit extensions

    This provision would make clear that the prohibition on 
commercial lending by credit card banks does not include the 
use of credit card accounts for business purposes.

Section 204. Affinity groups

    This provision clarifies that affinity arrangements and co-
branding arrangements with regard to non-purchase money 
transactions are legal if the consumer receives a direct 
financial benefit from the endorsement.

Section 205 (a). Unfair practices

    Provides for collection on bad checks, if it is 
``reasonable, does not exceed $25, results from the collection 
of a check returned for insufficient funds, and notice of the 
charge was conspicuously posted * * *''

Section 205 (b). Clarification of allowable collection activities 
        during the verification period

    This provision codifies aspects of an FTC interpretation 
and analyses rendered by Federal Courts that if a debtor has 
not requested verification of the debt or notified the 
collector of a dispute, the collector may attempt to collect a 
debt during that 30-day period, as long as the activities and 
communications do not overshadow or contradict the consumer 
information provided in law.

Section 205 (c). Amendment to Fair Debt Collections Practices Act 
        (FDCPA) to address conflicts with the Higher Education Act 
        (HEA)

    Exempts a ``prejudgment administrative wage garnishment 
permitted under section 488A of the Higher Education Act'' from 
the definition of communication with regard to the collection 
of any debt.

Section 206. Restriction on acquisitions of other insured institutions

    This provision would allow limited-purpose banks to acquire 
insured institutions which have Prompt Corrective Action 
capital categories of ``undercapitalized'' or lower.

Section 207. Mutual holding companies

    This section includes numerous technical changes to the 
mutual holding company provisions of the Home Owners'' Loan 
Act, as well as some clarifying language. It specifically 
authorizes a mid-tier stock holding company as currently 
permitted by several states. It would facilitate capital 
raising by permitting the subsidiary stock holding company or 
the subsidiary association to issue one or more classes of 
voting stock, and build in more flexibility by allowing shares 
authorized at the time of the initial mutual holding company 
formation to be subsequently issued.

Section 208. Call report simplification

    This provision calls for: the modernization of the call 
report filing and disclosure system; the uniformity of reports 
and simplification of instructions; and the review of the call 
report schedule. The exact same provision was included in 
Section 307 of the Riegle Community Development and Regulatory 
Improvement Act of 1994.

Section 301. Elimination of further development of the supplemental 
        disclosure of fair market value of assets and liabilities as 
        duplicative

    This section would clarify that banking agencies need no 
longer pursue further development of the supplemental 
disclosure method. Even so, Section 36 of FDIA and its 
supporting regulations provide agencies with discretion to seek 
additional information in regulatory reports and annual reports 
regarding fair market value.

Section 302. Creditor fairness/payment of interest in receiverships 
        with surplus funds

    This provision gives the FDIC the authority to establish a 
uniform interest rate with regard to receiverships.

Section 303. Amends the reporting requirement of differences in 
        accounting standards

    Amends the requirement for each agency to produce an Annual 
Report on ``Agency Differences in Reporting Capital Ratios and 
Related Accounting Standards.'' Instead, this provision directs 
the Federal banking agencies to jointly produce one report.

Section 304. Streamlining of Bank Merger Act application filing 
        requirements

    This provision eliminates the requirement that each federal 
banking agency request a competitive factors report from the 
other three federal banking agencies as well as the Attorney 
General. The proposed provision would decrease that number to 
two, with the AG continuing to be required to consider the 
competitive factors of each merger transaction. The provision 
also requires the responsible banking agency to take into 
account appropriate competitive measures when considering the 
competitive effect of mergers.

Section 305. Elimination of SAIF and DIF special reserves

    This provision would eliminate the need for the 
establishment of a SAIF ``special reserve.'' Beginning in 1999, 
the FDIC will be required to establish a SAIF special reserve 
equal to that amount of SAIF funds that is above 1.25% on 
January 1, 1999. The FDIC has suggested that this could mean an 
amount of nearly $800 million set aside for a special reserve, 
yet, none of these funds could be used in calculating the 
reserve to deposit ratio of the SAIF.

Section 401. Amend TILA requirements for credit advertising

    Provide a uniform rule for all credit products advertised 
on either radio or TV. As an optional alternative to current 
disclosure requirements, credit advertisements in those media 
would state basic rate information, give a toll free number, 
and make further information available upon request.

Section 402. Positions of Board of Governors of Federal Reserve System 
        on the Executive Schedule

    This provision simply raises the pay of the Chairman of the 
Federal Reserve Board from Level II of the Executive Schedule 
to Level I (approx. $14,800) and the Board Members from Level 
III to Level II (approx. $10,500).

