Competition in banking act of 1977 : hearings before the Committee on Banking, Housing, and Urban Affairs, United States Senate, Ninety-fifth Congress, second session, on S. 72 ...

Google

This is a digital copy of a book that was preserved for generations on library shelves before it was carefully scanned by Google as part of a project

to make the world's books discoverable online.

It has survived long enough for the copyright to expire and the book to enter the public domain. A public domain book is one that was never subject

to copyright or whose legal copyright term has expired. Whether a book is in the public domain may vary country to country. Public domain books

are our gateways to the past, representing a wealth of history, culture and knowledge that's often difficult to discover.

Marks, notations and other maiginalia present in the original volume will appear in this file - a reminder of this book's long journey from the

publisher to a library and finally to you.

Usage guidelines

Google is proud to partner with libraries to digitize public domain materials and make them widely accessible. Public domain books belong to the
public and we are merely their custodians. Nevertheless, this work is expensive, so in order to keep providing tliis resource, we liave taken steps to
prevent abuse by commercial parties, including placing technical restrictions on automated querying.
We also ask that you:

+ Make non-commercial use of the files We designed Google Book Search for use by individuals, and we request that you use these files for
personal, non-commercial purposes.

+ Refrain fivm automated querying Do not send automated queries of any sort to Google's system: If you are conducting research on machine
translation, optical character recognition or other areas where access to a large amount of text is helpful, please contact us. We encourage the
use of public domain materials for these purposes and may be able to help.

+ Maintain attributionTht GoogXt "watermark" you see on each file is essential for in forming people about this project and helping them find
additional materials through Google Book Search. Please do not remove it.

+ Keep it legal Whatever your use, remember that you are responsible for ensuring that what you are doing is legal. Do not assume that just
because we believe a book is in the public domain for users in the United States, that the work is also in the public domain for users in other
countries. Whether a book is still in copyright varies from country to country, and we can't offer guidance on whether any specific use of
any specific book is allowed. Please do not assume that a book's appearance in Google Book Search means it can be used in any manner
anywhere in the world. Copyright infringement liabili^ can be quite severe.

About Google Book Search

Google's mission is to organize the world's information and to make it universally accessible and useful. Google Book Search helps readers
discover the world's books while helping authors and publishers reach new audiences. You can search through the full text of this book on the web

at|http: //books .google .com/I

D„ii„.db,Go(5glc

D„ii„.db,Go(5glc

D„ii„.db,Go(5glc

ION

HEARINGS

iNKINO.

BJjrfliD BTA;

M \' I I 1 I It I

»MPniTION IN BANKING ACT OF 1977

HEARINGS

BBFOBB THB

COMMITTEE ON

iAlfKING, HOUSING, AND URBAN ATEAIES

UNITED STATES SENATE

NINETY-FIFTH OONGKBSS

SECOND SESSION
OK

S. 72

TO AHBND THE BANK HOLDING COMPANY AOT AND THB
BANK HBRGBR AOT TO RESTRICT THB ACTIVITIES IN WHICH
RE»I8TBRBD BANK HOLDING OOMPANmS MAY ENGAGE) AND
TO CONTROL THE ACQUISITION OF BANES BY BANK HOLDING
COMPANIES AND OTHER BANKS

UARCH 7 AND 8; AND JUNE 16 AND 28, 1978

Printed for the tue of the Committee on Banking, Housing, and Urban AfFairs

D.8. OOTBBNHENT PBIMTING OFFICE
WASHINGTON : 1978

Digitized bvGoO^^IC

COMMITTEE ON BANKING, HOUSING, AND DRBAN AFFAIRS

WILLIAM FROXUIBE, Wlsconaln, Olurirmm
JOHN SFARSHAN. Al&bama EDWARD W. BROOKE, MaBMchuiettB

HARRISON A. WILLIAMS, Jb.. New Jerser JOHN TOWER. Teiai
THOMAS J. McINTYRE. New HBniiiHhIrF JAKE QARN. Utah
ALAN CRANSTON, CalWorala H. JOHN HEINZ III, PconirlTUiU

ADLAI E. STEVENSON. lUlnola RICHARD Q. LUQAR, Indiana

ROBERT MORGAN, North Carolina HARBISON SCHMITT. New Mexico

DONALD W. RIEOLE, 3a.. MlcblEtn
PAUL B. SARBANE8. Mai7lBDd

KiHHilB A. MCLbin, Blaff Dtrtctor

jEiiuuu 8. BocKUi, Uinorttg Staff Dirtctor
Chablib L. Uabinaccio, Special Counstl

D„ii„.db,Go(5glc

CONTENTS

Federal Deposit Insurance Corporation 42

LIST OF WITNESSES
Tuesday, Mabch 7

John H. Sbenefleld. Assistant Attorney General, DepartJnent of Justice 2

Pbilip B. Coldwell, Governor, Federal Reserve Board 15

Evelyn Y. Davia, Editor, Hlgbllgbts and Lowliglits 30

Wedkebpat, Masob 8

3. R«i Duwe, chairman, Farmers State Bank, Lucas, Kans ; past presi-
dent. American Bankers Association 52

Richard Peterson, legislative counsel. Independent Bankers Association of

America; accompanied by Terrence H. Klasky 63

John C. GeilfuBs, chairman, eieciitlve committee. Marine Corp., Jlitnaukee.
Wis. ; accompanied by Donald L. Rogers, president. Association of Bank
Holding Companies 80

Fridax, June 10

Richard Farrer. chairman. L^Blatlve Committee, National Association of
Realtors ; accompanied t^ Paul Preston, director of mortgage finance ;
and Joan Moore, legislative analyst 110

William L. Hemphill, president, Mortgage Insurance Companies of
America ; accompanied by John Williamson, cieentlvc vice president 204

Robert R. Masterson, chairman, Committee on Federal Legislation, Na-
tional Association of Mutual Savings Banks; accompanied by James J.
Butera 215

Edward I. O'Brien, president. Securities Industry Association; accom-
panied by Donald Crawford, vice president 242

David Silver, president. Investment Company Institute ; accompanied by

Matthew F. Fink, general counsel 286

Fkidat, Jttne 2S

Wayne L. Nai^le. president, National ABsoclation of Professional In-
surance Agents 354

Joel A. Shapiro, cochairman, Committee on Federal Law and Legislation,
National Association of Life Underwriters : accompanied by William B.
Scher .- 361

Thomas E. Wilson, counsel, Wilkinson. Cragun and Barker, Independent

Insurance Agents of America; accompanied by Edward Kremmer 368

John J. Gardiner, vice chairman. National Affairs Oommlttee, National
Socletv of Public Accountants; accompanied by John H. Fitch -100

Kdison R. Zayas, economist, National Federation of Independent Business;
accompanied by William J. Dennis, Jr., director, research staff 488

AnmnotTAi. Statements and Data

A. Clyde Rohrs A Associates, letter from A, Clyde RohrsL 476

Digitized bvGoO^^IC

Advertisements of banks offering investment services: *'»•

Continental Illinois National Bank and Trust Co. of Chicago 324

Fifth Third Bank, Cincinnati, Ohio.__ ___ 323

First National Bank and Trust Company of Tulsa 326

First National Bank of Birmingham, Ala 325

Hibemia National Bank, New Orleans, La 322

Marine Midland Bank - 327

National Bank of Detroit 320

National City Bank, Cleveland, Ohio 321

Affidavits received from Iowa real estate brokers:

Aid Insurance Services, Dysart, Iowa 149

Carey-Vrzak, Inc., New Hampton, Iowa 164

Dirks Real Estate and Insurance, Reinbeck, Iowa 173

Eugene A. Anderson, Toledo, Iowa 154

F. C. Earley Agency, Traer, Iowa 157

Irene A. Stout, Grundy Center, Iowa 159

John R. Currens, Traer, Iowa 156

John J. Kaloupek, Chelsea, Iowa 174

Kensinger Real Estate, Tama, Iowa -^ 152

Pieper Heal Estate and Inaurance, Tama, Iowa.. 158

The Kinney Agency, Gladbrook, Iowa 151

Twin Cities Insurance and Real Estate, Toledo, Iowa 150

American Banker, reprint of article titled "Consumer Finance Firms

Beginning to Offer More High Rate Certificates to Individuals" 232

American Society of Travel Agencies, statement of James A. Miller, presi-
dent and chairman of the board- 764

Clark, Chas. H. Jr., public accountant, letter to NSPA Department of

Government Affairs 420

Committee of Banking Institutions on Taxation, letter from John F.

Eisinger, chairman 791

Conference of State Bank Supervisors, letter from Lawrence E. Kreider,

executive vice president-economist 831

Excerpts from the legislative history of the Bank Holding Company Act

of 195fi _ - 75

F. C. Earley Agency, reprint of affidavit of Franklin C. Earley, realtor of

Traer, Tama County, Iowa _ 134

Federal Reserve Bank of Chicago, printout showing information on bank

holding companies in Iowa 177

Federal Reserve Board:

Activities ruled by the Board under section 4(c) (8) of the Bank Holding

Company Act as of February 27, 1978___ 736

Exchange of letters between Chairman Bums and Senator Proxmlre

regarding study on bank holding company movement 499

Letter from Chairman Miller accompanying study prepared by the
staff on the economic and financial implications of the bank holding

company movement 521

Reprint of study titled "The Bank Holding Company Movement to
1978: A Compendium";

I. A Review of the Evidence on the Bank Holding Company

Movement; Summary 525

II. A History of the Bank Holding Company Movement:

1900-78 by Donald T. Savage 541

III. Bank Holding Companies as Operational Single Entities:

A Review by John T. Rose ._ 582

IV. The Performance of Bank Holding Companies: A Review

of the Literature by Timothy J. Curry _.. 602

V. Bank Holding Company Affiliation and Cost Efficiency by

James Burke 626

VI. The Effect of the Bank Holding Company Movement on
Bank Safety and Soundncs-s: A Literature Review by

John T. Rose 640

VII. The Effect of Bank Holding Companies on Competition: A

Review of the p:vi<lencc by St^hen A. Rhoades. _ 677

VIII. Bsnk Holding Companies and Concentration of Banking
and Financial Resources: A Review by Cynthia A. Class-
man and Rol)ert A. Eisenbeis 698

Digitized bvGoO^^IC

History of bankandbaukholdingcomp&niesin the travel industry

''" lependent Bankers Association of America;

Letter to Senator Proxmire from Richard W. Peterson, legislative

Federal Reaerre Board — Oontinued

Reprint ot stud; titled "The Bank Holdiag Company Movement to 1978" :
A Compendium— Continued

IX. Convenience and Needs and Public Benefits in the Bank *■«•

Holding Company Movement by Anthony Cymak 742

Statement of Governor Philip E. Coldwell before House Banking

Committee on H.R. 9086, September 28, 1977 502

Fischer, Harold O., House ot Representatives, State of Iowa, letter to

Senator Proxmire 172

Florida Accovintants Association, letter from Gordon M. Wiggin, executive

director 478

Florida House of Representatives, letter from Wyatt Martin, Commerce

Committee counsel 481

Florida State, Office of the Comptroller, letters from Barry F. Rose, legal

research assistant, division of banking 483

Grundy National Bank of Grundy Center, Grundy, Iowa, examples of

real estate advertising 119

Hale, Matthew, Washington counsel, letter to Senator Proxmire enclosing
memorandum re: testimony of John H. Shenefield, Assistant Attorney

History of I

Independent Bankers Association
Letter to I
counsel-.

Statement of Raymond Campbell, first vice president 64

Independent Insurance Agents of America, Inc., paper titled "Research
Data Regarding Bank Holding Company Entry Into Certain Non-
banking Activities" 380

Institutional Investor, reprintsof advertisements of banks 321

Investment Companv Institute, additional letter received for the record

subsequent to the hearings 328

Iowa Association of Realtors, letters enclosing 17 afHdavitts concerning
banks in the real estate business from F. Harold Atwmathey, director,

government affairs division 148, 163, 197

Justice Department, letter to Chairman Frank Wille, Federal Deposit
Insurance Corporation from Richard W, McLaren, Assistant Attorney

General, Antitrust Division 802

Lisbon Bank and Trust Co,, samples of real estate advertising 145

Literature from banks soliciting accounting and bookkeeping:

Cape Cod Bank and Trust Co 424

Continental Bank, Phoenix, Ariz 430

First and Merchants National Bank, Richmond, Va 421

First National Bank of Boston 473

Freedom Federal Savings Bank, Worcester, Mass 474

Greeley National Bank, Colorado 487

Mercantile Banks, Missouri 477

National City Bank, Cleveland, Ohio 472

Old Stone Bank, Providence R. I. 423

University National Bank of Boca Raton, Florida 480

Valley National Bank of Arizona 426

Merchants National Bank, Cedar Rapids, Iowa, reprint of questionnaire

concerning real estate practices 122

National Association of Casualty and Surety Agents, statement submitted

by Bruce T. Wallace, executive vice president 856

National Association of Mutual Savings Banks, letter received for the

record from James J. Butera, associate director _ 241

National Association of Public Accountants, letter from Rol>ert Grille 470

National Consumer Law Center letter on consumer credit insurance from

Willard P. Ogbum, counsel- 835

People* National Bank, Albia, Iowa, samples of real estate advertising 128

Pension World, reprints of advertisement of banks 320

Public Accountants Society of Colorado, letter from Everett L. Hanson,

secretary _ 486

Purolator Services Inc., statement of John M. Delaney, group senior vice

president and general counsel 847

Tama State Bank, Tama, Iowa, samples of real estate activities _ 173

Digitized bvGoO^^IC

VI

U.S. Comptroller of the Currency: P*"

Exchange ot correspondence with John Heimann regarding national

banke^ activities in the travel business 768

Letter from John G. Heneel, regional administrator of national

banks-- _ 485

Wall Street Journal, reprint of article titled "Auto Loan Fees Plunge in

Two Maine Towns As Small Savings Bank Sparks Rate War" 231

Washington Mutual Savings Bank, statements concerning merger in the
FDIC annual reports and the opinions in the district court ana court of
appeals __ 804

Cbartb and Tables

Acquisitions of nonbank firms by bank holding companies by activity and

year 1971-75 ._ 57

Bank affiliated mortgage banking firms among the top 50 servicers in the
United States 738

Bank holding company groups' deposits as a percentage of all commercial
bank deposits for selected years 1967-76- 734

Comparison of capitalization by bank holding company nonbank affiliates
and independent firms 384

Directory of bank officers and employees who are real estate brokers and
salesmen (small area in Iowa) 132

Eotimated yearend market share achieved by bank holding company con-
sumer finance subsidiaries based upon total capital funds (withm the
category of 100 largest noncaptives) 381

EMimated yearend market share achieved by bank holding company finance
subsidiaries baaed upon total capital funds (within 100 largest noncaptlve
firms) 382

Estimated market share achieved by bank and bank holding company
factoring entities (based upon "old line" factoring volumes) 383

Estimated yearend market share achieved by bank and bank holding com-

fiany firms in mortgage banking (within 100 largest services) 381
ty largest bank holding companies ranked by asset size, December 1976- 78

Five firm concentration ratios 733

Growth of registered bank holding companies 1970-76 53

Impact of holding company acquisitions on statewide concentration,

1968-73 - 731

Maximum small one-year loan annual percentage rat«s in Georgia and

States where Ritter does business 842

Nationwide concentration in banking, selected years, 1971-75 54

Nonbanking acquisitions of bank holding companies, January 1, 1971 to

December 17, 1977 737

One-bank holding companies with domeatio deposits of SI billion or more

as of December 31, 1976 - 79

Percentage of domestic statewide commercial bank deposits in 3 largest

banking organizations 21

Percentage of statewide commercial bank deposits in 3 largest banks on

bank groups 43

Private mortgage insurance companies, 1978 239

Selected factors acquired by l)anking institutions: A comparison of fac-
toring volume at the time of acquisition versus 1973 741

Share of the deposits of the largest banking organizations in the United

States -„ 727

Statewide concentration ratios for commercial banking organizations 728

Status of l>ank holding company nonbanking activities under section

4(e)(8) - 61

StatuH of the largest 100 independent finance companies at December 31,

1970 739

Trends in nationwide concentration, 1957-73 43

Digitized bvGoO^^IC

COMPETITION IN BANKING ACT OF 1977

XnZSDAT, HABCH 7, 1978

U.S. Senate,
Committee on Banking, Houbino, and Urban Afpaim,

Washington, D.C.
The committee met at 10 a.m., in room 5302, Dirksen Senate Office
Building, Senator William Proxmire, chairman of the committee
presiding.

Present: Senators Proxmire and Sparkman.

OFENINO STATEHXHT OF CHAIKUAN FROZHIBE

The Chairman. The committee will come to order.

This morning we continue hearings on legislation to control the
growth of bank holding companies and the concentration of banking
assets in banking markets. In the last Congress we began hearings on
the legislation but we did not have sufficient time to complete the hear-
ing record. I hope we can complete the hearings on this legislation in
this session and bring it to a vote of the committee.

Bank holding companies have experienced explosive growth during
the past 25 years. They now control over two-thirds of tlie banking
resources of the Nation. Although their subsidiary banks are pro-
hibited from branching across State lines, no such restriction applies
to the permissible activities of bank holding companies. As a result,
bank holding companies have begun to operate in wide geographic
areas and the largest operate from coast to coast.

It may be argued that this expansion enhances competition over cer-
tain loan functions or deposit-taking institutions. There is some merit
to this argument. Nevertheless, bank nolding companies have expanded
way beyond the business of banking— that is to say the business of tak-
ing deposits and making loans — into a wide range of business and
commerce which is destructive of fair competition and poses serious
questions for the stability of the banking system.

The Federal Reserve has condoned the expansion of bank holding
companies into such diverse areas as insurance underwriting, insurance
sales including property and casualty insurance, data processing,
annored car and courier services, and automobile leasing. Spokesmen
for these industries and others — notably the securities industry and the
travel agents — have complained of the premissiveness of the bank
regulatory agencies in allowing bank holding companies and their
banks to expand beyond banking. I'm inclined to agree with them.

Credit is allocated in our market economy to borrowers through the

banking system. Banking organizations need to be prudent in making

(1)

Digitized bvGoO^^IC

loans. They need to take risks — sometimes even make risky loans. But
they need to make these important judgments free from the hope that
if they make the loan they will also get collateral business — such as
insurance premiums. This distorts the market not only for loans but
also for insurance because when credit is scarce a borrower will likely
buy his insurance from the bank as a "carrot" in order to induce the
bank to make the loan, and there is no question that in periods of credit
stringency — and we have had them in the past and we will have them
in the fiiture — that the bank has an enormous competitive advantage
that has nothing to do with efficiency or competence or expertise and
has everything to do with just plain clout induced by the fact that they
have the capital.

Some banks have failed because of the expansive and poorly regu-
lated activities of their hank holding companies. Perhaps the best
example of poor Federal Reserve policy was in allowing bank hold-
ing companies to engage in real estate advisory services where the Fed
engaged in the fiction that the trust was severable from the bank
holding company thus sanctioning in real terms an unregulated affilia-
tion where the incentives were all on the side of imprudent lending
and all know the result was the REIT debacle. "While passage of this
bill will not by itself insure a safe and sound banking system, it will
surely help by requiring banking institutions to stick to banking.

At the same time this legislation will begin to control the concentra-
tion of banking resources in the Nation by flatly prohibiting the bank
acquisitions by bank organizations holding 20 percent of the banking
assets in any State.

We are happy to have the head of the Antitrust Division of the
Justice Department here this morning to be followed by Governor
Coldwell of tlie Federal Reserve Bank as our principal witnesses.

Our first witness is the Honorable John H. Shenefield, Assistant At-
torney General, Department of Justice, Incidentally, if you would
like to summarize your statement — you have a substantial statement
here, 23 pages — we hope you can do that in 10 minutes or so and we
will have the entire statement printed in full in the record.

8TATEKEKT OF JOHH H. SHEREFIELD, ASSISTANT ATTORHEY
GENERAL, SEPARTHENT OF JUSTICE

Mr. Shenefield, Thank you, sir. I will do my best.

My statement begin? with an explanation of our interest in this area
and our considerable responsibility. It's a matter of substantial con-
tinuing interest to us that the banking industry be as competitive and
as free to move into important new areas of activity as possible, Thosa
twin concerns have guided us throughout onr enforcement program.

Section 101 of S. 72 would amend the Bank Merger Act to add new
provisions relating to bank mergers. The proposal to place a statewide
ceiling on the assets which may be held by a single banking organiza-
tion raises difficult issues. A good deal can be said in favor of it and
many questions can be raised as qualifications to it.

First of all, I think you have to start with the premise that the
commercial banking system in this country is marked by a large num-
ber or local, independent, relatively small institutions, hut it is also

Digitized bvGoO^^IC

marked by a substantial amount of concentration among the largest
banking organizations on a statewide basis. My statement contains
some statistics having to do with the nature of that concentration.

Under the current framework of the law I think it is fair to say that
horizontal mergers — that is, mergers l>etwee?i direct competitors — have
largely been eliminated at least in particular localized banking
markets. Some of those have Iteen prevented at the agency level. ^Vhere
the agency has l)een imwilling to take that step I believe the United
States has been relatively successful in court. However, it is also true
that mergers of banks which do not serve the same locality and there-
forB are not in that sense directly competitive, may in a significant and
different sense l>e anticompetitive. Some mergers of that sort have been
denied approval by the regulatory agencies ; more have not. As a result
we brought a number of so-called potential competition cases in the
late 1960's and early 1970's which were by and large substantially un-
successful in achieving a rule of law that would have prohibited what
we feel to be anticompetitive potential competition mergers.

My statement recounts the progress of that litigation, specifically the
Marine Bancorp, and Conneeticvt Kadonal Bank cases which together
it seems to me give anyone — any serious observer of this area — real
cause for concern over the viability of potential competition arguments
in the field of commercial banking.

The proposal to establisli a statewide ceiling on share of banking
resources is one approach to the problem created by those cases and the
anticomjwtitive problems that they address.

It is quite clear that it is important to be concei-ned over the evolu-
tion of State banking stnictures that seem likely to produce or may
have produced what we in antitrust call highly concentrated oligop-
olies, where a very few large banks dominate major markets. A ceiling
on banking resources that a single institution may acquire throurfi
merger is one approach to that problem and it's one that's been used by
several States, but it does have its own problems.

For instance, if the proposals for financial regulatory reform are
enacted, there may well be significant amounts of competition from
nonbank financial institutions which ought to be considered. In addi-
tion, in major metropolitan areas where the characteristics of the
banking market involve interstate economic transactions, it's im-
portant to consider that fact. Further, the electronic funds transfer
system — the future of that development, and its impact on competition
among banks — needs to be considered. Finally, whether it is appro-
priate to establish a single specific figure for all States needs to be
given consideration. If it is on balance determined after a study of
these rather coniple.^ issues that a statewide ceiling approach is iippro-
priate, it seems possible to use to inquii-e whether the 20-percent figure
is an appropriate figure.

For instance, we think it might well be possible, if the statewide
ceiling approach is adopted, to consider whether a lower ceiling would
really be more helpful in furthering the objectives sought by the pro-
posal while not really placing any unreasonable limits on expansion
through merger transactions.

A possible qualification to the language that would allow appro-
priate mergers could be found in the convenience and needs defense

Digitized bvGoO^^IC

which the S. 72 proposal does not contain. The omission of a con-
venience and needs defense in S. 72 in effect subjects bank mergers
in excess of the statewide ceiling figure to a stricter standard than
those which would be outright violations of the antitrust laws. Thus,
I would think it might well be considered whether a convenience and
needs standard would be appropriate if the statewide ceiling approach
were to be adopted.

We have not had, in general, a bad experience with the convenience
and needs defense in regulatory agencies or in the courts and it seems
to me that that kind of language might offer the possibility of ap-
proving a clearly procompetitive banking acquisition which would
otherwise have to be disapproved.

My statement also discusses whether it is advisable to total assets
as a ceiling figure as opposed to amounts of deposits and shares of
deposits in a particular market.

The second substantive amendment to the Bank Merger Act and
the Bank Holding Company Act made by S- 72 clarifies that the
responsible agency may deny a merger acquisition on competitive
grounds, even if the substantive standards of the antitrust laws or
the statewide ceiling, if that's adopted, are not violated, where ad-
verse competitive effects are not clearly outweighed by the convenience
and needs of the community to be served. We support that provision.

This goes to the decision of the Ninth Circuit Court of Appeals in
the Washington Muheal.cttse, in which that court held that the FDIC
could not disapprove a merger on competitive grounds unless it found
an actual violation of the antitrust laws in the conventional sense.
Wo doubt the wisdom of that rationale. The case did not receive a
Supreme Court review. It seems to us in line with similar legislation
in other rep:ulafor\- contexts that in a balancing of public interests it
would be appropriate for an aeency to disapprove a merger that was
on balance anticompetitive where all other regulatory aspects were
neutral even though in a conventional sense the merger might not rise
to a violation of the antitrust laws, particularly section 7 or section 2,
We would suggest that a similar provision might well be added to
the Savings and Loan Holding Company Act to clarify that the Fed-
eral Home Loan Bank Board may disapprove mergers on the same
basis as the banking agencies.

I turn now in the final minutes of my summary to section 301 (a)
of S. 72, which has to do with activities of bank holding companies in
closely related financial fields. You have summarized the present law,
which is to the effect that a proposed activity, in order to be permitted
to bank holding companies, must be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In a
variety of ways S. 72 changes that language by adding words that
require a more direct relationship and a more necessary incident of
that activity to the business of banking or managing or controlling
banks in order for it to be approved by the appropriate regulatory
agency.

It's a little difficult to assess these changes and their impact, al-
thousrh it appears clpar that their intent is to limit the scope of per-
missible activities under section 4(c) (8).

In general, the current closely related standard has emerged from
the 1870 lepslative compromise between widely differing views. The

Digitized bvGoO^^IC

question of ho-w far afield bank holding companies should be permitted
to venture is a difficult one because it reflects concerns about bank

solvency on the one hand and unfair and discriminatory competition
in the so-called target markets on the other.

In 1970 we in the Department of Justice advocated increased flexibil-
ity for bank holding companies because that flexibility held the prom-
ise of increased competition in related areas and we still think as a
general matter that barriers to entry into new fields should be erected
or maintained only upon showing of clear need. We in general defer
to the Federal Reserve Board for expert comment on what kinds of
activities are appropriate under this standard. We do have a general
philosophical concern about raising entry barriers and we would sug-
gest only that it is appropriate to examine most closely the conten-
tions of those in the target industries that would be forced to confront
new competition. We ourselves carry a philosophical skepticism into
that kind of debate.

There are also provisions of section 301 that would have the effect
of amending the so-called public benefits standard of section 4(c) (8)
and again it is somewhat difficult to assess the significance of those
changes.

We would make the same sort of comment with respect to that
tightening as we did in connection with the closely related test.

In general we think the better general approach is to favor free
new entrv into an industry without an affirmative showing of public
benefit. Thus, increasing the existing burden would represent a greater
departure from normal competitive policy. The existing burden should
be increased only if the Congress affrmatively finds that the present
standard has resulted in actual and significant adverse effects to the
public as opposed to a rather more speculative fear of new competition
and possible adverse effects. We are not aware of evidence of harm to
the public or complaints about this other than from the target indus-
tries. The Congress in its judgment may have better evidence and be
able to form a more refmcd view.

I think, Mr. Chairman, the remainder of my statement has mostly
to do with procedural aspects of the amendments.

In summary, S. 72 deals with what we consider a number of highly
important and controversial i.ssues concerning competition in banking
and related areas. The provisions which would place certain limits on
additional expansion of banking activities througli mergers and acqui-
sitions do represent one approach to a problem which is intricate and
requires careful consideration. The proposed changes to section
4(c) (8) of the Bank Holding Company Act raise doubts as to their
necessitv or desirability and should be adopted we think only if there's
clear evidence of their need and should, in that event, be specifically
tailored to deal with particular problems without imposing unneces-
sarv barriers to new entry.

The Chairman. Thank you very much, Mr. Shenefield.

[Complete statement follows:]

Mr. Chairman and tnerobers of the committee, I appreciate the opportunity to
diHciisK the Importnnt IsaueB ralspd by S. 72. which would aroend the Bank Merger
Act and the Bank Holding Company Act in several competitively signltlcant ways.

Digitized bvGoO^^IC

Tbe Deportmeot of Justice has a apeclal Interest and respooslblUty in this area.
We review hundreds of mergers and acquisitions each year and provide reports
on their competitive effects to the federal banking ageaeles. Our role In the iMink
merger area is not limited to making recommendations to the agenples ; where
we deem it necessary, we bring Independent actions under the antitrust laws
challenging mergers and acquisitions we believe to be unlawful.

Because or the role of the banking industry as financial intermediary, com-
petition in it Is crucial to tbe well-being of the entire economy. Therefore, tbe
Antitrust Division has always accorded high priority to competitive questions
arising In banking. Following the Supreme Court's landmark decision In Fkila-
detphia National Bonl;,' we have successfully challenged many direct horizontal
bank mergers. We have been less successful, however. In prosecuting cases based
upon other antitrust concepts, such as potential competition. In addition, we
have been concerned about the competitive questions raised by bank holding
company dlversiflcatlon Into fields not traditionally associated with banking.

Section 101 of S. 72 would amend the Bank Merger Act to add two new provi-
sions coneemlng tbe sul>atantlve standards to be applied to bank merger trans-
actions. New subparagraph S(c) would prevent amtroval of a transaction wbere
"the acquiring, assuming, or resulting bank woold upon consummation of tbe
transaction hold more than 20 per centum of the total assets held by all banks
located In the States in which sucb bank la located. . , ." llie only qualification
to this prohibition Is where the approving agency determines that "immediate
action Is necessary to prevent tbe probable failure of a bank and that a less
anticompetitive alternative Is not available." Tbe second substantive cbange
would eliminate questions that bnve been raised as to whether the approving
agency may disapprove a merger wblch Is anticompetitive, although It does not
violate the antitrust laws. Section 201 of the bill would make similar amend-
ments to the Bank Holding Company Act.

The proposal to place a statewide celling on the assets which may be held by a
single banking organization as a result of merger or acquisition clearly raises
extremely dlfflcult Issues. The commercial banking system In the United States,
In contrast to that In most other developed countries. Is marked hy a large num-
ber of local, independent, and relatively small Institutions. In 19T5, there were
over 14,600 commercial banks In the country operating more than 44.000 offices.
■Rie vast majority of these banks have assets of under $100 million.' Despite
this Structure, however, our banking system Is also marked by significant con-
centration among the largest banking organizations on a statewide basis. In
eight states ' and the District of Columbia the shares of the top four banking
organizations totaled 7.5 percent or more as of December 31. 1976. In an addi-
tional 13 states,' the top four firganlzatlons have shares of between r>(t percent
and 75 percent as of tbe same date.

The existing legal framework governing bank mergers has been sucee«sfal In
blocking horizontal mergers which eliminates substantial existing competition
In particular localized banking markets. Many such anticompetitive mergers have
been blocked at the agency level, and we have been successful in court In those
cases which were not. These eases have sometimes Involved small banks located
In small communities' as well as lai^e institutions located In major financial
centers.'

Mergers of banks which do not yet serve the same local retail customers may
also be anticompetitive. Occasionally, such mergers are denied by the banking
agencies, but since the late 1960s, most of our difficult bank merger litigation
choices have arisen In this area. We have initiated a number of "potential com-
petition" cases which typically have involved the acquisition of a leading local
bank by a large bank outside the market. Such acquisitions elimlnte the acquir-
ing bank as a significant source of potential competition by eliminating It as an
"actual" entrant de novo or through a procompetltlve "toehold" acquisition. They
also eliminate the procompetltlve effect a potential entrant has on banks already

■United Statps v, Phllsdelphlft National Bank, S74 U.S. 321 (1063).
' ime Statistical AbbBtract of the United States 483-484.

'Alaska, Arizona, nelaware. Hawaii, Idaho, Nevada, Oregon, and Rhode Inland.
•California, Connecticut, Maine, Maryland. MassacbusettB, Minnesota, Montana, New
Mexico, North Carolina. South Carolina, Utah, Vermont, and Washlneton.

'"- '■-•'--—-■ " - n, 3Bft U.S. 3S0 (IflTO) ; United Statea r.

86 (D. Vt. 1872).

Digitized bvGoO^^IC

in the market merely bwfluBe of the threat It presents Bhould they price too high
or fall too low in quality of serviee.

In the first such case appealed to the Supreme Court, the adverse decision of
the IMstrlct Court was affirmed by an equally divided Court.' Subsequently, the
Court derided two major "iwtential competition" cases adversely to the Kovem-
ment.* While the Court accepted the relevance of "potential competition", It
rejected use of a statewide marltet to measure the effects of the merger and
emphasised as moat Important to the analysis of a particular case "the unique
federal and state regulatory restraints on entry"' Into comnierdBl banking. Thus,
the Supreme Court's rulings in Marine Bancorp and Connecticut National Bank
l>rovlde real cause for concern over the viability of potential competition tiTgn-
ments in the fleld of commercial banking. The cases appear to establish stand-
ards of proof that may be so high as to make existing law inadequate to prevent
many anticompetitive acquisitions by larger banks not presently operating in
particular local hnnkinR markets of banks in those markets.

The proposal to establish a statewide celliiig on the share of banking resources
which may be controlled by a single Institution as a result of mergers or acquisi-
tions Is one approach to problems existing under present Judicial determinations.
Current law generally prohibits banks In one state from opening offices in an-
other. Thus, the state boundaries are effective barriers to entry, and the states
they enclose assume both legal and economic significance as far as the competi-
tive effects of mergers and acquisitions are concerned. We have long been con-
cemed over the possibility of state banking structures evolving Into highly
concentrated oligopolies, where the same few very large banks dominate all
of the major local markets. Adopting a ceiling on the percentage of banking
resources that a single Institution may acquire through merger is an approach to
(his problem which has been used by several states.

The statewide celling approach is not, of course, without its problems. Other
financial Institutions provide competition to commercial banks, which may in-
crease if financial regulatory reform comes to pa.ss. although it should tie noted
that as recently as 1075, In the Connecticut Xational Bank case, the Supreme
Court held that "commercial tianking" remains a recognizable line of commerce
for antitrust purposes. Some Interstate banking competition does eTlst, partic-
ularly In major metropolitan areas which cross state lines. The Interstate
future of electronic funds transfer systems should also be considered. Finally,
consideration should l>e given to whether a single percentage figure would be
appropriate for all states, or whether an appropriate figure would have to vary
from state to state.

Of course, any statewide celling approach would present the difficult task of
deciding upon a figure for sucb a celling,'" Predictable competitive effects depend
not only on the market shares held by Individual institutions but also upon the
total share controlled by the leading banking organizations In a particular state.
As previously noted, in 21 states (plus the District of Columbia) the "four-fltm"
concentration ratio exceeds 150 percent. In several of tbe.se states, however, the
leading institution does not have a 20 percent share.

In several states, the leading institution does not control 20 percent of banking
as.<iets, but nonetheless a major acquisition by it would appear to be Inappro-
priate ir any other form of entry into the local market is available. For example.
In Colorado the two leading banking organizations each have over IS percent but
less thn 20 percent of the statewide market, and the proposed ceiling would not
have been effective In prohibiting the acquisition we challenged unsuccessfully in
the Greeley case. If upon adequate study a ceiling approach is adopted, we
recommend that Congress consider whether a lower ceiling would further the
objeclives sought by the proposal while not placing unreasonable limits on any
expansion through merger transactions.

Also raised Is the isoue of whether a state«-ide ceiling should always be an
absolute bar to acquisitions. S. 72 as presently drafted does not contain a "con-

'VnUnl Ststra v. First National Biinairiioritlon. Inc.. ^29 F. eupp. 1003 (D. Colo.
Ml), aff'd. bf/ an ejuaJIu dU-lied Court. 410 D.8. KTT (IBTSl,

*VaU*d Slsten v. Marine Banrorporatlan. Inc. 418 U.S. 802 (IBT4) : I7nllfd StatM v,
t National Bank. 41f) V.S. SSB (1974).
• ■ -27.

■rr ajipfar In dlfffrlne utatr. utattitm. New HampBhlre Snd Npw Jntey ha"

Digitized bvGoO^^IC

8

Tailence and needs" defense such as presently coatafued In the merger sections
of tbe Bank Merger and Bank Holding Company Acts. This provision permits
approval of a merger, either by the regulatory agency or by the Court in a subse-
quent Clayton Act i 7 case, where the anticompetitive effects of the proposed
transaction are clearly outweighed In the public Interest by the probable effect
of the transaction in meeting the convenience and needs of the community to be
served. The statewide celling provision would establish a stricter standard for
certain mergers than does the Clayton Act as presently interpreted. We doubt that
it is appropriate to permit approval of a merger which otherwise violates the
Clayton Act on the ground that (he "convenience and needs" of the community
clearly outweigh the anticompetitive effects, but not permit approval of a trans-
action in a comparable situation solely because of a numerical celling on state-
wide market share. Therefore, we believe that a "convenience and needs" stand-
ard, strictly applied, would be appropriate If a statewide ceiling approach were
adopted.

It is our experience that neither the regulatory agencies nor the courts have
used the "convenience and needs" provision as a loophole to avoid the subE^a-
tlve competitive standards of the Clayton Act." While we have disagreed with
certain of the agencies from time to time over proper application of the defense,
we have found the courts reluctant to accept it where other solutions to banks'
problems are potentially available." We assume that the same approach would
be taken in the case of mergers which would result in a market share in excess
of the statewide celling. Moreover, the existence of such a provision would allow
approval of a clearly procompetUive acquisition which otherwise would have to
be disapproved. For example, entry by a banking organization with a large state-
wide share into a highly concentrated local market through a truly "toehold"
acquisition. — a bank with only 2 or 3 percent of the local market — could often
be desirable, particularly If other large statewide organizations are already pres-
ent In that local market. ITie statute should be suffldently flexible to allow such
a transaction. Inclusion of a "convenience and needs" defense, we believe, wonld
provide such flexibility without vitiating the basic prophylactic purpose of the
celling.

Let me turn now to measuring concentration. The statewide ceiling provision
In S. 72 is drafted In terms of a banking organization's share of assets held by
all organizations located in the state. Ordinarily, In assessing the position of a
bank, both the iianking agencies and the Antitrust Division consider the amount
of deposits held by the bank and Its share of total deposits In the market. The
choice of assets rather than deposits could be signincant wliere either the tiank
involved in the merger proposal or other banlts located in the state have sub-
stantial foreign holdings. This provision may limit in a particularly rigid fashion
major money center lianks whose overall strength Is greater than their share of
deposits In their home state. If a statewide celliug approach were to be adopted,
we believe use of state deposits rather than as.4ets would provide a more accurate
measure of the actual competitive situation in the particular state.

We note that Sections 102 and 202 of S. 72 confer a statutory cause of action
on the t'nited States to enforce the ceiling provision contained In the bill. Absent
these provisions, we might not lie able to independently aeek to enjoin a merger
or aquisitlon which violates the ceiling provisions since such a violation would
not necessarily constitute a cause of action under existing antitrust laws. We
sngge^t additional language which would allow use of the Antitrust Civil Process
Act to investigate possible violations of the new standard where such becomes
necessary.

The second substantive amendment to the Bank Merger Act and the Bank
Holding Company Act made by S. 72 clarifies that the responsible agency may
deny a merger or acquisition application on competitive grounds, even if Ihe
substantive standards of the antitrust laws (or the statewide celllne) are not
violated, where adverse competitive effects are not clearly outweighed by the
couveniencc and needs of the community to I* .served. We fully supiiort this
provision.

The effect of this amendment would l>e to reverse the decision of the Court of
Apjieals for the Ninth Circuit in Ihe WnilUngton ilahial case." That decision

"S« United Slai™ v. Flrit Cltr NMIodbI BsnK of Houeton. 388 U,S, ."iSl (IBSTl.
Tnlted SUCm v. Third NiHonal Bank In NaihTtll«. 380 U.H. 171 (196(1).
i> WaablniitoD Mutual Savlagi Bank v. Federal Deposit Insuraafe Corn. 4nS F. 2d 459
(Btb CIr. 1973).

Digitized bvGoO^^IC

held that the responsible agencr may not disapprove a merger on competitive
grounds unless the merger's anticompetitive effects rlae to a violation of the
antitrust laws. The decision was founded on legislative liistory of the Bank
Merger Act dealing with the problem of forum shopping and the need to avoid
Incon.sistent competitive policies among the three federal agencies which ad-
minister the Act.

The WaxhingtOK Mutual case did not receive Supreme Court review, and we
doubt the wisdom of its rationale. The effect Is that a merger which is neutral
with respect to "hanking factors", but anticompetitive and thus overall adverse
to the public interest rnunt be approved. This certainly cannot or should not be
the inteuiled result of the Bank Merger Act. Moreover, a candid recognition of
the subjective nature of the decision-making process, particularly In potential
competition situations, suggests that forum shopping is still a real possibility
even under the Washington Mutual holding. Therefore, even tliough we doubt the
validity of this decision, corrective legislation as contained in S. 72 is appro-
priate. In addition, we suggest that a similar provlson be added to the Savings
and Loan HuldlnR Company Act. 12 U.S.C. % 1730a, to clarify that the Federal
Home Loan Bank Board may disapprove mergers on ttie same basis as the
tianking agencies.

Let me turn to other provisions in S. 72 which address activities oC bank
holding companies in closely related (Inaneial fields. Section 301(a) would make
several substantive changes in the standards governing bank holding company
entry into related financial fields under Section (4) <c) (8) of the Bank Holding
Company Act. Section 4(c) (fi), as amended in 1970, provides basically two tests
which must be satisfied before bank holding company entry into a related
industry Is permissible. These are the "closely related" test and the "public
benefits" tests.

Under present law, a proposed activity must be "so closely related to banking
or managing or controlling banks as to be a proper Incident thereto." S. 72
would alter this standard to require a determination that the activity be "bo
closely and directly related to banking or managing or controlling banks as to
be proper and necessary- incident thereto" (emphasis added). The significance
of these changes is difficult to assess, although It appears clear that their intent
is to limit the scope of permissible activities under Section 4(c) (8).

la Xational Courier Aasocialion v. Board of Governor*. 316 F.2d 1229 (D.C.
Cir. 1975), the Court of Appeals identified three factors which might Justify a
dnding of ''closely related" status under the existing standard. These factors
are: <a) banks have in fact generally provided the service ; (b) banks generally
]>rovide services that are operationally or functionally so similar to the proposed
service as to equip them particularly well to provide the proposed service; and
(c| banks generally provide services that are so integrally related to the pro-
posed service as to require its provision in a specialized form." We understand
that the Federal Reserve Board has accepted this interpretation of the eitlsting
Ftsndard.

The current "closely related" standard is the product of a difficult legislative
compromise In 1070 between those who wished to limit bank holding companies
to "traditional" banking activities, and those who saw additional fie:clblllty as
potentially benefiting not only the Industry but also the consuming public. Just
how far afield tiank holding companies should be permitted to venture Is also
of interest from the standpoint of assuring bank solvency. Finally, and not
incidentally, it is of vital concern to those who see bank holding companies as
threatening potential competitors.

In 1970, the Department of Justice advocated increased flexibility for bank
holding companies in large part t>ecause of its promise of increased competition
in related areas. We continue to believe, as a general matter, that barriers to
entry into new fields should he erected, or maintained, only upon a showing of
clear need. Thus, white we would defer to the Federal Beserve Board for partlc-
ularicd comment on its experience under the "cloaely related" standard since
1970, we have serious concerns with any proposal which would severely tighten
the existing standard in the absence of a demonstration of general adverse effects
stemming from it. We think that this Committee and the Congress should refrain
from enacting remedial legislation solely on the basis of questions It may have

Digitized bvGoO^^IC

10

wltb Board dedslona and look Instead for adTerse experience under those decl-
sione. An appropriate remedy con only be created after a specific problem is
Identified. Speculative concerns grounded In the fear of new competition are not.
wltbout more, the kinds of problems this Committee should be concerned with.

Whether the amendments to the "closely related" test in Section 4(c) (8) wonld
in fact severely tighten the standard is. as I have indicated above, not certain.
However, the addition of the term "directly" and "necessary" might make ap-
proval of virtually any new activity most difficult. For example. It could be
argued that few. If any, activities whiiii are not part and parcel of the business
of banking Itself are a "uecessary" incident thereto.

Section 301(a) also amends the general "public benefits" standard of Section
4(c) (8) . Under present law the Board is required to consider whether perform-
ance of a proposed activity "can reasonably be expected to produce beneflta to
the public . . . that outweigh possible adverse effects. . . ." S. 72 would require
the Board to determine that a proposed activity "is likely to produce substantial
tteneflts to the public which clearly and signiflcantly outweigh possible adverse
effects." Once again, while the significance of these changes is difficult to assess,
their Intrat clearly is to alter and make heavier the burden of proof that must
be borne by proponents of bank entry into related activities under Section
4(c)<8).

Our comments on the approach we feel should be taken to severely tightening
the "cloeely related" test also apply here. Moreover, it should be remembered
that the present 4(c) (8) standard is a departure frmn the usual approach in
our economy which permits new entry Into an industry without an affirmative
showing of public benefit. Thus, Increasing the existing burden would represent
an even greater departure from normal competitive policy. We do not here
question the concept of a "public benefits" test In the case of bank holding com-
pany expansion into related activities (and Indeed the Justice Department sup-
ported this ai^roach at the time of the 1970 Amendments) ; however, the exist-
ing burden should be Increased only if Congress affirmatively finds that the
present standard has resulted in actual and significant adverse effects to the
public as opposed to simply fear of new cranpetltion and the possible "adverse"
effects that might have on specific companies. At the present time, we are aware
of no evidence of such harm to the public.

Section 301(a) also makes changes In the specific examples of "benefits to the
public" and "possible adverse effects" presently contained in Section 4(cK8).
For example, the terms "increased competition" (In the list of benefits) and
"decreased competition" (In the list of adverse effects) would be changed to add
the words "over the course of time." Apparently, this is a response to the ai^u-
mcnt of opponents of bank holding company expansion that, while new entry
might increase competition in the short run, the power and resources of com-
mercial banks will inevitably lead to their domination of a proposed activity in
the long run. The bill would also require the Board In specific cases to "take Into
consideration the relative economic size and market power of the bank holding
company and that of those wltb whom the afHUate would compete."

One amendment with which we are particularly concerned would delete the
current direction to the Board to appropriately recognize the competitive bene-
fits of de novo entry, as opposed to entry by acquisition. The Department sup-
ported this current provision vigorously In 1070^ and opposes Its deletion now.
TTie competitive concerns which must be dealt with whenever significant mer-
gers or acquisitions are proposed are comparatively more serious than those
presented by de novo expansion. Conversely, de novo entry promises new com-
petition, spurred by a firm's desire for success sufficient to Justify its Investment.

While we would defer to the Board on the actual effect of all of the proposed
changes, we believe that the Board should be and already is looking to long-
run effects as well as shori-term ones and to the general competitive structure
of the Industry Involved In applying the present standards. More signiflcantly.
we think that the effect of all of the proposed changes would be to increase the
burden on both proponents of new entry and the Board, strengthen the posi-
tion of opponents of holding company expansion, and thus make much more
difficult the approval of specific activities under Section 4(c) (8>. Although we
are not prepared to debate the merits of each particular decision of the Bosrd
imder the present 4(r) (8) standard, as already noted we are unaware of actual
evidence of adverse harm to the public whirti would justify the highly restric-
tive approach of Section 301f a) of the bill.

Digitized bvGoO^^IC

8 procedural aspects of bank bolding company exitanalon.
SecUtMi 601 <tf 8. 72 would make a nomber ta procedural changes in tbe handling
of Sectitm 4(c) <8) applications by the Board and in judicial review of Board
mlea and ord»% Section 70t wonld grant standing to any Interested person to
petition the Board to modify or rerolie 4(c)(8) ruleB or ordera. In geneisl, we
defer to the Board on the effect tbat these changes would have on the present
^ocedutes ntlllsed in rerlewliig Section 4(c) (8) applications. We would offer
aome broad comments on theae mroviedons.

Under existing Judicial interpretatlcm,'* wblch we understand has been ac-
cepted by the Board, a tnll Administrative Procedure Act type hearing Is
required where there are material facts in dispute In the case of an appUca-
tl<m for permission to engage tn related actMUee. Where the Board acta through
nUemaking to determine whether an activity is "closely related", the Board need
not bold a formal hearing. Section 601 would subject both rulemaking and ad-
judication of spedDc appUcatlone to a requirement that the Board act on the
record after <vportunity for a full AdmlnlstratlTe Procedure Act bearlQK. Judi-
cial review of Board mlea as well as orders would be under a "subBtandal evld-
race" test In addition, any party partidpatInK in a hearli^ could discover any
non-privileged documenta or information from the Board or an applicant and
could require that the Board undertake stndlea to provide any absrat relevant
information.

These requirements obviously would place a aubstantlBl additional burden on
the Board. In the case of rulemaking, the full bearing requirement represents a
Bignlflcant departure from current law and practice. In many Instances, a rule-
making aitnatlon may not warrant a full hearing because it is baaed only on
"leglalatlve facts" and Interpretations of law, and does not directly affect tbe
rights of Individual parties. On tbe other hand, we recognize that rulemakings,
as well as adjudicatory proceedings, can involve controversial fact attnatlons
and can have a significant effect on the prospects for Indlvidnal Section 4(c) (8)
appUcattoDS. "nierefore, we are unable to precisely assess tbe likely competitive
or substantive effect of tbe procedural changes contained in Section 601. We do
bdleve, however, that regulatory processes should be no more burdensome than
necessary to accomplish a legitimate regnlatory objective. We would recommend,
therefore, that these changes be adopted only if ttie present procedures in fact
are Inadequate to provide a fair opportunity for the presentation of all relevant
facts and views, and it tbe changes do not create slgnlflcant new barriers to ap-
proval of holding ctnnpany entry into related activities which are In the public
Interest

Section T(a prorides that any interested party may petition the Board "to
consider the issuance, amendment, or revocation of an order or regulation"
promulgated under Section 4(c) (8). The Board may determine whether to grant
tbe petition in whatever fashion it deems appropriate. One purpose of this pro-
TlMon apparently is to permit challenges to continuation of previously approved
actlritles which may not meet the new standards contained in Section 301 of
tlie bllL" In addition, however, Section 701 carries the potential to tie up the
Board In endless relitigation of deddons made under Section 4(c)(8). Whatever
the ultimate determination as to the appropriateness of bank holding company
expansion Into related areas, we believe that finality of litigation ie a value which
should not be lightly discarded. We question whether creating a new right to
petition for unlimited review of dedslona In the manner of Section 701 Is likely
to produce benefits which outweigh the costs which will be Incurred in handling
■udi pedtiouB, botb at the Board and in the District Courts.

In summary, S. 72 deals with a number of highly important and controversial
ISBuea concerning competition In banking and related sreaa The prorisions which
would place certain limits on additional expansion of banking activities through
mergers and acqaisitions represent one approach to a problem which requires
careful consideration. The proposed changes to Section 4(c)(6) of the Bank
Holding Company Act raise doubts as to their necessity or desirability, and

(D.C.

idepcndent Bankers Aieodatioii of OMrtlB v. Board of Oovemon. Slfl F. 2d 130S

™.. .«.,., . n.. ^^ Qg^ y Board of Qovemorfc B17 P. 2d 803 (Bth f'— ""-• ■

Inc. V. Board of Ooveraora, 000 F. 2d 20 (Stfa Cir. l:

S01(b)(l) doe* provide ■ limited "gruidrather" pi

br a bank balding campanv prior lo November 1, 197S, bi

^ (^ » . _, .^ ^^^

■■We note that Section S01(b)(l) doea provide a limited "grandfather" provlaloD foe
tiTltl** encaged in tv a bank balding company prior lo November 1, 197S, bat doea not
rmlt ""the ■com or alM (ia terma of volume of buaineia) of tbow artlvltlM to expand to
7 atgnlAcant degrea."

D„ii„.db,Go(5glc

12

should be adopted only If Uiere Is clear evidence of tbeir need. Any such changex
to Section 4(c)(8) should be speriflcall; tailored to deal with the perceived
problem without tinposinK nnnecessarf btirrlers to new entry.

Mr. Chairman, this concludes my proposed etatement. I would be pleased to
respond to any questions the Committee may have.

The Chairmax. Mr. Shenefield, you support the provisions in this
bill which would give the agencies authority to deny anticompetitive
mergers in cases where the existing antitrust laws are not violated?

Mr. Shenefield. That's correct.

The Chairman. You indicate that this provision would eliminate
what you call "forum shopping." I don't understand that term. Can
you explain how forum shopping would work ! What does that mean ¥

Mr, Shenefield. Well, as we understand it, bank holding companies
and banks in general may predetermine a particular regulatory agency
that will review a merger by fashioning the transaction in such a way
as to have it wind up as within the jurisdiction of the FDIC or the
Comptroller of the Currency or the Federal Reserve Board. Our
thought was that to the extent that uniformity can be introduced into
the regulatory procedures involving these agencies the de^iirability of
forum shopping from the point of view of banking would be

The Chairman. So this is one additional advantage of that partic-
ular provision. It would eliminate that shopping around wherever
they can get the best break.

Mr. Shenefield. Yes, sir.

The Chairman, I'm going to ask Mr. Marinaccio to follow up on
that. He had a point.

Mr. Marinaccio, I would just inquire as to the best way to insure
that regulatory uniformity in view of the fact that competitive factor
reports are now distribut«d among the agencies and there is now a
lack of uniformity. Can you recommend any way in which to insure
uniformity among the agencies perhaps short of unifying the three
agencies?

Mr. Shenefield. As I understand the ruling of Washington Muttud,
it applies only to the Bank Merger Act and there is to some extent an
open question about whether the rule would apply to decisions by
other agencies under other statutes. As my statement indicates, some
forum shopping is inevitable, due to the nature of the decisirai, and we
don't think that reversing the Washington Mutual rule would in-
crease the problem. For Congress to establish a clear rule reversing
Washington Mutual that would be applicable across the board would
at least to the extent itsel f promote uniformity.

The Chairman. You say if a percentage ceiling on mergers is adopted
and one provision of the bill is that we provide a 20-percent limit-
grandfather in tihose holding companies that have a larger share, but
we have a 20-percent limit on the additional acquisitions within a
particular State — 20 percent of the total deposits in that particular
State — it could be under the control of a specific one holding company.
Now you say if the percentage is adopted Congress should consider a
ceiling lower than 20 percent, and yet in your analysis of this you
seem to indicate that there are arguments on both sides — that this
isn't something on whioh we should come down very hard. There are
good arguments for it and good arguments against it, and you surprise

Digitized bvGoO^^IC

13

me by coming in and saying that something may be more restrictive
and lower than 20 percent might be appropriate. I'm not sure I follow
your reasoning on that.

Mr. Shenefteld. Well, Senator, it's an extremely intricate and diffi-
cult problem. It seems to me that the policy benefits and detriments
are difficult to weigh, at least in the absence of any very precise
analysis.

The ^atewide ceiling approach is the proposal embodied in S. 72.
We were attempting to call to the attention of the committee what we
considered significant possible disadvantages of such an approach, but
in the event that the approach is adopted by the committee to ofifer
perhaps a refinement in that a lower number might be appropriate.

The Chairman. Would you refine it further — you pointed out that
in some States it's more appropriate than others. One obvious element
that might be considered is the size of the State. Obviously 20 percent
in Idaho is not like 20 percent in New York or California. Would that
be a possibility — ^that you would have a lower percent in a very large
State than you would in a very small State?

Mr. Shenefteld. Yes. It seems to me that would be entirely
appropriate.

The Chaikhan. Now you say that our banking system "is also
marked by significant concentration among the largest banking orga-
nizations on a statewide basis." What is your view of the effect on
competition and on the consumers in the marketplace in concentrated
markets ?

Mr, Shenefield. It's difficult to answer that question in general. One
has the normal rather theoretical concerns about competition in that
sort of a situation. One also must note the particular aspects of the
banking industry, by which I mean that the pool of potential entrants
that would deconcentrate individual local markets is in a sense limited
by State lines. In addition, there are a variety of State regulations and
laws that make it difficult at least in some States for banks to move
across the State, across the county lines or in some States branch at
all. So I guess that there are at least two major effects on competition
of that sort of concentration. No. 1, you may well develop a kind of
shared monopoly— that's the phrase we have used — ^and an interde-
pendent oligopoly approach to pricing and services that would be less
competitive than a more deconcentrated industry. Second, because of
the existence of Stat« lines and the relatively limited number of
potential entrants in at least some States and the potential for decon-
centrating those markets does not exist.

The Chairman. But since many markets are concentrated and anti-
competitive, don't we need a percentage limitation on mergers as one
tool to control increasing concentration ?

Mr. Shenefield. It seems to me if despite the qualifications we have
suggested and the theoretical difficulties we have suggested the Con-
gress adopts that route, clearly one of its major benefits would be to
put a ceiling and deconcentrate — prevent the increasing concentration
of such markets.

The Chairman. You recommend that if a percentage ceiling on
mergers is adopted "that a convenience and needs standards be in-
cluded as an exception." Now the lejj^slation already has in it an excep-

DigilizedbvGoO^^IC

u

taon for failing banks. How much further would you expect your con-
venience and needs exception to go i

Mr. Shenefteld. It seems to me that one major benefit of it might
well be to permit acquisitions that would move the percentage only
slightly beyond whatever figure the Congress chose, yet have procom-
petitive effects in local markets. That is to say, if Congress chose the
20-percent figure and there were an acquisition that would move the
percentage of that bank— the resulting combination — to 20.5 but did
so for what are judged to be very good reasons short of the failing com-
pany situation, such as allowing foothold entry into a concentrated
market, a convenience and needs defense would at least be a regulatory
outlet f or brinpng those kinds of judgments into play.

The Chaibhan. Jjet me ask you about what you called your philo-
sophical skepticism about limiting competition. I can understand that.
After all, you are head of the Antitrust Division of the Department
of Justice and your responsibility is to fight for competition under
almost any circumstances, but I tliink you have to recognize that here
when banks move into competition with auto leasing firms, for exam-
ple, and banks move into competition with securities firms, when banks
move into competition with insurance firms, they come with a very,
very sharp advantage that may not be fair. They have capital. They
have capital at a time when capital may be the principal ingredient
that's most important in whether or not a market can move and expand
and ejow and so on.

When I talked to auto lessors in Wisconsin^ — and I'm sure Senator
Sparkman may have had this experience in Alabama— they are pretty
desperate. They just don't see how they can survive if the banks are
going to get into that business with them because their position is so
feeble compared to the banks from a capital standpoint. They may be
far more expert. They may do a much better job in knowing the busi-
ness. That may be something thev have done for Ifl or 20 years and
they may do it extremely well. When the bank comes along with a
capital advantage — and capital is hard to get — why shouldn't that be
a consideration confining banks to banking!

The general feeling about the Glass-Steigel Act that was passed
years ago after the very serious problems we had in the 1920s and
early 1930's in the stock market with banks getting into investment
banking — banks being in investment banking the way they were —
seems to have been healthy, seems to have been good from the stand-
point of keeping the banks sound and responsible and credible and
also certainly in my view at least the investment banking industry
hasn't suffered, and confining banks to this particular area where they
are so good and where they have the expertise seems to have been a
wise policy.

Do you recognize any of that in your position you have taken ?

Mr. SiiENEFiELD. Yes, we do. First of all, I concur fully in the con-
cern that you have voiced about the enormous power of financial in-
stitutions and banking in general to move into related areas, and you
simply can't read tlie history of this country in the 1930's and not
have a lingerine concern, a residing skepticism about whether it is
alway.s appropriate for tliese institutions to move freely and without
control into related or unrelated areas.

Digitized bvGoO^^IC

I had thought that the language that was incorporated in section
4 (c) (8) and the balancing that was required which specifically, bs I
recall, mentions unfair competition, on the side of adverse effects,
might have been sufficient to deal with particular problems and per-
haps it has not been in the view of the Congress. Outside what I have
called in shorthand the target industries — outside the industries into
whose maiitets banks have moved as related activities, there hasnt
been a lot of complaint as nearly as one can tell.

The Chairman. Well, I wonder about that. Do you really get com-
plaints from customers under those circumstances? Aren't the people
who are likely to make the case — isn't it predictable that the people
that are goinjt to make the case are the people whose ability to com-
pete has been injured ? Don't you traditionally find that ?

Mr. Shenefizij). I agree that they certainly would make the case.
It's only because their own self-interest is so clearly involved that I
counsel an attitude of skepticism in evaluating the facts that underlie
the case. It would be helpful and reassuring if there were corrobora-
tive complaints from customers whose own business firms weren't ad-
versely affected competitively by this kind of entry. That was all I was
suggesting. We are not clearly experts in the banking business, shock-
ing as that may seem to some of the people who have received the bene-
fit of our liti^itiv© efforts. We tiy in the best way we possibly can,
however, to offer a mode of analysis and the mode of analysis I would
suggest here is that you bring to the complaints of the insurance people
and the travel agency people and the other people who are seriously
concerned simply a skepticigm. You require them to make the case.
In effect, you put the burden of proof on them to show that there is
competitive harm rather than on the banks to show that there is com-
petitive benefit before seriously tightening the standard. I guess that's
what I would suggest because what you're doing is making it difficult
for firms to move into new areas where competition might be a good
idea. That's all, and that's a very philosophical view I readily admit.

The Chairman. Senator Sparkman.

Senator Sparkman. No questions at this point, Mr. Chainnan.

The Chairman. Thank you very much, Mr. Shenefield, for a very
impressive presentation and for your excellent responsiveness to our
questions.

The next witness is the Honorable Philip E. Coldwell, Governor of
the Federal Reserve Board, who's always an impressive witness for
this committee in the past. Mr. Coldwell, we would appreciate it if you
could abbreviate your statement and if you do we will have your state-
ment printed in full in the record. Go right ahead, sir.

STATEKEHT OP PKU.TP E. COLDWELL, GOVERNOR, FEDERAL
RESERVE BOARS

Mr. Coldwell. Thank you, Senator.

I will attempt to abbreviate the statement, assuming that the full
statement will ^o into the record. I would like to concentrate my initial
remarks on basically the first seven pages of the statement and then I
will quickly summarize the last few.

Digitized bvGoO^^IC

[Complete statement follows :]

f GOVKBNOBB OF TBE

Mr. Cbairman, I am pleased to appear before thla Committee on behalf of the
Board of Governors to teaUfy on S. 72, the Competition in Banking Act of 1977.
This bill would have far reaching Implications for the regulation of banking
atmcture In the United States. It atTects not only the standards and administra-
tive procedures employed by the Federal banking agencies In acting on proposed
bank mergers but also those applied by the Board of Governors In reviewing
proposed new activities for bank holding companies and deciding on particular
acquisitions. Before addressing the major substantive provisions In the bill, I
believe that It Is important to comment briefly on the four basic findings and
purposes of the bill which presumably provide the rationale for many of its
Bpeciflc provisions.

The bill's first finding is that there has been a continuing trend toward con-
centration of banking resources In the United States. However, recent Board
studies fall to indicate that there has been a significant trend toward Increased
concentration ot dom^Stki banking resources nationally, statewide, or in most
of the country's 400 most significant local banking markets. In fact, concentra-
tion appears tn be declining.

For example, at the national level between 1668 and mid-19T7. the 10 largest
banking organizations' share of domestic deposits declined from 20.4 percent
to 18.3 percent and the top 35's share dro^ied from 31.9 percent to 28.0 percent.
The 100 lar^st organizations' share declined from 49.7 percent to 45.0 percent,
over this period. A similar pattern Is found at the statewide level. Moreover, It Is
important to note that the most concentrated states — all of which permitted
statewide branching — typically had declines In concentration. ( See attached
table) . The results of our review of over 400 local markets, including 213 SMSAs,
tietween 1966 and 1975, Indicate that the majority tended to become less concen-
trated and to exhibit a more competitive structure Irrespective of the measures
used. We also note that even these flfrures tend to overstate concentration since
they do not refiect the rapid growth of bank type activities at savings and loans,
mutual savings banks and credit unions. Tn many states, thrift Institutions now
provide substantial competition for commercial banks.

The sharpest growth In our largest banking organizations has been In the
foreign sector ; and it is only when deposits held abroad are Included that there
appears to he an Increase In banking concentration. While It might he argued
that foreign financial activities of U.S. banks contribute to their overall economic
power, this argument is not particularly germane to the proposed bll! which
focuses on dntnestlc and not worldwide concentration and competition.

The second finding of the bill points to the fact that an Increasing portion of
the Nation's banking resources have come under bank holding company controL
The registered hauk holding company share of domestic U.S. deposits did increase
from 16 percent In 1870 to 70.8 percent In 1977 but about two-thirds of this
Increase resulted from the Inclusion of over l.IOO one bank holding companies
under the umbrella of the Act In 1971. This Includes 16 of the Nation's 2.1 largest
Imnks. Also, It is important to note that while bank holding companies account
for 70.8 percent of domestic hank deposits, all but about 8 percent of these
deposits are in the lead banks of holding companies. Thus, expansion of bank
holding companies' share of deposits has been due principally to conversion In
the legal status of existing banking organizations to the holding company form
and not to acquisitions of existing hanks by multi-bank holding companies.

A third finding of the bill Is that hank holding companies have expanded into
activities beyond those directly related to banking. Specific activities cited are :
insurance agency and underwriting services, leasing, accounting, travel, and
courier services; management and data processing services ; and marketing
securities. While these descriptions do not comport with the list of permissible
activities Issued by the Board, several points are worth noting with respect to
this general finding.

In administering Section 4{c) (S), the Board has generally determined various
activities to be "closely related" to hanking If they satisfied one or more of the
following four criteria :

(1) The activity was one in which a significant number of banks have
engaged In for some years (e.g., trust services) ;

Digitized bvGoO^^IC

17

(2) IJie activity Involvee either the acceptance of deposits or lending (e.g.,
conanmerfliiaiira companies) ;

(3) The activltf is complementary to the provision of a banking service
(e.g., acting as an insurance agent for credit related poticles) ;

(4) The activity is one in which banks possess considerable expertise
(e.g., data processing for banks) .

So far, the Board has only approved 17 activities as being permissible for bank
holding companies — 12 by rulemaking and 5 by order. An additional 11 were
denied, Including travel agencies (mistakenly mentioned above in the Bndings
(tf the bill aa an approved activity) as well as property management, real estate
brokerage and operating a savings and loan association. Generally, activltiea
approved, except nnderwritlng of credit life Insurance, were, in fact, permlsalble
activities for national banks or their subsidiaries at the time they were au-
thorized. Moreover, the Board did not provide for carte blanche entry into those
activities as is implied by the findings of the bill. In many cases, the activltiea
were severely restricted to those that are bank or finance related and. In some
instances, such services may only be provided to a customer In connection with a
bank related service (such as the sale of credit life insurance).

Furthermore, hy far the largest number of bank holding company eipanslons
in the nonbank area have been de novo and not by acquisition ; over 3,100 de
novo nonbank notifications were received between January 19n-September 10,
1977 as compared with only 461 acqulsitioiiB of existing Arms approved by the
Board : 54 applications were denied.

Finally, despite the number of acquisitions acted upon by the Board and de
novo notlflcatlons received, nonbanking assets still account for less than 4 per
cent of bank holding company assets. In view of these considerations, we question
whether this finding of the bill describes a development of any real significance
to the economr.

The fourth finding is that credit resources of the Nation have l>een mlsal-
located by bank holding companies. The basis of this finding Is not stated and
Is unclear. Objectively, there appear to be several reasons why bank holding
comi>anieB might be expected to facilitate a more efficient allocation of credit.
Bank holding company expansion In restrictive branching states, together with
the provision of various bank type lending services on an Interstate basis through
nonbank affiliates, probably has resuite<1 in increased competition in local and
regional markets and has facilitated inter-reglonal credit flows. Both could be
expected to provide more rapid and efficient allocation of loan funds geograph-
ically. Similarly, the ability to attract funds from cheaper sources through the
debt and equity markets, particularly during periods of tight money, may have
moderated financing pressures on holding company banks and helped maintain
their ability to accommodate credit demands.

The causal factors cited In the bill for such misallocatlon of resources are
that the Federal Reserve has not adequately protected the public Interest in
approving activities In which bank holding companies could engage and has not
maintained continued oversight over the activities of bank holding companies In
a manner which protects the public interest. In my view, the facts would not
support either finding. A review of Board orders issued !n connection with
action on applications clearly demonstrates that all statutory factors. I.e., com-
petition, convenience and needs of the public, and financial and managerial
resources, are carefully weighed. In the area of public benefits, the Board has
taken definitive action such as obtaining commitments for reduced rates on re-
insurance activities. With respect to financial considerations, the Board has long
held to the philosophy that bank holding companies should serve as a source
of strength for their subsidiary hanks. In many Instances, the Board has obtained
commitments from holding companies to supply additional capital to their
subsidiary banks and has urged that nonbank subsidiaries be adequately capi-
talized. In 1974, when certain banking firms began to experience sharp Increases
in problem loan sltiiations, the Board instituted a go-slow policy with respect to
further expansion. Consistent with this policy, the Board has denied a number
of applications, some for the Nation's largest banking organizations.

Since 1970, the Board has taken a number of steps to improve its ongoing
sarveiliance and supervision of bank holding companies. For example, as a
supplement to Its other surveillance activities, the Board recently announced a
new inspection program whereby most large bank holding companies will be
subject to an on-site inspection annually. The Board also collects detailed in-

DigilizedbvGoO^^IC

18

formation on Intra-holdlnK company transectlona wtalcli are rontinel]' monitored.
Additionally, recent changes in the reporttnf; forms for banks bave been instituted
and special emphasis is being placed on the analfsia of foreign operations and
risk exposure of large organizations.

As my comments suggeat, our review of the facts reveals little in the way of
evidence or analytical support for the bill's fonr principal findings. This gives
rise to a general conclusion on the part of the Board that the actual adverse
effects, which the bill seeks to redress, are smalt. The Board feels that restric-
tions should not be imposed nor regulation Intensified without demonstrated
need, especially when tbe longer run effects may t>e to inhibit competition, or
to protect eilBtIng firms from competitive forces. At the same time, we also
recognize that there may be some specific areas affecting the Federal regulation
of bank and bank hoMlng company structure which need review and the Board
would support Committee efforts in these areas. I shall now torn to the major
substantive features of the bill and our reactions to them.

The proposed legislation would establish an outright prohibition of any bank
merger or holding company acguisitlmi of a bank In which the resulting company
would control more than 20 per cent of the banking assets In any state. Ttie one
exception would be where the proposed acquislticm is necessary in order to pre-
vent a bank failure and no leas anticompetitive alternative Is available. The
Board questions the desirability of such an absolute limit, especially In view of
the wide differences In bank structrures In the various states and the lack of
evidence that there has been a trend towards concentration of resources at the
statewide level. We are particularly concerned that such a limitation would
have the anticompetitive effect of protecting some banks from actual competition
(a the threat of future competition that could result from relatively modest ad-
ditional acquisitions by large banking organisations. Undoubtedly, the effect of
the Instant legislation would also be to significantly inhibit the growth of some
hanking organizations by even the de novo route. The Board believes that there
are few Instances when such expansion would not be procompetltlve and to re-
strict de novo expansion would not be in the public Interest.

The proposeid percentage limitation, as drafted In terms of total assets, would
also discriminate against those institutions which derive a significant portion <rf
their business assets from the national and international markets. These tnstltu-
tl<ms' domestic expansion by acquisition within a state would be curtailed even
though they might hold a significantly smaller proportion of the business originat-
ing within the state than other smaller iDstltutions. The focus on bank assets also
overlooks the fact that expanded powers of nonbank financial Intermediaries.
such as thrift Institutions, are blurring the distinction between banks and these
Other Institutions end are Increa^ng competition In the markets for some banking
services.

Should the Congress choose to adopt such a percentage limitation, the Board
believes that it should be based on domestic resources. However, because of the
uniqueness of each state, the Board strongly feels that no single percentage figure
would be appropriate. Use of a single figure would ignore Important factors such
as (a) the number and powers of competing Institutions operating in each state,
(b) their size distribution, (c) the general economic environment In each state
and (d) restriction on branching and geographical expansion. Federal imposltloit
of an overall constraint would Interfere with the right of a state to decide what
type of structure best meets its needs. The Board feels that the present case-by-
case approach better serves the public interest, since it provides the Board the
needed flexibility to weigh the unlqne competitive, structural and other Impor-
tant factors associated with a given state.

Despite concern for the bills asset limitation, which the Board opposes, there
are several other provisions pertaining to bank mergers and holding company
acquisitions of banks which provide usefnl clarifications of existing law. In
particular, the Board favors those provisions which permit denial of acquisitions
even when the level of the possible anticompetitive effects does not constitute
violation of the antitrust laws or the 20 per cent limitation, if the responsible
agency believes that the proposed acquisition would not be in the public Interest
and the anticompetitive effects are not clearly outweighed by the probable con-
sequences for community convenience and needs. This feature has the desirable
effect of clarifying that competitive considerations should dominate the banking
agencies' decisions on proposed acquisitions.

As currently drafted, S. 72 would result in major changes in Section 4(c) (8)
of the Bank Holding Company Act, which governs the nonbanking activities of

Digitized bvGoO^^IC

19

hokUsK companies: At present, bank holding company propoBale to engage in
aonbanldng activities must pass two tests— the "closely related" teat and the
"public benefits" test. S. 72 would make both tests more stringent.

The "closely related" test now contained in Section 4(c)(8) requires that a
proposed activity be ."bo closely related to banking or managing or controlling
banks as to t>e a proper incident thereto." In contrast, S. 72 would require tbat
s proposed activity be "so closely and directly related to banking or managing
or controlling banks as to be a prop&T and necessary Incident thereto." It is not
clear what these additions would mean for the "closely related" test. One possi-
bility Is tbat it would limit permissible 4(c) (8) activities to "banking activities",
tliat is, activities in whch banks themselves generally can engage. If so, the
ezsting list of permissible activities would not be greatly affected, since banks
can now engage. In most of the present 4(c)(8) activities, including such Im-
portant ones as mortgage banking, consumer tending, leasing, factoring and
data processing. But there are other possible Interpretations of the prcqwsed
wording changes In the "closely related" test, and these different interpretations
conld have significantly different effects. In any event, the Board iDdleves that it
Is important to draft any wording changes in the "closely related" test so as to
minimise subsequent controversy over the meaning of the test.

The Board also believes tbat there should be no changes In the "closely related"
test witbout a thorough review and analysis of the Impact that bank holding com-
panies have had In the various noobanking areas since the passage of the 1970
amendments. As the Committee Is aware, the Board's staff Is nearlng completion
of a comprehensive review of recent research on all aspects of the bank holding
company movement. The Board believes that this study, as well as all other
available evidence, ^ould be carefully reviewed and considered before changing
the present standards for permissible actlvltlea .

The provisions of S. 72 would also alter the "public benefits" test of Section
4(c)(8), making It substantially more stringent. The present iStatute requires
that a proposed activity "can reasonably be expected to produce benefits to tbe
public that outweigh possible adverse effects." 3. 72 would require that the
activity "is likely to produce substantial i^enefits to the pilblic which clearly and
significantly outvre]^ possible adverse cfTects." The specific factors to be con-
sidered In determining the substantial benefits and adverse effects would also be
expanded.

The Board believes that the meaning of the proposed "public benefits" test
Is Ukely to produce controversy. But more Important, the Board does not believe
tbat the proposed public benefits test would serve the public a^ well as the exist-
ing test, tinder the proposed test, the Board would have to deny nonbanking
significantly outweigh possible adverse effects." The specific factors to be con-
benefits wonld only slightly outweigh adverse effects. In contrast, the Board
can approve aucb applications under the present standard. The Board sees no
reason to den; the public the opportunity to derive bencQts when there Is a
reasonable probability that these benefits, on balance, will outweigh any adverse
effects.

8. 72 would provide grandfather rights for bank holding companies engaged
In nonbanking activities tbat wonid be made Impermlssilile by the bill. If S. 72
Is enacted, the Board would strongly support grandfather provisions, but would
nrge that the effective grandfather date be the date that the bill was Introduced
in the current Congress, rather than November 1. 1975, as proposed In 8. 72.
Also, we would suggest the elimination of the provision In S. 72 that would
prevent a holding company from Increasing to any significant degree the volume
of bosiness of a grandfathered nonbanking Rubsidiary. Such a provision would
tend to discourage the holding company subsidiary from competing aggressively
and meeting the needs of the public.

The bill also specifies that the Board shall require that bank holding com-
panies and their subsidiaries be capitalized and otherwise financed In a safe
and sonnd manner. Certainly this objective cannot be eritlclzed. However, it
should he recognized tbat the Bank Holding Company Act already requires the
Board In bank acquisitions to "take Into consideration the financial and man-
agerial resources and future prospects of the company or companies and the
banks concerned." Similarly. Section 4(c) (8) of the Act requires the Board to
consider such possible adverse effects as unsound banking practices In nonbank
acqalBitions. In carrying out both of these charges, the Board carefully considers
the capitalization end overall financial condition of the holding company and Its
tmbsldiaries. Fnrthermore, as part of its ongoing responsibilities for supervising

Digitized bvGoO^^IC

20

baok holding companleB. the Federal Reserve conducts inspections of the parent
companies and their nonbanklng subsidiaries, examines sub^<Ilarr banks that are
State member banks, and reviews the examination reports of other subsidiary
banks that are examined by either the Comptroller of the Currency or the FDIC.

The bill also spectfles that the Board require bank subsidiaries to refrain from
discriminating in favor of their parents and nonbank affiliates In making loans or
establishing terms and conditions of credit. The Board agrees that the practices
referred to are lDH>r(^>er If the terms or conditions of the loan are more favorable
than the bank would make to a non-aSlllated borower of comparable credit worth-
iness. Bnt we omHise the provision with respect to the making of loans to sub-
sidiaries which could have the effect of unduly restricting the flow of funds
within the holding company organization. At present. t>ank examiners closely
review hank loans to affiliates and will criticize a loan to an affiliate made on
preferential terms that are adverse to the bank. It should also t>c noted that bank
loans to holding company affiliates are covered by Section Z3A of the Federal
Reserve Act. This Act places quantitative limitations on such loans, as well as
requiring that all loans be full; secured by high grade collateral. Indeed, the
collateral requirements on bank loans to affiliates tend to be significantly more
stringent than collateral provisions on bank loans to non-afflllated borrowers.
The Board feels that a better way to deal with transactions involving Intra-
company fund flows Is through Section 23A. In this connectimi, a new proposal to
modernize and strengthen Section 23A has been completed by the Board and Is
being transmitted to Congress.

S. 72 contains a provision that would require each l>auk holding company to
submit to the Board each year a report detailing the terms and condltlcms of all
Intra-conqmny loans and investments. Moreover, the Board would be required to
make such reports available to the public. The Board does not believe that these
provisions are necessary. First, the Board is already receiving an Intra-company
transactions report on a quarterly basis from medium and large size bank holding
companies. Second, bank examines carefully review transactions between bank
BubBldiaries and the rest of the holding company system, and the Federal Reserve
now periodically inspects the financial affairs of parent companies and nonbank
subsidiaries. In the Board's Judgment, these examinations and inspections, along
with existing reports, supply the supervisory authorities with sufficient informa-
tion on Intra-company transactions. In addition, the potential reporting burden
associated with such a pr<q)oeal would be substantial, especially since most intra-
company transactions Individually would not be material. The general problem
of the appropriate level of public disclosure of insider transactions, of which
Intra-company transactions are a subset, is currently under review by the SEC,
the accounting profession, the hanking agencies, and Congress. We believe it pref-
erable to waft until the general Issues have been resolved before legislative re-
porting In this area.

