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105th Congress                                            Rept. 105-164
                     HOUSE OF REPRESENTATIVES

 2d Session                                                      Part 4
_______________________________________________________________________


 
                    FINANCIAL SERVICES ACT OF 1997

                               __________

                          SUPPLEMENTAL REPORT

                                 of the


                         COMMITTEE ON COMMERCE

                        HOUSE OF REPRESENTATIVES

                                   on

                                H.R. 10

      [Including cost estimate of the Congressional Budget Office]





                January 28, 1998.--Ordered to be printed


105th Congress                                            Rept. 105-164
                        HOUSE OF REPRESENTATIVES

 2d Session                                                      Part 4
_______________________________________________________________________


                     FINANCIAL SERVICES ACT OF 1997

                                _______
                                

                January 28, 1998.--Ordered to be printed

_______________________________________________________________________


  Mr. Bliley, from the Committee on Commerce, submitted the following

                  S U P P L E M E N T A L R E P O R T

                         [To accompany H.R. 10]

      [Including cost estimate of the Congressional Budget Office]

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, December 5, 1997.
Hon. Tom Bliley,
Chairman, Committee on Commerce,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 10, the Financial 
Services Competition Act of 1997.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Mary 
Maginniss (for federal costs), Mark Booth (for federal 
revenues), Marc Nicole (for the state and local impact), and 
Patrice Gordon (for the private-sector impact).
            Sincerely,
                                              James L. Blum
                                   (For June E. O'Neill, Director).
    Enclosure.

               congressional budget office cost estimate

H.R. 10--Financial Services Competition Act of 1997

    Summary: H.R. 10 would abolish the federal thrift charter, 
thus allowing the merger of the bank and thrift insurance 
funds, and would eliminate certain barriers to ties between 
insured depository institutions and other financial and 
commercial firms. While these changes could affect the 
government's spending for deposit insurance, CBO has no basis 
for predicting whether the long-run costs of deposit insurance 
would be higher or lower than under current law. Because 
insured depository institutions pay premiums to cover these 
costs, any such changes would have little or no impact on the 
budget over time. CBO estimates that implementing the bill 
would increase other direct spending by $4 million in 1998 and 
$103 million over the 1998-2002 period, and would decrease 
revenues by less than $500,000 in 1998 and $16 million over the 
1998-2002 period. Assuming appropriation of the necessary 
amounts, CBO estimates that several agencies would spend 
between $1 million and $2 million annually to carry out the 
provisions of the bill, once fully implemented. Because H.R. 10 
would affect direct spending and receipts, pay-as-you-go 
procedures would apply.
    H.R. 10 contains several intergovernmental mandates as 
defined in the Unfunded Mandates Reform Act (UMRA), but CBO 
estimates that the costs of complying with these mandates would 
total less than $10 million annually and thus would not exceed 
the threshold established under that act ($50 million in 1996, 
adjusted annually for inflation). H.R. 10 also would impose new 
private-sector mandates as defined in UMRA, but we estimate 
that the costs of complying with those mandates would not 
exceed the threshold set in UMRA ($100 million in 1996, also 
adjusted annually for inflation) in any one year for the first 
five years that mandates are effective.

Description of the bill's major provisions

    H.R. 10 would:
          Require all federally chartered savings associations 
        to convert to a national bank or state charter within 
        two years after date of enactment, merge the Office of 
        Thrift Supervision (OTS) with the Office of the 
        Comptroller of the Currency (OCC), and allow the merger 
        of the Savings Association Insurance Fund (SAIF) and 
        the Bank Insurance Fund (BIF);
          Permit affiliations of banking, securities, and 
        insurance companies;
          With certain revenue limitations, allow financial 
        holding companies to affiliate with commercial firms;
          Provide for a new type of wholesale financial 
        institution (WFI) that does not accept retail insured 
        deposits and would be subject to the Community 
        Reinvestment Act of 1977;
          Create a new system for regulating and supervising 
        financial holding companies, and clarify the functional 
        authority of various federal and state regulators of 
        financial institutions;
          Establish a nonprofit corporation, the National 
        Association of Registered Agents and Brokers, to 
        provide uniform licensing and training standards for 
        insurance agents;
          Establish an expedited legal process for resolving 
        disputes as to whether or not a product qualifies as 
        insurance, and whether or not a state law regulating an 
        insurance activity is preempted by federal law;
          Require the General Accounting Office (GAO) to 
        analyze the costs and benefits of creating a government 
        seal for identifying products not insured by the BIF or 
        the SAIF;
          Amend the Securities Exchange Act of 1934 to define 
        bank employees or bank affiliates as ``brokers'' if 
        they conduct certain activities; and
          Shift from the financial regulatory agencies to the 
        Department of Justice (DOJ) the authority to review the 
        competitive effects of the antitrust laws involving 
        mergers of depository institutions.