Section 403. Coverage of employee health plans at Federal banking 
        agencies

    The FDIC will eliminate its alternative health insurance 
plan at the end of the 1997 health benefits year, due to a 
recently ratified agreement with the National Treasury 
Employees Union. Most of the employees will be able to enroll 
in the Federal Employees Health Benefits Program (FEHBP) during 
the open season this fall. However, employees are required to 
be enrolled in FEHBP for at least five years immediately prior 
to retirement in order to carry FEHBP coverage in retirement. 
Thus, without a legislative change, the FDIC will have to 
maintain a non-FEHBP plan for the approximately 2,000 retired 
employees and those within five years of retirement around the 
country. This provision allows employees within five years of 
retirement to carry FEHBP coverage in retirement and is 
consistent with legislation that Congress passed on behalf of 
the OCC and OTS in 1994. This provision also applies to the 
Federal Reserve System.

Section 404. Federal Housing Finance Board position

    This section eliminates the Consumer Representative 
requirement for a member of the Board of Directors, since no 
such position has ever been filled. In doing so, this provision 
does not reduce the required number of Directors, merely this 
specific requirement.

Section 405. Reports by indenture trustee

    This provision amends the Trust Indenture Act of 1939 to 
require an indenture trustee to annually forward each indenture 
security holder a form requesting change of address 
information.

Section 501. Technical error in DIFA amendment

    Section 2707 amends section 7(b)(2) of the FDIA to provide 
that assessment rates for SAIF members may not be less than 
assessment rates for BIF members. It currently begins as 
follows: ``Section 7(b)(2)(C) of the Federal Deposit Insurance 
Act (12 U.S.C. 1817 (b)(2)(E), as redesignated by section 
2704(d)(6) of this subtitle) is amended--''. The proper 
reference is to section 7(b)(2)(E) of the FDIA.

Section 502. Conform rules for continuation of deposit insurance for 
        member banks converting charters

    Section 8(o) of the Federal Deposit Insurance Act (FDIA) 
provides for termination of deposit insurance when a member 
bank ceases to be a member of the Federal Reserve System, 
subject to an exception for certain mergers or consolidations. 
Prior to FIRREA, section 4(c) and (d) were referenced in a 
single subsection: subsection (b). In FIRREA, Congress divided 
former section 4(b) into two separate sections, 4(c) and 4(d), 
but neglected to change the reference in section 8(o). Later, 
in a technical amendment designed to correct the error, 
Congress amended section 8(o) to include an exception for 
section 4(d). This incomplete amendment was insufficient to 
encompass the original intent of section 8(o) because no 
exception was included for section 4(c), which provides for 
state-to-federal and federal-to-state conversions. Providing a 
technical amendment to section 8(o) to include a cross 
reference to section 4(c) would remedy this omission and 
restore the original intent.

Section 503 (a). Waiver of the citizenship requirement for national 
        bank directors

    This provision provides that the Comptroller may waive the 
U.S. citizenship requirement for up to a minority of a national 
bank's directors. The Economic Growth and Regulatory Paperwork 
Reduction Act (EGRPRA) inadvertently deleted the long-standing 
authority of the Comptroller to waive the citizenship 
requirement for up to a minority of directors of national banks 
that are subsidiaries or affiliates of foreign banks.

Section 503 (b). Technical Amendment to Section 11 which currently 
        prohibits the Comptroller from having an interest in any 
        national bank ``issuing national currency.''

    This provision simply updates section 11 to reflect that 
national banks no longer issue national currency, while 
maintaining the provision that prohibits the Comptroller from 
owning interest in the national banks they regulate.

Section 503 (c). Technical Amendment to repeal Section 51 (obsolete 
        minimum level of capital)

    This provision repeals Section 5138 of the Revised Statutes 
(first enacted in 1864), which imposes minimum capital 
requirements for national banks. This minimum capital 
requirement (ranging from $50,000 to $200,000) is obsolete, 
since Congress granted the Federal banking agencies the 
regulatory authority to establish minimum capital requirements 
in 1983.

Section 504. Conforming change to the International Bank Act

    Allows branches and agencies of foreign banks that satisfy 
the asset test imposed on domestic banks to be examined on an 
18-month cycle instead of the 12-month cycle.