Turning to that portion of Ihe bill dealing with administrative procedures and
Judicial review, the Board strongly objects to the proposals contained In Sec-
tion 601. These proposals represent a st^ backwards to the burdensome and
time-consuming procedures uf the Bank Holding Company Act prior to the l&TO
Amendments. Section 601 would depart from the basic concept of the Admin-
istrative Procedure Act emI>odled In the Board's current procedures by requiring
a formal hearing for the Issuing of new regulations and for «ll individual case
determinations.

We believe that the precedents In administrative law clearly demonstrate that
the public Interest Is best served by avoiding the cumliersome procedures of
formal adversary hearings except in tho^e Instances contemplated by the Admin-
istrative Procedure Act. In connection with rulemaking, the experience of those
few agencies that have used formal bearings as opposed to Informal proceed-
ings has been that such rulemaking proceedings are unreasonably lengthy. At
a time when the Government Is endeavoring to accelerate the decision making
process within administrative agencies, the proiposal would impose the burden-
some procedures of formal rulemaking and its attendant formal hearings upon
a type of decision making generally recognized by the Administrative Procedure
Act and the courts as not requiring an adversary type proceeding.

Tlie Board's present procedures provide OKwrtunlty for the presentation of
views by Interested parties. In situations where facts are in dispute, the Board's
procedures currently provide for a formal hearing, after which the case Is
decided on the basis of the hearing record. Where no such disputed facts exist,
there Is no need for a formal bearing. Section 601 would eliminate ttala adminis-
trative flexibility to the detriment of the public interest.

Digitized bvGoO^^IC

Wo are equally concerned with the provisions erf SectlMi 701 that would re-
qnlre the Board to procesH a petition to commence a proceeding to consider the
Ismiasce, BmeDdmeot or repeal of any order or regnlatlon relating to nonbank
aetivltle«. We note that under the Administrative Procedure Act any person
already has the right to petition the Board for the adopUon or amendment of a
repilation. Aditlonally. we believe that the procedure established to challenge
the cq>eration of individual companies would provide a continuing possibility of
attacks on a bank holding company wishing to engage In a bank related activity,
nils possibility could deter many bank holding companies from engaging in non-
banking activities or seriously Impair their nonbanking subsidiaries' abHitiea to
compete vrith unaffiliated companies engaged in the same activity. Such an out-
come wonld tend to reduce competition and Innovation in bank related fields, and
amid hardly be in the public interest.

PERCENTAGE OF DOMESTIC STATEWIDE COMMERCIAL BANK DEPOSITS IN 3 lAAGEST BANKING ORGANIZATIONS

+1;!

D„ii„.db,Go(5glc

22

Mr. CoLDWZLU IncideatallT, as the Senator knows, we are in the
process of finishing up a study of the bank holding company move-
ment. We expect to complete it the latter part of this month, and some
of the resulte may bear closely on the question of the definitions in
these tests. So we would suggest that Congress await the results of
the study since it is so close to being completed, before legislating on
this matter.

The Chaibkan. You say the latter part of this month that will be
available f The study will be completed f

Mr. Cou>WELL. We promised, I believe a date of March 31, Senator,
and we plan to meet that date.

Regarding the grandfather test, the only comment I have made there
is I would hope tBat if you le^late you would make the grandfather
date the date of the introduction of this bill in the current Congress.

With regard to the report on intracompany loans and investments,
the testimony does point out that we already have intracompany trans-
action reports which we monitor continuously. We don't think addi-
tional requirements are needed in this field.

Finally, I'd like to make just a couple comments about the admin-
istralive procedures required by the bill. We have adopted, following
the passage of the 1970 amendments a procedure according to the
Administrative Procedure Act by which formal hearings are held only
when there are disputed facts in the case. We have found this to be
an efficient and effective way of handling these procedures. We would
be considerably disturbed if the Congress thought we had to go into
a formal hearing for every acquisition or every challenge made with
regard to the Board's rulings. We do provide arransements whereby
the views of interested parties are given a chance to oe heard, but the
situations where facts are in dispute are the only ones where we think
a formal hearing is required.

We are concerned with the provision of section 701 which would
require the Board to process a petition to commence a proceeding to
consider the issuance, amendment or repeal of any order or regulation
relating to nonbank activities. We think this could be a "go" sign for a
considerable amount of formal activity and we don't think it^ really
necessary.

I would close my introductory rranarks on that, Mr. Chairman,
and be pleased to try to answer any questions.

The CHAmsTAN. Thank you very much, Governor Coldwell, for a
very impressive analysis and you certainly went over the bill very
carefully and we appreciate that care and consideration you ^ve it.

First, let's start with the good news, and there is some good news
in your statement as far as the bill is concerned. You say the Board
favors those provisions of the bill which would permit tne denial of
an anticompetitive bank acquisition even if it does not violate the
antitrust laws or the 20 percent limitation set out in the bill. You say
that this feature has the desirable effect of clarifying a competitive
consideration should dominate the banking agency's decisions on pro-
posed acquisitions.

Mr. Coldwell. Right.

The Chairman. Now I appreciate your support for that provision
and I wonder if you could expand on your reasons for support a bit

Digitized bvGoO^^IC

more. For example, do you feel that some anticompetitive mergers
Iiave been approved for convenience and needs reasons that should
not have been approved !

Mr. CoLDWELL. I can't isolate any particular case for you, Senator.
I think there have been marginal or borderline situations where we
found the convenience and needs test did outweigh the adverse im-
plication, but we were uneasy about it. Normally we approve an appli-
cation if the convenience and needs test outweigh the anticompetitive
side.

We have been exercising judgment in these matters and we have put
that line, a rather broad bwid, in there and tried to exercise judgment
where we thought there were more significant elements which might
lead toward a denial even though we find some favorable consequences
tor the communities' convenience and needs.

These are not clear-cut cases all the time. In fact, most of them are
not. And our problem is to not only where are we today on competitive
needs, but where are we going to oe tomorrow? What will happen if
we permit the acquisition of a particular bank in a community and
that bank looks like it will provide a good competitive stance against
the other institutions within the community; but we look down the
road and say, "Well, now does this community need this kind of
muscle in its structure in order to maintain a competitive stance f Are
there adverse effects which we really can't measure too well on, say,
the profitability of smaller banks in that community ?" Tliese are tests
or problems which we face in trying to measure all of these. Even the
determination of the banking market becomes difficult for us some-
times. You get a large community, a standard metropolitan area, and
maybe that's a single banking market in our definition, but when you
get out into the suburbs maybe 10 miles from that central city limit,
do you have anotiier separate banking market? Well, there have been
some arffument that we ought to treat this as accepted banking mar-
ket, but it's a part of a broad market and the people moving to and
from the central locations do have access to other banking communi-
ties in that whole market. It's been a difficult kind of determination
but one that we have worked hard on.

The Chairhan. You have worked hard on it and it may well be —
that I'm going to ask a question that doesn't pertain to this bill be-
cause I can't resist asking it from what you say. It may well be that
the present restrictions on entry are wise. If I want to start a haber-
dashery or a garage or any kind of a business like that, I'm free to go
ahead and do it and no regulatory agency is going to say, "You can't
do it because we think it would be too tough on the people who are in
the business now." Of course, as you know, small businesses are started
every day and many of them fail and many of th^n succeed as part of
the market apparatus, and it's part of the reason we have a very effi-
cient market system in this country. But banks have that protection
of convenience and needs and let me go a little farther.

Supposing we drop that entirely and permitted the basis on which
a hank would be permitted to operate on to be whether it had adequate
capital, whether it had adequate and competent leadership and man-
agement but not on whether or not it would have an adverse effect on
mea\ competition. What's your feeling about that? I think we ought

Digitized bvGoO^^IC

24

to be thinking about legislation like that. I'm not talking about this
particular bill. It doesnt do that. But whether we ouf^t to be think-
ing in that area, I have had a strong feeding that maybe our country
would be better served if we didn't provide thig protection for banlffi
and encouraged competition on any able, properly capitalized group
that wanted to establish a bank.

Mr, CoiJ>WELL. Well, you're going back to the heart of our problem,
Senator, Banks can't go into business without a charter. We don't do
this for the other types of firms which are allowed to go into business,
and allowed to fail. With very few exceptions, we have virtually ar-
ranged now, through FDIO assisted purchase and assumptions, that
banks are not liquidated anymore. Certainly there may be losses, but
not huge ones. We have had roughly 105 banks "fail" since 1960. But
there were very few of them where* the depositors were paid off and
the bank doors were closed. Mt^t of the time the bank is purchased by
another organization.

The idea of having this wide open to anybody who wants to come
in without a charter, provided only that the institution has adequate
capital and— I'm not quite sure how you do that because we haven't
been able to achieve it over many years of regulatory endeavor — has
some attraction to it. But there are also some risks because, we are
dealing with the public's money. This latter point convinces me that
we still ought to keep a fairly close rein on banking and depository
institutions.

The Chahiman, Now you take issue with the premise in the legisla-
tion that banking resources are becoming more highly concentrated.
The way you do it is I think very effective. I'm not sure that I would
buy the fundamental premise. You cite domestic deposit data to sup-
port your argument rather than the overall deposits. Isn't your
reliance on domestic deposits misleading? After all, when all deposits
are taken into account your concentration ratio has increased
markedly. For example, from 1950 to 1974. the 10 larger banks' control
of bank deposits increased from 19.7 to 28.9 percent— in other words,
from 20 to about 30 percent — while your fixed based only on domestic
deposits shows a small decline during the past 10 years. Shouldn't
we include all deposits in determining concentration ratios on the
grounds that all deposits represent the real competitive power that
a bank has in the marketplace and that in this day and ace we are
operating in an international basis and that if you talk about big hanks,
of course, that's where the action is. I notice that the eight biggest
banks in New York in the year ended last June 30 increased their
foreign loans by over 26 percent and they reduce their domestic loans
by 2 percent.

Now it seems to me that we should take notice of that. That's part of
the business, part of the power and clout that they have. They get
deposit.s from abroad. They can make loans wherever they wish. They
may choose, to make loans abroad or make loans here, but they have
that discretion.

Mr. CoLDwELi,. I won't disagree with yon that a strong international
department of a hank may give that bank a little more power. I think,
though, if you are looking at the idea of whether we ought to restrict
«Mnpefition or restrict access within the States, we ought to be looking
at State deposits.

Digitized bvGoO^^IC

26

The Chairuan. Before we get to that point, I think the thing to
look at is the concentration. Is there concentration or isn't there! If
you look at it overall on the basis of the total deposits, the concentra-
tion is there. You say it's not relevant because all we should really be
concerned about for this purpose is the domestic deposits.

Mr. Coii>WEiJL. Well, if we are talking about international competi-
tion, yes, we ought to include the international deposits, clearly. But
if we are talking about U.S. concentration, it seems to me we ought to
be talking about U.S. deposits. That was the whole purpose of the
analysis as we went through, of the 10, 25, and 100 largest organiza-
tions and we went through a similar analysis with regard to the per-
centage of domestic deposits for the 3 largest organizations. Again,
we show a slight diminution of their percentage of concentration.

The Chairman. But here what we're talking about, holding com-
|>anies, whether or not holding companies may be moving into a situa-
tion that may not be as competitive as it should be. It seems to me that
the power that these additional deposits that are received from other
countries are an element that shouldn't be completely ignored. You
shouldn't just concentrate on domestic deposits.

Mr. CoLDWELL. Well, I guess we have a difference in view on the
proper way to measure concentration. To me, concentration within
the United States should be measured on the domestic side.

The Chatrhan. Xow you also take issue with the Rnding of the
legislation that more and more banking resources are coming under
buik holding company control. You point out that most of this growth
has been in the one-bank holding companies, but bank holding com-
panies; do allow not only greater geographic expansion than banks
are allowed, but allow expansion into nonbanking areas. Aren't you
concerned with the concentration of the banking system into a bank
holding company system which has greater powers? If tliis expansion
is so healthy, why shouldn't the banks— why shouldn't Congress let
the banks do it directly ?

Mr. CoLDWELi„ The banks are doing a good share of what we ap-
prove for the holding companies. As I indicated

The Chairman. They are, but why reiiuire them to have any re-
struction at all? Why not let them — if the First National Baiik of
Chicago wants to get into these businesses, why have the First Chicago
Corp. as the means by which they can do it ? Why not }ust let the
First National Bank of Chicago go into it without having a holding
company ?

Mr. CoLDWELL. Well, you'd have to change the law somewhat to do
it. Senator.

The Chairman. Then why not change the law to do that?

Mr, CoLDwELL. It would mean vou would put nonbank holding com-
pany activities under a bank and that bank then would be operating
over the entire country. At present it's the holding company that does
this.

The Chairman. Well, you've described it exactlv. That's precisely
the situation. What we are doing is permittini? the banks in effect,
because we know that the banks and the bank holding companies in
many of these cases one bank holdinsr coinpanv — is oretty much the
same. The management is very closely connected. You're really letting

Digitized bvGoO^^IC

the banks get away with this national operation which as you say the
laws dont pennit. Why not knock out those laws if they are not right
or face them directly anyway rather than have this kind of an artifi-
cial system by which they can get into these other areas?

Mr. CoLOWELL. Well, this comes down to a very deep philosophical
question and one which I think the Congress would, I hope, think
about. Should we be regulating nonbank activities or should these
activities be set aside and not subjected to bank type regulation? Let
me illustrate.

Suppose you have a bank holding company that has a data process-
ing subsidiary. This data processing subsidiary has to compete in the
data processina: world. Now the rest of the data processing companies
don't have banking type of regulation. If we put banking type regula-
tion over the data processing subsidiary we are interfering with the
competitive equality between affiliated and independent firms.

Now we have compromised on this. We have shaded here, there and
beyond. We are now doing some looking at some of these nonbank
elements. We have not gone to the point or applying bank-type exami-
nation standards to the nonbank subsidiaries. What we have done is
to say, "Well, you are part of the holding company, and since the
holding company also has banks, we've got to have some sort of a wall
here to make sure that the nonbank problems — if you develop prob-
lems in your nonbank subsidiaries — don't spill over through the hold-
ing company down to the bank," So we have built some walls in here
to keep them separate.

In a few cases those walls have broken down, but largely because
of illegal activity on the part of the organization. I don't see any way
we can legislate to force a man to abide by the law. He's going to abide
by it or not.

The Chairman. It would be easier to enforce the law if he didnt
have that capability of the bank holdinc companies getting into these
areas and instead — you weren't using (he bank holding companies by
the device by which they do. If the bank examiners had responsibility
for the wliole bank operation and you abolished bank holding com-
panies and simply gave the banks this authority and power that the
bank holding company has, why wouldn't the examination process
be much more comprehensive, much more effective, and be able to act
with greater solarity in preventing these activities that the holding
company engages in from having the adverse effect as it has had, as
you say, on banks in the past !

Mr. Coi.nWELL. Well, in very few sitiiatinris. But we come back to the
question, "Do we put some elements in an industry under banking type
regulation and leave other ones free?"

Senator Spaiikman. May I ask a question ?

The Chairman. Go ahead.

Senator Sparkman. Governor, I have enjoyed greatly your presen-
tation. T think if has been a wonderful nrese"tation dealing with some-
thing that to me is a very difficult subject, but T was particularly in-
terested in your reference to the bank holding company lenislation and
yon correctly quoted the law with reference to their activities being
closely related. I believe you used that term and that term is in the law.
I remember quit« well when we had a verv difficult time dealing with
the question of bank holding companies. I believe Senator Robertson

Digitized bvGoO^^IC

27

was chairman of the committee at that time. I remember the confer-
ence we had between the House and the Senate when we were tied up
for quite a little time and finally we resolved it by usin^ that term
"closely related." I think that has been the safeguard throughout the
times, I don't care to ask you any further questions, but I did want to
make that comment, I think you have made a wonderful presentation.

Mr, CoLDWELL. Thank you, Senator.

The Chairman. Governor, you take issue with the bill's finding that
bank holding companies have expanded their operations beyond those
activities directly related to banking but under your own test you show
that this is so. You say that insurance sales are complementary to
banking and banks possess in your terms considerable expertise in
data processing. I recall you're saying that. Wouldn't you agree that
logically under these tests there isn't much that a banlt holdmg com-
pany could not do ?

For example, why should banks engage in the auto rental business?
That is what leasing is. Don't you see that banking and commerce
should remain separated or do you feel that should be?

Mr. CoLDWELL, I'm in thorough agreement that there ought to con-
tinue to be a separation between basic commerce and banking in this
country because otherwise I think you end up with too much power
in the credit institutions.

The Chaibma V. How can vou do this ?

Mr. CoLDWEi.L, Well, I think we have done exactly what Senator
Sparkman said. We have applied the test of "closely related." Now a
good many of these activities, Senators, were fully approved for banks
Before being approved for bank holding companies. There are a large
number of activities which were approved for banks, some of which
we have not approved for holding companies, for example, travel
agency activities, janitorial service on property owned or leased by
the bank, title insurance and abstracts. We have not approved those
things and yet the banks have

The Chairman. Didn't you rule that travel agencies are not a
permissible activitv for the banks ?

Mr. CoLDWEi,L. We ruled it was not a permissible activity for bank
holding companies. We have no control over the

The Chairman. The courts ruled that travel agency activities are
not a permissible activity for national banks.

Mr. CoLcWELL. Well, we took the same position on bank holding
companies. There's no difference.

The Chairman. Now you take issue with the bill's finding that the
Federal Reserve is not adequately regulating bank holding companies
in the public interest, I think the record may show otherwise. There
have been bank failures where holding company activities have been
the cause of it. In fact, the Hamilton National case is the example that
comes to mind as perhaps the most conspicuous. The GAO found that
Federal regulation of bank holding companies needed upgrading. Of
20 bank holding companies causing problems for their subsidiary
banks the Federal Reserve in 15 cases did not detect weaknesses until
after the subsidiary banks were damaged. Wouldn't yon agree that
that history lends strong support for the provisions of this bill which
requires that bank holding companies and their nonbank subsidiaries
be adequately capitalized ?

Digitized bvGoO^^IC

Mr. CoLDWBLL. Well, we are in perfect a,greement with that state-
ment, Mr. Chairman. We think they should hs adeqeuately capitalized.
In fact, we have turned down some applications to us where we
thought that the company would not maintain adequate capitaliza-
tion over the period of the acquisition and we have a court case right
now going to the Supreme Court in which the lower court said, "You
can't apply that test."

The Chairman. This puts it in the law and, as I understand it, you
simply require that test when you're approving the application, but
we would put it in the law here.

Mr. CoujwEix. Well, I have no objection to that. I think it's exactly
what we are doinp witii bank holding companies, and banks ought to
be adequately capitalized.

The Chairhan. How about their nonbank subsidiaries (

Mr. CoLDWELL. Well, the nonbank subsidiaries, they ought to have
adequate capital either supplied by the holding company or supplied
internally. I don't know that we are in the position of being able to go
into, say, a finance company and judge if it is adequately capitalized
by X amout of dollars. All we have is Sie industry experience on this as
a measure of whether a particular finance company is adequately
capitalized. The same thing with a mortgage company.

The Chairhan. You say the Board study nearing completion should
be reviewed for any change in the "closely related" test and you just
told us that will be completed at the end of the month. Does that mean
you are not opposed to this bill at this time but wish to give the matter
further consideration?

Mr. CoiDWELL. Well, I think we would put it this way, Mr. Chair-
man : if we are going to change these tests, I hope we change them in
clear and unambiguous wording so we have some reasonable chance of
enforcing this law. For example, I don't know what you mean by "sub-
stantially and clearly outweigh anticompetitive effects." Does that
mean that we can't approve an acquisition where there are public bene-
fits which outweigh the anticompetitive effects, if any? What does
"substantial" mean? Does that mean 20, 40, 100 percent? We would
like to have the law very clear if we are going to change this procedure.

The Chairman. What it does is put the burden of proof on the bank
to show that there is a clear, demonstrable public benefit.

Mr. CoLDWELL. Well, that's where it is now, Senator.

The Chairman. I'm not so sure.

Mr. CoLDWELL. Wlien an application comes in and we look at it and
say it's an adverse situation in a competitive mode, we require that
bank to show convenience and needs and benefit to the community
before it can he approved.

The Chairman. Now you take strong exception to the provisions of
this bill which would require the Fed's rulemaking process when it
aproves an activity for bank holding companies to be on the record.
In formulating such rules the Fed is acting in a legislative capacity on
behalf of the Congress. In these circumstances, isn't the public entitled
to know the full record upon which these decisions are based ? Why
not have full disclosure?

Mr. CoLOWELL. Well, the thing I was objecting to particularly was
formalized hearings. Senator, which to us takes a terrible amount of

Digitized bvGoO^^IC

time. We would have to hire a whole bunch of administrative law
judges to conduct hearings. After all, we are looking at 300 to 400 ap-
plications a year. Now if we are going to have to have a. formal hearing
on every one of those, we are going to have not a 91-day rule; we are
going to have to have a 391-daY rule.

The Chairmax. Well, the bill simply requires an opportunity for
a hearing. We certainly don't want to enact any lepslation now in
view of all the complaints we have had already about the paperwork
and about delay and about requiring too much cost and .so forth, but
we do want disclosure. We want it on the record. As I say, this is a
matter of extending tlie Congress legislative authority which is done,
fts you know, in the public now in virtually every phase of our opera-
tion, and for that reason we want to have that provision of the bill
enacted but we will look it over and if there is anything in there that
would requiie a greater amount of cost — if you have to hire additional
judges and so forth, we will certainly do our best to amend that. That's
a good objection.

Mr. CoLDWELL. If we read the bill right, it would be a major prob-
lem in terms of the burden.

The Chairman. If your rulemaking has to be on the record ?

Mr. CoLDWELL. I'm talking about a formal hearing type approach
which we interpret this law to require.

The Chairmax. Well, in a rulemaking procedure you do act as a
legislative body in tlic sense that your determinations have the force
of law. For that reason it would seem

Mr. CoLDWELL. They are challengable by court.

The Chairmax. Yes, but the whole process ought to be a matter
of public record,

Mr. CoLDWELL. Well, in a good many of these instances, especially
where we get a protest, the protest is written to us, we supply the pro-
test to the holding company, the holding company writes back to the
protestant and to us, and there's clear disclosure of the facts of the
situation. That's all we are saying, that the facts are open and don't
require a formal hearing.

The Chairman. Now I just have one other question. Section 401
of this bill will prohibit a national bank from engaging in any activ-
ity which the Federal Reserve has found to be an improper activity
for a bank liolding company. Would you support that provision?
For example, the Federal Reserve has said that operating a travel
agency is not permissible for bank holding companies and yet Ui©
(Comptroller refuses to take national banks out of the travel agency
business.

Mr. CoLOWELL, Well, Senator, I think that's a matter which you
ought to discuss with the Comptroller of the Currency.

The Chairman. Yes. I'm just giving you an example. I'm asking
you, however, whether you would favor that part of the bill, Section
401 of the bill, which would prohibit a national bank from engaging
in any activity which the Federal Reserve has foimd to be an improper
activity for a bank holding company.

Mr. CoLDWELL. If this is a device to centralize the examinations and
control of the agencies, it does so beautifully by the back door because
if we ruled a holding company activity impermissible, the CtanptroUer
could not approve it for national banks.

Digitized bvGoO^^IC

30

The Chairman. It has nothing; to do with examinations. We are just
talking here about permissible activity where you have the responsi-
bility and your determination oujjht to be respected.

Mr. CouiWELL, We are detei-mining it for holding companies. Now
there could be an argument that in a small local community national
bank that you're not damaging anything to allow that bank to do it
within its own community. If wc approve it for a holding company
they not only can do it in that community, they can do it across the
Nation, I think there's a difference here, Senator. I would hope you
would look at it carefully.

The Chairman. All right, sir. Well, I want to join in Senator
Sparkman's comment, and I am very impressed, as I have always been.
You do an excellent job and we are most grateful to you. Thank you
very much, sir.

Mr. CouiwELL. Thank you.

The Chaibman. We have one final witness this morning, Mrs. Evelyn
Davis, editor of Highlights and Lowlights.

Mrs. Davis, we are happy to have you before us.

STATEHEHT OF EVELTH T. DATIS, EDITOR, HIOHUGHTS AHD
LOWLIGHTS

Mrs. Davis. Good morning, Mr. Chairman. My name is Evelyn Y.
Davis, editor of Highlights and Lowlights, and I am a small stock-
holder in 128 corporations of which 12 are bank holding companies,
and also, municipal bondholder in various States, including the dis-
tinguished State of Wisconsin.

It is with ^reat pleasure today that I am supporting this very neces-
sary legislation. In the last few years the bank holding companies
through their going into too many nonbanking activities have become
much too big and diversified, and have been unable and imwilling to
account to their own stockholders. They have rescheduled their stock-
holder meetings to take place at the same time and dates as many
other bank holding companies, some of their own correspondent banks
and/or some of their biggest corporate customers in order to deprive
questioning stockholders from attending annual meetings and to cir-
cumvent the proxy rules of the SEC or Comptroller of the Currency,
in my opinion.

Apparently those chairmen of bank holding companies who do this
do either not know the answers to stockholders questions regarding all
these nonbanking activities, or are unwilling and afraid to account
to their owners. Also they may have engaged sometimes in unsound
and/or questionable practices that they are afraid their stockholders
mav know about and make public.

And this is not funny either. According to figures I received yester-
day from my broker, at the end of 1973 the Standard and Poor New
York City Bank index stood at 69.57. and at the end of 1977, at 42.11.
which is a decline of 39.47 percent, almost 40 percent, while at the same
time the Standard and Poor Index of .WO, at the end of 1973 stood at
97.55, and at the end of 1977 at 95.10, which is oif only by about 2^4
percent.

So these banks going into nonbanking interests has not been in the
interest of public stockholders, and they have also been unable to give

Digitized bvGoO^^IC

31

pnough supervision to what they should stick to, namely banking, and
a lack of supervision by top management has resulted in a lot of these
bad loans, real estate, and overseas.

If they would stick more to banking maybe these things wouldn't
hare happened.

Sow the National Bunk of Georgia and J. P. Morgan, after having
received a resolution from me re disclosure of loan and overdraft

Solioy to officers, directors, and/or politicians, now meet on the same
ate, one in Atlanta and the other in New York.
As we all know from reading the paper today, J. P. Morgan is the
lead bank in Omni International which is in difficulties and which is
based in Atlanta. So there may have been colhision there.

Citicorp, which received a similar resolution and which they tried
to keep unsuccessfully out of the proxy statement, because the SEC
told them they had to include it in the proxy statement, now for the
first time meets in Chicago, and the bank is based in New York, on the
same date that Bankers Tnist and Chase Manhatten, as well as some
of their bigger corporate customers meet in New York City, as well as
Citizens and Southern in Atlanta. How can one be in all of those places
at the same time?

BankAmerica, which also had to include the same aforementioned
resolution in their proxy statement by order of the SEC^his year is
meeting at the same time and date in California, while Eastern Air
Lines, Merck, Warner Lambert meet in the New York area, and the
Xew York TimeK Co. meets in Lakeland, Fla,, and some other com-
panies meet elsewliere. Chemical New York is on the same date as its
bigger corporate customers: General Electric and Westinghouse, two
so-called competitors, and Pepco. Dupont just changed to conflict with
Pfizer, while United Technology Corp. switched to the same date as
IBM, American Express, and others, all meeting in different parts of
the country. And so on.

In a few years the game of musical chairs could very well result in
just one meeting, one bank holding company lor stockholders to attend.

If banks would no longer be allowed to engage in all of those non-
hanking activities, with the exception of underwriting of municipal
bonds, which is one activity as a municipal bondholder, which I be-
lieve they should remain in, in order to assure a more liquid and
orderly market for individual investors, then perhaps they would not
have to do so much homework for their annual meetings and would be
back to nonconflicting dates, as they did many years ago before they
engaged in all of those extracurricular activities.

John Heimann, the Comptroller of the Currency, and Harold
Williams, the SEC Chairman, have looked and are looking into this
matter of conflicting meeting dates, yet no action has been taken yet. It
has only been words and promises. Nor has either one made a public
statement of this matter yet, but that really is not surprising, since
regulators almost always take jobs with the banks, the corporations
and/or their law firms eventually.

Senator Proxmire, I heard you mention previously the First Na-
tional Bank of Chicago. What do you expect, with the former Comp-
troller of the Currency being the executive vice president of that bank t

Bill Miller, our new Federal Reserve Chairman, has stated to me in
a telephone interview that he believes there is a need for more cor-

DigilizedbvGoO^^IC

porate democracy^ that he will personally look into this matter, and
may make a public statement on this subject perhaps.

Most ot these aforementioned bank holding companies and corpora-
tions also have interlocking directorates amongst themselves. This is
an area of abuse that this Committee ought to look into. And in partic-
ular, since the SEC has oversight over t^e New York Stock Exchange,
something very easily could fce done. The New York Stock Exchange
could recommend to the banks and the corporations when they should
be meeting. But of course nothing is being done, because Mr. Battel,
the current chairman of the New York Stock Exchange, is still, while
being chairman of the New York Stock Exchange, on the Boards of
companies he regulates, like J. C. Penney, and A.T & T., for instance,
and J. C. Penney is also meeting on conflicting dates.

Once again, I support Senator Proxmire on this particular bill, and
I wish to thank him for having given me the opportunity to express my
views here today.

I would like to answer any questions you may have.

The CHAraMAN. Well, thank you very much, Mrs. Davis, for a force-
ful statement.

Much of what you say, of course, is above and beyond our concern
about this particular bill, particularly the timing of meetings by
corporations.

As you know, there are, what, 1,500 corporations listed on the New
York Stock Exchange, something like that, maybe more, but roughly
that number.

Of course there are many other companies that are listed. When you
are as diversified a stockholder as you are, I think you are just up
against that kind of a situation.

After all, there are only a couple of hundred business days a year,
that means with 1,500 firms, there are seven or eight firms meeting
every day, if they meet Monday through Friday, and I imagine many
of them would not meet in the summer, or be less likely to meet in the
summer, and not meet on holiday periods, and so forth.

So there are a limited number of days and I just don't know how
you could arrange it so you wouldn't have a number of conflicts.

It is an interesting situation, however, and maybe it is something
that the SEC ought to think about. I don't know if they could do any-
thing about it, or should do anything about it.

Mrs. Davis. Senator, what I am trying to bring out is many years
ago, before the banks went into all of these nonbanking activities, they
met on nonconflicting dates. It is only in the last 5 or so years that they
have all changed. I am not talking about companies that have always
had these dti^s. But they have deliberately, each year, it is a musical
chairs game, each year five or six switch over, so eventually there will
be nothing left.

It is a conspiracy and collusion between the bankholding companies
amongst each other and their principal corporate customers.

It is true there are 350 business days in tlie year, or 300 business days.
Why do all of the companies have to meet on a huge concentration now
in about 6 or 7 days, in April and May. Tuesday and Wednesday toward
the end of April, and toward the end of May? Even if they want to
meet in April and May, there are many nonconflicting dates. But they

Digitized bvGoO^^IC

have purposefully picked those dates for certain stockholders, such as
myself, so we cannot attend. And there are plenty of other nonconflict-
ing dates, even in April and May.

It is a concentration on tliese five, six, or seven dates in April and
May where each year a few of them have added to. They liave made no
effort to go to nonconflicting dates. And the SEC has not done its over-
si^it work.

The committee has oversight over the SEC, and the SEC in this
respect has failed to do its job by making even a public Btatement on
this.

Of course, what can you expect, when some SEC Commissioners and
staff members all take jobs with the corporations and/or law firms ?

The Chairman. Well, we will look into it. I am not sure that the
SEC has the authority under the law to do this. I don't know, as I said,
that the SEC has the authority under the law to determine tliat a cor-
poration must meet at a certain time or can meet at another time. Maybe
they should have ; maybe not.

We will have to look into that and we will. I appreciate very much
your calling it to our attention.

Mrs. Davis. Thank you verj- much, Senator. Like I say, they could
make, at least Mr. AVilliams could make a public statement, he has made
public statements of value to stockholders on other subjects, he could
make a public statement. The New York Stock Exchange could make
suggestions to the companies when to meet. They put out a bulletin
every week.

Another thing I ask you, have the staff study the New York Stock
Exchange bulletins for April and May, which come out one a week,
and compare now when these companies meet to just 5 years ago, and
you will see that I am right. They are all going little by little to those
five, six, or seven particular dates, when they all conflict.

The Chairman. Very good. Thank you very much. The committee
will stand in recess until 10 o'clock tomorrow.

[Thereupon, at 11 :30 a.m, the hearing was recessed, to reconvene at
10 a.ra. the following day.]

[Complete statement of Mrs, Davis, a copy of S. 72, and communica-
tions from the Comptroller of the Currency and the Federal Deposit
Insurance Corporation follow :]

Pkefaked Statement bt Eteltn Y. Davis, Editob. Hiohlkibts and Lowliohts

With great pleasure today I am snpportliiK tbls VERT necesBBry leglalatlOD. In
the last few years tbe bankboldlug companies through their going Into too many
non-l»iikliig activities have become MUCH too big and diversified and have been
unable and unwilling to account to their own stockholders. They have rescheduled
their stockholder meetings to take place at tbe same time and dates as many other
banUioldlng companies, some of their own correspondent banks and/or some of
tbcdr blggeat corirarate customers In order to deprive queetloDlng sto^bolders
tnxu attending annual meetings and to clrcumvMit the proxy rules of tbe SBC or
Comptroller of tbe Currency in my opinion. Apparently those chairmen of bank-
holding companies who do this do either not know tbe answers to stockholder
questions re all these nonbanking activities or are unwilling and afraid to account
to their owners. Also they may have engaged sometimes In unsound and/or ques-
tionable practices that they are afraid their stockholders may know about and
make public ! \ National Bank of Oeor^a and J. P. Morean after having received
a reflolutlon from me re disclosure of loan and overdraft policy to officers, direc-
tors and/or politicians, now meet on the same date, one in Atlanta, the other in

Digitized bvGoO^^IC

34

New York. Citicorp wblcb received a similar resolutloii and whtdi tbey tried to
keep UNSUCCESSFULLY out of the proiy statement (the SEC told them they
had to include It In the proxy etatement) now for the first time meets in Chicago,
on the Hame date that Banlcers Trust and Chase Manhattan as well as some of
their biggest corporete customers meet, as well as Citizens and Southern ! ! ! Bank-
America which also HAD to Include the same aforementioned resolution into the
proxy statement by order of the SBC. this year Is meeting at the same time and
date as Eastern Air Lines, Merck, Warner Lambert, the New York Times Com-
pany and some others.

Chemical N.Y. is on the same date as Its big corporate cnstomers : OB, Westlng-
honse and Pepco. Dupont Just changed to conflict with Pflier, while UTC
switched to the same date as IBM, American Express and others. And so on ; in
a few years the game of musical chairs could very well result In Just ONE meet-
ing, on bankholdlng company meeting, being left for stockholders to attend. If
Banks would be no longer allowed to engage In all those non-banking activitie*
with the exception of the underwriting of municipal bonds which is one activity
I believe they should remain In. in order to insure a more liquid and orderly
market for Individual investors, than perhaps they would not have to do so mncb
"homework" for their annual meetings and would go back to n on-con fllctlng dates
as they did many years ago, before they were in all those "extracurricular" ac-
tivities. John Helmann. the CiMnptroller of the Currency and Harold Williams,
the SBC chairmen have looked and are looking Into this matter of conflicting
meeting dates, yet NO action has been taken yet, nor has either one of them made
a public statement on this matter YET. But that really is not surprising, since
regulators almost always take Jobs with the banks, the corporations and/or their
law firms eventually '. ! ! Bill Miller, our NEW Federal Reserve Chairman has
stated to me In a telephone interview that be believes there Is a need for more
corporate democracy, that he will personally look Into this matter, and may make
a public statement on this subject perhaps. Most of these aforementioned bank-
holding companies and corporations also have interlocking directorates amongst
themselves. This Is another area of abuse that the Committee ought to look into.
Once again. I support Senator Proxmire on this particular bill, and I wish to
thank bim for having given me the o^tortuDlty to express my views here today.

[S. 72, esth Cong., lit ■«■■.]

A BILL To amrnd tbr Banh Holding Companr Act and tbe Baok Merger Act to rectriet
the aclivKleB In wblcfa nglstercd bank holdlnv companleg mar engage and to cODtroI tbe
acqulBitlon of banks by bank holding companies and other banki.
Be it enacted bj/ the Senate and Soute of Repretentativet Of the United Statea

of America (n Congreii astembled

BHOBT TITLE

Section 1. This Act may be dted as the "Competition in Banking Act of 1977".

nNDINQS AND PCBPOSES

Sec. 2. Congress finds that—

(a) concentration of the banking resources of the Nation Into fewer hands
has continued unabated; and

(b) the explosive growth of bank holding companies bas resulted in aa
increasing share of such Mnking resources coming under the control of those
tnstitutions ; and

(c) bank holding companies have extended their services Into product
markets beyond those directly related to banking, thereby eroding tbe line
between lianking and commerce in the Nation: (i) In oO'erlng Insurance
agency and underwriting services, (ii) In offering leasing, accounting, travel,
and courier services, (Hi) In oBTering management and data processing
services, and (Iv) In marketing securities; and

(d) credit resources of the Nation have been mlsallorated by the activi-
ties of bank holding companies and the Federal Reserve has not adequately
protected the public Interest In approving activities In which bank holding
companies could engage and the Federal Reserve has not maintained con-
tinued oversight over tbe activities of bank holding companies in a n
which protects the public interest.

Digitized bvGoO^^IC

BTANOABM FOB BA

Sec. 101. Paragrapb (5) of secdon 18(c) of the Federal Deposit Insurance
Act is amended to read as follows :
"(5) The responsible ajcencj' shall not ai^rove—

"(A) any proposed merger transaction which would result in a monopoly,
or which would be in furtherance of any combination or conspiracy to
montqmllEe or to attempt to monopolize the buslneaa of banking in any part
of the United States, or

"(B) any other proposed merger transaction whose effect in any section
of Uie conntry may be substantially to lessen competition, or to tend to
create a monopoly, or which In any other manner would be in restraint of
trade, unless It finds that the anticompetitive effects of the proposed trans-
action are clearly outweighed In the public interest by the probable effect of
the transaction in meeting the convenience and needs of the community to be
served, or

"(C) any other proposed merger transaction if, either as a result of such
merger transactlm or because of its preeslstinK assets, the acquiring, as-
suming, or resulting bank would upon consummation of transaction hold
more than 20 per centum of the total assets held b; all banks located in the
State in which such bank Is located : Provided, however. That this subpara-
graph shall not apply to any merger or consolidation of banks in which the
responsible agency finds that Immediate action Is necessary to prevent
the probable failure of a bank and that a less anticompetitive alternative Is
not available.
For purposes of this paragraph. If any company has, or upon consummation of
the merger transaction would have, control, as defined In section 2 of the Bank
Holding Company Act of 1956, over the acquiring, assnmlng, or resulting bank,
total assets held by all banks over which the same company has control shall
be attributed to such bank. As osed In this paragraph, the terms "bank" and "com-
pany" have the meaning ascribed to such terms In section 2 of the Bank Bolding
Company Act o( 1958. In every case, the responsible agency shall take Into consid-
eration the financial and managerial resources and future prospects of the existing
and proposed Institutions, and the convenience and needs of the community to tie
served. Nothing contained In this paragraph or in any other paragraph of this
subsection shall prevent the responsible agency from disapproving any other
merger transaction on the grounds that such transaction would have adverse
effects on competition or concentration in any market, region. State, or other
area which, although not requiring disapproval under subparagraph (A), (B),
or (C) of this paragraph, are not clearly outweighed In the public interest by the
probable effect of the transaction In meeting the convenience and needs of the
community to be served.".

Sec. 102. Section lS(c) of the Federal Deposit Insurance Act is amended by
inserting in paragraidi (8) after "(the Clayton Act)" the words paragraph (ft)
of this subsection, and"; and by renumbering section "(»)" section "10"; and
by adding a new paragraph "(8)" as follows:

"(9) (A) Every merger transaction having the effects set forth In sub-
paragraph (C) of paragraph (5) of this subparagraph is declared to be
Illegal.
"(B) The district courts of the United States have Jurisdiction toprermt and
restrain violations of subparagraph (A) of this paragraph, and It Is the duty
of the United States attorneys, nnder the direction of the Attorney General,
to institute proceedings In equity to prevent and restrain such violations. The
proceedings may be by -way of a petition setting forth the case and praying that
the violation be enjoined or otherwise prohibited. When the parties complained
of have been duly notified of the petition, the court shall proceed, ^s soon as
possible, to the hearing and determination of the case. While the petition Is
pending, and before final decree, the court may at any time make such
temporary restraining order or prohibition as It deems Just Whenever it ap-
pears to the court that the ends of Justice require that other parties be brought
before It, the court may cause them to be summoned whether or not they reside
In the district in which the court is held, and subpenas to that end may be served
In any district by the marshal thereof.

"(C) In any action brought bj or on behalf of the United States under sub-
paragraph (A) of this paragraph, subpenas for witnesses may run into any

Digitized bvGoO^^IC

36

district, but no writ of sntipeDa may Ifwue for witDesees living out of the dlBtrlct In
which the court la held at a greater distance than one hundred miles from the
place of holding the same withont the prior pennlealon of the trial court upon
proper application and cause shown.

"(D) Nothing contained in this paragraph ahall be conatraed as affectuiK
in any manner the right of the United States or any other party to bring an
action under any other law of the United States or of any State, Including any
tight which may exist in addition to specific statutory authority, challenging the
legBllty of any merger transaction which may be proscribed by this paragraph.".

STAiTDASDB ron BAITS HOLnino cxjupany AOQTnemone of banks

Sdc. 201. Paragraph (c) of section 8 of the Bank Holding Company Act of 19B6
is amended to read as follows :
"(c) The Board shall not approve —

"(1) any acquisition or merger or consolidation under this section which
would result In a monopoly, or which would be In furtherance of any com-
Unatlon or conspiracy to monopolize or to attempt to monopolize the business
of banking in any part of the United States, or

"(2) any other proposed acquisition or merger or consolldatlOTi nnder
this section whoee effect In any section of the country may be substantially
to lessen competition, or to tend to create a monopoly, or which in any
other manner would be In restraint of trade, unless It finds that the
anticompetitive effects of the proposed transaction are clearly outweighed
in the public interest by the probable effect of the transaction in meeting
the convenience and needs of the community to be served, or

"(3) any other proposed acquisition, merger, or consolidation transaction
under his section if, either as a result of such transaction or because of the
preexisting bank assets over which it has control, the acquiring or resulting
company would have control over aggre^te total banking assets exceeding
20 per centum of the total hanking assets held hy all banks and bank holding
companies located in the State In which such company Is located : Provided,
however. That this paragrapb shall not apply to any acquisition, merger,
or consolidation transaction in which the Board lladB that Immediate
action is necessary to prevent the probable failure of a bank and that a
less anticompetitive alternative is not available.
In every case, the Board shall take Into consideration the financial and
managerial resources and future prospects of the company or companies and
the banks concerned, and the convenience and needs of the community to be
served. Nothing contained in this chapter shall prevent the Board from disap-
proving any other acquisition, merger, or consolidation transaction on the
grounds that such transaction would have adverse effects on competition or
concentration fn any market, region. State, or other area which, although not
requiring disapproval under paragraph (1), (2), or (8) of this subsection, are
not clearly outweighed In the public interest by the probable effect of the
transaction In meeting the convenience and needs of the community to be
served.".

Sec. 202. The Bank Holding Company Act of 1966 is amended by inserting in
section 1849{f) after "(the Clayton Act," the words "subsection (g) of this
section" ; and by adding to section 1849 a new section <g) as follows :

"(g)(1) Every acquisition, merger, or consolidation transaction having the
effects set forth In paragraph (3) of subsection (e) of section 8 of this chapter
is declared to be illegal.

"(2) The district courts of the United States have Jurisdiction to prevent and
restrain violations of paragraph (1) of this subsection, and It Is the duty of
the United States attorneys, under the direction of the Attorney General, to In-
stitute proceedings in equity to prevent and restrain such violations. The pro-
ceedings may be hy way of a petition setting forth the case and praying that
the violation be enjoined or othervrise prohibited. When the parties complained
of have been duly notified of the petition, the court shall proceed, as soon as
possible, to the hearing and determination of the case. While the petition pending,
and before final decree, the court may at anv time make such temporary restrain-
ing order or prohibition as it deems Just. Whenever it appears to the court Uiat
the ends of Justice require that other parties be brought before it, the court
may cause them to be summoned whether or not they reside in the district in

Digitized bvGoO^^IC

37

which the court is held, and subpeuas to that end majr be served in any district
br the marshal thereof.

"<8) In any action brought by or on behalf of the United States under para-
graph (1) of this HUbsection, subpenas for witnesses may run into any district,
but no writ of subpena may issues for witnesses living out of ttie district In which
the court is held at a greater distance than one hundred miles from the place
of holding the same without the prior permission of tlie trial court upon proper
application and cause shown.

"(4) Nothing contained in this snbsectlon shall be construed as affecting in any
manner the right of the United States or any other party to bring an action under
any other law of the United States or of any State, including any right which may
eiist In addition to specific statulory aulhnrlty, challenging the legality of any
acquisition, merger, or consolidation transaction which may be proscribed by this
subsection.".

Sec. 301. <a) Section 4(c) (8) of the Bank Holding Company Act of 1866 is
amended to read as follows :

"(8) (a) stiares of any company the activities of which the Board, on the
record and after due notice and opportunity for hearing, has determined
(by order or r^ulatlon) —

"(A.) to be so closely and directly related to banlilng or managing or
contrt^ng banks as to be a proper and necessary incident thereto, and
"(B) is llhely to produce substantial benefits to the public which
clearly and significantly outweigh possible adverse effects. For the
purposes of this subparagraph, (1) the term 'substantial benefits to the
public' Includes Increased competition over the course of time and greater
convenience or gains in efllciency of operation that will substantially
benefit the public, and (11) tJie term 'adverse effects' Include undue con-
centration of economic or financial resources, decreased competition over
the course of time, unfair competition, conflicts of interest, unsafe or un-
sound banking or business practices, risk to the financial soundness
of a bank holding company or its banking subsidiaries, and Inter-
ference with the primary responsibility of a bank holding com-
pany or Its banking subsidiary to provide effective banking services
to the public. For tbe purposes of determining In specific cases whether
the performance of a particular activity by an affiliate of a bank hold-
ing company Is likely to produce substantial benefits to the public
which clearly and significantly outweigh possible adverse eflTects,
the Board, In addition to Its other considerations, shall take Into consid-
eration the relative economic size and market power of the bank holding
company and that of those vdtb whom the affiliate would compete.".
(b) (1) Notwithstanding the provtslons of subsection (a), and subject
to the provisions of subparagraph (2) of this subsection, a bank holding com-
pany may continue to engage in those activities In which It directly or through K
sutisfdiary (A) was lawfully engaged on November 1, 1976 (or on a date
subsequent thereto In the case of activities carried on as the result of the
acqul^tion by such bank holding company or subsidiary thereof, pursuant to
a binding written contract entered Into on or before November 1, 1976, of
another company engaged in such activities at the time of the acquisition), and
(B) has been continuously engaged since November 1, 1B76 (or such subsequent
date), except that such a bank holding company shall not permit the scope
or sice (in terms of volume of business) of those activities to expand to any
significant degree.

(2) The Federal Reserve Board by order or regulation, after opportunity tor
hearing, may terminate the authority conferred by subparagraph (1) on any
bank ho'ding company to engage directly or through a subsidiary In any activity
otherwise permitted by subparagraph (1) if the Board determines, having due
regard for the purpose of this Act, that aucb action Is necessary to prevent undue
concentration of economic or financial resources, decreased competition over the
course of time, unfair competition, conflicts of Interest, unsafe or unsound bank-
ing or business practices, risk to the financial soundness of a bank holding com-
pany or Its banking subsidiaries, or interference with the primary responsibility
of a bank holding company or its banking subsidiary to provide effective banking
■endcee to the public.

Digitized bvGoO^^IC

vhdobu afftjcatioh of standabsb aoTEsniKa ehtbt ihto bark kelateo fields

Sec. 401. (a) Snbject to the proTlelons of subsection (b), no national lank
Bball directly or through a aubsldlary euKiiKe Id any activity which Is found —

(1) pursnant to a regulation of the Federal Reserve Board issued after
the effective date of this Act to be an improper activity for banh holding
companies under section 4<c) (8) of the Bank Heading Company Act of 1966.

(2) pursuant to an order of the Federal Reserve Board Issued after the
efFective date of this Act to be an improper activity for the bank holding
company of nliich such national bank Is a subsidiary.

(b) Nothing contained In this section eliall be Interpreted or construed as
authorizing a national ttaulc to engage in any activity prohibited to it under
any other provision of law.

STAltDABDB FOB SOtTHD AWD COMPETTriVB FINAKCIHO OF KOHBANKHrO ACnvITIES

Seo. 501. (a) Section 4 of the Bank Holding Company Act of 19S6 is
amended by Insertfne at the end thereof the following new subsection :

"(f) In keetilng with Its responsiblllUeB to administer and carry out the pur-
poses of this Act, and with particular attention to the standards eslabllshed
under subparagraph (8) of subsection (c) of this section, the Board shall re-
quire, both in connection with a bank holding company applicat'on to engage in
a partlcnlar actlvll^ and in connection with the Board's ongoing supervision of
bank holding companies, that (1) bank holding companies and their BubsIdisrleB
be cairitallzed and otherwise financed In a safe and sonnd manner, and (2) banlt
subsidiaries of bank holding companies refrain from discriminating In favor
of their parent holding company or their affiliated subsidiaries in the making of
loans or In the establishing of terms and condition of credit."

(b) Subsection (c) of section 5 of the Bank Holding Company Act of 1BB6 is
amended by striking out "(c)" and inserting In lien thereof "(c)(1)" and by
inserting at the end of such subsection the following new subparagraph ;

"(2) In addition to such other reports as the Board may from time to time
require, the Board shall require each bank holding company to submit to the
Board each year a report detailing the terms and cond'tions of all Intercompany
loans and Investments, as t>etween the bank holding company and its subsidiaries
and as between any such subsidiaries, made during the twelve-month period
immediately preceding such repcvt. The Board shall make such reports available
to the public".

ADiaKIBTKATIVE PB0CEDUBE8 AND 3ITDICUI. KEVUCW

'Sec. 601. (a) The Bank Holding Company Act of 1966 is amended by rede-
signating sections 9, 10, 11, and 12 as sections 10, 11, 12, and 18, respectively, and
by inserting immediately after section 8 the following new section ;

"Sec. 9. (a) The provisions of subchapter II of chapter 5 of title 5 of the
United States Code (relating to admlnistratlTe procedure) shall apply with re-
spect to ail Board proceedings under section 4(c) (8).

"(h) AH Board determinations (whether by order or regulation) under
section 4(c) (8) shall be made on the record after opportunity for hearing, and
the m-ovlsions of sections 566 and 6S7 of title 5 of the United States Code shall
apply with respect thereto. The Board shall give all Interested persons an op-
portunity to participate in any such hearing.

"(c) (1) In connection with any proceeding under section 4(c) (8), no person
shall, directly or indirectly, make or attempt to make any es jiarte communi-
cation in connection with the subject matter of any such proceeding to any
member of the Board or any member of the Board staff participating in such
proceeding.

"(2) No application made under section 4(c) (8) shall be held or considered
to be an application for an Initial license within the meaning of subsection (d)
of section 554 of title 5 of the United States Code.

"(d) In connection with any proceeding under section 4(c) (R) to which the
requirements of sections 556 and W7 of title 5 of the United States (3ode are
tieing applied, any Interested person participating In such proceeding may call
upon (1) the Board, or. (2) in the case of the consideration of an application,
the applicant, for any information or documents, not privileged, for purposes

Digitized bvGoO^^IC

of diatover; or for use ae evidence. In addldon, in any sscb proceeding where
Uiere is an absence of relevant information, tlie Board, upon its own motion
or tbat of any interest*^ person pertlt^lpatlnK in such proccedluK, shall under-
take such Btodies (and make r^^rts thereon available) as will [trovlde the
relevant information required.".

(b) Section 9 of the Banli Holdin;; Company Act of 1966 (as In effect imme-
diately prior to tbe enactment of this Act) Is amended (1) by inserting "or regn-
lutiiiu" lmmMiat«ly after "order" each place that It appears, and (2) by etrlk-
ing ont "as provided in section 2112 of title 28, United States Code" and inserting
ill lieu tliereof tie following: "in tlie same manner as provided in section 2112
of title 28, United StatcB Code, with respect to orders of administrative
aRenciee".

public's bioht to petition fob uoniPiCATion of ordebs and beodiations

Sec. 701. Tbe Bank Holding Company Act of 1956 (as amended by section SOI
of this Act) is further amended by inserting at the end of the new section 9
thereof the following new subsection ;

"(e) (1) Any Interested person, including a consumer or consumer organlu-
tlon, may i)etltlon the Board to commence a proceeding to consider the Issn-
ance, amendment, nr revocation of an order or regulation promulgated under
the authority of section 4(c) (8), Such petition shall set forth (a) facts wbidi
It claimed established that tbe Issuance, amendment, or revocation of an order
or regnlation Is necessary, and (b) a description of the substance of the amend-
ment or of the order or regulation It Is claimed should be issued, as the case

"(2) Tbe Board may conduct a pnbllc hearing or may conduct such Investiga-
tion or proceeding as It deems appropriate in order to determine whether or not
anch petition should be granted. Facts which warrant the issuance, amendment,
or revocation of an order or regulation shall Include, In addition to such other
matters as the Board may from time to time determine to be appropriate, the
following matters :

"(A) a finding that a particular activity conducted on the part of a bank
holding company or its subsidiary falls to conform to tbe scope of the activity
for which Board approval was originally given ;

"(B) a finding that a particular activity conducted on the part of a l>ank
holding company or Its subsidiary fails to conform to new or amended Board
orders or regulations Judicial determinations altering the scope of the activity
for which Board approval was originally given ;

"(C) a finding that the continued conduct of a particular activity on the
part of a bank holding company or its subsidiary has ceased to produce, with-
in t^e meaning of section 4(c) (8), substantial benefits to the public wUdi
clearly and significantly outweigh possible adverse effect ; or

"(D) a finding that the continued conduct of a particular activity on the

part erf a bank holding company or its subsidiary otherwise violates the

standards established under section 4(c)(8) for permissible bank holding

company activity.

"(8) Within one hundred and twenty days after filing of a petition referred

to In subparagraph (1), the Board shall either grant or deny the petition. If the

Board grants such petition, It shall promptly proceed to determine, on the record

and after opportunity for hearing, whether to issue, amend, or revoke such ord'ir

or regulation. If the Board denies such petition. It shall publish in the Federal

Register Its reasons for such denial.

"(4) If the Board denies such petition, or if the Board falls to grant or deny
snch petition within one hundred and twenty days after the filing of the petition,
the petitioner may commence a civil action In a United States district court to
compel the Board to grant snch petition. Any such action shall be filed within
sixty days after the Board's dental of the petition, or, If the Board fails to grant
or deny the petition within one htindrcd and twenty days after the filing of the
petition, within sixty days after the expiration of the one hundred and twenty
day period. If the petitioner can demonstrate to tbe satisfaction of the court,
by a preponderance nf evidence In a de novo proceeding before such court, that
sufflcient facts exist to Justify the granting of the petition, the court shall order
the Board to grant such petition.

"(5) In any action under this subsection, the district court shall have no
aatboritr to compd the Board to take any action other than to grant inch a
petition.".

Digitized bvGoO^^IC

UTtA^n^h t>ATC

COKPTBOLI^ or THB Cdbwckct,
Aduixibtkator or National Bakxs.
WatMnpton. D.C.. Mareh 6. 1978.
Senator Wiujam Psoxuire.
ChalrmtHK Benate Banking Committee.
Wathinglon, B.C.

Deak Hb. Ota IBM at* : This is in reaponse to your request for the comm«its of
this Office on S. 72. the "Compptltton In Banktnf; Art if 1077."

Hie bill Is Intended to restrict concentration in bankliig by leifislaUng stand-
ards for bank mergers and for bank holding company acniiisltions of banks, llie
standards for bank mergers set In the bill noold be uniform amnnR all federal
bODklng agencies. Similar standards would apply to Federal Reserre review of
bank acquisitions by holding companies. The bill would set a standard for acUvi-
tle« of national banks and their subsidiaries which Is intended to be the same as
that which applies to activities of hank holding companies. Also Included ar»
sections which would affect the financing of hank holding company subsidiaries
and which would apply the Administrative Procedure Act to Federal Reserve
determinations concerning the entry of bank holding companies into bank-related
activities. The final section of this legislation would grant any interested person,
including conaumers and consumer organizations, the right to begin a i»oceed-
iDg before the Board concerning the issuance, amendment or revocation of a
decision affecting a holding company's entry Into a bank related activity.

Reasons for the introduction of S. 72 are stated In section 2. While we disagree
that a need for this legislation has been demonstrated, we And particularly In-
appropriate the broad statement In subsection 2(c) that certain product markets
into which bank holding companies have ventured are not directly relnted to
banking. To the contrary, most of the activities now permitted to bank holding
companies by Federal Reserve Regulation Y appear to us to be legitimate actlvl-
tlea which are sanctioned by federal law and Integrally connected with traditional
financial services. In any event, we do not believe that specific Federal Reserve
Board determinations In this area should be drawn into question In an ambivalent
fashion. Rather, if Congress disagrees with a specific determination, It would
seem more appropriate to address that activity directly and legislate a reversal.

Section 101 of the bill would add new criteria to existing standards for all
banking agencies to follow in reviewing bank mergers. Section 201 would operate
in a virtually Identical manner with respect to Federal Reserve review of bank
holding company acquisitions. No proposed merger or acquisition could be ap-
proved where the hanking assets of the Bcqulrlng. assuming or resulting bank or
holding company would amount to more than 20 percent of the SKsets held by sU
banks In the state In which the bank or holding company is located. A proviso
would permit the responsible agency to Ignore this standard it the transaction
Is necessary to prevent a failure and no less an ti -competitive alternative is
available.

We believe that the issues raised hy the addition of a rlcid standard such as
that proposed require more extensive consideration by Congress, bank regulators
and others. You stated nhen intrnduclng S. 2721, the prmlecessor to S, 72, "An
analysis of the growth of large hanking Institutions reveals that over the course
of the past 25 years, the 10 and 25 largest hanking Institutions have Increased
their share of the nation's bank deposits from 20 percent and 30 percent respec-
tively, to 2B percent and 89 percent," These figures fall to demonstrate any clear
trend toward concentration of banking assets In this conntry when It Is under-
Stood thst the computations include foreign, as well as domestic, deposits.
Without taking foreign deposits Into account no trend is evident, as over the
last two decades the percent of total domestic deposits held hy the 100 largest
banks has remained relatively constant. In fnct, during the period of most raiJd
holding company expansion, twni 1966 to 1975, aggregate concentration actually
declined by nearly one percentage point.

lu connection with the spedflc test used by the bill to determine concentra-
tion, a review artificially limited to bank assets only, as opposed to assets of all

Digitized bvGoO^^IC

41

competlug flnanclBl institutions, (s of questionable lesltlmacr. With the trend
toward diminution of diBtlnctions among financial inatitutloas, any &m«nd-
ment requiring banking agencies to ignore the competition to Iwnka and banli
holding companies posed by other flnancial institutions roust l>e approached
cautiously. Representative ot the growing Intensity of this competition are the
margin-l>ased casli management program recently initiated by Merrill, Lynch,
third party payment share drafts offered by credit unione, and N.O.W. accounts
available at thrift institutions In New England,

A second problem with the 20 percent of statewide bank assets standard Is
that it would give no recognition to competition presented by out-of-state banks.
A slgnlflcant number of Standard Metropolitan Statistical Areas ludude por-
tions of more thau one state. An agency reviewing a proposed bank merger afteet-
Ing a bank in any of those SMSA's should not be required to ignore other finan-
cial Inatitntlonfl in the area merely because they happen to be chartered In a
difFerent state.

Finally, facts mav not bear out the presumption of excessive concentration
inherent in the application of a strict numerical standard snch as that proposed
in sections 101 and 201. Toda.v, more than 15,000 commercial banks are actively
doing Imsinesi across the notion, not to mention thousands of other institutions.
Including savings and loan associations and credit unions, which also accept
deposits, extend crcd t and jirovide other financial services.

Section 102 would amend 12 U.S.C. 1828(c) by adding a new paragra[b (»),
which primarily would establish an Indei)endent right of thi- Justice D^>art-
ment to challenge mergers which do not conform to the standards of 12 TJ.S.C.
lg2R(c) (5). In this regard more particularly, this new paragraph would also
dfclare Illegal any lank merger which has the effect described In the proposed
new Bnbparagraph (C) of 12 L'.S.G. 1828(c) (S). Thus, a merger which exceeds
the 20 percent of statewide bank assets teat would be per se illegal. Section
203 won'd amend the Bank Holding Company Act with the same results.

No other industry is subject to such a strict numerical standard for per se
Illegality, Furthemiore, the U.S. Supreme Court has indicated In recent cases
that It no longer views statistical demonstrations of market shares as conclusive
Indlcatnr.-i ft a uti com pell five effects (See VS. v. Gencrul Dynamics Corp., 415
n.8, 486 (1974). This trend began with the landmark decision of Brown Shoe v.
V.8. in wliich the Court noted ;

'■Statistics reflecting the shares of the mailcet controlled by the industry
leaders and the parties to the merger are, of course, the primary index of
market power; but only a furlher examination of the i>articular market— Its
rtmcture, history and probable future — can provide the a|:^ropriate setting for
Jndgii^ the probable anticompetitive effect of the merger." 370 U.S. 294 at S2Z,

In light oi: the difBcuitles in this area we would hope the Committee will
proceed with careful deliberation.

On ■ separate matter, we find section 401 to display a serious conceptual
fault. The apparent intent of the section is to legislate uniformity of all bank
and bank-related activities, whether engaged In directly or indirectly by u bank
holding company or a national bank. However, by limltins national banks to
those activities approved by the Federal Reserve for bunk holding companies.
section 401 would seem to create a circular standard which not cmly begins at
the wrong place but also is inconsistent with speciflc statutory authority con-
ferred upon national banks— See. e.g., 12 U,S,C. 24(7), G2. Under the provision
BB now drafted, a national bank could be liarred from euj(nt!ing in an activity
for the wholly Illogical reason that that activity U prohibited to a holding
company even when the activity la plainly proper for the bank itself,

Moreo-.-er, such an approach could lead to curious competitive Inequalities be-
tween rational and state member banks. It the concept were valid, it would
seem that proper regard for its impact would call for extending it to ail insured
banks.

This is not to say that I am completely satisfied with the present regulatory
■tmctnre over bank holding companies. I am not. As I have testified before the
Committee, this system, with authority divided Itetween bank regulators and
the Federal Reserve System, does not always work smoothly. A bank holding
company shares common Identity and assets with lis subsidiaries. However, the
Comptroller has no authority to Issue cease-and-desist orders, to approve or
disapprove applications, or to take other supervisory measures against a hold-

DigilizedbvGoO^^IC

lug compaoj, even if the only Bubeldlory of the holding company Is a naUoaal

Clearly, thlB divided tesponelbillty ehonld be modified In a conslmctlve way.
nierefore, I have recommended that the federal regnlatory agency whldi la
respCHistble for sapervlsfng the bank or banks which hold a majority of eaBcts
of a bank holding company serve as the principal anpervlsor of that holding com-
pany as well. Of course, I recognize tliat a shifting of charters within a multi-
bank holdli^ company may result In undeatrably frequent change In regulators.
To address this problem, I have also si^gegted that after the initial regnlatw
has been determined by the majority of assets In a holding company, change rf
regulators not occur unless two-thirds of the assets change from one type of
diarter to another.

I trnst that these vlewa will be helpful in Committee deliberation on S. T2.
Sincerely,

John O. Hew an n.
Comptroller of the Currency.

Statement e

We appreciate this opportunity to submit our views on S. 72, the "Competi-
Uon In Banking Art of 1&77."

In general terms, 8. 72 would (1) prohibit any bank merger or acqnlaftlon If
the resulting bank or Its parent holding company would thereafter control more
than 20 percent of the bamdng Bsseta In a particular State except where e*-
sentlel to prevent a bank failure and where no feasible, less anticompetltiTe,
alternative solution were available, (2) narrow the statutory standards under
whic-h the Federal Reserve determines what activities are permissible for bank
holding companies and formallee the administrative procedures by which the
Board makes these determinations. (3) prohibit national banks or their subsid-
iaries from engaging in activities in which the Federal Reserve does not permit
bank bold'ng companies to engage, and (4) direct the Federal Reserve to require
that bank holding companies and their subsidiaries (including all banking sub-
sidiaries) be capitalized and otherwise financed In a safe and sound manner and
that bank anbeidiaries refrain from discriminating In favor of their parent hold-
ing companies or affiliated subsidiaries In extending credit.

Section 2 of the bill recites congressional findings to the effect that (a) con-
centration of banking resources has "continued unabated," (b) the "explosive
growth" of bank holding companies has contributed to this concentration, (c)
bank holding companies have extended their services into areas "beyond tliose
directly related to banking" such as selling Insurance, underwriting and market-
ing securities. ofTering leasing, accounting, travel and courier services, as well as
management and data processing services, and (d) the Nation's credit resources
have been "misallocated by the activities of bank holding companies" without
the Federal Reserve having adequately exercised its oversight responsibilities
to protect the public Interest.

In my opinion, S. 72 would not effectively achieve its goal of promoting com-
petition among financial Institutions and it could, in fact, be anticompetiUTe
to the extent that It would prevent bank holding companies from offering tile
types of services cited In the preceding paragraph.

In addition, by empowering the Federal Reserve to delineate the charter
powers of national banks and to determine carttal adeonacy for all banks In a
bank holding company system (including national and State nonmember banks),
enactm«it of the bill would represent a major and fund'amental departure from
the present Federal hank regulatory structure. While I am not wedded to the
existing bank regulatory structure, I am concerned by the changes this hill would
make in the structure. Giving the Federal Reserve authority to prescribe capital
adequacy fnr national banks and Insured State nonmember bankR that are
afflliated with holding companies and to circumscribe Indirectly the permissible
activities of national banks would be a major step toward centralizing the Fed-
eral regulation of banks In the Federal Reserve. I have stated In previous testi-
mony on the Federal Bank Commission Act twfore this Committee my tentative
conclusion that bank supervision and regulation should be divorced trom the
formulation and execution of monetary policy.

Digitized bvGoO^^IC

BANKINQ CONCBNTBATION

Hie bill's prohibition against any merger or holding company acquisition result-
ing tn one banking Institution controlling more than 20 percent of the banking
assets in a given State is premised upon the "explosive growth'' of bank holding
companies. Evidence on the concentration of domestic t^eposits In the lar^st 100
banking organizations was presented by Samuel H. Talley in the March 18, 1976
Issue of Washington Financial Reports as follows :

TftENDS IN NATIONWIDE CONCENTRATION. l«;-73

rtntid a( iBbl dt

Pircintiii point chmit

19S7

19S1 196« 19M 1973

19S7-6g 19M-7J

n.2

4ft 4 49,3 49.0 47.0

+aB -2.0

Soarct: Boird ol Govtmon Ol Ih* FHii*) RtMrv* SyiHm.

Based on these figures, no trMid toward increased aggregate eonoent ration
la evident. Indeed, from 1968-1973, aggregate concentration declined by two
percentage points, despite the fact that this was a period of rapid holding
company expansion.

Interestingly enough, while holding company acquisitions accounted for only
2J* percent of the growth of the 20 largest banking organizations between
1968-73. 30.0 percent ot the growth of the "next 80" banking organiiations
during this period was accounted for by holding company acquisitions. These
differences may reflect the constraining Influence of existing antitrust laws and
bank regulatory standards on acquisitions by the nation's largest holding com-
panies, liiey may also reflect the fact that during this time period the largest
banks turned their attention toward foreign markets.

However, because S. 72 would limit acquisitions on the basis of Statewide
concentration and la apparently motivated iiy a desire to stop trends toward
increased concentration, it would be more instructive to examine changes In
Statewide concentration in recent years. The table below presents Statewide
concentration figures, based on the three largest banks or banking organizations
for 19(10 and for I97S. as well as changes in concentration over that period.
States are grouped according to branching status at the end of 1975. Within
branching categories States are ranked in descending order tiased on concen-
tration tn 19G0.

PERCENTAGE OF STATEWIDE COMMERCIAL BANK DEPOSITS IN 3 LARGEST BANKS OR BANK GROUPS

IS. 91

!l.»4

8m footnote at end ol table.

D„ii„.db,Go(5glc

44

PERCENTAGE OF STATEWIDE COMMERCIAL SANK DEPOSITS IN 3 LARGEST BANNS OR BANK GROUPS

wn?

«»

< Dnotof tiM pruHKi at Mlln mnlllbinli hoMIni cofliptnln In individual SW*.
> SloM Jin. 1, 197E, KMmtldt bnnchlni li Mf mItM in Nfw York.
' On J)i. 1, 1977, Fm Id* mm! to counlywIiH brinchlni.

An analyslB of these data indicates that there iB no overall trend toward In-
creased concentration. Between 1960 and IflTS. Statewide branching States ex-
perienced an average Increase in concentration of 0.80 percentage points. Limited
branching States and unit banking States, in turn, experienced an average de-
crease of 0.03fi and 1.T8 percentage points, respectively, here is also no trend to-
ward increased concentration evident in the data if Ststes are grouped according
to whether holding companies are permitted.

In general, the most concentrated States experienced declines in concentra-
doD, and the least concentrated States bad Increases. Bach of the four instances
where States had Increases of more than 10 percent {Maine, New Hampshire.
Vermont and Virginia) can be espifllned in large part by changes in the States'
banking laws. Hence, S. 72's finding that concentration of banking resources lias
"continued unabated" clearly is not borne out by these figures. What the figures do
indicate, however, Is that concentration levels vary considerably among the
several States. The thrust of S. 72 ignores these differences.

Another recent study in banking concentration is summarized in the May 1977
Federal Reserve Bnlletin. The purpose of this study was to identify recent trends
in the atructare of 213 standard metropolitan statistical area (SMSA) banking
markets and 233 county banking markets over the 1966-75 period.

The results of this Federal Reserves study indicate that most SMSA and connty
banking markets acquired a more competitive structure between 1966 and 19TS.
Moreover, these procompetttlve changes tended to he quite sizeable. This study
also found that procompetltlve changes in banking market concentration oc-
curred with greatest frequency and in largest magnitude in those SMSA and
county Iwnking markets that bad a relatively high concentration ratio in 1966.

Finally, the study examined changes in banking market structure according
to the branching laws of the States in which the markets were located. In all
three branching classlflcatlons^uutt banking, limited branching, and Statewide
branching — it was found that most markets experienced procompetltlve stmc-
tural changes between 1966 and 1975. The most frequent and largest proeompeti-
tlve structural changes occurred in markets located in Slates with unit banking
or with Statewide branching.

Digitized bvGoO^^IC

45

AlCbough no alarming trend toward increased banking concentration Is
evident, It is true that concentration has remained high In some markets and
has Increased In some. Even in the Statewide branching States exhibiting the
greatest declines In concentration, the three largest Institutions still control about
T5 iiercent or more of the States' banking resources.

A lin»ic shortcoming of the proposed legislation, however, is the assumption
that Statewide concentration figures are relevant measures of banking competi-
tion. The Supreme Court in the past has consistently rejected the use of State-
wide dejfOKlI concentration figures when considering cases under Section 7 of
the Clayton Act.' In this context the State Is neither a "section of the country"
nor a "relevant geographic market." Aggregating assets or deposits from the
many economically diversified and geographically dispersed markets across a
State does not necessarily yield a meaningful measure of the banking structure
and level of competition in the separate markets within that State. Further-
more, a foothold acquisition by a large banking organization in a highly con-
centrated market could well have procompelitlve effects within tliat market
and negligible adverse effects In other less concentrated markets tbrougbout the
State. However, such an acquisition, if It exceeded the 20 percent "cap," would
be prohibited by the Competition in Banking Act.

I do not believe, therefore, tbat the proposed 20 percent limitation would
make a meaningful contribution toward keeping tlie concentration of banking
resources within bounds that are compatible with the maintenance of competi-
tive t>anking markets.

Another problem with the proposed prohibition of a merger or acquisition
where the resulting bank or holding company would control more than 20 per-
cent of tbe banking assets In the State Is that it would impose an arbitrary
standard which would not permit consideration of such factors as competition
from other financial institutions.

Furthermore, the 20 percent of Statewide bank assets standard would give
no recognition to competition presented by out-of-State banks. A signiflcant
number of Standard Metropolitan Statistical Areas include portions of more
than one State. An agency reviewing a proposed bank merger affecting a bank
in any of those SMSAs should be able to consider the activities of all other
financial Institutions In the area.

Section 102 would declare illegal any bank merger which eiceeda the 20 per-
cent of Statewide bank assets test, thus making such mergers per se Illegal.
No other industry is subjected by Federal statute to such a strict numerdal
Etandard for per se Illegality. The Supreme Court has indicated that it does not
view statistical market shares alone as conclusive Indicators of anticompetitive
effects. United Staten v. General Dtmamici Corp., 415 U.S. 486, 498 (1974). In
Brown Shoe Co. v. United State», 370 U.S. 294 (1962) at 322 n. 38, the court
stated as follows :

"Statistics refiecting the shares of the market controlled by the Industry
leaders and the parties to the merger are. of course, tbe primary Index of
market [rawer ; but only a further examination of the particular market — Its
stmctnre. history and prottable future — can provide the appropriate setting for
Judging the probable anticompetitive effect of the merger."

For the foregoing reasons, an arbitrary cutoff for acquisitions of 20 percent
ot Statewide aaaeta, as suggested in the bill, is unnecessary and, in my opinion,
Inaiqwoprlate.

Apart from the desirability of Imposing a Statewide limit on bank concen-
tration, there Is a significant technical defect In the bill as it is now written. The
portion of the bill limiting bank mergers (Section 101) uses tbe total assets of
all bank.t witbin a State ns a basis for the 20 percent calculation. However, the
portion applying to holding company acqulstions ( Section 201 ) uses as a base the
"total banking assets held by all banks and bank holding companies located In
tbe State." For holding companies, this would appear to Include banking
assets beld in other States. While such instances are not prevalent, the con-
sequences can result In sizable inequities. In Minnesota, for example. Northwest
Bancorporatlon had total assets of $1.5 billion as of December 31, 1975, of which
13.3 billion was held by subsidiary banks outside of Minnesota. Hence, under tbe
tAU as drafted Independent banks In the State would be limited to acquisitions

:. 602 (1074). and United Stalet v.

Digitized bvGoO^^IC

where the resulting bank would hold less than 20 percent or Statewide assets,
while the holding company would be able to use as a base Statewide assets
pins the t3.3 billion. The result would be that a bank would reach its asset ceiling
at $3.5 billion in Minnesota while such a holding company could make Bfi-
qntsitlons uutli It surpasses 14.2 billion.

A further technical defect in the bill Is Its use of bank assets as a basis for
tneasuilDg concentration. Assets do not necessarily reflect the relative competi-
tive stren^s of banking orKanlzatlons within a particular State. U.S. securi-
des, for examine, are not competed for within any localized geograi^lc market,
and loans can be made, purchased or sold irrespective of the area from which the
funds were generated. A concentration ratio using total domestic deposlte,
however, while not a perfect measure either, would be more relevant to the blirn
apparent goals. Virtually all domestic deposits are subject to competitive pres-
sures and are more likely than assets to have been acquired in a localized area.
Hence, domestic deposits would seem to be a preferable basis for measurlnc
relative competitive strengths of banking firms operating with a given market

STATCTORT BTANOABDS FOR BANK HOLDINO COMPANIES

Section 301 of S. 72 wonld restrict permissible activities for bank holding
companies under Section 4(c) (8) of the Bank Holding Comf>any Act to those
"directly" related to banking — narrowing the present "closely related" standard.
Under the amended public benefit test —

1. It would be necessary that the activity be "likely" (In lieu of "can reason-
ably be expected" ) to produce benefits to the public ;

2. It would be necessary that the activity be likely to produce Increased com-
petition over Ume, not just In the short run as suggested by present law;

.1. It would be necessary that the beneflclnl effect of the activity "clearly out-
weigh" adverse efl'ects, not Just "ontwelgb" as provided by present law ;

4. It would be necessary that the activity not have a tendency to lead to an
undue concentration of "economic or financial" resources, not just "economic
resources" as provided by present law ;

5. It would be necessary that the actlvit]- not lead to decreased competition
over time, not Just In the short run :

6. It would be necessary that the activity not risk the financial soundness of
the bank holding company or Its banking subsidiaries (the present law is sllent
on this point) ; and

7. It would be necessary that the activity not Interfere with the primary
responsibility of the bank holding company or Its banking subsidiaries to pro-
vide banking services to the public (the present law is silent on this point).

The bin would grandfather those activities In which a bank holding company
was lawfully engaged on November 1, 197,'5, so long as the bank holding com-
pany does not expand the scope or size (In terms of volume of business) of the
grandfathered activities to any significant degree.

It should be noted that bank holding companies have provided healthy com-
petition In areas where there bad been little or no competition before, as well
as convenient one-stop service for consumers of banking, travel, insurance, and
other services. This has Increased competition in these service markets and
has afforded bank holding companies the potential to diversify risk through
product diversification. Drawing a stricter public benefit test could reduce or
eliminate such lieneflfs.

Let me stress again that any anticompetitive effects of undue concentration
of economic or financial resources should be considered for both banking and
nonbonklng functions of bank holding companies, and determinatlnns should
he based on the relevant facts In each esse. While antitrust suits against
bank holding comnanies may be time-consuming and expensive, this posslbtllty
exists for all antitrust proceedings, and should not be the basis for Imposing
limitations on bank holding companies which could limit competition and be
detrimental to consumers.

Nor should hank holding company activities be restricted merely because a
IKitential for abuse exlsti. Unfair competition and other abuses should lie dealt
with liy the regulatory agencies, as neoeasar.v. for both hanks and bank holding
comnnnles. Also, anv likely adverse effects on (he financial siundnesa of hanks
resulting from any banking or nnnbanking activities of bank holding cimpanles
can best be dealt with by efTectlve regulation based on the parilcular circum-
stances, rather than by across-the-board statutory restrictions.

Digitized bvGoO^^IC

47

It is my view, therefore, that Congreaa should consider very carefully whether
legialatton designed to protect various types of industrieB from the vigoroua
competition of bank holding companies Is truly in the overall public Interest. It
may well be that such a legislative approach could have a serloas anticompeti-
tive impact.

F ALL BANKS

Section 401 of the bill would prohibit national banks or their subsidiarieR
from engaging in activities found by the Federal Reserve to be prohibited to
fa*nk holding companies under section 4(c) <8) of the Bank Holding Company
Act of 11136. This provision is designed to prevent situations where the Comp-
troller of the Currency could permit national banks to enter activities directly
that the Federal Reserve had not approved under section 4(c) (8).

By requiring national lianks to follow the standards of the Federal Reserve
regulations, t>eclion 401 may prohibit natioual t>anks from participating in sonv>
currently permissible bank-related activities. Thus, the section can be viewed
as a device for protecting Mme industries from the effects of competition.
Furthermore, enactment of the section in its present form cannot provide full
uniformity of standards, for some of the laws governing activities of national
hanks are more restrictive than those governing holding company activities.