Estimated cost to the Federal Government

    H.R. 10 would make a number of changes affecting direct 
spending and revenues, which would result in increased spending 
by the banking regulatory agencies and a decrease in the annual 
payment--recorded as revenues--that the Federal Reserve remits 
to the Treasury. CBO estimates that direct spending would 
increase by about $103 million over the 1998-2002 period. We 
estimate that enacting H.R. 10 would decrease revenues by $16 
million over the same period. The bill also would increase 
discretionary spending by an estimated $6 million over the 
1998-2002 period, assuming appropriation of the necessary 
amounts. The estimated budgetary impact of H.R. 10 is shown in 
the following table. The budgetary effect of this legislation 
on outlays falls within budget function 370 (commerce and 
housing credit). The legislation would also affect revenues 
(governmental receipts).

                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                                  1998      1999      2000      2001      2002  
----------------------------------------------------------------------------------------------------------------
                                                 DIRECT SPENDING                                                
Spending under current law: \1\                                                                                 
    Estimated budget authority................................         0         0         0         0         0
    Estimated outlays.........................................    -4,261    -2,853    -1,167      -482      -290
Proposed changes:                                                                                               
    Estimated budget authority................................         0         0         0         0         0
    Estimated outlays.........................................         4        29        27        21        22
Spending under H.R. 10: \1\                                                                                     
    Estimated budget authority................................         0         0         0         0         0
    Estimated outlays.........................................    -4,257    -2,824    -1,140      -461      -268
                                                                                                                
                                               CHANGES IN REVENUES                                              
                                                                                                                
Estimated revenues \2\........................................     (\3\)        -4        -4        -4        -4
                                                                                                                
                                  CHANGES IN SPENDING SUBJECT TO APPROPRIATION                                  
                                                                                                                
Estimated authorization level.................................         1         2         1         1         1
Estimated outlays.............................................         1         2         1         1         1
----------------------------------------------------------------------------------------------------------------
\1\ Includes spending for all deposit insurance activities (subfunction 373).                                   
\2\ Includes changes in the Federal Reserve surplus. A negative sign indicates a decrease in revenues.          
\3\ Reduction in revenues of less than $500,000.                                                                

