Symposium: The Financial Services Industry: A New World (Dis)Order

Testy, Kellye Y.

English

Indiana University Bloomington Maurer School of Law

Indiana Law JournalVolume 67 | Issue 2 Article 1Winter 1992Foreword: The Financial Services Industry: A NewWorld (Dis)Order? SymposiumKellye Y. TestyUnited States Court of Appeals for the Seventh Circuit.Follow this and additional works at: http://www.repository.law.indiana.edu/iljPart of the Banking and Finance Law CommonsThis Symposium is brought to you for free and open access by the LawSchool Journals at Digital Repository @ Maurer Law. It has been acceptedfor inclusion in Indiana Law Journal by an authorized administrator ofDigital Repository @ Maurer Law. For more information, please contactwattn@indiana.edu.Recommended CitationTesty, Kellye Y. (1992) "Foreword: The Financial Services Industry: A New World (Dis)Order? Symposium," Indiana Law Journal: Vol.67: Iss. 2, Article 1.Available at: http://www.repository.law.indiana.edu/ilj/vol67/iss2/1The Financial Services Industry:A New World (Dis)Order?FOREWORDKELLY Y. TEsTY*In publishing this symposium on the financial services industry, the Editorsof the Indiana Law Journal have provided their readers a multidimensionalresource. Foremost, each article in this symposium identifies and deftlyexplores a pressing issue within the banking and finance industry. In doingso, however, this symposium as a whole carries a more subtle message: itrecognizes two strands of tension with which regulators are, consciously orunconsciously, grappling. The first is the strain created by the desire fordomestic institutions to become internationally competitive without forsakingdomestic safety and soundness; the second is the often-encountered conflictbetween normative social goals and the perceived costs of adhering to amarket philosophy. Each of the four articles in this symposium is set inthe arena of these policy tensions.First, Professor Rubin addresses an area that strikes at the heart of therelationship between social policy and the regulation of financial institutions:lifeline banking.' As Professor Rubin notes, the call for lifeline banking,that is, providing banking services to low-income individuals, is itself anadept political move.2 The implicit proposition in the term lifeline-thatone's life is at stake from the lack of a checking account as it would befrom the lack of heat in the wintertime-is incredible. Whatever its politicalpower, however, the present conceptualization of lifeline banking may notsucceed in meeting its redistributive objective. Using economic analysis,Professor Rubin demonstrates that current lifeline banking proposals wouldwaste resources and fail to provide advantages to the intended beneficiaries. 3Taking as his premise that the goals of lifeline banking are valid socialpolicy, however, Professor Rubin goes on to suggest an alternative approachto providing low-income individuals with payment services at a cost belowthe prevailing market rate.4 Professor Rubin recommends that the financialservices industry be deregulated to allow retail chains (such as supermarkets)* J.D., 1991, Indiana University School of Law at Bloomington; Law Clerk, TheHonorable Jesse E. Eschbach, United States Court of Appeals for the Seventh Circuit.I. Rubin, The Lifeline Banking Controversy: Putting Deregulation to Work for the Low-Income Consumer, 67 INm. L.J. 213 (1992).2. Id. at 214.3. Id. at 223-30.4. Id. at 230.INDIANA LAW JOURNALto offer federally insured deposit accounts. To compensate those entitiesoffering these services, he further suggests that the institutions be permittedwide latitude in the use of depositors' funds, including the right to use thedeposits for internal corporate purposes.5 Thus, Professor Rubin's proposalarguably accomplishes a valuable social goal by adhering to free marketprinciples rather than by deviating from them as present lifeline bankingproposals would require.Professor Lichtenstein's article turns our attention to the pressing needto bolster domestic financial institutions' international competitiveness with-out further straining domestic health. By arguing for intellectual coherencein regulations that seek to separate banking and commerce, ProfessorLichtenstein seeks to increase the ability of United States banks to competewith their foreign counterparts. 