Section 501 would require that (1) bank holding companies and their sub-
Bldiaries be capitalized and otherwise financed in a safe and sound manner as
determined by the Federal Reserve, (2) bank subsidiaries of bank holding
companies refrain from discriminating in favor of their parent or their afflUated
subsidiaries In the making of loans or in the establishing of terms and condi-
tions of loans, and (3) bank holding companies disclose on a regular basis to
the Federal Reserve the terms and conditions of all loans to or Investments in
bank holding cconpany subsidiaries. The Federal Reserve in turn would be
required to make this Information public.

As discussed earlier, T believe that Sections 401 and SOI would be a major
step toward realigning the Federal regulation of banks. While assuring uniform
treatment In some areas, these sections would not eliminate the existing frag-
mented regulatory framework under which a bank holding company could be
supervised by all three Federal banking agencies. As I indicated last Septem-
ber In teetlmony on the proposed Federal Bank Commission Act (S. Of^), I
believe that fragmentation of hank holding company supervision Is a serious
inadequacy In the present regulatory framework at the Federal level. Becent
events have illustrated that the existing framework has not only been costly
because of the overlapping and conflicting Juriadictions Involved but also ^mply
has not functioned properly in some instances.

In three of our largest hank failures — the Insolvencies of Hamilton National
Bank of Chattanooga and the American City Bank of Milwaukee and the dis-
tress merger of the Palmer National Bank of Sarasota. Florida— -the cause was
massive unsafe and unsound lending practices occurring tn the essentially un-
supervised environment of a non-banking holding company affiliate. The failure
of the Hamilton National Bank is perhaps the most graphic case. Hamilton
Mortgage Corporation, based in Atlanta, Georgia, got into difl3culty during 1974
when its borrowing capacity evaporated and it was unable to fond Its loans or
commitments to lend. More than $130 million out of a portfolio of $200 million in
real estate loans, concentrated primarily In i^Kculatlve land acquisition and
construction loans, was funded by Hamilton banking subBldlaries through the
purchase of loan participation. Many of the loans originated by the mortgage
company were of inferior quality and when the real estate market collapsed In
1974 Hamilton banking affllates. particularly Hamilton National Bank of Chat-
tanooga, were left holding a large volume of bad loans.

These cases Illustrate two points which should be recognieed by both the bank-
ing agencies and the Congress. First, one segment of a holding company system
cannot easily be insulated from the remainder of the system. These cases also
have shown that t)ecause a holding company tends to be operated as a integrated
enterprise, it is simply a form of self-deception to assume that the lead bank,
or any other holding company banking affiliate, is in a safe and sound condi-
tion because Its last examination was satisfactory, if other facets of the holding
company system are not undergoing equally rigorous scrutiny.

Digitized bvGoO^^IC

48

Secoad, It makes little sense for as many as three Federal bank regalatorr
agencies to Iiave safety and soundness Jurisdiction over various segments of an
Integrated business enterprise. Inevitable, tlils approach will be at times con-
flicting and uncoordinated.

During the congressional debate over the 1970 Amendments to the Bank HcM-
Ing Company Act of 195tl, holding company safety and soundness superrlsion was
not a matter of great concern. The emphaslB at that time was on providing safe-
guards against undue concentration of economic power stemming from batUi
holding company acquisitions of banking and non-banking subsidiaries. For ex-
ample, In testimony before the Senate Banking and Currency Committee on the
1970 Amendments, Charles Walker, then Under Secretary of the Treasury, stated
that legislation was required to stop the trend toward the merging of banking
and commerce that was taking place through the vetilcle of the one-bank holding
company. Federal Reserve Board Chairman Arthur Bums voiced similar con-
cern. Although there was discussion during consideration of the 1B70 Amend-
ments about dispersing supervision and regulation of bank holding companies
among the three Federal bank regulatory agencies, the emi^asis on the com-
petitive and banking structure aspects of the bank holding company movement,
coupled with the Federal Reserve's responsibility for admlnlBteiing the 1956
Bank Holding Company Act, led the Congress ultimately to delegate respon-
sibility for administering the 1970 Amendments to the Federal Reserve System.

That such little consideration was given to the consequences of fragmenting
responsibility over the different segments of a holding company system probably
reflected, in part, the prevailing theory that the respective entities within a sys-
tem could be eETectively Insulated from tronbles elsewhere in the system. It also
may have reflected the notion that the larger Institutions in the holding company
system, like the lead bank, would be a source of strength for all the components
of the system. Events since the passage of the 1970 Amendments have demon-
strated flaws in these assumptions and the inherent weakness of the existing
fragmented regulatory framework. In spite of the rhetoric about the legal separa-
teness of each entity within the bank holding company, it has become more and
more apparent as we have gained experience that a bank holding company
should be regarded as a single, integrated unit.

In sum, I believe that Sections 401 and 501 would exacerbate that current
overlapping and conflicting Jurisdictional framework for the regulation and
supervision of bank holding companies. By giving the Federal Reserve express,
ongoing supervisory authority over the capital position of all subsidiary hanks
of bank holding companies and over the corporate powers of national banks,
these Sections represent a significant Increase in the Board's supervisory powers
over banks and a significant diminution in the supervisory powers of the Comp-
troller, the FDIO and the States. Arguably, Section 501 could place the Federal
Reserve In a preeminent position over the Comptroller and the FDIC In the
matter of banli capital adequacy largely because there would be an express and
continuing statutory mandate for the Federal Reserve Board to make deter-
minations as to capital adequacy. There Is no comparable express statutory pro-
vision so directing the Comptroller and the FDIC, except, of course, with respeot
to bank applications.

Section 501 Is also objectionable because it is Indeflnlte and provides no
guidance as to how it is to be Implemented and administered. There Is no hint as
to how the power over capital adequacy given to the Federal Reserve Board
is to mesh with similar existing powers of the Comptroller or the FDIC. Nor is
there any provision establishing a means or method of enforcing the Section.
What happens if the Board and the Comptroller or the PDIC disagree as to the
capital adequacy of a subsidiary bank? The bill Is silent on both grounds.

In my Judgment, tjie Federal bank agency charged with supervising the
lead hank of a bank holding company comniex should be given resnonsiblllty for
snpervising the entire Systran, Including the holding company Itself.

Under n lead bank arrangement, the Federal Reserve Board could function
in much the same manner as It does now. mat Is, the Board could issue regnla-
tlons and Interpretations for all bank holding companies and conld even retain
authority to approve or disai^rove applications under the Act. However, ongo-
ing supervision of each l>ank holding company would rest with the Federal
agency having primary Jurisdiction over the lead hank. "Hie lead bank could
be determined on the basis of total deposits or total assets as of year-end
preceding enactment of the amendment to the Act.

Digitized bvGoO^^IC

49

The one bank holding company would, of course, present no partlcalar prob-
lem. However, for a multi-bank holding company Hltuatlon comprised of a mtx-
Inre of national and State member and noampmber banks. It would mean that
the saperrlBor of the lead bank would aapervlBe all banks within the bank
holding company family regardless of whether the banks were national, State
member or nonmember l>anks. Thus, there would be uniformity as to the scope
of acdvlties of bank holding companies and aa to the criteria, and application
of the criteria, for entry and acquisition, while at the same time the present
frapn^nted and ineffectual supervisory framework would be eliminated and
corrected.

Section 601 also provides Uiat "bank subsldiarleB ot bank holding companies
refrain from discriminating In favor of the parent holding company or their
affiliated subsidiaries in the making of loans or In the establishing of terms and
conditions of credit." In addition. Section 601 mandates the Board to require
each bank holding company to flle a report with the Board detailing the "terms
and conditions of all inter-company loans and Investments" for the 12-month
period immediately preceding the report.

Rather than a flat statutory prohibition, I would prefer to see a statute
drafted along the lines of the FDIC's Insider regulation (1337.3), whereby
insider transactions are not proscribed per se but Board review and approval
is mandated, appropriate records and minutes must be maintained for examiner
review, and the agency has the prerogative of taking action where abuse Is
present even though the statute (or regulation) has been followed.

Perhaps the best way to accomplish this would be to provide that the Federal
Reserve must issue a regulation dealing with insider transactions of bank
holding companies and to prescribe certain statutory guidelines which must be
Inclnded in the regulation, without prohibiting Insider loans Including those
that may be made nn more tavorable grounds than to outsiders of comparable
creditworthiness. 'Oiere may be instaacea where the economics of a situation
may warrant making a loan on more favorable terms to a member of the l)ank
holding company organization. Such a flexible alternative, rather than absolute
prohibition, would enable the Federal Reserve to deal more effectively with
the dynamics of the situation In much the same way as the FDIC can In enforc-
ing its insider regulation.

In condaslon, let me summarise our views on 8. 72.

First, I do not believe that the bill's premise of drastically Increased bank-
ing concentration baa been substantiated. On the contrary, objective analjals
of available data snisests a net decrease of concentration in Statewide bank-
ing markets In recent years. However, the State is generally not a relevant
banking market and a Statewide limitation on banking concentration would not
be procompetltive in most circumstances. The bill would also tend to be anti-
competitive to the eitent it prevents bank holding companies from expanding
tbeir anrtces into bank-related activities.

Furthermore, in giving the Federal Reserve power to define cairital adequacy
for national Itanks and for State-chartered banks which are not members of the
Federal Reserve System as well as the power to delineate the corporate powers
nt national banks, the bill to a large extent prejudges the merits of consolidat-
ing the Federal bank regulatory structure without really focusing on the Issues
Involved in sudi a centralization. Alternatively, I would recommend a realign-
ment of holding company re^nlatlon along the lines suggested above. In any event
I would strongly recommend that reorganization of the Federal bank regulatory
structurp be approached directly and openly and not decided by Indirection on

For these reasons, I oppose enactment of S. 72.

Digitized bvGoO^^IC

D„ii„.db,Go(5glc

COMPETITION IN BANKING ACT OF 1977

WEDNESDAY, KABCH 8, 197B

U.S. Senate,
Committee on Banking, Housinq, and Urban Affairs,

Washington, D.C.

The committee met at 10 a.m., in room 5802, Dirksen Senate Office
Biiilding, Senator William Proxmire (chairman of the committee)
presiding.

Present : Senators Proxmire, Sparkman and Brooke.

The Chairman. This is in its second day of hearings on the Com-
petition in Banking Act.

We have this morning a panel of distinguished witnesses : Mr. Ray-
mond Campbell, president of the Oberlin Savings Bank of Oberlin,
Ohio and vice president of the Independent Bankers Association of
America; Mr. J. Rex Duwe president of the Farmers State Bank
in Lucas, Kans., and former head of the American Bankers Associa-
tion; and Mr. John C. Geilfuss, chairman of the Marine Corp., Mil-
waukee, Wis., Association of Bank Holding Companies.

Well, I understand that Mr. Campbell has another matter that has
come up that is extremely urgent and no way ho could avoid it, so he
won't be here, but a substitute is coming to take his place and will be
here in 20 minutes, so we will start off with Mr. Duwe.

Senator Brooke. I have an opening statement.

The Chairman. I b^ your pardon.

SIATEHEITT OF 8EHAT0E BBOOKE

Senator Brooke. I appreciate that, Mr. Chairman.

Mr. Chairman, I deeply regret that my schedule did not permit
me to attend yesterday's hearings. I believe that the subject of regula-
tion of hank holding companies which is dealt with in your bill, S. 72,
is one that deserves very close examination by this committee. And. as
you know, I was deeply involved in the consideration of the bank hold-
mg comiiany legislation which led to the enactment of the Bank Hold-
ing Company Act amendments of 1970 and I continue to be interested
in this area.

I have reviewed the testimony which the committee received yester-
day from the Justice Department and the Federal Reserve Board and
I was interested in the point made by Assistant Attorney General
Shenefield that the burden of proof of the need for restrictions on the
activities of bank holding companies should be on those who would
(61)

Digitized bvGoO^^IC

oppose such restrictions. There's no question that there is potential
for abuses in any situation where a creditor may link the granting of
the credit to the provision of other services which he has to oiTer
through his bank holding company. However, in seeking to prevent
abuses, we should be careful not to stifle legitimate competition.

So, Mr. Chairman, having said that, I look forward to hearing
the testimony of the fine panel of witnesses who are appearing before
the committee this mormng not only on the subject of the activities
of bank holding companies but on the question of concentration of
banking resources which you also address in S. 72. I thank you.

Tlie Chairman. Thank you. Senator Brooke.

Mr. Duwe, we would be happy to have you go ahead. I might say,
if you abbreviate your statement in any way, it will be printed in
full in the record,

STATEUENT OF J. REX DUWE, CHAIBMAIT, FARHERS STATE BANK,
LTTCAS, KAITS. ; AlTD FAST FRESIDEKT OF TEE AHERICAS BASS-
ERS ASSOCIATIOIT

Mr. DuwE. As you stated, I am chairman of the Farmers State
Bank in Lucas, Kans. and a past president of the American Bankers
Association whose membership includes approximately 92 percent of
the Nation's nearly 15,000 full service banks. I welcome this oppor-
tunity to present the views of our association aa S. 72, the Competi-
tion in Banking Act.

[Complete statement follows :]

Stateuent of J. Rex I>dwe

Mr. Cbalrman aod memberB of the Committee, my name is J. Rex Duwe of
Lucas, Kansas. I am Cbalrman of tbe Farmers State Bank In Luces, Kansas.
I am also a past President of the American Bankers Aaaocifltlon wbose member-
ship Includes approximately 92 percent of tbe nation's 14,000 banks. 1 welcome
this opportunity to jffeeent the views of our Aseoclatloa on 8. 72, the Competition
In Banking Act.

The American Bankers Asaoclatlon believes tbe Competition In Banking Act
(S. 72) is misnamed and misdirected. Even though the title suggests tbls legisla-
tion would enhance competition In the financial system, we believe S. 72 Is really
anticompetitive and would, in fact, have a negative Impact on the competitive
environment. Procompetltlve legislation Is nanally designed to benefit the public,
but we feel the primary beneficiaries of S. 72 will be Industries wltb an Interest
In preventing or delaying bank and bank holding company entry into banking
related activities and thereby preventing them trova offering competitive services
to the public.

Speelflcally, we believe, the Competition in the Banking Act would :

1. Make unnecessary additions to current long-standing antitrust standards
with respect to bank and bank holding company acqulslUonB, mergers and
consoUdatlnns.

2. Virtually repeal the 1970 Amendments to Section 4(c) (8) of the Bank Hold-
ing Company Act which gave bank holding companies, through strict Federal
Reserve Board supervlBion, greater flexibility in order to meet the changing
needs of their customers.

3. Move toward a de facto consolidation of the federal bank regulatory agen-
cies by giving the Federal Reserve Board broader authority over national banks
and state-chartered nonmember banks.

In short, we do not believe these proposed changes can be Justified by tbe facts,
and would If enacted, actually result in less c<Hnpetitlon between InsUtations
offering financial services.

Digitized bvGoO^^IC

eEcnons 101 aitd 201

Sections 101 and 201 woold establlBh new antitruBt standards for bank yid
bank holding company acqulsltlonB, mergers and consolidations by limiting such
transactions to institutions with less than 20 percent of the banking asBets In
the state in wblch the bank or bank holding company Is located. Sections 101
and 201 would also give the bank regulatory agencies the discretionary authority
to deny bank or bank holding company transactions which do not violate the
Sherman Act or the Clayton Act If the actlcompetltlTe conflequences of such
acquisitions, mergers or congoUdatlons are not clearly outweighed Id the public
Interest by the probable effects of such transactions In meeting the convenience
and needs of the community.

The American Bankers Association believes that both the Sherman and Clayton
Acts as well as existing antitrust proTialons of the Bank Merger Act and Bank
Holding Company Act are sufficient to prevent antl-competltlve acquisitions,
mergers or consolidations that are not In the public Interest. Therefore, to author-
ize the banking agencies to deny transactlonB which do not violate the well estab-
lished principles of the antitrust laws Is unnecessary. More importantly, this
power would impose stiicter standards on banks and bank holding companies
than are applied to any other Industries or other types of flnanelal Institutions.
More Bpeclflcally, the Bank Mei^er Act and the Bank Holding Company Act
direct the appropriate federal hank regulatory agency to disapprove any anti-
competitive bank or bank holding company acquisition, merger or consolidation
unless the agency concludes that the anti-competitive effects of the transactlrai
'^re clearly outweighed by the probable effect of the transaction in meeting the
«mTenleuce and needs of the community to be served." These Acts also direct
the regulatory agencies to prohibit any transaction "which would result In a
monopoly, or which could be in furtherance of any combination or conspiracy to
monopolize or attempt to monopolize the business of banking In any part of the
United States." In all cases, the regulatory agencies are required to consider
the financial and managerial resources and the future prospects of the existing
and proposed institutions as well as the convenience and needs of the community
to be served.

An additional safeguard exists In the 30-day waiting period which Is imposed
before the transaction becomes effective. This gives the Justice Department time
to review all the Information relating to approved transaction, and to determine
whether or not the transaction comxKirts with antitrust laws.

We believe this comprebenslye process has been and continues to be very
effective In preventing anti-compeCItlve bank and bank holding company acquisi-
tions, merger or consolidations that would not be In the public Interest.

Two of the proposed findings in Section 2 of this legislation would have Con-
gress tlud that;

Concentration of the banMng resources of the nation into fewer hands has
con tinned unabated.

The explosive growth of bank holding companies has resulted in an increasing
share of banking resources coming under the control of these institutions.

Although it Is clear that there has been an increase In both the number of
registered Iwnk holding companies and their share of total bank deposits, as
shown In Table 1. the changes In nationwide concentration shown in Table 2
indicate these shifts in organizational form have not had a significant effect on
the concentration of banking resources.

TABLE l.-GHaWTH OF REGISTERED BANK HOLDING COMPANIES, I97D-7G

OliCM Ji ■ ptrcmtii* of ill ba

Dtpawb (In biBiani) 178.0 (297.0 1379.*

Dttnuti 11 1 pimnUfi ol ill bink di-

895

3. ISO

2.t»

i.m

13, Ml

3,097
15,17*

3.4fi2
17, 131

3,674

3.791
19, IM

4,1»

13, ;u

16,l«l

it, 171

20,S93

ii.m

2.990

D„ii„.db,Go(5glc

54

TABLE !.-NATIOHWtOE CONCENTRATION IN BANKING, SELECTEP YEARS. 1971-TS

SsuFo: M. Jnitt iiul S. SmIIi "Binli HoMinl Conpinln XMl Ui« PuUtc liittrait." Lnfnlton BoiiIk, 197T, p. 1«.

While we recognize that statewide or nationwide Information does not Indicate
the competitive situation in a particular niarket, a 1977 Federal Reserve Board
Stair Studj used approximations for local banking markets that are frequently
employed by the bank regulatory agencies, the Department of Justice and the
courts. (S. Talley, Recent Trend* m Local Banking Market Slrveture, Staff
Economic Study No. 89, Board of Governors of the Federal Heeerve System.
1977.)

We believe the results of that study not only conflnn the adequacy of current
antltrast standards, hut also refute the proposed finding which makes the claim
that concentration of the banking resources of the nation into fewer hands has
continued unabated.

The study examined 213 standard metropolitan statistical area (SMSA) bank-
ing marlceta and 233 county banking markets over the 1966-1975 period. For each
banking market, trends were measured by changes In (1) the number of banking
organtiatlons In the market; (2) the percentage of total market deposits held
by the three largest banking organisations In the market ; and (8) the Herflndahl
Index which takes Into account both the number and size distribution of organi-
zations In the market.

The study found :

1. The Nation's major banting markets as a group experienced significant pro-
competitive market structure changes over the period 1966-1975.

2. The magnitude of the pro-eompetltlve changes In market concentration gen-
erally were greatest in those markets that had the highest level of concentration
In 1966.

For these reasons, we question any need for giving the hank regulatory agen-
cies within their discretion, additional authority to deny transactions that do not
violate current antitrust standards. Moreover, given the fart that a recent Circuit
Court decision found that the PDIC could not apply more stringent antitrust
standards to acquisition applications than contained in Section 7 of the Clayton
Act, this proposed provision Is not and should not be viewed as simply a clarifica-
tion of existing authority. (Washington Mutual Savings Bank v. Federal DepoM
Tnturance Corp., 462 F. 2d 459 (9th Clr. 1973).) Olving the agencies additional
authority in this area would, In our Judgment, unnecessarily complicate what is
already a very costly and time-consuming process.

In addition, although Sections 101 and 201, are supposedly designed to CMitrol
the concentration of bank resoun;es and ensure competition In the banking indus-
try, we believe they are really anticompetitive and would, infact, have a negatlTe
Impact on the competitive environment.

Using a concentration ratio to Increase competition, as proposed In Sections
101 and 201, may actually disguise more than It reveals about the competitive
environment In a state. For example, a five bank concentration ratio of 100 per-
cent could mean five banks competing vigorously with one another In each of the
significant markets In the state. Alternatively, it conld mean each bank is domi-
nant In a sector of the state with very little competition within each of the sectors.
Or, to take another example, a four bank asset concentration ratio of 80 percent
does not tell us anything about the relative size of hanks below the four largest.
It could be that the four have equal shares of IB percent followed by three more
of IS percent or they might have enual shares and be followed by ten or more
banks, none of which have more than four percent. The two would present unite
dlfTerent competitive situations and, poss'hly. different behavior.

In addition, limits on statewide concentration ratios would not be In the public
Interest as they conld not reflect the economic, getwraphlc, or demographic factors
that vary from state to state. For example, trying to achieve the goal of a bal-
anced banking structure by imposing an Infiexlble statutory celling on banking

Digitized bvGoO^^IC

55

assets may m&ke It Impossible for banlu In eparselr populated states, like New
Mexico and Utah, to meet the needs of their cnBtomers. An inflexible statutory
ceiling on banking assets could also prevent the combining of smaller banks tiat
may wish to compete more efTectively with larger banks in a neighboring state.

Contrary to the premises of Sections 101 and 201, restricting statewide concen-
tration may actually encourage local concentration. For eiamjde, a lar«e state-
wide bank might be prohibited from entering a highly concentrated local market
when a de novo or foothold entry would probably dectracentrate the market and
enhance competition. In fact, according to Information Included in a study pre-
pared for the American Bankers Association by Golembe Associates of Washing-
ton, D.C., a number of the bank mergers and bank holding company acquisitions
that would have been prohibited by a 20 percent ceiling in effect from 1Q06-19T6
would have involved de novo banks or the kind of market entry enconraged by
long-standing antitmst policies.

Moreover, because some banking services (e.g., commercial loans) are fre-
quently offered on a nationwide or regional basis, placing an inflexible statutory
statewide celling on banking assets may have a negative Impact on economic and
Bodal priorities by limiting the flow of funds to capital deflcit areas. Imposing
Identical limits on all states could undermine economic and social priorities as
weU.

In snmmary, our Association believes that no case has been made for the estab-
lishment of additional antitrust standards to govern bank and bank holding
company aciiaialtlons, mergers and consolidations and we oppose Sections 101
uid 201 for that reason.

BEonon 301

The 1070 amendments to Section 4(c) (8) of the Bank Holding Company Act
allowed bonk holding companies to be in any business that the Federal Reserve
Board determined to be "so closely related to banking ... as to be a proper
Incident thereto." The 1970 amendments also added a "public benefits" test to
be osed in Board decisions on bank holding company expansion.

In determining whether a particular activity is a proper incident to banking
or managing or controlling banks, the Board shall consider whether Its perform-
ance by an affiliate of a holding company can reasonably be expected to produce
benefits to the public, such as greater convenience, increased competition, or
gains in effldency that outweigh possible adverse effects, such as undue con-
centration of resources, decreased or unfair cwnpetition, conflicts of Interests, or
nnaoand banking practices. (Section 4<c)(8) of the Bank Holding Company
Act)

Section 801 of S. 72 wonld place stricter standards on bank holding company
expanrion by prohibiting Federal Reserve Board approval of bank holding com-
pany activittes under Section 4(c) (S) uiilese the activity was both "so closely
and directly related to banking as to be a proper and necessary Incident thereto."
(Changes from existing law underlined) .

Section SOI would also tighten the easting "public benefits" test. For example :

1. It would be necessary that the activity be "likely" (In lieu of "can reason-
ably be expected" ) to produce benefits to the public ;

2. It would also be necessary that the beneficial effect of the activity "clearly
outweigh" possible adverse effects, not Just "outweigh" aa provided by present
law.

Additionally, the Findings and Purposes section (Section 2) of S. T2 would have
Congress find that :

Bank holding companies have extended into product markets beyond those
directly related to banking thereby eroding the line between banking and com-
merce in the Nation :

1. In offering Insurance agency and underwriting services,

2. in offering leasing, accounting, travel, and courier services,

3. in offering management and data processing service, and

4. In marketing securities.

Credit resources of the Nation have been misallocated by the activities of bank
holding companies and the Federal Reserve has not adcduately protected the
public Interest In approving activities In which bank holding companies could
engage and the Federal Reserve has not maintained continued oversight over the
activities of bank holding companies in a manner which protects the public
taitereet.

Digitized bvGoO^^IC

56

Vbta considered together, Section 801 and tbe Findings and FurpoBes section
rfrtnally create a list of acUTltieB tliat would be prohibited to Bank Holding
Companies if 8. 72 ts enacted. HiIb wonld tte In direct contradiction to and a
rapadlatlon of the judgment of tbe Congress in 1970. That Congress made a
consdoDS decision not to inclnde a eo-called negative laundry list of activltlea
prohibited for Iiank holding companies In the interest of aiiowlnf; the Federal
BeoeiTe Board greater flexibility in meeting tbe financial needs of the nation.

Bankers thronghont the nation are vitally concerned with preserving tbe
effectivenesG of banks and their ability to provide imaginative and dynamic
services (or the public In the future. We recognize that the financial needs of the
American people are changing and we believe that banking mnst remain flexible
in order to respond producttvely to new demands for finandal service. In fact, we
believe the case for maintaining flexibility is even stronger today than it was
eight years ago. Congressional recognition of this need and objective is also
clearly reflected in the legislative history accompanying the 1970 Amendments
to ttae Bank Holding Company Act.

In Its report on tbe 1870 amendments, this Committee agreed with FDIC
Chairman Frank Wille's statement on tbe need for greater flexibility In deter-
mining what bank-related activities and acqnlsltlona were to be permitted bank
holding companies :

Inasmnch as the economy and its financial recinlrements are conEitantly chang-
ing, tbe Corporation considers it essential timt banks and bank holding com-
panies have the flexibility to engage In new types of bank-related activities that
may be needed now and In the future If the financial needs of tbe people are to
be met efficiently, competitively, and at reasonable cost. Ukely changes in tech-
nology, the natnre of financial competition and the economic and legal functions
Of commercial banking all lead to a conclnaion that retaining such flexibtltty Is
tbe wise course (or the future, (Senate Committee on Banking and Currency,
Report on the Bank Holding Company Act Amendments of 1970, August 10, 19T0,
page 13.)

The Committee's report also noted the support of the Federal Reserve Board,
tbe Department of the Treasury, the Department of Justice, and the Comptroller
of tbe Currency for permitting greater flexibility.

The Senate version of tbe 1970 Amendments passed by a vote of 77-1. And,
daring this Committee's bearings on tbe Amendments, Federal Reserve Board
Chairman Arthur Bnms stated :

If banks and bank holding companies are to be prohibited from otTering service
simply because It might compete with a nonbank business, we can expect a
stagnant banking system and. perhaps also, a consequent drag on our economy.
(S^ate Committee on Banking and Currency, Hearings on Ibe One Bank Hold-
ing Company legislation of 1^0, May 14, 1970. page 144.)

It should also be remembered that the 1970 Amendments to tbe Bank Holding
Comnany Act became law approximately one year before the Hunt Commisaion
on Financial Structure and Regulation sabmitted its final report to the President.
In describing its approach, the Commission cited a statement in the 1970 report
of the Council of Economic Advisors.

nnandal services required by tomorrow's economy will difTer in as yet un-
definable ways from tbose appropriate today. Tbe demands on our flow of na-
tional savings . . . will l>e heavy in the years ahead, and our financial stractnre
must have the flexibility that will permit a sensitive response to changing
demands. (The Report of The Pretident'a OommUHon on Flnantrlal Strwctvrt
and RegulaUon, December 1971, page 7. )

Moreover, as shown in Table 3, close to 70 percent of the 2406 firms established
by bank holding companies In nonbanklng activities during the 1071-1975 period
Involved de novo entry. As discussed later in my testimony, the difference be-
tween de novo expansion and expansion by acquisition in an important distinc-
tion when considering the Implications on competition. This distinction was
recognized by the 1970 Congress and was dearly embodied In Section 4(c) (8).
Onr Association disagrees with the elimination of this important disUnctlon
under the proposed amendments to Section 4(c) (8).

Digitized bvGoO^^IC

Appravtd KquliHIoni

SiMirca:M.JiuM)ndS.SMlii. "Sink Holdin(Ci>rnpini*]ir)dthi Public lnt*r«it"Lulnt»nB<Mii, 1977,11. 40.

We believe bank boldiog company InvolTement In "closely related" activities
haa bad a positive impact od tbe financial systcme' responsiveness to consumer
needs. In contrast, we feel the proposed changes In Section 301 would actually
decrease competition as well aa Interfere with efforts to provide consumers with
a wider range of flnaneial services in a more efficient and convenient way.

Tbe expansion of bank holding company activities bas provided and will con-
tlntie to provide an alternate source of service that can stimtUate competition.
Competitively induced rate reduction on banking and nonbanklng services Is an
important direct benefit to tbe public and leads to an improvement in the quality
of competition in the market for tbe services Involved.

We alBo believe the Federal Reserve Board's current approach to bank holding
company regulation bas not resulted in a wealsening of the banking system.
Despite fears tliat tbe 1&70 Amendments wonid "unleash" the banking industry
Into divergent nonbanklng areas, this has not occurred. The Board has not gone
much beyond, and In some respects has not even gone as far as, the actlvittes de-
scribed to tbe Senate Banking Committee as probably permissible during the
hearings on the 1970 Amendments.

In fact, although approximately 2,000 bank holding companies currently control
over 1700 billion in assets, or close to 70 percent of all commercial bank assets,
nonbanking subsidiaries account for less than 6 percent of tbe total consolidated
assets of bank holding companies, and about 3 percent of the assets of tbe fifty
largest bank holding companies.

Our Association endorses the Federal Reserve Board's current awroach to
monitoring ban holding company activities because we believe It balances and
reflects the importance of both a safe and sound banking system and the need
for changes that improve convenience or meet expanded needs. For this reason
we believe Section 301 of S. 72 Is an unnecessary and nnneeded alteration of
the current Bank Holding Company Act, and we therefore oppose this section.

BBonoRa 801 ADD 701

While tbe proposed amendmenta to Section 4(c)(8) of Uie Bank Hidding
Cnnpany Act in Section 301 wonld effectively inhibit tbe entrance of bank bold-
lag companies into related activities, the enactment of Sections 601 and 701 of
of 8. 72 wonld also create the same result by greatly Increasing tbe procedural
burdens necessary before bank holding companies could enter into these banking
related areas. Therefore. I will comment on these sections before discussing
Sections 401 and 501.

Section 601 of 8. 72 would subject both the rulemaking and individual bank
holding company application procedures of the Federal Reserve Board to the
formal trial-type bearing requirements of Sections &Se and S67 of the Administra-
live Procedure Act. This would mean that all orders and r^rulatlons of the
Federal Reserve Board under Section 4(c) (8) would have to be conducted on tbe
record after opportunity for hearing. Section 701 of S. 72 would permit any in-
terested person to petition the Federal Reserre Board "to commence a proceed-

DigilizedbvGoO^^IC

58

fng to consider the iasnance, amendment or rcTOcatlon of an order or regalatlon
promulgated under the autborlty of Section 4(c) (8) of the Bank Holding 0(»n-
pany Act." Due to the increased burdenB created bj tliese two sections, and tbe
necessarily anticompetitive, stifling effect upon tlie entrance of bank holdiuK
companies into banking related actlTlties, the American Bankers Association
must ommse Sections 601 and 701.

Our Association believes the case for procedural reform has not b«en made.
More Importantly, we believe the case for de facto repeal of the ISTO leglalatlon or
even for substantial modlflcatlon of the Judgment of that Congress clearly has
not been made. Contrary to the Implication In the sect ion- by-sectlon analysis of
S. T2, tbe formulation of regulations hy the Federal Reserve Board with respect
to what constitutes permissible 4(c) (8) activities Is already subject to the re-
quirements of the Administrative Procedure Act under Section 553 which governs
the rulemaking process. These provisions for Informal hearings applicable to the
rulemaking process have been Judiciously followed by the Federal Reserve Board,
and it appears there is uo evidence to the contrary. In addition, the Federal R«~
serve Board's present procedures provide for an adjudicative hearing on in-
dividual applications when there are disputed questions of fact.

One of the arguments made for the inclusion of Section 601 in S. 72, la that
due process Is denied under the procedures now In effect for administering Sec-
tion 4(c) (8), namely, the procedures under Section 653 of the Administrative
Procedure Act. Contrary to this contention, due process in raiemaking does not
call for the kind Of trial-type hearings that are proposed In Section 001. Ttiese
formal trial-type bearings require tbat determinationa t>e made on the record
after Inteneted parties are given the opportunity to present evidence, to present
written or oral argument, or both, and to cross-examine opposing witnesses.

Not only does dne process not require that formal trial-type hearings be
arallable in the administrative process, but these tyi>eB of hearings are generally
tjelleved to be the least condacive to a smoothly functioning administrative
rulemaking process. As Professor Kenneth C. Davles states In his AdminlttraUve
Law Treatise at p. 379: "A trial Is designed for resolving Issues of fact, not for
determining Issues of law, policy or discretion. In rulemaking, the method of
trial has no place except when specific facts are at issue, and even then it should
seldom be used when the disputed facts are legislative." In fact, according to
Davis, due process does not even require an informal hearing. "Of all the many
Supreme Court decisions concerning the requirement of opportunity to be heard,
not a single clearcut decision has been found in which due process is deemed to
require an argument type of hearing . . . ." (Davis, Adminlttratlve Law Trealite,
page 436.) Therefore, although the right to cross-examine is usually deemed ap-
propriate at least as to adjudicative facts, a number of courts have held in cases
involving complex and technical factual controversies that written submissions.
possibly supplemented by oral argument, suffice. Virgin lalamd Hotel Att'n. v.
Virgin Iilands Water d Power Authority. 476 F,d 1268 (3rd Clr. 1973).

The Important aspect of the rulemaking process is to assure that challengers
are accorded timely access to the critical reasoning process of the agency. This
opportunity Is present in the informal process as well as the complex and
time-consuming formal trial-type procedure. Therefore, It is not unreasonable
to assume that some of the attractiveness of the formal rulemaking procedure
allowing for cross-e^camlnation Is due to other aspects Inherent in the procedure,
rather than the desire for due process. The cross-examination offers challengers
an opportunity for delay, a valuable bargaining tool with the agency, and a mode
of exerting pressure upon the agency and other Interested parties.

The procedures proposed In Sections 601 and 701 will be time-consuming and
expensive and wilt unnecessarily delay Board decisions on regulations estab-
lishing permissible activities under Section 4(c) (8) and individual aopllca'tlonB
by Imnk holding companies tn engage In these permissible activities. Even under
present procedures there Is the ability to forestall bank holding company expan-
sion into related Industries. This Is evidenced by the history of the Insurance
industries' attempt to defer bank holding company expansion into insurance
aclivllies connected with extensions of credit. This effort resulted in over ."i years
of delay in the allowance of hank holding company expansion Into this area.
Tills demonstrates that existlne procedures have enabled competitors to signif-
icantly delay facing additional competition, and it Is clear that their ability
to do so in the future would he greatly enhanced It the procedural sections
contained in S, 72 are ever enacted.

■nie way in which 8. 72 contradicts the 1070 amendments Is evident when the
history of the procedural requirements Is considered. Prior to 1970, Section

Digitized bvGoO^^IC

4(c) (S) required tbat a formal hearing be beld on each application thereunder,
even in the absence of any Interest or tcBtimony by anyone other than the ap-
plicant. As stated by Dr. Bums before the Senate Banking Committee In 1970 :
"This Is a time-con Huming and expensive procedure, which should be limited
to instances where a hearing 1b requested by an interested party." {Testimony of
Arthur F. Bnms, Chairman, Board of OoTernora of the Federal Reserve System.
Hearings on H.R. 6778, Senate Banking Committee, 91st Congress, 2d Sess.
p. 143.) In response to this request by the Federal Reserve Board, the Congreas
eliminated the requirement of formal on-the-record hearings, for the very purpose
of providing greater flexibility in the applicable procedures.

Another result of S. 72 would be to eliminate the distinction between activ-
ities commenced de novo and activities commenced by the acquisition, in whole or
In part, of a going concern. This would be accomplished by the deletion of the
last sentence of Section 4(c) (8) as mentioned previously and, more significantly,
through the requirement of Section 601 that all Board determinations under Sec-
tion 4(c)(8) of the Banic Holding Company Act be made on the record after
opportunllT for hearing as provided by Sections 566 and 537 of the Administra-
tive Procedure Act.

Tlie advisability of dlatlhguisblng between those two methods of expansion was
addressed by Dr. Burns before the Senate Banking Committee In 1976. In dla-
coesli^g the approval of Individual applications, he stated ". . . while ap-
proval would be required whether the expansion is to be achieved by establishing
a new company or by acquiring an existing one, de novo entry would be favored
^nce a company newly entering a market must, of course, face the competition
of those already fn it." Ibid, p. 143. This concept was embodied in the last
sentence of Section 4(c)(8), and the reasoning behind the distinction was re-
iterated in the Conference Report accompanying H.R. 6778 at page 17.

"One of the asserted Justifications for permitting bank holding companies to
engage In activities that the Board has determined Independently to he closely
related to banking. Is to permit the Introduction of new Innovative and com-
petitive vigor into those markets which could benefit therefrom. Where a hanic
holding company enters a market through acquisition of a major going concern,
it may not have the Incentive to compete vigorously, thereby bringing the poa^ble
benefits Into play, as It would Immediately succeed to what It might consider Us
fair share of the market. On the other hand, where a bank holding company
enters a new market de novo, or through acquisition of a small firm, as opposed
to acquisition of a substantial competitor, Its desire tn succeed In its new en-
deavor Is more likely to be competitive. Thit Icffitlalion gperiflcallu empha*iie»
(Ae Importance of the manner In tchich a bank holding companjf may enter new
acHvitiet." (emphasis added). (The Conference Report on the Bank Holding
Company Act Amendments of 1970, December 16, 1^0, page 17.)

This Committee's report contained a similar statement :

"TTie committee approved a provision which states that In making Its deter-
minations under section 4(c)(8), 'the Board may differentiate between ac-
tivities commenced de novo and activities commenced by the acquisition in whole
or in part of a going concern.' Ilie committee believes that an activity com-
menced de novo will tend to have competitive effecta, and consequently should be
viewed more favorably than the commencement of an activity through the ac-
quisition of an existing concern." (Senate Committee on Banking and Currency
Report on the Bank Holding Company Act Amendments of 1970, August 10, 1970,
page 15.)

Since the Federal Reserve Board was authorized to differentiate between de
novo entries and Bcquisltions of a going concern, the result was a procedural
embodiment of this concept in Section 225.4(b) of Regulation T. In this section,
the Federal Reserve Board designed dllferent procedures for a bank holding com-
pany engaging in permissible activities de novo, and the procedures for a bank
taoldlng company applying to acquire or retain the assets of a company already
engaged in permlaslbie activitiea. The essence of the procedural difference is that
de novo entries require a much simpler and less formal procedure, unless It ap-
pears appropriate to apply more formal procedures. These more formal proee-
dnres are normally Implemented In resiMnse to adverse comments of a substantial
nature. By the enaclmenl of Section 601. these procedural disllnrtlons will be
eliminated, and all entries by bank holding companies Into area» of permissible
activity will be subject to formal trial-tyi)e tiearlngs coiidHcted on the record,
llie Imoact of this new requirement Is particularly important in view of the
fact that approximately 70 percent of the entries of bank holding companies
Into related areas are commenced de novo.

Digitized bvGoO^^IC

It may be useful to trace the procedural path under the propctsed amendmentB
o( the adoption of a new actlvitf under 4(c)(8), and an application sub-
mitted pursuant tbereto.

(Following scenario as developed by Golembe Associates In AiiminUiration
of the Bante Holding Company Act. p. 18.) Let us say that activity "X" haa been
enggested to the Board by potential applicant and the Board concludes that the
activity has sufficient merit to justify the inauguration of the TUlemaliing process.
The Board would begin the process by publishing notice la the Federal Regitter
that It will commence rulemaking proceedings. A formal trial-type bearing would
ensue and a record would be developed for and against the [ncluslon of Activity
"X" In the permissible list. If the activity Is controversial the process Is likely to
be lengthy, not only because of the time required for satls^ng all of the pro-
cedural requirements for a formal hearing, but also because of the discovery
rights of participants In the proceeding and the opportunity to elicit from the
Board special studies that may be necessary to provide relevant information.
By way of contrast, rulemaking under present practice would be Informal, with
opportunity accorded all parties to submit written comments and to make an
oral presentation to the Board.

Assuming that activity "X" is finally approved by the Board, applicant bank
holding company "T" may then seek approval to commence the activity on a de
novo basis. Under the proposed procedure, once again a formal trial-type bearing
would have to be held, with cross-examination and the development of a record.
Under present procedures, all that may be required (because of the de novo
character of the applicant's proposal) Is advance publication of the nature of
the proposal and notlflcatlon of the appropriate Federal Resen'e Bank, with
authority to proceed unless notilled to the contrary by the Reserve hank or unless
a protest is submitted within 4S days. However, If a protest has been filed or the
matter Is otbemise non-routine, the Board Itself may process the application and.
If requested, a formal trial-type hearing will be held.

If. after conclusion of the formal bearing on Its application. Company "Y"
receives approval from the Board to engage In Activity "X." and does so, pro-
teetants may then petition the Board under Section 701 to commence a proceeding
for revocation of Its order. Presumably, some brief period of operation would
be necessary before such a petition would be considered, although the proposed
new statute does not spell out how long that period should be. In any event, a
hearing on the petition would be held b.v the Board, at which many of the same
Issues covered previously are likely to be raised again.

Assuming that the Board denies the petition, protestants may commence o
civil acdon in a U.S. District Court to compel the granting of the petition. The
trial will be de novo and the evidence considered by the Court would again be
similar to that originally beard by the Board.

The complexity and unavoidable length of these procedures can only serve
to frustrate bank holding companies' efforts to enter Into banking related Indus-
tries, and therefore will probably totally deter hanking entry into these areas.
This too will directly contradict the Intent of the 1970 Congress In amending
Section 4(c) (8), which was to encourage hank expansion into related areas. As
stated by Senator Sparkman in the Conference Report of 1970, the amendments
"... provided the necessary flexibility of regulation and administration which
the Federal Reserve Board requested in order to permit it to depart from past
precedents and to permit expansion of bank and tiank-relaled activities which
will be required In order to meet fully the rapidly expnndlnc and varying fi-
nancial needs of the economy of the nation." {Cnni/reitlnnal Recnrtl. December
10, 1070, R-20638). Therefore, the result of S. 72 will be to negate the purpose
of the 11)70 amendments by discouraging the entrance of hank holding companies
Into hanking related areas, and thereby Inhibiting competition.

For the foregolne reasons, the American Bankers Association opposes the adop-
tion of Section 601 and 701 of S. 72. This would result In a regression to the
state of the law t>efore 1070. and Impose unnecessarily long and complex proce-
dures upon a system which has proven adequate in the area of bank I "~ '
company expansion. More Importantly, we believe these uro) " "

an anticompetitive Impact, which would contradict tbe Mtta al

Digitized bvGoO^^IC

61

rently, the Comptroller of the Curreocy, under provisions ot the National Bank-
ing Statutes, has that authority. Additionally, If the Federal Reserve Board
denies a parent company's application to tngage In an activity tbrougti a holding
company snbsldiary, then a national banlt subnldiary of the hanli liolding com-
pany would he prohibited from engaging in the Hctlvlty as well.

According to the sectlon-by-section analysis that accompanied S. 72, "Under
the law as It currently exists national banlis under some clrcumstancem are per-
mitted by the Comptroller of the Currency to engage in activities which have
been found by the Federal Reserve Board, after lengthy hearings and delibera-
tions, to be outside the scope of permissible hank activities." However, as of
March of last year, nearly all the activities permissible to national banks had
been approved by the Federal Reserve Board tor bank holding companies under
Section 4(c) (8), as shown in Table 4.

Also, the American Bankers Association believes that applying Federal Reserve
Board decisions on holding companies to the activities of national banks could
threaten the delicate balance of competitive equity as between state and na-
tional banks and lead to an increase in the number of state-chartered banks.
We also believe this additional authority would undermine an important com-
petitive and Innovative influence in the banking industry—the independence of
the Federal bank r^ulatory agencies.

For these reasons, we oppose Section 401.

Activities approved by the Board : Activities deuied by the Board :

1. Dealer in bankers' acceptances'

2. Mortgage banking '
8. Finance companies '

b. sales

c. commerdal

4. Credit card Issuance'

5. Factoring company '

6. Industrial banking

7. Servicing loans ■

8. Trust company '

9. Investment advising'

10. General economic information '

11. Portfolio investment advice '

12. Full payout leasing'

a. personal property

b. real property
IS. Community welfare investments '

14. Bookkeeping A data processing

services '

15. Insurance agent or broker— credit

extensions '

16. Underwriting credit life & credit

accident ft health Insurance

17. Courier service'

18. Management consulting to nonafflli-

ate banks '

19. Issuance of travelers checks '

20. Bullion broker'

21. Land escrow services"

22. Issuing money orders and variable

denominated payment Instrii-

1 Addfrt to II

•Activltlwi penrlspilble ti

' Thew vere found to be
denied br tHe Bonrd of Oovernora an part of ItB "go glow" policy. '

* To be decided on ■ caBe-bj-case basiii,

Sonrce : Dale S. Drum, "Nobanklng Ai^tKitio m nuti numiuii vuuiua
ttr$ptriltf. Federal Renrv* Bank of Cblcaso. March-Apill, 1ST7, piE* I

1. Equity funding (combined sale of

mutual funds ft Insurance)

2. Undern-riting general life Insurance

3. Real estate brokerage '

4. Land development

5. Real estate syndication

6. General management consulting

7. Property management

8. N on full-pay out leasing '

9. Commodity trading'

10. Issuance and ^ale of short-term debt
obligaiions ("thrift notes")

11. Travel agency ' '

12. Savings and loan associations'

Activities pending before the Board :

1. Armored car services '
Insurance '

2. Underwriting mortgage guarantee

3. Underwriting ft dealing in U,S, Gov-
ernment and certain municipal
securities ' '

4. Underwriting the deductible part of
bankers' blanket bond insurance
(withdrawn)

5. Management consulting to nonafflli-
nted, depository type, financial in-
stitntinns"

— naHonal hanhn,
"cloaely related t

banklnfc",bat the proposed acqatiUloni

o( Bank HoldlDR Compante*." Eeanemle

D„ii„.db,Go(5glc

flKCnOH BOl

GlTiag the Federal Reserve Board the anthorit? to determine the cafiital
■deqnacr of subeddiftir banks as propoaed in Section 601 would be tm additional
step toward a de facto consolidation of tlie Frencb bank regulatory agendes.
The American Bankers Association opposes tbls provision because we believe
tbe present tri-parte bank regulatory structare has fostered tbe development of
innovative and more efficient bank customer services by maintaining a carefal
balance between the protection of customer deposits and competition within a
dual banking chartering system.

Another provlelon of Section fiOl would require that bank sobsldiaries of
bank holding companies refrain from discriminating In favor of Uielr parent
or their affiliated subsidiaries Id the making of loans or tiie establishing of
terms and conditions of loans. We believe this provision would be an nnueccs-
sary addition to cnrrent law.

Section 23A of the Federal Reserve Act currently imposes limitations cm a
bank investing In the securities of any affiliate, and making loans to the affiliate
or to others when collateralized by securities of an affiliate, to 10 percent of
the bank's capital and snrplus In the case of any single affiliate, and to 20 per-
cent of capital and snridus for all affiliates combined. But perhaps most Impor-
tantly, no bank may make any loan or extension of credit to an affiliate nnless
it Is ooUateralised by bonds or similar obligations having a market value from
100 to 120 pwvent of the loans with the lower tlgure applicable only If tbe col-
lateral consists of U.S. Government obligations or of paper eligible for Federal
Reserve discount.

What this means, for all practice purposes, is that an affiliate of a bank or
bank holding company is so rigidly limited In both the amount and the cot-
lateralizatlon of Its borrowings from the bank Involved that It often precludes
such borrowing.

In this connection, three additional points deserve mention :

1. Among those precluded from borrowing (except on the terms noted) is the
holding company itself, which since 1966 has been Included in the definition of
afflUate.

2. Tlie extension of credit has been broadly deflocd to Include, for example,
discounting notes or Other paper of tbe affiliates, with or without recourse: and
pnrchaBing from affiliates such Items as mortgages and automobile or appliance
paper.

3. All three Federal banking agencies have specific statutory authority to
examine bank affiliates.

Section 501 would also provide for public disclosure of all Intercompany loans
and Investments between bank holding companies and their subsidiaries on an
annual basl?. To the extent public disclosure might limit intercompany loan
and investment transactions, there could he less funds available to ^^erve the
pabllc, e.g., a loan to a finance company subsidiary. For this reason, we believe
Information that Is kept confidential for competitive purposes should be ex-
empted from public disclosure standards and procedures.

For the above stated reasons, our Association also opposes this provision of
Section 501 of a. 72.

C0NCI.U8I0H

In summary, the American Bankers Association opposes the Competition In
Banking Act becauw It wonld :

1. Make unnecessary additions to long established antltnist standards with
respect to bank and bank holding company acquidtlons, mergers and consoli-
dations.

2, Virtually repeal the 1970 Amendments to Section 4(cl(8) of the Bank
Holding Company Act.

8. Move toward a de facto consolidation of the Federal bank regulatory
agencies.

■Rie staff of the Federal Reserve Board Is wheduled to complete a compre-
hensive study of banli holding company operfitlons later this month. That study
should be valuable In determining wbat additional changes may he needed to
Improve the efTectivenesn of hank holding company regiilat'on and mii>ervielon.
We believe thp best Interests of both hanking and the public will be well served
by this approach.

■Hie American Bankera Aaaoclatlon appreciates the opportunity to express Its
views on this proposed legislation.

Digitized bvGoO^^IC

The Chairman. Thank you very much, Mr. Duwe.

As we indicated earlier, Mr. Campbell cannot be here, but I under-
stand Mr, Richard Peterson, WashinjJiton counsel for the Independent
Bankers As-wciation, is present. Mr. Peterson, you have a most impres-
sive statement here, 33 pages, with substantial appendixes added to
that and lots of other exhibits. We will be happy to place that entire
statement in full in the record. It's a brilliant job T think, but we
obviously would appreciate it if you could summarize it in about 10
minutes.

STATEHEHT 07 BICHA21D PETEKSON, LEQISLATIVE COTllISEL, IIIDE-
FEBBEirr BAHKEBS ASSOCIATION OF AUEBICA; ACCOHPAHIED
BT TESBEHCE H. ELASKY

Mr. Peterson, Mr, Chairman, I am Richard Peterson, legislative
counsel of the Independent Bankers Association of America, on whose
behalf I appear today. The association regrets not being able to pro-
vide one of its officers as a witness. We are in the middle of a con-
vention in Florida and are faced with quite a few policy planning
problems that require immediate solution. Consequently, none of
IBAA's officers is available, I also apologize for being late, but my
schedule has been considerably tightened in the last 2i hours trying
to keep the membership from burning a prominent newscaster in
effiey if not in the flesh.

I am accompanied by Terry Klasky, another legislative counsel of
IBAA, who will be available to answer questions.

We appreciate the opportunity to present our views with respect
to S. 72 and the need to strengthen existing legislation regulating Imnk
holding companies. We agree that a thorough review of bank holding
company legislation and its administration by the Federal Reserve
Board is urgently needed in view of the rapid growth of multibank
holding companies and what we view as the adverse effects of their
gi"owth on the concentration of control of commercial banking.

We are in basic support of S. 72 provided certain changes are made.
In summary, we would urge the committee to fortify the capability
of independent banks by :

1. Strengthening the standards and administrative procedures for
the approval of bank mergers and holding company acquisitions,
including a requirement that those seeking such approval establish
clear and convincing evidence of a public need,

2. (I am glad to see that the Senator from New Hampshire is not
here.) — "McFaddenization" of the Bank Holding Company Act,

3. Exempting small one-bank holding companies from the act.

4. Requiring prior disclosure of tender offers under detailed
procedures.

5. Grandfathering existing nonbank subsidiary activities of small
one-bank holding companies and permitting such activities in the
primary service area of the main banking office.

At the outset, we should point out that since lfl.56 a large number
of independent banks have been absorbed by multibank holding com-
panies. If their growth by mergers and acquisitions is not abated, the
strength of the independent sector of commercial banking will be
seriously eroded to the detriment of the communities they serve.

Digitized bvGoO^^IC

[Complete statement follows :]

Statement op the Ikdepbndent Banebbs Association of America

Mr. Chairman, my name Is Raymond Campbell. I am flrst-vlce preeldent of the
Independent Bankers Association of America and president of the Oberlin Sav-
ings Bank of Oberlin. Ohio.

We appreciate the opportunity to appear before this Committee on behalf of
the 7,400 members of IBAA to present our views with respect to S. 72 and the
need to strengthen existing legislation regulating bank holding companies. We
agree that a tliorough review of bank holding company legislation and Its ad-
mlDistration by the Federal Reserve Board la urgently needed In view of the
rapid growth of multibank holding companies and what we view as the adverse
effects of their growth on the concentration of control of commercial banking.

Our review of S. 72 suggests that this bill would begin to address concerns
our Association has observed In the Federal Reserve Board's administration of
the Bank Holding Company Act, As the Committee will recall our Association
was formed in 1830 to combat the centralization of economic power through de-
posit concentration which arises via multibank holding companies and large
branch banking grids. For many years our Association sought regulation of bank
holding companies — a concern Anally shared by Congress In 1956. That Urst effort
to stem the concentration of financial power has gone awry in the hands of the
Federal Reserve Board, and we agree that the time has come to substitute specific
limitation for unbridled discretion.

We appear here today In basic support of S. 72 provided certain enhancements
are made consistent with our belief that this Committee is concerned about the
future of Independent banking. In summary we would urge the Committee to
fortify the capability of Independent banks by :

1. Strengthening tiie standards and administrative procedures for the approval
of bank mergers and holding company acquisitions. Including a requirement that
those seeking such approval establish clear and convincing evidence of a public

2. "McFaddenizing" the Bank Holding Company Act.

3. Exempting small onc'bank holding companies from the Act.

4. Requiring prior disclosure of tender offers under detailed procedures.

5. Grandfathering existing nonbank subsidiary activities of small one-bank
holding companies permitting such activities In the primary service area of the
main banking office.

At the outset, we should point out that since 1956 a large number of Inde-
pendent banks have been absorbed by multibank holding companies. If their
growth by mergers and acquisitions is not abated, the strength of the Independent
sector of commercial banking will be seriously eroded to the detriment of the
communities they serve.

IBAA Is concerned by these developments l>ecause Its membership, for the
most part, is comprised of a large number of relatively small community banks.
More than 80 percent of our member banks have assets under $25 million. About
half of our members are located in communities of 5.000 or less; and !)0 percent
In towns and cities of less than 30.000. Most of our members are found in the
middle third of the country, mainly the agricultural states of the midwest and
south. Consequently, they are heavily involved In rural financing, especially
agriculture. In 1976, commercial banks with assets under $25 million accounted
for 46 percent of the credit extended to agriculture by all commercial banks in
the I'nlted States. Additionally, our member hanks supply the backbone of rural
credit to meet the housing and consumer needs of the population as well as
meeting the credit needs of small business. By supplying a ma for share of bnnk
credit to rural needs, the nation's Independent hanks are making a considerably
larger contribution (o the nallon'a economic well-being than one might assume
from asset size alone.

TUB PRINCIPLE OBJECTIVES OP INDERAL BANK HOLDINO COMPANY LEQISLATION

One Of the principal objectives of federal legislation designed to regulate com-
panies which manage and control banks, was to prevent concentration In the
hnnbing business. Congress lielleved that adequate safeguards should be pro-
vided against undue concentration of control of banking activities because of

Digitized bvGoO^^IC

65

the Importance of the banking system to the economy. Therefore, Congress sought
to protect and foster the growth of independent unif hanks. The holding company
device, whereby control of a group of banks has been acquired and the hanks
thereafter operated in efTect as branches, has been a major factor In concentrat-
ing banking control Into fewer hands. It was the declared view of Congress that
independent banking was being thwarted by indirect branch banking, through the
holding company mechanism. Congress in enacting legislation to regulate banlt
holding companies sought to Umlt the ability of bank holding companies to In-
crease the share of commercial banking in a particular area which could be
brought under a single control and management.'

Eacb time the Congress has i>een urged to permit branches, regardlesa of state
bank laws, on a trade area basis or on an Interstate or Federal Reserve District
basis. Congress has opted for a system of local Independent and competitive banlcs
and has left the matter of branches to the states to determine, each state for
itself. De^ite this consistent policy the holding company device has tieen used,
In the absence of state law, to concentrate control Into fewer and fewer hands.
This prompted the House Banking Committee to comment that the difFerence
between branches and affiliated, or subsidiary banks, was only one of form and.
in effect, holding company banking was nothing more than brunch banking.'
The legislative history of the Bank Holding Company Act of 1956 clearly es-
presses the intent of Congress to restrain holding company growth as will be
apparent from an examination of Appendix Exhibit I.

Because the Bank Holding Company Act of 1966 applied only to bank holding
companies controlling or owning two or more banks, one-hank holding companies
were exempt from regulation under the Act. The Bank Holding Company Act
Amendments of 1970 were enacted primarily to bring one-bank holding companies
within the regntation of the 19&6 Act. In addition, the 1970 amendments elimi-
nated a partnership exemption from the definition of the lerm "company." The
19o6 ittandard for determining what bank-related activities a bank hotding com-
pany may engage In was retained. One-bank holding companies were subjected to
potential Federal Reserve Board Jurisdiction under the Bank Holding Company
Act regardless of when they were created. Hie 1970 amendments were designed
to prevent concentration and to affirm the long-standing policy of separating
banhing from commerce.' In the late 1960's, a large number of bnnks began con-
verting to one-bsiik holding companies to avoid regulation by the Fed under the
Bank Holding Company Act. In addition, mnny slgnlHcant nonbank corporations
l>egan ncauirlng a single bank, thus mixing banking and non-banking In complete
contravention of the purpose of lK>th Federal banking laws going back to tbe
193l>'s and the Bank Holding Company Act of I9S6. Left unchecked, the trend
toward the combining of banking and business could ultimately result In the
formation of a relatively small number of power centers dominating the American
economy.'

r ACniEVED THE

The growth of hank holding companies since the Bank Holding Company Act
was enacted by Congress clearly reveals its failure to restrain the growth and
influence of bank holding companies. In the 17 year period 19S9-1976. the
number of r^stered multi-bank holding companies incre.ised almost six-fold
from 48 to 298 ; the number of banks and branches they operated rose more than
eight times, from 1,380 to 12,022, and their deposits multplled 17 times from $17,3
billion to $287 billion." The growth of one-bank holding companies in the period
1955-1976 was even more rapid. Their number Increased almost thirteen times
from 117 to 1.304 and their bank deposits rose 20-foId from $11.6 billion to (267.1
billion. However, most of the deposit growth of one-bank holding companies
occurred In the short three-year period 1965-1968 when 200 one-bnnk holding
companies were organized expanding the aggregate deposits held by all one-
bank holding companies from $15.1 billion In 1965 to $L08.2 billion at the close

' Ftdtral Bank Law Rtporter, vol, 3, Commerce Clearing House. 1B73, pp, 28-051-52,
tiara ifraph 43.042,

■ HoDBP CoramlttPe Report No, 809, 84th Cong.. Ist Sesa,. pp, 2-3.

■ Op. at., CCH, Federal Baoklng Law Reporter, pp 22.miS-n4.
• Coutf-rente Report No, 1747, 6lBt Cent;,, 2nd Sees,, pi
'Feientl Keierve BulltHn, Aug, 1960, p, 813. June

Dioett. Frdrral Reserve Board, 19T6.

Digitized bvGoO^^IC

66

of IG68, an Increase of 600 perc«tt.' Enactment of tlie 1970 amendments to the
Bank Holding Cmnpaaj Act slowed but did not halt the growth of one-bank
holding compantee. Between 1068 and 1076 the number of one-bank holding
companies grew from 890 to 1JS04, an increase of 72 percent, and their aggregate
deposits rose 47 percent from $181 billion to $267.1 billion.*

Although studies of the Impact of holding company ownerdilp on tbe cost,
terms or the relative amount of credit extended to agriculture have been limited,
there are indications that aflSllates ot mulUbank holding companies tend to reduce
their proportion of farm loans while increasing consumer instaUment, business
and mortgage loans*

A study of farm lending patterns of holding company banks in Florida found
that between 1962 and 1970, on the average, farm loans tended to decrease soon
after banks became affiliated with holding companies, while at tbe same time
farm loans at Independent banks were continuing tbeir upward trend. For banks
first affiliated In 1909, farm loan volume in both that year and the next was
lower than In the five precedlne years, although total loans continued to rise."

The growth of muitlbank holding companies, particularly In the many agri-
cultnial states where unit banking systems are prevalent, could have a signiflcflnt
Impact on the availability of credit to agriculture If. as the aforementioned
studies Indicate, bank holding companies tend to shift the lending policies ot the
Independent banks they acquire from agricultural loans to other types of loans.

A large number of the smaller banks in the nation not only hold a large
portion of their loan portfolios in farm loans, but they also suf^ly a major
share of total bank lending to agriculture. In 1974, for example, banks across
the nation that bad less than {25 million In depocdts held 66 percent of the
agricultural loans held by all banks. This is a remarkably high percentage in
view of the fact that total deposits at these smaller banks amounted to less than
one-tenth of tbe deposits of all banks In tbe nation."

Tbe growth of bank holding companies has been a significant factor in ralstng
the level of concentration of commercial banking. Nationwide concentration of
connnercial banking reached the point in 1976 where the SO largest banking com-
panies controlled $535 billion of assets or SI percent of all commercial bank
assets. The share of commercial bank deposits held by muitlbank holding com-
panies has risen from 18 percent In 1969 to 34 percent in 1976. When the deposits
of one-bank holding companies are added to the deposits of the muitlbank holding
companies their combined share of deposits rose to 66 percent in 1976." However,
it Is the very large muitlbank and one-bank liolding companies which exert the
most influence in raising the level of concentration in commercial banking. By
far, the largest number ot one-bank holding companies are relatlyely small. In
1970, 36 or the tS04 one-bank holding companies had deposits in excess of one
billion dollars and accounted for 63 percent of the aggregate deposits of all one-
bank holding companies. Consequently, the one-bank holding companies which
exert the greatest Influence on tbe structure of banking are these very large
companies with deposits oyer a billion dollars. These companies are listed in
Appendix Table No. 2.

Probably tbe most accurate measure of bank holding company control of com-
mercial bank deposits la tbe share of deposiU held by tbe 298 muitlbank holding
companies and tbe S6 largest one-bank holding companies. In 1976 these 334 bank

'■■Hecent Chanups in the Structure of Commerdal Banking." Federal Reitrvt Biillglta,

. , . . ^j Btatittical Mgeil, Federal Reserve Boartf """

s, Ttie Performance of Bank Holding Compa

cb. IflTO, p. 200: and Annual S(o«»(ieal ntgeit, Federal Reserve Boar-J, 1978.
., Sober' ' ■■- ' =— '- "-'-"— -■ '-■

ianiink ProbiemB.'Bnard'of Got eriiors, 'Federal Heaerve Syatemi June 1975.

■• Mar; Hamblln. "Bank LendlDR Co Agrlcalture an Overview," Jf onlAIy Review. Federal
RMcrre Bank of KanuB CIt7, November 16TS. p. 19.

" Annual Btatietieal Dtoeil i>T«, Federal R«erve Board.

Digitized bvGoO^^IC

ft7

botdlns companiea controlled deports of t4MS blllloD. 54 percent of tbe nation's
commercial bank deposits."

The proliferation of multlbank structnres in a given geograpbic area and tbe
consequent elimination of independent banks Increases tbe concentration of bank-
ing resonrces to the ultimate detriment of tbe public. To determine wbether tbe
growtb of boldlng companleii has altered concentration levels In banking requires
an examination of concentration nationwide; and at tbe atate and local levela.
Aggregate concentration at the national level, while signlflcant. Is of a lower
order of significance tban at the state and local levels. The growtb of bank holding
companies of lat^ absolute sEce raEses tbe isBues of concentration of economic
resources and tbe point at which growtb in absolute size endows a firm witb the
aUUt7 to wield excessive social, political or economic powers. Concentration In-
fluences tbe composition and Structure of state and local markets and reduces
tbe vigor of competition between banks as these banking markets become more
concentrated."

We emphasize tbls distinction betwem tbe email one-bank bolding companies
and tbe larger one — and multlbank bolding companies to Justify our belief that a
limited exemption from the provisions of the Bank Holding Company Act should
be granted to one-bank bolding compaoleH witb banking assets of less thau ffiO
million and nonbank assets of less ttian flfi million. Historically, institutions of
tbls sfie bave )>een formed to facilitate tbe sale or the formation of a bank or
tbe consolidation of ownership which may bave occurred through testamentary
transfer. Tbe motivation for the creation of these small one-bank holding com-
nanfes Is, therefore, very much difTerent from the large rouiti or one-bank hold-
ing companies where tbe ultimate result is expansion and concentration of
economic resources and tbe goal U increase In the price per share of stock.

Oar position is not novel. In previous testimony before tbls Congress In 196B,
William JlcChesuey Martin, then chairman of the Federal Reserve Board, recom-
mended that the Act provide an exemption for small banks along the lines we
have suggested. Me did tbls in pert to meet the concerns expressed by the Senate
during its ISOR review of bank holding companies. In pointing out that tbe
absence of an exemption would make it 'more difficult to hold or form small
independent banka," he accurately forecast the problems of concentration which
bave brought us to this point today. Any impediment wbicb can reasonably be
removed In order to promote the formation and continued existence of small in-
dependent banks should l>e of paramount concern to this Committee. We believe
our recommendation will go a long way, in conjunction with other comprehensive
changes in tbe current law. to prevent further concentrations of economic power.

Tbe structure of banking within the boundaries of a state Is shaped by state
regnlatlon creating a relevant political. If not a purely economic, market for the
analyris of competition. Therefore, it is appropriate to examine concentration
wltbin state boundaries and the influence of bank holding company growth on tbe
level of state concentration.

Cbanges In banking structure at the state levd, are significantly affected by
laws tliat regulate muitlple-oflJce banking. Thus, In 19 states and the District of
Colnmbia which permit branching statewide, tbe level of concentration of
commercial bank deposits, measured by the share of deposits held by tbe
Ave largest banks or bank groups. Is higher than It is in the remainiiig 31
states wbicb limit or prohibit branching. Concentration In tbe statewide brandl-
ing states In 1975 ranged from a low of 49 percent of deposits held by tbe five
largest banking organizations in South Dakota to a high of 97 percent In
Nevada. In limited branching states the level of concentration ranged from 24 to
94 percent. Concentration ratios were lowest In tbe unit banking states where
tbe share of deposits held by the Ave largest organisation's ranged from 16 to
56 percent."

"Boot Holding Companiei and SubHdtary Bimka <u of D»e. 31, ItH. Federal Reeerve
Board, 1»TS.

u]ack 8. Light. "Bank Holding CompanleB— CotiMDtratlan levels In Three IHitrlct
Statet." ButtntMt CondlHani. Federal Reaerve Bank of ChlcsRO. June. 19TS. p. 10.

"'"Relative Blie of Larmt Commercial Banka or Bank Oronps In States. ClawlSed by
StatDS of Branch Banktne." FDIC. Bammary ef Aeeounti and Depoatli, June S$, 1911, Table
K,IM7.

Digitized bvGoO^^IC

Tbe clow relattoQShlp between tbe presence of bank holding companies In
the market and high lerels of banking concentration 1b revealed by the fact
that 6T of the 100 largest banks'* In the statewide branching states where
concentration ratios are the hli^est are bank holding companies. In California,
for example, four of the state's five largest banks are one-bank holding companies
and la 1976 controlled 72 percent of the state's deposits. The largest bank con-
trolled 3S percent; the second largest bank IS percent; and the third largest 10
percent. All Bve of the largest banks in Rhode Island which control 94 percent
of the state's deposits are one-bank holding companies. The largest acconnted
for 41 percent in 1976; the second largest 26 percent; and tbe third largest 24
percent. In Maryland 61 percent of the state's commercial bank deposits In 1976
were held by the Bve largest banks or bank groups, all of which are bank holding
companies. The largest controlled 20 percent; the second largest 14 percent;
and the third largest 11 percent. And finally, in the state of Washington, the
three largest banks are bank holding companies which controlled 61 percent
of the state's deposits in 1976. The largest company held 85 percent ; the second
largest 19 percent ; and the third largest 7 percent.**

These are but a few of the examples of the role bank holding companies play
in concentrating control of a state's commercial bank deposits in the hands of a
few large banks. It also reveals that tbe largest bank boldlnt; companies in
California, Rhode Island and Washington have already captured a higher per-
centage of control over their state's depoeits than would be permitted under the
20 percent ceiling proposed by S. 72 and demonstrates the urgent need for Con-
gressional action to slow further multlbank holding company expansion.

Although Congress has consistently endorsed a national thanking policy aimed
at preventing the increased concentration and control of banking, bank holding
company legislation has not been effecttve In carrying out this policy since the
sharpest rise In the number of bank holding companies has occurred in the fif-
teen unit banking states. At the end of 1976, there were 1342 bank holding c(»n-
penles in these states, an increase of 24 percent from 1971, Furthermore, 68
percent of all the bank holding companies in the United States were located in
the unit banking states. One of (he principal reasons advanced for the growth of
multlbank holding companies In unit banking states is the prohibition or geo-
granhical limitation on full-service branches, whether de novo or by merger.

The holding company form of organization was devised as an alternative for
developing multiple office organications on a geographtcalty extensive baalB
where state branching laws restrict such development. On the other hand, bow-
ever, It controverts the State's preference for unit banking as o state policy. To
protect and foster independent unit banking and tbe Integrity of state branching
laws, bank holding company legislation should be made a more effective Instm-
ment for restraining the growth of bank holding companlein by merger and
acnuisitlon. While continuing effort,'* are being made on tbe state ievel to prevent
controversion of state policies designed to prevent concentration, we believe,
it Is time for the Federal government to reaffirm Its concern by enacting legisla-
tion to dose these bank holding company loopholes.

THE IMPACT OF B

Inasmuch as most banks are retail banks serving local communities, tbe closest
Approximation to a relevant market in which to consider banking structure Is
the Standard Metropolitan Statistical Area (SMSA). While Individual SMSAs
may be either larger or smaller than relevant market areas determined by de-
tailed market analysis, they serve as reasonably valid approximations of banking
market areas.

In the statewide branching states where concentration of deposits In the state's
five largest banking oriraniKBtlons Is highest, concentration levels In SMSAs gen-
erally exceed that of the state. For example, the five lorgest bank organizations
In CallfnmlH held 79 percent of tbe state's deposits in 107.') while In 16 of the
state's IS SMSAs the five largest firms confrolied from SO to 96 percent of the
RMSA'x deposits and the median concentration ratio was 8!> percent. In North
Carolina five-firm concentration at the state level in 197r) was 6« |)ercent but In

Tompri»Ml of thr" a lararat binkii or bank aroupa In the Ifi Btatpwid* branrhlns stalp"
■nd tb> niBtrlct nf CoInmbU,
» Op. CU: FDIC Tibulallon.

Digitized bvGoO^^IC

tiK State's seveD SMSAa concentration ranged from 79 to B7 percent wltb the
median being 86 percent. The pattern was the same in Connecticut where flve-flrm
concentration at the state level was 62 percent but ranged from 80 to 100 percent
tn the Htate'e eleven SMSAs with a median of 80 percent. For the 19 statewide
branching states and the District of Columtila, as a whole, flve-flrm concentration
in 1975 ranged from 51 to 87 percent of deposits at the state level but was
Hubstantlallr higher in each of the 69 SMSAs in these states."

In Florida, until very recently a unit banking stale, the ten largest multibanh
holding companies Increased their share of the state's deposits from 38 percent
In 1084 to 55 percent In 1974. In the state's 14 SMSAs, however, the share o(
deposits held by multibanlc holding companies ranged from a low of 64 percent
to a high of 93.5 percent reflecting a significantly liigher degree of concentration
than that found at the state level."

Bank holding companies which control a large share of the state's deposits
also tend to exhibit a corresponding degree of control in the state's SMSAs. In
Connecticut, for example, the largest banking organization with 22 percent of
the state's deposits was also the dominant Arm in two of the state's largest
SMSAs and had a foothold in a third. The state's second largest bank holding
company with 19 percent of the state's deporita was a major factor in three of
the state's largest SMSAs and a minor factor in a fourth. And finally, the third
largest Arm with 9 percent of state deposits operated banks In four major SMSAs
and held a substantial share of deposits in two." Many of the largest multlbank
holding companies hare penetrated major banking markets In states with high
levels of concentration. Tlius, fhey face each other In these markets recognlilng
their mutual Interdependence and adopt pricing and other practices that dampen
competition. Such behavior tend to make them less responsive to the needs of
indlvldnal customers and the local community."

rACTOBB RDSPOnSIBLE FOB THE OBOWTH OF BASK HmjtlNG CX>llPAmE8

A. state banking latos

One of the factors claimed to be most responsible for the rapid growth of bank
holding companies is state law restricting branching. The holding company ve-
hicle provides a means for circumventing geographic restrictions of state branch-
ing laws and the penetration of every market within a state. It also enables
banking organizations to expand Into new product and geographic markets across
state boundaries through nonbanking subsidiaries. Prohibition of the estahlisb-
ntent of fnil service branches, whether dc novo or by merger, has often been ad-
vanced as the principal reason for the growth In Importance of multlbank hold-
ing compenis In unit banking states. While the largest number of holding com-
panies are found in these states, they are of about the same importance in limited
■Dd statewide branching states. The holding company form of organization has
provided a means for developing multiple-office organization on a geographically
exten^ve basis where banking laws prohibit or restrict such development by
hanks."

Banking organizations In unit banking states, where bank holding companies
are permitted, rely entirely on holding company acquialtlons for expansion. Orga-
nisations in limited branching states use the holding company device to expand
outside the limited area within which they are permitted to branch. In statewide
branching states, where banking organizations can expand anywhere in the state
tbroogh branching, the holding company Is not an essential instrument for geo-
graphic expansion. At the end of 1975 there were only 50 multlbank holding
companies in the statewide branching states compared to 138 in the limited
brandling states and 139 In the unit banking states.

State branching laws were, therefore, responsible for the significant growth of
bank holding companies in recent years In such states as Florida, which was a

" Bummartlof Dtpoiitu In Alt Cammerefal and Mutual Bavtngi Bnntct, June SO, I97f.
FDIC, Table K, p. 17. Op. Cll., Relatire Sde of tht Largtit Commtrclal Banit FDIC

" B. Frank King, "BanklnR Btructnrs In Florida," Monlhlu Review, F«derRl ReserTe Bank
of Atlanta. September, 197B, pp. 145-148.

'■ KatheHne QlbBOD, Georne H, Gonyer, Olna Koee™, Ohanffing Commercial flant Struc-
'»•''*'* J"<^ ,e»alaad. Feders! Reaerre Bank of Boaton, Research Report BB. June IfllS.
n ai - Btintt,-t Sine of Depottta of Largest Bank Groupi In Eaeh Stale, FDIC, Dec 1074.

T.ii„„ mi. , , gf iroiaing ComBang A.cqiiiittto«t on Aooreijate Con-

^rve Board Stalf Economic Study No. BO. I6T4, p. 2.
ire of Commercial Banklns," Ftdtral Reiervt BuUelln,

Digitized bvGoO^^IC

70

unit banking state nntU 1976, New York, which, until recently, was a limited
branching state, and New Jersey another limited branching atate. EffectlTe re-
straint on the growth of bank holding companies by merger has been achieved
oniy Id the thirteen states which prohibit multibank holding companies. In ei^t
of these states Sve-flrm concentration was under 86 percent in 1974.

In statewide branching states where flve-flrm concentration has reached very
high levels the major factor restraining further multibank holding company ex-
pansion by merger Is the self-restraint exercised by the largest bank holding
companies due to the fear of regulatory opposition to further acqoldtlons.

For a number of reasons our Association does not take much solace in the iwoe-
pects of self-imposed expansionary restraint. History has taught us that large
financial institutions go through cycles of expansion. It Jnst so happens that
these Instltutlotts are stin cutting their losses ^m their last reach for the stars,
and therefore, we seem to be In o period of relative calm. So we laud the C<Hn-
mlttee for considering amendments to the Bank Merger Act and the Bank Hold-
ing Company Act which would limit the degree of concentration a bank or bank
holding company could obtain by acquisition or merger to 20 percent of the ag-
gregate assets of the banks In Uie state in which the bank Is located. Unfortu-
nately, we do not believe that these amendments as they appear In Sections 101
and 201 of S. 72 go far enough. While we will discuss Sections 101 and 201 in
connection with an analysis of antitrust enforcement to date, we urge yon to
prevent further concentration by closing a loophole created by Section 7 of the
Bank Holding Company Act.

Our Association has adopted several convention resolutions calling for the
"McFaddenlxatlon" of multibank holding company acquisitions. Under such legts-
latlon (1) further multibank holding company activity in any state would be
permitted only to the extent permitted by its legislature and (2) where multi-
bank holding companies are now permitted due to an absence of state legisla-
tion, any further bank acquisitions would require specino state enabling legisla-
tion. Such uniform control of multibank holding companies under state standards
is highly desirable because tbls form of banking structure Is comparable in
practical effect to branching as already noted, liils uniformity would require
an amendment to Section 7 of the Federal Bank Holding Company Act. Currently,
that section provides that In the absence of state legislation, bank holding com-
panies are free to operate without restriction, other than by approval of the
Federal Reserve Board.
B. Feieral Reaerve Board Adminittrdtion of the Bank ffoldinff Company Act

The policies pursued by the Federal Reserve Board In administering the Bank
Holding Company Act reflect a departure from the objectives Congress Intended
the Act to achieve. Instead of pursuing policies which would prevent an Increase
in concentration In hanking and foster the growth of unit banks, the Board has
sliar[)ly increased the number of multi-bank holding companies ; has permitted
them to acquire a lai^e number of viable Independent banks ; and has raised the
levels of concentration In banking.

The policy pursued by the Board with respect to multi-bank holding companies
has been to effectively foster large banidng organizations capable of offering
banking services on a statewide basis. In pursuit of this policy the Board has
favored the formation of holding companies by the large dominant banks In local
markets and encouraged their expansion through mergera and acquislricms
ost^islbly for the purpose of making them large enough to achieve economies
of scale."

Over the fonrteen year period 196S-76, for example, the Board approved
the formation of S30 bank holding companies under Section 3(a) (1) of the Act
while denying onlf 63. In the same period the Board approved multibank hold-
ing company acquisitions of 1619 banks under 3<a)<l) of the Act but denied
only 112 such acquisitions Indicating a blghlr permissive attitude toward multi-
bank holding company acquisitions. Similarly, the Board's policy toward the
entry of bank holding companies Into non-banking activities reveals the desire to
expand the area of permissible activities. Under Section 4(c> (8) of the Act the
Board, since the 1&70 amendments, has approved or permitted 2.649 entries of
bank holding companies into non-banking activities but denied only 179.'