                      REGULATORY IMPACT STATEMENT

    In compliance with paragraph 11(b) of the rule XXVI of the 
Standing Rules of the Senate, the Committee makes the following 
statement regarding the regulatory impact of the bill.
    S. 1405 reduces the regulatory burdens on financial 
institutions by eliminating and streamlining various regulatory 
and statutory requirements and prohibitions. In addition, many 
provisions of the bill would lower the cost of regulation by 
reducing the regulatory hurdles that hinder efficient corporate 
governance.

                        CHANGES IN EXISTING LAWS

    In the opinion of the Committee, it is necessary to 
dispense with the requirements of paragraph 12 of the rule XXVI 
of the Standing Rules of the Senate in order to expedite the 
business of the Senate.

                        COST OF THE LEGISLATION

    Senate Rule XXVI, section 11(b) of the Standing Rules of 
the Senate, and section 403 of the Congressional Budget 
Impoundment and Control Act, require that each committee report 
on a bill containing a statement estimating the cost of the 
proposed legislation, which has been prepared by the 
Congressional Budget Office. The estimate is as follows:

                                     U.S. Congress,
                               Congressional Budget Office,
                                 Washington, DC, September 2, 1998.
Hon. Alfonse M. D'Amato,
Chairman, Committee on Banking, Housing, and Urban Affairs,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 1405, the 
``Financial Regulatory Relief and Economic Efficiency Act of 
1998.''
    If you wish further details on this estimate, we will be 
pleased to provide them. The principal CBO staff contacts are 
Carolyn Lynch and Mark Booth.
            Sincerely,
                                         June E. O'Neill, Director.
    Enclosure.

               Congressional Budget Office Cost Estimate

S. 1405--The Financial Regulatory Relief and Economic Efficiency Act of 
        1998

    Summary: S. 1405 would make numerous changes to the 
relationship between financial institutions and the federal 
agencies that are responsible for regulatory and monetary 
policy. Most significantly, the bill would permit the Federal 
Reserve System to pay interest on reserves held on deposit at 
the Federal Reserve, and it would repeal the provision of law 
that prohibits depository institutions from paying interest on 
commercial demand deposits. The bill also would transfer the 
health coverage of retirees and certain active employees of the 
Federal Deposit Insurance Corporation (FDIC) and the Federal 
Reserve System to the Federal Employees Health Benefits (FEHB) 
program. In addition, the bill would eliminate the requirement 
for the FDIC to establish a ``special reserve'' for the Savings 
Association Insurance Fund (SAIF) and it would raise the pay of 
the Chairman and six other members of the Board of Governors of 
the Federal Reserve System.
    CBO estimates that the bill would reduce federal revenues 
by $575 million and direct spending by $54 million over the 
period from 1999 through 2003. Consequently, pay-as-you-go 
procedures would apply to the legislation. The provisions 
regarding interest on reserves account for most of the 
budgetary effect, with the rest coming from the provisions that 
would transfer the health insurance coverage of certain 
employees. The provisions to remove the requirement that the 
FDIC establish the SAIF reserve and to raise the pay for the 
Board of Governors of the Federal Reserve System are estimated 
to have an insignificant budgetary effect. CBO estimates that 
no significant budgetary effects would result from the 
remaining provisions, which largely clarify or streamline 
certain rules and procedures.
    S. 1405 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA) and would have no 
significant effects on the budgets of state, local, or tribal 
governments. S. 1405 would, however, impose a private-sector 
mandate as defined by UMRA by requiring indenture trustees to 
mail forms once a year to holders of indenture securities 
requesting change of address information. For reasons described 
below it is unlikely that the direct costs of this mandate 
would exceed the statutory threshold established in UMRA ($100 
million in 1996, adjusted annually for inflation), although CBO 
cannot make that determination with confidence. The bill would 
also change existing laws in ways that could lower the costs to 
depository institutions of complying with existing federal 
requirements.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of S. 1405 is shown in the following table.

                                    [By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                        1999      2000      2001      2002      2003     2004-08
----------------------------------------------------------------------------------------------------------------
                                           CHANGES IN DIRECT SPENDING
FDIC:
    Estimated budget authority......................         0         0         0         0         0         0
    Estimated outlays...............................       160       -14       -15       -18       -20      -144
FEHB Program:
    Estimated budget authority......................      -178         6         7         8        10        58
    Estimated outlays...............................      -178         6         7         8        10        58
Total, direct spending:
    Estimated budget authority......................      -178         6         7         8        10        58
    Estimated outlays...............................       -18        -8        -8       -10       -10       -86
                                               CHANGES IN REVENUES
Interest on required reserves and business demand
 deposits...........................................      -145      -116       -98      -102      -107      -609
Shift of Federal Reserve employees and retirees to
 FEHB Program.......................................       -11         1         1         1         1         5
                                                     -----------------------------------------------------------
      Total, Revenues...............................      -156      -115       -97      -101      -106      -604
----------------------------------------------------------------------------------------------------------------
Note.--FDIC=Federal Deposit Insurance Corporation; FEHB program=Federal Employees Health Benefits program.