6 As this symposium goes to press, Congresscontinues to struggle with legislation to revise restrictions dating back tothe 1930s on entanglements between banking entities and industrial corpo-rations. Indeed, after the House soundly defeated the most recent versionof the banking overhaul legislation, 7 the Senate was not even able to musterenough votes to restart debate on the measure. At this juncture, Congress's"overhaul" efforts may result in no more than increasing the nearlyinsolvent bank insurance fund's credit line with the Treasury and liberalizingthe ability of the fund to borrow from taxpayers for its working capital.9The desire of the Bush administration and many of the nation's largestfinancial institutions to push through regulations allowing banks to expandinto the securities and insurance businesses continues to face enormousobstacles, not the least of which is the powerful securities and insurancelobbies.10With prospects of sweeping overhaul looking less likely, Professor Lich-tenstein's approach of fine tuning existing regulations looks increasinglyinviting. She convincingly posits that regulators need to reestablish theprecise evil that they are seeking to guard against in separating banking and5. Id. at 230-40.6. See Lichtenstein, Thinking the Unthinkable: What Should Commercial Banks Or TheirHolding Companies Be Allowed to Own?, 67 IND. L.J. 251 (1992).7. Labaton, House Turns Down Banking Overhaul By 324-to-89 Vote, N.Y. Times, Nov.5, 1991, at Al, col. 6.8. Labaton, Banking Bill Is Delayed in the Senate, N.Y. Times, Nov. 6, 1991, at C5,col. 6.9. See Rosenbaum, Banking Overhaul's Fate, N.Y. Times, Nov. 6, 1991, at Al, col 2.10. See Berke & Wayne, Cacophony of Lobbying Overwhelms Bank Bill, N.Y. Times,Nov. 6, 1991, at C5, col. 1. To be fair, the aftermath of the savings and loan debacle (whichis often perceived as a result of deregulation), combined with scandals of sinister entanglementssuch as that involving the Bank of Credit and Commerce International (B.C.C.I.), also inspireshesitation in regulators. See Lohr, 2 Banks in U.S. Tied to B.C.C.I. Get Special Aid, N.Y.Times, Nov. 8, 1991, at Al, col. 5.[Vol. 67:207FOREWORDcommerce and then calibrate regulations accordingly. While conceding thatregulators should consider prudential concerns," that is preserving the healthof banks, she argues that the current "50%6 of voting stock test" of theBHCA 2 imposes too many costs while striking wide of the mark in actuallyprotecting against those prudential concerns. She also demonstrates that ifoverreaching is the concern (or an additional concern) in limiting banks'equity holdings, then the firewall provisions of section 23 of the FederalReserve Act are sufficient to achieve neutrality in credit decisions.' 3 More-over, Professor Lichtenstein points out that the misdirected "equity test"unfortunately has been imported into regulations addressing the foreignactivities of United States banks-specifically the 1991 revisions of Regu-lation K-putting United States banks at a severe competitive disadvantage. 4As part of her recommended antidote, Professor Lichtenstein points Con-gress to the European Community's Second Banking Directive as a propermodel for its efforts to limit banks' entrepreneurial interests in nonfinancialcompanies.In the symposium's third article, Professor Hughes, as does ProfessorRubin, identifies an area that perhaps has received regulators' attentionmore for its political impact than for its intellectual coherence. In addressingthe problems of drug dealers using funds transfers for money laundering,Professor Hughes argues for reliance on existing regulations and disputesthe necessity and efficacy of a recently proposed additional layer of regu-lation. 5 She argues that the 1990 Funds Transfer Proposal will create agreater compliance burden for the banking industry, 6 without any corre-sponding benefit flowing to law enforcement efforts to track money laun-derers. 17 In an era when the "drug war" is often accused of being used asa vehicle to run roughshod over citizens' rights, 8 Professor Hughes hasarguably identified yet another victim of this war: the banking industry.Professor Hughes suggests that, instead of adopting new regulations underthe 1990 Funds Transfer Proposal, new Uniform Commercial Code Article4A, along with traditional police investigatory techniques, provides a suf-ficient mechanism to police money-laundering activities. 