""The Trderal 'Rtmtm and tb« Bank Holding Companr," Rmiarh* of 0«oice W.
MIIAell. Ttee ChalmiaD, Board of Ooveniora, Federal Reaerve Sratem, Boh Raton, Tit..
Vth. IR, 19TB.

■ AQQDal Reports at the Federal Reserve Board. 196S--Tfl.

D„ii„.db,Go(5glc

71

While Uie m&Jorlty of tbe Board has exhibited a strongly pro-bank holding
company posture, sharp oppoeltloa to this policf has been expressed by minority
Board members In a number of instances. These dissenta express tbe view that
the Board's policy o( approTing acquisition ol viable independent bankiiiK orga-
ulsations by large multibank holding companies is inconsistent with the Con-
BTcaaiotial mandate to prevent further concentration of banking resources in a
few large organizations," Dissatisfaction with the majority's pro-holding com-
pany posture was expressed in a dissent from the Board's approval of an Ala-
bama bank bolding company's application to acquire an independent bank.
Governor Brimmer, in his dissent, noted that Alabama was well on its way to
becoming a state where four statewide organisations would dominate the bank-
ing sc^ie and that if the Board continued to permit the big four to acquire tbe
large Independent banks in the state It would discourage the development of
additltmal competitive holding companies. Furthermore, by fostering four ale-
able organisations which confront each other in the large local markets in
Alabama, an <^gopollstlc environment will be created permitting the doodnant
firms toadopt similar policies and reduce the vigor of competition,'

It was not until 1973 that the Board bcsan to shift to a "go slow" policy which
retarded ail forms of multibank bolding company expansion. The Board, at Uiat
Ume, began to disapprove acquisitions whlcb would add to a holding company's
debt burden. This change in policy was prompted by concern over the issae of
"cairital adequacy" raised by the continuing decline In the cairital ratloB of
banks and multibank holding companies."

Aboat tbe same time, the Board also revised its treatment of competitive fac-
tors considered in bank holding company acquisitions by placing greater empha-
sis on the acquisition's effects on potential competition. Early in 1874 the Board
denied several merger applications where there was no existing competition
between the applicant and the bank or nonbank company to be acquired bat
where potential competition would be adversely affected," While shifts In the
Board's attitude toward "capital adequacy" and the adoption of the potential
competition doctrine may have ccmtributed to a decline in hank holding company
aeqnlsltionB since 1974, It could also be attributed to a sharp reduction In the
market price of holding company shares, especially those of the nation's largest
bank holding companies."

The pro-holding company policy pursued by the Federal Reserve Board in
its administration of the Bank Holding Company Act has, as has been noted,
been fonnded on the premise that the formation of multibank holding companies
by the large dominant banks in local markets and their expansion through
mergers and acquisitions would make them large enough to achieve the maxi-
mum level of efficiency obtainable through economies oC scale." Thus the comer-
stone of Fed policy has been predicated on the assumption that most Independent
banks could not achieve the economies of scale and portfolio diversification
essential to the improvement of bank performance,"

A number of studies of multibank holding company performance, many of
which were sponsored by the Federal Reserve Board since 1068, do not support
the basic premise of the Fed's bank holding company policy. These studies have
fonnd that, at best, affltiatlon with a holding company results In very modest
changes in performance, mainly in portfolio composition after afflliatlon.

One of tbe earliest studies of multibank holding company performance fonnd
that the operating efficiency of acquired banks did not improve when measured
by operating ratios,"

» ntMcntlnE Btstement of Got

of First v.tlonal BancomoriitloL,

1BT1, Ti, .19T; Spr alRO IBTO Federal Re'erre

■ Dlinrntlnt: Statrmrnt of GoTfmor Brimmer, In Alahamn Banmnwratlon apnucatlon
to anmlr' Indrpcnilent banke In TubciIoobb and Annlalon, Ala,. Federal ReMerve RuUettn,
Anmrnt IOT:;, n. SB6.

"Rarrrr RoBFahlnm. "Bank Holdinz Companr Revieir 19TS/T4 Part I" Bnttneu
ConiUHona. Pederal Rcaerrc Bank of Cblcnfro, Prbruary 19T5. p, T,

"TMd.'no. B-B,

"Op, at.. Owree W. Mitchell remarks. Boca Raton, Fla,. Feb, 13. 1976.

"Arthnr O. FraaB, Tlie Performance of Indeoendent Baltic Bolding Companlei, Staff
EcoDODilc SIndy No. 84, Federal Reserve Board. 1B74, p. 1,

■> Robert J. Lawreoee, Tht Ptrfernanee of Banlc Holdino Oompanttf, 1697, Board of
Oovnnora. Federal Reaerve Bratem, pp. 2^-iS.

D„ii„.db,Go(5glc

72

A later study to determine the significant differences in operating iterCormance
asaoclated with cliangea <n individual bank ownership overlooked the efficiency
issue but found tbat banlts with new owner- managers tended to increase loan
availabliity in tbeir communities by placing greater emphasis on higher interest
rate consumer loaas."

A 1971 study to determine the effects of banlt holding company acnulsitlons
on bank performance examined IS banking ratios for 82 baniia acquired by hold-
ing companies twttveeo 1966 and 1969. The study found that the major effect of
bold lag company acquisitions was to alter the portfolio composition of ttae
acquired banlis by switching; out of U.S. Government se^^urities Into state and
local gOTemmrat securities and hi );h- yielding Instaiiment loans. While portfolio
changes surest that the acquired banks made more credit available in tbeir
localities, the acquired banks made no sifniiflcant changes in their capital, prices,
eKpenses or profitability. Therefore, the conclusion to be drawn from tlie study
was that holding company acquisitions did not noticeably enhance tbe per-
formance of acquired banks."

The moat reliable studies on production efficiencies in banking Indicate that
economies of scale may exist up to atKiut JIlOO million in deposits, but are not
observable above that level. Apart from the separate Issue of management
efficiency, there is no persuasive ar^ment that economies will result from hold-
ing company affiliation per sc.**

The record of the Federal Reserve Board's administration of tbe Bank Hold-
ing Company Act has demonstrated the need for statutory changes which will
ensure that the Act will be administered to achieve the objectives intended by
the Congress. It has been demonstrated that the policies pursued by the Board
under the Act have favored the formation of holding companies by the large
dominant banks in local markets and encouraged their expansion through
mergers and acquisitions so that they could achieve economies of scale. But. the
Board belatedly came to recognize that there are clear limits to the achievement
of such economies and embarked on a "go slow" policy with resped: to multibank
holding company growth by merger and acquisition.

Unfortunately, the evidence is clear that once a market becomes highly con-
centrated deconcentratlon Is not only extremely difficult biit also painfully
slow. A recent study of the Federal Reserve Board brought this Into sharp
focus when It found that in the period 1966 to 1975 there was an average decline
of about six percent in three firm concentration ratios in 171 SMSA's where
the three firm concentration ratios ranged from 50 to 100 percent." At this rate
of reduction of three firm concentration it would require a ppro.il mutely 66 years
to bring the degree of control exercised by these flrma down to the more ac-
ceptable, but not necessarily ideal level, of 50 percent of the market.

We have already addressed some issues which would sc a long way In
statutorily preventing future expanaionlst policies — and we have suggested
ways to strengthen the bill along those lines. At Ihe same time, we believe tbat
wo have demonstrated that the failure of the current law to achieve Its rurposee
is in substantial iMirt due to the recalcitrance of the Federal Reserve Board to
heed the legislative intent of Congress. While we are confident that the proposed
amendments will go a long way In solving the problems we ill recognize, we
have also seen how a clever lawyer or economist can twist the law or the facts
to justify an opposite result. The Board seems to have an abunilance of this
talent.

Since we agree that it is time to start afresh the flglit against concentration
of economic power, we urge the Committee to replace Ihe current administrator
of the Bank Holding Company Act with either another existing agency or a
specially constituted body. We frankly have no specific thoughts on this matter
other than the need to make you realize that the current caretakers of your
efforts have not done the job.

Bnlinl nf nare

" fiamnpl H. 'IAIIPT. "l"ne CBfi oi avmtni/ T.wmjjMiitf rtt-1
Bomvl nf OnvirnorK, Fi<lli-rnl TtmeTvr Srstpm, 1»71. np.

»• HamiiH R. Thuw. Jr. snd .lohn M. Mlntro. The Remlat
Paner prcHfntpd at Amprlcan Econnmlc AssoclBtlon mwtla

"Ssmiipl It. TflllPv. Hecpul Trrndi In Local nniitlng Martel Slrni-lure, SlnlT Eronnmlp

Digitized bvGoO^^IC

The determination of nonbank activities closely related lo bankini; which
Iwnk holdliiK comiianies are permitted to enter is a responsibility of the Federal
Reserve Hoard under Section 41c) (8) ot the 1070 amendments to the Bank
Moldinf! Couiimny Act. By late 1974, the Board had approved 21 general claBses
of nonlMink activities as l>elng permlRflible for bank iiolding ^vrnpaDies but sub-
Hequeiitlj- took a more cautious stance toward broadening the permissible areas.
In its September 0, 1974 order declaring that tbe iindem'ritiiig of mortgage
Kuaraiiiee insurance would not be an appropriate bank related activity, the
Board stated that under current conditions it would be desirable for bank
holding comiMinles generally to slow their rate of expansion iind to direct their
energies principally toward strong and efficient operalionK witbin their existing
modes, rather tlian toward expansion into new activities. vnMo not represendng
a 180 degree turn In position, this view represents a very different philosophy
than the Board expressed la its statement of principles of February 20, 1968 that
bank holding com|>anies should be allowed to enter certain nonbanklng areas
which would facilitate brooder services for the public consistent with the con-
tinued growth and development of the economy."

Initially, tlie Board's riew was that banking management needed to move
away from thinking like bankers and to think Instead like corporate managers
looking out over a related set of businesses which Included one or more banks."
More recently, however, the Board expressed the view that bankers shonid devote
more time to the business of banking and give reduced priority to expansion into
new areas. However, the Board began to manifest disagreement as to whether
all bank holding companies should be constrained or whether the permissible list
should l>e closed to new activities until there has been a reversal of the emerg-
ing lodu.stry trend toward deteriorating capital ratios. The majority of the
Board has opted for a policy which would restrain bank holding companies from
adding to their debt burden by acquiring leveraged companies requiring periodic
Infusions of capital."

The expansion of bank holding companies into nonlmnklng activities exposes
a holding company's banks to new risks which could jeopardize the soundness
of these banks. Holding companies' earnings have lieen adversely affected by
the REIT disaster depressing their stock prices and their ability to raise sorely
neded capital for their banks. Bank holding company legislation needs to provide
more protection for the banks In the holding company from the risks of non-
banking affiliates: and to provide for closer sujiervlsion and regulation of the
soundness of nonbank ventures entered Into by bank holding companies.

Furthermore, a recent Federal Reserve Board study. The Perfortiiance of Bank
Hoiding Cnrnpany-AfflUalFd Finance Oompaniei, by i^tephen A. Rhoades and
Gregory E. Boczar, found that after nfllllation with a holding company the
affiliated company was found to have higher Interest and debt expense, lower
profits, greater leverage, and higher growth than the independent companies.
Moreover, affiliated companies, sultseciuent to afHlintion, did not have lower losses,
did not open more offices and did not have lower operating expenses than in-
dependent companies. The study did not confirm the arguments of bank holding
companies that their entry into the consumer finance industry will yield numer-
ona public benefits.

Section 301 of ,S. 72 seeks to address the concerns which we have just discussed,
by rhanging the regulatory test to those activities which are directly related to
liankiiie and in which specific public benefits are shown. Willie we would agree
that some bank hohling companies have gone too far afield, we are concerned
that an attempt to corral their aclivltieR may ensnare small bank holding com-
panies engaged In longtime legitimate activities.

First, we reiterate our petition (or nn exemption for small one-bank holding
companies with banking assets ot less than $50 million and nonbanklng assets of
lefti than $1.'> million,

"irnrvfj: Rownblum, "Bank Haldlna Company Revlrv 11)73/74 Tort I," Binine« fnii-
dinonr. Fi^nrnl Bnscrvp Bnnk of fhli-aso. Ffhrunry imr>. ]>. .1.

" JpfTri-v M, Hiio(i»r. "BBnhprH nnri thp Bank HnliUns Cnrnpany," Rpwph l*fiir* Ih* 7B[h
.\nniinl l'<in<i>ntlon of Ihp Florida Itankorn AMorlBllon. Jun» 2:i. lU7n.

" Op, Cll„ lianvy RoBenblum, pp. .'i-6.

D„ii„.db,Go(5glc

74

Second, we believe that any nonbank services offered by a one-bank boldlnK
compaoy should be limited to ttae primary service area of tbe main banking
office.

Finally, we would support the grandfathering clause as set forth In Section
301(b) of S. 72 as a reasonable haxlH for allowing continued operationa of exist-
ing companies.

TBB lUPACT OF ANTITBUST ENFORCEMENT ON BANK HOUIINO COUPAHS BZPANSION

Antitrust enforcement under the Clayton and Bank Merger Acts bas bad a
profound effect on bank mergers end bank holding company acquisitions of ifi'
dependent banks since the IBOtys when the Supreme Court In the Philadelphia
National Bank case made It clear that bank mergers were subject to the provlslone
of the Clayton Act. Initially, antitrust enforcement focused primarily on the
application of the Clayton Act to horizontal bank mergers. Successful litigation
of these cases closed the door to such mergers and prompted banks and bank
holding companies to acquire hanks located in markets In which they did not
compete. This shift In acquisition policy gave rise to serious antitrust enforce-
ment problems*

The growth In Importance of geographic market extension acqulstttmu by
bank holding companies moved both the Federal Reserve Board and the Justice
Department's Antitrust Division to broaden their horizons toward a concern for
the protection of competition In statewide markets. The Antitrust Division, In
challenging banking acguisltlona of the geographic market extension type re-
lied on the doctrine Of potential competition In the absence of any evidence of
competitive overlap in conventional local markets affected by the acquisition.

In moving against these mergers the government's main concern was the
prevention of the domination of commercial banking tn a state by a very few
banking Institutions. By challenging market extension bank mergers, the Anti-
trust Division was attempting to establish a rule that In effect said that the
lai^est bank organizations in a state cannot acquire other large banking or-
ganizations where concentration Is already high, I.e., where the top four banks
or banking organizations In tbe state -were doing well over half of tbe banklnK
bnslness In the state,"

In pursuit of tbe establishment of this rule, the Department flled 21 anti-
trust suits to enjoin mergers between banks operating in separate markets that
it twileved would have the effect of eliminating substantial potential competi-
tion. In eight consecutive potential competition cases, which were Ungated, the
District Courts ruled against the government. However. !t was not until the Su-
preme Court ruled In U.S. v. Marine Bancorporation, et al. that the doctrine
of potential competition was fully examined by the Courts. In its majorltr
opinion sustaining the District Court, the Supreme Court held as follows ;

"In applying the doctrine of potential competition, courts must, as we have
noted, take Into account the extensive federal and state regulation of banks.
Our anirmance of the District Court's Judgment In this case rests primarily on
state statutory barriers to de novo entry and to expansion following entry into a
new geographic market. In states where such stringent barriers exist and In the
absence of a likelihood of entrenchment the potential competition doctrine —
grounded as It is on relative freedom of entry on the part of the acquiring
firm — will seldom bar a geograi^lc market extension merger by a commerclBl
bank. In states that permit free branching or multlbank holding companies, courts
hearing cases involving such mergers should take Into account all relevant
factors, Including the barriers to entry created by state and federal control over
the Issuance of new bank charters. . . ."

The Court's decision In Marine Bancorporation makes It next to Impossible
for the government to challenge geographic market extension mergers by banks
in states which limit branching or bank holding companies. The government's
inability to ntllize the doctrine of [totential competition in challenging geo-
graphic market extension mergers by hanks has the effect of Immunizing such
mergers from antitrust challenge in some 31 states which limit branching and/or
bank holding companies. Unfortunately, this gap in antitrust enforcement will
open the door to market extension mergers by bank holding companies in states
which have consistenly had the lowest levels of concentration and is bound to

■"The CorapMltlve 8tiind»rd Ctlllwd br the Department o( Justice with Rpapect (o
Bank HoldInK Compan):- Eipsnalon," Kemsrks by Barry GroBsman, Acting Deputy AsBlHlant
Attorney Qeneril. Andtruat Dirlslon. Apr. 6. 19T4,

* "Bank Holding Company Eipanalon In the Bouthwest— An Antitrust Look." Remarks
by Donald I. Baker, Director of Policy Planning. Antitrust Division, Hu 28. 19T3.

Digitized bvGoO^^IC

76

result In Bnbstantlal Increaeee In banking concentration nnloBB Gongreas acts to
overturn the Marine Bancorporation decision and subject these mergers to cbal-
lenge onder tbe aiititmat laws.

By way at background, It sliould be noted that the governments' reliance on
tbe doctrine of potential competition In challenging market extension mecgere by
banks was necessitated by the narrow geographic scope adi^ted by the govern-
ment and the Courts In deflnlng relevant banking marketi; In horizontal merger
casea. Bank holding companies, finding themselves foreclosed from miiTHiig ac-
quisitions of banks In their owd geographic markets by the government's soc-
cessfnl (iiallmge of these mergers, turned to merger partners in more r^note
markets within their states. In the absence of evidence of a lessening of direct
competition the government adopted the doctrine of potential competion to chal-
Imge these mergers. This doctrine held that the acquiring bank would be most
lik^r to enter de novo the market of the bank to be acquired. The limltatlona
now impoaed on tbe government by Marine Bancorporation will neceaaltate chang-
ing existing leglBlation to broaden the geographic concept of the relevant market
In which such mergers should be tested for competitive Impact.

Sections 101 and 201 begin to address tbe problems of indiscriminate acquisi-
tion of Independent banks for the sake of CTpansfon with the resultant concen-
tration of economic resources. As we have intimated we do not believe these
provisions go far enough.

First, we would aui^tort these two sections provided the alternative permis-
eible percentage limits are set at 10 percent. As we view the 20 percent limit,
five holding companies, each with 20 percent of the state's banking assets could
control the market— creating an unacceptably high level of concentration which
win work to the detriment of the consumer. Additionally, the bill would exempt
banli holding company acquisitions from the percent limit where necessary to
prevent Immediate failure of a. bank. This brings Into question the Issue of tbe
Interstate acquisition of banks which, at one time, was advocated by tbe Fed-
eral Reserve Board. We strongly oppose this proposal and urge that the l^Bla-
tlve history of S. 72 reflect the view that nothing In the Act should be conatrned
to permit holding company acquisition across state lines.

Second, we believe that no merger or acquisition should be approved unless
there Is clear and convindog evidence of a public need. The utilization of such
B new standard would obviate the problems currently faced by the regulators in
enforcing the current Sherman and Clayton Act language, which has proved to be
Ineffecttve.

Third, we believe there should be a formal trial-type hearing condncted at the
site of the proposed acquisition or merger. In every case.

Fonrth. in conjunction with the bearing procedure, we would urge a require-
ment of prior disclosure and adequate administrative procedures designed to
prevent secret bank takeovers. In some cases, multfbank holding companies gain
acceptances of tender offers by obtaining the slgnatnres of the holders of the
controlling shares one at a time. In this manner, control is acquired without
the knowledge of other shareholders. The FTC tender offer rules recently
promnlgated wonld be a good starting point.

These recommendations, when adopted by this Congress will form the basis
for the continuing viability of Independent banking. We hope to work closely
with this Committee In the days to come in pressing the early passage of 8. 72
with our recommended changes. We appreciate the opportunity to appear before
this Committee today and will be glad to answer auy questions you may have
regarding our statement.

Al>i>ERDIX ElHIBIT I,—

The legislative history of the Bank Holding Company Act of 1956 shows
clearly that Congress was convinced that bank holding companies were thwaiiing
national banking policy ; that they posed a threat to competition In banking ; and
that Immediate controls were urgently required. We believe it will be helpful to
the Committee to have the pertinent parts of this history.

Following are excerpts from House Report No. 609, gupra. :

"The need for immediate legislation which would at the same time control the
future expansion of bank holding companies and force them to divest them-

DigilizedbvGoO^^IC

"ETidence developed during the bearings bas conTinced your commlMee that
bank holding companies are not In accord with the very precepts upon which our
banking syetem reatn. The United StatPs early in its history, it should be recalled
adopted a democratic Ideal of banklnf;. Other countries, for the most part, have
preferred to rely on a few lariie banks controlled by a banking elite. There has
developed in this country, on the other hand, a conception of the independent unit
Itank as an institution having Us ownership and origin in the local community
and derlTins its business chieOy from the community's industrial and commercial
activities and from the farming population within its vicinity or trade area. Its
activities are usually fully Integrated with local economic and social organisa-
tion. The bank holding company device threatens to destroy this democratic
grassroots institution."

"Your committee believes that the destruction of the American unit banking
system, resulting In the further concentration of credit facilities, would have
revolutionary effects upon our free^nterprlae system. Ultimately, monopolistic
control of credit would entirely remold our fundamental political and social
institutions."

"The time for action Is now. We dare wait no longer, for already we are rsp-
Idly following the example of England whose many banks became the Big Hve."

"While our banking structure has evolved down through the years to meet
changing economic requirements, this country has held steadfast to the doc'trine
that competition should prevail in the banking industry. Onr national Itanking
policy has aimed at protecting and fostering the growth of independent unit

"Your committee believes it is obvious that the declared will of Congress In
favor of Independent competitive banking is being thwarted by indirect branch
hanking, through the mechanism of the holding company."

"Independent unit banks, by their willingness to bear substantial local risks,
have accelerated the economic development of the United States • • • As the
Commercial nnd Financial Chronical has so well stated :

" 'Unit banking is peculiarly suited to the gMiius of the American people, to
the democratic republican form of government which we have developed, to the
nature of our business and industrial organizations to our social institutions,
and to the Individualism which Is the foundation of our national progress • • •
[«t us never despise the day of small t>eginnlngB nor the virtue inherent in small
things."

"Tour Committee should like to reeniphaslze the fact that thin Is the only
country left where most communities are served by home-owned and home-man-
aged banks which are aware of and responsive to the needs of the people of their
areas. Our independent lianking systpm has been a vital factor in the develop-
ment of the United Stnte.s. Like yeast cells in n loaf of bread, each working in
its immediate area, our Imnks scattered throughout the country have cooperated
to produce the greatest and most general economic development the world has
known.

"Other countries must depend on ^. 4. or 5 banks having up to thousands of
branches. Policies and important credit decisions arc made hundreds or thousands
of miles from any of the branches. The interest of an enterprising local cus-
tomer may run counter to that of a large main office account. In which event
the former might suffer. This inevitably tends toward concentration in all lines.
cartels, the stifling of new enterprises, and stagnation, what has been termed the
'mature economy.' "

Digitized bvGoO^^IC

lev who comprise the management of the holding company, giving them a decided
advantage in acqniring additional properties and In carrying out a program of ex-
pansion. Such power can he used to acquire independent hank.s by measures which
leave local management and minority stockholders little with which to defend
tbemsclves except their own protest • • •"

This House report was followed, in the second session of the 84th
Congress, by Si:nate Report No. 1095, supra, from which we quote the
following pertinent excerpts:

"In the opinion of your committee, public welfare requires the enaetment of
legislation providing federal regulation of the growth of bank holding companies
and the type of assets It Is appropriate for such companies to control."

"The dangers accompanying monopoly In this field are particularly undesirable
In view of the signlBcant part played by banking in our present national
economy."

• ******

"It is upon the basis of these factors [the five factors of Sec. 3(c) of Act; 12
U.S. lS24(c) ] that the Federal Reserve Board is to measure whether each appli-
cation should be granted nr denied in the public Interest, It will be noted that
these factors extend beyond the nature of those primary In Importance to hank
supervisory authorities In the exercise of their superrlsory powers. • * • The
factors required to he talien Into consideration by the Federal Reserve Board
under tills bill also require contemplation of the prevention of undue concen-
tration of control in the banking field to the detriment of public Interest and the
encouragement of competition in l>anking. It is the lack of any effective require-
ment of this nature In present Federal laws which has led your committee to the
conviction that legislation such ns that contained In this bill Is needed."

Following are excerpts from House Report No. 1416 {U.S. Code,
Cong. & Adm. News, 86th Cong., 2nd sess., 1960, p. 1!)95 et seq.) on the
1960 amendment to the FDIC Act, supra, controlling bank mergers
and acquisitions of bank assets. While this act is not directly appli-
cable to this review, the House report views the banking scene at the
time the Pipistone bank acquisition was being consideredl)y the Board,
and constitutes the most recent expression of onr national banking
policy.

"Vigorous competition In banking stimulates competition in the entire econ-
omy, fn industry, commerce, and trade. There is no question that competition is
desirable In hanking, and that competitive factors should iie considered In all as-
pects of the supervision and regulation of banks.

"The large numbers of mergers In recent years, the vast resources Involved In
these mergers, and tiie increases in the size of large banks, particularly those
which have grown through mergers, all give rise to concern for the maintenance
of vigorous competition in the banking system and in the Industry and com-
merce served by the banking system. The reduction in the number of banks and
the loss of competition between merged banks also give rise ti

"Sad CKperlences in our history have demonstrated that to i
banking system In this country banks must be regulated much r
ordinary businesses."

Digitized bvGoO^^IC

"We do however reject the philosophy that donbts are to be resolved In favor
of bank mergers. At Uie rlak of saflng the same thiag another way, we feel the
bnrden should be on the proponents of a merger to show that it Is In the public
Interest, if it 1b to be approved.

"After all the factors have been weighed, the transaction should be ai^roved
only If the supervisory agency la satlafled that, on balance, its effect will be
beneficial."

APPENDIX TABLE NO.

).-» lAROEST BANK HOLDING COMPANIES RANKED BT ASSH SUE. DECEMBER 1(76

CanMV

ToW

TTp.olhoMI>

.,a,n.p.»T

RMk

(■niltlm)

MottitiMk

ItlMll

u CoiB., San Fnnciico. Catil.

[wYoii, N.r _

"in Corp, N«« York, N.Y..

inTraitNHtVorkdwp.. Nov, >r.ik ^

IWltll WlHilCwj)., ClllCl|0, III

> rim Chieip Corf., CtuuiD, HI

II Wiitfrii BiiKDrporitloii. Lu Anidai, Cilil.

11 3Min!)iPlallcCon.Lo>Auifu,CiIil...

12 HMb FWB « Ce„ Sir FrtKluCilit

1} Mulno MMuHl Bnki, Inc, BurMo, N.V...

U Cracktr NiUoimI Co>v„ Sin Titmitai, ah'

IS CluftMNMrVarkCon.,HawYo(li,N.T..

!| Wioo (Mwrnl Cotv.Piii*hu^t^ Pi

17 Flnl NiHonil Bortoii Corp.. Boiba, Mm.

JMptnliOB.IlHllMWDttvMll

i353 -

i.4n
a.3M

& i(itto3rD«f5rcoft7brtSuEiL.7r"'///.:::;^ tm

n fln« Pimwtvrti (Srp, PNUMphU, Pi 7,200 ..

a nrallnlMnitloMieinciliim, lnc,D*llli.T« 7.IG7

a lllpoblkolTioiCofp-Dolla,Tn _ 6,S21

» SwIW Corp, SMOh. *«ii S,3I0 ..

IS nnlCltyBmurponeonofTiUf,1nc,HaiiiUtn,Tii._._ S.2K

ZS Biok ol Now YoA Co, Int., Now Vofk. N.T S.XS

V NCNB Corp. CIU[MM. N.C.._ - -. 4.*33 ..

2* (Mm SMBorp, Lot Antrin, Carif 4,133..

Zt PMlKMpliliNrtonllCorp^PblEidBlpli.q. fj flSl ..

10 nntM»)MtoCo(|i,Mlh««hM. w^ *.^

31 HaAntCorp,CMa|D,lll 3,ns ..

n BomDMo C*rp, CAwAHw Ohio. . 3,5H

" "-—11 cofB, w— - •-■ ""

IncRcteniDnt.PB..

*\

Maryland

'i&^sxsiSSff.

3,159

3,113
3.10S -

Z,30» ..

iri»itFmc(«OfCo«».,ln<lianapolii. IriO 2,H6 ..

FltriilN*OMlCofp.,Proviilinca,H.I --. l.VX ..

I NttloralHoMIni Corp., Atlanta, Ga Z, "1 -

Tot* $66. «S

Digitized bvGoO^^IC

APPENDIX TABLE NO. Z.—]

°rs

1 B*[Hi Amtnci Cofp _. Bank ot Amarica. N.T.

2 Chn* Minhittin Corp Chaie Manlultan Binl

3 SaoitHy Pacilic Corp _.. ^Kunty PkiKc Nition

2,211

2,07}

1,123
1.0*3

i,on

Soum: "B«nli HoMIni Compinin iiMtSublldiary Binkm at OKomlMr 31, 19T{" Fiiliril Raurvo Boird.

Tiie Chairman. Thank you very much, Mr. Peterson, for a fine
summary.

Our last witness this morning is Mr. John Geilfuss, a distinguished
citizen of Wisconsin. Mr. Geilfuss has a fine record not only in banking
but in many other respects in our State and he's chairman of an. out-
standing bank holding company in Wisconsin, the Marino Corp.

You also have a rather detailed statement. We would appreciate
it if you could possibly boil it down to 10 minutes,

Mr. Geilfdss. I will abbreviate it.

The Chatbman. We will print the full statement in the record.

Digitized bvGoO^^IC

STATEMENT OF JOHN C. &EILFUSS, CHAIBMAN, EXECUTIVE COM-
MITTEE, THE MARINE CORP., MILWAUKEE, WIS., ACCOMPANIED
BY DONALD L. ROOEBS, PRESIDENT OF THE ASSOCIATION OF
BANE HOLDING COMFAIHES

Mr. Geilfuss. Mr. Chairman nnd members of the committee, it's a
real pleasure to appear before you. I had an opportunity to appear last
May before you on S. 71 and I was delighted to be able to speak in
favor of all of it, but, unfortunately, this time I am not in that same
position, I am here on behalf of the Association of Bank Holdinj;
Companies and Donald L, Rogers, its president, is with me. As you all
know our association is a voluntary trade association establisned in
1958 to represent bank holding companies regulated by the Federal
Reserve Board.

In addition to the positions named in my prepared testimony, I am
also serving this year as president of the Wisconsin Bankers As.socia-
tion. In this capacity I have had the privilege of meeting with many
of the 618 members of the association throughout Wisconsin. It may
come as a shock to some, but we in the holding company movement in
Wisconsin get along quite well with our colleagues who hail from unit
banks. Traditionally, wo have preferred to view banking as banking
rather than to engage in philosophical disputes. We believe strongly
in Wisconsin that tjiere is a role for both bank holding c<Hnpanies,
large and small, and for independent banks. The spirit of coopera-
tion, accommodation, and compromise, which has been evidenced in
our work in Wisconsin with consumer groups on such items as the
Wisconsin Consumer Act and our electronic funds transfer legislation
and rules, has fimctioncd equally well in establishing and governing
the State's interbank relationships. We feel the present Federal laws,
administered by the Federal Reserve with overview by the Department
of Justice, have protected quite adequately the interests of bank hold-
ing companies, tneir competitors, nnd the public at large. We see no
need for imposing any further restraints on bank expansion from
Washington.

[Complete statement follows O

Statemest of ths Association or Bask HoLniNn CoiiPAniEs

Mr. Chairman and members of the committee, my name Is John C. Gellfnss,
and I am chnirmoii of the executive committee of The Marine Corporation,
Milwaukee, Wisconsin. I am appearing here today on behalf of the Association
of Banklntt HoldlnR Companies. Accompanying me Is Donald L. Bogers. president
of onr association.

Our associntlon is n voluntary trade association established In 1858 to rep-
resent bank holding companies rpgulnted by the Federal Reserve Board
("Board") pursuant to the Bank Holding Company Act of 19156 ("Act"). We
agree with the Board, the Comptroller of the Cnrrency and the Federal Deposit
Insurance Corporation that the provisions of S. 72 wonld drasticnlly change
the future regidation of bank holding companies and banks. Therefore, we liavp
a vital interest in IhLs hill, and we appreciate having this opportunity to present
our views.

The provisions of S. 72 rnise a host of issues fundamental to the strncture
iinil operation of commercinl banking in the United States, In the coursp of this
statement, we inlend to deal with these is-sues In turn. But to do so effectively,
we ielieve It is imperative that a record be made of what has transpired In the
implementation of the Act, particularly since the enactment of the 1970 amend-

DigilizedbvGoO^^IC

meiits to the Act. Unless this hlstoriCHl perspective 1b set forth, there 1b a danger
that proposals wUl he made, and responses provided, wltliout the benefit of the
factual data that is needed to permit an Informed judgment.

Although bank holding companies first appeared In the United States around
the turn of the century, the first sul>stnii[la1 number of companies was organized
in the late l»20's. The Banldng Act of 1933 recngnized the existence of these
companies and subjected those companies afBUaled with Federal Reserve member
banks to certain restrictions and to llniited surveillance by the Board.

During the IBSO's and ISiO's, liank holding compaRie>> grew tnoderatel; in slie
and number. After World War II, concern was expressed bj the Federal banking
QgencieB and by some members of the Congress that the unregulated acqnlsitlon
of baabs and nonbanking businesses by bank holding companies couM cause
potential problems in the future. These concerns led to the enactment of the Bank
Holding Company Act of 1956.

THE lese ACT

The 1956 Act gave the Board authority to regulate hank holding companies
controlling two or more hanks. In regard to bank acquisitions, prior ajiproval of
the Board was required for each acqui»4!tlon and no bank could be acquired
outside the home state of the hank liokling company unlfss the state to be
entered specifieally authorized such acqulBitions. Bank holding companies operat-
ing in more than one state were "grandfathered" by the 1956 Act. The limited
authority for bank holding company entry Into nonbanking businesses ^as
further restricted by interpretation to those activities where tliere was a signifi-
cant and direct connection between the activity and the business of managing
and cODtrolUng banks. By the end of ld56, fi3 companies had registered with the
Board. The banks aflillEited with these companies held 7.5 per cent of total
commercial bank deposits.

In 1966, the Congress amended the Act to incorporate a number of te<*nlcal
changes necessitated by the Board's experience In administering the Act. More
significantly, the amendments eBtabllshed new competitive standards for future
ac<|u)siEions of banks parallelling the provisions of the Bank Merger Act of 1966.
In efTect, Congress applied traditional antitrust standards to these future acquisi-
tions, and required that the Board take them into account in reaching decisions
on individual applications. Moreover, the Justice Department was explicitly
given the opportunity to challenge in court Board decisions approving any future
ac<|uisltlons of banks. Since this provision relates to later discuBslon. I ^ould
like to quote the provision now ( Section 3(c)) :

(c) The Board shall not approve —

11) any acguijitlon or merger or consolidation under this section which would
result in a monopoly, or which would be in furtherance of any combination or
conspiracy to monopolize or to attempt to monopolize the business of banking
in any part of the United States, or

(2) any other proposed acquisition or merger or consolidation under this section
whose elTect in any section of the country may be substantially to lessen com-
lietilioD. or to tend to create a monopoly, or which in an; other manner would
lie in restraint of trade, unless It finds that the anticompetitive effects of the
proposed transaction are clearly outweighed in the public Interest by the probable
effect of the transaction In meeting the convenience and needs of the community
to be served.

In every case, the Board shall take Into consideration the financial and
managerial resources and future prospects of the company or companies and the
banks concerned, and the convenience and needs of the community to be served.

The efl'ect of this provision in the Act Is to establish uniform standards tor the
Board and the court.^ in evaluating the legality of the acquisition of banks by
liank holding companies. These provisions assure the preservation of the public's
interest in the promotion of free and fair competition. Bank holding companies
are required to furnish the Board a great deal of specific information when
submitting their applications for the acquisition of bank.^. and the Board supplies
copies of the applications to tbp Department of Justice for comment. Because
of Ihe extensive nature of the information sought by the Board, the preparation

Digitized bvGoO^^IC

of application^ bas become a specialised nndertaklug of Its own. coammlnit more
and mnre bumaii and finanelal resourcea. In many cases, tiie Board'ii staff will
seek additional data in order to clarify or add to Information already In band.
The result of this process Is the compilation of exhaustive data that serves as a
basis for the Board's decision on each application. Each sKch decision Is subject
to challenge by the Justice Department and to review by the Federal Court of
Appeals.

We believe this process, while costly to tbe applicant holding companies, fully
meets the Congressional concern expressed In the Act to carefully weigh aa to
each application : (1) the competitive consequences; (2) tbe financial and man-
agerial resources and future prospects of the institutions Involved; and (3) the
convenience and needs of the communities to be served. To propose forther re-
BtrictlonB on bank holding company acquisitions suggests that the existing pro-
visions and related administration are Inadequate. Our Association beileres
very strongly that the present statutory safeguards have proven more than
adequate to protect the public interest. We believe the evidence provided by the
Board's administration of the Act supports this view. It is incnmbent on propo-
nents of additional restrictive proposals to come forward with more than undocu-
mented assertions that the operation of present law Is Inadequate.

By the end of 1966. there were 65 bank holding companies regulated by the
Board, and banks affiliated with these companies held 11.6 per cent of commercial
bank deposits.

THE IB TO AUENDHENTB

As Indicated earlier, the 1966 Act applied only to holding companies owning or
controlling two or more banks. In the late 1960's, public offlcials became con-
cerned about the growth of corporations controlling only one bank, the so-called
"(me-bank holding companies", the nonbank activities of which were unregulated.
This concern was the principal canse of tbe enactment of the 1970 Amendments
to the Act.

As we see it, the major purposes of the 1970 legislation were as follows :

(1) Reffulation of One-Bank Holding Companiet. — The Amendments extended
the provisions of tbe Act to cover corporations and partnerships owning or
controlling one banlc. Tbe Impact of this provision is Illustrated by the fact that
the number of bank holding companies regulated by the Board increased during
the Brst year of the Board's administration of the 1970 Amendments from 121
companies (as of December 31, 1970) to 1,567 a year later. Since 1971, the
number of bank holding companies registered with the Board has Increased at
a mach slower rate and at the end of 1976. there were 1,912 registered companies.

It is Important to recognize that much of tbe "growth'' In bank holding com-
pany assets that has occurred in recent years has simply been the result of the
dedsions of bank managements to reorganize Into a holding company format.
Obviously, when a bank converts to a one-bank holding company, that action
adds nothing to aggregate concentration In local, state or national banking
markets. This fact is so central to our discussion that I should like to comment
on it In greater detail.

The effect of the movement to the holding company structure in commercial
banking, and the enactment by Congress of the 1970 Amendments, was to produce
a gigantic one-time Jump in the amount of banking deposits controlled by bank
holding companies. At the time of the 1970 Amendments, deposits In multiple bank
holding companies' bank subsidiaries came to 16.2 per cent of total bank deposits
($78.1 billion) . Total deposits In subsidiary banks of one-bank holding companies
at that time came to about 38 per cent of total bank deposits ($191 billion).
Combining the deposit totals for the two types of holding companies can make It
appear that an undesirably large expansion In bank holding companies occurred
when, in fact, all that took place was a corporate restructuring in many hundreds
of banks. This restructuring produced no change In the underlying deposits or
competitive position of the individual Institutions. Accurate analysis of banking
data related to competition clearly requires more than simply coming up with
rough aggregations of measures such as total bank holding company deposits.
(See "Aggregate Bank CompetiHon and the Competition In Banking Act of 1976"
by Manfred O. Peterson, laauet in Bank Regulation, Bank Administration Insti-
tute, Summer 1977, p. 37. )

Because of the evolution of the Act and the efforts by the Board to con-
edentlonsly administer it, a wealth of data has been assembled that has been
utilised by researchers to develop measures to indicate degrees of competition In

Digitized bvGoO^^IC

markets (or banking and other Berrlces offered by bank holdlnB companies. A
recent study. "Concentration Ratios and Commercial Banking : Use and Limita-
tions", commisaloned by our Association and conducted by Golemlie Associates,
UlnstrateH the limited value of using ratios to meaeure concentration. Another
study, by Samuel H. Talley at the Board's staff, reporting on trends in aggregate
concentration in banlilng, deserves the particular attention of the Committee.
Mr. Talley found that, during the period 1968 to 1975, nationwide concentration
(the per cent of total domestie deposits held by the 100 largest banking organiza-
tions) fell 1.1 percentage points, from 49.0 to 47.6 per cent. This contrasts with
the experience of the period 1957 to 1968, when nationwide concentration rose
■lightly from 48.2 per cent to 49.0 per cent.

It should also be noted that the percentage of commercial bank deposits held
by all banks affiliated with bank holding companies has declined from 68.1 per-
cent In 1974 to 67.1 percent in 1975 to 66.1 percent in 197a

We agree that all data of this nature should be used judiciously because con-
centration in banking markets can be judged on different levels — International,
national, regional, state and local — and by different measurements. Nerertheless,
the data do at least provide a caution to those who might be unduly Impressed by
simple B^regatlons of numbers.

(2) Expantion of Section Ho){S) 4 cHiH (tea. —Another Important result of
the 1970 Amendments was revision of section 4(c) (8) of the Aet to permit bank
bidding companies to broaden the range of financial services offered to the public.
The old language of the section, as Interpreted by the Board, had been recognized
aa unnecessarily constricting and as thwarting efforts by bank holding com-
panies to meet the flnancial needs of their customers. There had been fewer
than 30 approvals by the Board under the old language and almost ail at these
rdated to insurance activities. When Board Chairman Burns teatifled before the
Senate in 1970, he outlined the scope of activities that the Board might consider
permissible under the proposed amendment to section 4(e) (8) :

". . . In the Board's judgment, authorized subsidiaries might well Include
those engaged In lending funds on their own account or for the account of others ;
acting as Investment adviser ; operating a 'no-load' mutual fund ; leasing equlp-
meot where the lease is really a form of security for flnancing ; performing in-
stirance functions In connection with services offered by other subsidiaries ;
IM«vidlag bookkeeping or data processing services; originating, servicing, and
selling mortgage loans; acting as travel agent or issuing travelers checks; and
making equity investments in commonity rehabilitation and development corpo-
rations engaged In providing better housing and employment opportunities for
people of low or moderate incomes." (Senate Committee on Banking and Cur-
rency. Hearings on One Bank Holding Company Legislation of 1970, May 14,
1970. page 142.)

After extensive hearings, the Board has adopted regulations (Regulation T)
anthorizing all of these activities with certain limitations and conditions, except
those of operating a "no-load" mutual fund and of acting as travel agent. The
Board's list of permissible activities also Includes trust services, lull pay-out
leasing of real property, courier services and consulting services for non-affliiated
banks, subject to restrictloas In each instance. We submit that these approved
■ctiTlties are not only "closely related to banking", as required by the statute, but
actually are "banking" in the sense that many banks have engaged directly in
virtually all of these activities for a number of years.

It Is Important to note that section 4(c) (8), aa amended In 1970, requires the
Board in passing on each individual application to engage in a "closely related"
activity to determine also: . . . whether Its performance by an affiliate of a
holding comijany can reasonably be expected to produce benefits to the public,
nich as greater convenience, Increased competltinn, or gains in efficiency, that
outweigh passible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of Interest, or unsound banking
practices . . .

The Board has taken its regulatory responstbilitles under eection 4(e) (8) very
■erlonaly. Much time, effort and expense has gone Into sophisticated and thorough
analyses to provide the Board with information on which to base its decisions in
Ught of the statutory purpose. As an example of the care with which the Board
has proceeded, it is useful to list the activities the Board has found to be Im-
permlasible for hank holding companies under section 4(c) (8) ;

(o) Insurance preminm funding — that is, the combined sale of mutual funds
and insurance

Digitized bvGoO^^IC

84

(b) UnderwTlting life insnraiice that is not sold In connection with b credit
traoBactlon

(o) Real estate brokerage

id) Land developinent

(e) Real estate syndication

(/) Management consulting for nonbanklng oi^nlzatlona

is) Property management not part of trust actlTltlea

(h) Acting as travel agent

(t) Savings and loan aesodatlon

We have not agreed with aU of these decisions of the Board, but we do believe
It is entirely clear that the Board has strictly constrned the language of section
4(c)<8).

(3) PuiUo Be»cflta.—Aa Indicated in the above-quoted portion of section
4(c) (8). Congress was concerned that, In allowing bank holding companies to
engage in activities under section 4(c)(8), the Board should perceive public
benefits. One aspect of this concern Is that Congress expressly provided In section
4(c) (8) an encouragement for de novo entry into pcrraisslhle activities, so that
new sources of competition for financial services could more readily emerge as
consumer alternatives to established businesses. The overwhelming majority
of applications approved by the Board under section 4(c) (6) have Iteen for de
novo activities as opposed to the acguisltlon of going concerns. We estimate
that more than 80 percent of the applications approved have been for the
establishment of new businesses.

Another concrete example of how the public has benefitted from bank holding
companies' engaging In approved activities shows up In credit life insurance
underwriting. The first two applications approved by the Board, in February
1973, contained commitments from the applicants to reduce premium rates on
credit life Insurance by 15 percent in one case and from 7 to 20 percent in the
other, (See applications of Fourth Financial Corporation to retain Fourth
Financial Insurance Company and Industrial National Corporation to acquire
Consumer Life Insurance Company.) This same pattern of reduced premium
rates or Increased policy benefits has been followed In all credit life insurance
applications approved by the Board since then.

The Board's decisions on numerous applications are replete with examples of
its insistence on the need for applicants to demonstrate bow their proposals are
expected to benefit the public. The Board has required specifics, Board generalities
are not sufficient.

A detailed analysis of benefits to the public In section 4(c)(8) acquisitions
is found In !he study by Golembe Associates entitled "Evaluation of Public
Benefits Arising from Bank Holding Company Xonbank Eipanalon."

(4) Proleclion of Compctilors. — Congress in 1B70 amended the Act to make
sore that In the interests of compctilors in section 4(c)(8) activities were
respected. The Board has adopted procedures to assure competitors of an op-
portunity to participate in proceedings to formulate regulations and to express
their views on individual applications filed pursuant to the Board's regulations.
They also may avail themselves of the Judicial review provisions of the Act
It Is extraordinary that competitors, even potential competitors, can by statutory
autliorily Intervene to prevent someone else entering into business in competi-
tion against them. To put It mildl.v, our competitors have not been timid In
availing themselves of the opportunities provided for them.

The procedures now in cfTect can be well illustrated by the protracted history
associated with the consideration by the Board of the conduct of insurance agency
activities by bank holding companies. Banks traditionally have engaged directly
or indirectly in the insurance agency business, and prior to the 1956 Act, this was
true also of bank holding companies. Although the language controlling the
Board's authority in this area under the 1956 Act was narrowly drawn and
interpreted, the Board prior to 1!>70 recognized that this nctlvity was in the
public interest and had acted to permit bank holding comi)anles to acquire sub-
sidiaries that seri-ed as insurance agencies where the Insurance was related to
the business of the companies' hank sulisidlaries. Senator Bennett of Utah, one of
the Senate Conferees, alluded t" ibis fact during the Senate debate on the
Conference Commlllee Beport on the 1070 Amendments, when he liad the
following discussion with the Senate Banking Committee Chairman, Senator
Sparkman of Alabama:

Digitized bvGoO^^IC

"Senator Bennett : . . . The Federal Resi^rve Board under the existing language
of section 4(c)(8) for the past 14 years has approved insurance activities for
hank holding companies, and there was no intent on the part of the conference
committee to overrule these past decisions. Fnrthermore, the new language of
section 4(c) (8) clearly gives the Federal Reserve Board broader discretion than
it now has to make deternil nations of iiermlssible activitiex. Federal Keserve
Chairman Burns stated In bis teaclmony before our committee that the Board
believed that Insurance was ojie of the BCtivitiea tiank holding comiwnles should
be permitted to engage in. Therefore, the Board wil! have ample authority to
approve insnTaace activities, and we expect the Board will do so when it con-
siders them proper.

"I should like to ask the ehalrman, the Seoator from Alabama, whether he
agrees with this.

"Senator Sparkman : I feel that Is a fair statement. 1 suppose It might be
well to point out, an the Senator from MictaiKan will recall, that the House bill
had in it the ao-ealled 'laundry list'. We decided in the Senate that that was not
the way to handle the matter. First of all, we did not know whether we could
include all of them. We do not know what the situation will be 10 years In the
future, and so forth.

'■We reached a decision that the whole thing ought to be fiOTible, that it ought
to l>e lodged in the hands of the Federal Reserve Board to carry out the guide-
lines we set. r think the answer would be that it la left In that manner." (Dally
Congressional Record, December 18, 1970, page S. 20645.)

lu view of this past bistory, It came as no surprise when, on January 29, 19T1,
the Board Issued its first proposed regulation under the amended section 4(C)
(8). the following activity was included :

(T) Acting as Insurance agent or broker principally in connection with exten-
sions of credit by the holding company or an; of Its sut»l diaries ;

All Interested parties were given an opportunity to submit comments to the
Board on this proposal. Subsequently, at the request of the Insurance agents,
the Board announced that it would hold a bearlnfc on the proposed Insurance
agency activity. A hearing was held May 12, 1871, and the insuranci' agents and
other Interested parties participated. Following this hearing, the Board on August
5. 1071, amended its proposal and adopted a final regulation efTective September
1, 1971, permitting a bank holding company, with prior Federal Reserve approval,
to engage In the insurance agency activity under obtain conditions.

Pursuant to this regulation, a number of bank holding companies flted applica-
tions beginning in September 1971 to engage in this acllvlt.v. However, repre-
sentatlveH of the insurance agents objected to these applications and requested
bearinKs on eftch individual application.

In March 1973, the Board announced that the bearings requested by the in-
surance agents on the pending Insurance agency applications would be held be-
fore an administrative law Judge (hearing examiner). The hearings were held
begtnDini; June 11. 1973. The administrative law judge rendered a decinlon on one
application September 7, 1973, and on flre Other applications November 9. 1973.
The Board In January 1974 approved one Of these applications, subject to certain
conditions, and the insurance agents filed a petition for a review of the Board's
decision with the Court of Appeals, In September 1077, that court rendered a
final decision, and last month the Supreme Court denied certiorari. SuliHequently,
the Board approved additional applications In July 1074 and September 1974.
with the last group of approvals being announced July 14. 197-'!. These decisions
were also appealed by the Insurance agents and (he court cases are still pending.

Clearl.v. the interests of the insurance agents have been well protected. But
the fact that the final decision in some cases has been delayed for over six years,
with no certainty that final resolution is Imminent, raises other questions of

While these cases have dragged on. competition has been stlfied. substantlnl
Foats. InMndlng but not limited to attorneys' fees, have been Incurred, and the
regulatory process has gained further notoriety. Arriving at equitable public
policy decisions is a complex and demsnding ta.sk. and we readily accept the
need for federal regulation of bank holding companies. At some point, however,
a line needs to be drawn between giving opponents of on action a fair hearing.
Ml the one hand, and the suppression of fair competition and the distortion of
free market forces, on the other.

Digitized bvGoO^^IC

Needless to say, we believe Congress should focus on ways of permitting regn-
latory decisions to be more timely. More timely decisions will save money, and
hold out the promise of increased competition, leading to benefits to the consumer
in lower costs and wider cbolces. At the very least Congreaa should not en-
courage measures that will Increase paperwork, raise costs, and promote delays
in regulatory actions. Today's economy Is not working the way our economy did
ten or twenty years ago, and some of the blame has to go to the enormous In-
creases in work and costs needed to accomplish relatively simple objectives, audi
as opening a new business. Our nation simply cannot afford to allow federal
regulatory policy, no matter how well meaning, to sUSe competition, smother
businessmen In paperwork, and raise prices.

(5) "Tie-Ina." — Congress evidenced its concern with possible unfair competitive
practices by adopting section 106 of the 1970 Amendments. This provision ^»e-
ciflcally prohibits "Ue-lns" involving bank holding companies and banks, and ta In
addition to the general federal antitrust law prohihlUons against "tie-ins" and
other coercive practices. The effectiveness of section 100 was emiAaidzed In a
speech by Donald I. Baker, then Director of Policy Planning In the Antltruat
Division of the Department of Justice :

"The Department of Justice supported section 106 in IdTo ae a useful and
worlcable provision. We are delighted to see this vindicated by broad-scale com-
pliance since then." (The Bank Eoldini/ Company AmenAmenU Revi»ited. July
20. 19T2, American Bankers Association National Governmental Afblrs Confer-
ence.)

We are pleased that there has been no change in the Justice Department's
view since that time, as is shown by the statement of Hussell T. Baker, Jr.,
Deputy Assistant Attorney General, that : ". . . we believe that the general com-
pliance noted by the Department In 1972 Is continuing." (8ul>commIttee on Fi-
nancial Institutions Supervialon. Regulation and Insurance. House Committee on
Banking. Finance and Urban Affairs. Hearings on The Sate Banking Act, H.R.
9086. Part 3, September 20, 1977, p. 1577. )

BANK HOUUNO COMPANIES TODAY

We believe that the overall goals Congress songht In enacting the 19R6 Bank
Holding Company Act. and the subsequent amendments to the Act, have been
achieved. We believe the Board shonid be commended for its accompli shmenta

In administering the Act over the years and particularly for Its conscientious
Implementation of the Act as broadened by the 1970 Amendments. There is no
doubt that bank holding companies are subject to detailed and comprehensive
regulation, hut regulation resulting in clear benefits to the economy In the addi-
tion of new services and Jobs. We support the Board's proposals contained In
S. 71. which the Senate passed last year, for additional pennlties and remedies,
which would enhance the eiecution of the Act. Beyond that, the Congress should
encourage the Board to administer the Act with the foremost aim of allowlog
bank holding companies to better serve the public.

This goal can be accomplished with minimal additional legislation. The frame-
work to assure full and fair competition exists In the Act, the regulation and
supervision thereunder by the Board, and In the antitrust laws. To go beyond
these proven safeguards and impose additional constraints on top of those that
now exist would serve only to Impede Innovation, and would erect barriers
against competition while creating areas of privilege for a selected few.

We submit that Congress ahonld be proud of the results of Its legislative
efforts In the bank holding company field. By legisNtlng wisely and avoiding
draconian measures. Congress has permitted bank holding companies, both large
and small, the flesfbiilty npcessary to meet the needs of their communities for
increasingly sophisticated financial services. Through their banking and other
affiliates, bank holding companies offer even small communities a wide range of
financial services otherwise available only from large banks nr banks with ex-
tensive branching aystems. This is especially Important in small towns and cltlen
traditionally served bv small bankw. A holdinz comoany bank in such n com-
munity Is a local Institution which, through affiliation with the parent holding
company. Is capable of satisfying the growing consumer demands for financial
services inherent In a dynamic economy. Thus, the bank holding company hnn
proven to be a flexible Instrument capable of meeting the diverse needs of Ameri-
can consumers In populous and sparsely populated areas, in cities and in agrl-

DigilizedbvGoO^^IC

87

cnltnral areas, maldng new flnanclal Innovations available to a broad spectrum
of the nation's people.

Employees o( bank holding companies benefit as well. The bank holding com-
pany provides Its employees with all of the advantages of larger organizations,
including salary, Insurance, medical and rettreinent benefits, that small organi-
caUons find difficult to match. In addition, employees of bank holding companies
and their afflUates beneflt from extensive training programs, varied Job experi-
ences, and greater opportunities for advancement. In fact, many of the Associa-
tion's members have pioneered job training and placement programs designed to
help job applicants from disadvantaged backgrounds become productive citizens.
Only the extensive managerial support possible in such Institutions as a bank
holding company can carry out such an ambitions undertaking.

And, we emphasize, over alt of this activity presides the Board, charged by
t:ongre6S to insure that bank holding companies, no matter how large or how
small, comply with the law and conduct their activities in a pro-competlUve
,8 to provide public benefits.

We believe that the record outlined above regarding the regnlated activities
of bank holding companies leads Inexorably to the conclusion that 8. 72 Is not
needed and would be detrimental. The Board's stewardship of its responsibllt-
Uea under the Act has been characterized by cautious, conscientious and, when
apmopriate, firm administration. The Board has moved with characteristic ex-
pertlae and care In authorizing formations of bank holding companies and in
aiq>ravlng acquisitions of banks by the regulated companies. In addition, we
believe the Board has administered the provisions of section 4(c) (8) in an ex-
tremely conservative manner. In fact, we see little likelihood that the Board
will permit any significant expansion of bank-related activities any time soon.
Virtually all of the bank-related activities ai^roved up to now have l>een fnnc-
tlona that ttanks have carried on themselves tor decades.

In light of the close and constant supervision and overslglit of the Board, and )
the conservatism of its r^ulatory policy. It would be unfortunate if the Board /
were foreclosed from acting at some future time to aj^rove activities for bank
holding companies that seem well suited to them and that promise pnbllc bene-
fits: The only beneficiaries of such a rigid policy would be other businessmen
who are not subject to federally imposed restrictions on their activities. Cer-
tainly, cmisumere would gain nothing from a deliberate federal policy of limit-
ing competition.

Let me turn now to a section-by- sect! on commentary on S. 72.

Section 1. — This section proposes that the bill he entitled the "Oompetition
In Banking Act." We believe our testimony will show that this title is a
mimomer.

Section 2. — We have grave reservations about the accuracy of the assertions
contained In this section. Has concentration of banking resources "continued
unabated"? If the findings of Mr. Talley cited earlier can be given credence, the
trend in recent years has been for banking to become less, rather than more,
concentrated. An official of the Justice Department testified In 1975 before this
Committee's Subcommittee on Financial Institutions that, on a national basis.
banklnK Is "one of the most unconcenf rated major industries in the country."
{Joe Sims, Acting Deputy Assistant Attornev General, Subcommittee on Finan-
cial InstltuUons. Hearings on S. 890, July 28, 1975. page 91.)

In considering local banking markets— which are the basic competitive units—
the decree of concentration varies. Where significant degrees of concentration
exist, however, the cause can frequently be traced to artificial limitations tm-
po«ed on new entrants Into those markets, A typical impediment would be a
restrict've state brancblne law or a law against multiple hank holding compa-
nies. The distinguished Chairman of your Subcommittee on Financial Instltii-
tions has undertaken a reexamination of the statutory restrictions on multiple
office hanking. We are In mmplete agreement that a study of this nature Is
badly needed and long overdue. We would go fnrtlier and argue that the effect
of these laws over time has been to Insure pockets of mnnnpolv and to reinforce
tendencies toward undue concentration. The remedy for this 111 lies in removing
the art'fleiai barriers preventing competition among banks while continuing to
tasnre that the resulting competition will be fair.

Digitized bvGoO^^IC

Section 2(b) asserts that "an increasing share of . . . banking i
has come under the control of bank holding companies. Technically this Is nn-
denlablf true, as we indicated earlier, because of the conversion of many banks
to the holding compan}' format, but it is not meaningful from the standpoint
of public poUcy, A^n, we would cite Mr. Talley'a paper as providing an ob-
jective analysis of the concentration issue.

Section 2(c) of the bill asserts that some of the services oflfered by banli
holding companies go "beyond those directly related to banking" and have
eroded "the line between bonking and commerce in the nation." This is a puB-
Ellng "finding" since, as we have noted already, virtually all of the activities
approved for bank holding companies by the Board have been carried on by
banks themselves for many years.

We have previously named the limited activities that the Board, after ct-
hauative consideration, has listed In Its regulation as permissible for individ-
ual t«nk holding companies, on application, to engage in under section 4(c) (8)
of the Act as amended in 1970. Such activities, we emphasize, have been care-
fully circumscribed by the Board either in its regulaUona or Interpretations, or
by its orders in particular cases.

Some of the one-bank holding companies brought under the Act by the 1970
Amendments, of course, engage in other activities by virtue of either the in-
deflntte or 10-year "grandfather" benefits given them by the statute. These
"grandfathered" activities, obviously, should not be confused with the activi-
ties listed by the Board as permissible Eince 1970.

Among the services criticized in section 2(c) of the bill are the "ottering of
Insurance agency and underwriting services". We have noted elsewhere the
vigorous opposition to bank holdine company entry into this area from the
insurance agency business. It might be useful to observe, for example, that the
Board, in permitting limited insurance agency activities, has allowed an Insur-
ance agency of a bank holding company to offer any kind of insurance in com-
munities under 5.000 population. But this parallels an authorllty for t>ank8 that
has been In the National Bank Act since World War I. In communities over
5,000, however, the sale of insurance to the public by bank holding companies
is strictly limited to insurance related to credit or services supplied by them
or their subsidiaries, and allows other insurance sales Miiy as a "convenience"
so long as the premium Income from such sales "does not constitute a tdgnlB-
cant portion of the aggregate insiirance premium Income of the bank holding
company." Furthermore, the Board has ruled that "a significant portion" may
be no more than 5 percent of the aggregate, and has outstanding a proposal that
would be even more restrictive.

The Board's regulation. In a similar vein, limits insurance underwriting by
a bank holding company to "credit life Insurance and credit accident and health
Insurance which is directly related to extensions of credit by the bank holding
company system."

Another criticized service in section 2(c) is "leasing". Banks engage dlrwtly
in this service where the lease is made on a full pay-out basis and Is the fimc-
tional equivalent of n loan to acquire the leased property. Such leasee have
been listed as permissible for bank holdine companies sublect to detailed limi-
tations to assure their preservation as instruments functionally equivalent to
extensions of credit.

Two other criticized services In section 2fc) are "accounting" and "data
procesring". The Board has not approved bank holding companies' serving the
public as accountants. TTie Board does allow them to do bookkeeping, data proc-
esslng and storing of flnanciai information, subject to certain conditions. But
this Is not accounting.

Section 2(c) also lists among the criticized fletivities "travel . . . courier . . .
and . . . mnnaeement" services. The Board has ruled that travel agency services
are impermissible for bank holding companies. The Board has allowed bank hold-
ing compiinies to provide limited courier services typical of the kind that banks
have operated. Init carefully hedged (o protect the intere.=its of cnmpetltora. Bank
holding companies also may offer management consulting advice, but only to
unafllliated banks, and subject to elaborate restrictions to guard against Improner
Influence. Stnnagement consulting, of course. Is a normal correspondent banking
service.

The last criticized service listed In section 2(c) is "marketing securities". This
Is not dear, lint it may have reference to the Board's limited permission for tiank

Digitized bvGoO^^IC

holding companies to provide iDveetment, financial or economic advice, Including
■ervice as iDveatment advlaer to Investment companies. The Investment Company
Ingtltnte bas pending against tbe Board a law suit challenging that service. In
oar view, the Board has exercised eitreme caution to prevent bank bolding com-
panies from BtefVlng beyond the advisory function wtiich, of course, is typical of
a function 'long available from banks generally.

Section 2(d) asserts that the nation's credit resourcea "have been mlsalloca ted"
by the actirltlea of banic holding companies and that the Board has been derelict
In its duties in administering the Act. We categorically reject both of these asser-
tions. No evid«ice has been produced to support either contention.

Moving now to tbe substantive provisions of the bill, sections 101 and 102
establish a novel antitrust standard. The bill would flatly prohibit mergers or
acquisitions wbere the resulting bank or company controls more than 20 percent
Of the banking assets of its state. There is. clearly, no similar federal standard
applicable In any other Industry, The Justification or logic for applying this sim-
plistic standard to external banking expansion escapes us. As we see it, enactment
by Congress of this standard would "freeze" the external growth of 20 liank
holding companies scattered throughout the country from Massachusetts to
Waalilngton, What public policy objective would be served by doing so Is not
made clear In the bill, but it would remove as competitors In certain geographic
areas a few bank holding companies and banks. We l>elleve it would be a mistake
to substitute a mechanical standard for the careful examination by the federal
iMnk regulatory agencies and the Justice Department of each application. Exami-
nation mast Include an analysis of eadh relevant market In the light of the various
factors affecting entry Into that market.

Tbe limitations of ain>lylng a mechanical percentage test is illustrated by the
fact that the proposed 20 percent test would restrain only two of tbe ten largest
banking organizations and only six of the 2S largest. In our three largest money
centers, the 20 per cent test would have no Impact on banking organisations In
N'ew York City and Chicago, and would affect only one organiiation in San
Francisco. Thus, the restraints fall principally on regional banking organizations
in states such as Arizona, Oeorgia, Idaho, Maryland. Minnesota. Montana, New
Mexico. North Carolina. Oregon, Rhode Island, South Carolina, South Dakota
and Dtah. where growth offers potential for competition with money center
banks In the national market. We submit that It is not In the public Interest to
suppress tbe growth of regional banking. We note that tbe Board, the Comptroller
of the Currency and the Federal Deposit Insurance Corporation also oppose this
dmplistic approach.

Another proposal In S. 72 would allow the bank regnlatory agencies the dis-
cretion to go beyond present antitrust standards and tbe new 20 per cent standard
to deny mergers or acquisitions having "adverse effects on competition . . . not
clearly outweighed in the public Interest by tbe probable effect of the transac-
tion In meeting tbe convenience and needs of the community to be served." This
is a very amorphous standard, and would result in endless litigation as the courts
Httempted to define Its parameters. We see no purpose to be served In adding to
tbe burden of tbe courts when existing antitrust standards are working effec-
tively. It also mns directly counter to the anUtrust [thiiosopby set forth in tbe
"Grays Harbor" decision (Washinaton Mtilual aavln[r» BanJe v. Federal Depotil
JMurance Corporation. 482 F. 2d 458 (9th Cir. 1973) ).

NEW SECTION *{C) (8) BEBTRICTIONS

In changing the standards for bank holding company entry into t>ank-related
activities, section 301 of the bill adds new restrictive provisions to tbe present
section 4(c) (8). Tlie result. In our view, will be to effectively eliminate this provi-
dion from the Act, bringing to an abrupt end the entire beneficial process that
Congress has permitted since it first decided in 19.'56 to subject bank holding com-
panies to federal regulation. This drastic result would take place with no show-
ing having been made that there has been any adverse impact on any segment
of the public. We think Congress should endorse the idea of vigorous, fair com-
petition rather than appearing to support privileged sanctuaries for onr
rompetltora in tbe financial markets.

Digitized bvGoO^^IC

90

Moreover, in readlns the "nefratlTe laandrr list" of acUvltiM mt forth In
section 2(c) in light of the new "directly related" and other reBtrlctive testa
proposed In section 301, the bill seemg to be prescribing a new definition of what
constitutes banking. As we have noted, virtually all of the activities approved by
the Board of bank holding companies have been offered by Banks themBelvea for
years. But If these traditional functions are to be specified by Congress as not
being directly related to banking, then the bill constitutes a retrenchment In the
scope not only of permissible activities for bank holding companies but for banka
as well. This approach is given concrete form In section 401, which would bar a
national bank from conducting itself any activity the Board has not permitted
for bank holding companies after the effective date of this bill.

Comptroller of the Currency Heimann stated his concern with the comparable
provision of H.R. 9086, as follows :

"By requiring national banka to follow the standanlB of the Federal Reserve
regulations, section 1311 may prohibit banks from participating In some currently
permissible bank-related activity. Thus, the section would perhaps unintentlooallf
protect some Industries from the effects of competition, an unusual result when
the primary purpose of the title seems to be to foster greater competition."
(Subcommittee on Financial Institutions Supervision, Regulation and Insurance,
House Committee on Banking, Finance and Urban AJlalrs, Hearings on The
Safe Baking Act, H.R. 9086, Part 4. September 28, 1977, p. 2203.)

We are doubtful that this Is the right moment for Congress to attempt to
redefine the business of banking. We live In a time when the entire concept of
credit, and credit-related services, Is nnderf;oing a searching examination by
lenders and others. The onset of ^ectronlc fund transfer devices has generated
a state of flux In banking markets that is without modern day parallel. In this
time of almost continuous Innovation, should Congress revert to spedflc and nar-
row definitions of what Is and what Is not banking? If It does, then progress
could continue only among other purveyors of financial services not hemmed In by
the maie of federal regulations that would fiow from the enactment of S. 72.
Our large retailers, for example, have already made enormous strides in the
offering of Insurance and credit services, and there is every reason to t>elleve
that they will continue to do so. By enacting sections 301 and 401, the Congress
will assure that this Committee will be presiding over a declining banking Indus-
try caught up In stultifying regulation.

A specific anticompetitive element In section 301 Is the elimination of existing
language In section 4(e) (8) permitting the Board, as we have noted atxive. to
differentiate for regulatory purposes between activities commenced de novo and
those commenced by acquisition. The existence of this provision has permitted
the Board to expedite applications proposing- the establishment of new businesses,
which, by their very definition, carry with them the promise of Increased public
benefits from new competition. We have already noted that, under this authority,
the Board has approved many individual applications for the conduct of bank-
related activities. We estimate that about 80 percent of all aiq>llcation approved
under section 4(c) (6) have been for de novo undertakings. To discourage de
novo entry would be an extremely anticompetitive step. As Board Governor
Coldwell has stated :

"We believe the authority to encourage de novo acquisitions has promoted
competition and we strongly recommend that it he retained." (Hearings on H.R.
9086, Part 4, September 28, 1977, p. 2263.)

CAPITALIZATION OF SttSSIniABT SANSS

Section 601 gives the Board explicit authority to set standards for capital in
both state and national banks that are affiliated with bank holding companies.
The Board up to now has been moving on a caae-by-case basis, and. in some In-
stances, urging applicants under the Act to Improve their capital positions. How-
ever, this Is not an area of simple or determinative guidelines, hut rather one
where flexibility Is essential. We believe It would be wrong to give one agen^
total authority to determine what is or is not adequate capital for banking sub-
sidiaries, while ignoring the informed opinions of other regulators, both federal
and state.

As to bank holding companies themselves and their nonbank subsidiaries, how-
ever, these limitations obviously fall within the direct jurisdiction of the Board,
which Is pursuing a responsible policy regarding capital adequacy at the present
time. To this extent, therefore, the provision is superfluous.

Digitized bvGoO^^IC

91

A second ikvtIsIod of secUon SOl(a) requires tbe Board to Ineure that bank
anbaidiariee of bank holding cM>mpaQiee refrain from discriminating In favor
of their parent company or th^r affiliated subsidiaries In the making of loans
or In the estabUafament of terms and conditions of credit. Up to now, section 23A
<tf the Federal Reserre Act bas been the principal means by which unsafe and
onsound loans and similar Rnancial transactions among aSlUatea of a holding
contponf have been policed, and tbe authorltj' contained in the section baa been
Ttsed Tlgoronely b? the Board, In fact, the Board has sent a letter to all bank
holding oompaniea (December 6, 1975) explaining and amplifying its policies
nnder section 23A ". . . with respect to situations In which a bank holding
company's banking aubstdlary may have been exposed to adverse conseqnencea
becanse of transactions wltii the cmupany's nonbank subsidiaries." In ll^t of
tbe ample present statutory authority and its enforcem«)t, this provision also
appears redundant.

The Committee might be Interested In a paper pi^Mred for our Association
by Carter H. Golembe Associates on tbe background of section 23A and the
policy Issues it presents. The paper is entitled "Loans By Banks To Their Affili-
ates and Section 23A of the Federal Reserve Act".

NEW PBOCmUKAL &EQUIBEUENTB

As to section 601 of the bill, the Board's functions under section 4<c) (8) of
the Act already must be ezerdsed in conformity with the Admlnlalratlve Pro-
cedure Act, whether the fnncUon is determining to list In Its Regulation T
permissible activities for bank holding companies [ rule-making) or acting on the
necessary Individual applications of particular companies to engage in any listed
activity (adjudication). This is evident not only from the statutes Involved, but
from the Board's rules and regulations. Us practice, and court decisions.

The apparent thrust of section 601, therefore, Is to go further and Impose new
limitations, the main one being to subject the Hoard's rulemaking function under
section 4(c) (8) to formal trial-type hearings of the kind traditionally reserved
tor adjudication , Section 601 thus would remove this recognised distinction In
administrative law and further restrict and burden tbe Board In administering
the law. This, together particularly with the restrictive provisions of section 301,
would make even more certain the virtual denial to consumers of the future
benefits of the Increased competition envisaged by the 1970 Amendments.

We tberefore oppose section 601. which would play directly Into the hands of
established compedtors of bank holding companies who vigorously oppose the
1970 changes in section 4(c)(8) and have already amply demonstrated tbe
adequacy of present means for participating in and challenging both tbe rule-
making and adjudicating functions of tbe Board.

ENFORCEMENT BT INDrVIDUALB

Section 701 of the t)lll would Invite "interested persons " at any future time to
challwige past Board section 4(c) (S) decisions and regulations and reopen issues
that were considered settled years ago. This novel approach for the enforcement
of a federal statute by private individuals would create an administrative night-
mare and would lead to endless delays and uncertainties.

That there is no need for section 701 tyecomes evident from the Board's practice
and present law. Clearly, the Board may amend, rescind or otherwise modify Its
regulations, and, needless to say, Board approval orders under section 4(c) (8)
are based on the facts of the particular case. Furthermore, each such order
carries a specific condition reserving to the Board authority to require such
modification or termination of the activities of the applicant or any of its sub-
sidiaries aa the Board dnds necessary to assure compliance with the Act and the
Board's regulations or orders, or to prevent evasions thereof.

The legal basis for this is clear not only from section 4(c) (8) llaeif, but also
from section 5 of the Act under which the Board has broad responsibility to
examine aud require reports from each bank holding company and its subsid-
iaries, and to Issue such regulations or orders as may be necessary to enable It to
administer Its functions and to prevent evasions. Tbe Board obviously has au-
thority to exercise continuing oversight of bank holding companies end does so.
And. It may act either on request or on Its own motion.

To be noted also is the recent action of tbe Congress, requested by the Board
and supported by our Association, tbat extended to section 4(c) (S) matters
Bpadflcallj, the Board's "cease-frnd-deaiBf ' antbori^ under the Financial In-

DigilizedbvGoO^^IC

stitntioDB Act of 1966. Criminal penalties have always be«n maided for rlola-
tlona of the law or reffulatlons or orders of tbe Board, as well aa proviaiona for
court review of Board atrtlniB, as prerlouslv noted. I also meotioned earlier the
Senate passage of the bill. S. 71, which contains the Board's recommendations
for new elvU penalties for vtolatlons of the Act and is endorsed by our
Association.

Clearly, there Is no more need for section 701 than for section 601, and, like
section 601, section 701 would provide further aid and comfort to competllors of
bank holding companies In their continuing attempts to Hitfle efforts of bank
holding companies to provide needed alternative sources of financial services to
the consuming public. A detailed discussion of these two onerous sections Is
contained In a Oolembe Associates study entitled "Administration of the Banli
Holding Company Act: An Evaluation of the Procedural Sections of S. 72,
'Competition in Banking Act' ".

We appreciate having the opportttnlty to sbare our concerns regarding the
far reaching implications of this legislation. I shall be happy to answer any
qneations you may have.

The Chairman. Thank you very much, Mr. Geilfuss. As I under-
stand it, Senator Brooke has to leave shortly, so I will yield to him
first for questioning. Senator Brooke.

Senator Brooke. Thank you, Mr. Chairman. Mr. Peterson, do you
think the 20-percent limitation on banking assets which is included in
S. 72 would adversely affect the growth of banks and holding com-
panies in the areas that are not considered money centers?

Mr. Peterson. No.

Senator Brooke. I want to be sure you understand. For example,
a bank holding company outside of New York may be large compared
to other holding companies or banks in its locale but it may be smaller
than most of the banks in New York with which it may be trying to
compete on a regional or even a national basis. Thus, placing a 20-
percent limitation on such a holding company might not affect its
stature within its home State, but it seems to me it would probably
hinder it from trying to compete for business with larger money center
banks.

Mr. Peterson. I don't think so. As I understand it, the intent of
the 20-perceiit limitation is to prevent acquisition of deposits by pur-
chase of many banks and not by any kind of internal growth that
banks or bank holding companies might be able to engender through
different kinds of marketing techniques,

I believe it is primarily aimed at situations, such as we had in
North Carolina, where in a very ver>' short period of time, after the
passing of a statewide branch banking .statute in North Carolina, the
number of independent banks just, dropped drastically due to mergers
and holding companv activities. The entire center of economic power
drifted into two or three banks in North Carolina.

T don't think that it would prevent any kind of internal growth.
I think the idea is to prevent acquiring the deposits by purchase and
by exchange of shares.

T believe the committee shonid be aware of the fact that there are
heavy inducements in the tax laws for small bankers to sell to multi-
bank holding companies by exchange of small bank shares for holding
company shares. For instance, the gains tax is deferred on such an
exchange while it would not be so deferred if the Kinall proprietary
type banker sold, say at retirement, to local individuals for cash. This
tax situation is one of the real catalysts for holding company
expansion.

Digitized bvGoO^^IC

Senator Brooke. Now you indicate in your statement that many
banks which have been acquired by holding companies tended to make
more consumer business and mortgage loans and decrease their level
of agricultural and farm loans.

Are other institutions still making the farm loans?

Mr. Petersox. No. You mean nonbanking institutions?

Senator Brooke. Yes.

Mr, Peterson. No, we are having a terrible time with it.

The insurance companies are completely out of the market. We are
very heavily loaned up right now in the Midwest. We have gone to
the Agriculture Committees, both on the House and Senate side, ask-
ing for more guarantees — more guaranteed loans to see a lot of these
people over. But just by way of an aside, we liave gone through a
traumatic experience at this convention in Florida, because we know
that the loan guarantees aren't going to get these people out of trouble.

Senator Brooke. You say they are out of the market?

Mr. Peterson. Insurance companies are out of it.

Senator Brooke. It has been suggested that having a uniform state-
wide bank asset ceiling does not accurately reflect the competition
situation in many States, since several States, such as New Hamp-
shire. New Jersey, Tennessee, Missouri, and Iowa have imposed ceil ■
ings ranging from 8 to 20 percent

Why shouldn't the Federal Government leave the setting of such
ceilings to the State governments ?

Mr. Peterson. 1 think it is mostly a matt«r of inducement right

Quite frankly, we would prefer to see the State governments put
into a T)Osition whereby they would have to adopt a policy on this.

The "MacFaddenization" su^festion that we have made here as far
as an addition to S. 72 would compel the State legislatures to take
action.

As is well known, IBAA is a very strong States rights organization,
and whereas we see benefit in a national policy of setting the limits at
10 percent, if the truth be known, I think the membership would prefer
to see the Congress compel the States to address the issue and set
their own limits.

But since it is up in front of you, and it is the only game in town
right now, we will take the 10 percent.

Senator Brooke. Mr, Gcimiss, in your statement you indicate<1 on
a national basis banking is one of the most unccmcentrated major
indiiRtries in the country.

While this may be true because of the limitations on interstate bank-
ing, what we are concerned with in our consideration of S, 72 is con-
centration within States.

Now in that regard, the Justice Department has indicated that in 21
States the top four banking organizations have market shares in such
States of no percent or more.

Does this indicate to you that there is concentration on the State
level ?

Mr. Geilfdss. I think statistically, it does. But it seems to me that
there has to be considerable interpretation of those statistics. First of
all. I don't know whether there is eliminated from the figures any
international business. Its inclusion would dispute the figures.

Digitized bvGoO^^IC

94

Second, I think you have a very different aitustion where you get
banks which are handling customers on a national basis or regional
bams as distinguished from that part of their banking business which
affects consumers and retail business.

If you limit it as to retail business, then it seems to me there is some
validity in lo(4dng at that kind of concentration.

But what I fear is if you restrict banks in States like ours — we
dont get up to the 20 percent test in Wisconsin — ^which are not in the
principal money centers, you keep banks or bank holding companies
in those States from competing nationally — ^nationally against those
in the money centers.