    The source of the largest budgetary effect of S. 1405 is 
the federal payment based on the profits of the Federal Reserve 
System. The Federal Reserve remits its profits to the Treasury, 
and those payments are classified as governmental receipts, or 
revenue, in the federal budget. Any additional income or costs 
to the Federal Reserve, therefore, can affect the federal 
budget. The Federal Reserve's largest source of income is 
interest from its holdings of Treasury securities. In effect, 
the Federal Reserve invests in Treasury securities in reserve 
balances and issues of currency that comprise the bulk of its 
liabilities. Since the Federal Reserve pays no interest on 
reserve or currency, and the Treasury Department pays the 
Federal Reserve interest on its security holdings, the Federal 
Reserve earns profits.
    By allowing the Federal Reserve to pay interest on 
reserves, the bill, according to CBO's analysis, would reduce 
the Federal Reserve's profits and thereby reduce federal 
revenues by $568 million over the period from 1999 to 2003. The 
estimate includes an anticipated response by depository 
institutions and depositors that would increase the amount of 
demand deposits and, therefore, required reserves. CBO 
estimates that this response would reduce, but not eliminate, 
the expected loss in federal revenues.
    In addition, direct spending would decrease by an estimated 
$18 million in 1999, $8 million in both 2000 and 2001, and $10 
million in both 2002 and 2003. The savings would result from 
the transfer of health coverage of retirees and certain active 
employees of the FDIC and the Federal Reserve System to the 
Federal Employees Health Benefits (FEHB) program. The shift 
would reduce costs because the health insurance the agencies 
currently provide these employees is more costly than health 
insurance under the FEHB program. Because the transfer would 
include the retirees and certain active employees of the 
Federal Reserve System, revenues would also be affected. The 
transfer would cause revenues to increase by $1 million per 
year from 2000 through 2003, but to decrease by $11 million in 
1999.
    Basis of estimate: The estimates assume that the provisions 
become effective at the beginning of fiscal year 1999, unless 
otherwise specified.
    Paying Interest on Reserve Balances.--S. 1405 would allow 
the Federal Reserve to pay interest on the reserves that 
depository institutions hold on deposit at the Federal Reserve 
(``required and excess reserve balances''). That payment would 
cause a shift in profits from the Federal Reserve to depository 
institutions that, on net, would reduce governmental receipts. 
The budgetary effect can be divided into two components. First, 
the bill would cause the Federal Reserve to pay interest on the 
level of its required reserve balances expected under current 
law, reducing its net income and, therefore, governmental 
receipts. The reduced receipts would be offset only partially 
by increased corporate income tax receipts from the higher 
profits of depository institution. Second, the payment of 
interest on reserves held at the Federal Reserve and on 
commercial demand deposits held at depository institutions 
would cause demand balances at depository institutions to 
increase. That increase would raise the level of reserve 
balances at the Federal Reserve, which would invest them at a 
rate higher than it would pay on them. This change in projected 
reserves would increase governmental receipts on net, but would 
only partially offset the loss caused by the payment of 
interest on reserves projected under current law.

                             REVENUE EFFECT OF ALLOWING INTEREST ON RESERVE BALANCES
                                    [By fiscal year, in millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                        1999      2000      2001      2002      2003     2004-08
----------------------------------------------------------------------------------------------------------------
                                               CHANGES IN REVENUES
Federal Reserve revenue.............................      -193      -155      -131      -136      -143      -812
Income tax revenue..................................        48        39        33        34        36       203
                                                     -----------------------------------------------------------
      Total, revenue effect.........................      -145      -116       -98      -102      -107      -609
----------------------------------------------------------------------------------------------------------------