Basis of estimate

            Direct spending and revenues
    H.R. 10 could affect direct spending for deposit insurance 
by increasing or decreasing amounts paid by the insurance funds 
to resolve insolvent institutions and to cover the 
administrative expenses necessary to implement its provisions. 
Changes in spending related to failed banks and thrifts could 
be volatile and vary in size from year to year, but any such 
costs would be offset by insurance premiums, and thus their 
budgetary impact would be negligible over time. The bank 
regulators would also incur expenses related to the proposed 
legislation, but not all of these costs would be offset by 
fees. Finally, H.R. 10 would affect revenues by reducing annual 
payments from the Federal Reserve to the Treasury.
    Deposit Insurance Funds. Enacting H.R. 10 could affect the 
federal budget by causing changes in the government's spending 
for deposit insurance, but CBO has no clear basis for 
predicting the direction or the amount of such changes. Changes 
in spending for deposit insurance could be significant in some 
years, but would have little or no net impact on the budget 
over time.
    Title IV would convert to national banks all federal 
savings institutions in existence within two years of the date 
of enactment, thus allowing the merger of the BIF and the SAIF. 
Both funds hold reserves in excess of the levels mandated by 
statute, and thus the combined fund would be well-capitalized 
initially. The SAIF insures far fewer and more geographically 
concentrated institutions than does the BIF, and those 
institutions focus on housing finance. A combined insurance 
fund thus could benefit from diversifying geographic and 
product risks that could lower the probability that the fund 
would become insolvent.
    Other provisions in the bill could affect spending by the 
deposit insurance funds. Some are likely to reduce the risks of 
future bank failures. For example, H.R. 10 would permit 
affiliations of banking, securities, and insurance companies, 
thereby giving such institutions the opportunity to diversify 
and to compete more effectively with other financial 
businesses. Changes in the marketplace, particularly the 
effects of technology, have already helped to blur the 
distinctions among financial service firms. Further, regulatory 
and judicial rulings continue to erode many of the barriers 
separating different segments of the financial services 
industry. For example, banks now sell mutual funds and 
insurance to their customers and, under limited circumstances, 
may underwrite securities. At the same time, some securities 
firms offer checking-like accounts linked to mutual funds and 
extend credit directly to businesses. Because H.R. 10 would 
streamline the regulatory and legal structure that currently 
governs bank activities, CBO expects that its enactment would 
allow banks to compete more effectively in the rapidly evolving 
financial services industry. Diversifyingincome sources also 
could result in lower overall risks for banks, assuming that the 
expansion of their activities is accompanied by adequate safeguards. 
The bill would create ``firewalls'' to protect the banking components 
of a financial services organization from its riskier securities, 
insurance, or other financial activities, and would prohibit or limit 
certain transactions between banks and affiliates, hopefully preventing 
financial and informational abuses and conflicts of interest.
    H.R. 10 also would allow banks to expand into relatively 
unfamiliar activities, thus possibly increasing the risk of 
bank failures. The bill would allow financial holding companies 
to engage in certain specified financial activities, as well as 
some activities that are not financial in nature. Financial 
holding companies could own commercial firms as long as the 
consolidated annual revenues would not exceed 5 percent of the 
holding company's gross revenues or $500 million, whichever is 
less.
    Permitting insured banks to diversify into product areas 
where they have little experience raises questions about the 
adequacy of the regulators' ability to protect the insured 
entities and the insurance funds. Several federal banking 
regulators have expressed uncertainty about their ability to 
maintain adequate safeguards between the transactions of the 
insured institutions and their commercial affiliates and 
subsidiaries, although their concern has typically focused on 
levels exceeding the 5 percent threshold. A major consideration 
would be preventing nonbanking losses in affiliates from 
draining the resources of the insured banks. To maintain safety 
and soundness in the banking system, H.R. 10 would require a 
holding company to develop procedures for identifying and 
managing risk. Nonetheless, experience with mixing commerce and 
banking in the United States has been limited. Ultimately, 
strong supervision and monitoring by regulators, which history 
has demonstrated is critical in limiting the exposure of the 
taxpayers during times of financial stress, would be essential 
to avoid additional losses to the deposit insurance fund.
    If losses to the deposit insurance fund were to increase as 
a result of enacting H.R. 10, the BIF would increase premiums 
that banks pay for deposit insurance. Similarly, if losses were 
to decrease, banks might pay smaller premiums in the future. As 
a result, the net budgetary impact is likely to be negligible 
over time in either case.
    Conversion of Thrift Institutions. Two years after the date 
of enactment, all existing federal thrifts would be converted 
to national banks, and all state-chartered thrifts would be 
treated as state-chartered banks. At the same time, the OCC and 
the OTS would be merged, along with the bank and thrift deposit 
insurance funds, the BIF and the SAIF. Thrifts would no longer 
be required to maintain membership in the Federal Home Loan 
Bank (FHLB) system. Finally, unitary thrift holding companies 
now in existence would retain all their current powers after 
conversion to a bank charter.
    Merging the OTS and the OCC should result in long-term 
savings to the financial institutions that pay annual fees to 
cover the administrative expenses of the agencies. CBO 
estimates that reducing overhead and streamlining the 
examination process would result in cost savings of between $10 
million and $15 million annually, once the merger is completed. 
The net budgetary effect of any such savings would be zero over 
time, however, because any reduction in expenses would result 
in a corresponding decrease in fee income.
