Legislature(1993 - 1994)
03/19/1993 01:40 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATOR TAYLOR introduced SB 149 (REVISION OF BANKING CODE) sponsored by SENATOR TIM KELLY, and invite his aide, JOSH FINK, to testify. MR. FINK deferred to WILLIS KIRKPATRICK, to testify. Number 438 MR. KIRKPATRICK identified himself as the Director for the Division of Banking, Securities & Corporations and thanked the committee for hearing the recodification of the Alaska Banking Code. He said he would give a brief explanation before introducing JEFF BUSH, the contractor for the department, who helped do the drafting for the recodification. MR. KIRKPATRICK gave some historical perspective on ten years of building up to the determination the Alaska Banking Code was becoming obsolete. The code originated in Oregon before Statehood and was adopted at that time, and during that time, Oregon has basically recodified or amended their code two different times, so there is presently no similarity between our law and Oregon's law. MR. KIRKPATRICK explained the changes that were occurring in the market place were happening faster than could be addressed. He further explained the obsolescence in the original statute fall into three areas: first; the marketplace has changed dramatically; second, financial institutions with multiple failings; and third, a need for a banking law that could provide additional economic development opportunities. MR. KIRKPATRICK claimed all of these areas of obsolescence put a bind on financial institutions. He wanted to reform the new banking code to be as liberal as possible in order that banks might be a better support to their community in the way of subsidiaries, interstate branching, or other related activities. Number 480 MR. KIRKPATRICK quoted former COMMISSIONER GLEN OLDS as being excited about international bank branching. Presently, there is a branching law in the code, but he explained in 1972 the Canadian Bank of Commerce was unable to branch into Alaska, since the law just didn't allow the branch. After a few years of history, he further explained the new act would be clear as to the procedures needed to enable foreign banks to set an office in Alaska, with two benefits. MR. KIRKPATRICK said these benefits would include a time zone and a centralized location to other market centers, allow foreign interests to develop energy for their countries' customers, and might benefit the development of our resources. MR. KIRKPATRICK suggested MR. BUSH proceed with a sectional analysis. SENATOR TAYLOR opened the meeting to questions, and SENATOR JACKO asked for an explanation of the changes in the financial markets. MR. KIRKPATRICK explained there was no longer a Regulation Q that regulated the deposit side of the financial statements, and one of the biggest problems is that the barriers, as brought out in the UCC, have been broken with electronic funds transfer. He further explained that if the states don't do something, then Congress is going to dictate interstate branching. This would allow any bank in other states to branch across the street from our banks in Alaska without any control over them. He continued to describe the barriers that have been falling with competition such as the proliferation of credit cards. He explained changes that make the 1930's law obsolete. SENATOR JACKO asked if the bill would limit the types of competition he described. MR. KIRKPATRICK said there had been no attempt to try to change or limit the other market places, but to address the ability of the state's financial institutions to be more competitive. Number 553 SENATOR TAYLOR asked JEFF BUSH for comments and thanked him for the sectional analysis he had done for the committee. He suggested that MR. BUSH give an overview of the legislation and take questions. MR. BUSH explained he was contracted, not only to work on the Alaska Banking Code, but also the associated regulations, which were in the bill packets. He said he would just skim the high points of the sectional analysis. MR. BUSH broke his subjects down into three areas - bank powers, bank regulation, and enforcement - which were changed. Under bank powers, MR. BUSH touched on international banking, which he thought was the most significant area of change in the proposed act. These banks might move from other states as well as other countries and could operate in Alaska, under some specific rules and regulations in order to set up their branch in Alaska. He thought MR. KIRKPATRICK had adequately explained the international banking changes. MR. BUSH said his second area was providing for banks to have subsidiaries such as separate corporations within the banks, and he gave the example of the First Bank in Ketchikan, which operates a title insurance company. He explained why these were unique to Alaska, where it is important for a bank to be able to operate a subsidiary to help them in their business. MR. BUSH said banks need to be able to ... TAPE 93-27, SIDE B Number 001 ... make a profit because regulations sometimes makes it difficult, but their competitors mentioned by SENATOR JACKO, such as Merrill Lynch, do not have the same kind of regulations as a bank does. MR. BUSH explained the third area addressed in the legislation was lending limits and the adoption of the general lending limits that the federal government and the Office of the Comptroller of the Currency (OCC) has also adopted. He outlined problems dealing with loans to one borrower, where the banks are prohibited from lending too much of its capital to one entity. He reviewed a couple of banks that got into trouble by lending to multiple parties to a transaction, all secured to the same project. MR. BUSH said there were a number of restrictions on lending on real estate mortgages, and he reviewed the regulations from the 1930's dealing with this. He said it now depends on the stability of the bank; however, the legislation eliminates the specific restrictions on loan-to-value and limits, to allow the banks more flexibility in real estate lending. MR. BUSH explained the legislation expands the type of property that a bank can own to include