We have found in Wisconsin that we frequently are unable, among
our banks, to serve needs of the larger corporations in the State, forc-
ing them to go to New York or Chicago, or somewhere elae, whereas
when you go up to the Twin Cities, or Indianapolis, you get much
larger bank sizes than we happen to have in Wisconsin. This is due
primarily to branching regulations, at least in Indiana.

Senator Brooke. What are your views of the Justice Department
figures!

Mr. Geilfuss. I nm not sure I am knowledgeable about them, sir. I
would be happy to check into them. I just dont know. I read their
statement of yesterday rather hurriedly, last evening, and I havent
tried to analyze their figures.

Senator Brooke. Bank holding company applications to acquire
hanks in small communities often indicate that illation with a hold-
ing company will provide new services to the communities to be served.

Now what are examples of such services!

Mr. Gbiijttsb, Our experience has been that there frequently has
been very limited consumer credit activity on the part of some banks
in smaller communities that we have added to our holding company.
Trust services is another one, international banking services, more
readily ability to service the large customers in the area through help
vantage of these services !

Senator Brooke. Do people in these communities actually take ad-
vantage of these sevirces!

Mr. Getuttss. Yes, and I think there are studies that have indicated
that this is so.

Senator Brooke. Mr. Duwe, under S- 72, a holding company con-
trolling 20 percent of bank assets in a State would be prohibited from
acquiring another bank in the State, even if the other bank only con-
trolled 1 or 2 percent of total bank assets in the State. I understand that
you believe a prohibition against such small acquisitions, commonly
referred to as toehold acquisitions, would be particularly anticom-
petitive. That is your position, is it not!

Mr. Ddwe. Yes.

Senator Brooke. Since small acquisitions by holding companies are
a way of entering new local markets and have been fairly common, I
would like to know whether, over a period of years, the banks ac-
quired in these situations have grown faster than the other banks in
the relevant markets!

Mr. DuwB. Senator, I doubt very much that those individual banks
acquired by holding companies in the isolated areas have grown

Digitized bvGoO^^IC

96

As a mfttter of fact, I am afHIiated with three banks, all in little
towns, and if a new bank moved to town, I would hope it would be
affiliated with a holding company ; I would like to compete against a
bank like that

But let me state that it is the position of the American Bankers
Association that any caps, any limitations, should be determined by
the States.

Every one of our 50 States is different from the other, the credit
needs, the mix of the financial institutions. As you mentioned, there
are five States that have imposed caps or limits.

But I think the important thing to note is that there are 45 that
haven't imposed these caps. So if a situation in an individual State
requires or seems to demand a cap, then we think that is a problem
for the State to deal with. We believe a monolithic cap applied at the
Federal level would end up being counterproductive, rather than
productive.

Senator Brooke. Now your Farmers State Bank in Lucas, Kans., is
that an independent bant?

Mr. I>trwE. It sure is.

Senator Brooke. Now in your

Mr. EhrwE. And those other two banks I am affiliated with are mem-
bers of Mr. Peterson's organization.

Senator Brooke. In your market area, do you compete with any
holding company banks i

Mr. DuwE, Yes. As a matter of fact, multibank hold'ing companies
are not permitted in Kansas. I think that is another thing that needs
to be brought out, that it is up to the States, to decide whether or not
multibank holding companies shall be permitted.

Senator Brooke, So they are subsidiaries of one-bank holding com-
panies, rather than multi?

Mr. DuwE. That is right. One-bank holding companies are permitted.
As a matter of fact, I began two of them.

Senator Brooke. What is your view of your bank's holding com-
pany competition? Do you believe the holding companies have un-
fairly hindered your bank's growth !

Mr. DuwE. Oh, absolutely not, they haven't hindered the growth.
I don't think they have helped the growth.

Senator Brooke. They have helped?

Mr. Dtjwe. I don't think they have helped the growth, but I do
Imow that they have been instrumental in providing a service to these
three little communities that those communities would not have had,
and that is the only insurance agencies in town.

Senator Brooke. Does your bank sell credit-related insurance?

Mr. DcfWE. Oh, yes. Not the bank, but the insurance agency.

Senator Brooke. How do your bank rates compare with those of its
holding company competitors ?

Mr. DcwE. You mean its credit life rates?

Senator Brooke. Yes.

Mr. DuWE. Weil, credit life rates in the State of Kansas all seem
to be about the same. However, let me point out that over a jjeriod of
the last several years, probably 5 years, the rate has been coming
down for everybody.

Digitized bvGoO^^IC

06

Senator Brooke. Do you offer any other nonbanking services!

Mr. Ddwi, No, only the insurance agency services.

Senator Brooke. Thank you. Thank you, Mr. Chairman.

The Chairman. Mr, Peterson, you make a good case for legislation
to deal with the concentration of banking assets.

Incidentally, I might observe, first, that this is a very, very helpful
panel. I think it is unusual that we get a panel that represents an
industry and hag this kind of diversity of view. I think that is very
helpful.

Mr, Peterson, of course, generally favors legislation of this kind, wid
Mr. Duwe and Mr. Gleilfuss both oppose it,

I think that gives us a nice contrast of experts in the industry, so
you can give us advice on it.

As I say, Mr. Peterson, you make a good case for legislation to deal
with the concentration of banking assets.

In your statement you say that banks in concentrated markets, and
I quote :

Face eacb other In tbeee markets recognizing their mutual Interdcpend^ice
aad adopt pricing and other practices that dampen competition. Such behavior
tends to make tbem less respansive to the needs of indiTldual customers and the
local community.

I think it is important to quantify for the record how consumers are
adversely affected.

First, does the money tend to flow out of the local communities in
your judgment for local needs, and into money centers ?

Mr. Petebson. Senator, I am going to have to beg off on that sta-
tistical question. I think we can supply the answer to you in short
order. A good deal of the statistical work on this testimony was pre-
pared by Tjewis Markus, who used to be the chief economist of the
Antitrust Division of the jTiRfire Department and who is our econo-
mist. He happens to be out of the city at the present time. But I would
be elad to respond in detail when he returns.

The Chairman. Yes, I want that and for the record maybe you can
give me this : Less money for housing and farming!

Mr. Peterson. Yes.

[The following letter was received for the record :]

Independent Bankers Associatiok of Auerica,

Wathington. D.C.. March H. 1978.

Hon. WlUJAM PBOSUIRB.

Ckafrtium. Ban/Hng, Houting and Urban Affairt Committee. Dlrkten Senate
O glee Building. Waghinglon. D.C.

Dear Senator Froxmise : In the course of my testimony on March S, 1978
with respect to S. 72, a bill to amend the Bank Holding Company Act and the
Bank Merger Act, I agreed to furnish responses to certain qiiesflona which you
raised and to which I could not respond fully. I believe the following will be
responsive to your questions and respectfully request that you make this letter
a i«rt of the hearing record.

At the hearing .you ashed how consumers are adversely affected when banks
in concentratf^ markets. recoKnizing their mutual interdependence, adopt pricing
and other practices that dampen competition.

While It la dlBlcnlt to quantity, with any degree of precision, precisely how
consumers are affected by an increase in the level nf concentration in banking
markets, there is some evidence which measures the impact of concentration. A
number of studies of the relationship of market structure to market performance
in banking have found that Increases In market concentratloD can he expected to

Digitized bvGoO^^IC

97

lead to B deterioration of bank performance. One sucb study wbicb measured
])erfonnaDce by prices of servlcea and loans and such services as overdraft
cbecking privileges and banking hours found that an increase in concentration
reaolting from a merger between two banks wltb market shares of 15 and 8 per-
cent, respectively, In a fairly uncoucentrated market, would lead to an Increase
in the interest rate on new car loans of almoat 40 basis point : '

AnoUier study which reviewed some 30 banking structure-performance studies
conducted since 1900 revealed tbe coDsenaua tbat there is a statistical^ dgnlflcant
relattonship between market structure and market performance and that prices
and profits are directly related to the structure of the market.'

You also asked whether money tends to flow out of the local communltieB for
local needs and Into money centers when concentration Increases as a result of
the growth of multlbank holding companies.

The eitent to which such outflows of funds may take place is directly related
to the degree of control of the operations and policy decisions of subsidiary banks
exercised by the holding company. The greater the degree of centralization of
control the greater the llklihood that funds will be moved more freely among the
commnnltles in which the holding company's subsidiaries operate as well as
Interr^onally.

Studies reveal that multlbank holding companies or the lead bank closely
control securities Investments, federal funds transactions, bank correspondent
relationahlpa and loan participations. The ability to control these functions and
effect interr^onal Sows of bank credit is one of the most Important advantages
claimed for multlbank holding companies over independent unit banks. Loan
participations, particularly, are an Important means of shifting loanable funds
among subsidiary bank a*

The conjunction of the centralization of control of a growing number of banks
affiliated with multlbank holding companies and tbe growth of multlbank
dominance of banking markets creates an environment likely to foster the move-
ment of funds away from tbe communities which generate them.

Some bank holding companies have used subsidiary bank fands to pnrchase
loans originated by non-bank subsidiaries. This practice has, for the most part,
diverted funds from the communities served by the subsidiary bank. During 1974
and 1975, many bank holding companies snlfered large losses as a result of their
non-bank subsidiaries, including mortgage banking, leasing, commercial fac-
toring, consumer finance, and REIT advisor subsidiaries. In sraue cases, these
losses were absorbed by transferring income from bank subsldiariea to the
troubled non-bank subsidiaries which siphoned off potential capital from tlie sub-
sidiary banks at a time when they ^ould have retained such Income to strengthen
their capital positions.*

Ton also asked whether the concentration of banking in mnltibank holding
companies would be likely to make less money available for bousing and farming?

Tbe evidence seems to indicate that the adverse impact of holding company
affiliation on farm credit is more serious than the impact >n housing credit.
Studies which have sought to measure the Impact of holding company ownership
of banks on the cost, terms, or relative amount of credit extended to agriculture
found that affiliation tends to reduce farm loan volume as funds are shifted to
hlgber yielding consumer Installment loans. A study of farm lending patterns of
multlbank holding companies In Florida in the period 1962-I9T0 found that, on
average, the volume of farm loans tended to decrease soon after affiliation while
farm loan volume was rising at Independent banks.*

A study of the effect on farm lending in Ohio of holding company affiliates
found that, on average, farm loans declined after banks became affiliated with
multlbank holding companies. Over a three-year period following acqulHitlon.
acquired banks reduced the ratio of farm loans to gross loans by about one per-

'AmoH A. HeE»Btad and JohD J. Mlneo, "PrIWB. Nonprlcfs a ., — .- ...

MMtm Banking MarketB," In Coaference on Bank Structure and Competlllon, March !8-
29. 107* Ffderal RMfrve Bank of Chlcaeo. pp. eft-95

• BtephMi A. Rhoades. "Strnctu re-Performance Studies In Banking ; A Summary and
EraliiBllon." Fpdpral Reeerre Board. 1077. ,. „ > ,

' Robert J. Lawrence, "OperatlnB Pollclps of Bank Holding CompoDles, Part I," Federal

' Ralnb Nader Biid Jonathan Brown. "Dleeloeure and Bank Soundness : Non-Bank
ActivltteB ot Bank Holdlne ComiwnieB." June 30, 1976. ^_ . „ ,. . ™ ^., ..

• Oene D. Sullivan. "Imnact o( Holdlnit CompaniPfl on Farm I.rf!ndlnK by Banks in PlorldB
"Improved Fund Ayallabllltv at Rural Banks, ■ Report of the Committee on Rural Banking
ProblemB. Federal Reserve Board. June 1976.

Digitized bvGoO^^IC

cent tlie first year ; a little less tlian one percent the 8ec(»id year and a little over
one percent tie third year.'

Other BtadleB have found that holding companies aflUtation reenlt In: a) a
rednctlon in farm loane; b) a shift in lending to higher yielding installmMit
loans; and c) no stgniOCBnt change In business or residential mortsBge loans.*

The growth of multibank holding companlee through the acquisition of small
banks, parttcnlarly in agricultnml states poses s real threat to the sapidy of
tfredit to farmers. The small banks, those with d^xiedts of $60 million or less,
are the major source of commercial bank credit for agriculture. Bince there is
evidence that tbese banks tend to reduce their volnme of lending to farmeia
after affiliation, expanded control of these bankers would reduce the credit
available to agriculture.

In 1976 small banks accounted for 72 p^cent of the credit extended to farmers
by commerdal banks. Holtibank holding companies currently control approxi-
mately 18 percent of the nation's small banks. Since holding company affiliation
tends to rednce farm lending a reduction of farm credit by these affiliated banks
could have an adverse effect an the volume of credit available to the agricultural
sector.

In some agricultural states holding company control of small banks has
already reached major proportions. In Florida, for example, multlbaok hcddtng
companies, In 1876, controlled 64 percent of the small banks In the state. In
Missouri 26 percent of the state's small banhs were affiliated with multibank
holding companies while in Minnesota, Colorado, Wisconsin and Texas, holding
companies controlled 25, 20, 16 and 12 percent, respectively, of the small banks In
these states.*

I trust that you will find the foregoing fully responsive to yotir questlMis bnt
If you desire further Information I will be pleased to furnish It npon requesL
Very truly yours,

RiOHABo W. pETsaaoH,

LegUlative Counael.

The Chairman. And the third is the cost of money to local borrowetB
has increased. Any statistical data you can give us on that would be
very appropriate.

Now in your statement you discuss the impact of the bank holding
company movement on agricultural credit.

Yesterday the Justice Department said they had received no com-
plaints from consumers on the bank holding company issue.

My question is this : In your view has this impact substantially re-
duced agricultural credit, has it made farm loans more costly, and if
so, why don't we hear from the fanners on this ?

Mr. Peterson. Well, I think, as we note in the statement, there is a
dirth of information on the exact impact on agricultural credit. I do
think that it is evident that from the studies that have been d<Mie that
holding companies shift somewhat into consumer credit and to that
extent I suspect that you can say the "consumer" is being reasonably
well served by the holding company, at least with respect to consumer
loans.

r^i. 20. 24.

' Robert J. LSHreiiM. "Tb« PertormBDce of Banb Holding Companifa," Federal BeBerrr
Bonrd. June. 1976 ;

Arttiur Ftibs. "Tbe PciformBn^e ol Individual Bank Holding Companlfi," Federal
Rewrr* Board. 1074 :

Paal y. JfBiup. "Chsnires In Bank Ownership ; The Impact on Operating Perfonnanet,
Federal Rpwrre Board, 1»S9 :

Robert J. Lawrence, "Operating Polldeg of Bank Holding Companies, Part 1, Federal
Re«err« Board, 1B71 ; _ _ _

Jack 8. Llaht. "EffeefB of Holding Company Afflllatlon on De Novo Banki," Federal Re-
ierve Bant of Chicago. 1074.

•"Bank Holding Companies and Sabaldlary Banks as of December 81, 197B," Federal
Reaerre Board ; _ _ .,

"AnelB and Uabllltles. Commerdal and Hutual Savings Banks, December 31, ISTS,
Federal Deposit Iniurance CorporattoD ;

"Annual Report of the FDIC, lOTD."

Digitized bvGoO^^IC

I dont think we can deny that very much. I think there is some evi-
dence that they begin to cut off agricultural loans.

Bat, on the other hand, I think that when you are chosing between
what kind of social policies you want, you cannot always sacrifice,
"just to the benefit of the consumer" by meeting consumer credit
demand. There are other countervailing practices and problems that
are involved in making your selection.

To the extent that the consumer is not concerned as a consumer or
an individual with what is going to happen to the overall social and
political fabric of the country through concentration, I just don't think
that many consumers are very much aware of that situation. But
you are, so Congress must pick and choose.

The CBATRif Ay. I don't mean to say I don't hear the farmers com-
plaining about high interest rates. They have always complained about
them, though, as they complain about everything else, and that is one
of the marvelous things about farmers, they never stop complaining,
whether it is high interest rates or high prices for tractors or whether
it is high taxes. But it is hard to distmguish a particular concern for
this problem. I think you are right, I 3iink it is a little too much to
expect that they would say now the holding company is responsible
for this. That is not the way they would look at it.

Are there any other areas of the economy besides agricultural credit
where credit has been curtailed or made more costly by the bank hold-
ing company movement, in your view ?

Mr. Peterson. Our prepared statement gives a fairly comprehensive
analysis of our views on what has occurred as far as holding companies
are concerned. I think that the benefits that have been frequently
claimed and that the Fed hoped for, higher efficiencies, have not been
borne out by the record.

We say: [See page 71.]

Thus, the cornerstone of Fed policy baa been predicated on the assumption
that most independent banks could not achieve the economies of scale and port-
folio dlveralflcfttlon essential to the improvement of bank performance.

And thereafter we say :

A. nnaber of studies of multlbantc holding company performance, many of which
were sponsored by the Fed Itself, alnce 1968. do not support the basic premise of
the Fed's bank holding company polic]>. These studies have found at best
aflUlatlon with a holding company resnlts In a very modest change in per-
formance, mainly In portfolio composition after affiliation.

So, as far as the benefit of efficiency that have been claimed for
the holding company mode, it would be our opinion that they are
nonexistent.

But as far as other areas of lending outside of agriculture, specific
lending sectors, such as mortgages and consumer loans, I have my
doubts that the holding company movement has either harmed or
helped very much.

I do think, as far as certain services are concerned, especially in the
area of insurance, that the holding company mode for one- bank holding
companies has proven to be of benefit to the public.

The Chairman, You recommend what you call McFaddenizing the
Bank Holding Company Act. What do you mean specifically by that!
And how would it work J

Digitized bvGoO^^IC

100

Mr. Peterson. Well, as you are aware, currently the Holding Com-
pany Act leaves fo the States under their general chartering authority,
corporate charterinj; authority, what they are going to do as far as
holding companies are concerned.

However, as long as the States remain silent, the holding companies
may do whatever they wish.

Our idea of McFaddenizing it would be to place an amendment in
S, 72 that would compel the States to adopt a specific policy by af-
firmative language in their codes and statutes to regulate one bank
holding companies and multibank holding companies.

As it is right now, many of them have not acted. Only 13 States have
i-eally adopted any kind of holding company legislation.

The Chairman. I would like to work with you on that. That is a
very interesting suggestion. I think it might be very constructive.

Mr. Peterson. Senator Mclntyre won't like it at all.

The Chahiman. Well, you might be surprised. Why wouldn't Senator
Mclntyre like that ! He is a very openminded fellow.

Mr. Peterson. Oh, primarily because he has been attempting to re-
peal the McFadden Act. I guess for 2 years.

The Chairman. Well, he might want to approach it in a different
waj.

I think its fundamental obiective might be acceptable, even though
he wants to repeal the McFadden Act.

Mr. Geilfuss, you cite various statistics which indicate that concen-
tration of banking is decreasing, as did Mr. Duwe. You both agree on
that. And as did the Federal Reserve Board, Governor Coldwell, when
he testified before us yesterday,

I think in every case it is ifor the same reason, what you have done
is taken domestic deposits and set aside the deposits that come from
overseas.

If you include the deposits, all deposits, including deposits from
foreign countries, then the concentration is clear, particularly with
respect to the big banks. There has been a big increase in concentration
in the last 10 years, particularly among the biggest banks in the coun-
try, the 10 biggest banks, especially, I am familiar with that, going
from something like close to 20 to 30 percent of all banking assets.

The reason I think we shouldn't just dismiss out of hand the inter-
national deposits is because the market power of an institution would
seem to me be based at least largely on its overall deposits.

If, for example, Iran buys a $1 billion CD or a $500 milliwi CD from
a very large bank in this country, it gives that bank obviously more
strength to loan, and gives them more power.

Why shouldn't we consider that!

Mr, Geilfdsb. It seems to me if you consider that, you ought to start
considering all banks in the world, and we have many foreign banks
in the United States, where they now have representative offices or
branches, and it seems to me that we then want to compare the U.S.
banks with banks headquartered in all other places.

The CiiArHMAV. Fortune does this every year, it seems to me, they
have a list. We do awful when you compare the size of our banks with
other banks. If you do that, there is still a concentration of banking.

Let me ask Mr. Duwe if he would like to comment on tliat.

Digitized bvGoO^^IC

101

Mr, DuwE. If you take foreign deposits into consideration, you
abould offset foreigTi loans against those deposits.

I agree that domestic deposits are a. measurement of concentration
of banking in the United States. But I think we would have to take a
look at the situation on a worldwide basis if we are going to be ccMn-
paring apples with apples.

The Chairmax. It seems to me that you have to look at the whole
thing, you have to look at profitability and of course profitability is
affected very much. As you know, one of the biggest banks in the coun-
try, National City Bank, made, I think, 80 percent of its profits from
overseas activity last year.

It seems to me that this whole picture is significant. It seems to me
it is just unwise to say that you should only consider domestic deposits
made in your own town. If people from outside come in from Wichita
and make a big deposit, it seems to me that would have an effect on
the power that that bank would have.

Mr, DnwE. I wish some would.

The Chairman-. I bet you do.

Mr. Peterson, could you comment on this ?

Mr. PirraEBON. What was the question again? I was thinking about
the snow, frankly.

The Chairman. I have been thinking about that all morning, too. It
gives us a nice Wisconsin touch.

The question is that the other witnesses have cited the domestic de-
posits and indicated on that basis the concentration in banking has
not been increased in the last few years.

The international deposits, if you look at the total deposits, includ-
ing international, there has been a concentration.

They say the relevant consideration is the domestic deposits. Do you
feel that the true market power of an institution should be measured
by all of its deposits, or iust domestic deposits?

Mr. Peterson, I think probably just by its domestic deposits. I be-
lieve our figures were edited for those purposes.

The Chaihmax. I didn't make the point I have been trying to make,
and I am sorry you don't agree with me. It looks like the panel unani-
mously disagrees with my position on that. That is not tlie first time.

Mr. Peterson. I think in terms of that, it is bona fide only to really
look at domestic deposits, when you attempt to determine concentra-
tion ratios, because I think fundamentally what you are dealing with
is a social policy that you either want to promote or you want to
cripple.

Here in the United States, when you get into international deposits,
you are be^nning to talk about all kinds of matters having to do with
recycling oil money flows, et cetera.

The Chairman. At any rate, looking at just domestic deposits, I
think there is a problem.

And you argue that what is relevant here, this is a bank holding
company bill, and as far as the concentration of bank holding com-
panies is concerned, there has been an increase in concentration on the
part of a few very large bank holding companies. You document that
m spades in your testimony. Is that right?

sir. Peterson, Yes.

Digitized bvGoO^^IC

102

The Chairman. TTiat is what you think is relevant as far as this
lemslation is concerned.

Mr. Geilfuss, vou said that this legislation would not only cut back
on the permissible activities of bank holdinR companies, but traditional
banking activities as well.

This IB not the intent of the legislation. For example, case law pro-
hibits national banks from selling property and casualty insurance and
engaging in data processing and acting as travel agents, because these
activities are not banking activities.

This bill would apply these restrictions on a consistent basis. Dont
you agree that banks, by virtue of their control of credit, have a po-
tential to compete unfairly in nonbankiag matters and therefore banks
E^iould be prohibited from expanding into fields of that kind!

Mr. Gklfcss. If you are talking about nonbanking markets, c<Hn-
pletely nonbanking,! agree heartily.

The Chairman, what has auto leasing got to do with banking !

Mr. GzuLFUss. Only if it is the same thing as a loan. It is a different
device, different mechanical device to accomplish the same purpose.

Many people would perfer to rent automobiles rather than buy
them. And if you can finance their acquisition of automobiles by han-
dling the leasing on a full payout basis, as we are all required to do, it
seems to me you accomplish the same financing result as though you
were making an automobile loan.

The Chairman. I wish you had been with me one day when we had
a meeting in Milwaukee of the automobile dealers who were selling
automobiles. They said that there is a big shift in this country toward
leasing automobiles. They don't know how long it will take, but they
think it may well be half, maybe three-quarters, of the market in the
future may be leasing instead of buying.

They were very concerned that the Imnks were moving into this area
in such an emphatic way with their enormous capital and they would
lose their business. These are people who have devoted their lives to
this, they have built up a business, they are expert in the area, they
have done very well, they serve a vital purpose.

They had a strong case that the banks were getting into, in effect,
selling automobiles, and into an area where it seems to me they are
not qualified, except that you have the clout to do it with your enor-
mous capital.

Mr. Gmmuee. We have no interest in doing that. But T still dont
see any difference between financing leases in the same kind of way that
one makes a loan.

The Chairman. That is it, there is a subtle situation here. I think
you are very sincere in making that argument. But if you look at it
from the standpoint of an automobile dealer, you can understand how
concerned he is when he sees this kind of competition. You come in
with your bank, with a whale of a lot more capital than he could ever
dream of having, and he thinks the competition is just going to over-
whelm him.

Mr. Gbiltobs. Of course, by and large, he deals with people like
GMAC, as distinguished from banks, which have that kind of capital.
He, by and large, doesn't do his leasing himself. Somebody finances
that leasing.

Digitized bvGoO^^IC

103

Senator Spaskuan. Mr. Chairman, I have to leave. I wanted to ask
just one or two questions.

The Chaisuan. By all means. Senator Sparkman.

Senator Sparkman. It has been a very interesting discussion. I
want to pose this question to Mr. Geilfuss, primarily, hut I would be
glad to have comments from any of you.

The hill we are having bearing on is S. 72. I take it from the crit-
icism which you make of that bill, Mr. Geilfuss, and others, to some
extent, that you just don't consider it a good bill. Is that right i

Mr. Geilfcss. We think a lot of it is already covered adequately
and that there are some provisions we just plain disagree with as not
being in the best interests of the people in the industry.

Senator Sparkman, I was impressed with the fact that you pretty
well tore it up in your objections to various sections.

Mr. Geilfitss. All rirfit, I will say yes.

Senator Sparkman. That is the way it impressed me. Do you think
we ought to have any legislation ?

Mr. Gkilfuss, I think S. 71 which the Senate adopted last year
should certainly become law. It is highly desirable to give more ciout
to the banking agencies in areas where I think, with that clout, they
can do a much tntter and more effective job and avoid many of the
criticisms that are levied at them.

Senator Sparkman. But you do not advocate a new bill at this time ?

Mr. GEiunaa. No.

Senator Sparkman. How about you other gentlemen ?

Mr. Peterson. Well, no, IBAA feels that something has to be done.
I think in many ways. Senator, what concerns us — one has to have a
little bit of background, I suppose, about the Independent Bankers
Association. It is a pretty much populist -oriented kind of organization.
It was formed by a man who is extremely active in the Farmer-Labor
Party in Minnesota originally. And its real motivating force is a
definite concern about over-concentrations of economic power.

We feel that those kinds of concentrations are going on, via the bank
holding company expansion, and we believe that the Congress should
do something about it.

Senator Sparkman. Do you feel that S. 72 is the proper vehicle for
making those improvements that you suggest!

Mr, Pbtebbon. I think, with work, yes. There are a number of
changes we would like to see made. But S. 72 is a starter, very much so.

Senator Sparkman. And you, Mr. Duwe ?

Mr. Duwe. I agree that, the American Bankers Association agrees
that S. 71 should become law. As a matter of fact, the American
Bankers Association has, as the chairman knows, supported S. 71 all
of the way through the Senate, and still Rupporls S. 71.

As far as this bill is concerned, we think. Senator Sparkman, that
the committee you chaired in 1970 came up with an ingenious way to
balance the holding company movement, to provide the flexibility
necessary to benefit the consumer and to supply new competition. I
might iwld that almost all of the criticism of the holding company
operations since the 1970 amendments has come from the competitors
that have been affected. We have heard very few, if any, complaints
from consomers.

Digitized bvGoO^^IC

1<H

But I would like to point out one thing for the record that is not
widely known. And that is the fact that before— and this has been
true since 1966 — before any acquisition by a bank or a bank holding
company, any merger, any consolidation, can become a fact, the Justice
Department has 30 days to file a complaint. And that puts an auto-
matic hold on it.

Let me point out that this is true only of banks and bank holding
companies, and not of any other type of institution. That safeguard is
there. And we are not complaining about that at all, we think it ought
to be there.

But it applies only to banks and bank holding companies. For this
reason, we think the concern about concentration of assets, concentra-
tion of power, and concentration of resourceB is a fear of the unknown.
We don't think it is fact

Senator Sfarkman. Well, I am not sure I can understand clearly
what you are saying, or that you have answered my question.

Are you in favor of enacting into law or reporting out of this com-
mittee S. 72 (

Mr. I>nwE. I thought I made that eminently clear. We are not in
favor of S. 72.

Senator Spakkman. That is the answer I wanted,

Mr. Drrwr,. I am sorry T took so long in getting to it.

Senator Spahkman. I want to express my appreciation, Mr. Chair-
man, to these witnesses, I think it has been a very fine discussion.

I am going to have to leave.

The Chairman, Gientlemen, I will just take a few more minutes.
I just have a couple of questions for Mr. Duwe.

Mr. Duwe, the statistics you cite in your statement show since the
passage of the 1970 amendments to the Bank Holding Company Act,
the bank holding companies have become dominant in the banking
industry. They now control over two-thirds of bank deposits, with
almost 4,000 subsidiary banks.

Now the character of the banking system seems to have altered be-
cause of that change. Doesn't it concern you that this industry, with
all of the power that it derives from the use of depositors' funds, may
come to dominate industries such as insurance or data processing, if it
is not controlled?

Mr. Duwe. It has not happened yet. The bottom line of table No. 1.
shows deposits as a percentage of all bank deposits. This is for all
registered bank holding companies, in other words, all bank holding
companies in the Nation. Eank holdine company deposits as a per-
centage of all bank deposits has actually declined since 1974, from
68 percent in 1974, to 66 percent in 1976.

Table 2 shows the percent of domestic deposits held by the 300
largest banking organizations has actually declined or stayed about
the same since 1961. and there has been relatively little movement in
so-called concentration.

T hear a lot about how this might happen, or this could happen, but
the point is that it hasn't happened. And in the meantime. I think
consumers have been benefited by the bank holding company
movement.

Digitized bvGoO^^IC

105

The Chairman. Well, let me just point out, as I look at these statis-
tics in your presentation, you had a very sharp increase. In 1971 you
had 2 acquisitions, in 1972, 11, in 1973, 34, in 1974, 33, and then you did
drop down in 1975. There are two elements of that that occur to me,
and the same pattern is true throughout.

For one tiling, you are already acauiring a very large amount of
assets in some of these areas. And in uie second place, 1975, of course,
last year, was not the kind of a year that banks were going out and
acquiring anything. The banking business was in pretty bad shape
that year, comparatively bad shape, it was a bad year for banks, a
recession year for banks.

So I think if we look at the statistics, if we could have brought the
statistics up through 1977, you might have a different picture.

So I think on that we might certainly have an area of concentration.
Mr. DuwE. Could I comment on that, sir ?
The Chairman. Yes, sir.

Mr. I>uwj:. I think the aigniiicant thing in table 8, again, is the
bottom line. You will note that from 1971 to 1975, the total of acquisi-
tions was 756. But the number of de novo entries, which is the most
competitive pro-consumer type of entry, was 1,650,
The Chairman. What is the significance of that again ?
Mr. DuwE. De novo entry is the moat pro-consumer type of bank
holding company entry into a market. That is a new business that is
being put into the field to compete and hopefully to bring more
efficiency.

The Chairman. I understand that. Of course the way they go into
mortgage banking de novo, or whether you go in by acquistion, the
fact is that you go in, in the view of the independent mortgage bank-
ers, as an entity that in many cases of course has a strong capital advan-
tage. And in a sense may constitute unfair competition.

All three of you gentlemen are representing the banking industry,
but a few months ago when we had the other people up here, you can
understand how they were not seeiner the situation the same as you do.
Let me ask another question of Mr. Duwe. You discuss the rule-
making provision;, of this bill. I think you make a good case for their
passage. You contrast this bill's requirements for on-the-record rule-
making with the informal present practices, where there is of course
opportunity to submit written comments and make an oral presenta-
tion to the Fed.

Since the Board acts on behalf of the Congress in these proceedings,
the outcome of which may change entire industries, why shouldn't the
Board l>e required to lay all of its evidence on the table and subject
it to cross-examination, before rules are made permitting bank hold-
ing companies to expand, for example, into the insurance business?
Why shouldn't all this be on the public record? After all, the im-
portant things to recognize is this has the effect of law. It is really a
delegated authority of the Congress.

Why shouldn't there be appropriate procedures which insure that
the public interests are protected as much as possible?

Mr. Chairman, the current procedures do insure that the public
interest is protected, and they are the appropriate procedures for rule-
making. This is reco^ized by the authorities in administrative law,
who believe that trial type hearings, with opportunity to cross

Digitized bvGoO^^IC

106

examine, have no place in administrative rulemakinj; proceedinf^ If
trial type hearings are required for all orders and regulations under
4(c) (8), the ability of competitors to si^ificantly delay and jjossibly

Erevent buik holding company expansion into related activities will
Bjmatly enhanced.

Now ii that is the extent, it is my belief Uiat that is what is going to
happen. And it is terribly ex{>ensive, too.

The Chairman. How terribly expensive is it? Isn't it after all very
important that when you take actions that are this far-reaching and
this fundamental, that have this kind of effect on the entire indnstiy,
that you should have the most complete protection that is possible,
you snould bring out as much as you can through cross-examination,
and you ought to have a formal record that is made public promptly f

Mr. I>uwE. It is our belief that the s&fe^ards are there now. And
that it is not necessary to have cross-examination trial type bearings
in most cases. Now in some cases it is. Whenever there is a complaint,
or whenever there is an issue of fact that is being disputed, trial-type
hearings are taking place today. But not very many.

Mr, Geiuuss. Mr. Chairman, might I comment ?

The Chairuan. Yes, sir, I wish you would. That is the last question,
so go rLght ahead.

Mr. Geilfuss. It seems to me that there is some confusion about be-
ing on the record. Everything is on the record with the Federal Re-
serve Board on these hearings. There is a record made. But it is not
an adversary proceeding.

The Chairman. Maybe we better get into that. We disagree whether
it is all on the record or not. It is an informal proceeding, a good deal
of it is agency discretion, which is really the point.

Mr, Geilfcbs. This is in rulemaking.

The Chairman. We are talking about submitting surveys, putting in
ectmomic data, having a clear objective base for judgment, rather tSan
discretionary intellect.

Mr. Geilfttss, My observation is there always is that kind of thing
going on.

The Chairman, If it is, then there wouldn't be any burden on any-
body or any problem.

Mr. GEiLFUsa, Excepting getting into trial proceedings, where you
have cross-examination. You have things of this sort, which to the
best of my knowledge doesn't go on in any rulemaking in any other
Federal agency, under the Administrative Procedure Act.

This would just change that completely, as far as banking and the
Federal Reserve are concerned.

I have difficulty understanding why this should be any different
from other kinds of rulemaking that go on in other agencies.

The Chairman. Mr. Peterson ?

Mr, Peterson. Well, I think we would agree as far as 4(c)(8)
procedures are concerned, especially for our people, it could turn into
a very difficult kind of operation, if yon start to talk about cross-
examination.

As it stands right now, the small bank has a great deal of difficulty
getting access to competent attorneys who can handle these kinds of
matters. And it is very very expensive when we want (o go into any
kind of 4(c) (8) operations.

Digitized bvGoO^^IC

107

There is just no denying that. And you have to remember that by
number the bulk of the banks in this country are small businesses.
And they have got a. lot of problems.

I would suggest this, however

The Chairman. We are talking about this being done by the Federal
Reserve, not by the small banks.

Mr. PBrEHBON. Well, we would have to be involved.

Let me offer one suggestion, thoueh, in this area that I think could
be used as a substitute for this kind of thing.

When you are talking about acquisitions there should be a require-
ment for a previous notification, even when tender offers are going out,
whetier it is to acquire something that is bank related or anomer bank.
We have had some very very tad experiences in holdine company
States, where established management nas been placed in uie position
of suddenly finding that a tender offer is already signed, and the bank
has been purchased quite without management s ^owledge.

I think this has probably occurred in some 4(c) (8) activities as
well.

So I think that procedures along those lines would allow the estab-
lished management of a bank-related firm or the language itself to
enter into its own defense as far as getting a feeling for what is going
on in its stock ledger.

I think that might be a reasonable proxy for what you are talking
about.

The Chairman. Grentlemen, thank you very very much. I appreciate
your testimony.

The committee will stand adjourned subject to the call of the Chair.

[Thereupon, at 11 :40 a.m. the hearing was adjourned.]

Digitized bvGoO^^IC

D„ii„.db,Go(5glc

COMPETITION IN BANKING ACT OF 1977

TBZDAT, JXnSlS 16, 1078

TJ.S. Senate,

COMMITTEB ON BANKING, HOUSINO,

AND Urban Aetaibs,

Washington, D.C.
The committee met at 10 :05 a.m. in room 5302, Dirksen Senate Office
Building, Senator William Proxmire (chairman of the committee)
presiding.

STATEHENT 07 CEAISUAH FBOXHISE

The Chairman. The committee will come to order.

This morning we continue hearings on S. 72, the Competition in
Banking Act. The main thrust of this legislation is to foster competi-
tive banking markets by restraining the growth of dominant bank
holding companies in banking by acquisition and to assure that bank
management focuses their attention on banking activities by prohibit-
ing their entry into nonbank fields not directly related to banking.

Passage of this legislation will provide a framework for desirable
bank holding company growth along with competitive market
structures.

Since the last set of hearings on S. 72 on March 7 and 8, the Federal
Reserve has completed a staff study of the bank holding company
movement to 1978, The findings of the study show that bank holding
company expansion has had adverse effects on competition in both
banking and nonbanking markets. For example, there's evidence that
bank holding company banks, while experiencing similar growth rates
to independent banks, have riskier portfolios and lower capital ratios.
There's also evidence that bank holding company mortgage banking
and consumer finance subsidiaries operate with lower capital ratios
than their competitors in these nonbank fields.

We search in vain in the Fed's report for factual evidence which
shows that bank holding company entry into nonbank fields demon-
strably provides benefits to the public that outweigh adverse factors
such as unsound practices or concentrations of resources. Many indus-
tries have expressed concern over this expansion by banks. After all,
banks have the one thing that everybody wants — credit, the lifeblood
of business enterprise. When the credit granting function is combined
with nonbank business there's potential for harm through unfair com-
petition to both.

Gentlemen, we welcome you here. We have a panel to begin with con-
sisting of Mr. Richard Farrer, chairman of the Ijegislative Committee,
N'ational Association of Realtors ; Mr. William Hemphill, president,
(109)

Digitized bvGoO^^IC

110

Mortgage Insurance Cos. of America; and Mr. Robert Masterton,
chairman of the Committee on Federal Legislation, National Associa-
tion of Mutual Savings Bank.s. We have a panel following this panel.
Our first witness will be Mr. Richard Farrer, chainnan of the
Legislative Committee, National Association of Realtors.

STATEHENT OT SKSASS EASBES, CEAISHAB, LEGISLATIVE COK-
HITIEE, ACCOHTAHIES BT PAUL PBESTOH, IISECTOB 01 HOET-
SASE FINASCE, AHS JOAS HOOBi; LEGISLATIVE ANALYST,
NATIONAL ASSOCIATION OE XEALTOXS

D„ii„.db,Go(5glc

NATIONAL ASSOCIATION OF REALTORS'

KICtUBD C. fAntER

LBGtSUTIVI CCMOTTSI

WTiotHL usocuTiOM or nuTORs*

Mfor* eh*
SB SanklBg, HmutDi and Xltbta Affair*

S. 72

n* 16, 19TB

Th€ MTIOML ASSOCUTIOB OF RKi

U.T0t9l

la caapilaa

board* gf KBALTCB^ lacatad

of

ha Unlo

•od Puarto Ue

. Co^lnad

p of t

haaa

boacda

pacoa. .ctl«

1 tnttKti In

f.

■aut*H

Indnati

craa

Aaaoclacloa ha

th* laftM

ip of

all facati of

T- T

m off

Pnaldanc, Tul

a. Oklahoaa

Donald

. Hovd

nt Vie

PoBtlua, Eh

ca Pia

t. Baa

ar* at AM Hor

h NlchlgaD A

III

nola 6

la loeatad at

IS 15th 8tn

at, B.H.

Baahlogto

, B.C.

a 1,712 local
ct of Coluobla
of MO, 000

of Ih* Aaaoclat

2000S. Tatap

Digitized bvGoO^^IC

Callfsrnla, and Chair

■an of th* Lagtilatlv* Conl

gf ItULT0R3<>. *cc«q>

„Tln< « h.« ...daj- at. Alb

FrMtdent. G«.m»[.t

AffalT*, and Paul FhiCod,

tha Hatlonal AiieelaC

Ion of BEALTOIS*.

The Hatlenal A)l

Delation of MALTOSS* la a n

cOBprliad of sliKXC 6

00,000 meobari tngagad In vl

rail aatata tnduttry

He are deeply uppraclaiClve

hen coda; to dlacuaa

Ch* iKopar col* of co^paclc

I a a SEALTOS" frai Caairo Vatlejr,

t of tha Rational Aaaoetatloo

and Sac t ion 401
Ralatad F

t NoItiaB* Finance for

a opportunity to appear
and bank holding

ptoblM Hhlch aoea to the vary heart of the Idea of proper and fair
:lon In our aconony. We (hall conftn* our coBenta on S. 72 prlaarlly Co

andarda Car Bank Hcldlng Company Entry Into Bank Related Actlvltle*
, Untfom Application of Standard) Covaming Entry Into Benk
■• tha balance of tha provlelon* contalnad in thia bill are beyond

•nts to the Bank Holding Coapini
bank holding conpanlea rather than Juit ml
the Federal fteaerve Board to evenq
agatnat eagageaenC in non-banking aetlvltlea ageh
after due notice and opportunity Cot haarlng baa (
ralacad Co banking by Baoaglng or controlling bani

•rage

■hlch coald reaaonably

ecCed th* Board ce peral
icpacted to produce benel

REALTORS* and oth

of bank holding

'bank holding coBpaniaa. It
iron Che general prohibition
;ctvtctee ... irtiich the Board,
•mined Co be ao eloaely
II to be a proper Incident
only bank rcUted ectldtlea
:a to the public — greater

■ In efficiency -- that night ouCwetgh

tlon or unfair coevetltlon.

y ponri vould oak* it Inpoiiible for

the aoall independent <

D„ii„.db,Go(5glc

l»HV.I, ..». to h.

KT* dlr.tt.d

of tha hoIdlBi u^Mii

1.. tb.».lM

.cclvlti.. .h«U b.

vhlch th.T nr* BiklD

t i»co.d..

■EALTORS* b»ll«»

• that honain

wrklng rMllt)F. 'Hi'

ln*ntTT li

that thli dlvOTi

which

• tha c

■ c pTotacItng Eha mcoaamlc atTaogth and aolv
, than In aor acknoiiladsaBaDt that thalr
iiac of tha adMMc tfftcta on tha toduttTlaa

d nariT othtC*, both
Ehaaa aacliat .

Mall and larga. U* ballav*

MaBlBgrul fraai

parta and li thantsra vulaaribla I
raaourcea auch aa tha bank holdini
ganaTalsonoar vill ataacually

raal aaiata brokaiata, appraltal, i

Coiranely. hsldlnl eoa^nlai i
coapanlaa, aaitias* coa^Dlai, and
unauttlot fot banka, and advlasry
la Clia paat, (ppllHttont ban beat

■rata*, hat

> balag abaorbad b

actlvltla* hj bank boldlBg coapaniai
for tachalcal taaaona, tha Board hai
talatad" to banking. It la elaar tl

oa, and of faring a

idiutry Kith larga
wing laai that oar
Eontrallad by a faw giant banking inatttuClona.
:rr bava raaauicaa unequalad by any oEhar aactar
■ic fotca hat baan (having a elaac and graving
:t*lEla* anch a* iBTtgaga goaTantaa Isananca,
ptoparty ■anagaaant , aaTlnga and loan oparatlona

an panlttad Co angaga In aeilTlElaa ol flnanea
I laaalng of raal or paraooal proparcy, BaoagoBanc

larvlcca fot raal atEata and Invaacaanc tmaca.

■ada for paralaalon Co angaga In aortgaga
loan aaioelaclona. Hhtla acqulalElon of tbaaa

I va* dtaapprorad by cha Fadaral laaarva Board

I •cacad that thay daan thaaa aeclvltlaa "cleaaly

icafor

t Ehla iaaua vlll ba talaad

lain.

Digitized bvGoO^^IC

»• btllara that •nch actLv
M "cloHly nUt*«" to banktPt
■tnca In t9?0. Tb* latKUtlM
did Bol daflM tb* pracla* booni

BarrinrlDB ttw carranCIy pnlaal
Act), aettvttu* fm "c1o*«1t i
aar* (trlnianC public Intaiaat i
baiwflt tha public aod Incraaaa

i( mra not tntandad hj CsBgraaa to b« conacnud
ID It (naeiwl tb* lank Boldlni Cgapanj Act Aaand-
cory ot Che 1970 Act lavaitt ttaac tha Csninaa
■ sf "cIdmIt r>lat*<" and, ai a raaalt, aamral
AaiKlatlaD auppatta S. 72 In tta goal of
Section 4(c)(8) (of tha Bank HaldUt Coa^ny
lUtaf te "dttactly ralatad" and veuld lapaaa
a^lTlng that tha actlvltlaa ba likaly to

taClon of lEALtOU* luppoTta tha antanalsn at
ink hsldlni ceapaax ragulatlsn ta aatlnal banka. Prstactlen of tha traditional
•taa of financial InatltutlsBa' tranaacttona dUtataa that a claac and ontatafcabla
In* b* drawn batman tha lander of aonay and tha uaar of aonay. TbaTtfoTt, ita
:»a(l]i aadDTaa a Hat that apaclflcally problblta activity alBllat Co tha ona
intalnad In the Houaa paaaad varaton af tha aBandaanta of tha Badi Holdln( Coapany
■.c of 1970.

Hhlla tha Aaaoclatlon aopporti aaandlng tha Bank Holding Co^any Act to chaaga
M *>phaala of par_ltiad bank holding actlvltlaa froai "cloaaly" to "dlractly

itad" to banking,
illy prohibit!
luppOTtad bank holdl
banking, arodlag It
:hlB Aaaoclatlon at
vltlaa apaelflc
itad to banking
In our opinion,
and tha othata .
prohlbltad by *

actlvltlaa Into >

ncluaton of a Hal of apact-
■I Raatrva Board hai conatatan

only parlpharally talatad to
• In tha Kttlon. Tharafota,
ueh ■ Hit of prohlbltad

Ivltl

aatly n

:ha (allowing actlvlcla*. of which the flrat la now panlttad

I prohibited by the Federal KaHTva Baard, ahould ba apaclflcally

1 pToparty (nndar i;

bank holding

Digitized bvGoO^^IC

(•■•nt conaulclni (otlwT tbaa for budu)

crty ■nugmnt (•«*pt Cor pTop«rCt» siRWd or hald bjr bank hsldln)

c*al (*Uta (TDdlcaClsn

opnatloD af aavisg* and loan aiaoclatlsna
nndanrrltlDt dI nal attaM ■ottiat* (uaranta* luatiiaDea
nal aaut* appralaal
Tlwaa apaeiflcallT pnhlblcad actlvltlaa vould elaarlr ladleata tha aanaa
CoDgraai that aitpanaloo of batilt holdlo^ cd^aaiaa Into Indapandant raal
flclda conatlttttaa a laag-ranfa threat to conpatltloa.
Tbla Aaaoclatlon atrongly aopporta tba pEoatalon to naka all loard pcscaadln|a
nndar Saction AtcXS) (objact to (ha AdBlattlratlva Procedural Act and on tha race>d
Tha currant practice of pcmlttlnt the board Co decide on the level of fomalttr
durlDs aoeh haarlnga aeierelf ■Ictgatea atalmt partiea oppoelns propoaad loard

I oii^ortuDltLaa for dlicavery, craaa-caaalnatlofli, aad alallar aafafoatda
■re not prcaeat. Crltlea sf thl* propoaal *r|ue aiatoet It on the grounda that It
■- csBitnlng and mmacaaaary. Hovamr, tha nrj famalltjr and praclaanaa* of
tng of record aakca thla prsvlalan Hcaaaarr. Ralatlsnihtf* baCMaa the
.tor end reflated itlll be ttuch harder to conceal, 5urel;r an Induitry aa
fovarfDl and aa l^ortant aa basking raqalcea tha uCBoat la aafegiurda and protec-
tion in the public tntereat. Full public bearlnga on record will go a long Hay
Id providing thla protection.

talking about, iihleh Section 401 (Untfora Application of Standarda GavanlBg Entry
Into Bank tolatad Plalda> vould rectify, 1 have with aa and aak parBlaalon that It
be aada a part af th* record, datallad docuMncatlon froa REALTOB^ In the SCet*
gf ton concerning unfair caaipeiltlon In raal aaCata brokerage by conBcrdal

Digitized bvGoO^^IC

«ld-ba bflrr

baoki, both itate and aatlanilly cbartllad. la laBai?, ottlent of cb«> buk* an
la dlracc coBpacltlon vlth IndependaDt real aicaca brdun. Thay fraquantlr advantaa
Tul aatata llatlDga and gin aa a esocact (or Ita raal catata brokaraga bualsaaa
tba badka* phooa mialbaTa. Wa alao hava docuaantatlcn at undna praaaura balog aitartad
iBd llatara of prsparcy ts deal with tha baoka. tnasfar aa
Lctvd by BCate chartflrvd banka ve raaliia Ic ia aaat probably
layood the leaiw of thla cmnlttee ta Icglalau nllaf. Inaafar, hoinvei, aa

ctleei conlCCad by offlcara of natlsoal banki *a would hope that cha
Id look Into thti vary claar caaClleC-Df-lnt*re(C and aba** of public
et tb* apprepclata lailalatloa. I >(k foe pamlMlon for tbaaa doeiBtnta
d and iiada part of tha hetrlng ncotd.
nao, I would nou Ilka to taka a fcv mautaa
lih ihti ganaral prablas of financial Inacltu
llH that tha acopa of tha leglatat

'lug* aad loan aarvlce corpotatlona

diituTblng ttand which we would IIV

ivlng* and loan aantlc* corpoii

I poTchaaad a Bortgag* banking e
iparatlon. Dndar tha taTHa i

and Indlcallva of Ebl*
• can. A few yaara age

It ace brakai

Board reaotutlon penal 1

ha axperlanca of ■

on lubaldlaly of a
opany which had nil

coBpany, nan a aabatdlarir

citti

[y had, nia covpany. however, uai luppoaadly enjoined
additional "third party" teal eitet* brokaraga llacinga,
cotporatlan could continue ai agaat far tta cwa prepactlea but

etttnei by davloui DeCboda, the acqulilIloD of third party

plaint CO Che rederal Roh Lo*n Kink Board ha) reaulttd

Digitized bvGoO^^IC

tsn-a 1978 3»t«

Lvlogi and loan

Rpmprva Boirdi the fedi

Id Hvlngi and leao ■srvlce <
:hE HEALTOItS* In chli counCr

kl ■ DltUT of fic
cUaale ccirbook '

LtDoiC SBS.OOO REALTOI^ i

.diy. «* oparau on
il aatat* Induatty anhlblcs a hi

a of "coBiMClclon" , bath quan CI natively

■a iHnkina or SU.B, vhlcfa really hia no fi
"esBpetlclva" hallaiTka, would ba unfi

C KEALTORS* are deeply

thtrdt o<
ipt of fttadom of em
degree of iKbllil

vlgorouaiy vith each .
illciclvely, of coui

Digitized bvGoO^^IC

But Hr. ChalniD,

1 *Db*tt Co you that

It t« not coapatlllon tn

Cha ptspai baat

undtritood

.c««le .«.. .C ch

tar..

vhan Cha flo«.eUl

nael

utlon

on uho al

builM)*Mr

d.p.p

Mr

llMa of

ctadlt

coBpacai Hlch ICa a

»cu.

CO.C

. VhlU

Chl> A)*CK

•tlon rMBsa

iaa. and

aincar

ly appraelataa [ha

flnao

tal mpport for

houitns mi

n>l

.cac.

that ecu

Ik holdtm

ub)ldi

tl..

aa vail

■ lavl

!■ and Loaa .aaoda

ttoo.

...d aarvlo.

corp««U.

.. «

trong

ly faal

hat panlaalbla bank holdl

m CO!

Vaay

c.Nitla.

iboolil b* «

paeiri

ally

eOBfiort

toft™

ncUl .C»» dtrac

tly r

laCd

CO bu.hln,

W* alto £•■

lth.t

aoa-b

•■iktnia

• by bank holding c

«pan

a. a.

..11 a.

..rvtc. «t

poTIClc

•na ahnuld not

ba pen

Itcad in Cha flald

.uch

■ raa

n.ld ch«.

cUrlMd by

.l«.t t

■tbook

l«ga n«.

of bur*n ■

nd ■>!

«..

He ipf

r«l«

cha

opportun

ty to

^raa. our «nc«™.

■bnu

thai

Mr lUKHir

<i( S.

72.

Thank

you.

D„ii„.db,Go(5glc

Xbe GRUNDY NATIONAL BANK OF GRUNOY CENTER .'p;

CRUNDY CEMTER, IOWA

■ ESOOIICES

c-h 1. v<»]i »d D» m tab

OTHER ASSETS

iwM.«ao«cts

LIABILITIES

S°s!;i4-^i.i^i.^-::::::::::::::::::::::::

l(,)3S.ttt.3a

Digitized bvGoO^^IC

JvstJstsd ,

«E«DTWPfl«at«»ia

^r#^i^^^

^St■u,

Digitized bvGoO^^IC

^^r 1

1

■

^H

I-

■

^^^^

-^^'s-r- "■ '^5 y?^

'^^1

B

^^^1

^^1

mo age o d eci e ate so espe ao his

^1

doy

y ^

^^H

1

o*a bodcvdo oiwohd
S p '■Wu (u but oVoy ho

uo

™ i

^1

o 0^0 meet 9 b he o, wo

0.

/.

■^H

1*

a oortsmo h e h Jng golf e
b olwcy ho me fb you

5

]H

1

■o w e 9 or a«i o on during pu h
few ftg nau an** n o«fi3 jrot mo eij o
wo e.»v oS oepo p

2? ■"'•'" «-nv ■i

.

' 1

r,, ,..,1,.

^oot^^^l

i'.vr -T Tova I ?li> Cod*; CciIdt Kipld*, louq SZ&
r.t^t of Qfflctrl! JuM Z. CanuUl^ECc, Pee*

■rf/oT ^lasnsn lleinied ondsr bank ot otho; c

L Sltim Itaslnoss dliKtly or inflSr-ctly eon^Toltd V,?jn> [Erpiijii)'

roIl(d by- the Banks of '.am holding e<

Digitized bvGoO^^IC

TTP* of Ital btata traaaMtlooa hftndlad ^ baBki

Ksjor Sour?* of Jto.'.! Eitat* Biiilsoui If IcBWni

CKada throuBh Uh b

iKig-^ of Tlx* In Baftl St'^ta BaalMaai

At iMit 10 T<

■ ;:|i.!jgasi^jS

ytatMr of 3re:cara A SolaiMn:
Only OM -.o By fcnpiilcdg«

in Off lolal Builc FublleaUon suah &■ i
r'nuiei*! ■tat«a(uit l^ieatlns noais of offloMra
h'3o &:n> alao lloaaiai imliara uicl/or MGiOaiHii

ji

'Hi:-

:t|;l«

ifflt

^.i;

T"*.

r ',: Ik

rtJ;;!

D„ii„.db,Go(5glc

■■\t\tT d-.;-'fiHr 0

Iclltad) ^i-al Esxata Bro

• Waamr: Jl».g<

ludci Hud
lOB, lou.i SI3H

S, 1«7S

Digitized bvGoO^^IC

Zlf! ir Tour. Ir Zis Eoi*: ;i3Li ;aS3^

>4iini be t;cit his a.1^:

Digitized bvGoO^^IC

2»jLt lot. 10*^ 3UtS BA.1K, ALBU, IDA S2J31

Offiecrst -lAT WnS. CL;J1.JS ^M. iiCBSB LU.lXHBEaC. . ' '

:i:.i 3r.;T:: CO. aluIa ^fnin. 301 Danton Ava. s. e. -.-

..■^' :,vjii- i-nszi!, aw-iii -jas - sursAK. ■;-.■.■;■

ilili iiiir.iss ..a s'..-i-;o-- l^- ij. 3„vl> lu tho Itji; tliai j^.tw -..io savci W^"

.'.;>.^.:x.'.-]ij>iiitj aA no 'ej^:.<tr> znd ^Jbob books. - (00^7 Ltfc'.eliti£) ' ■•:^r. ■ .'•^.'JX:

Lsve i:: ^usinocs x.)i)i> Z yosrs. . '^ ;

Lrolar 1 SJ-itia 1. . ' ' '■'"■'"'i-'.

I ,■ f I ff^.

D„ii„.db,Go(5glc

76 Pr<nr»r»— Itwil

■^HERE TO BUY [V

LETTERPRESS AND .

OFfSET PRINTING

OFFICE SUPPLIES '

WE MAK£ KUSBER STAMPS

RECISTES FOBMS-CAICULATORS

Public Utilities

Sm Km Unu, EWrie CompaniM,
RoilrMict, T>!*p}i«nfl CompaniM,
alio Ge: Companiat

Kailroads

Ranges & Stovat— Deolara

Communitotien Eq«iomont-a
A Systams

HOTUIOU FM 2-WAY RJ

AJBii .^M'lau .

-WHERE rO CALt* ..■.-.^,

"sin!

"w-j;!?

Lmir. CIMlwil A SFO 9 *16

"™

ICa.

tiniRM K,a

!■•*■)

Dioling you con dial your own t'otioi
Italian Long DisTancv caDi. Bi lur

Digitized bvGoO^^IC

.AVES MAHONCY FARM 161 acres, .
Guilford township. Op«n excapt 'or a few ^
ticairereo Trees/ some wainut. Completely ¥ ;

N£W LISTING— 50 Acres with new.'y
remadeSed 2>bcdrocm home/ S miles Ea-it
of Moravia. 21 acres crop ground, S9 acrnt
pasture.

Fse's E3sl Estate "

\« S. Clinton f31-2474

■.«lt and Lo«t«r Po»t*, Brohvr*

SALES ASSOCIATES

Jtthn A P«nv J(^9« 938-1761 Gr«fl Mor«hMd 933-7W5

£. e. \ftn Sickal 7:4-9^ Howard V*nZdnt« H9-44:4

Digitized bvGoO^^IC

tjy» of Hill EolLBt* tracsaetiona haodled bjr b

Kajo; Soure* of P.aal Ettata 9uaiu««*, if Icnouii:

Iion^h or TljM Iji ^Ml £ttata Bu«ia**ai

: Brwiars i S«l««iMn! Drokoro 2, 5;J.eo :'.sBoci^-.es 4.

Is an Orflcial B«nk Publication such as « ^

:,'.i.M.iani lodiea.lnil nanaa of offlcara
Iso licanaad bro^ora and/or s

D„ii„.db,Go(5glc

Xasei arid addrssscs of uiy pMfla who yon think Kay
have b«n Influoncefl, lithir directly or Indlrtctly
inso ie\ng buiiness vleh ■ buik or thair Hul Sitat«
Entity, uhan thiy bad uutscd to do buiinasi uith
anothar (noa bank «i9leiatad) Rul Eitata Brokar

Other Infornation

Tear Saati yity.^ q. fc^ut

rtiiress! ^j._ _,_ aL.rl-,:cn lii-.yi , lo..-;. 52j',a

D„ii„.db,Go(5glc

X e^. ssosm -a. nasau, a

•., X ?^'J.;ffi s-icus A Mo MIES nju to a ruam, luoi, viuik: ahj u'^ n rASUSt
nuK. :)zs mKum mmd vbt to his "maixr' bmux to Bctnn «»i cf rs ix»

r. /grrr rag: wgi:; ^tMim n wiw aan pjki md-jt m; g>aai igtmi TV-g ■:z-: ^Mt-^a
ntrj.tjgi ?yH :-T rco sai a tj»n» c< was naei a»3 m. fra gmna. ta cTT-m a;; 3,11^

J. .1--: sasiM R'jacwTiT UK, nnat ud iwis" pso'i.'; «o rxn : u.»3. Lc:f .0
"1^, r\e . ■1- :;■ orta 7,11115 otnst t*« uu. tsrui rur laar <«r tHw To x .;;:. t;-u:
svns^. .i"?.- ■.:■:;■ M^T^t i«i3. » 1 oosi tcora tr met., ki Ktiwa'i 7L:;;-,oi

!- In iTtSf rffl: m.k

D„ii„.db,Go(5glc

132

3 >>^

III

:i:'

H-5|!*IFjl'^ III

sal

^ §i i| ii Mil t tm I i-i i

mm, I I i! Jill I im i iii ii

D„ii„.db,Go(5glc

Jii I
llee 5

II
:.

Sm^C

II 1^

i:

^il Hi i I
!! Ill i I

I'e

D„ii„.db,Go(5glc

F. C EARLEY AGENCY

STATE OF IOWA 1

) SS:
COCNTY OF TAMA 1

er. Tama County.

Thai my agency ahcwed a proapectlve buyer a partial piece
of farm land which he desired to purchase to add to his exisllng
operation.

We had Dontacled all lending agencies including Federal
Land Bank and three prominent insurance companies who make auch
loans, excepting the buyer's personal bank. Our client was able to
obtain financial assistance Trom one of the above lending agencies
except for a few thousand dollars in order to consumate the purchase.
He then coneulled his personal banker with his financial problems. The
banker, who also had a real estate broker's license, assured him that
he could asaist him In making his purchase if he would sign a purchase
agreement with his agency. This «ititled the banker to a share of the
commission even though the client was really oura and we haddine all
of the preliminary work. The farmer later told us that the banker
loaned him the money to make the initial down pigment using personal
collateral already secured by Ihe bank.

This same banker was Involved in another transaction as
fallow a:

My client, Mr. A. who wished to purchase a 10 acre parcel
of land 1o add to his existing farming operation went to his banker,
being the above and same banker, and confided in his banker hie inten-
tiona and asked hlB advice, slating the lop dollar he would pay. The
banker, upon learning of the offer, then wrote up a purchase agreement
tor one of hlH more prominent bank customers, Mr. B, offering slightly
more then Mr. A intended to offer and consequently Mr, B purchased Ihe
land entitling the banker to a share of the commiasion which he would not
' winning the esteem of Mr. B who was a

D„ii„.db,Go(5glc

F. C EARIEY AGENCY

larger conaistent borrover of tbe bank funds for his farming
operation than Mr. A. Mr. A, upon learning of Che deceit of
hie banker, immediately lernilnated hla aafloclatlon with aaid bank.

Dated thU /£■ ''^dav of April, 1978.

F. C, EARLEY AGENCY

By ^A*t-^
/"Frank

■'^j.ci.

Franklin C. Earley.

by Franklin C, Earley

f^

NotoTK^ubUc in and tor the Slate 6f Iowa.

Digitized bvGoO^^IC

;.:;jt. C,-:;ilicr

MS directly or lit J1 rdctly_ controltA by bj:.:.

D„ii„.db,Go(5glc

sUkisaaasA ei caadiis

Taao, ^»r* 52339

Digitized bvGoO^^IC

'.'.:;4 ~ ^1.1 ^'i^t.* SuskKisa

C l.-^'jitn & Siiloa

Digitized bvGoO^^IC

3..I*; ^.J 1 i.r- ;:.-<:■.. af liuy piiipli' vha f.'.: •.h\n\ m.iy
a-v* L^.-n ;:.t:ui.-!p:e.l. ilther illre.-ay •■•■ ■.u.fj n-ctly

icBTh*; (p.cr. bvii: aislclatcd) nail lf::>:ibM Orekcr

I Sv.-fc .'iSi rj-;(jr:il jcc- !:■ cor-Ti o in :ne tliat t.lej- Vi:\- ^ .^cl.-

iRriuesC'-S (I.e. laan jrEscum; tnco clcttv- their ;vsl j'.:.^-; ■

"'bisir.e-.s ■-■i-.r. tr.i boa':. Hcvwvi"-, whon I ssicect ':x-.z if 1 ■^ii:.\

•■iz* t.'.cir -".-,..■': befori.- sr. lnvc;t l~!.tivo CMV-nittt'i", i i-:;- ip;:i(

■■#.-■■■

ii

D„ii„.db,Go(5glc

D„ii„.db,Go(5glc

Z Stor3', 3 BS Home

New Siding & Carpet. 1006 Slale SI Twna

. .1 Story, 2 BR Home ^,

Near Country Club. Carpeted. Full basNtieai. lOM Seymour

- Near new 3 Bedroom Home

ONE LOT - 7U Grant Taira

OTHER LOTS AND
APAETMENT BUILDINGS

HOV^ PHONES
Wm J Beohm 4M-33:i4 Ke h Lazar 4E4-X93

J ry hn on 3i-lW6 Lo Cooper I8 Jrf7

Ho nl n4&.4409 DJ) Po Icr 414 150a

THE HewSPAPEJtS OF BEMTOM COUNT*

•IhE ECUE BAIM W

3 of lfl73, !0 "S/T/

. IS snr

- "FOR SALE ' -
604 ieth Street '■

" ^D&G Associates

fcai— "

D„ii„.db,Go(5glc

8? acres in Columbia Township, 73 acres
tlLlaSIe. Ko biOIdlnei, PojMSSlon MarcS
1,1978.

rc.iz.d.vCoOt^lc

coKaavi-j BUSS n reu. ss:.\'^'. nmnEss » lou*

««TOr iBdlrtcll* cant

■,<'•
-- #;

M..

{'^•-^■--■)

■'v«L.

■ Kgldtng C»i>uT> II v

{(:-.«>. cepT af pabllcitlon vlth id)

tj^fr^'^ / Record ■ Hsr^lS

D„ii„.db,Go(5glc

-::,;^--i ■■"^■:^ " ■

^=j:^-■'■L^i*il■rf:-.'■ -

|«^*^^- j^ ■ -

. cexiKimossL.-'AicEi'.-:^ ^

■ ■=r.rasiACssiAn«Acas:;.'ii

Cin^lbtiHui' Swnitm. u-

,] ■■ -R^SOURC-^-*

•■ =JAGmeiu--.-l

i Bob). £ i'.'.WOJa

■\- i«-i V3-!,SW.T,

•■■■lirtittas-

«aa3)(ilB...K»M0.t»

rjO.\S«A:.»3fW.-0','STS ..

m.wj:ix».i»

i *ii)e«»Ho««..-

.... !a.ac«.»

C'-- rml«™*R«BW-'.:v..:...

.,...iijn(i.(»:

» . H«J&u»LVi»d<*l..r

* UiR>ew<k«««««

....,iA(»,oo

, OlIwAiHU

«/wi<»

•; TtiTAt

tS.TS4/)M.M

■: ' L!AB!l.!T!cS

■■;. .':

.C^MSUKk . ..

i ■ *^» . .

. - IM.CM.OD

J . Viio'ikMl'nflu ..

' . : in.om.m

-j , DVMto ^

■" - y.S.O..Y-H>,T«.k. .::

..,,«.(»0.0I)

-; . 7«:wrJFBDtMfM.lhMKl

. . . teo.ooo.oD

. c variety of.constrtic-
tive services, suchos:

•..•-■ f .■pi-ni^b;* intivUunJi. ■ "■

r- '- ' M liKntWHuntflMiI

AMi!niiiln!Be nUi oa

Le: this stotamoVrt ye- j
mind you enew of th« j
complete bonkin? »er- '
vic^ otferaci by Ciis '!

bon<. ■ ■-..■.. -i

Digitized bvGoO^^IC

146

Trp* of Baal E*Uta tnAMOtiona haadlod by biak:

... ■■ , ;. • ■ •;*&■■

Xajo? Ssura* of BmI Eatato SasinSMi If ImoHn:

I naiuDc Se get« hie re«l «Biat« i««dB ■» all broker* do, Jm vail a* Ihrouel'

tha bank.

,:■■■: -.^ «'-.;::t:|v:

laocth «f TlM la BmI ZaUta auiMsai . ■.

A: leaa: 6-7 yaa-a . ''. ■

!>'u.-.>s? of Srokara & Ealesaan:

Attachad la an OTfloial Ban'/ Tnblloatlon Bueh aa «
flna.te.Ul atatanarr, lolloatli.^ oanaa of offtoara
vho ara alae lleaocad brolcors 4sd/«r a*!Uo>oa

Digitized bvGoO^^IC

• ■■ '.■■:- ■ ■ ■■•-.■'.iHi:

3ic«s and addra*«M of any pMpli uho yon think »*f
hava b«*n Influenced, cllhir dlraetly or Indirectly
'.T.'.'-. dsiTi? busLnns with a bank or thalr Itaal btata
ir.-.'.-^.Y, ->.'<•" thr/ had uantad to do bustnaai ulth
aIla:^.•r £non bank antclatad) fie il Eicata Brokar

^;^t%

Joel I. Harti

Herti Fan Hanajcntnt, Inc.

102 PallMulii R,>ad

Kt. Vernon, low.' 5231*

f^-of" "osbari 319-895-88M
^-•! Kirch 15. 1S78

Digitized bvGoO^^IC

IB.

IOWA ASSOOATION OF REALTORS*

S99 Odiridje Oiive. Dn Mointi, Iowa 503M
Telephone 51S 244-2 IW

AFFAIRS DIVISION

m.\

Mr. CharlM I. Barinaccio
SMCla1 Counsal
ConUtM on Banking
United StatH Sanita
Washington, O.C. 20SI0

He are forwarding Btth this letter 13 affldavltts concerning banks fn

real estate business. He hope these are In line olth your request this past

Harch Nhen we visited you In your office.

CC: Paul Preston

Nttlonal Association of REALTORS
REALTOR I.L.'Tortw" Tucker

Digitized bvGoO^^IC

StnatOT Pmxalz* ml othar Maabara of tba Saokta "tn'rlng fTi— llln

la » raal Mt«U broka I h&Ta ansountaz^ tha dmioultla> of •alllne
|copaxtla« *«i yott bvra a tanking Invtltetloa al«a Itt tha hialaaaa of
MBl aatata aalaa wl aaucMNBt.

Ll mf liatcaoa tha aala of a 120 aci* faiB aaa Inrolvad. Tba KttorM7
did not Mitt to Kiva «i axelualva llatli^ ao ha ocatMrtad •aiazal raal
■BtKto agatta aad tcild thaa ba aculd aooapt offaz* on tba f bib and would
pif tba ooaalMlaa to tba ana «ltti tba tOtvr vhlgh mb Moartad. I aoAad
with • ollMit «ha gara ■• » vntal offar pandlac AH* ha oentMtad hi*
ba^ar to mua It ba oould raoalva • loaa. In a eoopla of dagrs ^ dlaot
«aM baok to ay offloa aod atatad that ha MUld radalra tha loan onlj If
ba imild axtand hla azlttaa offar thnDgh tba bankax ao thKt Im would
taoalva tha aala aDd tba oo^daaloo for it. Thla dLlant did obtain tha
loaa and pnrohMad tba faia, I did all tha wnk on tlila aaU and tba
kankar aat baok and caapad tha harvaat. Ha zMalvad tha oeaniaaioa oo
tba a^a of tha proparty Alia I Taoalvad nothing for all of ajr affoxta.
Ha took >lnnt«« of hi* poaltlon in tba lattdl^ iMtltatloo ud I faal
that thla la taklsg nndua adTantaga of anothar tnaiaaaa paiaan.

I foal rav ationglr th«t anj paxaoB, offloox or af^loyao of a bank,
abCMld not bo eonoaotad In ang' oar with tha aala or aaiia|Maiil of raal

«Bt«tO.

not bo too hvpr about that alt)i«tlon.

V^u^^. Jtk„^

State cf loMi

f iiUAs*— ■W'Vl*'«" ■•. "" u»l«"lgiud, a Sptyr ftiU:

itj aU ^to, paraooallj aan— J»d Vji.-^ ^ A A iw/f

ta Idantioal pocaon Mho axaoutod and a'ignad tha fozagolng

D t« bo tha Idantioal p

DolovM K. S^Btdt, lotaijr Riblio in and for aald Oountr and Stato

Digitized bvGoO^^IC

ttuiH eUiU OhUmuum & Hud ZiiaU

n tha Iwl lauu li

ma 1« t0 Inf«n 7QU that (

oiIiIuHt qaaCHl. Tharafara oa loac tlia aala utall;.

aa a Amtac and a principal ol Uili afancy, Tvln ClUaa Kaal

tacala, 41d oil thl> ochir brokac and aakad Mb If va lould

/&™u, l^«-^ <p thU .2_ da, c, -^ru-. ■ l-.^

D„ii„.db,Go(5glc

608 Gaiffld Sln»l -

Senator Pr
WsBhlngton

".!

• and Othar

SehBt* Banking Com

t..

I Bi *Bry conBamrt vlth ths unfair
■ban bsnkB are IntolTad In tha Real
profesiions, I balUTe that bank*
tbeae buBlnsBHea beeiuHa of tbe pre
cllenta, by lapljlng that unleaa th
is handlad through tha bank, thaj .

ooapatltlon that ocoura
Estate and InauraRCB
hould ba prohibited froB
Bura thay exert on tha

11 not aaka loana to the
inaaa to na paraonally.

J)D P*~\

ai*-

an pays a greater

coat

The

lecond

loi

506)5

STAT

B OF IO>A.

COWTT OF TAHA. u;

suba
«tii

crlbad
daT of

■ Dd

Itar

aworn to bafora^ Barold H. McKlnnay oa

thla

7h

D„ii„.db,Go(5glc

KENSINGEK REAL ESTATI

, cankhcldlrig Coi yianles

1 had a rari" listed through our offlc*. We had a young far-ner and
his wife as prospects, the ■^an k^ew the far" wall, having lived
near It Tor sone time. Wo talked to then several times concerning

The younp wife care In to our office and said they were ready to
"ake an offer on the farm, her husband h.'^d gone to the bank to see
about financing. They dlin't return that day ro I called then and
she said since the bank would loan the-i the m ney they had to buy
the fsrii through the bank. They raade the offerthrough the Vice -
President of the t^nk, also a Real Estate Salesi^an, It was accepted
and we lost the sale of the farm. la that Fair Conpetloni

Very Truly, ^^

Le/ Stel

.^ Jo, my

D„ii„.db,Go(5glc

KBNSINGER REAL ESTATE

Digitized bvGoO^^IC

MEMO FROM
CU0INIA.ANDIIISON

s.. EE'" i

Si.

72if J~« »?«_ '-=»-'

D„ii„.db,Go(5glc

Notary puuio In and fovTuu County, loi

Digitized bvGoO^^IC

STATE OF ICWA. COUNTV OF Ti

mawa ran m too has * mnw oimT mw an hi. ibi aunn. is imTmn tpb mib
or « (B BE wmn ipp»'t o»t nt lou.

t» m» PBBSiDRE DSU) BI

mns '.OTH TK9^,W
6. ttVS KHODi NJ

TUB. ItXl jorfs

I^&Aj fl.

D„ii„.db,Go(5glc

167

F. C EARIEY AGENCY

Tna, Imra BOCTG
AFFIDAVir

STATE OF IOWA
COUNTY OF TAMJ

That a reprea entBtlve of a local State licensed bank who
■ also liccnaed by the State o( Iowa to sell real estate told an
evenlual client of mine that the real estate agency of the bank could
very likely find a buyer for her property more readily than 1 due to

vlng more access to the public through dally businaes in the
bank. She. therefore, listed her property with the bank agency
until her listing with it terminated (90 days), at which time she cams

t financial transactions

Alao the bonk real sBtate agency recommended tt
er property for cash rather than on an instaUmen
al the method used in finally consumating the sale through my agency
nd approved by her attorney and income tax consultant. If the sale
ad been for cash as the bank advised, the bank would have received
le cash from the seller as a depoell and also the bank would have been
I a position to loan funds to a prospective buyer of the said property.
hrough [he installment contract sale, the seller was the peraon who
eceived the interest and we obtained an able and willing buyer within
SBB than one week after listing the property with my agency.

Dated this /<"' day of April, IBTfl,

rrankllnC. Earley, Realigj
o before by Franklin C. Ewley this

Notarji^ Public in and for the Sti

Digitized bvGoO^^IC

Pieper Real Estate and Insurance

1» W«t lath BtnA Thh. l«n mw

/W

^i*-«

Yj^^/f^J',/f^'^

D„ii„.db,Go(5glc

Dear Senttor Prox1«1re:

They also Infoni their CustoMTs, not to do business with other Reeltors.
and Indicate to the* their needs for future financing could be Jeopardized
with thai, being In a smII toNn.

The Banks, Mirk soMWhat together, but they do not Inclixle anyone else.
Vien the Custoners asks the Banks, abont listing their property, and do
they (Banks] belong to HoTllple, they say yes, which Is incorrect ( It being
the two Jost work together). This being a shU town the people knowing I
too an tn the Real Estate Bostness, they think that I too can shcM their
property. Not ontil after ft It Itsted with the Banks, and they talk to ne
aboDt showing their property, do tRcy f Ind oat that the Banks, do not belong
to a aoltlple or that they do not cooperate with other Realtors.

i resigned and went Into the EUslnest-nyseif.

Sincerely,

Irene A. Stout, Broker

101 E. Ayenoe

Grundy Center, Inn SIX38

*> tMs \\ day oftt^JSjl. D. 1978. before we, the undersigned, A

Notary Pobtlc 'In and for ftV Cdtmty, In said State, personally appeared

SiuZi. ^ JH^ to w known to be the Identical person nawed

in and who execoted the foregoing instmnent, and acknowledged that they
executed the sane as her voluntary act and deed.

(otary Pool 1c In and for %■

Digitized bvGoO^^IC

To Uhon it

May Concern:

I OMn ana operate

a 240 acre

fann near

Hudton.

A finnnejr

ne HK

up for «a1e
; father.

. The ow

tier had

1 kiwD Mi listing was expiring neit day. He had It listed Hlth
a bank officer In the locality where his new farm Has located. I
asked hin after listing expired to let >iy tIEALTOR list and present
an offer from ne to purchase. He stated that bank had advanced on
note down pajaent on hts new far* providing they could 11st and
sell present fara.

On this ^{ __, _ . . _.. .._,

A Not«ry~i*iiETTc Jo-an*JorTa1d County, In said State, personally
appeared ■ ,-^i,. -^ '; -.. to me knowto be the Identical

person nmta In and who eiecuted the foregoing instnwent and
acknowledged that they eiecuted the sane as his voluntary act and

Notary^ubllc In and for Said County

^^£]

D„ii„.db,Go(5glc

IOWA ASSOCIATION OF REALTORS*

E999 O^kridte Driv«, Dm Moinn. Iowa S0114 ^^

Telephone S15 144-219* FO

Mr. Charles L. Harlnaccio
Special Council
Conlttee on Banking
United State Senate

UaiMngton, D. C. 20510

Dear Mr. HaHnaccIo:

He tn fonnrding you the following:

1. Four pore affidavits.

2. Prlnt^out furnished us by the Federal Reserve Bank of Chicago
showing Inforwitlon on bank holding coMfHinles In Iowa.

3. Copy of a late ad fron bank In Leon, Iowa.

He realize nost of the naterlal git/en you last March, and again by the
Natlontl Association June, when they appeared before the Banking
Comnlttee concerned State of loHt chartered banks. When you check the
print-out on bank holding co^Mnies you will see that a very large
percentage of these state chartered banks are nnMrs of sone bank
holding coumKly.

He especially call your attention to three bank holding conpanles.

1. Brentan Bank^ Inc. - Oes Koines. Iowa. Very active in fan>
management other ttian their trust accounts.

2. tentn Nattond Ganlishares Inc. - Des Moines, Iowa. Very active

n farm management and do take part in soae real estate sales
other than their trust accounts.