    Initially, CBO anticipates that the transition costs to 
move employees, to cover cancellations of leases, to train 
employees, to pay the costs of reductions-in-force, and to 
reprogram payroll, accounting, and other data systems, would 
cost about $15 million over the 1999-2000 period. Based on 
information from the OTS and the OCC, we expect that the OTS 
would tap its existing reserve funds to pay these transition 
costs. Given the current OTS surplus, the agencies do not 
anticipate that fees paid by banks and the newly converted 
thrifts would be increased to replenish any reserves used for 
this purpose. As a result, CBO estimates that outlays would 
increase by $8 million in 1999 and by $7 million in 2000.
    H.R. 10 would require about 1,100 federal thrifts to choose 
a new charter--either a state depository charter or a national 
bank charter. If no action is taken, the institution would 
automatically be designated a national bank. Under current law, 
the OCC is responsible for regulating national banks; the 
Federal Deposit Insurance Corporation (FDIC) regulates state-
chartered banks that are not members of the Federal Reserve 
System; and the Federal Reserve regulates state-chartered 
member banks and bank holding companies. CBO expects that most 
thrifts would retain their state or federal affiliation, and 
that most large thrifts would become national banks, thus 
coming under the OCC's authority. The FDIC would supervise some 
smaller thrifts that shift their federal charters to either 
state thrift or state bank charters, as well as holding 
companies where the lead bank is state-chartered and not a 
member of the Federal Reserve System. We expect that abolishing 
the federal thrift charter would have a minimal effect on the 
supervisory activities of the Federal Reserve System. In 
addition, all the federal regulators are likely to have some 
additional examination activity associated with banks and 
nonfinancial affiliates.
    As previously noted, with the exception of transition 
costs, transferring supervisory responsibility for newly 
chartered national banks from the OTS to the OCC would have no 
net budgetary effect, because both agencies charge fees to 
cover all their administrative costs. That is not the case with 
the FDIC, however, which uses deposit insurance premiums paid 
by all banks to cover the expenses it incurs to supervise 
state-chartered banks. Because the BIF and the SAIF are well-
capitalized, most banks and thrifts pay no premiums for deposit 
insurance at this time. Further, any increase in administrative 
costs triggered by H.R. 10 is not likely to result in future 
rate increases. CBO estimates that the FDIC would spend an 
additional $2 million in 1998 and about $18 million annually 
beginning in 1999 on regulatoryand examination costs associated 
with its role in maintaining the safety and soundness of the 
institutions it supervises. CBO expects no significant administrative 
savings or costs from merging the BIF and the SAIF into a combined 
fund.
    Other Bank Regulatory Costs. The Federal Reserve, the 
Securities and Exchange Commission (SEC), and state and federal 
banking regulators--the OCC, the FDIC, and the OTS--would have 
primary responsibility for monitoring compliance with the 
statute. H.R. 10 would impose consumer protection regulations 
governing retail sales of nondeposit products and other 
requirements. The regulatory agencies would be required to 
develop programs for promoting housing finance, and to 
implement new regulations, policies, and training procedures 
related to securities, insurance, and other areas. CBO expects 
that spending by the FDIC would total about $1 million in 1998 
and $2 million annually for these new activities and for costs 
associated with monitoring compliance with the Community 
Reinvestment Act by the newly converted thrifts. The OCC and 
the OTS would also incur expenses for these purposes, but they 
would be offset by increased fees, resulting in no net change 
in outlays for those agencies.
    Revenues. Based on information from the Federal Reserve, we 
estimate that H.R. 10 would require the Federal Reserve to 
incur added examination costs of about $4 million per year once 
the bill's requirements are fully effective in 1999. These 
costs would be necessary to supervise the activities of the new 
financial holding companies, as well as the new WFIs, which 
would not accept retail insured deposits. The Federal Reserve's 
cost of processing applications could also be affected. 
Applications for nonbanking activities could decrease but 
applications for the newly authorized activities of holding 
companies could increase. We expect that these changes would be 
roughly offsetting, resulting in no net budgetary impact. In 
addition, small savings would result from the bill's general 
requirement that the Federal Reserve not examine certain 
affiliates for whom the primary regulatory and supervisory 
responsibility lies with other federal entities. The estimated 
savings would total less than $500,000 per year.
    Because the Federal Reserve system remits its surplus to 
the Treasury, changes in its operating costs would affect 
governmental receipts. The net effect of the changes in this 
bill would be to reduce governmental receipts by an estimated 
$16 million over the 1998-2002 period.
            Spending subject to appropriation
    A number of federal agencies would be responsible for 
monitoring changes resulting from enactment of H.R. 10. CBO 
estimates that total costs, assuming appropriation of the 
necessary amounts, would be about $1 million each year once the 
provisions of the bill are fully implemented, primarily for 
expenses of the SEC. The SEC would incur costs to monitor 
market conditions, to examine firms, and to investigate 
practices to ensure compliance with the statute. We expect 
these additional rulemaking, inspection, and administrative 
expenses of the SEC would total about $1 million annually.
    H.R. 10 would require GAO to conduct a study of various 
methods of informing consumers about products that the FDIC 
does not insure. CBO estimates that GAO would spend less than 
$1 million through 1999 to collect and analyze data and prepare 
the report. Finally, DOJ would assume primary responsibility 
for streamlining the review of the antitrust implications of 
bank acquisitions and mergers. Based on information from DOJ, 
we expect that the department would continue to work with 
federal banking regulators to monitor such activity, and would 
incur no significant additional cost as a result of this 
change.