property used for promotional purposes. Current law limits the property to "what is necessary for a banking business." The changes in the bill would allow the banks to own property, and he gave some examples. MR. BUSH said the legislation changed capital and reserve requirements by regulation, and he said they were currently negotiating with the banks as to what figure that should be. He said the intent was not to change the reserve requirements, but to make it easier to tell what the reserve is for a particular bank. He explained the present use of varying percentages based on differing types of deposits that must be kept in reserve, and he explained how the legislation would affect demand deposits. SENATOR TAYLOR presented the example of a newly formed bank, the TAYLOR, LITTLE, JACKO BANK, with $300 in deposits, and asked, under the current reserve regulations, how much they could lend. Under their of example of a $300 deposit, there was agreement they could probably not loan any. There ensued a discussion of percent of deposits, type of deposits, withdrawal of reserves, and MR. KIRKPATRICK estimating they could loan about $1.80. The discussion continued until they agreed the bank would have to keep $24.00 and could loan the rest. Number 068 SENATOR JACKO asked about the capital reserve requirements, and MR. BUSH said it was set in both state and federal law. MR. BUSH described the difference of philosophy between the federal and state requirements, and he explained the differences. There was a discussion of the regulations by the FDIC and the OCC in relation to reserves. SENATOR TAYLOR wanted to know why the state bothers to regulate banks on a state level since they are under such significant regulations by the FDIC and the OCC. MR. KIRKPATRICK said it was protectionists against federalism, and he explained the National Banking Act as being for a specific purpose - to repay the cost of the Civil War. He explained the relationship with the state and the banks as being cheerleaders as well as regulators. He described the intent of state law was to service the needs of a specific community, such as a mobile branch for Greens Creek, the NOW accounts, and being available to the state's constituency. MR. KIRKPATRICK explained there is a Mutual Savings Bank Act under Alaska law, and he praised the Mt. McKinley Mutual Savings Bank in Fairbanks as a great thrift institution. He said he didn't want the federal government managing the financial institutions in Alaska any more than we do the Fish and Game. Number 147 SENATOR TAYLOR returned to an answer from MR. BUSH about amending the reserve requirements and asked how the changes implemented in this law would affect the amount of money their hypothetical banks could loan. MR. BUSH said it was difficult to determine because in their simple bank there would be a difference if it had a savings deposits, checking deposits, or a NOW account. He explained the legislation would propose a 15% across the board reserve, so they would have to keep $45 of the $300 in their mythical bank. MR. BUSH said some of the banks were upset at this proposal as being too high an amount of money to have in their vault, and he explained changes in what form this amount could be. Rather than being money in the vault the 15% could be in the form of CD'S, all kinds of bonds, or in other assets that can be readily liquidated. SENATOR TAYLOR reviewed the provisions of the bill as related to their mythical bank and expressed concern over the liquid assets as opposed to money in the vault. MR. BUSH shared some of his concerns, but added the mythical bank was still subject to examination, and he didn't think MR. KIRKPATRICK'S division would allow a faulty action to exist. He explained the bank depositors would remove their deposits leaving their bank out of compliance with the limitations. MR. BUSH further explained there was a push on to make the liquid assets include stocks that are marketed. They have resisted that move, but would allow government bonds for reserve requirements. Number 216 SENATOR TAYLOR continued in his concerns that the only regulation would be through legislatively passed regulations, and he thought there were some broad perimeters and policies set in the legislation on the reserves. MR. KIRKPATRICK outlined one of the problems being problems themselves change, and he told SENATOR TAYLOR he was absolutely correct in his assessment of the liquidity problem. He described two failing banks in California that are heavy into correspondent banking, which means that any bank that is relying on that correspondent relationship for liquidity. He said they are both in trouble and would be monitored quickly. He outlined the steps that would be taken to rectify the problem and had decided the best method was regulation. MR. KIRKPATRICK continued with his recommendation of 15% liquidity on the formula, and he claimed it was easier to monitor by regulation as the new instruments become available. MR. BUSH explained the current law was not being complied with today because of the obsolete provisions in the law, and he described a wild card statute promulgated by MR. KIRKPATRICK in the 1980's that would allow the banking department to adopt regulations that over rule a statute. He quoted the statute as saying if the state banks are at a competitive disadvantage with national banks, MR. KIRKPATRICK, by regulation can adopt federal standards to equalize competition to over rule the state standards for reserves; hence, there are no state reserve requirements at the present time. Number 248 SENATOR TAYLOR reviewed his previous concerns, but expressed his hopes the legislation would make it easier for the Department of Banking, Securities & Corporation to maintain some stability and insure better banking institutions. SENATOR TAYLOR entertained a motion to move the bill. SENATOR JACKO moved to pass SENATE BILL NO. 149 (REVISION OF BANKING CODE) from committee with individual recommendations. Without objections, so ordered. SENATOR TAYLOR thanked both MR. KIRKPATRICK and MR. BUSH for their efforts and dedication in working on the legislation.