    Interest Payments on Reserves Projected Under Current Law. 
Because depository institutions currently do not earn a return 
on reserve balances, they have an incentive to minimize such 
balances. Required reserve balances measured almost $30 billion 
at the end of 1993, but have since fallen sharply to about $10 
billion today. The widely-reported expansion of consumer sweep 
accounts has caused this recent decline. In typical sweep 
accounts, banks shift their depositors' funds from demand 
deposits, against which reserves are required, into other 
depository accounts, against which no reserves are required. 
The banks shift the funds back to the demand deposit accounts 
the next business day, or when needed by the depositor. Sweep 
accounts for business demand deposits have existed in various 
forms since the early 1970s and have had the same effect of 
reducing required reserves. Recent advances in computer 
technology have now made the shifting of funds feasible for 
many consumer (``retail'') accounts as well. Under current law, 
CBO expects the expansion of retail sweep accounts to continue 
and, based on its March 1998 baseline, required reserve 
balances to decline further to about $4.4 billion by 1999. 
Thereafter, CBO projects them to rise gradually with growth in 
the economy.
    S. 1405 would permit the Federal Reserve to pay interest on 
reserve balances. The Federal Reserve would be allowed to 
choose the interest rate, although the rate chosen could not 
exceed the general level of short-term interest rates. The 
Federal Reserve has indicated that, given the authority, it 
would pay interest on required reserve balances and it would 
choose an interest rate near the key short-term rate, the 
federal funds rate. The rate likely would be roughly 10 basis 
points lower than the federal funds rate to account for the 
lack of risk. The Federal Reserve has indicated, however, that 
it would choose not to pay interest on excess reserves unless 
required reserve balances fell to such a low level that 
interest on excess reserves was needed in order to build 
reserves. CBO assumes, therefore, that the Federal Reserve 
would pay interest only on required reserves, at a rate near 
the federal funds rate. Based on its March 1998 baseline 
assumptions, CBO projects the federal funds rate to average 
about 5.7 percent in 1999 and decline to about 5.2 percent by 
2001 and thereafter. CBO assumes that the payment of interest 
on reserves would start early in fiscal year 1999. CBO projects 
that the bill would cause the Federal Reserve to pay interest 
to depository institutions of about $250 million in 1999 on the 
$4.4 billion of required reserve balances expected under 
current law. Interest payments would decline to about $235 
million in each of the following two years because of lower 
interest rates. Over the period from 1999 through 2003, 
interest payments would total about $1.2 billion. Those 
payments would reduce the profits of the Federal Reserve--and 
thus its payment to the Treasury--by the same amount.
    Because receipts of interest by depository institutions 
presumably would increase their profits by the same amount that 
the Federal Reserve's profits declined, overall profits in the 
economy would remain unchanged. Assuming that depository 
institutions face a marginal tax rate on corporate income of 25 
percent, we estimate that corporate income tax receipts would 
increase by about $60 million in 1999 and $300 million through 
2003 as a result of the additional interest income. That 
increase in receipts would offset one-quarter of the reduction 
in governmental receipts from reduced Federal Reserve profits. 
Thus, the net revenue loss to the federal government from the 
interest payments with no change in projected reserves would be 
about $190 million in fiscal year 1999 and approximately $900 
million over the period from 1999 through 2003.
    It is possible that, instead of retaining the additional 
interest income, depository institutions would pass some of the 
increased profits through to their business and consumer 
customers by raising interest rates on deposits or lowering 
rates on loans. If a complete passthrough did occur, then the 
customers--not the depository institutions--would accrue the 
income and pay the additional taxes. The increase in income tax 
revenues would be roughly similar to that estimated without 
such a passthrough assumption.
    Projected Impact of the Bill on the Volume of Reserves. If 
the Federal Reserve paid interest on required reserve balances 
and depository institutions were allowed to pay interest on 
business demand deposits, there would be a second budgetary 
effect that would reduce--but not eliminate--the net revenue 
loss from the payment of interest. In particular, based on a 
survey by the Board of Governors of the Federal Reserve System, 
we would expect reserve balances to increase because depository 
institutions would close a significant share of their retail 