Pay-as-you-go considerations

    Section 252 of the Balanced Budget and Emergency Deficit 
Control Act of 1985 sets up pay-as-you-go procedures for 
legislation affecting direct spending or receipts. Legislation 
providing funding necessary to meet the deposit insurance 
commitment is excluded from these procedures. CBO believes that 
the various costs of H.R. 10 related to consumer protection and 
housing lending do not meet the exemption for the full funding 
of the deposit insurance commitment and thus would have pay-as-
you-go implications. We estimate that direct spending changes 
resulting from the increase in the FDIC's supervisory costs 
associated with activities other than those related to safety 
and soundness would total about $1 million in 1998 and $2 
million annually beginning in 1999. Costs for similar 
activities of the OCC and the OTS would be offset by increases 
in fees of an equal amount, resulting in no significant net 
budgetary impact for those agencies.
    CBO expects that the Federal Reserve would incur additional 
expenses associated with consumer and housing issues that are 
not directly related to protecting the deposit insurance 
commitment. We estimate that the resulting increase in 
regulatory and other costs would reduce the surplus payment 
that the Federal Reserve remits to the Treasury by less than 
$500,000 annually.
    The net changes in outlays and governmental receipts that 
are subject to pay-as-you-go procedures are shown in the 
following table. For the purposes of enforcing pay-as-you-go 
procedures, only the effects in the budget year and the 
succeeding four years are counted.

                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                             1998   1999   2000   2001   2002   2003   2004   2005   2006   2007
----------------------------------------------------------------------------------------------------------------
Changes in outlays........................      1      2      2      2      2      2      2      2      2      2
Changes in receipts.......................      0      0      0      0      0      0      0      0      0      0
----------------------------------------------------------------------------------------------------------------

