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Speech
Superintendent of Banks, Richard H. Neiman, Testifies Before the New York Assembly Committee on Banks on the Role of New York in a Restructured Financial Services Industry

TESTIMONY OF

RICHARD H. NEIMAN
SUPERINTENDENT OF BANKS
On behalf of
THE NEW YORK STATE BANKING DEPARTMENT
On
“THE ROLE OF NEW YORK IN A RESTURCTURED FINANCIAL SERVICES INDUSTRY”
Before the
COMMITTEE ON BANKS
THE NEW YORK STATE ASSEMBLY

October 23, 2009

Good morning. Chairman Towns, Ranking Member Raia, and distinguished members of the Committee: on behalf of the New York State Banking Department, I appreciate this opportunity to speak with you today on the important topic of regulatory reform. You’ve asked that I assess the Obama Administration’s impact on New York and the dual banking system.

The Administration’s reform proposal contains many critical elements that would benefit New Yorkers. I especially support the effort to elevate consumer protection and rollback federal overreach in preemption. Other elements would strengthen financial stability, including creation of a systemic risk regulator, limited consolidation of federal agencies, and development of a resolution process for the orderly unwinding of complex financial institutions. I support all of these changes, and have been meeting with key committees and members of the Congressional delegation to share our input and to emphasize that New York deserves a prominent place within such a restructured regulatory framework.

In my testimony this morning, I would like to elaborate on three areas of regulatory reform that could have a profound impact on the state’s role in financial supervision and consumer protection:

I will also describe the role that New York is playing as a leader in market-based reforms through substantial new charters.

A. Preemption

I will begin, however, by discussing preemption, which closely affects your work as a state legislature.

Changes to current preemption practice are being considered in connection with the Administration’s proposal to create a federal consumer protection agency. Under the Administration’s original plan Rules made by a new consumer agency would function as a floor, not a ceiling; states would be able to set higher standards as needed.

This rollback of preemption would deny the federal Office of the Comptroller of the Currency (OCC) the unfettered discretion it has claimed since 2004 to override entire classes of state consumer protection laws. Rather, state laws would be considered on their merits to determine whether they are inconsistent with federal laws, and would not be considered inconsistent simply because they are more protective. And beyond the agency rulemaking process, the National Bank Act could also be amended to explicitly affirm the state role. 

As the legislative process has advanced in the House Committee, amendments have been approved which modify the original preemption proposal in two significant respects. First, the presumption in favor of more protective state laws has been removed, but the OCC would need to find on a case-by-case basis that a state law “prevents or significantly interferes” with a national banks’ powers. Second, the legislation would overturn the Supreme Court’s decision in Watters v. Wachovia. State-chartered operating subsidiaries of national banks would have to comply with state laws.
 
The proper state-federal balance needs to be restored regardless of whether a new federal consumer agency is created, and I urge this Committee to take a proactive role on the preemption issue. Rollback of preemption is not the radical step that its opponents, or even its strongest supporters, sometimes contend. It is actually the classic understanding of how preemption doctrine worked for nearly a hundred and fifty years, until the 2004 ruling. The Supreme Court’s decision in Cuomo v. Clearinghouse also clearly affirms an enforcement role for state attorneys general with respect to national banks, with or without the Administration’s plan. 

Regulatory reform is urgently needed, but it must include the meaningful ability of the states to protect people, through laws and enforcement efforts, beyond a federal floor.  If there is one lesson that we have learned from this crisis, it is that we need more eyes on the banking industry, more cops on the beat, not fewer. 

B. Federal Assessments for State Banks

While the preemption debate is longstanding, there is a new issue in the regulatory reform movement that would have disastrous consequences for the state charter. The President’s plan asserts that it is supportive of dual banking, but one element- the imposition of federal examination fees on state banks- would have serious unintended consequences. The Administration’s reform plan would subject state banks, which are currently assessed only by their state regulator, to a new federal assessment from the FDIC or the Federal Reserve. This examination fee would be the same as that charged by the OCC for primary supervision of national banks, and would create strong incentives for state banks to change charter to avoid paying double fees.