3. Hawkeye B an kcorp oration - Des Noines, Iowa. Very active In all
types real estate, listing, sales and nanagaient other than their
tnist accounts.

These are not the only ones Involved, but probably the largest.

He hope the uterial will be of sow help to you.

^ruly.

Digitized bvGoO^^IC

Cat^-Vr^aJk, Omc.

REALTORS

M CMbwl v». M s-nte - 1 oar. ,4 Sta^t^ CkM

Q

»» Oakridg* Mti-n

follow Mr. Fj<

thit tta« llitlBC oontTut aiweinH Out tBa fkn
ID until Aiwuat 15, 19TS Hit bIh that It hu
ska wuld uoipt UTOa <AI1< Ih* llitli* prls*

Digitized bvGoO^^IC

July i. '9TB

by uB ITbl^u M^^" c^**" "^^ ^^ VrtAk And -yArlted to r*-lllt hi ff
-tdvlaiiv Ui&c ha had oliai:^*! attomayt -and prcfarrad ta chvig* bi

It ba pivtabljr a«td tnd* h:

Aupiat ^ttf and 'voida -ta nttmo-

: Palaar la ■ '1939 f,

• adviMd tar jmr o\

■.«Srt<^

,,( O C..^./^

D„ii„.db,Go(5glc

ci.nalder any ui'her ol

rf.-r,, (hiu

p«ri¥ .<r (h.' iir=

1 |..ir

I nuy preaoni Co

■his tUiy anil duie af<

'r!:'m.,?i'™nl:

l»Lln,. f..«,ir;,ci u

"

ir l^rm enterad Into

if.£u;.;

n,; Conlr.icu i.cIUe
t dul>.'d Mjiv 11, t

J:.\'

,11 parcies that there
,rty oC th* .ccind part
and purporti to be a

■„'nlfo™ Listlnn Conti
by salJ Volney Palmei

rbl!fc.ra A..

Eusc 15. "1978" ''"

lu\:

Pnr.granh :
and all ocher real ei
farm Qwo«d by psrtiei

■■:;';S-

r ihc nr.t pnrt

v;i\

' to coapBrate «lth any
■entlal Wen for the

P»iranr»ph •
have pnlered Into thi

c by their mm vo
y l.ind b»loR nade

^Pb"

■knowledge chat they
try Acclon and daed
ics of ths flrat pari.

iirr.ior

I'AKTIKS OK Tilt: SnCOKD P«RT

Digitized bvGoO^^IC

UNIFORM USTINO CONTRACT

.PTE* f I - NATIOMAL IHSTITUT« OF FARM t L*HD I
isiMi ini,mr„iw,.M.Tiii_. _C«REY - VRZAl

Thi- Eiisr Hnlf (K%) of Section Seven (7), Township
5th F.H., Ulnneshlek County, Itwa;

snacifled by KlUr in

In other feriii* to be

E the conilder»l:lon. Difference between traded

lleri present^ eontraet obligation to be paid on or before

vMnt in Che amount of SIO.000.00 on Cyril JeatI
,r n..Lo« uet^nber 15. 1978. All principal and 1"""" W"
ler Deceiabcr 15. 1978. on preienC contract with Cyril J"t:r.b
by purchaser according to Che eniatlng contract, and all oChe
jI^IT > j-he contract will he coBplIed with by aiaiBnment .

lelli

indltions of

Digitized bvGoO^^lt^

May 30, 1978

Carey, Vriak and Associates

3 East Main

New Hanpton, Iowa S06S9

Re: Don Reicks

Pursuant to the listing agreenent that you had
1 Don Bekks, I regret to inform you that it is necessary as pre-

tement. Don advises ne that due to the fact that this was only
ic wi^ck tentative type listing, that in fact your listing did
particularly nean a great deal. However, be that as it nay,
<a5 signed, and therefore, I am required to give you this particu

real estate, but I have no f
therefore, as his attorney.

DONOHUE LAW OFFICE, I

Digitized bvGoO^^IC

l?lJ ^1~> nauL wu't&Mt.' 'ibMuuMiM

-■«.-_.-.»M,-i

[■ft^.oou.oo.li g,

iNGi CHUM) Ti:iiA.'a '».Mu'i>1 JSSmmi '

rr^

■« >y* a*r^'*

~7h^

/-'''"«'^,"a'r:x?&

D„ii„.db,Go(5glc

UMVOUC LMTjIC C«ltnUCT-A(it«nd bY

TiarTMTl-rftr-tTOO.lM p-r »«• if .irntwi jN

Digitized bvGoO^^IC

UNIFORM IJSTING CONTRACT

^a^^^^

""y^ar. /^yij^.

-Kiiiit f>t-u^ 1^, aiM.*'

-f:.y-/iwA, ^ aj>^..c/A,^

B— iJl>.»- il-.. -:^...

Digitized bvGoO^^IC

~ SblY-Ftflh CcfiersI .IncmMb

WELUBUBC IOWA sw R.n wKH HallsburE, Inn

f— . (Ill, a»^ 37» »«j«««..»*,W3l» Ml 15. 5978

Sanitsr Wiuiu ProiMln

& KKbKi of Uh 3«ut* Binldnc CcazittH

Sniat* Offl» Banking

W.»blJKton, D. C. M5I5

Gmtlimni "*' ^•~** B""*!"* ^"1 *'^

Although I ban nan ntlrad friB laglilatlia larviea anl hin gold i^ gmaril
Inauranaa agancjf I haw long bavn auarv nf Ula abUJta bj nany lndap*nd«oi banka
and bank hoLllAg coHparir Mnb4r banlia irtw bavq raaartad to undu* prvasur* and
co*relon iJl pmootlng lie g^a of Tarloua foraa of Inauranoa as irall aa tla-ln
traneactlont on raal aatat* aalas and loajla thrtju^ thalr r«ap*ctlTv lJlffnranD»
and r*al astata dapartaants. During th* tljH tbat I dazTVd In Um leva Laglalatura,
Donaldaratlm ma glvan mMICf tinaa to proMbltlAg bankd Tnm angatf>nf in aii^
non-banking aaFfloaa and aotlvltl4B. B»caiia« auob a lav wnUd not applj tr

only ^P7^ to thoaa

It ±t ^ flonfiraad ballar and poaltloot that glTan propar invsdtlgatlon ani
haarlng by jmir Coalttaa, tha iiajorltjr of your nsibera will agT*a that ttrlot
Itglslatlon Is not only badly naadtd but alio daslnabla to allalnaU tha vair
arlatsncs of a taaptatloD for thoaa oparatora who ua« undu* praaaura and ooarolon
In tbalr bmlnaSD praotloaa. It ahoald b* mtad, bowarar, that iBost Tletdaa of
thl» typa of praaaure and noarclon an gaoaraUj BOat, relnotant to ta»ti/]r baoasja
of faar of ratallatlon ani ratrUmtlDn. '

,- ^Sfwully ywira,

SKwg^ — •

Tli. STATE OF ItVA. COOBTI OF ffltOHDIi SS

P^ On this 15th day of Hay, 1976, bafora m, Damll E. Braiuun, a lotar; ndiHo

f^ Iji an] for tha County of GruMy, Stata of Ion, paraonally appaarad Har^ 0.

■— 1_' ] Flashar, to sa known to bs tba panon nffd In.an) wbp wcacatad tha aaaa aa bl>

t^i Ui TolanUrr •ot and daad. fiJaMjU* ?/S<«i„«>

^m

m^

D„ii„.db,Go(5glc

0

BlltKS REAL ESrATf i INSURANCE

Xu^t^^l ■

..-■«i-TC-«-*W-^

STATE OF IOWA )

COUNTY OF GRUNDY »

SUbacrlbad and sworn to bvfora m* b;
Dooald D. Dlika thla Hit daj of June, 19T8. ■ ^,. — ., n

My Com. tiplrM 9/10/TS,

Digitized bvGoO^^IC

«/Ti«rB

ntlTB mnd 0th.

If NeDbars of th
iklng Bill #7J.

I hiva tiasn
due to thB Infl

s r8»l oHt»W hrok.
During that psriod i

usnoB and poHor thB'

ir in th*

If tlBB I

For In.
binkar
nuatwr

Iter
r th

■ 'pr

amis* that on poBBSBBlon data
ra. ma bankar advlaad ha cou
had thla fara for Bale, and
•y, h* would have to buy the

inty o(

1 for tha

raal astat* ( and insuranca]
ileldad by bankers.
I. ni* buyar went to his
tha Bonay. but

I if h

iru hiB. iihich

did.

In anotJiar inBtanoa, I waa Bailing JitO aorea, n» buyer nent to hia
bankar and advisad he hbb going to vrite a ehack for *!' nuaber of
dollira as th* down paynant on a fan. Ha found oho tha 8*ll*r vaa
and wantto hU, and advlaad thla vary aldarly nan, thatif ha didn't
gat ona-Half the ooamlaBlon fron the aala, he would no longer take
> of his racords and incosa tax retuma. Tha banker had nothing t

do with tha Bale of th* fara. and 1

-efUBS

= giva

B banker

■ of t

Digitized bvGoO^^IC

TO TH 3TAT1 LBJiaUTDHSi >=-^ _ f^, irv^— ^- fi^r^-j *^^Av

Mr opinlOD la that Baokara and tbalr
•Bplejraaa ■Iwnld not hold Raal Batata Ueanaaa wrA should not
b« paralttad to aall Inauranca, auch aa Bortgasa Inmranea, ate,
Bt laast vhlla thar ara tiorklns In a Bank.

I ha** loat aavaral aalaa of r«*l
•atata and Bortsaga Inauranca dna to flnanelB|<

I alao faal that Bankara abould not
ba panUttad to ct** lagal advieo In ragard to raal aatata.

I >a boplag fou Hill taka ■
B thi* rapaaett

3J3 Oraan Straat,
Traar, Iowa 50675

3ubacrlbad and sNDm to bafora ■
tba aald Moal H. lanaburc, thla ZOth da; of K^, 19TS<

WotuT^^.

Digitized bvGoO^^IC

CORPORATION

•fMBtateSatot
■ndSanlen

INSURANCE
SERVICES

ata«rivN*klMM*«p«ri

"Halping I* What

Wa'ra Atauf '

* We are now providing:

and REAL ESTATE
APPRAISAL SERVICES

VWant to SflM InsuranM
Preniiiimand$$$b»
pnNNriy oonreci??

can Mpl

tar th* abMiitM owiMT, wt fMt
!• 1 vwy wiM Mdwvor

EMPLOYErOMUniAL

• APPRAISAL SERVICES

are tMoomlns a iwoMitty.

• Call, wrilo, or Slop
by our oMca

« 111 N. Mtffi, Uon, aid an
will dIacuM your iiMda.

•you-w Spmt a UMkna
bulMng your aelala...

HquMlty iMip praMrvB

H? LM w twip...

wardKllgon-BrolMr
JoMiBurmi -Brokar
Karmit Hazan-Brakar

URoyPack - Salaa
Hatha OwaiM • SaJaa

Ph.
SIS 44M844

•

THE PnOVIDENT LIFE

& ACCIDENT CO.

THE BANKERS UFE

* Call Tany Slaanbaiig
-Today

11-: N. Main, Laon.Jowa
[515)446-4844 /^^^

Complete Banking Services

with 3 Offloaa to Sarva You
triaJn Bank • Driva In Offhia - Qrand RIvar OffkM

^^ THE DECATUR ffjf/Q
Wf COUNTY STATE BANK

D„ii„.db,Go(5glc

ill

ill

m
Hi

in

ill

s §3 i i t t i it i i ss % i SS

i i £ *' i*s :^ it i z z i ''

2 Bs 33 53* it eS ii ii £b

i i« a ii i ii a a a "

,S ,S ,ijl ,1 ,2 ji Iji |S

i
i

, ii

1 1;

m

i !

1 11 Mil
I ; I ; i

» 3 tr s «

i

5' i| I

111

i\ ; I

ih

II I

a- i

in; i ; i n : I

D„ii„.db,Go(5glc

:c sa S3 ss 38 CB as

ii ii II ; ; E R s ; £ £ si ; ;

-' - s s s a ' - as -" -" i i •* ■* 5 i

r r 1= 1= i= 1= r fi" r

<l

if

8

!

^i

>!

)

)

■-

li

i

^'

F

ti

IM

if

1

1

1

SS sS

I i

111 IN !M l=|lil lil
■ I ' I ■ I ' r ' I I

^ ! I ■ i > i ^ ' « I I

D„ii„.db,Go(5glc

it s£ is St PC I i sitiiai i
ii i i ' ' i i i i i i imUi j

= .,sL ., .

>s ..B a 3< &«»■! fci B

il 111 >E 1 1' -i ^i'li'mt ■

I I ill!

i i £ I i I

liiil
I i i p 111 II if!; i I

I ! |H 1 i I 3 ^ ; I 3 I s ! {

D„ii„.db,Go(5glc

Ill

(7 3 a; 22 t g e: ss t t :s

Ssa it a i i I t I S:

11 I I 1 3 1 l,!l

" 2" r i" ir r i- ri°

U

it Si ,i

|i if p

! I I

I|8

ES.S

111!

i!

I j ' I ■ I " . i ■ s

I 3 > I I i < |S ■ > I «

i= 111

n ir

'^U ^

s

D„ii„.db,Go(5glc

as SB

[i BS i i SB sS SS 33 SI S

IP

I

S3

ii

ta

" s

I :

i"!

s

:

s!

li:S

"I %'•>".>'

I > i t I : :: ■ ■ I

D„ii„.db,Go(5glc

i i % i St S£ Se

RS PC 3a 33 E3 it S!

1° r 1= I"

J

V v

|! ti ii ;i

I* SB Oe at;

i SM |! i |! i \n

I " I " ! I S

• J • J « B ■ I ■ 5 »

! I

! %■■

\x p

I- |I

ii H

' s ' s

i !

fl l|

i ^ i •

! s S V

Digitized bvGoO^^IC

iiiiiii i ii'-i i ! ! i:

• ' iiiiisisiiiiiiiii i aji £ i i : si

) iiiliifiiiiiiiiij ill 1 > *

a |9ss85S3sssssss3aG i'"!^ 1° i° i

!!>3aliii!!i!llHl

i i!iSl|||ii|iiiiii iii I
) IKiifilHiSKni iff :

I .

m i n !

t iiiKM\;iHAii-n mm |S i!

!| InHEilsSSShfr-i I Sill 1$ | SJf f.%
1 " I " - I " S " !

D„ii„.db,Go(5glc

t f tSsSSsissSsH * i t I

s i HHiiiiiiii si i i ' '

u

:l!3jil!fi;ii:!|l|3

iiillilhli! i ! I
Hiiilih':!! Hi

S|

.8 Si- i " * . E J..

5 i;ifel:5-!l=: III

ss i^.^siE'sesa-s* _5'.

i ; i ''Itf:

D„ii„.db,Go(5glc

186

13 i i

! i : i i i

i" V e V V I-

iS fl

1 I I

11 t a t s

i' e

I

u i u

Sh IM PI

■ I ■ I ■ I ; 1. " j

'iltSti'l!*

D„ii„.db,Go(5glc

i > 3 3 3 3 ! :

! i ) ! ! i I : i a

-• ' a a -■ -■ a

i ; 3

Pi Pipi 111
1 = 1

ii ,i

|l |l |i |l If fl p |l ji I

S! iS

■ ! ■ i

I ' ! '
3 V £ V

i!
!ii

D„ii„.db,Go(5glc

m St a a a

as 8 9

I § It S a

j! |l |l |l |i|l |l |l |l |l

I I

I
! I

II

|| J d

liiilipipfpipi

1.1 =

|S |! ,i

! ;^i M : i ; i

ill

Pi

; I

D„ii„.db,Go(5glc

tt >> SR IS ::

I a It e V a :

* « Si S a

I- I" r I" 1= I" I" r 1^

I g

si il

?

S«

i

3

If

5

B

5

Pi

1

" a

s • 5 J . J
s y I V a x

^1 i!|
S ' I

S > 3

si

BR

ill

I ;

If I !! I

■ s * s

. « , 1

= It ! «

D„ii„.db,Go(5glc

m

S3s:i£ i 3 3 £ S

iiitii i I s a

l'"----c V I' I' V

jil fl

iiliSil
JiiiiK

jlli

I . I

U '3 !

isiuij .! :

tsecs-S 35

I
t)

I s

" : » « •

t y s s

11

SI I
■ s

D„ii„.db,Go(5glc

is s s It

ft as xs 13

n

K
III

: \

1 1

i i| p

A P %

s ■ i ■

i it I s ):

a H

I! I

K I V S V

If is

sfl 111

' I ■ I

, ■ I I

I X ! V

D„ii„.db,Go(5glc

it ;; i i SI x 1 er

si S£ SS S9 XI St II si SI

I" r i- i= n= p I- li= I"

ii

U >S ii I: ii

I

I ; i ; s < i I

M Hi

11 pi [if

S E •

V g U

D„ii„.db,Go(5glc

m

$3 33 18 a S i !l 8S

as it in I i i it sS 1(3

|l |l

9 8BC8 8 8 B8B:S X

i i ! i if i i
i i i i i i i i

I-

! I f.

- - "I

\i All I I i.ili ,

It I ^! Jiiii I u m I

! ' I " i " ■ . i ■ i ■ ! ■" ■ . I ■

D„ii„.db,Go(5glc

CE SR II KS

: f as 3 s

31 f 3_fii i A t i i

:ic

i 1 !

I

ilii

.BP- w

Hi!

1(1 .:| 3

P li it

:l ilii i If s|i;i I

E* eg'^1-* B a* BrS-" B
" ' 5

11 1 ii

I li

D„ii„.db,Go(5glc

:! fi il il f i ss ts SS ^3

3S is 99 ss is i i i i

11111311
1= |S 1= 1= JS |9 |2 |S

I' I-

1 I

Is

S S I
I ' : ' > *

S V S y ■ V

I

.11

it!:

I

In ill [h iM til ;m ill is ni I

; I Si

I

D„ii„.db,Go(5glc

^1=

si i { * %

S3 t X 9 3

13 1

tkt

! if

;■ 1

VI

8i 5"

HP II

n i|i E

1

K||l! f!

It

III

B

)!

S 8 1 J i !

D„ii„.db,Go(5glc

ss it as 11 I i

I 3. Si 1 1 1 1 lis

1= |» M|= 1= 1= 1= 1= 1= Iji

li

! i

D„ii„.db,Go(5glc

[9.

IOWA ASSOCIATION OF REALTORS*

<m Oakndie Di<v«. On Mixnes, lorn WJ14

COV[»4M(NIAL AtFMRS DIVISION

Q.

Chir1*t L. Harltuccio

SpMl4l COWlttM

CoNilttM on Ganklng
United SUtM Sanata
Ibthlngton. B.C. ZOSIO

DMr Hr. HtrlNccIo:

His letter It telf-eiplanatory. He otsh to point out that the office of Center
Insurance and Real Estate li In the lobby of thli bank and that all Mibert of
thU Insurance and Real Estate flra are wployaes of this bank. Also that this
bank Is a aeaber of i bank holding Coviny, Hawkeye Bancorporatlon Des Moines, to
and that they so state In the last page of the brochure.

You;

Digitized bvGoO^^IC

%

KAMBER-VAN DORN CO.

*»a OOUSLAS AVENUE. MS UOINES, IOWA 50)10 PHONE: l70-flH1

7^1^ cx^ -^ »aw «•--- ^ <? 'S^'"

D„ii„.db,Go(5glc

V"^ '^Be«.^ .-"^a^ ,-s><U ^<at<£ a^

D„ii„.db,Go(5gle-

For Sale

Modem Industrial Plant

Gnutdy Center, Iowa

(Jq[) Center Insurance &Recil Estate

LX. Fka, FlcMn Sbi^ iMk, GcM4r Cw 4r, Inn

lU Nn>, ■nh«, C^irtK taMMH 4 ImI IMM*, Ghm^ CmM, toM

Digitized bvGoO^^IC

Thiis Plant

b

PriwidToSell

Thlt It an ouUUiidIng IntfuMrW tMllKy wH
all tM utllHlMw.illabla«id In um. TIm htal
Production Building, a 200 x 400 ««
building built lnlB71-72, laontof tha tirwi
InduMrW bulldlnga In ttta Stm ot Iowa.

2 automot va ipray paint boothi
(1 with hydraulic hoiat, 1 with crarw n
through)

4 overt>aatl cranai

Machlna tool araa

Motal labrlcMion facility

Tha buildings are locatad on 28.59 acrat of
land. 11 bulldlnga, Including oHIca apaca, ara
located on the piant alt*.

Digitized bvGoO^^IC

Brief Facts

LOCATION: Along Hlghtvwi 14>17B, 1 mil* WM of Qrundy Ctntur, I
taoMid W mllOT oHhar w^ tram MMholHown md Wattrioo ind 38 mill
IntaraUU Highway 36.

ELECTRICITY: ProvklKl by Iowa ElMtrtc Light & Powar Co. with Industrial rata*.

■I PcH Oflica Box In Qrundy Caniar or through

SCHOOLS: The plant Is locatad In tha Grundy Cantar Community School Dlstrld.
Grundy Cantar is 30 milos from tha Unlvarslty ol hlortham Iowa at Cadar Falls, 00
mllaa from Iowa Stata Unlvarslty at Amea. and 30 mllas from Hawkaya InMltut* of
Tachnoloay In Watartoo.

TRANSPORTATION: Sovaral Ivga trucking firms ara avallabia lor contract hiring
within a 30 mlla radius. A half mlla long grass atrip for small alrplanas ts locatad 1
mlla from tha plant, hard surf acad runways north of Marshalltown are 25 mllas away
and commarclal alrllna sarvica Is 30 miles sway In Watarloo.

Digitized bvGoO^^IC

Priced to Sell in a Community
That Wants You

it

Grundy Center, Iowa

Where Industry and Apiculture
Are Partners in Progrets.

@

IOWA

A Place to Grow

For Further Information
Contact:

Fvmefi Sartap Bftok

Gmady Centw, Iowa

(319)824.52]6

Cntet iHanacB A Rul Estate Atenej

OraMly Cntar, Iowa

(3I9)814-M14

MemberHawkeyeBancorporation

3'

D„ii„.db,Go(5glc

204

The Chairman. Thank you very much, Mr. Farrer,

We are going to ask Mr. Hemphill, of the Mortgage Inenrance Cos.
of America, if you would recognize when you start the green light
will go on and it will be on for 9 minutes and then the yellow light
for 1 minute and then the red light comes on and that means to stop.

If you would like to abbreviate your statement, the entire statement
will be printed in full in the record.

STATEMENT OF WHLIAH L. HEMFHUL, FBESISENT, HOBTOAOE
INSUEAirCE COS. OF AUEBIGA, ACCOHFAITIEI) BT JOHN WILUAH-
SON, EXECUTIVE VICE FRESISEKT

Mr. Hemphill. Mr. Chairman, I am William L. Hemphill and I'm
president of United Guaranty Corp., whose home office is in Greens-
boro, \.C. I am also president of tiie Mortgage Insurance Cos. of
America, on whose behalf I appear today. I am accompanied by John
Williamson, our executive vice president, who is based here in
Washington.

I have already filed a detailed statement setting out the reasons
why we support S. 72 to restrict further the entry of bank holding
companies into activities which are not directly related to banking and
which are not necessary incident thereto.

[Complete statement follows :]

Digitized bvGoO^^IC

CTArEMKNT or MiLLuui L. BEMPszLL, PtasioBiiT, mxaGMSS msoiauKS oompwiss
or uamcA, bbfokb tbb sbjmiz comhtteb cm bmkiik, hoosikg, and iuebjin
AFFiaas m bbbuid to s. 72 bblhtzbg to bmik holdibg ccupmibs

Jiuw 16, 1978

Mr. Chmlrmu) aad HAabars of the contiictEs.'

I an HliioB £. RespAJiJ o/ Greeiuboro, HorUi Carolina, and am Ptoside.
of ualtad Guaranty Corporation, a private aortgage insurance company . I appaa
batora i^u as PmidenC of CJ» Nort^aTs Tnsurance Conpaiiisa of Mierlca.*

J aa pleased to present thia statenent in anpport of pzoposed amand-
■ents to aection 4(e> et Um Sank Bolding Ccopanif Jlct, as sat forth la Section
301 of S. 72, which MDuJd provide stronger and aore rastricelv* taata In
determining uhaeher a bank holding caapany aay engage in certain non-banUo^
activities.

The Bort^age insurtuioe induatrv is direotJy involved in the issues
firasented by the legialatlon. On Hay 33, 1973 tha FeOazal Keaerve Board issued
1 notice of proposed mlemaklng that the aadenrltlng of real estate mirtgage
guaranty Insurance waa a parmiaslble nonr-banking activity of bank holding
Subsequent Jy, in January 1974 public hearings tiara Aeld cm
applications of tJie three bank holding compaBlaa for da novo entry in
mortgage guaranty insurance business. On September ii, 1974 the Board

•The Mortgage I

isurance Companies of Aaerica is a trade aaaociation

consist

Ing of fourteen p

Ivate BOrtgaga Insurance coi«MUiies Hfwaa insuraoee in

in eioeas of S6a billion. The national officers of

the Ass

am L. Kemphlll (President of United Guaranty Corporatic

Greansb

oro, IKI, Presidi

nt; Preston Martin (President of PMI Mortgage Insurance

Coepantf

, San Francisco) ,

Vice President; Leon r. KendaJi fPresldanC of Mortgage

9 Insurance Corpo

Tiger I

nvestors Mortgage

Insurance Company, Boston), Treasurer/ and John C.

tfiJlian

son, Waahlngton,

K, Executive vice President.

D„ii„.db,Go(5glc

giaranty Inaumice "!■ doaely relatad to bBoklBC" utd tharaf ora Id prlnc^ite a locloal and
Isfsl ■CHVI9 for bank haldlng corapuilsB.

II !■ Dur caaBUered oplDloa thit tha Federal Reierve Board haidns ruled that
morliag* (uaranty loiuraoce li "cloaaly related tc baaMnc or manafliig or coatrDllIng
baaka «a to be a profier ioddent aareto" that tlili l> mfnclent and eloquant UatUni»ir
that tha last, quotad abova, require* tha amaodmenta prci>oaad by aactlaii 301 alS.^l.
that tha acHvlQp aou^l ba "cloaaly and dlraetlt" rslalad to bankh^, apd that the acllvt^
be "a propar and aacaaaarv loddaat tharelo,"

If tha "oloaaly related" teat makea morlpiae laauniiDe a permlaalblB aotlvUy,
thsB the teat must ba revlsad to require that the letlTlty ba "cloaaly lod directly related
to baaklBg" as prorldad la S. 72.

Out aixuraants as harela aat forth will potot out the reuona why bank hoUlng
compaalea should not be pennlctad to engags lo mortgage Insurance. HiIb will underacore
our argument why Sactloo 301 of S. Tl should be approved so as to avert such a ruling by
Die Psderal Raaarve Board.

Tha underwriting of mortgage guaran^ Inaurance may bs "related" to banking
In the aenae ttaatbuki originate morlgagaa on real estate. At that point the Inleraat of tha
bank aa lender, and that d tha mortgage Insurer, mova off at divergent inglea.

First a IllQe htatory. The private mortgage Insurance Industry which nourished
In the early decadea of this canniry went broke In the early ISSCTs. A New York State Com-
mlsilOB hiveettgated tha debacle and concluded:

D„ii„.db,Go(5glc

"Tha bnilaw of (oannMaliv maitpfie li not
ID otMiarf fc«»Miif (MutUoD utd Um public would ham baen
■attac t0 K aoo* (f tha ooBqaiilea had tmati or bam arnll-

, P. M)

If Iha praiant taata tor acgulalBon or da now «atfT br banfc hoMliK compaiilaa
In mort|ico guanatr InauraiuB wera to raaiill la ^ipronl by tha Board, Aa tOUowlns
eoafllota at lataraat with liiavllable delrlmsnt to Ox puUlc Islaraal would remit:

1. Sliniaattog d Hadprocal PoIlcUg

The ntatkMidilp batwaao mortsafe laaursn and leodora tada; la aiAJacI to
Om diaclpllaa Isiiioaod bj tha compsUag Intaraata [< liidapandsnt bualBeaisa with dWerlng
vtawpolnta. Whera Ifaa mart|aga leader and marlgase ioaurar ara unrelated, there [■ a
aalutarr laoentlte for reelprooal ptdlela| at b<& lendtos and laaarlBf pracUeea. "nie
nortgaflo lender will seek la loaurer whoae rate* Hod aarvlcaa ara oompetltlTe and who
poaaaaaaa lutflcteBt fioaiicUl atranBth and rlak dl^urtfoa to uaura Ite ablllly to wtlaff
Its Inauraace obllgatlaia. At tha aame ttmo, tha Insurer nOl aaek to itoM uadarwrltlng
laodera whoae praetlcaa aqioaa It to bl(h rlaka of loaa, AftUlaUoa tt Iha leader aad
tawurad would relax or allBlaata anllralr tha taoantlva for aueh mutual policing. Thia
raault imiiiiii divtoua to oaaaa it profldinf DOMrage for tha credit rlaka << leading
affDUtaa.

Coofllcta majF ilao axlat whaoavar an tnauTaoce itdialdlaTT underwrllaa moTtgaga
loaua orlgtnalad or held by a mortgage lender with slgnlflcanl buaineas contacta alaewbara
In Iha holding company lyatam. 7%ua, a martgaga tianker or a commsnilal bank wUcli
borrowa from or taaa algnlftcaat depoolta b a k*wMhj Bid>BLflary wLlfaln the holding company

D„ii„.db,Go(5glc

maybe in a poallloa to cDtnniud apeolal trsUniBnL f rom tbe taoUtnf compui^B Inaunocs
■ubatdiity. The opfKMlU could, ol douth, iIbo bs Lba oia — Lhit U, nioh ■ oiubnmer
might (oel cooBtnlDsd to purohua tba holding company's mortgage Insanoce beouae oC
tiTorible credit relatlonihlpa. It la tbo malign lofluenee Buch raUtlouhlpa may h>*a on
nlUlBrorltlDg pnctlcae and Btandnrda which are cauBa for graalsBt conoem.

Z. Advene Klek Balaottoa

A favorite banking cuatomer al the holding company ayatam may be granted
InaurBBce on mortgage loana which, but for the banlUng relatlooahlp, would have baec
rejected by dia mortpge Inaurar, The dilqultoua haaard al advene rlak aelectloa ilwaya
prenlant <n tlia moclBage Inaoranoe bualnaae, and Indeed taf inaannca bualneaa, wIU be
greatly exacerbated by tbe praseaoe of axtranecua tooaatlvea tor an Inaurer to accept (or
fall to tnveatlgata adeiiuately) riaka propoaed by > prgfernd cuatomer cf ila >-"fc'"t

a, Atptalaal Practlcea

FaulQ qipraiaal praclloea poae ao sveo graver poUatlal problem dian advene
credit rlak aelectlcB. Mortgage guaranty inauren geoenlly raly upon tbe property a[f>nlaa]a
■ubmltlsd by (heir lendan (apot checking by meana al btdqieodent apfiralaala). Iirflated
qtpnlaala expoae the mortgaga insurer not ooly to normal fluctuattooa In property valuea
but alao to an InltUl inadequacy e< aecurl^ w hich virtually aanres loas In the event ctf

To psraotia nnramlllar with the inaurance Induatty, It may not be ai
ig hidden rsbatea cao be. Slate loEurance ragulatlona generally prohibit
rebating irf premluniBi and the Federal Home Loan Mortgage Carporatln'a eligibility

D„ii„.db,Go(5glc

:a a]q>ceaily prtdiQiU paylns "

companuHon to Inaurad landen or parBOna relatsd to them (FICLMC, EltgOilltty Requlre-
menU a. ISO). Tlie prloc^nl objectlvs of theis ragulatoiy problbUlona Is to preVBOt
unfair digcHmtiHtloa betwoan Inmreds and proslda RSBuranca that premluma are sufflolenl
to cover ths Insured risks. Allowing aftUlation rf banks and Inauren wDl sraatl; faoaitaCe
drcumventlDa ol thsss salutar; ante and fadaral regidatlDna.

5. Plnanelal ReUHonahlpa

The existence i£ other flaaoclal rslatlonsfalpa within the same holdhig oompanf
would create an oxcallent vehicle for corart premium rebatea, A bank holdlof company
ml^t hidlrectly cornpenaate a cuatomer at Its mortsaffs Inauraace aubaidlaiy by havlDK
Itn banktaf affiliate make defKialtH In or reduce correepDndent aarvlcQ charpn to such
Efen more obvious apportunldaa for premium rebating exist wbaoaver the
« customer la also a borrower from the bankbiK system, e.g., lotarest rate re-
ducUona or more favorable loan tanns. There are times that the mere avaQabQl^ al
credit when It would not otherwise be anasble could be considered a rebate.

"Hie Intricate web of reciprocal relattonahipB which exist In the correapondent
banking araa would make robatos almoat Impossible to dtscovar or police.

The crucial point is that there la no conceivable way to prevent, much less
police, audi rebating If significant financial relationships with non-Insurance substdlarlea
al the holding company are allowed to exist. It would not be feasible to determine (bat
exceeelve deposits are t>elng made by a holding company hank with correspondent banks
which are also customers itf its mortgage Insurance affiliate or that the Intsreat rates on
loans to > mortgage banker have been slightly reduced to compensate the mortgage banker
for using the holding company's mortgage Insumnce.

D„ii„.db,Go(5glc

S. Belatofaca

Anothar dugar !■ tbe poaslbill^ tbu the Dorlme tnsumics ■fTQlaCa id a bulk
hoUIng cumpuqi will nlmire Its rlaks wUh ■ thinly capttalliBd r«lB«uraaoe iSaiate c( ■
buiklDB customar o( ■ hddbig ooDliany. RBlnnirance on owlly ba uaad to diagulia

ff Qia laideT who oontrola tha now i/ Inninnce bualnau aUo ow
Che laodar on rsqulra the prinurr Inwrer to relaaure witti the lendei'i ■ftllUled relD-
■nrer, ShicB rafniuiauoe prsmlum nlei are not regulatad> tba raiaaurar can charge
angi price It wants, K the prlmair Inaurer wants to keep Chat landai'a boalnaaB, It will
have to paj tha price. ThU type of nbatlsB throu^ Itaa rehaiuaiKie modianUm haa
axtated In the credit life and credit aecldeal and health field for aemral yaara. It haa
proved to be ilmoat ImpoHlbla to regulate or coattol thia type </ rebating acHvUy.
Bucb rabaCIng has potontLally dlaaatroua conaeqHencea because the prlsuuy Inaurer haa
fewer funds bscauaa of the bigb reiaaunnce premium and, atnoe the ralnaurer l> uniallr
dlatrlbutlng Ita prof Ita, It nuy not bava tha funds available to maet lla nbllgatiaaa.

T. Tiiaiiwjmie Qecgn4)ble Dlaperstoii of Riaka

AnoOier danger biherect In allowing mortgaga hisurera affiliated with baidL
boldlng compaotea to Insure cuatomera cf tha holding company banb la the adveraa
Impact 00 geographic dlaperalon <J mortgage Insurance rlaks. Becausa even the
liigast liank holding coniiauiy banks are asseatlally ragioiud In bair opetntlona. It
will be natural for bank holding companies to place greatest emphasis m marhating
mortgage buuraace In Ihe reglona where thatr banka have establlahed maikets — (hat

D„ii„.db,Go(5glc

■a Ibeir nolpracal larnnga to idl mortsage Isnnnca darlnd froai Che banking
» will b* tha crsateaL Cntflnliig riak dtapenlcn to ■ Itmltad seofiaphtc area
ta axtmnel; usdaalrablB fRMU an ItuuisBcs ataodpolota bacauaa It makaa tha Inauiar
pecullaiiy vulaerabla to bcobodiIc reraraala affecting oolj tiat ragloo,

S. UmBoaaaarT Inauranoa

Hw daclalon to purchaaa or raquln mDrtgage Inauraiica (like cradtt llfa and
cradll haaldi and accidaot Inauranoa) ia mada by Iha laader, not Ibe bornwaE who to ose
torn or aiwlbar paya for It, In a normal ann'i logth altuatlon, ooispatltiTe Interplay
anoBf laodara may prevent their reqnlrlag boTroKera to maintain
axceiit whara It la daarly Deeded from a credit atan^wloL The ai
tlaaahl|i8, aucfa aa correapoadeot banking or a morlgagi lendar's o
the banklig afflllaCe of a mortgage Insurer, may, however, cauaa the martgaga lender
to laalat on mortgags inauranoa For raaaona which have no connection with the mortgage
loan iranaactlon. Particularly In Aa caaa <rf commercial ttanlia (wblch tend in treat
reatdentlal mortgage ItDdtng an an "aff-apln, oo-agaln" profraaltlanl, 11 la lUcsly Qial
there will be a atrocig tendency to require mortgage toaiirxioa (Aenever It wnild be (<
advantage to the bank tor other reaaona.

S. Heverae r'™r*'"'""

The premlimia charged for credit life and credit accident and haaltt Ensurance
are not aubjact to normal competlllve dladptlnaa. Indeed a reveraa competition prevalla
with credit Inaurance: Hie atrongar the ccmpetltloo forauch loaunsoe, tha hl^iar Ibe
pramluma become becauae larger "ejiparlanca" rebataa, divtdairia. ooounlaaloiia or
other meana are iflerad aa a meana id oooymnsallng tendera who dictate fta purchaae
lo not pay for It. In the case id credit Itfa and credit acddenl

D„ii„.db,Go(5glc

d aiagte-oamptn}/ dominated Sndaatrg and nsmda thm competition tittt yould £w
ttfordMd by iaadtr •ncrv- Aa tfma nofd ahov*, tim mortgegt guaranty liaarano

In 1957, Mottgaga Guaranty mauxanc* coipotatlon t^d loO parcant o£ the marke
vritten by private coavartiea untiJ ccopecitors began suitacing in the early £<
Aa coopfltitorv entarad the laatket, including By ovn coapany, LTnJted Guaranty

lleged by the banM h

mortgage guaranty i.

D„ii„.db,Go(5glc

13. Th» Crilt funottaa AiMimr

ADoOar allsptloo <d tba bank hcOdlic eamf nlM !■ that mortgiffa (unstr
taaarucB !■ so uialagDui to Iha credit funotloD (tf 1mmIIi« mooay, Qial It !■ well wUbin
llielr exUttng tcope al axpeitiea to aogBga lo Ihla icUvlV. Tbl> ■■•enloa mlaiea tha
polat mOrlf Ifaat tha e^nrtlaa needw) lor ImhtIiv la aifcatmHally dttfsreol fron tha
eiqwitlae needed Id write bauranoo ewiB tboufh thara are Booia almLlar criteria

A lendloc tnatlluUao doaa not make loane o& Iha Ibaor]' that Uune loam are
gnlBi ID go iBto iMaiilt, Cradll U axtended only lo Iboaa tndlvlduala or oarporattoaa
that Ihar belb*e wHI par oS Iba debt. CoDlrariwIae, martcaca luaias^ Inaiuaaoe la
wrlttaa go Uw aaaumptlaa that IbeEe wQI ba loaaaa and that the morlsaca guaranlj bunr-
aooa oompaor wfll have to be able to pay ctf loana wUefa ban defaulted. TheraToret 11
la hnportaat b the Inaurla^ funotioa to hava an actuarially aouid reaarrlaf ayatam aod
> taeiraphloally apiaad book d bualaaaa. WbUa moat laodinc inatUutloaa aaocaotrala
hi me particular area << geoKrattblc eivartlae, an Inauranea cdovuqf muat apraad Ita
rtaka teograpblcally lo that It camnl be deebnaled tiy the acoDnnlc condlHaaa bi one
parttoular area. Conaequantly, the functloa of extaodlns credit ia a very different oua
from Hm (uDctloB al biaurtaig agabiat dAult rf credit.

To •ummarlu, diere la no need for entiy of bank boldly compaDlaa Into the
privata mortgage itiaurance field to laaure competitton or to contribute capttal tor evaii-
aioo. Nor do bank holding compaolaa poaaeaa my opeclal aqtartlaa or other aaseta pecu-
liarly adapted or advtible to mort0ge inauranea undarwrlting. Hence, no gain in
cfflclaacy or cooianieDca to the public could be expectad to anaue. Indaad, aa pointed
out abofe, the reUtlanahlii would give rlae to a atroeg Incentive to folat umieceaaaiy

D„ii„.db,Go(5glc

mortgigs bwucance ivm Ota barrow lag public asd would Inrite bMOlubls conflict of
Int^rast iLtiHllDu to Ac datrlmmt </ the mortgapi buuruica Lnchutry. Ae mtiEakAi
cf tba pRst Indicate ttal It Is inportut to nt>lB tte checks sod baUncaa «falch exlat
tocby and which praierve ths kitsgrlly dF [be Induitr;.

F^irtharmore, It claariy would be » nlataks to ■uperlnipoae a eaptlal demaadtds
activity aucb a* mortga^ bwuranee la a *""M"c ijutam *hlch alreaitr hai demniatntad
extrems tramna from capital ifaorlagea.

I want to raltenta b die itrangegt terma Ebat ander exiatliie law, the Fedaial
Reaerve Board haa concludad Oat raortEace guaranty Insurance Is cicaetf rslalad to
banking and presumibly a pennlsiSile activity it bank holding companlaa. In Uils alats-
ment I have pointed out dw dlaad vantages to ae public t< sucb an sntry. "nie imaoiknenli
set forth In aectlon 301 of S. fl would bar luch sntry. We dwrefore atron^y neaamtni
Its approval by die Committee and die Congreai to avert any final ruling by tlia Board
wblch would geoerata confllcta </ Interest and hava aucb an adveres Impact oci ths bome^
buying pidillc and the banking bidustry.

D„ii„.db,Go(5glc

316

Mr. Hbhphill. Concluding, it's my understanding that the House
Subcommittee on Financial Institutions last week rejected language
similar to that proposed in S. 72. However, I have had an opportunity
to examine substitute language which was approved and which would
sharply limit insurance activities of bank holding companies, both as
principal, asent or broker, to credit life and credit disability.

My mitial reaction to this change is it accomplishes our objective.
However, we prefer the language of section 301 of S. 72 which is more
general but unmistakable in its principal thrust of barring bank hold-
ing companies from the infiurance business. I recommend, should the
House bill find its way into conference on S. 71, the banking bill
approved hy the Senate last year, that whatever language is adopted
to curb activities of bank holding companies into nonbanking fields
should also be applicable to other supervised lenders who may be
tempted to extend their activities into nonlending areas. Thank you,
Mr. Chairman.

The Chairkan. Thank you very much, Mr. H^nphill.

The last witness on the panel will be Mr. Bobert Masterton, chair-
man of the Committee on Federal Legislation, National Association
of Mutual Savings Banks.

8TATEHERT OF BOBEBT B. HASTEBTOH, CHAIBMAW, OOHHITTEE
OH FEDEBAL LEaiSLATIOlT, NATIONAL ASSOCIATIOK OT HUTTTAX
8AVIH0S BANKS, ACCOHFANIED BY JAHES J. BUTEBA

Mr. MAeTEBTON. Thank you, Mr. Chairman.

Digitized bvGoO^^IC

■•tiaoul Association

B. ^^, 'nic CoBpetlttoD Id Baoktog Act

Before tbe

Ccmlttec on Beaklna, Houalng and Urban Affairs

United Statee Senate

June 16, 1976

Mr. Cbaiiaan and oaibera of the CoiBlttae, iff naae la Robert R.
KMterton. I sm praeldeut of ttw Maine Savings Bank In Portland, Halna
and chaiman of tbe rmiiill 1 1 1 on Federal Legislation of tbe Katicoal
Association of Kitual Savings Banks. I am scec^^aiilsd todar "V Jaaas J.
Butera, tbe Associate Director of our Haahlngton Office. This Association
ecBMnds the CoSHlttee Chalrasn, Senator ProiMlre, for Introducing S. T2,
the Cco^tltlon In Banking Act, vblch serves as a focal point for these
livortant bearings on the Iqiact of the bank holding coopany noveaent on
tbe nation's banking industry end related lines of ciViBrce.

A acre glance at the rav data on the r^ld grovth of bank
boldlne cCBpanles clearly eHtabllBbeH the need tor a reexaolnatlcn of
tbe federal laui regulating this fom of banking organisation. According
to HtatlBtici coiqillea by tbe Federal Deserve Board, the nunber of registered
bank balding cmqianlea increased froi 63 to 1,912 during the period I966
to 1916; the nunber of banks and brancbes operated increased alnoat ten
tlaes frcai 3,363 to 22,990, and their total deposits multiplied over
thirteen tlaes fro« Wl billion to t35>^ billion during this aanie lO-year
period.!/ According to tbe latest availabl* data, tbe bank holding coqiany
share of doaestic comierclal bank depoalta haa risen to TO. 8 percent.^
Clearly tbe bunk holding cc<q)sny is tbe donlnant font of financial Institu-
tion In the country today.

Digitized bvGoO^^IC

la tb* aavlDBa iMnk Induati?, ve ara particularly coiMemad

about tbe racent attovti by lereral bank holding ca^iales In Maine and

Bev Ht^iblra to acquire a laTlngB bank •ubaldlai?. Ha vtll be discussing

tbls Issue Id sore detail In the course of our testlBOoy.

BACIORWaU AM) OBJECTIVB OT ygpERAL
mOULATIOM OF BAWC HOUIIIG CCMFAHIEB

Although the federal regulation of hank holding cosqwnles was a
Batter of legislation as tarly as 1933, It vas not until the Bank Holding
Co^any Act of 1956 tbat the Congress first established the principal
public policy considerations vbich should pertain Id this area. A. ravleu
of the relevant legislatiTe history Indicates t
with:

1)

2) separation betveen hanks snd other types of

To deal ulth these prohlens, the 19^6 Act required registration
of Biltl-hank holding co^ianles and provided tbat no such cos^any could
acquire another bank vlthout th* prior approTal of the Federal Bessrv*
Board. It further provided that. M • practical Batter, no holding coofiany
could Bake a bank acquisition outside tbe hose state of Its principal
banking subsidiary .iL' With respect to nonbaoklng activities holding
ccopaoles vere limited to those cosvanlei of a 'fliuiaclal, fiduciary, or

insurance nature so closej; related to tbe buBlness of hanking or of

■anaglng or cootrolllng banks as to be a proper Incident thereto."!/

During tbe period 1956 to 1966 the holding cos^aoy share of total
deposits did not sbov any significant sKiuiit of grovtb. After reviewing
the experience gained to date, the Congress did decide la 1966 to Bake certain
changes to tbe Initial Bank Holding Cce^any Act. Insofar as co^etltloo

Digitized bvGoO^^IC

la banklne vu coDcemad, tbe 1966 iMPJiDtB ■>&■ futur* bank Bcqiii*!-

tloQi by holding co^wiisi lubjsct to tbe •lat ataaOaTdj ipplleabla to
bank Bergerm undar tba Bank Hergar Act of 1960.^ Thau itudvda ara.
In tun, aaaeDtlally a raatatoMnt of Sacttoo £ of tba Sbanun ActI/
and Section T of tba ClBjtoD Act.^ nw I966 »■— j— *- did Dot raaddiwaa
tba qvwatloD of pernlailble nonbanklng actlrltlea aloce at that point aueb
activities were atill quite llidted.

Over tbe next fev jaara, hovevar, there occurred a Bailed pro-
liferation of holding ecapany fonutloni with those Involving tbe cooraraloo
of the nation's major banka to one-bank boldlng camfmay status particularly
arousing the consem of Congrea*. Proa 1S66 to June 1968, 201 nev one-bank
holding cdqianiei vera formed, and Tram June 196S to tbe and of 19T0, an
additional 690 ware created. 2/ One reason for tba gro¥tb vaa tba fact that
one-bank boldlng coavanlea vera at tbla tins under no atatutoiy Ualtatloos
regarding tba types of nonbanking ectlTlties nblcb could be undartakan on
an Interstate basis. Another major reason cited bgr a Federal Reserve staff
study for tba rapid grovth of one-bank holding co^anles vaa the "ability
to use the holding company as ■ means of ratalng funds free froa constraint
of Regulation 4 Interest rate ceilings. "12/

To rectify tbls iltuatlon tba Congraas acted first In 1969 to
grant the Federal Reserre and tba FDIC flexible authority to define tba
obligation! of bank affiliates. Including those of a parent holding
coqiany, as deposits for purposes of interest rate ceilings and reserve
requtraaents.ll/ Htth regard to tba nonbanking actirltlea of one-bank
holding ecBpanles, tbe Congress addreaaed this In 19T0 by ending the

Digitized bvGoO^^IC

emptlaii to tbe Bcnk Holding C<agian]r Act thkt oae-liMdE holding
cc^inivs had rajored alnce 1936. li/

There na another BBjor change brought about by the 1970
lasndBeDtB In the area of Donbanklue actlvitlea, and thla action haa
generally been Interpreted as llberaliitng the range of closely related
activities vhlch the Federal Reaerre Board could authorlu bank holding
ci^wniea to engage In. Specifically, tba 19T0 anendDeiita asfillfled the
itaadards for determining that a particular activity la ao "cloaely
related to banking aa to he a proper Incident thereto," by deleting the
llBltation to cca^anlea of a "financial, fiduciary or Inaurance nature,"
vhlle at the aeme tloe providing that any aucb activity muBt "reasonably
be azpaeted to produce benefits to the public."!!/

nw 19T0 amendment g vere the last najor change to the Bank
biding Cea^aoy Act, although Congresa was forced ooce again in ISTb to
leal Hltb the related problea of bank holding coo^anles Issuing debt
obligBtlona In excess of federal interest rate cootrola i^iplicable to tbeir
banking subsidlarlea. Specific legislation vas necessitated by the Federal
Reserve Board's stated laability to regulate tbc floating rate notes of
Citicorp and other bank holding coiqianlea because tbe proceeds of the note
sales were purportedly being used outside their banking subsidiaries. -=-/
To resolve thla, tbe Congress acted in 19711 to broaden the authority of
t^tae agencies to claaalfy obllgatlooB of bank affiltatea as depoalta
"regardless of tba use of tbe proceeds."!!/

He have chronicled these bank holding ccoqiany developsKnts to
deBcnBtrata that notwlthstandlag several amendaeotB over tbe years, the

D„ii„.db,Go(5glc

bulc thrust and overall abJecttTs of tb« foderal ragulktlOD of bank
holding coqioDiaB bss not changed. Each time the Act has been rsrlsved
■nd Bodlfled the ConereHH has reinforced the coadtBent to the tire
principal goala of preaenrlng eoBpetltlon In banklne and pnsKitlaB
cc^petltion In related □□□'baziklng areaa.

Ue reapectfully BUtolt that Id admlDisterlog tbe Bank Holding
CdVaDy Act, tbe Federal Reaerve Board baa in lunjr inatancea taken action
inconsistent vlth tbe CnngreaaioQaJ goals vhlcb we have Just outlined.
Tha result baa been that bank holding coiqianles have been pcraltted to
engage in both banking and nonbanklng activities vhlch have not aerred the
best public Interest. 1 vould nov like to dlscuaa certain of these areaa
In detail before rect^oendicg specific aspects of the present statute vhlch
abould be tightened up so as to reduce or eliminate the prospect of
continued pro-holding coqiao]' Inplementatlon by tbe adninlsterlng ageocr
In tbs years ahead.

1. Acmilaltlon of Savings Banks by Boldlna CoBpanlea
Turning first to the question of oo^>etltlon In banking, the
bulk of tbe studies co^leted thus far suggest that bank holding ccoqpeny
activity has had little systenatlc effect on oarket concentration and hence
no measurable livact on banking conpetitlon pro or con.lE/ But as vaa
pointed out by tbe Federal Reserve Cbalrnan C. wllllaa Killer in teitlaony
before this Conlttee on »tay 2;, 19TS, the banking environment has become
considerably more coo^etltlve In receot years. ^ We vould contend that

Digitized bvGoO^^IC

■oat of thl* iDcramacd caqpstltioD at tba retail lavvl hu eoae about aa
thi ranilt of th* participation ^ flnwcial Instltutlona other than
eo^Fclal bank*. Bare vo are reftTrlng, for wUivl*> to MOH account!,
vfalcli vara Inaugurated tqr aarlnga banki In >«v toalanaj off-prsBlaa
•lactrcole banklnc, vblcb naa started by a aailnga and loan aiaoclatlon In
tba llldMBt; talapbooe bill p^ng aerrlcea, uhleb vara flrat Buccaaafully
maikatad Igr aaringi bankaj credit udIoq abare drafti; aod variable rata

nnia, w* are auHeatliis tbat utilla retail banking haa becoae Bora
cc^etitive. It baa not beea tba teiolt of holding eamfaar aetlTlt7 but ,
ratbar. It baa bean Increased participation tgr tbrlft Inttltutlona In (uch
areaa aa soniuasr lending, tbird party tranatera, etc. On tbla particular
point ■« bare attached to our teitlKmn aa Btblblt A, a Wall fltraat Journal
article indicating tba eooxBer beoafiti brought about tgr Increased
eovatition In mj own state of Haloe as a result of the revlalon to our
Banking Coda granting conaunar lending povera to aa-rlnga banks and savlngi
and loan associations.

For the very reaaoo that covetltlon In banking li coalng Id
large part frCB tba tbrlft induatry, vb sutalt that tbls Ce^ttee and tba
CoDgraaa should share our concern orar the fact that bank holding eo^aoiea
are evidencing increased Interest la acquiring their tbrlft cc^^ltora and
Id certain other vajrs attB^tlng to utilise the holding coq^any devle* to
gain unfair aarkat advantages over those Institution! specialising in boas
■ortgaga finance.

Digitized bvGoO^^IC

Althougb tba great attjorlty of BBvlngB baaki tra >utual
(oonatock) iottitutlonB, tbora axlsti authority Id the atatt* of Malna aad
lev Ha^ahlrc for alollar iaatltutlon* to be organlied in atock font.
Six such iDBtttutloaa are nov ind have for Boae tiae been opeTattne In
Bev Haa^Btilra. Under currant FDIC Interoat rate control resulatlooa,
atock aavinga banka cerate under the lane rate atructure peisitted
nutuaJ. aarlnsa backi. I.e., tlie; offer a one-viarter percent differential
on BOat depoiit accounts. ^^ Because a atock sBTlnBi bank can offer tba
Intereat rate differential, there hare been ■•reral attaapta by bank
holding covaaiea In Maine and lev Haapahlre to obtain stock Ba*IngB bank
charters and operate the aaTings bank aubsidiarlea on tbe ine banking
praolsea aa tbelr c<mercl«l aubaldlarlea.i^

These applteatlona were oppoaed tqr this Industry and aeTeral
otber intereated parties during the hearings held before tbe atate banking
departaenti last year. While the teat casea vere turned doun by the
banking departaenta in both states, there ia no indication that the ardor
of tbe holding eoa^any actlvlats to sove in on th« thrift industry haa
Abated. The decisions raaehad In these two particular cases are tqr no
■eaaa the final diaposltlon of the aany loportant public policy queatlona
InvolTed. The Maine Sup»r In t anient of Banking recently stated that, "Mr
dectalon on Caaco's application doesn't Bean that t vould reject h bank
holding co^iany's application for a stock thrift In another comeunlty . ■ ■ "^2/
and tbe )l«v Eai^ahire decision Is being appealed. Moreover, a Btmilar
application for a stock thrift institution has been filed and is currently
being beard Id tbe state of Rhode Island.

Digitized bvGoO^^IC

Sbould an ^plication for a thrift Inetitutlon sUbaldlary b>
■pprored at the statB level. It muld tben be i^ to the Padenl HcBarre
Boud to grant final qiproval hy detendnios lAethar opantlne a thrift
iBititutlOQ la a psralaalbl* holding toa^anj actlrlt/. Since tbs Board
ha« already detaialnWl that operating a savlngi ban^/ and. Id a ■•parat*
action, that operatliv a aavlagB and loon BBiaciatlon^ are "cloialy
related to banking," the aole reaainlng queetlon to be decided ll the
so-called "public benefita" teat.

In our rleu, thia question Is of auch arerrldine Iiqiortanca that
the Congreaa and not the Federal Reaerve ehould sake the daterBlnation .
Looking orer the record, the Federal Reaerve Board haa never seriously
enforced tha statutory requlrensnt that th« acquisition of oonbanklng
cosQanieB aust result, in all cases, in public benefits, but has Instead
appeared willing to accept the ^o fonaa recitation of anticipated public
benefits. For aiaBpls, in connection dth ^ipllcatlona by bank holding
coapanles to engage Id both nortgage banking and consuaer finance, claiaa
have been Bad* that granting the appllcatlCHis vould yield a variety of
public beneflta. Sufficient tlas bss el^ised since Bortgage banking and con-
suaer financing vere added to the list of pemiselble nonbanklng activities
ao as to permit these clalns to be evaluated on the baali of actual
experience. According to studies prepared by the staff of the Board of
Governors, the "public beneflta" clalae of the bank holding co^anle* have
not been substantiated in either case.

Mortgage banking was first placed on the list of permissible
bank holding coa^any activities In 1971,^ and since that time bank holding
cavinies have acquired numeroue mortgage banking firms. Including many of
the nation's largest. The study conducted by Stephen A. Rhoades, a itsff

D„ii„.db,Go(5glc

ecoDonlot vlth tha Board, compmrei the perforaaoc* of ortalD nortga^

banUng flnu vblch hkd Affiliated with buik holding eo(qiaiile> vlth ones

which liad not. The lumBiy and eoneluaioni of tfae itudy were as follows:

The two sets of regreation results presentsd in this paper
indicate that mortgage bankera amilated nith a bank holding
■company <i'' n'3t grov faster than nonaffiliated mortgage bankera
and ir. ■ :■-■-■- -',-■' -.. '■■-.: l.anl(B do DOt Increaae cr decrease

the;- -- OS a result of afflllBtion with

a ai 1 ' ^ taken together suggest that

hank holding company acqulsitlona of mortgage bankers do not
IncreaBe tl» flow of funds to the nortgage market and, therefore,
should not generally be viewed as a public beneflt.ilL'

Ad ersQ aore detailed study vu conducted of the conauaer finance
bualnesB, which the Board also included on tbe inlttkl liat of permlssibl*
nonhanUnc actlvltteB for hank holding co^anles in 1971. i^ This study
analysed a savla of affiliated and independent consumer finance conpanles
and convared them to one anotber as well as co^iarlDg the performance of the
affiliated co^wnles hefore and after tbelr acqulaltlon by holding companies.
The results Indicated that prior to their afftltatlon, the consumer finance
cc^anies performed no differently tban Independent co^ianiea; after affilia-
tion, however, the testing revealed that these coapanles had higher Interest
and debt eipanae, lower proflta, greater leverage and did not even beoeflt
from lower operating expenses than Independent companies, Tbe authors'
sumary of their study Is particulsrly pointed:

It must be concluded that this studjr^ does not confirm
the orguaenta of /bank holding companies/ that their entry
into the coDSuuer'Vl nance induatry will yield numeroua
public benefits To the contrary, results Indicate poorer
perro(»ance by affiliates with respect to profits, leverage,
and Interest expCDSes.i"/

Given the Board's acccDBOdating attitude over the years toward the

expansion of holding cos^any activities, ve urge the Congress in the

strongest possible terms not to leave the question of whether a bank holding

Digitized bvGoO^^IC

etrnptny Ibould te paialttad to ora a iBrlngi Iwiik In the hands of tb*

adaloltterlng agancr. Indead, oc the related question of wbetber
oparatlng a aavlBgi and loan association Is a pei-alsslble activity, the
Bow4 Itaelf baa aafced tbe Rongrvaa for precisely auch guidance.^

Of eouraa. It would be our position that coHMrclal bank
boldlnc cosvanlaa should not t>« peniitt«d to ohd or operate a thrift
institution of any kind on tbe grounds that acquisitions of ttal* sort
would eventually erode the coapetltln enrlroDBent in vhlch deposltoiy
Institutions do bualneaa today. Another potential problen Is that
opening up the thrift Industry to bank holding ee^aoy acquisition vould
give additional lapetos to the trend already davaloplng of Bitual-to-
Btock canreraiOBS of such Institutions.

S. Erasloo of Regulation q

Rotwlthatandlng the fact that bank holding co^ianles have been
thwarted thua far in their efforts to son in on the thrift induatry
directly, the holding cC^Moy device haa allowed then to Indirectly under-
cut their cc^atitors by issuing depoalt-llka Instruaents at interest
ratea excaedlng that which can be paid by thrift Inatitutlona. An noted
at tba outaet of our testlKmy, the ability to issue a so-called "thrift
csrtificate" with an Interest rate and other terva oore liberal than that
parBltted aeaber banks under Begulatioo Q, was one of the prise factors
behind the rapid growth of back holding eoivanlea In the late 1960's. In
1969 and I973/I'. during periods of hl^ Interest rates, nuMnua bank
holding coapsolea resorted to this fonn of raising funds and racantly, aa
open Market rates have risen again to a level exceeding the ceilings
authorised for deposits under federal Interest rate cootrola for alMlar
■Bturltlasi these types of note Issues have begun to reappear.^S/ Although

D„ii„.db,Go(5glc

Coi^reBS tuH tvlee attevtad to put u end to Ragulatloii Q aruloDm of
thla aort, tbe probtea peralats to tbls dajr for the bulc reuoo tbvt tha
■tatute InvDlvad gnnt* dlacretlooux eDforceaent •utborlty to tbe Pedaral
Raserv* Board, and ttaa Board bas nerar exarclaod Ita autboritjr.

In order to underatand tbe aanner In vblcb bank boldlnc eoapanieB
and tbetr aonbank aubaidlaries are evadins Resulatloa Q, It le firat
neoeaaary to rCTlav brlafly tha regulatlona vplicable to tbe deposit* and
nondeposit obligations of eo^rclal banks. Dspoalts in awiunts of less
tban $100,000 ara, of courae, subject to Regulation <1 Inaofar aa neaber
banks arc eoncemad and, for noiiBenber Inaurad banks, tbe FDIC baa an
Identical ragulatton.^ Depoalta io excess of llOO.OOO are not regulated
as Is also the case vith sbort-tero borrovtnga bf banks in denoninations of
1100,000 or Bore — cc^nly referred to aa conerciaJ piver.

However, banks are subject to certaio regulatory reatralnta vlieD
It cciKB to ralaing capital tbrough longer teis notes and other oondsposlt
obltgatioaa undertakeo for the purpose of obtaining funda to be used in
tbe banking buainess. These obllgationa generally take tba fon of deben-
tures aubordioata to the clalBS of depositors and, vhen issued In aBounta
of less tban tloo.oOO.nust oeet the follovlng conditions In order to STOid
bein« treated as depoaita for purposes of Interest rate ceilings;
an original maturity of at leaat 7 years ;
s BiniBUB deoominatlon of 1500;

advance approval b; tbe appropriate federal
bank aupervlaory agency; and

an inaured depoait.J

Returning dov to tbe authority of bank holding co^wnles and thai
nonbank subsidlariea to Issue debt obllgationa. It should first be noted

Digitized bvGoO^^IC

that Section k of the Bank Holding Cmqiaiiy Act prorldes that ■ holding

coapBDJf may engage in the activity of:

"■ ■ ■ banking or of DanaglDg or coatrolllDg banks
or other ■ubaldlarleB authorlied under thla chapter . "21/

Tbie sale of lecurltiei to obtain funds for doing buaineag la

clearly a basic function of oanaging a subsidiary ciMpany and thus It

follovs that a bank holding company oay borroH funds on either a long'tem

or short-tern baBls In the aame manner permitted any nonbanking Bubaldlary.

The issuance of thrift type notes tv finance co^anles. Industrial

(tion-ls Plan) bonks, etc.. Is a fairly ccaaoo practice, and since operating

lucb ccapanles is a pemlssible activity for bank holding coBqianles,!^/

there can be little qusstlon, at least Insofar as the Bank Holding Coii;>Bny

Act Is concerned, that a holding cosfiany is permitted to solicit funds

through SBall denomination certificates. Nonbanking subsidiaries of bank

regulatory Impedlaents as to their short-term borrovlng suthority-

Aa noted, the Congreaa has attes^ited to plug this loophole by
granting the Federal Reserve Board and the FDIC authority to classify the
obligations of holding cct^ianiea and their nonbank Bubsldlariea sa bank
deposits for purposes of interest rate ceilings and reserve requirements.
But neither the Board nor the FDIC have deemed it necessary to auend their
regulations to Inplement this suthority on a formal basis. On balance, one
■1st, therefore, conclude that the current state of the law is Inadequate
to prevent bank holding eoqianles from Issuing "thrift certificates" in
eicees of Regulation Q ceilings. The problem Is best sumwd up In the
n^lemental restsrka of Congressnsn James N. Hanley set forth In the House

D„ii„.db,Go(5glc

Report Bcco^anying tba 19T>i leglalatlan:

"H.R. i;92B, u reported ty the Comnlttee od Baokine
■od CurreDC7, obvloualy doe* not rasolve tbe question
coafrontlng the Ccoalttoe ebout vbat to do to cbaek the
circuBveiitloa of RegulOitlan Q by in&Jor book holding co^BiiIeB.

"The BDeiidiient adds more discretion to the discretion
already posseBsed hjr the Federal Reserve Board. . ■ . "33/

In Rovasber of last year vhen Citicorp proposed its latest

issuance of "thrift certificates," this ASBOclatloo filed a fomal protest

vlth the Federal Resenre Board. In addition to seeiiing to have tbis

particular note issue restrained, MtCE reiiueated the Board to establish a

regulatory schene for handling Bimilar type Issues In the future. Altbougb

the Federal Reaerre Board declined to stop the note issue, it did finally

a^ree, in a letter dated Decenber 2T, 19TT, to undertake fonul ruleaaklne

on this long-standing problea vlth a vlev tovard establishing regulatory

procedures to be followed by bank holding cog^anles proposing to sell Email

denonlnation debt obligations to the public. Thus ue were rery dls^ipointed

to leam that the Board of Governors reversed this decision on Wednesday,

Hay 31. 1978, by voting to reject a staff proposal to solicit public coiment

on guidelines for the Issuance of thrift notes by bank holding coiqianleB.

3. Eraalon of Interstate Branehlna Prohibitions

The use of the bank holding coapauy form of organization to evade

restrictions on branch banking vlthln a given state is, of course, a veil

established practice. Id certain savings bank states, such as Hen Haoqiahlre

and Minnesota, the ability of commercial bonk holding companies to establish

nev banking Eubsldisries does give then a conpetltlve advantage, but vhat

has us particularly coneemed is the recent use of the holding company

device by a Rhode Island banking Institution to eitabllah an FDIC-insured

D„ii„.db,Go(5glc

depoBltOTT tnstltution la tba state of KKaa&cfauBetta . nili has come about
as a result of a quirk In the law which defineB a "tank" for purposee of the
Federal Deposit Insunuice Actl!*/ differently and inre broadly than the tena
Is defined In the Bank Holdlns Cc^uny Act.^

Aa alluded to at the outsat of our testlBony, a bank holding
cc^paoT la precluded fron maklne a bank acquisition In another state unless
there Is a reciprocal branching arrangeBent.uhlch does not exist betveen
any states at this tlme.^ The acquisition of two KorriH Plan banks In
Hassachl^ettfl b7 a Rhode Island based bank holding company vas initiated
by filing an application to engage In a nonbanklng actlTlty, nsaely.
Iterating aii industrial loan coiqiany, which la already on the penaissible
list of holding cospanr activities. After the application vas approved ^
the Federal Reaerre Board as a nonbank acquisition,^' the holding coapaay
then turned around and applied to the FDIC for deposit Insurance for the
iastltutioQS Involved on the grounds that they were banks. Hot only was
toposit insurance granted to these Institutions ,M/ but the FDIC bestowed
■ further windfall by claaslfying the Itorrls Flan banks as thrift institutions
for purposea of eatabllahlng their maxiauiii Interest rate celltngi-^Z' We
are of the view that bank holding coi^anles should not be pemltted to
exploit the current state of the law to establish interstate branching
netwoAs of this sort-
COBCmSIOB

In the courae of thia testiKmy, ve have attested to highlight
the Bajor problems for the thrift Industry caused by bank holding conpaniea.
Ovir industry has consistently opposed the past practices of holding
copanies to utilise their foni of corporate organlcatlon to evade federal

D„ii„.db,Go(5glc

intereat rate control withorlty, BJid we «re eapBclally concerned about the
latest artifice iiblch is being «Bploir«d to •cblave tblB eoal> I.e., the
acquisition of a BaTlagB bank or other thrift Institution Bubsidlarr- Co
contested issues tbe Federal Reserve Board, as the a^dnliterlng a^eDcy of
tbe Bank Holding Coqwiy Act, has repeatedly failed to give adequate
consideration to tte vievs prssented by this iodustry and other cfa^etltora
of the bank holding conpanles. For this reason. It Is cur conclusion that
tbe Congress Bust reduce the smouot of discretion accorded the Federal
Reserve by the Bank Bolding Covaoy Act and related banking statutes.
E^cifically, ve support changes vblch would:

1. prohibit bank holding cct^anies and their nonbank
aubsidiarj frcei iasulag thrift certificates with
interest rates in excess of those psraltted aatfier
banks under Regulation Q;

2. prohibit bsnk holding co^anies froB operating a
savings bank; and

3. redefine tte tera "bank" to achieve a uniformity
betvcen the Federal Deposit Insurance Act and the
Bank Holding Conpany Act.

As a final ^tter ve Hould like to suggest a procedural change to

that section of tbe Bank Holding Co^any Act vbicb liatt* the right of a

party to intervane in a holding coqiany q^llcation and request a public

bearing to those who would be "a coi^etltor of the applicant." Tbs effect

of this language is to precli*le trade associations and other interested

parties who are oot actual coqietttorB fron participating fully In adalDis-

trative procedures conducted by the Federal Reserve Board. In a Board action

taken Just lost BOnth, for ekaople, a nonprofit, public interest law firs

attested to Intervene in an application fay a bank bolding ccopany to engage

in tbe consiaer flnanc* busineBS> and the Board rejected the request for

lack of standing even though this fin represented nany lov-inccae
persons who would be affected If the qipllcation were granted. ^^^ We would
si^ly suggest that this limiting language be deleted frooi the Act.

This concludes our testlisony on S. 72, I would be pleased to
answer any questions which the Coiadttse BeDbers Bay have.

D„ii„.db,Go(5glc

Auto Loan Fees Plunge in 2 Midne fmms """t a
As Snudl Savings Bank Sparks Rate War

Wi. ■ T dfc» Imp ■■iipiHii

dM mm K M ( bBfMt -n* <Mt. "

(V KW MM M> IMtW NMVMI

laMtjlwn
liDMnM,ll1
MartMlar

■'■ iiM^r pnUc u» fci ■ car IB

-)«■■ taSntafM aw ■«•■ iM yn-B
taM a li M tti ndta finMWf >" —
kBI ntt « IJM ni Om iHM —V

Cainl llilBtl nl* nr m wvaNv

g| 1 nan AipM mtap buk. nm 0»

HkutHOIMVkiBgii

xneKiol WiLU Stret Journal
pi"**" HondKr, Juuarr 23

I piTti CDmuaa Sivlnii.

II. And ODdUB tlTUIl luy

D„il„.db,G00'

i^onsumer Finonce Fimts Beginning to Offer ■ ■
IVIore High Role Certifiinles to lodividuols

D„ii„.db,Go(5glc

UTItnAL ASSOCIATION OF HOTUAL SAVIIG6 BAKKB

Footnotai to StstsBBnt before the

CoMilttee OD Benklng, Hounlng and Urbui Affalra

United St»te Semite

June 16, 19TS

; AdiiubI Bt«tl»tic«l Mgert. Federal Besem Board, 19Tfi, p. 311.

2/ Crnthla A. Olaasaao and Robert A. BlseDbala, "Bank Boldtns Caqwolet
and Conemtratlon of Baaklnc and Plnaoclal ReaoureeB: A Bevlev,"
TMaral Bnem Staff Studr. April, 19T6.

3/ 8—. £,•£■. H. Rept. SU-fiO?, Sbtb Cone., iBt Seas., p. 11.

y TO Stat. 13l>, 12 U.S.C. llMStd].

5/ TO Btat. 135, 12 U.S.C. Il»3(e)(8).

£/ 80 Stat. 237. 12 U.S.C. llM2[c).

y 15 U.S.C, le.

S/ IS U.S.C. 118.
2/

U/ 83 Stat. 3Tli 12 U.S.C. Hli6l,ie2e(e).

12/ 81| Stat. 1T£0i 12 U.B.C. Il81>l(a).

13/ SU Stat. 1T60; 12 U.S.C. •l81i3(o)(8)

]>/ Letter of Ceorge U. Mitchell to Chalman of the Securltlet
CoanlailoQ (July 2, l9T't).

iS/ 88 Stat. 1557, 12 U.8.C. MliSl, 1828(8).

StatensBt of G. Vllllam Miller, Chalman of the Federal Beaerre
Board, before the Coonlttee on Banking. Boualng and Urban Affair*,
95th Con«., 2nd S*aa. , Hay 25, 19T6.

18/ FDIC Reg. 329.7(a).

Digitized bvGoO^^IC

E.^. Appllc&tton of CkicD-Sortbam Corporation before tb* Burea
of Bulking, DepartMnt of BusincBB Begulatlon of the State of H
filed June 13, 19TT-

59 Savlnna Bwik JouroaJ, So. 3, p. l"* (>tay, 1978).

ApplicBttoD of Profile Bankshere 6l fH Ball. 901 (1975).

22/ 36 I.E. 107771 raB Beg. Y, laSS.lifaXl).

2k/ Stephen A. Rhoades, "The Bffeet of Bank-Boiaing Co^enj AcquiattloDa
of Hortgige Benkers on Mortgage Lending ActlTity," W Joum. of Bue.
aUl., 3l>a (July, 1975).

SJ/ 36 F.R. 10777i FHB Reg. Y, I225.1'{al(l).

26/ Stephen A. Rhoades and Gregory E. Booaar, "nie Performance of Bank
Holding Conpan; Affiliated Finance Con^anleB (auBnarlied In 63 FR
Bull. 715 (197T)).

21/ Application of D.H. Baldirtn Co., 63 FB Bull. S80 (1976).

28/ Exhibit B.

2^/ FPIC Heg. 1329.6,

30/ FRB, Reg. Q, ■217.1(r)i gSS. Iw HlIC Reg. a329.10 for an identical

regulation applicable to insured nonmenber banks including Butual
savlags banks.

Jl/ 12 U.S. C. ll8I<3(a)(S}(A)i (egphaals added).

J2/ FRB Reg. 1, S225.Ii(a}(2).

^ H. Bept. 93-1259, 93rd Cong., 2nd Eess., p. 19.

3i^ 12 U.S.C. llBl3(e).

J2/ 12 U.S.C. I81il(c).

26/ SuErai.U.

22/ Application of Old Stone Corporation, Ul PR 52531 (Bov. 30, 1976),

21/ FDIC PR-I19-77.

22/ '■2 FR 21101 (April 25, 1977).

to/ FHB Order ApprOTing Application of ManufacturerB Hano»er Corp. ,

Digitized bvGoO^^IC

The Chaibhan. Thank you very much. As I say, your statements will
be printed in full in the record.

Mr. Hemphill, in your statement you say that it is argued
that the holding company entry into the private mortgage or insurance
business would bring increased capitalization to that industry.

Sow I'm curious about that argument. The facts appear to Be just
exactly the opposite. Chairman Bums and Chairman Miller, the
former and present chairmen of the Federal Reserve Board, both said
that the banking industry is undercapitalized and I think the evidence
is overwhelming that it is undercapitalized, particularly the big banks.

If the rule of thumb is that they ought to have $8 in capital for
every $100 in assets, they average m the big banks less than $5 ; the
biggest bank in the country has only $3, and even the smaller banks
have less than that rule of thumb.

Xow there's been a reluctance to go to the market for capital in that
industry, in contrast to your industry. We know that bank holding
company, mortgage banking and finance subsidiaries are more poorly
capitalized, less capitalized than their competitors. So how in the world
can you ai^e that at this time banks are in a position to fortify the
capital of other industries ?

Mr. Hemphill. Mr. Chairman, I did not intend for this statement to
suggest that. The additional capital argument is one which has been
advanced by bank holding companies for years. This was one of their
principal arguments in the 1974 case and I attempted in my statement
simply to refute the argument.

The Chairman. So you say their argument is they will improve the
capitalization and you disagree with that!

Mr. HEMpniLL, I disagree with it. I say it is alleged by the bank
holding companies. It is not my suggestion.

The Chairman. I thought that might be the case but I wanted to be
sure because I think this is one of the strong arguments in favor of
the bill and in favor of preventing this kind of entry, that they are
already undercapitalized and there's no way they can improve their
capitalization elsewhere.

Mr. Hemphill. I said that in 1974 to the Federal Reserve Board and
I'm saying it recently to the Home Loan Bank Board, that the mort-
gage insurance industry is very capital intensive and that permitting
an institutional

The Chairman. Ijet me just interrupt. What was the Federal
Reserve's response in 1974 ?

Mr. Hemphill, In 1974, they said, "No; not at this time," but they
found it

The Chairman. "No" what!

Mr. Hemphill. No ; they could not enter at that time — "at this time"
was the finding in 1974. The door was not closed forever. It was
slammed shut at the time but it was not locked at that time.

The Chairman. Now, Mr. Farrer, incidentally, I'm delighted with
your excellent documentation of the competition in your industry.
You point out the ease of entry and exit, and an enormous number of
competitors. I think everybody who's got eyes to see knows that your
industry is tremendously competitive at the present time. Any addi-
tional competition from the banks would be a position in my view of
unfair competition because they have advantages tliat you don't have.

Digitized bvGoO^^IC

In your statement you say that you have documentation of undue
pressure being exerted upon would-be borrowers and listers of prop-
erty to deal with banks. Can you give us some details on this^ Are
banks tying the use of their credit facilities to the sale of real estate
activities and, if so, how widespread is this practice?

Mr. Farrer. Well, we specifically are documenting it in the State
of Iowa because there they seem to be very blatant about it. To ap-
proach it from the standpoint of the real estate commissioner him-
self, if the banker wants a real estate license, certainly his character
and quality and references would be such that the Division of Real
Estate would have to issue him a license. So he's got an ease of entry
into my business.

The Chairman, Can you give us that documentation for the record!

Mr, Farreb. Yes.

The Chaihuan. That Iowa documentation would be very helpful.

Mr. Farrer. The problem arises that then there comes a time for
extension of credit to one of my customers because he then at that point
can either directly or in an implied innuendo say, "I have a real estate
license and therefore as a requirement to extend this credit I desire
that you purchase this piece of property from me."

We have some specific cases, affidavits signed by people that this
actually happened to them in the State of Iowa,

Now the problem is. of course, without the presence of the credit
making it impossible for the buyer to buy. he had no alternative but
to accept the services of the bank, not only as a real estate agent but
also as a lender in advance of credit.

The other concern on the part of the industry is that to extend that
favor at that time that it might be to the detriment of the public be-
cause at some future time if that loan were ever to get into default
that I, as the borrower, would also want to get back and get another
favor from that same banker because after all he's the one that helped
me to get into trouble.

The Chairman. Mr. Hemphill and Mr. Masterton. both of you
make, I think, a very eood point in saying that the Fed has denied
acquisition of bank holding companies of mortgage insurers, savings
banks, and savings and loan associations in a wav that leaves it open
to the Fed to permit such acquisitions in the future. The Fed has
essentially said their activities are closely related to banking, but they
are not convinced that sufficient public benefits would result at this
time.

Now, my question — and I'll ask Mr. Masterton first and then
Mr, Hemphill to comment — in my view, the Fed has put itself in a
position to make decisions that properly belong with the Congress.
To my knowledge. Congress has never sanctioned the takeover of the
thrift industry by the commercial banks.