Estimated impact on State, local, and tribal governments

    H.R. 10 contains several intergovernmental mandates as 
defined in UMRA. CBO estimates that the total cost of complying 
with these mandates--primarily preemptions of state laws--would 
be less than $10 million a year. The bill contains other 
provisions, which are not mandates, but which CBO estimates 
would affect the budgets of state and local governments. H.R. 
10 would not impose mandates or have other budgetary impacts on 
tribal governments.
            Mandates
    A number of provisions in H.R. 10 would preempt state 
banking, insurance, and securities laws. For example, states 
would not be allowed to prevent banks from engaging in certain 
activities (such as selling insurance and securities) 
authorized under the act, nor would they be allowed to restrict 
the reorganization of mutual insurers. Such preemptions are 
mandates under UMRA. Based on information provided by the 
National Association of Insurance Commissioners (NAIC), the 
Conference of State Bank Supervisors (CSBS), and the North 
American Securities Administrators Association (NASAA), CBO 
estimates that enactment of these provisions would not result 
in direct costs or lost of revenue to state governments 
because, while they would be prevented from enforcing certain 
rules and regulations, they would not be required to undertake 
any new activities.
    Title III of the bill would require a majority of states 
(within three years of enactment of H.R. 10) to enact uniform 
laws and regulations governing the licensing of individuals and 
entities authorized to sell insurance within the state. If a 
majority of states do not enact such laws, certain state 
insurance laws would be preempted and a National Association of 
Registered Agents and Brokers (NARAB) would be established. The 
purpose of the association would be to provide a mechanism 
through which uniform licensing, continuing education, and 
other qualifications could be adopted on a multistate basis. 
Membership in NARAB would be voluntary and open to any state-
licensed insurance agent.
    If NARAB is established, states would maintain the core 
functions of regulating insurance, such as licensing, 
supervising, and disciplining insurance agents and protecting 
purchasers of insurance from unfair trade practices, but 
certain state laws would be preempted. Specifically, Title IV 
would prevent states from discriminating against members of 
NARAB by charging different licensing fees based on residency. 
Based on information from the NAIC about the number of out-of-
state agents and current state license fees, CBO estimates that 
these preemptions would result in the loss of license fees to 
states totaling less than $10 million a year.
            Other impacts
    Enactment of H.R. 10 would result in additional costs and 
revenues to state regulatory agencies. Certain provisions of 
the bill could lead to the establishment of new bank 
subsidiaries involved in insurance or securities activities. 
Because most states already allow banks to be involved in such 
activities, we expect that any additional costs would be small. 
In general, costs incurred by states would be offset by 
additional examination and licensing fees.
    Title IV also could result in additional work for state 
banking agencies if federal thrifts whose charters are being 
abolished under the bill choose to become state-chartered 
financial institutions. Based on information from the CSBS, CBO 
estimates that any such increase in workload would be modest 
and that any costs would be offset by an increase in receipts 
from bank examination fees.
    Finally, certain provisions in Title II, which would expand 
the definitions of ``investment adviser,'' ``broker,'' and 
``dealer,'' would increase the number of individuals and 
organizations registering with states, thereby increasing fee 
revenues. Based on information from NASAA, CBO estimates that 
income from additional filing and registration fees would not 
be significant.