and business sweep accounts and, as a result, maintain a higher 
level of required reserves. By doing so, the institutions could 
eliminate the costs of maintaining the sweep accounts and 
receive a return on their required reserves. However, closing 
the sweep accounts could reduce the earnings of banks because 
the return on required reserves--approximately the federal 
funds rate--likely would be lower than what they could receive 
with free use of the funds from the sweep accounts.
    CBO assumes that by 2001, depository institutions would 
eliminate 30 percent of both retail and business sweep accounts 
currently in existence, and half of those that otherwise would 
be undertaken. Although S. 1405 would not permit the payment of 
interest on business demand deposits until after January 1, 
2001, the bill would allow businesses to deposit funds in a new 
money market account (MMDA) upon enactment of the bill through 
July 1, 2001. Depositors in those accounts would receive 
interest and be permitted up to 24 transactions in any month. 
Because reserve requirements would also apply to those 
accounts, they would be similar in many ways to interest-
bearing demand deposits. Despite the similarities, during this 
transition period CBO assumes a slower rate of closings of 
business sweep accounts than if interest were immediately 
allowed on business demand deposits. As a result of the 
closings of retail and business sweep account, demand deposits 
on which required reserves are calculated would increase at 
depository institutions. CBO therefore projects that required 
reserve balances would increase above the level expected under 
current law, by about $17 billion in 2001 and $19 billion by 
2003.
    Although the Federal Reserve would pay interest on the 
added reserves at approximately the federal funds rate, it 
would invest the reserves in Treasury securities, earning a 
rate of return in excess of the federal funds rate by an amount 
estimated at between 0.6 and 0.7 of a percentage point. As a 
result of the rate differential, the Federal Reserve would 
generate additional profits of $465 million through 2003 and 
return them to the Treasury as governmental receipts. Other 
corporate profits, including those of the firms that generate 
the computerized sweep account software and the depository 
institutions, would decline on net, however, by the same amount 
as the increase in the Federal Reserve's profits. (Again, 
overall profits in the economy would be unchanged.) The reduced 
profits of corporations would cause corporate income tax 
receipts to fall, assuming the same marginal tax rate as before 
of 25 percent, by about $115 million through 2003. The overall 
net effect of the added reserves would be to increase 
governmental receipts by about $45 million in 1999 and $350 
millionover the 1999-2003 period. This effect, therefore, 
offsets about 40 percent of the five-year revenue loss estimated for 
the payment of interest assuming no change in projected reserves. The 
overall estimated budgetary effect of the provisions allowing interest 
on reserve balances and interest on commercial demand deposit accounts 
is a reduction in revenue of $145 million in 1999 and $568 million over 
the 1999-2003 period. Over the period from 2004 through 2008, the 
overall revenue loss would total $609 million, making the 10-year 
revenue loss total slightly less than $1.2 billion.
    Health Insurance Transfer for Certain Employees.--The bill 
would transfer the health insurance coverage of retirees and 
certain active employees of the FDIC and the Federal Reserve 
System to the Federal Employees Health Benefits programs. These 
employees are currently covered by in-house health insurance 
plans. The legislation would also require the two agencies to 
make a one-time payment to the Office of Personnel Management 
(OPM), which administers the FEHB program in order to cover the 
long-term cost of the government's contribution toward the 
insurance premiums of the newly covered individuals. CBO 
estimates that over the 1999-2000 period, overall direct 
spending would decline by $54 million and revenues would 
decline by $7 million as a result of the bill.
    The shifting of the FDIC employees and retirees to the FEHB 
program would reduce direct spending in each year because the 
FDIC pays more for health insurance than the FEHB program would 
pay. The current FDIC plan is more expensive then the typical 
FEHB plan because the insured employees are older and fewer in 
number, and it provides more general coverage. Ongoing savings 
would grow from an estimated $7 million in fiscal year 1999 to 
$11 million in 2003. CBO assumes that the FDIC would make the 
required one-time payment to OPM in January 1999. We estimate 
that the one-time payment would be $170 million; but we also 
estimate that the FDIC would save $10 million in the same year 
from lower health insurance costs. The net cost to the FDIC in 
1999, therefore, would be $160 million. Reflecting the transfer 