Is it correct to characterize your position as favoring S. 72 because
it would merely give the particular current Fed nilinps a force of
law?

Mr. Masterton. Yes. Senator, it is. and we would request that the
final legislation include the specific exemption prohibitine the acqui-
sition of thrift institutions by the bank holding companies. I believe
that the Federal Reserve in 1976, in the Bnldu-in case, stated that it
also felt that had the Congress intended the acquisition, it would have
specifically directed it, and we feel that the Bnldmn case specifically
seeks from the Congress direction on the acquisition question.

.izoj.vCoO^^lc

237

The Chairman. Mr. Hemphill.

Mr. Hemphill. Mr. Chairman, let me comment briefly. Just as
mortgage insurers are not permitted to make loans — and we think
(liat IS proper — the mortgage insurers take the position that the
obvious conflict of interest should preclude permission of lenders to
become mortgage insurers. I don't think it's in anybody's interest —
the public interest or in the interest of the banks or the savings and
loans.

The Chairman. Now, assuming the Fed would change its mind and
permit bank holding company entry into the thrift industry, which
I don't believe even the present bank holding company law sanctions,
could you. Mr. Hemphill, give us the dimensions of the outcome in
terms of the relative size of the industries, who would acquire whom
and the resulting effect on our economy ?

Mr, Hemphill. You might better address that question to someone
representing the thrift industry. I can respond to you on mortgage
insurers if you want me to do that.

The Chairman, All right.

Mr. Hemphill. I should say that only the very large bank holding
companies would attempt to enter the mortgage insurance field on a
national basis. It is capital intensive, and I think a bank holding com-
pany which moves into the national field would be that group, I
should think that there perhaps would be acquisitions attempted
rather than de novo entiy. It would take a large accumulation of
capital then and in the future to operate effectively on a national
basis. So I think that there would not be a mass movement by all
bank holding companies to enter the national market, but I think
you would see some initially in the large ones. Following that, I
think you would then see creation of captive mortgage insurers by
regional bank holding companies. Those would be small, very small,
insurance companies, and they would receive both the business com-
ing off paper originated by the particular bank holding system and
from otner lenders. I think it would take a number of years for this
to happen ; I would think on the order of H years perhaps.

If it is permitted by the Fed, just as if the Home Loan Bank Board
permits S, & L.'s, I think we would eventually see a number of small
capitive companies, insurance companied, owned by large units or by
combinations of units.

The Chairman, Let me ask you. Mr. Masterton, as far as the mutual
savings banks are concerned. I'll state the question quickly again.
Assuming the Fed would change its mind and permit bank holding
company entry into the thrift industry, give us the dimensions of the
outcome in terms of the relative size of the industries and who would
acquire whom and so forth.

Mr. Masterton. Senator, I cannot, and we have not studied the
impact on the national level, but there are two specific States in which
attempts have occurred in the last 12 months, and if they had been
successful or if they are sucessful in their appeals at the State court
level and upheld by the Federal Reserve, it would be the beginning of
a very major shift in acquiring of those assets. The specifics of the two
cases may give you some perspective for proiecting nationally.

In Maine, the largest single banking entity, the Casco Northern
Bank and Holding Company, was the applicant to form and acquire
a stock savings bank. Another banking holding company testified
they were opposed to the move, but if Casco were approved it would

be necessary for them to also take such a move, the reason being that
Casco then would have circumvented Regulation Q and be in very
commanding positions with 56 branches statewide vis a vis other
commercial Minks. This would have forced literally the six largest
commercial banking entities which control 90 percent of the State's
commericial banking resources into the business and since they have
already circumvented the State branching law over the past decade
and have a statewide distribution they would be in a veir commanding
position vis a vis other financial institutions because of the convenience
of the services the consumer requires.

In the State of New Hampshire, the final decision of the regulatoir
authorities there came down on the point that it would not be possible
for all of the commercial banks to acquire or form stock thrifts subsid-
iaries. Theiefore, the circumvention of interest regulation would be
uneven and inequitable. The net result, if the application had been
granted, would be a major structural change withm that State of total
banking resources.

So I tliink that both of those cases — and we would be very happy to
fumisli both decisions to your staff — clearly outline the kinds of prob-
lems and the scenario that could occur on the naticmal level. If it does
occur, we hold that there would probably be a major shift in banking
resources.

Tie CiiAiRKAN-. That's a very helpful response.

Mr. Farrer, you say that the Federal Reserve is permitting bank
holding companies to engage in leasing of real and personal property.
I'm familiar with the banks and bank holding companies auto leasing
activities, I have met with the auto people in Milwaukee.

Can you give the committee a better idea of bank holding company
involvement in leasing real estate? Which banking holding companies
are involved nnd the activity they engage in and the ultimate effect on
the market ?

Mr. Farreh. I didn't bring that information with me, but we would
be happy to provide it. We are not talking just about the leasing of
real estjite. Tliey have computer service leasing and automobile leasing
and these other kinds of activity.

The Chaihman, I'd like to have that detailed as thoroughly as
possible because that's an excellent point. That would greatly
strengthen our bill.

Mr. Hemphill, you make a very convincing case for prohibiting
hank holding company entry into the private mortgage business.
Nevertlioless, bank Holding companies and even the Justice Depart-
ment, to some extent, argue that bank holding company entry into
nonbank fields would have a procompetitive effect. All of us are
proeomi>otition. Everybody argues that his position would favor
competition.

How do you answer the argument that allowing bank holding com-
panies into private mortgage insurance would have a procompetitive
effect! What's your answer! After all. all of us are really interested in
serving the public and having, especially these days with inflation
what it is, having competition the great regulator of pricing in our
free enterprifio system effective. So what is your response ?

Mr. Hrmpiiill. Obviously, nobody can oppose competition on prin-
ciple and certainly we have no objection to the keenest possible compe-
tition. That already exists in this business.

Digitized bvGoO^^IC

The argument made wars ago and the argument which was bantered
back and forth in the Fed case in 1974 was the indnetry was pretty
much a one-company dominated industry and that permitting and
encouraging entrance would increase competition. Since that time the
industry has become much more competitive. At one time one company,
20 years ago, had 100 percent of the business ; there was only one com-
pany. Now there are 15 companies in this very specialized part of the
insurance business. It would be difficult to see how it could be any
more competitive than it is.

The one company which at one time had 100 percent is now writing
38 percent. Companies such as the one I have come from, nothing 15
years ago and we are writing 12 percent of tJie national market. In
my company we have strong competition in all 50 States.

The Chairman. Do you go along with— I'm sure that there are dif-
ferences, but Mr. Farrer made the very helpful statement that in his
industry, o, there were very large numbers; o, there was ease of entry
and ease of exit, particularly ease of entry, which is imperative to
competition. Now you're making that point with respect to your own
experience. You say in 15 years you came from nothmg to a very big
competitive factor.

Can you give us a little more documentation on that as to the num-
bers and as to the number of firms coming in and leaving and so forth
so we know it is a dynamic industry t

Mr. Hemphill. Yea ; we shall be pleased to submit that. I cannot
give it to you off the top of my head, but I can assure you that it is
a very competitive industry now. Entrance is relatively easy. Anyone
who can accumulate money to start a small insurance company can get
into this business. Companies have done that. Companies have sprung
up and have become factors in a regional sense and some have moved
into the national scene. We have seen that particularly in the last 5
years. Other companies coming in and capturing 7 or Spercent of
the national market over a 5- or 6-year period of time. We shall be
glad to submit that.

[The following table was received for the record :]

mvATE MORTOAGE INSURKNCE COMPANIES, )*Tt

Hgmbtr «l
nmrtiaitt
..luimllit

quirtir 197t

llMta|«Guinnt)rlill«raK«C>p. 1957 50, GST

AoMffcin Mortun ImuTMC* Cs 1961 II,i$l

Vim A>wrHM.nnc 1961 16,041

UriMd G>ir*My C»rp _ 19S3 1G,S5Z

n|Mlin«*)nM(MtiM*lnuinn<»Cir _ 1968 S.635

FwMwit Guinnty Corp 1972 2, 161

likfon MwtHfi GmuMt Corp 1972 HA

Hum GMdlilir C«(p 1973 NA

PW Kortan InifiKi Ca 1973 1^706

RWiHIc MoFlM* iMinnc* C«rp 1973 3.4(2

TkMllwtanlriiurMMCo - 1973 12,942

CoMMfdiiTcraiflt Mortmt Inurancf Co 1974 HA

CoBMmmlth Mortui* biurMc* Co. 1977 HA

TcM 134,797

« tiMil M< <l 1 |M

Digitized bvGoO^^IC

240

The Chatrhak. Very good. Mr. Masterton, your example of the
Fed allowing a holding company to acquire an alleged nonbank acrofis
State lines and thereafter the FDIC insurance company insuring: the
alleged nonbank as a bank is another good example of the connised
regulatory structure. There's a provision in S. 72 which would prohibit
national banks from engaging in activities prohibited to their bank
holding companies. Would you support a provision requiring a con-
sistent definition of the term "bank" for the purposes of the holding
conmany and deposit insurance loss?

Sir, Mabtehton. Yes; we would.

The Chairman. You might submit for the record your notion of
how that definition should be constructed (see p. 241).

Mr. Masterton. I would be delighted to do so.

The Chairman. Mr. Farrer, in your statement, yon ai^e for pro-
hibiting bank holding companies from operating savings and loan
institutions. What would be the effect on the housing industry, in your
judgment, if bank holding companies were permitted to acquire
S.&L.'s.

Mr. Fakrek. I think there would be a significant shift of credit from
the long-term market to the short-term market and the fact that the
savings and loan associations virtually having an exclusive power to
lend only on real estate, which tends to mean there are longer term
loans. I think you'd see those funds would then shift to the holi^ng
company where they could be used on the short-t«rm kind of basis. So
1 think there would be a definite shift either way from money for the
housing industry.

The Chairman. Mr. Masterton, you say that the Federal Reserve
has refused to use its authority to classify the obligations of bank
holding companies and the nonbank subsidiaries as hank deposits fw
the purpose of interest rate ceilings and reserve requirements. Can
you tell us exactly how this hurts thrifts and what the size of the
problem is?

Mr. Masterton, Senator, our concern is in times of disintermedia-
tion, when it is very advantageous to circumvent interest rate ceilings,
that the holding companies will issue their so-called thrift certificates
and easily acquire funds in the capital market Those funds are pur-
ported to be for their finance company or other nonbank affiliates, bat
we suggest that those fimds are in essence transferable within the liold-
ing company system. It is an easy matter, rather than lending from
the banking subsidiary to its finance company's subsidiary, to simply
raise those funds in the public market through their small certificates
and use the residual funds elsewhere in the banking system. The net
result is that the holding company is directly competing, making an
end run around the interest rate regulation. We brought this to the
attention of the Federal Reserve most recently in 1977 on the Citicorp
note issue which I believe was a $25 million issue as I recall it throu^^
their finance company subsidiaries. We would be most pleased to —
I believe we already have done so in previous testimony, but to fumUh
some summary of the extent of those notes and certificates on this
historical basis.

The CiiAmMAN. Are you saying that all obligations of a mortgage
banking subsidiary of a bank holding company should be consi<Kred
bank deposits and, if so, wouldn't that put tne nonbank mortgage sub-
sidiaries at a comi»titivo disadvantage f

Digitized bvGoO^^IC

241

Mr, Mastebton. I don't think we're coming down that hard on it.
Senator. I think we are specifically referring to the thrift certificates
or whatever other name they are given that are generally corapetinff
for consumer dollars. They are in general the specific ones of the Citi-
corp notes sold through tneir subsidiaries on a multistate basis.

Mr. Bdtera. Senator, what we are suggesting is a regulatory ap-
proach in this area which would treat the obligations of finance com-
panies, mortgage subsidiaries, and other nonbank affiliates of the bank
holding companies as deposits when they come take on the character-
istics oi a bank certificate of deposit. We currently have both the FDIC
and the Federal Reserve regulating this area wnen it comes to banks
themselves, so that if you have a. nondeposit obligation of a bank that
begins to look in terms of its denomination, maturity, and interest
rate much like a depositj then these instruments can be classified as
deposits for purposes of interest rates and resei-ve requirements.

[The following letter was received for the record :]

Natioitai, Absociatioit cw Hutital Savinqs Barks,

Jtfew Tork. N.T.. JtOf/ U, 1978.
Hon. WiUJAH Pkoxmibe.

Chaimum, Committee on Banking, Housing and Urban Affain, U.S. Senate,
Wathington. D.O.

Dear Senatok Fboxuibe: Tbla letter Is Id response to tbe two questions which
jtia posed to our National Association's witness. Robert R. Masterton, darlog
the recent Committee bearings on S. 72, the Competition In Banking Act. Spe-
eUlcaUy, yoa requested that we furnish a suggested definition of the term "bank"
that would reconcile the inconslsCency between the Federal Deposit Insurance
Act and the Bank Holding Company Act (transcript p. IS), as well as a sum-
mary of the extent to which bank holding companies have been Issuing "thrift
eertiflcHtes" as a means of evading federal Interest rate controls applicable to
bank deposits (transcript pp. 19, 20).

First with regard to the Issuance of thrift certiflcates by bank holding com-
paoiee, our research reveals that during the last period of high interest rates
in 1974, numerous bank holding companies resorted to this form of debt financing.
Our information, which was developed primarily from reports appearing In the
flnancial press. Indicates that the amount of such note Issues was approximately
|L25 tdllioD. The breakdown by Issuer was as follows :

Chase Manhattan Ctorp 200

Continental Illinois Corp 126

Mellon National Corp 100

Crocker National Corp 76

Philadelphia NaUonal Corp 50

First Piedmont Corp 10

Alabama Bancorp ^

First Security Corp 20

This Ust is not neoeesarilr an exhaustive compilation, and in addition to ttie
bank holding companies listed, it should be noted that certain industrial firms
also sold similar small denomination variable rate notes. For example. Standard
Oil Company of Indiana offered $160 million of such notes for public sale.

Our research has not been able to turn up similarly detailed data for the
period 1968-60 when the issuance of thrift certiflcates by bank holding companies
first became a large-scale problem. However, according to the documentation
supporting the 1960 legislation dealing with the Issuance of short-term notes by
bank holding company affiliates, over ?2.0 billion was raised through this par-
ticular financing device-'

., (Nov. 6. 1969), at p. 9; B. H«pt. 91~TB0, 91>t

Digitized bvGoO^^IC

243

Turning now to tbe qaefitl<»i of defining the tenn "bank," Uie prablem u
pointed out in our tefitlmMiy fs that the Federal Deposit Inmirance Act contains
a definition broader tban that uUUied in tbe Banlc Holdlus Coropanr Act. This
makes it poeslble for an instltuUon to goailfr for federal d^Wt Insurance coy-
erage but not be considered a bank for purposes of the holding company act. It
would be onr soggeation that the inconsistencr between tbe two statutes can
best be reconciled by modifying tbe Bank Holding Company Act to include
within its definition of the term bank (12U.S.C. 11841(c)) any insUtution whidi
could be Insured by the FDIG. Specific language ml^t take tbe following fonn :
The term "bank" Includes, for purposes of Section 1842(d), an Insured
bank as defined in Section 18X3(h) of tbls Title or any insUtutlon eUglble
to become an insured bank.
This definition would expand the definition of the term bank only for tbe pur-
pose of bringing it wltliln the proscription on the Interstate acquisition of bank-
ing eut)sl diaries, 'nils limitation is designed to accom[disb tJie needed result
without disrupting the dlFFerlng regulatory scheme erected by the Bank Holding
Company Act of 19C6, as amended, for prior approval of applications to engage
In banking and uonbanldng activities.

I trust tliat you will find the foregoing to be reoponslve to your requests ; we
look forward to working with you in the subsequent progress of tbis legislation.
Sincerely yours,

James 3. BimxA,
Ai$ociate Dirwtor.

The Chairman. Well, I want to thank you very much. I think you
have made nn excellent record. We deeply appreciate your testimony.
And I might say that Senator Lugar ma; have some questions that he
would appreciate your responding to in writing when you correct your
remarks for the record. Thank you verv, very much.

Our other panel is Mr, Edward f. O'Brien, president of the Se-
curities Industry Association ; and Mr. David Silver, presidMit of the
Investment Company Institute.

Mr. O'Brien, we have the same ruling. When you start the ^;reen
light will go on, and that will be on for 9 minutes, and then a minute
for the yellow light and then the red light goes on.

We are delighted to have you back, and go right ahead, sir.

STATEHEHT OF EDWABD I. O'BRIEH, FXESOEHT, SECUBITIES IH-
SnSTXT ASSOCIATION; ACCOM? AITIED B7 DONALD CEAWFOSD,
VICE PRESIDENT

Digitized bvGoO^^IC

Written Statment or Securities Industry Association

Hearings on The Competition In BanklnB Act of 1977 (S. 7

before the

C<^lttee on Banking, Houslne and Urban Affairs

United States Senate

June 16, 197 B

Hr, Chalivan, ay name la Edward I. O'Brien, and I am
President of the Securities Industry Association, a national
trade asBOclatlon representing approximately 500 organisations
responsible for over 90l of the securities brokerage and
Investment banking business of the nation. With me today is
Donald J. Crawford, Vice President In charge of our Washington
office. Our Benbershlp represents a cross section of aany dif-
ferent facets of the securities business and is comprised of Denbera
of national securities exchanges and finis which are not nenbers
of such exchanges. The business of our members includes retail
and Institutional brokerage, over-the-counter market making,
underwriting and other Investnent banking activities, and
various exchange floor functions. Many of our members perform
these services In municipal and government, as well as corporate
securities. Qeographlcally, the firms which comprise our menber-
sblp are located all across the nation and provide aerviees to
investors of every size and type.

We appreciate the opportunity to appear before you today to
offer our comments on ■ piece of legislation which we believe is

Digitized bvGoO^^IC

essential to the continued ■tablllty or the banking syetem and
to the vitality of our economy, "The Competition In Banking Act
of 19T7 ." The provisions of this bill are responsive to many
of our concerns about the Increasing domination by commercial
banks of the nation's financial resources.

For example, the bill would limit the further concentration
of banking resources among the major commercial banks. Such a
limitation Is easentlal because banks and their holding
companies already wield an overwhelming degree of control, not
only over bank resources, but also over other financial resources,
such as trust assets. Encroachment by banks Into the securities
industry further exacerbates this concentration.

The bill also would limit the Incuralons of banks and their
holding companies into "commerce" — i.e., into non-banking
activities. This tendency to expand into other bualnesBea not
only increases the concentration of economic power In the major
commercial banks, but also be a breeding ground for other problems,
such as mlsallocatlon of credit, unfair competition, and conflicts
of interest. Such problems have been particularly acute in the
case of bank- sponsored securities activities. It na:^ also divert

banks managsBent ' s attentions from their primary and essential

banking function of proper credit allocation.

Digitized bvGoO^^IC

Moreover, m the major banlcB have attenpted to utilise their
ready access to deposits In offering an ever-widening range of
services, their capital structure in many cases has become
seriously Impaired. In recognition of this problem, the bill
would reQUlre the Federal Reserve Board to carefully supervise
the capital structure of bank holding companies and their
subsidiaries. Ve believe such supervision Is especially neces-
sary to guard against liquidity problems associated with the
long-term bank loans which ere extended to many corporations
as a substitute for equity capital.

In sum, we strongly endorse the underlying principles and
basic approach of this bill; however, we would like to suggest
several minor amendment s . First, to avoid the "competition In
laxity" at which Section '*01 of the bill Is aimed, we suggest
that the Board be given power to limit the non-bank activities
not only of national banks, which the present language confers,
but of all federally insured banks, or, alternatively, all
member banks of the Federal Reserve System. Secondly,
to assure that banks and bank holding companies are
prohibited from engaging In those activities which are not
closely and directly related to banking, we believe that Section
301 should be amended expressly to proscribe certain specific
activities to banks. Also, although It may be unanblsuous,
«e suggest that the bill's legislative history make clear that
the "concentration of financial resources" standard set forth
In Section 301, as one of the factors to be considered In

Digitized bvGoO^^IC

determining peralsslble non-banking activities. Include those
reBources owned or controlled by autual funds, Ineurance
companies, securities underwriters and other financial Inter-
mediaries as well aa by banks. Finally, we believe that the
mandate to the Federal Reserve Board Section 501(f)(1) to super-
vise the adequacy of bank holding company capitalisation should
be emended to require that supervision take account of the
illlQuldlty associated with excessive long-term loans and to
extend such supervision to all insured banks (or all member
banks), to Insure against continuation of s "competition In
laxity." The need for these amendments to a bill which clearly
is a long overdue step toward restoring better balance and more
efficiency to our financial markets Is discussed more fully below.

Securities Activities of the Commercial Banks
We believe bank expanalon Into the securities business
provides an excellent example of the excesses toward which this
legislation is directed. Aa the trade association for the
securities Industry, we, through our members, are particularly
aware of the many securities activities In which banks are engaged.
The aecurltles activities of banks may be divided Into three
general areas: CD Investment advisory services, 12) brokerage
related services, and (3) investment banking services.

Investment Advisory Services
Apart from their own assets, banks are responsible for the
management of more funds than any other type of financial

Digitized bvGoO^^IC

Institution.* In their fiduciary capacity, banks manage the
aeBets of pension and other employee benefit plans and of
trusts and estates of Individuals. In their agency capacitor,
they aanage the portfolios of a variety of Individual and
corporate oustraera. In addition, banks serve as investment
advisers to both open-end and closed-end Investment companies
and also act as inveatnent advlsara to Real Estate Investment
Trusts (REITs), which they sponsor in many caaas.

Brokerage Helated Services
In recent years, many banks have begun to offer several
brokerage related services to their cuBtomers. One of the nore
common of these Is the autonetlc Investment service (AIS).
Through AIS plans, banks offer customers the opportunity to
have a specified amount deducted automatically each month from
their checking accounts and invested by the bank in the connion
Htock of one or more Issuers included on a list supplied by
the bank. The list typically includes the twenty-five largest
corporations in the Standard and Poor's 125 Industrial Index,
based on the market value of the corporation's outstanding
coanon stock. The bank pools tbe monthly deductions from the
account of each participating customer and directs a broker to

• The Treasury Department has estimated that commercial banks
manage approximately $100 billion In trust assets alone.
Public Policy Aapecta of Bank Securities Activities. An
Issues Paper. Department of the Treasury. Hovember. 1975.

pTt:

Digitized bvGoO^^IC

! transactions for the pooled accounts. Each AIS custouer
I monthly atatement Indicating, among other things,
the number of shares purchased and their price.

Banks also offer dividend reinvestment plans (CRP) under xhich
Investors may have the dividends they receive from a partici-
pating corporation automatically reinvested in the securities
of that corporation. Through these plans, shareholders of a
participating corporation may request that their dividends be
paid directly to a bank, which pools the dividends received
and purchases additional shares of the corporation's stock In
the open market.

Besides pooling funds snd acting as a conduit between
brokers and customers, some banks perform a more traditional
type of brokerage by executing agency transactions for their
trust and other managed accounts, either through a registered
broker, in the case of listed securities, or, directly in the
over-the-counter market. In the fall of 19T6, one major money
city bank Introduced a retail brokerage service. The services
provided were execution of orders in listed securities and
portfolio valuation services. The experimental service was
discontinued In December of 1976.*

Digitized bvGoO^^IC

Invatiicnt Banking Services

Tha Investnent banking activities of the major comnerclal
banks generally taka two foms: the rendering of rinanelal
advice to corporations and the finding or fumlshlnc (or both)
of funds for the lone-tem capital needs of corporations.
Financial eounsellnf may be provided for a fee either on a long-
term basis or for specific projects (e.g., the financing of a
new plant) and generally eneompasses the eustoaer's total need
for financing, ranging from short-term borrowings to permanent
capital. Banks also furnish financial advice In connection
with corporate reorganlcatlDns, including mergers and acqui-
sitions, and sometimes perfoim appraisal services for such
cr ana act lone.

Banks also serve directly as a source of long-term funds,
either through their own lending facilities or by arranging
private placements of securities with other lenders. Frequently,
loans are made through syndicates of banks, which range in slie
from a handful to a substantial number of domestic, and sometimes
foreign, banks.

In addition to providing long-term funds themselves, banks
have become quite active In arranging, for a fee, private plaee-
•ents of securities of all types, from long-term bonds to
equities, with a variety of Institutional lenders. In some
Instances, banks participate In private placements they have
arranged by purchasing for portfolios under their i

Digitized bvGoO^^IC

portion of the Bccurltlea to be sold, and on occasion a bank
will esBCMble Tor a cuBtoDer a financing package oonalstlng
of a medlun-tem loan fron the bank Itself, together with a
private placement to provide the ultimate long-tern financing.*

The provision of securities services by the najor cossnerclal
banks raises concerns anong our nembers similar to those to which
the bill Is addressed. These anendmsnts discussed beloM would
help assure that the bill will achieve Its stated
objectives.

"Adverse Effects" of Bank Securities Activities
The proposed amendment to section *i(c){8) of the Bank
Holding Company Act of 1956 contained In section 301(a) of the
bill would require the Fed to consider certain specified "adverse
effects" in determining whether an activity it finds to be closely
and directly related to banking is to be a permissible activity
for bank holding companies. Bank participation in the securities
business can result In a number of such adverse effects. Including
unfair competition, conflicts of interest , undue concentration
of financial resources, as well as the mlsallocatlon of credit.

' The Final Beport on Bank Securities Activities, prepared by
the Securities and Exchange Conmleslon dated 6/30/77, fully
describes bank corporate financing services beginning at
p. 51- "Conmercial Bank Private Placement Activities," a
staff study of the Federal Reserve Board, dated June 1977, alsc
describes these activities.

Digitized bvGoO^^IC

Unfair Coapgtltlon
Under axlstlng law, banks enjoy numerous sdvantages not
available to commercial entitles such as the members of the
securities Industry. These advantages give banks an almost
Insurmountable, and Mholly unfair, edge in competing with our

The principal such advantage possessed by banks Is their
unique ability to accept deposits coupled with the unrestrained
freedom to allocate such deposits to borrowers. This enables
them to obtain funds at comparatively low cost — and in some
cases at no cost — without the expensive and tlne-consumlns
disclosure process which eonnercial entitles must follow. Banks
EiBO have primary and direct access to a reliable and extensive
source of funds through their ability to borrow from the Federal
Reserve System at low interest rates, even when they may be
suffering from financial difficulties which would prevent a non-
bank entity from obtaining credit. Moreover, banks possess
substantial tax advantages, such as their ability to deduct the
Interest cost of carrying or purchasing tax-exempt securities
and their ability to set up reserves for losses. In fact, in
19TT major commercial banks paid federal taxes at rates eub-
atantlally lower than those paid by the securities Industry.*

Banks also have unfair advantages over members of the
lecurlties industry in the operation and promotion of their
securities services. For example, bank borrowers and depositors

* The February 9, 1978 American Banker, p. 2, reported that th*
average large banking organizations paid 6f on their world-
wide income. For the same period, broksr/dealere paid ap-
proximately Ugt.

Digitized bvGoO^^IC

provide a convenient and favorable narket for the promotion of
any additional aervleas a bank may choose to offer. In addition,
the sheer slEe of the major commercial banks and the diversity
of their financial and aanaEerlal resources enable tham to
utilize econonles of scale unavailable to other competitors in
performing securltlea eervlceB.

Furthermore, banks are In a position to use the economic
leveraee Inherent In their ability to extend short-term credit
to establish explicit or Implied tying arrangements ~ I.e.,
according preferential landing treatment- to users of their
securities services.* Even if a bank has no explicit policy
of so using this economic power, the probable expectation of
Its customers or prospective customers that such a connection
exists suggests that fair competition nay not be possible when
a bank offers services in competition with non-bank entitles.
Lastly, the comparative regulatory framework places burdens
upon the broker/dealer not found In banks. ■■

■ The Conference Coimnlttee that reported the Bank Holding Com-
pany Act araendraents of 1970 specifically noted the possibility
of this □ccurjjig

Such tie- 1ns may result from actual coercion by a
seller or from a customer's realiiation that he
stands a better chance of securing a scarce and
Important commodity (such as credit) by "volun-
teering*' to accept other products or services rather
than seeking them In the competitive market place.
In either case, competition Is adversely affected,
as customers no longer purchase a product or service
on Its own economic merit.
H.R. Rap. No. 1717, 9l8t Cong., 2nd Seas., p. le (1970).

Digitized bvGoO^^IC

Thaa* eoiv«tltlTe advuitftges make It relatlvaly apparent
that banks would donlnate the aecurltlea Industry war* tha; to
eoapate directly in offering aecurltlea aervlcea.

Confllcta of Intereat

A bank's perfoTvance of various securities services may
result In conflicts of intereat adverse to: (1) Its trust
cuBtoBers and other managed accounts, (2) Ita comnerelal cus-
toaers, and (3) users of its securities services.

On* of tbe more esregloua conflicts between a bank's in-
terest In a aeeurlties service and Its duty to Its
■anaRed accounts exists in the case where a bank trust
department causes an account to purchase securities from
« private placement bank for a corporate client
of the bank or aecurltlea distributed by the bank as under-
writer, as in the case of municipal bonds. Even where restrictions
In private trust agreements or legal proscriptions prevent this
conflict from occurlng directly, two or more banks may have a
tacit understanding that the trust department of each will
participate in the private placement or underwritlngs of the
other. Further, if a private placement proves a dlaappolntment ,
the bank's trust department may be tempted to cause accounts
that it manages to make Investments In, or to lend money to,
« corporation for which the bank has effected the placement in
an attempt to assuage the dissatisfaction of the placement
participants.

Digitized bvGoO^^IC

The relBtlonsbip of ■ banker to corporate borroMr m*j
create another aora aubtle conflict situation, aspeelalljr when
substantial loans are in questionable condition. Dlslntereated
credit decisions become Impossible, and the banker In effect
begins to run the corporation. A recent example la the Bank of
Amerlca-Memorez situation. After unsuc cess full:/ trying to
arrange a purchaser for the company. Bank of America deposed
Its then current management and hired a new president and
guaranteed bis employment package, while extending additional
credit to the corporation.*

The charges reported In the Hlcrodot-Irvlng Trust episode
Is one of the more dramatic examples of potential conflict
between a bank's securities services and Its commercial cus-
tomers. In that case. It was alleged that Irving Trust used
its confidential knowledge of the financial condition of Its
credit custonier. Microdot, In the course of providing advisory
services to General Cable — also s credit custoner — In Its
bid to capture control of Microdot through a tender offer.
Although the facts must await adjudication of that dispute. It
is obvious that. In the course of providing financial advisory
services, there are many opportunities for a bank to sake Im-
proper use of confidential financial Information obtained from
Its credit custcmers.

Digitized bvGoO^^IC

In providing an AIS or DRP to oustoners, a bank Is In a
position to delay placing orders for Its pooled accounts in
order to enjoy the use of the funds without Interest, On sone
occasions such a delay may result In a less favorable execution
for such accounts. Similarly, the bank trust department is In
■ position to take advantage of its knowledge of Nhen an order
for an AIS or DBF will be executed in placing orders for accounts
it manages.'

A bank also may have a conflict between the interests of
Its financial advisory customers in giving objective advice
and Its own business interests In extending loans. Por example,
when a corporation consults a bank for financial advice, the
bank aiay be tempted to advise the corporation to meet at least
some of Its capital needs through bank borrowings, even where
the terms of such borrowings nay not be as favorable as those
obtainable In the public market.

In summary, we believe, whatever the fact situation, the
prudent course of setion is to Unit the potential conflicts
arising when banks invade new areas of commerce.

Concentration of Financial Resources
As the Chairman suggested in his remarks Introducing this
bill, its naln purpose Is to prevent the concentration of eco-
nomic power In the major commercial banks and their holding
companies. By way of example, those remarks cite the concentra-
tion of bank assets in the najor conmereial banks. The Asso-

( Securities Activities, prepared by

Digitized bvGoO^^IC

elation believes that even aore aerlouB than this concentration
of b&nk rasourees Is the concentration of financial peaources
In general that may result Teoa the continued ofrerlng Of
securities services by such banks.

There are six principal kinds of Institutions in the
American economy that act as financial Intemedlsrles, chan-
nelling Idle funds and savings to those with coEnserclal and
investment needs for such funds: (1) Insurance companies:
(2) thrift Instltutlonsi (3) eopvierclal banksj (U) trust con-
panles (or trust departments of conterclal banks}; (S) mutttal
funda; and <6) broker/dealers. Ccnmierclal banks already dominate
the two largest and fastest growing of these, categories (3)
and lU).

The trust departments of cOBmerelal banks manage over iUOO
billion In assets of personal trusts, estates, and employee benefit
and pension plans.* In addition to these enoraous trust assets,
comnerelal banks have available for lending or other investment
approximately $900 billion of their own assets. Thus, comner-
elal banks control over $1,300 billion of assets. This concen-
tration of control over financial assets Is In Itself shocking,
but what is far more worrisome, in our opinion, is the fact
that control of over 70 percent of the trust assets Is held by
less than 2 percent of the eomnerelal banks.

* The next largest category of asset management Institution,
insurance companies, manage only an estimated $300 billion
In assets.

Digitized bvGoO^^IC

Two recent studies, "Disclosure of Corporate Ownership"*
•nd "Interlock ins Dlrectorste Among the Major D.S. Corporations"""
demonstrate the enormous economic power exercised by ctHmnerclal
banks. For exanple, four major commercial banks own spproil-
aately and voted S5I of the outstanding shares of Burlington
Northern.*** There Is considerable evidence that unlike broker/
dealers, banks vote shares In their registered nane, and quite
often vote with managenent. Large bank trust departments control
large portions of the common stock of the insurance Industry.
In the case of one najor insurance company, the 50 largest bank
trust departments held in excess of 351 of Its common stock,****
and the ten major financial institutions had two direct inter-
locking directorates and 25 indirect Interlocking directorates
with that company.***** Additional, and perhaps most persuasive,
are the direct and indirect interlocks between financial insti-
tutions and Industrial utilities, transportation ccanpanles and
retailers, the heavy users of financial services. ■■*■■■

Study prepared by the Subcommittees on Intergovernmental
Relations and Budgeting, Management and Expenditures of
the Committee on Dovemment Operations, U.S. Senate, 'i/^/1^,

A staff study prepared by the Subcommittee on Reports,
Accounting and Management of the Committee on Qovem-
mental Affairs, U.S. Senate, January 1978.

OP. CIT., p. 5.
OP. CIT., p. 36f
Ibid., p. 120.
Ibid., p. 7.

Digitized bvGoO^^IC

The sane large noney-center banks also happan to ba thoae
most active In ofrering aeeurltles aervices In oonpatltlon wltb
broker/dealers. Their sheer site. In relation to the aaeurltiea
Industry, le Illustrated by the fact that the shareholders'
equity of Citicorp, Inc., the parent holding coBpany of First
National City Bank, was $2,922 billion at the end of the first quar-
ter of 1978. This anount is almost as large as tha *3.l8o blUlizi i<ileh
Mas the aggregate shareholders' equity and proprietora' capital
at that time of members of the New York Stock Exchange. Because
of their disproportionate slse, as well as the other decided
competitive advantages mentioned above. It seems probable that
banks will also come to dominate the securities Industry, giving
them control of four of the above six categories. If banks aucceed
In dominating the securities Industry, virtually every source
of inveatment capital — save insurance conpanlea and mutual
funds — would be controlled by these few giant banks, a situa-
tion which presently prevails in Europe.

Bank Expansion Into Commerce
Whenever a bank has a financial Interest in a conneroial
enterprise. It is possible that credit determinations with
respect to that enterprise will not be made solely on the basis
of disinterested banking Judgment. The experiences of the members
of the Association would suggest that banking Judgment Is equally
subject to distortion when banks participate In securities
activities.

Digitized bvGoO^^IC

Sueh bank InvolTenent rftlBCB nony oonfllots betMcan a
bank's ljitar«st In Its tbtIous Bceurltlca acrvlcftB and Its duty
to Bake prudant and dlsintarasted loans solely on the basis of
banking and credit Judgnents. For example, a bank nay extend
credit to a corporation as an Indueesient for that corporation
to patronise financial advisory eervlcea of the bank. Also, a
bank Bay be tempted to make loans to a corporation In which some
of the bank's AIS customers have Invested In order to prevent
that corporation's financial difficulties from reflecting ad-
veraely on the bank. A bank may also extend credit to a ecrporatlan for
which It effected a private plaeenent of securities to maintain
its "credibility" with those who participated In the private
placement. Recent history provides a vivid example of the
potentially serious consequences of the conflict between a bank's
interest in furnishing inveatnent advisory services and sound
banking practices: the substantial loans which many commercial
banks have extended to (or purchased from) the REITs sponsored
and managed by them or one of their subsidiaries appear In many
eases to have been effected in less than a prudent and dis-
interested manner.'

Apart from producing a distorted allocation of credit,
the conflicts between a bank's interest in its securities

■ "Diaclosura and Bank Soundness: Non-Bank Activities of Bank
Holding Companies," a study prepared by Ralph Nader and
Jonathan firoim, dated 6/30/76, detailed this problem.

Digitized bvGoO^^IC

activities and Its duty to observe sound banking principles Kay
alto aerlouBly Jeopardise the stability of the banking systen.
For example, aany of the banks which recently have been revealed
as "problem banks" posBees loan portrollos laden with loans to
their REITs.

SuKKCated Amendment 3

Because the potential abuses which nay be associated
with the securities activities of banks are reflected In the list
of "adverse Inpacts" In Section 301(a) of the bill, we strongly
endorse the scope of that list. However, the Association would
suggest several amendments to strengthen and clarify that section.

To prevent the major commercial banks from gaining further
control over sources of investment capital, we suggest that the
reference In Section 301(a) to "concentration of . . . financial
resources" be clarified. We feel that, either through language In the
bill or in its legislative history, it should be made clear that
no bank may engage in non-benklng activities — even if directly
related to banking — if such Involvement would cause any
further concentration of resources among any type of financial
intemediary, such as securities underwriters, Insurance com-
panies and mutual funds. The Association believes that such a
clarification is necessary to assure that the aiajor commercial
banks do not further their control over our nation's capital

Digitized bvGoO^^IC

Furtheraore, to preclude nost of the potantlal abusei dls-
euae«d sbovei tw atronglr support the approach taken by Section
301<a) of the bill In placing greater limitations on non-banking
activities. HoMcvep, we suggest a minor anendnent to that
section. He believe banks should be expressly prohibited. In a
new clause of Section 301(b) (which amends Section '■(c)(B) of
the Bank Holding Company Act or 19^6}, from engaging In those
activities enumerated In Section 2<c). The new clause, to be
Inserted In subparagraph (B), would read as follows:

( } the term "closely and directly related

to banklne cr managing or controlling banks"
does not Include (1) orrerltig Insurance agency
and underwriting services, (2) offering leasing,
accounting travel or courier services, (3)
offering manaeement and data proceaalng services,
or (4) soliciting purchases or sales of securi-
ties (e^icept Inveatment securities to the extend
permitted to national banking associations by
the provisions of section 21 of this title),*

Competition In Laxity
Both past and recent history bear out the proposition that
when banks are able to choose among several regulators a "competi-
tion In laxity" may occur, and banks may switch charters In order
to avoid restrictive regulatory policies of a particular agency.
The result often can be the frustration of critical national polcly
objectives. In the second and third decades of the twentieth

■ He assume that the phrase "marketing of seeurltles" In
Section 2<c)(lv) Is Intended to refer to the solicitation
of purchases or sales of securities.

Digitized bvGoO^^IC

century, bo many state chartered banks had aaeurltles afrillatee
that the Comptroller at first Ignored his duty to prevent national
banks fron engaging In such activities and, then, sueoessfully
lobbied Congreea to permit them to engage in those activities.

The end of that competition emons regulators was proupted by
the failure of many banks in 1933 due to the losses incurred by
their securities affiliates. Hore recent history has seen banks
converting to one-bank holding companies during the 1960'8 in an
attempt to employ their competitive advantages Iti areas outside
of banking. Also, as the Chairman mentioned in his remarks
when he introduced this legislation in 1973, bank holding com-
panies which have been denied permission to engage In certain
activities by the Federal Reserve Board have succeeded In ob-
taining approval by the Comptroller of the Currency for the very
same activities.

Since most of the securities activities of banks are provided
by banks themselves, rather than by subsidiaries of bank holding
companies, those activities are subject to the more permissive
regulation of the Comptroller of the Currency and of various state
banking authorities, rather than the stringent controls imposed
by the Federal Reserve Board. For that reason, the Association
strongly endorses the Intent, expressed in Section AOl, of having
the Board determine oermlBslble non-banking activities of
national banks. However, we would urge that a uniform and

Digitized bvGoO^^IC

coherent national policy with reject to carietltlcn In the bonkiiig
Industry — which this bill seeks to enact Into law -- requires
that competing atate and national banks be treated equally In
this critical regard. In the absence of such uniformity,
attalnflwnt of national policy objectives nay be frustrated.
Thus, we believe Section tOl should be extended to apply to all
Insured banks, or at the very least, all member banks.

Pndercapltallaatlon of Banks
A quick analysis of the current financial situation for
Many bank holding companies leads one to the conclusion that
bank holding companies should return to the business of banking.
On the average, their equity to asset ratio Is approximately 't.3f
for the major bank holding companies, and their holding company
debt to an equity ratio approaches the one-to-one Unit Imposed
by the Federal Reserve. The major bank holding companlea asset
growth cannot exceed their equity growth because of this situa-
tion. How can bank holding companies raise equity capital with
their current financial structurea and businesa conditions. For
example, Cltlcctp debt to equity ratio Is one-to-one, end Citicorp Is
looking at an t80 billion capital need in the next five years.
HoM It will raise its equity capital should be a major concern.
and it is clear that invading the small and cyclical securities
Industry will be of no assistance.

Digitized bvGoO^^IC

Expansion of banke Into non-banking areas nay seriously
compound the problem of Inadequate bank capital. To the extent
banks devote their capital resources to Investment In other
activities, they are deprived of the use of those funds to
support their lending activities. In addition, the tendency over
the pest decade has been for banks to steadily Increase the matur-
ity of the loans they extend. Such loans nay be said to have
equity attributes In that the terms of the accompanying loan
agreements nay give the lender virtual control over the corporate
borrower. Consequently, repayment of the loans nay depend more
on the long run success of the borrowing enterprise than on
normal considerations of solvency.

Such long-term loans may affect bank liquidity adversely In
two respects. The probability of such loans being repaid at
■aturlty generally Is sonewhet lower then with short-term bor-
rowings. Moreover, because of the extended maturity of these
loans, banks nay lose some of their flexibility to adjust to
unanticipated declines In their deposits, nany of which are
subject to withdrawal on demand or short notice.

To preclude such risks to bank liquidity, we suggest two
minor amendments to Section 501. First, the section should be
revised specifically to require bank regulators to consider. In
determining the adequacy of a bank's capitalisation, the relation-
ship between loiag-tem loans and other Illiquid assets on the

Digitized bvGoO^^IC

oiw h«nd and lonK-t«m soure*s of funds, such as tin* dsposlts
■nd shareholders' equity, on the other. Secondly, to avoid the
problems of competition In laxity discussed above, Me suggest
that the provisions of section 501 be Bade applicable to all
Member banks or all insured banks.

Conclusion

We are concerned with nany of the Issues addressed by this
bill and strongly endorse the tbruBt of this proposed legisla-
tion. Indeed, the concentration of economic poMer In the
■ajor connerclal banks poses a seriouB threat which calls for
legislative action. Banks* control over financial resources, if
not our entire econoay, suggests the need for strict limitations
on both their size and their activities. We believe that this
legislation, modified in accordance with our suggestions, will
go a long way toward solving the problem as we perceive it.

We appreciate this opportunity to offer our comcnte and
suggestions on this Important piece of legislation and will be
happy to try to respond to any questions.

Digitized bvGoO^^IC

266

The Chairman. Thank you very much, Mr. O'Brien.

Mr. Silver. I understand that vou want to have 10 minutes on your
statement and 5 minutes on anotner matter. Will you proceed in that
way!

Mr. Silver. Yes.

The Chaihican. All right. Go right ahead.

STATEMEHT OF SATID SILVEK, FKESIDEHT, IHVE8THEHT COK-
PANT mSTITUTE; ACCOMFAKIEI) BT XATIHEW F. PIHX, GEB-

T-lutT. COTIMSEL

Digitized bvGoO^^IC

16 Jun« 1978

ORAL STATEMENT OF THE
[HVZSTKEHT COMPAHy INSTITUTE
OH S. 72
(BcfOE* tha Sonata Conoitttae on Banking, Housing and Urban Affaira]

Mr nana is David Silver. I. am PrealdenC of tha Invastmant
Coapony InatiCuta, tha national aaaociftion of the nutual fund
induatry. tfitli ma today is Matthew P. Fink, the Institute'a
Saneral Counael. Hr. Cbaicmon, we have a statomant which is too
long to Eflad and I aak that it be ineludail in the flaeo£d.&

I would Ilka to opan with a few general obsarvationa and
then proceed to a auanary of ou£ writton teatlmony. I ahould
■tate at tha outset, however, that we endocse the purposaa and
provisions of S. 72.
Unique Role of Banks

From time to tlna, objoctiva obaervora raise the question
■« to why tha nation'* banks should not be freed to join the
competitive race In the securities field and other areas of
commerce. In a society built on competition, this is a reaaonable
inquiry. Yet, for over 100 years there has been chronic tension
IS the banking induatry, often aided by bank regulatory authorl-
tiea, has triad to expand into othar bualnassa*, whlla the Congress
has time and time again attempted to confine banks to the business
Qf banking. What Is it that has given rise to the tension between
free co^>etitlon and the recurrent legislative efforts? Nhat

D„ii„.db,Go(5glc

b«tard« wclat wIwd banks ant«r otJi«r lin** of

particularly One aacurltlas buslnaaa? An anavac to tha lattar

quaation aay ba found In the form of a atudy of bank sponaorad

real aatsCe iDvaatnaot truata which I will dlaeusa later.

Bowever, the coiq^tltlv* leaue la not devalopad In onr wrlttan

•tataownt and I would like to offer a few worda with raapact to

It.

Banka are unique. Hoat bualneaa depend* on a aatlafactory
banking relationship, while a good relationahip vlth a bank

doea not Inaurs commercial buccbbb. Its absi
I do not have to detail for thla Comdttee
uaeful aervlcea provided to bualneaa by the

But the Inportance of banka li
aervlcea. A banking relatlonahlp la liq)ortj
Uvea of ■llltona of Anaelcana, A bank may
our boon, and be the source of loana for thi
of our children or to meet aoch crlaea aa l:
bank nay participate in the admlniftratlon of
this 1b without considering that the savingi
entrusted to banka. To quantify aome of tb:
page B of our atateiaant Indicate that com
atand at about one trillion dollars, irtiili
banka are now at $S00 billion or more. Tl
of all other financial Inatltutiona coaiblned.

ica can be crippling.
>e valuable and
nation's banks.
itricted to bua loess
\t In the paraonal
lold the mortgag* on
college education
Inaaa and death. A
estates. And

of e

citli

.a, the statli

ist assets of these
assets exceed those

> economic p

relationships created with u

f the banka and the web of

' bank services make it logical.

D„ii„.db,Go(5glc

lAdAffd InarlUble, that banks, eapacl>lly the najor co^wrclal
IwnkB, would sesk to us* their financial power and leverage to
expand Into other lines of couBgrce.

History reveals tao nwjoc concerns with bank entry loto
businessea other than banking.

First, the unique relationships between banks and customer*,
coupled with their economic power, give banks sn enonioua co^ietl-
tlve advantage In whatever business they enter, increasing the
already high degree of economic concentration In the najor banks.
Bank cuatoners know that the totality of their use of bank
offered services will be considered by bank officers passing on
thair loan applications.

Second, are the effects on the econony as a whole when
banks, particularly the large banks, divert, their assets and
energies from providing banking services to enter other businesses.
Of ev«n greater significance are the drastic consequences when major
banks encounter trouble and bank assets are placed in jeopardy.
Then, all who are dependent on bank services suffer and the basis
Is laid tor widespread economic disaster. The legislative efforts
culminating In the Glass-Steagall Kct were In response to such
financial debacles.

Our wrlttsn statement Illustrates some of these points.
He show that tor over 100 years, in the face of recurrent financial
crises, Congress has sought to prevent connercial banks and their
affiliates from engaging In the general securities business. Yet,

D„ii„.db,Go(5glc

th« banks and th« bank ragulatory authorttlei have repeatadly
sought to subvert Con^reas' Intent, for •xan^la: by banks
fomlng lecuritlea afflliataa In the early 1900 's in order to
circunvent The National Banking Xcti by the Coiqitroller ' a
lobbrtng In the 1920'i to pemlt banks Co underwrite securities;
by the Comptroller's efforts in the 196D'a to authorlte bank*
to sponsor mutual funds; by bank sponsorship of REITs In the
early 1970'si by the present mass -merchandising of interests In
bank collective pension funds; and by the current efforts to
repeal the Glass-Steagall Act and return to the dangerous pattern
of the 1920*B. It Is to these matters which we now turn.
The Glass-Steaqall Act

In 1927 as a result of banking Industry pressures and the
efforts of the Comptroller, Congress enacted legislation relaxing
previous restrictions to permit national banks to underwrite
securities. By the early 1930*s a national consensus emerged
that conmercial hank entry Into the aeeuritles bualneaa had been
a major contributor to the Great Craah. In the Glass-Steagall
Act of 1933 Congress restored the historic separation between
commercial banking and the general securities business.

While coimerclal banks have achieved phenomenal success
and gigantic growth since the Great Crash and the enactment of
the Glass-Steagall Act, the bonking industry now seeka to expand
Into areas prohibited by the Act. As to the wisdom of these
efforts I might note the recent statement of Federal Reserve

D„ii„.db,Go(5glc

Board Govamor Buiry C. Halllch that Id viaw of tha a
exparienca of bank holding coEq^anlea due to the 1974 recesalon.
'..-the banka vara fortunate not to have been burdenedi at the
■■me tlao, with aacurltlaa afflliataa. In 1974. 61a*a-6t«agall
■tood the banka In good atead.'

The banking Industry, bowaver, haa continued its afforta
to uae the Holding company device to erode tha Glasa-Steagall
Act and then to repeal It ao that once again banks would be
permitted to operate aecuritlea affiliates in the form of open-
end and cloaad-and Inveataent con^aniea.
Sponaorship of Inveataant Companlea

In 19S: the Comptroller authorized banka to aponaor and
operate open-end inveatment cos^anlea. commonly known as mutual
funds. This attonpt waa struck down by the, United States Supreme*
Court in 1971 in its landmark decision in Inveatmant Conpany
Institute V. Camp. Tha Court found that 'the sana basic hazards
and abusea that Congreas intended to eliminate about forty yaars
ago...* still existed.

One might have expected that the Suprama court's decision
in casgi would have put the issue to rest. However, acaccaly
four months after the Supreme Court's decision in Camp the
Federal Reserve Board proposed, under the Bank Holding Company
Act, to permit banks to serve as Investaient advisers to invest-
ment coiqiBDiea. In Its final ruling, the Board reinterpreted
the law to permit a componsnt in a bank holding oo^any to

Digitized bvGoO^^IC

organise, aponaor and advtsa a cloa*d-«nd invaataant co^Mnyi
anil to advliB an opan-and company, l.a., a nutoal fund. &■ a
rsault, bank holding compantaa now manage at leaat twanty-flva
Inveataant con^onlea with total aaaata In exceaa of $2 billion.

Maplte the actlona of the fadaral banking agenclaa in
undercutting the aiasE-Steagall Act, the banking induatry haa
decided to aeek ita complete repeal. The banking industry would
have Congraas believe that the Glasa-Staagall Act waa an ax
In public relationa lAlch ha* now outlived it* uaefulnasa.
Glaas-Steagall Act, however, simply restored the historic aepaca
tlon between comerclal Banking and aecurltlea activities w
was unwisely abandoned in the 1920's. Horeovar, the Glaas-Steagal
Act not only helped restore public confidence In the banking
ayatem but haa generally prevented the recurrence of the abuaea
of the 1920*a.

Recant experience Indicates that the problem la not that
the Clasa-Steagall Act went too far, but that It haa bean evaded.
Sponsorship of REITa

The

the efforti
banking.

Aftei
Federal Bei
holding company
clal banka

> than

itory of bank managed real eatate

It shows the hlstor:

of the Congraaa

i confine banks to the bualneaa of

1970, the

the Bank Holding Coa^any Act Anandmenta c
larve Board adopted regulations permitting ■

La inveataant adviser to a BEIT. Co»»ar-
proMptly proceeded to form REITs and provide REIT* with
11 billion of loans. Between 1972 and 1974. while
more than doubled, those of bank -sponsored

c wisdom c

D„ii„.db,Go(5glc

KIITb Inoraa^Ad «bout taa-toU to constltnta approxlBatsly ana-
third of induatry aaacts.

Proa thalr vary Incaptlon, banka aponaorlng RBITa wigagad
in practtcaa which do not B«*n conalatant with prlnciplea of
aouad bulking, rlrat, thair proaotlon*! octlviclaa mra
qusatlonabla. Slnca tha aponaorlng banX and Ita MIT oftan bad
tha aaaa offlcarat it waa no aucprias that Inveatoca worn induced
to purchaaa REIT aaoorltlaa In rallance on tha aponaorlng bank
ttaalf. Indaad Id proBotlng thalr SBITa, hankers atreaaad tha
r««l aatate axpartia* of their banka.

Sacond, bulks uaad thalr ability to nanlpolate the fin*noial
affairs of the RZIT to the advantaqa of the banlC. The bank's
advlaary fee was ordinarily based on Che annunt of the SEIT's
asaets. BankSi tharefoce, had every Incentive to swell the site
of their RBITs by caoslng them to borrow exceaaivaly and to Bake
loans without adaquat* review. At laaat one aajor bank's failure
to Bake adequate reserve provisions for losses in its RKIT waa
allegedly due to ita deaire not to lower tha advlaory faa It

Third, there were aejor confllcta between tha boslnaas
Interaats of banks and that of their REITS. Loan* that were Judgsd
too risky for a bonk wsre sliqtly pasaml on to ita bsit. SlBllarly,
loans which a bank itself could not sake could lawfully be passed
on to the REIT, thereby eoBplanantlng the bank's own real estate
activities by not refusing a loan to a good bi

Digitized bvGoO^^IC

Thaev mce subtla conflicts of Inearaat. Banks profited
fron the uae of tha 'float' cr«at«d by tha REITS' loans to
davelopars who ware bank custoaars. In addition, banks aamwd
co^Dlasiona on tlia placanant of REIT loans and racaivad fa«s as
the REITs' tranafar agents, cagistrars and dividend aganta.
Thay also l«nt InMnsS suns to thalr captive REITs, which had
the triple effect of producing Interest incoaa. conpensating
deposits in the bank, and expansion of the REIT ossst base
enhancing tha bank's advisory fee. Finally, there appaEently
vera prafaeantial loans to REITs controlled by the banka' own
offieara and directors, which in turn gave loans to thasa saaia
inaiders.

Hhan the speculative real estate bubble of the early 1970 's
inevitably burst, bank- sponsored REIT* and thair aharaholders
suffered the consequences. Although we cannot distinguish
between bank- sponsor ad REIT* and others, at least seven tl£ITa
have gone into bankruptcy — another 11 have failed to pay
interest on thair subordinBted debt, much of which was sold to
public Invaatora; over 40 REITa have nominal or negative net
worth; and another 19 apparently have been kept afloat by
intereat rate concessions from their banks. REITs owe over iS.i
billion, $7 billion of It to the banks.

The rescue operations which banks uountad to bail out
their SSITa have diverted neadad moniaa which would have been

Digitized bvGoO^^IC

avatlabla bo othisr barrowsrs. Fsx axaBpla, Cbas* Manhattan
BanK baa taken av«r about $160 ■llllon of Its ttBIT'a loana.
At laait two BBallar bank holding coBpanlaa hava failad bacauaa
of tba drain of raal aatata afflllataa. Invaatnant adviaara
««mad Invaacora agalnat puecbaalnc) bank atoeka.

The banka had llttla choice but to attampt raicua >iaaions.
Jta eajor nXT eradttori, the banka obviously wtahed to avoid
bankruptoy proceedtn^e. Farther, eince the original proBotion
of bank RIITa had lotantioaally blurred the diitinction batwaan
the bank and the REIT, the banka had to protect their own naaaa
and reputatione. On top of all thlai the Federal Reaarve Boainl
preasuxad the banka to 'ball out* their RSITe for faar that KBIT
failures aonld lead to a 'financial panic* end vould endanger
■the atabllity of the financial Byatea. ' At the soiai tlse, bank
regulatory authorities aought to ahleld the public from the (acta.

Uter ravieving the banka* rescue attaiqits, one observer

warned that exaainatlon ofi *ABarlca*s last axpariance {of] a

pattern of banks coning to tha aid of troubled affiliates revealed
such ahuaee as to lead to the Glaaa-Staagall Act of 1933> seperat-
ing coBBiercial f roai invastawnt banking. *

In abort, tha KBIT story la graphic and current confirmation
of the SupresM Court's analysis of the haiards which lad to the
enactmsnt of the Olass-Stsagall Act. By intarprating tha Glass-
Steagall Act narxovly and giving a broad interpretation to tha
Holding Coai^any Act, tha hank regulatory agencies produced the
very evils which the Supreme Court enumerated in the Camp caae.

Digitized bvGoO^^IC

8pQn»or«hlp of CO— on Triiat yand> and Coll*otlv PM>»lon TvuOm

Ma also ballflva that thaae haarln^a offar the opportunity
Cot th* Congraca to taka naadad aaaauraa ragardlng tha currant
attanpta of tha banka and bank ra^ulatory authorities to convarC
bank coanon trust funds and collaotiTa panslon funds into waaa-
■arkatad lnvaat»snt vshlclaa. Tha daolslon tn Caap, though
dlractly tn point, has not datarrad tha banka ttoM thla affort.

Tot axaaplai wa hava with oa today coplaa of ads onrrantly
bain; publtabad by banka In nawapapara and aaqasinaa alaad at
hundrada of thooaanda of aaall panalon plana. Thaaa ada do llttla
■ora than tn^pat tha collaotiva funda' invaatnant parforaaoea.
Tba Fifth. Thlcd Bank of Clncliuiatl'a haadlins is 'Kntaring our
Second Dacada of OutperformlTig tha Dow Jonaa.* Blbamia National
Bank'a haadlina atatas that it la 'II.' Tha national Bank of
Datroit's ad conslsta of a lo-yaar chart coaparing tha parfonunoa
of ita co^nglad aquity funda with tba Backar Hadian.

Miat Boat ba anphaaiiad la that thaaa aalaa natarlals aca
alaad at aaall, unsophisticated anployaa banafit plans. Thara
ara ovar 800,000 a^loyaa banaftt plana in tha country with laaa
than 100 participants. Mian one viawa adveriiseiiienta almad at
hundrada of thouaanda of staall plana, and which tout Invastaant
performance with scarcaly a word about fiduciary axpartlsa. It
aaaaa difficult to baltava that the banka ara not aarchandlslng
intaraata In thaaa funda in violation of tha Olaaa-Staagall Act.

Digitized bvGoO^^IC

Na ballava that thasa haurlng* *ftord Congraaa the
opportnnlty to raaeflm th* Uatartc natioDBl policy that
pEaliU)lta I iiiiMai i 1 ■! banks and bank holding coapanlas froa
angaging Ln tha ganaral sacurtttas busbiaia. Ovar 100 yeara
of aKparlanca tndlcataa that tMa nattac la far too iMportant
to be Isft to tha bnalnasa judgaant of tha bank* or to tha
adMlnistrattv* diacratlon of tha bank ragulatory autbotltlaa.

Digitized bvGoO^^IC

STATBUSKT OF THE
tNVBSTMBNT CXJMPANT I^STmJTB
BEFORE THE

SBNATB COMMITTBE ON BAt^KINC

HOUSINC AND URBAN AFFAIRS ON S. 72

Jaa» 16. 1978

Mr name la EhTld Silver. I am Praaldeiic of Cba iDTeacmeiit Companr Inslltatc.
With me codir !■ Manfaen P. Flak, the lasduta'a Genenl Couosol.

Iha InvasuneDt Company lastltuta Is tha uHoiul aasociacloa ol the Amerlcwi
mutual Imd Lndustiy. Its membersblp Iscludea 4S4 open-end luTeitmem companies
("mutual ftinds"). cheli; IscaBtmeiil advlaeia and pitDclptI uudaiwilten. lu mutual
iud members account for over !>0% of lndustiy assets and have approiinutdy seren
mlllloo shaiebolders.

We greatly appreciate the opportunity lo teatlty before you in cODnecdDi) with
S. 72, A BUI to Amend the bnk Holdlog Compeoy Act and The Btnic Merger AcC We
have CeSUlled before you Ln the past In connectlOD with similar leglaladon, and on
March 21st of this year we submitted i wilEieii statement reUting to S. 72.

We sirsogly lupport enactment o( S. 72. In particular, we support enactment
of SecOoa 301(a) which would Ugbten up the tests ctntolned In SecttoD 4(c)(a) of the
Bank Molding Company Act reladog lo the permissible noa-£ankliig actlTldes ol
components la bank holding companies. In addlcloo, we support the a

D„ii„.db,Go(5glc

Saaioo 401 of dM Ull irtrich piovldM ctMC u vMTitr foaaS bf Ibe Fodanl Rbmtt*

lUtil. ind wUcb flirilMr acfileitif dmlaa ■ uuioiicl tank Oa tlgtc ta oogaga In utf
■ctlvltr pcofalbltad to It ondar inr ocbor prorttlaa at law.

Cur teaUmoDr codir wUI locua oo die Incnaalng acHTltlaa at buika uid bud
boldlDg companlsa Is [be genetal aacnrltlM bioUaaa. For ner 100 7aai«. the

engigliig Id these acilTUlea. Ttda loag-atuidliig paaltloo baa bean buad on Coograia'
ccocem that bank InrolTamast In the aecuilcle* bualneii InerUably will result In dlaaatar
tot baofca »'y('"f In diasa aetlvlllaa, and hence cause aerere problema lOr the anllre
Ameilcan econooiii; ajratem. Caigreaa' caicatna hare b»^ ampir JuaHfled br evanta,
most recently bf the cdsea wMcb reaulted from bank aponaoraMp of aacurlde*
ifllllacea In tba 1920'8 and from bank aponaorshlp at real eatate Inveatment ouata In
the early 1970' a. In our taattinony today ws will demonstrste chat a wide Dumber o(
QdsElng bank secuiltlea actlTltlea, '"-'"■♦'•■g bank-managed mutnnl flmda and doaed-
oid Inveacmeor compuilea. bank-apeisced aucomade isveatraenc idang. tank-aponaored
REITs, and maaa-marcbandizlng of bank coUedtre penatoD ftinda, are cootrary to tlie
basic Inceu of tbe federal bsnUng laws, and Indeed TloUce specific provisions of ttaooe
laws, Indudlns the Bank Holding Campany Act as amended in 1970. '

' The leglalaClTe htstciy of the 1970 Act makes It abeolutet; clear tbal CocgreBS did not
Intend to permit non-bank components In bank balding compaolea to engage In securities
acdvltle* proMUted to banks tbemadves. See the dooi colloquy bemeen Senators
Vrilllams and Spsitanan. qnotad In full on page 3 of our earlier scatemeiu to cUb
Committee, dated March II, 1978.

Digitized bvGoO^^IC

W« ballnra tb>t the Inccoductloa of S. 72 itlbrdl Congroaa the appoitnaltr to

DkAke It clemr diet benke and bank **Hdtrg compuilee axe profalMted troa mgiglnj ia

tbeee acdTlilea, which. It left unchecked, could Oxeetea our padcMial *p«iwi«i ariteni.

Spedflcelly, we recoDunend thee Coograee meJu It plain that baolu (cd bank tiniMng

eompanlea ue pnUMted tram:

- apaoMtlns or uMdog open-end Inveenneitf compudes
f mutual fluids")

' Bponaoiliig or uMolog doead-end Investment compeniea

' aponaoilng or uMalng real estate investment trusts

' Mlling itf ereets In common tnial Ainds ocher [ban to due

, aelling IntereeES In coUecdve peseloo fluids other than to
Uxge ud medUun'-slze corporsce penaton plans (and aOC CO
Individual raOrement accounts, Keogh jians and small corpoxats

fluda and coUecdTe peoalai Auda

We ballero that It would be useflil to begin hp brlafi; summarizing the Mstor;
of the federal '""'^"g laws which, lOi over iOO years, have sougl
benk* and ttwtr afllUstee btni sngsglDg in the general securities
THB FBDBBAL BANKING LAWS

At its odglns in the nineteenth century, the modeiii
was based en a complete sepentloa of commercial bauUog and securities actlviilee.
TUs was modelad oo the En^sh system which "ci^aidared ic

Digitized bvGoO^^IC

la Rodn and boodi an Inprapar builnaaa puradt" tot conunerdtl buta, ' Tlw
NMlaaal boUng Act at 1864, wUch (lanUd imHbpiI haok* ceiutn Ilmltod pm«n,

aao-OorazmiMDt aaoullles. ** In tlw aady 1900' ■■ tta CompCToIlar of tlw Curraocy

■acutldea. Howavar, lo 1902 tb* CcmpcroUer aiui ntlad tbtc Tha NMIomI BuiUiig A

In oRter to ardd ttieae tagal prohtUtloiu CD dw aecuridea acttvlilaa of oiUonal

I, tha banlu reaoRad to tha aow-bmlltar darlce of creatlas ooa-banlc ■fflilatea.

I worda of die Treaouiy Deputment'* I97S laauaa Fapar:

"... In dw bee of tbe ComptroUei of die CuneDC^ ruling that oallaoal
taaka ceaae cheir uoderiTillliig of alocka, che major utlooal banka,
commeadng [n 1908, created secuiltlee atSlUtee charTend under
Kate law. Tbe aflUtatee were bree of Federal regulatloo and Una
able to eigage in tlie wide range of lecurlUea actlrltieB pennlttad
under state law, induiUng tbe undeiwiltlng of corpoiate atocks."*"*

' hiUna, "Tbe Dlroice of ConuneicUl and Inreaonaoc Banking: i
IS Baoklag U« Jounial 4S3, 4SS (1971).

Jideaa, Vidume 2 at 389

' Treaauiy laauea Ikpei AppendLt aupra, at S. (Footoate omlned).

D„ii„.db,Go(5glc

Tb— dwaloimatts, whlcb wara dliacdy coai&iy to cto MmmIc Mpandoa
«/ comiiMreUl b*nkln( wd MculitM udvUlas. dU wc go lainnHcad. In 1911 ttaa
SoUdlor Caienl and AnoinaT CmwiiI of ilw Unltod Souo w«i« of the oElaloa iliu
buk aecuilclea iflHUrf unoganatfa, witlch pecmiiud uHowl Imaka to do lodtnedjr
wfau Ctuy could QOl do dlT«ctIr, caaMUnml u "utuipadoo of Fodsnl unbuitty ud
(wen) In vloUdoo o( Fadoal Inw. " HDwarar, for nawoj narar — r'*'"' tba Taft
iM taka lof acdon. ' In addition. In 1912 dia Rijo C

UodaiWTlilDg of coipoimte aacuittlea, based no cooc

ecDoomlc pnrer and the bdlet ctiat secuilda* acttvlttea vara not a propar linctlaD of

banking. Howarar, for a Tailety of unrelated reaaoaa. Coograaa tailad to enact tbe

raeommended leglaUllao. "

Thera now lOUtnrad tba fcmilUr paRem of cbe bank ivgolatolf autboilUea

lobtrrlDg OD bebalf of the eoounerclal h«niring Induatiy to completely break down (tie

hlatoilc sapaiatlao of coaomerdml banking anil cha aeaumes bualaaaa;

". . , [T]be Comptroller did not eofbrca tbe axtiOug rastrlctloaB on tba
pooers of oadonal banks and Miggeated greater leniency in cha natiecal
banking law*. Fran 1913 to 1927 the Office ol Cbe Comptroller wa*
ctM dil*lng force beUid tba laglalatlon wUcb confeired an naltooal
banka cbe power to enpga In a modified aecuiltlee faualneaa."*"

' PerHna. aupra. at 517,

** Treasury laauaa hper AppandU. aupra, it 10-12.

"* Peach, The Secntlty AHUlataa of t^tlonal EMka. it ISO (1941). (Foooots omitted).

Digitized bvGoO^^IC

Tba CiNDpatdisr'i aflortt oa ^'■'**'* of dto >miiHm liMtitfTT rvottod lA Qio
puaaga o( ttaa UcFaddea Act Is 1927 wUdi p«tmtaad Mtlnml buaka to uodarwilca
MdUdXlAtf MM ■uttnrrlritrl bf iSm CompAiUvr* Tba CumptroIlM tooa paimitttd "f^l^TMl
budcB (o midsrwilta both debt ud wfulty ■■ iiiIiIm * Follmrtag paisaga or iJm
UcFuld« Act, "CoauMTctal bauk* bacama lacraaiiaglir mora BctlTs la tbs Mcudtlaa
malfcat sbara of new bond Isaua parOdpatlaaa ma boowd tram 37
lant In 1927 to 61 par caat In 1930. ... 4 tha end at the dacada eomnaicUl taaka
hair aAUacaa bad bacaae tiie *»"*"■■* IOicb la the inToatmooc h^^nwy flald*'"*
TliUi CO iIm ara of tin Graac daah. cmmarcUI bauka, thma^ tba da*lca of

comi^acciT amaahad tha tndltloaal bardar batwaan cGmmardal hawHw^ uid ifaa
■acuiillea bnataaaa. Tba nalloiia] hanUng lynem *nd the oatlon a* > wbole were ra
mSet (to cooaeqaeocaa.

Tlma doea Den penult ua to Ailly doacdba the mrrlvl abuflaB which reanlced
from commeiclal bank entiy Into cbe aecuilllaa buflneaa In the 1930's, otbct than to

ctuldered too "daky" br the bank IcaelC ckun|lag bad bank loua and Inre
iKo laaidtlaa aHUlatea' portfoUoa; ihe purchase bf banka and ccotroUed tnai accm
otgaaoccaaabl taeuea undenrTlttaii br ivnildea aflUlatsK Impiudent and eiceafllTe
bikloaaa to prevent the coUapae of securlclei aflUlacea; beak loaas to puichaaara o:

* hrklaa. aupra. n. 27 at 494.

" Ud, at 495. (Foecnota omictal).

Digitized bvGoO^^IC

■ecuiiaM nndsiwilttai by lCSUum: tank louu to corpoimdaai oiliig imirltlM
itOllaM* as undazwiUars; abuiaa of raUtlooBblpa wlcli conatfciaimit buika to halp
dlitilbut* Mcniltlaa KaUlacaa' unilttrwTltlD(i; and pmootl MU-daallog bf bank ofBo

^ cha aail7 19X'b therama a |«De»l nuloaal conaamoa ibac csnunaiclMl b
waa tad baen a malOE contrtbwpr to itaa GriM Ciaah as

". . . Manbara of tba Qaaa Coounlttaa and Aa geaacal putllc bdlevod at itM

tlma tiat the lacuiltlea ictlTltlas of banks coacxibula] to ud ■cceaniaMd
tba acooomlc coUApae. Tbay bdlarad diat tha lanUng cammuBitj, aa tba
dspoalcaiT at IndlTldual savliiga ud the InMcudon wUcb c reatad credit,
bore bigbai atandarda of raapooalbilltT aa a reault at lea ciadal poaUoo
of Influeoce orar tbe (Cate o( tba ecoaomy."'*

Aa a TMult, Coogreaa enuted tba bnkfag Act of 1933 (tba Qaaa-Scaagall Act) vidch

reatorad the htatodc aepantlaa l>ef ean cammerclal t^iMng ud tba general lecuiltlaa

For example. Section 16 of GUaa-Steagall proirtded tbal a uHonal bank "iball

w mf laaue of aecuiiae* or itock" lod (hall not parchaae "for Its awo

■c count. •■ aiqr abarea of nock ofaay corpontton". and Section Zl prohlMled a otElaaal

tank from — ipj^ng lu "[he bualaesB of Issuing, underwdclng. tdllng or dtauttuttnf. at

wboleeale or leull. or tbniugb sjmdlcate partldpatlCD, bonds, dabentores, notes, or

In tba 4S rears since the enaccnieiu of the (3aas-Steagill Act, Coogreas bas
steadbatlr relised to tamper wltb tbe separatloo of commercial banking and the

' Treaaurr laauea Aper Appendix, aupra, at 17.

'■ Bonking Act 9f 1933, Rib. L. 73-66, Ch. 89, 43 Sut. 161(1933).

Digitized bvGoO^^IC

MOuUlM batln—*. dMtin npncad aRampn by dM buUng taiiaaj taS tb
ttgaluotf MiflwrtB— toT^Ml OAis-StaAgKlI ud nmnt ra Uw dugunis p
ttaB 192a'a. Aa «a ihtU dMnoaftme later 1b at

Slaca tiM anactmatt of Oaaa-Staa^Il, commaxdal bulks bara baeoRM lar,
br largar, ao dst ctaa dwigcra biharaot In bask Ivralvamat la dM aacuritta* tartnaaa
ar» areD iraacar todar tlan diar vara 45 raaca ago. In 1933, commarelal banks had
noo'tnat aaaau ot $46. 1 UUton and tnat aaaau of (2S bUlloa. • At dw a^ of 1976.
theaa amauta bad fcoma co S966 bUlioa and H36,6 bUllon, naapacttralr. " Tlwaa
eomUnfld coDunardal bank aaaeci of 1I4S2. 6 billion axeoad dia aggragace aaaec* of
all odiar *—f*^*l laadndaoa, audi aa mutnal aaTlnga banka, aavlaga ""* lonn

Idlt union*. pilvatB and goranmant panaloo Ainda. Inauzanca compudaa
, Moraorar, thera la cnnciirrratloii widdn coocantntloD. In 1976, tlu
Mau ot the tap 10 commarelal banka amountad to 36. 7% of all cominorclnl
■aaif. *** Moraorar, tba aaatta of juat tliana 10 Mnka alooa ajcaadad tba
tenl aaaata of all ottMr major crpaa of financial InadmUooa ccmUnad, otbar tban savings
and loan aaaodatlttu. Tbars ara 4 h*ww« vUcli IndlTiduaily bava comMnad commarelal
and tiust aaaatswMchars largar dan tta ratal asaata of iha antlia munial AudlnAiaoy.

* GddamitG, Financial Intarmadlartaa In tba Amarlean Beonomy Slnea 1900, NUlooal
Boreau ot Economic Rsaaaxch Sauttaa In Ca^tal Formation and Flnaoca, No. 3 {19S8k

*' Osta compiled from tba Dacembar 1977 Fadanl Rasarro'i "Ho* Ot Funda Accoonta:
Aaaets and LlabUldaa Outstanding 1965-1976", and dia 1976 Joint rapott ot tba fadanl
banking agasdea "Tiuat Aaaata of Insurad Commsrclal bnks 1976".

••• "Tba Fifty Largatt Commarelal -bnklng Companlas", Foituna, July, 1977. at 162.

Digitized bvGoO^^IC

Tb* pouotlal ol baaka to .doml
of 1977, fadeaUlr-ctButerad banks wUb u>«a In sxcua of fT5 mlllloa bald ttw (oUowliig
peicaougaa of rotlng nock of Out Mlowlag major compaulaa: 19. 5% of Caoent Mocorat
20. 6% of Ezxttu 20. 9% of Dow '~h»."''--l; 22. 9% of IB.!: Z7. «( of SCanlazd OU of InlUiiai
and DTcr 30% of Ford, Ccterpdlar Tnctor, K Man and Kdloggi. Tbaaa baaka owoad
20. 9% of tb« UBuiiiliuua coal mlMng lodutrr; 23. 3% of tbe ehamlcai aod diug Indumy;
2S.6%af tbe food prodncc<gialnmlll Indusny, ukl 27.4%of tba ftunUara and flxtnra -
Indiaiiy. * Ic auiat b« anpbaalzed thai ibaaa Dguna omlc itw atockboldlnga of aMM>
chaiteTod tanks vMch ale almoac aqual co tboae of fedoraUr-cbaitarad banks. It Is dau
fair to assume tbat tbess poicenuges substantially undsntata die atockholdliits of all

Supeilmposad on tbla donilnanC Block mniersMp la i pervaalre system of loter-
locUng dtrectorstes beneen banks and aon-flnsncUl coiporatloos. TUa systan Of
tolerlocklDg dlreccoracaa was Ugbllgtned In > recant Senate Staff Study .' * Tb« Study
found 181 Mpaiats dtreccor Interlocks aloae Jusi betwoan the Sve largsst banks and
tbe llTe largest nm-Snandal corpoiadona. "* In addlilon, the banks Inceriock lodlractly
among Ibemaelres by baving directors oo the boards of tbe same corpotatloas. For

* Data comfiled from Spectrum 3, Bank Stock Holdtnga Survey. Decambar 31, 1977.

** "Interlocking DIteccoriEea Among the Major U. S. Corpo radons", ScaS Study
Prepared ty tbe Subcommittee on Reports, Accouatlng and Managanent of tbe
Senate Committee on Govenmental Afltlra, 95th Cong. > 2d Seaa. (January 1973).

D„ii„.db,Go(5glc

. . [T[baf darlMd am u
gUherljiy dapoaiti and ■"'"'<g loans. Tboy opaoed offlces >l >

and increulji^y enooded dHdr openltOM m d«w g«ognpUc araaa

Hw^ to bacon* ragtooal in scopei legtooal tioka morcd to
rffTiMifh a nadcoal preaenca: and our Nitloa'a lArgesi banka

lookad more and more to opportanlttaa abroad.""

lo the aco-baaklD8 area, tbe Fedeial Raserra Boaid baa vPt^^"! ^^ (FpM ^ DOO-bank,
•cQTltles, and In 1971-1976 apjiroTad 3,753 CidlTldual appUcaUcna ro engage la cbesa
tcdvlilea. *" The bejiJca' aggreaalTe puah for growth waa accompudad bf a sharp
drsp la tbe capital latloa of Inaured commeTdal bank*. Between 19fit and 1977, capital

' Ud, at 1^

■■ Teatlinoay ol
Canmlttee on bj

"' Sange, "A History of tlM Bank Hiding Company MOTemant 1900-1978", priaied as
SKdu n ot"'nie Bank Holding Compaq Morament to 197S: A Compeodlimt". at 35,
Stik))r 0/ die staB of tlw Boaid of Coreiaors of tbe Federal Heaerra System (April 197S).

Digitized bvGoO^^IC

288

«■ a puMot of dak aauu Ml (lom U% to 9. 1%. * TMa oatuiaUy taaa lad to
concen orar dia scatlUtr of the mhiwuI h«nirinj synton. Fedartl Reaeive Beard
GoTanor Houy C. WaUlcb lacently acued Uiat It wai (brtunale In Tiew of tliaaa
darelopDiBitB and tha 1974 recasalai Out bank* and bank bcUtng compaidaa «ai«
pradudad br '^ QaaB-StMgall Act teoax irging In cbe gnnanU aacnzltlsa baalaaaa. **

Deajlte tbas tmcta. Ibe >»"iring loduanr la aogagad Is an all^ut ettDit to
tapMl tba GUaa-Staagall Act and to onca again pennlt taida lo opente aacuddaa
.wiiUrjM .. lUa Oma In dw bzm at opao-and and doaad-aod inrMCmam compantaa.