Estimated impact on the private sector

    H.R. 10 would impose several new private-sector mandates as 
defined by the Unfunded Mandates Reform Act of 1995. The 
mandates in the bill would affect federal savings associations, 
banking firms, and other organizations that engage in financial 
activities. CBO estimates that the net direct costs of those 
mandates would probably not exceed the statutory threshold for 
private-sector mandates ($100 million in 1996 dollars, adjusted 
annually for inflation) in any one year for the first five 
years that the mandates are effective.
    The bill contains several new mandates on businesses in the 
financial services sector. If enacted, major provisions in H.R. 
10 would;
          Force all federally chartered thrifts to convert to 
        another charter within two years after enactment;
          Require banking organizations to adopt several 
        consumer protection measures affecting sales of 
        insurance products;
          Limit the authority of federally-chartered banks 
        (national banks) that currently sell title insurance, 
        and end the authority to sell title insurance for 
        national banks that do not now sell insurance;
          End the blanket exemption under the Securities 
        Exchange Act of 1934 for brokers and dealers that 
        conduct business in banks, making them subject to 
        regulation by the Securities and Exchange Commission; 
        and
          End of exemption under the Investment Adviser Act of 
        1940 for bank investment advisers, making them subject 
        to SEC examination and registration requirements.
    CBO estimates that, by the second year after enactment, 
federally chartered thrifts would incur a one-time cost of 
about $14 million for converting to another charter. In 
addition, banking organizations would incur additional costs to 
comply with new mandates in the bill. Greater uncertainty 
exists about the additional costs to banks because many of the 
mandates on banks are highly dependent on the actions of 
regulators. CBO cannot estimate the costs to comply with future 
regulations on securities activities in banks, but the costs to 
banks of other mandates in the bill are not likely to be 
substantial. The direct costs of mandates on banks would be at 
least partially offset by savings from changes the bill would 
make to expand the powers of banking organizations.
            Elimination of the Federal thrift charter
    Two years after enactment, title IV of the bill would 
require federal savings associations to be converted, by 
operation of law, to national banks. The bill would grandfather 
all current thrift powers except for those of thrift holding 
companies not in existence or not on record as having filed to 
become a holding company by September 16, 1997. The direct 
costs of conversion could include such items as conversion fees 
to a new chartering agency, the costs of replacing signs and 
stationery, the cost of a pre-conversion examination, and legal 
costs associated with adopting and conforming with the new 
charter. CBO assumes that the chartering agency would not 
charge federal savings associations a conversion fee and that 
the converting federal savings associations would not incur the 
legal costs associated with filing for conversion or the costs 
of a pre-conversion examination. Therefore, the direct costs of 
converting to a national bank would be the costs of replacing 
signs and stationery. Given that federal thrifts would have two 
years for this transition, new stationery would not necessarily 
be an additional cost. The cost to replace signs, assuming a 
cost of about $2000 per branch, would amount to about $14 
million.
            Consumer protection regulations--insurance sales
    Section 308 would direct the federal banking regulators to 
issue, within one year of enactment, final consumer protection 
regulations that would govern the sale of insurance by any bank 
or by any person at or on behalf of a bank. According to the 
bill, the regulations should include requirements for: (1) 
anti-coercion rules (prohibiting banks from misleading 
consumers into believing that an extension of credit is 
conditional upon the purchase of insurance); (2) easily 
understandable disclosures as to whether a product is insured 
by the FDIC; (3) an appropriate delineation of the settings and 
circumstances under which insurance sales should be physically 
segregated from bank loan and teller activities; (4) standards 
limiting compensation systems for insurance referrals by bank 
tellers or loan personnel; (5) proper licensing and 
qualification of bank insurance personnel; and (6) prohibitions 
on insurance discrimination against victims of domestic 
violence.
    Except for the anti-coercion and anti-discrimination 
provisions, the provisions in section 308 are based on current 
industry guidelines issued in 1994 by bank regulators in an 
Interagency Statement on Retail Sales of Non-deposit Investment 
Products. The anti-coercion provision is similar to the anti-
tying provision in current law. The bill would direct the 
federal banking agencies to jointly establish regulations to 
prohibit consideration of domestic abuse as a criterion in any 
decision on insurance underwriting, pricing, renewal of 
insurance policies, or payment of insurance claims for any 
insurance activity conducted by or at a bank or by a bank 
representative. Many industry experts indicate that such a rule 
would not impose significant costs on the industry. Other new 
regulations would largely codify a modified version of existing 
guidelines drafted by the federal banking regulators and, 
therefore, would not likely impose large incremental costs on 
banks that currently engage in insurance activities.
            Regulation of other insurance activities
    Several provisions in the bill would change how current 
insurance activities and future insurance products are 
regulated. H.R. 10 would require that all insurance activity be 
``functionally regulated.'' Because the bill would grandfather 
most existing insurance activities, the incremental costs of 
these mandates would be small.
    Section 304 of the bill would continue a ban on insurance 
underwriting by national banks and their subsidiaries, except 
for products they are currently underwriting and were allowed 
to underwrite as of January 1, 1997. These exceptions do not 
include annuities and title insurance, which banks would not be 
allowed to underwrite. Section 306 would generally prohibit a 
national bank and its subsidiaries from selling or underwriting 
title insurance, but would grandfather those activities that a 
bank (or its subsidiaries) was actively and lawfully engaged in 
before the date of enactment. However, if a national bank had 
an insurance underwriting affiliate or subsidiary, any title 
insurance underwriting or sales activities would have to be 
conducted by such affiliate or subsidiary. Section 306 would 
also grant national banks and their subsidiaries the authority 
to sell title insurance in a state that allowed state-chartered 
banks to sell title insurance as of January 1, 1997.
            Regulation of securities activities and investment adviser 
                    services
    H.R. 10 would end the current blanket exemption for banks 
from being treated as brokers or dealers under the Securities 
Exchange Act of 1934. Securities activities of banks would, 
therefore, be subject to SEC regulation, with some exceptions. 
The bill would exempt from SEC regulation the securities 
activities of banks handling fewer than 500 transactions 
annually. Many of the roughly 300 small banks that currently 
provide brokerage services on bank premises would fall under 
this exemption. Sections 201 and 202 would exempt several 
traditional securities activities of banks from the 
registration requirements and regulations that apply to brokers 
or dealers under SEC regulation. The exemptions would cover 
many products and services that banks currently offer as agents 
so that they would not trigger SEC regulation. However, certain 
bank products and services related to securities--self-directed 
IRAs and private placements, for example--may not be exempt 
under H.R. 10. If regulators determine that any of those 
products would no longer be exempt under the bill, banks would 
either have to become registered brokers or dealers or they 
would have to channel the non-exempt activities through an 
affiliated broker-dealer. A substantial number of banks that 
currently handle securities activities have a broker-dealer 
affiliate so that the incremental cost of complying with SEC 
regulation would involve moving non-exempt activities to such 
an affiliate. Because of uncertainty with regard to how 
regulators would determine which products would be exempt, CBO 
cannot estimate the incremental costs of compliance for banks 
currently engaging in activities that would be affected.
    Section 205 would require bank regulatory agencies to 
establish record-keeping requirements for banks that claim the 
exemptions allowed under sections 201 and 202. The impact of 
the new reporting requirements on banks that would be allowed 
an exemption is uncertain because it would depend on future 
federal rulemaking. The bill directs regulators to make the new 
requirements sufficient to demonstrate compliance with the 
terms of the exemption. Because CBO has no basis for predicting 
how this provision would be implemented, we cannot estimate the 
costs of new requirements on banks. However, given the 
infrastructure in place that supports current reporting 
requirements, we expect that the incremental costs of the new 
requirements would be small.
    Section 217 would amend the Investment Advisers Act to 
subject banks that advise mutual funds to the same regulatory 
scheme as other advisers to mutual funds. Currently, about 120 
large bank holding companies engage in investment adviser 
activities. Before enactment of the National Securities Markets 
Improvement Act of 1996, the SEC charged a fee of $150 to 
register investment advisers. Because of the 1996 act, the SEC 
is in the process of formulating a fee that will be based on 
the expected cost of administering the registration program, 
and the expected number of registrants. Banking organizations 
that continue to be investment advisers would have to pay this 
new registration fee annually and maintain books and records 
according to SEC rules. Inasmuch as the SEC is still in the 
very early stages of designing a system for registration, CBO 
has no basis for estimating the incremental costs of 
registering with the SEC. These costs, however, are not 
expected to be large.
    Section 214 would amend the Investment Company Act to 
require any person issuing or selling the securities of a 
registered investment company that is advised or sold through a 
bank to disclose that an investment in the fund is not insured 
by the Federal Deposit Insurance Corporation or any other 
governmental agency. Typically, the costs of creating a 
standard disclosure form and distributing such a statement at 
the time of a transaction are not large.