9Professor Hughes, who provided the genesis of this symposium with her1990 Banking Law seminar at Indiana University School of Law, provides11. Lichtenstein, supra note 6, at 280.12. Bank Holding Company Act, § 4, 12 U.S.C. § 1843 (1988).13. Lichtenstein, supra note 6, at 255-56.14. Id. at 257-60.15. Hughes, Policing Money Laundering Through Funds Transfers: A Critique of Regu-lation Under the Bank Secrecy Act, 67 IND. L.J. 283 (1992).16. Id. at 300-07.17. Id. at 307-15.18. See, e.g., Guthrie, Note, Drug Testing and Welfare: Taking the Drug War to Uncon-stitutional Limits, 66 IND. L.J. 579 (1991).19. Hughes, supra note 15, at 324-30.19921INDIANA LAW JOURNALfresh insight into the banking industry through her pragmatic scholarship.By paying close attention to the technical constraints within which thebanking industry operates, Professor Hughes adeptly bridges the gap be-tween theory and practice. In so doing, she avoids being swayed by thepolitical tug of the desire to police money-laundering activities and insteadconcentrates on the efficacy of existing regulations. 2Like Professors Hughes and Rubin, Michael Schrader also reveals an areain which the banking industry is the potential captive of a social agenda:the use of the Community Reinvestment Act (CRA) as a means to challengebank mergers and lending policies. 21 As Mr. Schrader suggests, CRA isbecoming the standard by which potential bank mergers are evaluated undertraditional "convenience and needs" analysis of bank merger guidelines.The increasing importance of CRA compliance is highlighted by the recentannouncement by Fannie Mae that it will offer a data service to help banksand thrifts comply with the CRA.22 The service, called "FannieMaps," willsupply demographic data on poor and low-income neighborhoods in majormetropolitan areas.? Furthermore, for the first time, the Federal ReserveBoard recently rejected a merger application solely on a bank's failure tosatisfy CRA requirements, when First Interstate BancSystem of Montana'sproposed merger with Commerce BancShares of Wyoming was denied. 24With mounting evidence of widespread discrimination against minoritiesin banks' lending policies, 21 however, the use of the CRA that Mr. Schraderidentifies may well be an appropriate foil to the immense power thatfinancial institutions wield in society. As Mr. Schrader notes, in this age of"political correctness," a poor CRA rating could have numerous repercus-sions for financial institutions. 26 Mr. Schrader's insightful connection be-tween CRA and bank merger or branching activities adeptly demonstratesthat social concerns no longer remain in the shadow of the financial servicesindustry's proffered competitive goals.In providing a forum for authors to address several disorders that areplaguing the financial services industry, the Editors of the Indiana Law20. As did Professor Hughes, the banking industry seems to be looking to U.C.C. Article4A as the appropriate standard for wire transfers. In announcing its newly developed wiretransfer system, Chase Manhattan Bank was careful to note that the system (called TX/Wireplus) enables banks to comply with U.C.C. Article 4A. See lida, Chase Wire TransferSystem Tailored to Middle Market, Am. Banker, Oct. 23, 1991, at 3.21. Schrader, Competition and Convenience: The Emerging Role of Community Reinvest-ment, 67 IND. L.J. 331 (1992).22. Fannie Mae to Offer Data for CRA Compliance, Am. Banker, Nov. 8, 1991, at 8.23. Id.24. Braitman, CRA Report Trips Merger in Montana, Am. Banker, Oct. 10, 1991, at 1.25. See, e.g., Excerpts from Fed Study on Bias in Home Lending, Am. Banker, Oct. 28,1991, at 9 (commenting on Federal Reserve Board study that showed, inter alia, that homelenders reject mortgage applications by blacks two to three times more often than applicationsby whites).26. Schrader, supra note 21, at 344-47.[Vol. 67:2071992] FOREWORD 211Journal have demonstrated that the relationships between international anddomestic policy and between financial and social policy are often symbioticones. Still, there is more to be said and done. As financial markets becomeincreasingly global and as financial power becomes increasingly concen-trated, these complex relationships will intensify. Subjecting the work offinancial regulators to the kind of rigorous analysis and criticism containedin this symposium is a vital component of efforts to restore order to theUnited States banking and finance industry and thus plays a necessary rolein establishing a more just and productive relationship between law andfinance.

Foreword: The Financial Services Industry: A New World (Dis)Order? Symposium

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