from the FDIC, the FEHB program would receive the payment of 
$170 million in that year but would incur additional costs of 
about $3 million to insure those employees and retirees, for 
net savings of $167 million to the FEHB program.
    The transfer between the Federal Reserve and FEHB would 
have a similar effect, but significantly fewer employees would 
be affect at the Federal Reserve. We estimate that the Federal 
Reserve would make a one-time payment of $12 million to OPM in 
1999, with associated savings of $1 million, for a net 
reduction in revenues of $11 million. The associated savings to 
the Federal Reserve and costs to the FEHB program beyond 1999 
would both approximate $1 million per year, although the FEHB 
costs may be slightly less and the Federal Reserve's savings 
slightly more. Also the budgetary effects on the Federal 
Reserve are recorded on the revenue side of the budget. Thus, 
the resulting increases in federal revenues beyond 1999 would 
approximate the increases in FEHB costs for coverage of the 
Federal Reserve personnel, and the net budgetary impact each 
year would be negligible.
    Special Reserve for SAIF.--The bill would repeal the 
requirement for the Savings Association Insurance Fund (SAIF) 
to establish a special reserve fund. CBO expects that the cost 
of that repeal would total less than $500,000 in any year.
    Under current law, on January 1, 1999, the Federal Deposit 
Insurance Corporation (FDIC) must set aside all balances in the 
SAIF that exceed the required reserve level of $1.25 per $100 
of insured deposits. The reserve funds become available to pay 
for losses in failed institutions only if the SAIF reserve 
balance subsequently falls below 50 percent of the required 
reserve level, and the FDIC determines that it is expected to 
remain at hat level for a year.
    Currently, the SAIF reserve is about 1.36 percent of 
insured deposits, and CBO expects that by January 1999, about 
$1.1 billion would be available for transfer to the special 
reserve. At that point, the SAIF fund balance would drop of 
$1.25 per $100 of insured deposits. CBO's baseline assumes 
administrative costs and thrift failures would remain 
sufficiently low to avod raising assessment rates on SAIF-
insured institutions through 2003. We expect that SAIF would 
continue to earn interest on its remaining fund balances of 
over $9 billion in 1999, and that the fund ratio would slowly 
climb each year, reaching about 1.4 percent by 2003.
    Although CBO baseline estimates do not assume that the cost 
of thrift failures in any year would exceed the net interest 
earned by the SAIF, unanticipated thrift failures could result 
in a drop in the SAIF fund reserve ratio below 1.25 percent. 
The baselne reflects CBO's best judgment as to the expected 
value of possible losses during a given year, but annual losses 
would likely vary from the levels assumed in the CBO baseline. 
Thus, some small probability exists that thrift failures could 
increase sufficiently to drive the reserve ratio below the 
required level of 1.25 percent, but not so low as to trigger 
use of the special reserve.
    When the balance of an insurance fund balance dips below 
the required ratio, the FDIC is forced to increase assessments 
for deposit insurance to restore the fund balance to the 
required level. Thus, if thrift losses were to exceed baseline 
estimates by a significantamount, we would expect the FDIC to 
increase insurance rates in order to maintain the SAIF's fund balance. 
Eliminating the special reserve would add to the fund balances and 
would make it less likely that the FDIC would have to raise insurance 
premiums. The probability that this change would affect premium rates 
in quite small, however, and therefore CBO expects that the cost of 
eliminating the special reserve would total less than $500,000 in any 
year.
    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act sets up pay-as-you-go procedures 
for legislation affecting direct spending or receipts. CBO 
estimates that S. 1405 would reduce receipts by $1.179 billion 
and outlays by $2 million over the period from 1999 through 
2008. The project changes in receipts and outlays are shown in 
the following table for fiscal years 1999 through 2008. For the 
purposes of enforcing pay-as-you-go procedures, only the 
effects in the current year, the budget year, and the 
succeeding four years are counted.
    The budget excludes from pay-as-you-ago calculations 
expenses associated with maintaining the deposit insurance 
commitment. CBO assumes that the budgetary effects of shifting 
the health insurance coverage of FDIC employees would be 
excluded from the pay-as-you-go calculation because they would 
be associated with maintaining the deposit insurance 
commitment. The budgetary effects on the Federal Reserve, and 
the corresponding effect on outlays of the FEHB, would not be 
excluded. Most of the effect on receipts is caused by the 
provision authorizing the Federal Reserve to pay interest on 
required reserves.