State banks would have no other practical way to avoid this fee, as oversight by a federal supervisor is a condition of access to federal deposit insurance for state institutions. Bank boards would likely be unable to justify the cost of a double fee to retain the state charter, and mass conversions could be expected. Therefore, I continue to work with the Conference of State Bank Supervisors to urge Congress to eliminate this proposed assessment.

C. Regulatory Consolidation

Another aspect of regulatory reform with major impact on states is the extent of agency consolidation at the federal level. The Administration’s plan leaves FDIC and Federal Reserve examination authority over state banks and bank holding companies intact. The proposal does merge the Office of Thrift Supervision with the OCC, which is a change I support to reduce arbitrage at the federal level.

But some in Congress propose going farther, to create a single monolithic federal agency. Only this charter-granting monolith would conduct exams; the FDIC and Federal Reserve would lose ordinary exam authority. The extent of federal consolidation impacts state banking because only state banks are dual-regulated, by the state and by either the FDIC or the Federal Reserve. National banks are supervised exclusively by the OCC.

Total consolidation of exam authority at the federal level would mean a new federal regulator for all state banks with deposit insurance- one with chartering authority. This new dynamic would set the stage for increased industry consolidation and charter conversions, leading to a less diverse industry with fewer regulatory checks and balances. Combined with the new assessment fee I described earlier, it could be devastating to the state banking system.

And creation of a single monolithic federal regulator does not address the real ways in which existing regulatory architecture created gaps in supervision between banks and nonbanks. Removing the Federal Reserve and the FDIC’s supervisory function over depository institutions, many of which are state-chartered community banks that played little role in the crisis, does not solve these structural issues.

D. Market-Based Reforms

Furthermore, the partnership between the states and the Federal Reserve is a model that has emerged even stronger from the test of this financial crisis. Together with the Federal Reserve, New York has taken a lead role in addressing regulatory gaps and supporting market-led improvements that complement the legislative reform process.

First, a new supervisory model for the investment banking industry is beginning to take shape with Morgan Stanley and Goldman Sachs converting to bank holding companies. Goldman Sachs’ further decision to form a New York state-chartered bank subjects them to oversight by both the New York State Banking Department and the Federal Reserve Bank of New York, demonstrating the competitiveness of the state charter and the benefits of a cooperative state-federal model.

New York has also recently chartered a trust company, ICE Trust US, LLC, to serve as a central clearing facility for credit default swaps (CDSs). Again, we worked closely with our counterparts at the Federal Reserve Bank of New York in overseeing this industry initiative. While reducing risk with respect to complex derivative products is an evolutionary process and will take some time to complete, I am proud of New York’s early involvement in shaping its future. The existence of central counterparties for CDSs will go a long way in closing gaps for this crucial sector of the market and in reducing systemic risk at a global level.

The Banking Department’s ability to fulfill these new responsibilities and remain at the forefront of financial services regulation is largely dependent on the expertise of our staff. We are facing the retirement of many senior staff, and this impending knowledge gap combines with the budget reductions required of all state agencies combine to pressure our operational capacity. And yet we are an agency that is totally funded by assessments of the industry; cost reductions at the Banking Department do not contribute to elimination of the state deficit. In order to maintain the highest standards, we will continue to employ cutting-edge examination tools to maximize our resources.

Conclusion

I am proud of what we are accomplishing together and you should be proud as well- New York has led the way in passing the most comprehensive mortgage reforms in the country. Through New York’s role in consumer protection, as a significant regulator, and as a global financial center, we demonstrate why it is so critical for states to have a meaningful role within a revised regulatory framework. We need to help shape changes at the federal level, and I look forward to continuing to work with this Committee to ensure that a more cooperative state-federal model emerges- what we need is a “New Federalism” with New York taking the lead with our federal partners. Thank you, and I would be pleased to answer any questions.