Ludwig Stresses Supervision as Key to Glass-Steagall Reform

Comptroller of the Currency Eugene A. Ludwig today urged Congress to eliminate artificial barriers that restrict competition for financial services as it considers reform of the Glass-Steagall Act. In testimony before the House Committee on Banking and Financial Services, Ludwig urged increased reliance on regulatory supervision to assure safety and soundness rather than artificial restrictions and rigid structures that limit competition.

"Artificial limits and segregation of non-traditional and innovative products and services do not further safety and soundness in our complex and increasingly competitive financial system," said Mr. Ludwig. Specifically addressing the bill sponsored by Rep. Leach (H.R. 18), he said his fundamental concern is that it puts insufficient emphasis on supervision and relies too heavily on organizational structure and transactional firewalls to shield institutions from the perceived risks of expanded financial services activities.

Mr. Ludwig pointed to two aspects of the bill:

It allows broader securities activities to be conducted by banking organizations, but only through a bank holding company affiliate.

It contains extensive firewalls that separate a bank and its securities affiliate to such an extent that it impairs reasonable opportunities for synergies.

Mr. Ludwig said these devices do not deliver the safety and soundness benefits that are needed. "We cannot depend on them to protect the bank in moments of crisis," he said. "We have a better alternative. The combination of effective supervision and flexible firewalls can deliver safety and soundness we need without excessive costs." Mr. Ludwig said that a balance between prudential safeguards and enhanced activities flexibility, coupled with sound supervision, is one key principle of modernization.

"Today, artificial and antiquated barriers and restrictions impede the ability of banks, securities, firms, and other financial companies to operate efficiently, to provide the range of products and services their customers desire, and to fuel economic growth," said Ludwig. "Financial services modernization is more than just an interesting idea. It will result in better customer service, more efficient businesses, and a more vital financial services section for the nation's economy."