                                                        [By fiscal year, in millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  1999     2000     2001     2002     2003     2004     2005     2006     2007     2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays............................................      -11        1        1        1        1        1        1        1        1        1
Changes in receipts...........................................     -156     -115      -97     -101     -106     -110     -115     -121     -126     -132
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Estimated impact on State, local, and tribal governments: 
S. 1405 contains no intergovernmental mandates as defined in 
UMRA and would have no significant effects on the budgets of 
state, local, or tribal governments.
    Estimated impact on the private sector: Corporate debt 
securities are often issued under, and controlled by, a trust 
indenture. An indenture is a contract that outlines the 
maturity date, interest rate, redemption rights, and other 
terms under which debt securities (in the form of bonds and 
debentures) are issued. The Trust Indenture Act of 1939 (TIA) 
requires that an indenture be executed by both the corporate 
issuer and a trustee who acts on behalf of bondholders. S. 1405 
would impose a private-sector mandate by amending TIA so that 
once a year indenture trustees would have to mail each holder 
of an indenture security a form requesting change of address 
information. The bill would allow trustees to include the 
request form in other customary mailings under the Trust 
Indenture Act when possible.
    Although it is unlikely that the direct costs of this 
private-sector mandate (net of savings) would exceed the 
statutory threshold for private-sector mandates ($100 million 
in 1996 dollars, adjusted annually for inflation), CBO cannot 
make that determination with confidence because of the 
uncertainties involved in identifying the number of 
beneficiaries who would have to notified and the extent of the 
offsetting savings that would accrue to depository institutions 
from other provisions in the bill.
    One of the difficulties that arise in estimating the number 
of beneficiaries occurs because the bill does not clearly 
define the term ``indenture security holder.'' Based on 
discussions with congressional staff, industry experts, and the 
Securities and Exchange Commission, CBO concludes that the term 
may apply either to a relatively small group of registered 
security holders or to a significantly larger group of 
beneficial (individual) security holders. Most securities are 
not registered in the name of beneficial holders but are held 
in securities depositories for banks and brokerage firms that 
hold securities for their customers. Although it is clear that 
the first group is smaller and easier to contact than the 
other, CBO was unable to obtain adequate information on the 
number of security holders in either category. Since some 
experts estimate the average cost of a mailing and other 
administrative actions associated with obtaining change of 
address information to be about $5 per person, if the bill were 
to affect over 20 million beneficial security holders, it would 
exceed the cost threshold for private-sector mandates. However, 
if the indenture trustees only need to mail to 
registeredsecurity holders, it is most likely that the direct costs of 
the mandate would not exceed the threshold.
    Many provisions in the bill would change existing laws in 
ways that could lower the costs to depository institutions of 
complying with existing federal requirements. The majority of 
trust indentures are handled by about 340 banks and thrifts. 
Those institutions could benefit from the changes the bill 
would make to reduce the burden of some existing regulations. 
Thus, the net direct cost of private-sector mandates imposed by 
the bill could easily fall below the threshold. However, CBO 
does not have enough information about how the benefits of 
cost-reduction provisions would be distributed to banks and 
thrifts to eliminate the potential savings to institutions 
affected by the mandate.
    S. 1405 would also authorize the Federal Reserve to pay 
interest on reserve balances held on deposit at the Federal 
Reserve. Along with the authority to pay interest on reserves, 
the bill would authorize the Board of Governors of the Federal 
Reserve System to prescribe regulations concerning the 
responsibilities of correspondent banks that maintain balances 
at the Federal Reserve on behalf of other institutions. 
Commercial banks, Federal Home Loan Banks and corporate credit 
unions serve as correspondent banks for many depository 
institutions that are not members of the Federal Reserve. Based 
on information provided by the Board of Governors of the 
Federal Reserve System, CBO expects the Federal Reserve would 
not use its authority to issue regulations unless problems 
arose in the crediting and distribution of interest earnings. 
Thus, this provision would not impose a private-sector mandate 
as defined by UMRA. If, after a period of time, the Federal 
Reserve determined a rule was necessary, the rule would most 
likely require that correspondent banks pass the interest 
earnings back to the institutions for which they maintain 
required balances at the Federal Reserve. The cost to the 
correspondent banks of complying with such a rule would be 
negligible.
    Previous CBO estimates: On June 1, 1998, CBO prepared a 
cost estimate for H.R. 1836, the Federal Employees Health Care 
Protection Act of 1998, as ordered reported by the Senate 
Committee on Governmental Affairs on April 1, 1998. It 
contained, among other provisions, the same transfer of health 
insurance as in S. 1405. The budgetary effects of those 
provisions cited in that estimate are identical to those 
included in this estimate of S. 1405.
    On Sept. 5, 1997, CBO prepared a cost estimate for H.R. 
2323, the Small Business Banking Act of 1997, as introduced on 
July 31, 1997. The bill would also authorize the Federal 
Reserve to pay interest on required reserves and depository 
institutions to pay interest on business demand deposits. The 
budgetary effect of those provisions cited in the cost estimate 
for H.R. 2323 differs from that cited in this estimate of S. 
1405, which incorporated more recent economic data and 
forecasts, additional research into the anticipated response of 
depositors and depository institutions, and a different 
effective date.
    Estimate prepared by: Federal costs: Carolyn Lynch, Federal 
Reserve costs; Mark Booth, Federal Reserve costs; Mary 
Maginniss, FDIC costs; Tom Bradley, FEHB costs.
    Impact on State, local, and tribal governments: Marc 
Nicole.
    Impact on the private sector: Patrice Gordon.
    Estimate approved by: Frank Sammartino, Acting Assistant 
Director for Tax Analysis; Robert A. Sunshine, Deputy Assistant 
Director for Budget Analysis.