Previous CBO estimate

    On September 12, 1997, CBO prepared a cost estimate for 
H.R. 10, as reported by the House Committee on Banking and 
Financial Services on July 3, 1997. That version of the bill 
includes provisions that would change the financial 
responsibilities of the Federal Home Loan Bank (FHLB) System by 
replacing the $300 million annual payment made by the FHLBs for 
interest on bonds issued by the Resolution Funding Corporation 
with an assessment set at 20.75 percent of the FHLBs' net 
income. As a result, CBO estimated that FHLB payments would 
increase by $109 million and Treasury outlays would decrease by 
an equal amount over the 1998-2007 period. The version of H.R. 
reported by the Committee on Commerce does not change the 
amount of the FHLB payments. Therefore, the bill no longer 
would impose a private-sector mandate on the FHLB System and 
thus, the aggregate direct cost of private-sector mandate in 
this version of the bill would fall below the statutory 
threshold.
    The Banking Committee's version of H.R. 10 also would 
create a National Council on Financial Services to define 
products that are financial in nature, identify the appropriate 
regulator, and regulate disputes involving those definitions. 
CBO estimated that the council would incur costs of $2 million 
to $3 million annually. The Commerce Committee's version would 
create such a council. The costs of other provisions related to 
regulatory and supervisory responsibilities of the federal 
financial regulators do not differ significantly.
    Estimate prepared by--Federal costs: Mary Maginnis, Federal 
revenues: Mark Booth, impact on State, local, and tribal 
governments: Marc Nicole, and impact on the private sector: 
Patrice Gordon.
    Estimate approved by: Robert A. Sunshine, Deputy Assistant 
Director for Budget Analysis.