Legislature(1993 - 1994)

03/19/1993 01:40 PM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
                                                                               
  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.                  

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