BANK INVHSTME^f^ COMPANiaS

WhU« the Oaaa-SteagaU Act pioUUt«d conimetctal badka tiom *"iPB'"ir la tbt
geawal aacudttaa buatneaa, commercial banka hare been peimitted to po«l tnull
tiuat accounts In bank-maaigad common tiun liodi. Is I93T tha Federal Reaerre

* Updated data baaed on Beisoo, "bak Holdlcg Company Caplul", In Canpoidlum
at Major laauea of Bank Reguiaclaa, Pdnl No. 2, Printed (or the Use ot cbe Senile
Commltlee (s Buifclog, Heualng and Uibao Afblis, 94chCong., latSess., at 4SS (197S]w

*■ "Tlien came dw receaaloa of 1974, ubich brougbi aericua loasea, AC chat dme,
newly eatabilabed bank '"'■""g companies bad been extending cheli operadona into new
areaa of *in«mH«i actlTlty. aucb as roottgage banking, consumer finance, and
adrlalng and fnf"'^^' real eatace isveatmeic crusts. The boldiag companiea' experience
in many caaea «aa autSclaiCly adverse to }uscil)r cbe conduaioa Ibal cbe banks were
fortunate oot Co bare been turdened, at tba same time, wllb secudclea afUllatse. In
1974, Qaaa-Sceagall stood tbe banks in good sCeul". Willich and t^rtVf. "ReHecdons
m Glass^Steagall ", Bankers Magazine, March-April 1978, at p. 9.

Digitized bvGoO^^IC

Bosid Brat «doiMd tuIm penmittiiB nmtloiMl buiki to opetsts coIlacdTB InTaamwut
bndi In IliitlianDco of "bona 9do Djbcl<iy {xirpoHe" and noc solcdy ta TeUclas fOr
tnremnaiC fuipoasi. ' Tba Bcwnl rapeatadl]' mned banks agsliiK uilsg conunoi
BUM biuti u inTMBniB TttdclM, prewmnHT Co iTold TlciUaoiu of tba OaiB-
Steagall Act. " In 1960, the Fedonl Beserre Baard propoaed ftirthar llmltatlODa Co
prerent the use ol commoo nuat linda loi rarocaiita larar tItoi ciaata wMch In imUit
werv atmply riaiiginf igmcy acccuots* *** For tUa afld ocb^t taaaouAi cha ^nMng
IndostiT preralled upon Caigiso la 1962 to oaaafsr cootiol orer — Hn».i Oank traK
pollers from cbe Fedsral Reaorrs Boanl Co Cba Conpcrtdler of tba Oimacf. ""

• Fed. Rea. Sd. Reg. F. 117, 2 Fed. Reg; 2976 (1937).

" Sae, a.g., 26 Fed. Baaeire Bull. 390, at 393 (1940): [In panalttlBg] cbe oparatloa of
Conunoa Tcuai Funds, cbe Boaid laleodsd ibac ■ Cancaoa Tniat Fund abould be uaed
merdy Co aid In tlie adnlnlatEadOD of tnisca b;* a trust Insdcutlon tbrougfa tbe
ccmmln^ed Invasdnent of funds of rarloua ousts.. .1) was caotem[i*ced chat [cba]
Ouat guile or form should not be used to enaUe a ttust InsUCudoa Co operace a
ComiDoo Tiusc Fund as an Inveslmenc trust actracdng money seeking Invesanent
lime and to onbark apoo what would be In etteci Che lale of paiddpatlan* In a
Coounon Trust Fund Co the putdlc as laresaneDta. "

"* 2S Fed. Reg. 12479 (I960).

"** tf backer. "Bank-Sponsored Investmeot Management SerTlces; A Legal Hlatoiy
ud Scatotoiy iDterprecaclTe Analysis - Art 1", 5 Secuiltle* Reguladoo Law Jouratl,

It lJl-52 (Summer 1977}.

Digitized bvGoO^^IC

Tba CooiptioUvr iciad quickly to paimlt buiks eo Bpoiicai coounlii^sd TMatglng
igmcy accounca ud dalaud tha cBqulzHnaot Oat 4 "bona flila Adadur pocpoaa" ailat
tor anahUsbliig ctaa larsaanent uMmuj islattoaaMp.* In Aon, the CompaoUar
a to apooaor aad opanie op«D-Md In

Tiya CcQipQtdler's bald attempt to pvzmlt commarclal baoka to ravntor tbtt
gansral McuilciM bnalnaM on ■ wbdaaile baala, was of coune mack dtnni br Ota
United State* Supreme Court In 19TI In lea laodmaifc dadslon In Inreatmit Company
Inatltute v. ''""p. " Tbe Court did act baae tta dedalai 00 a tectolcal readtog of th«
Qaaa -Steagill Act, but found tbat "the potential hazarda and abuaaa diat floo from a
bank's cntz; Into the mutual Invsstment tualnes* aie the saine Oailc hazaids and
abuaaa that Cangreaa Inlaided to eliminate about foity years ago. ..." Time doe*
not permit ua to do more than quote a tepreaentaiiTe excatpt ftom tba Supcame

' Reg. 9 19. IB, 28 Fed. Reg. 3311 (1963).
■• 401 U. S. 617 (1971).

Digitized bvGoO^^IC

"And itera are otiMr iiTirtil tazanli of tiM ttnd Caagna*
acat^ to dlmlnalB wlch clia pasMge at the Oass-SteagaU Act.
The bank'i ttala la the limaimaiiE ftind mi^ diacoti tia cMdIt
daddooB or load lo unaouiu] loaoa lo the compuilea la vlilcli
tlM ftuvl *»d InrMtad* Tlw hawtr ffiig*^ arpit^r ttv caatliitatiMi
rHiTl^tUp will] Us commercial and iiiduacilal c:
tlia bMMAt a< (lia ftmd. Timtt

tt hclUdea irailaUa i

luae [be bank would ha
a ptnlcnlar IntMonenE dacUtoa — t±M dectaton to InrMt la
the baiik'B loraacnaiit Bind -- tha customar might douix Qia

such an InveatmeiC If the nind lovealment ahould turn out
bad^ there would be a ttanger that the bank would iMe tbe
good will of thote cunomeTa wbo lad Envealed In Che ftind. It
mlfte be unlikely thai diaaacbaittinent would go ao hr aa to
threaten the aolvency of the bank. But because hanks are
dependant on tbe confidence of Ibelr cuatsmeia, (be ilefc
would not be unreal. "

One might have expected tbat tbe Supreme Court's declaloa In Camp would

have Snail]' put to rest the questtoo of bank entry Into the aecuiltiea bualneaa la genen

or at a miolmum. Into the mutual ILmd buaineas la particular. Siibaequent erenta,

boweret, have demonaiTated that tbe banking induatiy and the bank regulatory

authoiUlea Tlew Camp doc aa a banlar, but merely as an obstacle to be avoided a*

baaka aggreaalTely seek to engage la more aad more aspects of tbe securldea bualnaai

For example, die Comptroller of the Cumncy has autboitzed banks to establish and

Digitized bvGoO^^IC

oponte uitODUlIlc nock Invannenc plant. * Moraorar. only lour moathi altar Iha
Suprsme Couit'a decUloa In Ctmp, che Federal RMerre Boaid Issued ■ nocics propoalnf
that the list of patmlaiUila nonbanklng actlTltles In Raguladcii Y ba axpandad to Ineluda
aeirlogia anliireatmeot adrlaartoin lavaanneat compwir.** Altar haailaga tte

sane "aa InvaMment adrlaar, aa daOnad la lafaKIO) ol cbe tnraaa

of 1940. to an Inraatmaor campany ragiatared undac thai Act", "* In lU ai

mllag, tba Board relniarpraud cba Qaas-Siea^dl Act and tfaa Camp caaa to peimlt

■ caropDoecs is a bank hnldtng company to organize, spoaaor and adrlae a datad-and

InTestmant company, and to adrlae, hut aot "apoasor, organlza or concral", a maoial

tlnd. The Board's daclalm has resulted In compooenia la bank holding compaola* lerTing

aa Inrastmeot adrisars to at least slztaan mutual lluuls with total assets In aaceaa of

$1.33 >*"'"", and in tjank apoosorship of at least nine closed -end InTesimenl compaolaB

with total assets Is excess of f780 mllUoa.

" The New York Stock Bxchange and the Inreatmeat Company Institute Jointly brought
an acticxi In the federal district court for the Disiiici of Columhda against the Coiupcr oiler
of the Currency seeking a Judicial declaration that the Comptroller's regulation per-
mitting such activity violates the Glass -Steagall Act. Summary Judgment bald that tha
case was not ilpe for Judicial review. A petition for a writ of cerUorarl has been
denied by du Supreme Court. New York Stock Eaehange, hic. 7. Smith. 4M F, Supp,
1091 <D.D.C. 197S): atf d oo other grounds sub nom. ■ New York Stock By bange. Inc.
V. Boom. 562 F. 2d 736 (D.C. ar. 1977); cert, dmled . 46 USLW 3S99 (I87B).

" 36 Fed. Reg. 16695 (1971).
"• 37 Fed. Reg. 1463 (1972),

Digitized bvGoO^^IC

Id our lUw, dw Board's MOoQa ropcMwt « flagttnt MMmpt to clicnm*«t Om
Suprane Conzt'i dodaloo Is Ctmpi Bu± ■ponsonUp of cloaad-and flindi TlolatM
tlM Oau-StM^dl Act ■■ mucb aa doaa bmnk spooaonUp et muiul Itud*. Cla*ad-«od

Imlontl tlw waccBaa of tbalr orlglaad ■iriirltliT otforlnft li cdtlcal to cloaed-aod fiinda.
In ■iWltl'Hii rlnoori onri ftudf can uti do t^ tfaMlr torn Till no to cho ["'^^'^ tftor tlidx
Stk dlitillntloD it complatad. In dila coataiL tlH only ralavant dUCaroBna botwai

Aiadn thare would be cODdDUOus floUtlDaa.

n muaul ftud utd "mardy" ndrlolng It In Ulnioiy. In tltfaw cnaetlia bank ban •
"Mleanun'a nnka" in the «uccei« of the Aud md bank Inralram^ nliea Ite pofllal
br the nine typei of haurdn tnd ataiioB vUcb tbt Supreme Court redtad In Che Cninp
cnae. The bank obrlouity profits from the sales of new abnras of the bad since the
benk's adrlsory toe is based on tbe size of tbs lind. Furtber. since ■ mutual bnd
ahartfiolder may radaem bla Interaat in the fund at any time, new salsa are seeded
simply in order to prevtoc a* fund flrom coodniDady cootnctins and thenty
cootlnuaualy roAidns the fee peld to tbs bank.

For th««« raaaeoa. we bave cbellenBcd cbe Board's ragulatiaoa in a suit wUcb
la preeendy pcndUis before the U. S, Couir at Appeals for tba Dlititet of Colabala. '

Digitized bvGoO^^IC

DMiits cbc friemfly •ciloaa bf tba fedenl banking agenclM, the bMiUag laOiaaj
b«fl woaiocad Ita IntanUoa to sedi leglaUllon lo eomiJBtBly OTemun tlM C«mp mm. *
Succeaatre ComptinUera of tbe Cumncy state and restate auppoit far permlrrlng faanka

Tbe baoklns loduMiy azgaes cbat cha proUbUloaa ceotaliMd In dw GUaa-Steagall
Act, auu^ perbapa xdannt In tha yaaii of tlia Gnat Depresalao, aia Irrelarant In llie
modem world of tbe 1970'*. Hui A. Angennudler. tbe Senior Vice PnaUma tod
General Coonsal of Citicorp and Its prlndpil subaldiary, nHhnir, N. A. . tbe utloo's
aecood largeat conuneidal bmulc, stated last year:

'"Tbe basic needs In 1933 were to streagtben tbe commercial
banUng lystem and restore depositors' conCdeoce so that bank*
could resume thdi InteimedlaT; (ImctlcKi of belplog to ci»veR
tbe oadoo's savings Into productive InTestments for ecoootnlc
growth. Tlie Oaas-Stesgall Act was remarkably successlkil In
meedng diose public needs.

"Today, howerer, tbe commercial bankliig system has shaken
off a series of economic and Onancial crises and bas emerged
atroDger and more capable than ever. Depositors feel no loss of
coofldeoce. " ■ ■ •

* As recently as February of tUs year, the ChaitmaD of the Trust Counsd Committee
Of the American Bankers Aaaoclatloa reiterated that organization's inteotloa to seek
legislation authorising commln^ed managing agency accounts (mutual fimda). "ABA
Seek! Commln^ed Agency Accts: Confronialion With Sec. Industry Seen", American
Banker, Feb. 8, 1978, p. 1.

•■ See. e.g. , Transcript o( Hearings on Securiiles Activities at Commercial bnks
before Sut>commlttee en Securities of Senate Committee on inking. Housing and Urban
Afhlrs. December 9-lQ, 197S, Vol. 1, 70-71, Vol. 2, U4-12S,

Digitized bvGoO^^IC

Tbe Tlair« of tba prMant CompcroUer of ilia Curreocy are conulnad Is ■ apeach dtllrer^

lareKmeDt buiJdag and securltleB ludustiy. In tMs conaectloa,
bcnHTer, ao ulempc should b« nude Co reJuatUf die Uneg of
demarutlaa Coegrass may, or may ooc, have Intended Co dmr In
1933 through the Oasa-Staagill Act. Rather, v^ cerlew tbould
focus oa Ihoae lines which make sense In light of tba flnam-iji
neada and rayUstoiy enTiroomeDl of today.

■■What were the i

"Flm and foremost, the lagislatloo was debacad wbai the
nattoo was fa tbe depdl* ot its greatest depression. This was a
lime wbea tbe standard of living of most Americans waa bdng
shattered. The stock market, long the putdlc symbol of economic
well-being, was in shamfaies, [n this setting, neither the Admlnl-
stration nor the Congress had any reason to provide for a world
where Inllatlon presents the most serious ecoaoiolc threat and
compellcloa Is accepted as a farce for the pulilc good."*

Tbe banking induttiy would have Congreea believe chat tbe Glass -St eagsll Act

was an exercise In putUc relations which has outlived its usefulness. This conveniently

Ignores the [act that the Glass -Slea^ll Act aim|dy restored the hlstoilc separatlan

between commercial banking and Becurldes acdvides which waa unwiaely abandoned

In the 1920* a. Moreover, the banks' line of reasoning could be applied to all of the

rm leglslatloa enacted In tbe 1930' s. Including tbe creation of Che Federal

Digitized bvGoO^^IC

OepoBlc losuruice Corpondoo ud ttw emcanenc of chs vailaai fadanl Mcudllea Uwb,
Moat Imponuidy, tbta leasonlog Ignores the real poaaltiilliy chtt cbe Clasa-SMagal] Act

wu one of Che meieum wUch retumad aCaHilrj to cbe udooal buikliig syaten after
Ebe abuses of the 1920' s, not only reaiorlng puUic conSdeace In the banking syatem and
bdctng to lad Che natloa out of cbe depreaaiai. but prerendng tt

Fuither, racent sxpeilaice

naged REITs, Chat ve boh nm.
SANK REAL B5TATB INVESTMEIfr TRUSTS'

Altar the snactmant of tha Bank Holding Company Act Ameadmencs of 1970, da
Fedaial Reserre Board adopted regulaelona permitting a component in a bank holding
eompanr to act "as invesmiaii adrlaei or Hnaiiclal sdrlser, including IX) aerrlng as

* to prepadog our testimony on REITs we reviewed unpubUshad material bf Rof A.
Scbodand, Professor of Law, Georgetown Law School, and J. G. Taylor, 01, a studaot
at cuke UntrersiCy Law School. However, neither Professor Schodaod nor Mr. Taylor
have been retained by the tnstltute and the poetUcias set forth la this castlnioiiy are out

D„ii„.db,Go(5glc

thsadrtaoir compute for > moinsage or tMl MtualnraKmont tiiiat...."' laaOmB
of rdadvely »*j moUf aad real aatau spacuLatlaa, commerd^ tanks procaedad to
plo*lda mote and mora cradle to RSlTs, nnallr coCaUlnzmora chan til bUllco." In
Ob word* of ana oMaTrer: "Scoraa of RBITa bagao a compMlllveacmiiblan pun
work the aaqt mooaji. made primarily poaalbla ly the commercial banka. flowing lotcf

dMlr coflara. ^ tba and of 1974, RSIT aaaeca amount*! to orar $31 bUllon. ■■"

TIm nampade waa lad ty baok-apODaoiad KBtTs. Bacwaaa 1972 and 1974, wUle orenll
REIT asaeta more tbaa douUed, bank-ipooaoted REIT) lacreaaed about teo-lold to
cooailuta appnHdmacaly oae-UdTd of Iwhiao? ■!>«(■. CUilng cbat padod than weM

acme UputilcoOetUiga of tiank-apoaaored REITs iBTolvlag over S25mUll«D«acl).

4> 197S, 39 of ttM 100 largaat RBITs were ad<riaad by compoaenta of bank boldtns

' 12 C.F.R. 1222. 4(aH5>aJ.

"■ Zucker. "A Curreoi and Fuura Aiaeaamant of QiaRaal Estate iDreaiment Tniat
Imlustiy, " Wbartoa Scbo^ Studies In Botxeprencuisblp, Rapott No. 2. at 11 (1975).
(FooinoCe omitted).

■■■■ 1977 BEIT Fact Book, at 24.

Digitized bvGoO^^IC

From llMlr v«ty lacepaoo. bank-apaoBorad R BTTs ware ch>iactailz«<l bf
coofllcca of InterMC lyctcall)'. cba bank and Ita RBTT bad tbe aama atflcan aad parMo
ThsrefDie, It la baidljF nirpilaliig cbal Inrwlon puicbuod REIT HcudUaa In rtflaaca
on tfae tpooaotlttg buk Itadt ** Imlnmr Is promoclac tbalr RBITa to tbe paUlc, bauksn
atzaased tbe real eetate expenlse o( tbe tmnk. **■ Since Ibe adrtooT]' fee racitTed br
tbe bank waa baaed do tba amooat of tbe RBITl assets, bank* scogtt CO iwaU cba alaa
of tbdr H BITa bp '■■■■■'"ir tbem to bormr axcaeslTelf and to make loans wllbout

' "Tbe REITs ipooaored bf banks were usually merely a txanafer of Ifae bank's
real estate people and ictlTltles to a aepaiate corporate esUty, wUcb proceeded
wlcb common oSIcera, often commoa Ikcllltlea, and often common clientele and
vatures." SchncUnd, aupra. at ^1.

" "Stockbolder reacilaa at ^le jnaBliBg was CyjMfled £p the abaeivailOD of ■
liQlwaukee attorney wbo inreatedln tbe trust's stock wben all algos pointed up.
'I got In, ' he said 'because tMs was being lun by First Wisconsin and I felt thay

were ■ good, orderly imeatar -minded orpnlzailoa. Banks are Dadarad Key

to Relief for 'Very Sick' First Wisconsin REIT'. Americas Banker, April 23,
197S, p. 1, cd. 2.

"And justlflad or not, the feeling may also exist that if a REIT runs Into
dmculdea, the bank will stand behind It, ratber cban Jaopsrdlzlnx the tank's DSSie.''
Scluleln, "Recent I>Teio[inents In Ibe REIT lobisliy". Federal Reserve Board
Bank of ftiaton. New Bn^and Eccoomlc Rerlew, September -October 1972, at 10.

*" "BecoRilng on adrlaor to Chase Manhacun Mortgage ud Really Trust was the
logical eiiBialai at our curreit acHvltlea. Chase is tbe largest national orlglnacar
of constructloo and derslopnent loans and bas cooslderaUe experience in making
equity real ealale Inrastments. " Slepbea R. Dowaes, Assistant Treasurer, Tbe
Chaae Manhattan Bank. N. A. , "Why Chase Manhacun Sponaored a Real Saiate
Inreanneoc Ttustr'. Ttnsc aad Estates (1970) p. 1026 at p. 1027.

Digitized bvGoO^^IC

HtoqMM imlmi, * IroolcaU7. th— pncIlCM cnduigarad lanki wMcb bad mada unrtsa
iMtM to dMlr KBIT*. '* At IsBK ODs major hulCa fUlim Co mak* *d«quata roiarre
pnvlalaM tDrwiln-dtnraa ud laa«M wma allagadr (ki« to itc dMliv not to lovor cfa*
•dflsoiT ha paid br Ita KBIT. '" Howwer, Ola coofltcta o( lotaraat batwaao buka
•Dd tfaelT RBTTa want wall ba7«Dd Ctw araa of adrlaoiT t"'- Laana ctaat vara coo ilakr
tH a bankwanalniplit paaaadoDtottacaixlTaRBrr."*- It baa baa allagad cbat
baaka Annpad bad loam on itetr RETta, ••••• amllazlr, loana wtalch tba bank ItaaU

* "With teaa baaad oo cba groaa amaDoi of moMT lauad, uMaara bad tfrexj locantlTa
to encODiaio tnata CO Iwaiaga chatr aaaeta hy bomnrlflg. " Robatttoo. "How dw
BtnkeE* Cot Trappad In dia RBIT IXaaatar", Fortune. March 1975, 113 at IM.

'DnHnfttala pailod of lapld growtti, nioac tiuat adrisei* ware coupeoulad
according to cba aaaat aUe tf Cluli RBIT. The gieatei che level at moRgage
InTaaDnaota. dM gieaiar cha faa. " G. [^ BulSagcon. BxecutlTe lilce ^eatdent
vkI Gaiaial Cainad of the NMlooal AaaoclMlaa of Raal Estate lareiimenc Truata,
aiUreaa to the AaaoclaUoa of Raasrre Clt; Bankara. March 10. 1975.

'The uuat would throw aocae kid Into the room with a Ug-dma derdoper like
(Walter J. } Kaaaufia. who knew eaccly wbat be wanted, and the Ud wguld be
oraiwbalmad. ' one aource aajra, " "Too Much Too Soon: How 2 Raal^ Tiuats
Gave Backara Btg Gaina - And Than Big Loaaea", Wall Street Journal, Marcb 14,
197S. p. 1, col. 6.

••"tankers Gain Ftodd Insider Deals", WaaUsgCon Foel, FebriaiT 15, I9Tfi, p, I, col. 1.
1 Over Tlieli Obligations ', WsU

"" The problem we> aggravated when benkers connecced with REITs recalled loan
requests from dereloperi. ' Yoi come In wltb a loan, and where Is Ic going to go?' says
Joseph W. Barr, former chairman of American SecurlCf. ' If IC a ■ good loaa. It goes Co
the bank. U It's not. It goes Co the trust. '" "Bankers Gala from Insider Deals ',
Washington ft>sc. Februery IS, 1976, p. 1, col. 1.

"Bankers, who mlghc hsTe Injected an element o( prudence along the way, dlda'c.
IndlrecCly, chixiugli Che REIT mechanism, ihey made loans for project* Chey would never
have Unancad directly...." Robettaoo. supra, at p. 113.

*"" American Banker, supra, at p. 1, col. 2.

D„ii„.db,Go(5glc

300

I nuidag vote piMad oo to dw RBIT, Oienbf cainplaii«nilns the
bank's nrn r^ aataM acdrlelai and kaaplag tlia tank's eoauiuiara taapi^. ' A ncMKl]'
■ettlsdSBC pioceedliiB lUagod dial ■ RSTT had emaded loan* In which lt> bankadfUar
had a pre-ffidatlng Inceivae. " Banks alao proAlad Iran cha oaa of cha "float" creacad
bf Che RBITs' loaoa to derdopars. "* In iddltloii. tank* eaniad
plaeamaot of RBTT loana, ractfred faes aa ttao RBITs' tianafer b|
diTldand agants, and lant Immaosa soms to their capdve REITs, i

* "L^atyaar waa rsal erldeoce of cUngs to come reganUng (he ftitun. whan without
cuztalling an; of our Real Batata and Mollgaga Loan CBpanmeot lendiiig actlTlCla*>
wa had co nun down aret one tUJlon doilars In prime caDstmcUan and darelopmaot
loan opponnnlllaa hecauae the funds wen not aTallatila. " Downas, supra, at p. 1027.

"Sponaoxiog b REIT anatles i commercial bank to bfpass luHracilr a *" '

ceatilctlaDt wUch mar hamper tcs acqidiictao uul lending of huda. For ta
Auing the paat Ugtat monay period a REIT could sail commercial paper wl
interest-rate ceiUsg. vbOe hanki were aubjeci co csUlngs. Ttaie, ■ banJ
to sponsor a REIT in order lo assure Its customers of i source of real ei
Schulein. supra, at 10.

Apdl 34. 19TS

••■ "For example. If a trust was lending J20 milUoo
Issued br the ■driser's bank m Frldajr, the check mightn't clear ludl the foUnring
Wednesdar. glrlng the bank six diya of Interen on the check's 'Boat"'. "Falling On:
Real Bstue Trusts Feud WUh Advlsere Over Tbdr OUlgatlooa", Wall Street Journal.
March 13. 1975, p. 1, col. «.

Digitized bvGoO^^IC

taaa uaad to calculots cha bulk's adrlsoij fae. W]wn buiki rsacbod tbdz own landing

Id ondar tanUng Uw. * Ektnfc* made praferaotal loada to RSTTa cantreUed tqr
■notScen and dlrectDra; Oa HBTTb latuingiTe laoa ud loana to ibe

In adraoca bf Oa CiMlnnan of dw Houaa

* Kacfe, Bniyatte t Woods, supra, at p. 6S.

** "Rlgga f-faft""*' Bank and MadlsOD Nadonal Bank have loaned mora tban ^9 million,
atUD u ptvleiaotlal imerast zataa, to a real estate Investment company cooczollBd ty tht
two haoki' kcf officers and directors.

"The money tram tbe banks bts been used in pait bf the Rlgga and Madison
otflcers and directors to give themselves mlUloas of doUara In fees and loans from cbs
real saute InTcatment dim. Mortgage Inraaiors of WaeblagCMi.

"Some of (be loans have net bea repaid oa time and. ikther than faradoalng on
tfaamaelras, the Rlgga and Madleon of&cars and dtractors have postpoosd date* when
Qm loan pairtnoit* an due. in some Instances, cbey have reibiced the Interest charges
so die loana." "Banker* Gain tnta Inalder Deal*", WalfatngtOD Post, FebnuuT 1^,
1976. p. 1, col. 1.

Digitized bvGoO^^IC

'^"'•'"i; and Currsacy Caaunlnee. * but naltbar die banks nor tba bank rasolncoir afandaa
took an; steps lo preteni Cbdr occurrence.

When tlie specuUtlTe real estste bubUe of die eaily lilVe Inevitably burst, tank-
•pcoaored RBITs and their »hirehoid»r» sutfersd Che consequences of these abuses. As
ons obssTTer concluded; "Unfoxtunatdy. all too often the REIT for a variety ol raasons
!, tnd as la hardty surprising when bankers aecoma

' Although we cannot dlsOngulsh betwaan
bank -sponsored REITa and others, at least seven RBITs have gone Into bankruptcy;
aootber 11 have EiUed to pay Interest on their subordinated debt, much of vUch «■■ eold
CO puUlG Inveatoiai over 40 RBITs have nominal or aegsdTe net voith; and aootber 19
apparandy have been kept afloat by Interest rata conceaslonB from their banks. The
"dee^ytroutded" RBITs owe over 18.8 Ulllon, S7 Ulllon of II to the tanks. ■" Moie
Importantly, the bank REIT debacle became a dlniler tor tha banks tbemselves. At
least two banks blled when they sought to ball out REITs. "" "We have seen banks
across the nation suffering declines la tbdr tioldlng comianles' earnings, and almost
certainly dlspropordonate declines In cbelr stock prices and ctaeli abUlty to raUa sorely
needed capUal for ibe taanka, because of the REIT disaster."*"" Oiase Manhattan

" Scbotlaod, supra, it 271.

•" Kenneth D. Campbell, 'Background of the REIT Industiy", Ptacticlng Law Institute,
REIT Resttuctuilng, at pp. LI, 15 (May-June 1977)^ Oatl and Miller. "The Real Estate
Debtor or REIT and the ^nkruptcy Act, " Id. at pp. 99, 147-152: and "Rise in Properqr
Aiding Recovery o( Real Eaute Investment Tiusts", New York Times, January 23, 1978,
at pp. Dl. D3.

' Schoiland, supra, ai 273.

Digitized bvGoO^^IC

Buk wu fUeai tatht Caapaoati'a Mcret Uai of protaUm buka, largaly diu to loans
to Ita KBIT. * Tba lialdlii( compuqr for Chemical Eknk wis Ibiced to call off a prapoaad
potUc oftedssof Its sacudtle* do* to loreator concern orer Iha bank'i loans to REITs.**
Inrsaansnt taankara warned Invastors against purehaalng bank stocks ganerally as a
nsultoftba REIT pnUem, "* and pantculadr •anted asalsst purchasing stock in
banks wbo sponsored RBlTs. ■***

When tbalT RSITs begsn to Ibundsr, the banks had little cboics otber than to
saempt rescue mlasians. As malor lenders to RElTa iha banks obvlouslr wished to
STold bankiuptcf proceedings. Funber, since tbe original piomoilon of bank RBITs
had IntentiaaaU)' Uuned tbe distinction becweeo ths bank and the REIT, the banks bad
to act to protect tbali own names and refucaUoos. ••■•■ Tbe banks bad also oilarad
Into so many queatlfflialie [ransacdoaa wich their capUve REITs that there was the

> "[0]n« ot tbe largest loaoa dasalfied by eumloers eaily last year at Chase was
$140 mllllao to Chase Mortgage ud Really TniBl. " "ClUbank, Chase Manhattan on
U. S. 'Problom' List", WasUngtoa Post, Jsniiuy 11, 1976, p. 1. col. i.

*" See, e.g., "Bank Loans to ItEITs: Problems and Prospects", Drexel Bumham k
Co. (I97S) It p. 1: "Accordtn^y. we mslntaln our very caudous approach to bank
stock Investing. We would, likewise, relraln from purchasing any bank stocks until
tbe threat from the REIT situation appears to be dissipating; and further. If beavUy
Inreaied Ln [he book group, we would advise Ugtaening posidoos, "

' Keefe, Etiuyctte k Woods, supra, at p. 64,

***** "CoocURlng In this view I* WlUlsni bteman, an eiecudve vice president of
Chase Bank, 'We're not anJdoua to see anyUdogwllh the name Chase Manhattan In
bankruptcy ai^wbere,' he says." "Too Much Too Soon; How 2 Realty Tiuats Gave
Backers Big Gains - And Tben Big Losses", Wall Street Journal, March 14, 1975.

maglne the world's tUrd largest Dank [Chase Manhattan] letdnR a
Its name go down the drain. ' [quoting Bialness Week:} Klaahip Is
d so tbe Chase lent its wayward child nearly the maximum amount
"Bid Investments'. New Republic, April 19. 1975. p. 3.

Digitized bvGoO^^IC

llkdlbood tfatt ■ RBTT buikniptcy would r«aiilt In REIT thar^KildMn adng the buk.*

One exput reteired Co tMa problem ■■ the "vlimil apn -coded U&btllCf for tbose
boldng compudea who bare spooiorcd RBlTa. "" On rap of all cM*. tbe Federal Reeaiv
Board pnaaarad tba benta to "ball out" tbcti REITs om ot faar thai RBIT Ulurei would

Tbm Ug baaka. wUcb bad tba gieaceac exposure, la mis put beiTy pnaaure oo nDaUer
banks to go along.""*

• Keafe, Bniyette k Wooda, wpla, •! p. W.

"Also, laduaoy obeerreis nld. If tiw bank dlcki't act and the trait's proUama
worsened, the bank a* the tiuat's adrltar could be expoaad to lawsuits bf tbe trust's
noteboldTi and aharebeldera aceualng U of mlmnsnaglngihectuafa attUw." "Cbeie
ManbaiCan REIT to ftopose Han far Dealing Vltb May 1 Default on Notes", Wall
Siree^ Jooinal, Uay 23, 197B, p. 8, ccd. 2.

** Kaafft Bruyette k Woods, supta. at pL 70.

*" "Anotber reaioo die banks bdped out tbe RBITi Is ttaat thoji were Cold to do
so by the goremmeM. Former member ot tbe Federal Reaerre Board Andrew
Bilmmar teetULed to tUs lict la Februarr- Ha told the Mwae n«nHnj Coramlnee
that the Fed asked banks to lend money to tbe REITs last summer. Bilnimer said
ttaat be and oclier Fed members felc tbat wi« a neceaaair action. At dw time, tbe
real estate lavestment trusts were In a greal deal of trouble. Tbe Fed' s directors
thou^ a sailaa of RETT Ulurea ml^ start a "■"■"H«i paalc, and to piETcnc thai
from bappeolgg, Ibc^ engineered ■ rescue of cbe REITs. Now the tmnks are stuck
with me coDsaqusicea. " New Republic, supra.

•••• Stalonant of Former Federal Reserve Board Chairman ArUair F. Bins, cpumd

Id Roberuoo, supra, at p. 113.

lUd. at p. 172. Oesplce these stalementa it

Board, tbe banks state "[W)e are awsie of no evldt
la algnlllcantly adrersety affected ly the preaent condtdon of t«nk-«drtaed REITs. "
Responae of tbe American Bankera AssocUtloa to "Tlie Securities Acartdes of
Commercial bnks Study Oufllno" of (be Subcommittee oo Securities of the Senate
Committee co Bulking, Housliig and Urban Affairs, Mey 1976. at p. 62.

Digitized bvGoO^^IC

ItaurM, tba buks' aOoRa la tell oil tlialr RBITi cbrai|b mteh d«Ttc«i u
iDcmsed llDM of credU, mF^vtiif cradit agraanaas hf bank STodlcales, Inlareat
nta rsducltooj or total Ibrbaannce, and panlculaily bank acqulalUao of REIT loan*
and propaMea, InpaiUad ttia baaka diamselTaa. In oaa aipart'i worda: "[Tlba
axtanE to wtdch lont bask hatdLog camfanlaa bara ■Iiaad]' gooa Co aid choir RSTTa fa

iDduati;. . . . Ttua, we a* bask (baToiioldsra ia»r be In tbs poaldoa of aMorUog aoroe
of the daki oilgliialir lotaodad to bs bonia Of REIT aliarabcilden."* At least two
bank haUlag comiwilea Uled wboo diay aougtal co nacua cbeir RglTa. " lo an
attonpt to aara Ita REIT from baiikiapccr> (3ia*« Bank puicbaaed bmi let RETT flM
mlllloa of loaoa. wtdch "nobodj' dae would tuj oa the taima Ihe Chase Bank gtvm. "***
The holding compan; and amilatwl auhaldlailea of Hm Wiacauln Nattooal tank entered
Inco similar cnnaactlaia with Its REIT. "** TUs has led Co cencain cbac tha bank* are
exposed to suit b; theti owa shueboldeta, Id the midst of iMs crisis, the bank

■ k«eto, Etniracce k Wodda, aapra, ac p. 1.

" "[A] small BHC in Florida and a major coe In TenneiBee tailed diilnf chat period
as a result of ejipoeure co bad real eatste loans which had been held oilgiullT ly
mortgage banking alBllacea but which aC the ead. in unsuccassftil 'work-out' afltons,
were loaded Irco the aflUlated banks. " Scbotland. aupra. at 247.

"* Ibid, alI7J.

.... -Y^ holding company and cwo of lia luboldlarlei agreed co purchase llS.B-mlUloa
In loans tram the HSIT at Ikca value, deaplca che belief that these loans included prlaclFla
loaae* of as muchas H-S-milUoo. In addition, the corporate group agreed to reimburse
Che REIT, npco ti.S-milUoa, for all principle loeaes above (7 .millloa. " 'First WIscoDSln'a
doom)! Cutlook^', Buidness Week, Auguac 3, 1974, at 43.

'"""If the Canks did go to ibe trust's rescue, asked ■ H EIT Indusciy obaerrar, 'to
what esent could ic be held liable by ica abarebolders' If the trust didn't recover and
Clia bank lost Its InTestmancTi "Chaae ManhaiUn REIT to ftopose Ran For Dealing
With Ma; 1 Detault on Note* ", WaU Street Journal, May 22, 1978, p. 8, col. 2.

Digitized bvGoO^^IC

ragolatoiy uithDiUlea mu^ id aMalil the puUlc from the &ct>. * Aftar rarlswlns ttaa
Mnki' reMse attcnpu. ooe obaBnai wuuod: "[I]i U caraia. iawmar. tfaki Anulca'*
Ian eipeileoce wlcfa ■ panem of txuiki coming to tb* aid of trouhlad aSlllatai rarealwl
lucb ibuaei is to load to tha Oaat-SCeagall Act of 1933, lapanting cammeiclal from

It cannot ba •mphaalzwt coo KTon^7 ttat tb* bank RBTT dtsaster occnrrad
dasptu tba tacttbat tba GUiS'Staa^ Act preramacl Ow Mnki fi»m dlnilbullng abaraa
of tbdr REITs to tba puUlc. Tba debacle occuned because, even as mere "tnreatmeni
adrlaeia" to RBTTa, taanka bad ■ "salesmaa's stake" In the lucceas of tbe eoteiprlae.
Slmplr pit, tbe banks had myiijd loceotlTea to nrell the size of their RBTTa - In order
to aim Ugfaer adrtsory teas; In order to racdve greater lateren paymaats and
compoiaallng balances; in order to generate placement commlaslaa*: in order n recetve
greater transfer agsnt, reglatrar uk) dlTtdend agenl tees; to order to tncraasa cba slia
of the "float"; ud in order to meet tbe dmiajids of bortwrers vbo were Judged too "rielcy"

■ "The prospect of bank losses oa loans to REITs and on property being taken over
unnerres federal banking regulators. They fear that too much disclosure of tbe
daogen would touch off runs oo banks and shake the nation's Onancial niuccure^
"'To orersnphaslze diacloaure of (bank) losses could Jeopardize. . . tnreacor
coofldence. , . and dui bring on sizeable deposit outflows, especially of imparsooal
moaey-market funds', Federal Reserve Board member EUlip E. Coldwell warned tbe
Senate bankiag committee last year. " "Discarding Losera: Realty Trusts Raise Cash.
Repay Bankers by Glvlog Up Asaeta", Wall Street Journal, Januarys, 1976, p. 1, col. B.

" Schodand. supra, at p. 273. Desptts these bets, tbe banks still maintain tlMt
"Bank*, for ttie most pen, have treated RBTT loans Jusl is all other loens, and It Is
merely a happenstance of the economy that ■ number of these loans have become
problems", Reapoose of tba American Bankan Association, wpra, at p. 37.

D„ii„.db,Go(5glc

IM Cba buk ItatlL in]IUilw bukRBITdSautaorlgladlr only tbtMtaMdclM captive
tank RBITi asd d^r itauvboldM*, U iMvtlab^ spnad to tlw buki dmiaalTM, tbOESty
•battng ttaa aaiti* utlooal buUog ^mrii to ■ dagra* vlilcb.tiaa dm acontnd ilac* tha
aajly 1930'a. ItebaakKBTtdabaclaliaaiiudalt daax that latarpntlnf tha Oaaa-
%tagt]> Act to pa^Dlt baaka u mt** at "mare" advlaan to HStTi proAicea tba jif
trpaa of haaanl) wlilch iha Suprama Cmit aaumaniad In (ha Camp eaaat *

We bdleve tbat Aaae *— '*"ir' aflaid Om opponanltr to pva*i
of tlia bank KBIT daharle. SpaetSoIljr, «a axga cbta Ccmmlnae to rapMi at

pnttle, bn Gmn aaciinf aa ~lo«eaaii«at adrlaeia'* or "Unandal adfUan" to RBTTe.
nutfaer, «• urge the enaconant of legltlaUco wMch will make U abaolutelr

or adrlae alcber doaed-aod tnTestmeat companiea or muejal Binda. Aa aet Ibllll
In Iha aaillar part of our teatlmotqp, tba Federal RaaeTre Board's regulaltooa
paimUtlaf tfaaaa acUTltlea are a dear attempt to clrcumT^it the Qaaa-Steagall Act
and ctte Suprema Court' ■ dadsloa In Camp. Tbaae actlTldas preaaii the tbit aane

• The banka take the vlen tbet "Hta etttct of the GUas-Steagall Act In ttda area

la CO pnmat banka Cram lalllng a R EIT a efaarea to the public Banka and

bank aflUlatea tbnl seire a> adrlBara to RBITa do noc piUldze, dletrUuta or
adl abaret In Oa RETT." Reaponae of the American Bankara Aaaodatlan, aupra.
at p. 55.

Digitized bvGoO^^IC

dangars Ou tte Supreme Coun recited In cenaecdoo wldi bank apauorddp of ntnawl
Aindi, ud wMch hare raceod; occnmd la eaanacOoa wlita beak apneoiaUp of RBTT*.
Indead, wa baUare Oal cfaa oolf ratoon tbu beak managed inraatmeat companlae bar*
noc pindiced a dtaaaler liinllar to ttiat genaratad ty bank RBITa la tlie bet that, to data^
most bank-adrlaed inreetmait campanlaa bara Inreatad In debt aaeiixUlea, Wa aotamtt
cfaat if dM banka bad opetatad aqnltf jboda orar tba laat decade, wa ml^ vetT w<U
bare wlmeaaed • flptnclal crlala tu ecltpelng the buk RETT debacle. *

FiaaUy. wo baUare tbat tbasa beailnga oftat tba oppotmnltr lOi the Coagraaa
to take meamiraa tegaidliig baok-apooaoied common txnat fimdi and collective peaalon

BANK COMMON THUST FUNtg AND CPLLECTIVB PErSIOH FUNDS

We prerlously discussed bank common tnat bade, wblcb were Bist auttetlxed
by che Fadenl Iteaenre Board tn I93T. Since 1962 tber have been under tba fulledlctioa
of 111* CompcroUei of the Cuneocy, whose regulations provide cbit linda bald I7 a
nadonal beak as DAidaiy may be invested collectively "In ■ common truai bad mala-
talned by cbe baak excluelv^y tor the collective la
Id tliereto £y the bank in its capacity a

■ la • recent article, Fedeial Reaervs Board Covemor Henry R. Wmlllch stated;
"Tbeo came die recession ol 1974. wblcb brousbt serious losses. At diat dms, newly
estatllslKd bonk hoIilLng companies had been extending cbelr operadoos Into new areaa
of ^"■■"^■1 ■cUrily, sucb is mortgage banking, cooiumer (Ins nee, uul sdvlalng and
Dnandng ceil estate investment trusts. The holding companies' experlance In maof
cases was sutDdaidy adverse to Justify the conclusion that the banks were fortunate
not to tave bem burdued, at the same time, with securldes affiliates. In 1974,
Class -Sleagall stood the honks In good stead", Walllcb and ttervey, "Retlecdoas on
Oass-Steagoll". Bankers Magazine. March-April 1978. at p. 9.

Digitized bvGoO^^IC

ngnlAddoa pnifalUt ell adTertfalA^ odwr tima prOfldliig tbtl tb9 Hrt of cfaa atiUaUII^
of lb* coaunoa cxnn ftauTi unitl flmncUl mpoit "dujp ba glran pntUdV •oMjr In

197S. SOS btnk* opencod 1, 913 cammoa (niM tood* vttti uaoM of 117. B UUlso. "•

R«««iT« Boatil in I93S. **" The CcmptroUer'i pr«B8Bt nfuUdeni pmrlda cbK
ftuds ImU tgr a OMtaoBl ImbIc m fldaduy a*j be Inrefltod "[llo ■ Bud '•^ftttlrg aolitr
of aJMti of iHiianiait. paaaloo, isxiflt-alaTtiiK Rock bonua or otfaar Inuu wUcb ■(•
•umpt bom Fadanl Income tratlan under tbe Internal Remua Code','**' •- ?rbaxaBa
itM Compcroller'a ragulattona do not paimlc banki to adrartlaa the Imreatmaoc perfotinaaee
of bank common ouat bnda, cUa ban doea noc >p^7 to pooled amploree baaadt fti^a, •••••

TTC"T:R. B.lHaKl) (1977).
■ IJC.F.R. l9.1g(bXSKi')«odf»)(l977).
■ SSC Final Repon oe bnk Secuttlea ActlTitlea, at 149 (197T).
.... 30 Fed. Rag. 330S (19S5).

■ IIC.F.R, l9.1S(aK2}(1977}.

* IIC.F.R, f9.1B(bXSKUl){t97T),

Digitized bvGoO^^IC

IS <•• wlU daoKnatiua lacar In our tMdmMiy, banks ud bank boldlag coaput**
te lnvemnenE pertbtmaDce nf thdr pooled paoalDn Bmili wtth ■ *«dgaaiic&
At tba sod of 1975, tb* top US banki optnted 4U poolsd panslaa ftuxU wtcta MMta et
$21.5 bUllm. * Bank pooled peosloa lindt caa be expected to grow at i rapid imte u
baaka maoaga more anit more peaatoa aaaeta. "

The Com^ircUerof iheCumDcy has auied ibat tbe purpoas of both benfc
commoQ tzuat hinds and bank collectlTe employee benefit hinda la to provide diveieUl-
catloa of InTeatmeota (or (null trnat* and pentlon pUoa and CO reduce casta and tee*
to cbe vailoua partlctpanta. *** Indeed, common tiun ftinds and coUectlTe enplofee
benellt ftinds are used by amallec tnista and employee beneUt plana. For example,
wbereaa the avenge separately managed emiioyee beneSc plan at Cbe lop IIS banks had

• SEC Report, supra, at 154.

" Bank-maoaged peosloo assets have grown from perhape (S bUlloe tn 19S0 to S134.S
btUlon in 1972. In 1972. the ten largest banks held twice as many aiseis In pension
Ainds aa In personal tiusi accounts. Herman, "CoofUccs of iDtereac: Comznercial
Bank Trust Departments", at 17 (1975). Employee beneDl plans are the fastest growing
camponenl al bank Imai depemnenc assets. Loomle, "How the Terrible Two-Tier
Mai±ei Came lo Wall Street". Fortune. July 2. 1973. at 126.

*** "The Federal Reserve Board, whlcb admlolsteied this statute from 1913 until
1962, allowed uatlanal banks holdtag trust Ainds or pension, proat-ihariog. or stock
bonus pUn Ainds to pool such funds together when authorized to do so by tbe governing
instrument or by local laws. The commingling of such (Unda allowed sbarlng of
admlnlst ration expenses among the funds 9o pooled, thus reducing the service and
management fees charged bf [he hank to each Individual fund, and also allowed tbe
dlverslll cation of aaaets required tor a sound investment program. " Brief for the
Comptroller of Currmcy in Opposition to a Petition for a Wiit of Certiorari. In
laveatroent Company Institute v. Camp, at p. 3 (December 1969). (I^ootnote* omitted).

Digitized bvGoO^^IC

■ olt2,796.58Siitfmx-«ad I9TS, ttMav«Eig« anplorM banallc pUnlntiMM
bulk's poolBd tiada bul uiau of oily t2M. 631. *

e 1920' ■
• 1970' ■ In a

wttb baak-*pcasored RBITa, ixs uUag [iaca tod^ with mpact to bank canmou ciuR
ftiadi and coUactl** paoiloo ituuU. ** Mora Impoitantly, In cacau yaara, tba banks
and bank re^ilBUir autbodtlM have rapaaMdly saagbi to coaran bank common uuat

tba ganezal puJiUc. Inrlanil cba Suprona Couit'a dadaloo In Camp aroaa oat of tha
CompctdUer'a tamaft to coavart comaion tniat Aioda imo patilelj-oltextd mucual Bud*.
HooereT, tba dadaloo In Camp baa not detarrod eitiiar tba banks or tba bank rogulatora
from aeeklng to conrsR botb common nuat funds and pooled penatoa Amds Into genacal
Iniestment refalcles. For aaompla, Tha First Nttlooal Buk of Chicago currently proposes
la'eSutallab ■ "conmOD trust tind" which will be sold to credit unions. There are
appiodmately 22, 600 ciedlt unions In tba counciy. Tba Deputy CompcroUcr of the
Currency has adflaad th« hank that the proposed tUnd will be In coapUsnce wUh the

' SBC Report, supra, at pp. 145 and 1S4,

'* For example, there Is evidence tbat banks accede to demands of imponsnt commercial
ainomers tor priority positions In the allocation of Investment o^iartunltles. Herman.
■Cn, 11 61. There la also evldmce that undesirable aecuriilei Isaued by favored bank
astomers are placed In pooled hinds. lUd. at 62-63. An Invenroent officer of a aaUooal
buik tecentty alleged tbat the bank's conunoo trust fund had purchased securlllea which
iDcTtaaed in value and wblch were then cranBteired at thdr original coat to ether
ucnmts. "Hamar Case: Did the Buk Regulators Fall in Tbelr OiUes", New York
Tlmts. ApiU 10, 1978. p, Dl, col. 2. The recant SEC Report on bnk Securities
AcdTltles iodtcatea that these are not laoUted caaes. SEC Report, mpr». at 196-99.

Digitized bvGoO^^IC

'> ragolAiiaiia i^Attitg Co coaunon tiuat ftndi* * Tba Couiptiuilar did rtilf
dM|ita the bet that ttie crwilt im^nw^ Imts oo traditloDBl cnut nHiTlflilfhlpi In bet no
rttlfltloiiahlp At aQ, wixh tha h*nW ** Tbo CampaoUer >*■■ t^v— ■ wiwiii**- action with
nspscc 10 bank call«cttva pcsslaa tutda, Tbe Depiqr ComptnUer b«a uMaad
Ccotiaancal Olljiola bnk c&u RagnUaoD I 9. lS<aXl} «fUl ba avillalie (or • bank ftod
to be oOatad to potaatlal partlcl^Ms In IndlTlAial Radramauc Accconca ("IRAa"). "*
IRAs are Intandad for ttw 40 mltllOD Amarlcaoa who axa tux corerad bf anplim-
flpooaored rrtlramant [lana and anmul coaerUutlaoa ar* llmlMd to f 1, SOO ■ Taar
(SI, TSO In the caaa of an dlgUle paridpuU and a aooiraiklng apeuM). Slnca tha
Conptiallai' ■ ragolaaooi relating to coUactin panalaa pUnJ do not fmUUt •draitltfof
of parftimapca, cho CanptxoUer'a action would paimlc tba aggr.aaalTa naii-mardMn-
dlzlng of InCoreats In bank poolod IDA lindi to mlllloaa of amall IndtTlAial li

** TIm bank baa auboUied an appUcatlon to the Securltlea and Bs:baaga Commlaalan
raqusstlngacoinplata exemption foi che ftud (lOm the Inraatment Company Acl.of 1940
on tbe baris that U is a eommon tiun ILind and bence exempt from tbat Act tgr reaacn
at Sactlan 3(c)(3). The SEC baa oidered a haerlng on tbe matter and the Inadtute li
paitldpatlnt In oppoatdoa lo [be requeaced enmpdoD.

1976). However, Oie bank wltlidraw Ita appUcaHoD after Che Inadtute reqoeKed a foimal
beating; (Inv. Co. Act Ral. No. 9611, January IT, 1977). Bariler [fala year Oe Colaracki
State Bask ol Danvai Olad a ftmUar appUcaclon wldi Oe SEC and tbe [oatltuta baa
requested a bearing.

Digitized bvGoO^^IC

Ikmanx, thoM dn^opm«ats ralattng to apedflc buiki are br ecUpsad by ttw
ettorti of btoki and buk beUiiig compules all acrosa tba couitfi? to agyroiaiv^
loaaa merehandlaa loiereKs In their coUectl*e penalao Bmda to tuodieda o( tbouaaDda
of Inreatora. Wa hare wltb ua mday co|iea of ada cuirontly boUig pubUibed ty Daaka
in Dowapapara ind magazlnei which reach '«■"'''■—'« qi ihouatnda of nnall plana, Aa
yOD will DMe, the ada do Ilnle more than uumpet tlw coUacilre tUada' Inreattneoc
pBrfbimaiice, and make pracdcallr no mentloD wbacaoerer of the banka' Oductarj
expeitlBe. Tlia FltOx Third Buik of Cindimatl's headline la "Entering Our Secood
Decade of OutpertDimlng the Dow Jooee. " Hlbaxnla NaUooal Bank' a h— hur- gtatea
that it la "t I", The Nulaoal Bank of Detroit's ad cenaiau of a lO-year chart coinpatill(
tbe peifotaaoce of ita cnninlngled equity Sinda with the Becker Median. (Wa ooca that
miueal bind* are totally precluded under the fedenl lecuiltlea laws Crooi adreiilalng
Qwlr Inveaimenc peribrnuuice la aewapaper ads: a mutual ftud can only set forth Its
pertormnnce In macerlal wMcb la accompanied or preceded by a Aill atatutoiy proapectua).

What la more, tbe banks have careblly selected the dme perloda used la cbeir
ada, preanmably so chat they can select the periods of their best performance. The
nftfa TMcd Bank of dnclnnad uses one year and unabashedly speaks of "our conslalency
of performance". The Natlooal ClCy Bank of Qereland usee 1, 2 and 3 years. Marine
Midland uses 1, 3 and S years. Tbe Flrat t^Uanal Bank of Birmingham uses 1 and S yeara.
Hbenda and Continental use 5 years. The First National Bank k Trust Company of Ttilia
aaea 7 years, and the Nadonal Bank of Dacrolt uses 10 years. On top of all this, the
bank* hare selected die particulai market index which beat Nlta cheir needs. The

Digitized bvGoO^^IC

NuiODil Bank of DKnlt, Hw FLiat ^htlaa•l hnk k TmK Companr of TUaa and tlia
hkHnwai City Wanif Of Q^^Mni USA BackoT* m«t<«* iiAdi4dd II n— FtaMiOOM fc lorMtnwci'
pBrtbinuuiG* Bnluitloa Rapon. The FUHi TUrd Buk of f^-— *-— h una cfae Dow JODaa
•ad Sttndud t Fooi'a. The FltM Nulontl Buik of Bimlnslum ody naei Stiddud t
toax't. Hlbanila uaaa thraa raidnlclu ooCuaadln uf otbarad.

Whit moat ba ampbaalxad la that etaaaa iggrasalTa (da are almad at amaU
imaoptdKlcatad majlafea banaflt piant. Tliara are orsr BOO, 000 ttajiofam booaflt flMum In
tha coumry wUb tawer tlan 100 puOclputa. * A« Oa rocant SEC Buik Raporl drnifnattatea,
Inlareala In bask coUactiTa amvlaraa bwafll Bnida an puichaiod br dia «DiallBT, le«a
aopM atlcatad Jplana. Tbe SEC Rapon found that at nie sad of 197S, am M, 000 ptana wars
Inrastad In ptjolad (unda opamad bf tha top IIS banka. TbB aranga ■ccnist alia waa
only ilSt, OOt). In tha imaller SSO banka Hia aTatage account alae *■■ l«sa llian t*0, 000, ■*

'Theraare (Jkot than 17. 000 |dana with over 100 paTtlclpanta. Figures beaed <n
Information pforldad to us by the [otemal Reveme Service Employee Hana Opeiatlona

Digitized bvGoO^^IC

ik coUecttT* mafioftt

bNMflt luuSa efanagb aigraHlra idrertlilng -inf'tr" alffiod al ntuUler. uaaopUitlcUBd,
Mnplofsa bvafit jiui* coomIidcbi ■ cImi TloUaoo ot dw dui-ftcagall Act. In dw
G«mp cue, «tMn tlia Sopinma Ceaxt Miack dtMra dM amtnpl bjr bulca n> opnsl*
commingled t^^tj ■ccoooti. it repwltdlr (treeaed the prtniacionil ud merchuidMng
BUnre ol &m Tanm e* cantruMd wltli the slinple commln^lng of useu which the

"TbsM uUtUIu, uoUka Che apentloD of an Inrntmenl bad,
do DM glre il(a to ■ pTomodoiul or Mlamian's nai^e In > pertlcuUr
iantanma: ttar do oot litnil*e an •otarprlaa Is dlracc compalltloa
with aggraaalraly promat«d fuoda offeted by other Inrestmnc
companlea; thsr do not sntUl a threat to putUc coolUaDce lo UN
tank lt*d£ and Ihaj do not Impair [he bank's aUlity to gin dla*
UMreotad Mrrlce ai a fittidaiy or managing agant. In sboR.
Chan la a plain dlfferance hatwaan the sale of lUtuclary aerrlcea
and Ibe ^a of inTanmonta. " * .

When ooe rlewa bank and bank >wfliting company adranlaenieats for coUectlTe
amplorea baneflt bnda wUcb are aimed at hundreds of thouaandi of amall plana, and
which tout InreMmaiB perfOimanca with acarcelT a word about flduclair expcidae, It
in not dlfilcult to badlwe Chat the hanks are merchasdlalng Interena In lb«M bnda in
Tlolatiaa of tha Oata-Steagall Act.

* ICl T. Camp, 40111.5. 617 (1971). Tha leading canmaotaion on the Camp caae
■nphaaize tha Ikct that tha dadaioo turned oo the promoUoDal and merchandizing
nenite of cooimin^ad afaacy accounta, aa oppoaad to tndtcioaal cruat actlrltiea.
"Whatarai miglE be aald about Che bciual falldttr of the Supreme Couit'a dlatlnctiaa
In Camp beCwaen conmlnglad agency accounts and other bank -sponsored InTcacmaic
manegemeDt arnngemencs, the Court did attempt to He sacuricy status to ccncen vrer
the nelbada of promoUoo tanks mlgtc adopt." (Footnote omitted). Snes, Tha l^w of
Inreatmeat Management T3.03[2][b] al p. 3-65(1978). "[T]he key difference undac
Iba CUaa-StaagiU Ace, as interpreted ty the U. S. Supreme Coiut. between tradltiaci*!
ttuac deparmeot aiMsoiy actirlUes, and other investment management services must
Itaia be the manner of alleilDg advlsoir (errlcas. " Lybecker, "Bank -Sponsored Inveit-
neu Management Services: A Legal Hatoiy and Scatutorr [ntarpretadve Aaalysls-
Ihit r, 5 Securities Regulation Law Journal I9S. It 223 (Autumn 1977).

Digitized bvGoO^^IC

Howe*«r, ■ dstarmlaailaa o( tlila Imd* cootd aetf ba acUavod tbrougb pco-
ttacied ud cosdj ""nr'^"" W« believe Out cbe lAttoaicUaa of S, 72 prwldM CoBgraM
with tba oppommllf ki aid Oia latj ital poialbUltf that bunk pmnadoa ot coU«ciiT«
peaHoD tukda will sroitually result In a tlp»ni-t«i citjaa almllaT to that eraalad bf
bank spooaonUp of Lnvestiiieot cnnpaalas la aa 1920* a and bank apooaorahtp at
RBTa in die I97iyt.

In recent yeara there bare been juimeroua anutlea leladng to ibe confllCTl of
Intereal wMcb insrltatiy ulae tram the comMnacloB la one bank or In ooa bank
b^dlDg campuiy complax of both commercial lending acdTltiaa and ganaial tzoM
■cdTltlei. * Some eipeiti hare concluded chei the conflict* are (o greet a« lo call
for a complete MpanUan of tbeae two Ainctiona. " If CoogioaB deddaa not to lovlio

* See, e.g.. Heimaa, "ConOlcti ot Iwereai: Commercial Bank Trust Depeiimenu"
(1975)1 Herman and Sabndi. "The Commercial Bank Tiuat Depenment and the 'Wall'",
14 Boatoa College lodumlal and Commercial Law Rerlen 21 (1972^ HunMcker,
"Coofllcls of Interest, Economic ClatonlaDa, and the Separatloa of Trust and Commercial
Banking Functloas", 50 Southern California Law Rerles 611 (1977); Lybecker "Regulation
of Bank Trust Department lavestmcnt AcUrltleB", 81 Yale Law Journal 977 (1973):
Lybecker, "Regulation of Bank Trust Depenment Activities; Seven Ga pa. Etgfai Remedlee",
90 Benklng Uw Journal 912 (1973); SEC Final Report on Bank SecutWee Activities (1977);
and "Financial lasiltucloDB: Retoim and tbe E\ibllc Interest", Staff of the Subcommittee

' * See. e. g. . Hinslcksr, supra.

D„ii„.db,Go(5glc

a can|i*ca wpksulao ot eomnurclal biak actlTldM ud emit acttTltlM. thara will ntll

couliue CO be pvimltMd to opanle conunoo Oun Binda and coUactt** snplof so baoafll
ftinda. Tilers majr well be valid raa*aoj tor Hm eoodiuad "<-"—- of dMoe
TeMcloSi iXDTtded cb^ an ool; uied tor cbeir original purpoaa — Id the woida at tbe

tlaia recfcicliig ±a Mivlca and management teea diaiged tif ibe bank m aacb IndtvlAial
Siod. and alao. . . [to aUaw] tbe dlraralflcatlao of UMta isqulied toz a sound iDTenmoic

profmn."*

Hoverer, hanks and bank bddiDg compaidaa ihould not be paimitted to mass -
mercbandtse tol^ nats In conunoa tiuat iLuuIa and coUectlTe ponsion ftinda to the
piUic a* a whole or lo <nn cacegDiles of putilc inTestora, tucb aa employee baneBc
(lana, credit unions and pantclpancs in Indlvldiul rtaimnaa accounts. Spadflcally,
we request tMs Committee to report out leglsUclon wtdcb makes it abeolucely clear
dan banka aod bank tiKiMng companies may only Mdl lutereits In common tiuat ftioda
to tiadltlanal personal trust accounts and may only aell InCeresta In coUectlTe pension
Ikmda to large and medium -size corporate plans (and not Co Individual retlrcnent iccounls,
Kaogb (lana and small corporate plaosX In addldan, cbe legislation sbould make Et
clear Oat banks and bank boldlog cmnpaDles are ibeolutsly piobtUied from a

• Comptroller's Brief, tupra. at p. 3.

Digitized bvGoO^^IC

■nd adrsEtUtiif chase reHclee. It U clear clMl cbeae nutnert cunoC bo laft to tlw bank
Teguluoiy uithotillas. As we have dancomirad, tbey have not llmltad die use of
commoo tnn ftinda uut coUecdTe pvialao HuuIb to (heir aitglii«l legldiiute jatfoaaa,
but nthar have encouiaged chelt expuialao Into publicly -ottered lavemneot Triddea
and bare unctlaoed tha cmdait typea of maaa ulveitlitiig -Bnplgnt timed at
uosopblsclcacad lorenore. We far chet if Coogieaa Ula to act In tMa area, baak

in * niWBdal crisis slmUar co chat cauaad bf baok spooaorBUp of (ecaiities afflUatsa
In ttM I9Z0'3 and bank spooTOTtMp of REITa In Che ead; pan of tUs decade.

CONCLUSION

For orer 100 years. Congress has sought to prereni commsrcUI banks and
their aCdllaie* fioai engaging In the general securities business out of coocem that
aucb acllTlEtes tnerlEably will result In ecooomlc disaster lor the banks and cbe nation
as a whole. Coagrees' concerns bars bean amply Justllled by ereacs, most recently
by the crises which resulted from bank sponsorship at securities sttlllaies in the
1920's and bDm bank spansorshlp of REITs In the early 19T0'«. Yet, the banks and
Om tank regolacoiy authorities have repeatedly sought to subvert Congress' Iniem.
for example; by lanks forming securities atllllates In Ihe earty tSOO's In order to
drcumvoic Tba MUonal BanUng Act; by cbe Comptroller' s lotliylag In the 19Z0' « Co
peimli hanks to undetwilce securities: by the Comptroller'a efforts In the 1960'b to
authorize banks to sponsor mutiul fuodi: ty bank sponsorship ol REITs In the early

Digitized bvGoO^^IC

1970' 11 bf dM iiiwil TMfTtnirr^Hwtttlng of tnteraats In bank eoll«ctlTB pcotfoo
SuuU; *wl bf itie curmt aflorts to zapaal tba GUaa'-SteipIl Ace ud roam to tbe
danearoui f«Rsin ot the 19W:

Wa batlsT* ctM dMM taadnii ttbrd C«DfrM* cba orfwraultf n cscofDilcaUy
raafflzm tlw Mfcoric "H^i^i poiicj that pioUUta wTim«^*i hanfc* ^j^ hawir haltfing
compaidaa trsm — fyg*"! In tba gonaEal aacailtlaa bualnaaa. Orax 100 raara of
wpilaBc* ladlotea that lUa nattat U br too Imponant co b« latt to tba hnalnan
f'-'l— *"' o( the banka or co cba adminiKnttTa dlscrstloa ol iba bank regDlacMT

Digitized bvGoO^^IC

pntsiOH WORLD, wovamra 1977

Read

b(

jtweei

iKlnlia I967-I976 ( IncludiDg Id

al

th

el

•

ir

le

1

,/\

y

A

r^

/

^

y,

/

V

s.

/

^

y

Vv

/

/'

/

V

;/

N

/

966

67

69

70

Tl

74

73 7

OVEK THE LAST DECADE, THE
NATBWAL BAIfE OF KTItOrT CMI.
MINGLED EQUITY FUNDS HAVE OUT-
FERFOBHED 97% OF THE BECKER
UNIVERSE.

THIS RECORD IS A RESULT OF:

• A uniquely diidpliiMd apptmdi to

mvennieni nwtttch ud pntfolb coa-

Mmctkn, utiiizini modern auet vain-

■dm ttchoology.

For tome (tucmaiiag deuiU on

(hii process, ind bow it cui benefit

you, plBMe coot act RICHARD L.

• Consjitently luperior pettonoance FOERSTERLING. Vice President.

from peak to peak, trough to tioagh, Tnut InvcJIment Depantaent Natttmal

tud over full market cycles. Baak of Detroit (313) 223-2S20.

I Trust Division
National Bank
of Detroit

D„ii„.db,Go(5glc

IHSTITUTIONAL INVESTOR, MOVEMBER 197^

Active investiiig

in fhe fixed-income market

makes sense and money.

iBeckerl

IC RM RETIItEMENT T1K1ST - nxED INCQfiE

TiHCJiveiOHrED Mm or kctvim wo mmkinos

PUIOOS ENKD JUNE 30, OTI

wtcofT rencEMT

This rate of return wu accomplished through efficient msnajieinent
of our n29 million Fined Income Collective Fund for Retirement
IhiMa without impairing the quality of the portfolio. 98.45% of the
market value ia in Govemmenta, Agencies and AAA Corporate Bonds.
We lael this is the type of bond managenient you should be looking for.
E-.. t.— L_- :.i .: . range lor a fact finding presentation.

National City Bank. 6

e, Cleveland, Ohio 4^

NatkmalCiljrBaiik

defdand'Oido

D„ii„.db,Go(5glc

INSTmjTIONAL INVESTOR. APRtL 1978

Hibemia National Bank

Bank Equity Piuid Managw for th»

fiv* ysars •ndad Dttoambw 31, 1977

mm itMasurad by Prank Russall Co., Inc.;

Contputar Diraotlona Advisors, Inc.;

and Rogars, Caaay, 4 Barkadala, Ina.

HIBERNIA

NATIONAL BANK

D„ii„.db,Go(5glc

PENS lows AMD IMVESTHEHT5,

EnterbiuS our

second (fecade

of otttperforming

the Dow Jones.

Why move your money to one of the Our consistency of peiformance has

larger investment cerrters for long- a lot more to do with philosophy than

term investment performance? You geography. And out philosophy can

can stay dose to home and receive the work anywhere. For anyone,
superior performance and adminis- We hiaintain the flexibility needed to

trative services you require! anticipate the market. Our size makes

Where? .At The Fifth Third Bank in it easier tc be resccr.sive to the needs

T'rci-raTl. Whi'e we den 'I have an of customers, ard .'.e prov ide personal

^cdrsss in the hear! of a major mcne>- ^:te-Mon cr- a c-^going bas's.
';en:er, ■■it do cutperfcrm the industry, .Are your funds perrorm.irg a; -ve,!

.Again in 1977. The Fifth Third Bark new heme ror your pensic.-i a:^d cro'i:

Trusi Department has outperformed sharing investment within t.-e 7-^.^'

the Dow Jones and Standard and Managamer.t Divis:cn of The F;fth

Poor's SCO averages^ Third Bank in Cincinnati.

Get conqjiete perfonnance informatkxi
from Bob MKdiell, Trust Officer at (513) 579-56B4.

t'trin irii.\U L-Ai'i..

Circ.rnEii. GH'C

Better things happen with Fifth Third Tnjst. 'SSOS,

Digitized bvGoO^^IC

PBM3I0W WORLD. MKRCH 1978

Ibur fixed-incame fund
has got to deliver
superior results.

Ifeai: After yeac After yeac

W^findaivajE

[t'l I mattar of racord,

Eich nooo InveMed In our Fixed- Incoma empkiyee banaflt iccouali for

Incoma Employa* BoMflt Fund lun Hva coDslJteiitperfarmaaca, with low volaUUty

>t Mu. Or lat
lu tailor in scttvaly mancged flxad-lacoiii*
portfaUo to your IndJvtduiil gaalt and
itrataglei and decdaUmi can dallvar oblectlvaa.

outituuUng retult*. CaO Tbm Pittanon. VIca-PratldaDt, at

' 18 tanUg ftud- 312/azfr'7an. WaUHndawar.

^ CONTJNEtTTAl^ BANK.

ndlhul Compuiy of Chicago • 'a\ South LaSailaStnst.Chlcaini. lUlDoMa

D„ii„.db,Go(5glc

PEB3I0M3 i IHVESTKEtlT3 , fcPRIL 3S, 1977

ITS ABOUT TIME IKVESTMEHTMAMAGERS
WERE JWGEO OH THEIR SUCCESSES IKSTEAO OF
THEIR ADDRESSES.

In odier woids, it's about time
that manageis of employee bcndit plztt
realoed that you don't have to
be looted in one of the great
nvestment ceniec TO have a
peat itivescmenl lecoid

Take us, fer example. The
Rnt National Bank of Biiming-
ham. Ws'recenainlvnotat
the hub of ihe investment
indusoy, yet our Trust Dniaon a ITi
ha« been outpetfooning the m*^'

M

utvlervalued and then sell them
when d^ reach lull value,
the lesula will be con-

indiatiystandan

1972-76 is;

standaidtfoT'

pic. Caning that tune, outCot'
poiaie commingled equity fund']
late of mum was 7.9 percent
venus only 4-9 percent foe
theScandaid& Rnr's 500.
And for 1976 itself, out
oveiall return was tntne than
14 points hitler than the SSiP-
ahcfty 38.5 percent.

How can a bonk from Bir-
min^iam get this kind of ibuIb
for lis clients? Because de^Mte all
the myths and misundetstand-
in^. it's snli philosophy that
detemiines investment success.
Not geography.

And we have a phik»o(^y
that woukJ be just as sound no
matter where we had our office.
Whidi is simply that if you
consistotdy buy stcxks that are

f

' * aI/ J^ slstendysood.
.itlQn -W AiaraOi.

f

mult of this

r r--/' wealteadyhave

of the largest tmstdoparanents
in the Southeast. At^ it's still growing.
Which jist goes CO show that there must
be a be of people out there who are more
Interested in our return on investment
than our return addtess.

Ifyou'te one of them, t^ease contact
Davis H. Crenshaw, Vice Presklent
end TcisT Marketing Officer, The
Brst National Bank of Birmingham,
PO. Box 11007, Bimundiam, Ala.
352S8; 161.(205)326-5391

S«M(N6HAM

D„ii„.db,Go(5glc

PENSION WOBLO

Your company employee benefit plan can^ profit
framabadfit

isl money rnanagers orsle' mat your coincanyS
naon en pfofil snannfl oWnbodesignodtofil
aolttien Handaraizea imiestmenr programs
At nrsi ot Tulsa, ws dor t mink mats rn your b*

aOm.n.sn3tivB Hogratra to (il your inlHtOual Mrt.
1M re soeoalrsts in stocks. Qonds oil realestalB
and tnsctvnplaiiMsof ERISA AnareQanHass

This Deublily has enablao Rrst ot liilsa !
™ean3 M rank Ml Hi* top 1 ZH of ttiOM TWW nu
surveyM nationwide Dy the 8ec<ier Sacumles

Rjr more intormalion atcut how our aomin

air9181 566-530' Orw

TRUST RRSlt^E

D„ii„.db,Go(5glc

PEMSI0W3 Atro IWVESTWgtraS, APRIL 24,

EVEN IF YOUR PENSION FUND
HADAGOODYEAR,

TELL IT TO
THE MARINE

As good as our performance is,
Marine Midland doasn't believe that
perfomumce is the only way to judge
management. We believe there are
other important issues to consider
in addition.

That's why you should ask your-
self these questions— even if your
pension fund had agood year.

Does the performance run hot and
cold as the market runs hot and cold?

Will the investment philosophy
that worked in the past be flexible
enough to work tomorrow?

Do you feel comfortable with the
king-term goals set up for you?

Understanding this total picture
is the way we approach pension funds.
And it's paid off.

Marine Midland had the highest
rate of return on a 5-year basis for

collective equity funds among the
largest 25 U . S . bank trust departments .'

We also ranked first in 1-year
performance. And number seven in the
3-year cat^ory. (All periods
ending 12/31/77.)*

In fact. Marine Midland is one of
the few major investment managers
whosecollectiveequityfundhas beaten
the Standard St Rwr's average over
the last 5 years.

If you want the kind of performance
that goes deeper than just a good
rate of return, tell it to the Marine.
Contact Mr. Bob^l L. Kuney.
Vice President. Marine Midland Bank,
250 Park Avenue, N.Y., N.Y. 10017,
telephone (

MARINE MIDLAND BANK(

D„ii„.db,Go(5glc

Investment Company Institute

March 21, 1978

The ibTnorabla Wllll«m Promlra, CbalmaD
Comilttec on Banking, Houilng and Urban Affair*
UnlCed SCBtas Senate, Suite 5300
WashlnBtoa, D. C. 20510

Dear Senator Pronalre;

Thank you for the opportunity to aubmlt our cooownca on
S. 72. The Inveitaenc Coopany Institute Is the national aiaocla-
tlon of tha American mutual fund Induacry. Ita maaberahlp In-
clude* 4Afi open-end Investment companies ("mutual funds"), thelc
investment advlaers and principal undaruricers , Its mutual fund
members account for ovar 90X of Industry assets and have appro^-
mataly eight million shareholders.

Our coMMnt* are primarily diractad to tha dealrabillty of
Section 301<a) of S. 72 irtilch tlghtans up both tha exlatlng
"closely related" and "public benefits" tests with respect to non-
banking activities made permissible co a baidc holding coopany
component by Section 4(c)(S) of the Bank Holding Company Act (tha
"Act"), and also to the desirability of Section 401 of the bill
Mhlch provides that an activity foimd by the Federal Reserve Board
to be Improper for a bank holding company Is Improper for a na-
tional bank and further explicitly denies a national bank the
right to engage In any activity prohibited to It imder any other
provision of law.

We support Section 301(a) and Section 401 o£ the bill.

by the Federsl Reserve Board to be "so closely" related to banking
or managing or controlling banks as to be a "proper" incident
thereto. He endorse the provisions of Section 301(a) of the bill
which would requite that the non-banking activities be not only
"closely" but also "directly" related to banking so as to be not
only a "proper" but also a "necessary" Incident. Ihe additional

Digitized bvGoO^^IC

public banaflc* cast Is also tl^c«a«d by Ehe bill In a'ambar of
iMja thac, iM ballava, place dealrabla reatrlctlons on noc-banklng
acttvltlas.

In racrat Toara banka, largely Chrough Cha device of bank
hnldlng company coaplaxea, Kave axpandad or tried Co expand cbelr
■eClvlCles Into new flelda not traditionally related to banking.
Banks lease equlpnenc; they sell Insurance; chey render accounclng
and tax aarvlcea; they laausd credlc carda; ttiey aarket securlclea;
and they offer InveacaanC isanageotent services. They also wanC Co
•xpand Into furnishing atMorad car sarvlcaa and travel agency

Baidc expansion Into such coi^erclal fields has raised serious
questions with respect to the permissible scope of bank acclvl-
ties under existing law. These activities have been or era being
contested In the courts by competition who would be directly
bamed by such activities.*

The focua of our testinony is on the increasing activities
of banks in the securities business. This relates to the finding
la Section 2 of the bill that, among other actlvlclea, "In market-
ing aacuEltlea" and "In offering management and data processing
service" bank holding companies "have extended their services Into
product markets beyond chose directly related to banking, thereby
eroding the line between banking and commerce in ch« nation."

* It should be noted that the Supreme Court and other federal
courts have In recent years struck down a number of attempts by
the Office of the Cooptroller of the Currency to permit banks to
•ngag* in actlvlclea not normally associated with the banking
bualness. For example, the Cmptroller's rulings were overturned
in the following cases: Saxon v. Georgia Aasnclation of Independent
Insurance teents. Inc.. 399 P. Zd 1010 (5th Cir. 1968) (selling life
Insurance); First Hattonal Bank v. Dickinson. 396 U.S. 122 (1969)
(setting up armored car service and deposlc rscepcables); Arnold
Tours. Inc. v, r-ip «hH South Shore national flank. 472 P. 2d 427
(let Cir. 1972), aff'g 338 F. Supp. 721 (D.C. Mass. 1972) (acting
as travel agent); and Involving Interpretation of Glass-Steagall,
InveaCment C^mpaay lostituce v. Camp. 401 U.S. 617 (1971) (aponsor-
ing and oparaclng a mutual fund); Baker. Watts h Co. v, Saxon. 261
F. Supp. 247 (D.C. D.C. 1966), aff'd. 392 F. 2d 497 (D.C. Cir. 1968)
(sale of mtmlclpal revenue bonds); National letailers Corporation
of America v. Valley national Bank, et al.. U.S.Dlst, Ct. Aria.,
Fab. 2, 1976 (offering data processing services).

Digitized bvGoO^^IC

At Che oucset wa wtlh to refer to what ahouLd be obvloua.
Banking Inceresti should not be pemltted to do Indirectly what
they are forbidden to do directly The Bank Holding Company Act
wa* never Intended ^nd cannoc be used as an excuse to permit
banking intereats to avoid prohibitions elsewhere contained in the
law -- such as the provisions of Che Class-StMgall Act of 1933
which divorced the banking busineas froa moat aspects of the
securitiea buatnesa.*

* Any poaaible thought that the 1970 aaendaents to tha Bank Holding
Company Act might be Interpreted to dilute the application of the
GLasa-Steagall Act to a component of a bank holding company waa
dispelled by the following colloquy between Senatora Wllllans and
Sparkman on Ch* Sanat* floor in corniactlon with the paasag* of such
a^endaerxts

! question I should Ilk*

Both the Senate and Houae bills contained, in section 4(c)(8),
substantially similar languAge reiterating the existing law
embodied in the GlasS'Steagall Act which provides essentially,
for separation o£ conmercial banking and the aecuricies
bualncs*. This language does not appear in the bill agr«ed
to by the conferees. I wonder whether there was any Intention
to Imply that the vtiy securities-related activities Corblddan
to banks directly may nevertheless be engaged In by bank-
holding cooipanies or their nonbanklng affiliates,

Hr. 3PARKKAN. The answer to the Senator's quaatlon la that
there clearly was not. As it now stands the Glass-Steagall
Act broadly prohibits both banks and their affiliates froa
engaging In what we commonly understand to be the aecurlcias
bualnaas. There are stme specific exceptions, of course,
but I can assure you that ue did not mean to enlarge or
contract then here. We regarded that general prohibition
■s being so clearly applicable to the subjects of this bill

as to make a re^taCfrnent cf ic unneceSHary If Congress

is to change that longgtanding, fundamental statement of
public policy, we will ha^>e zo do so in other legislation.
I hope there Is no longer any misconception on that point.

Hr. WILLIAFC of New Jersey: It Is reassuring, indeed, to
know chat the Glass-Steagall Act has not been disturbed In
any way and that there is no intention at all here Co do so."
[116 Cong. Rec. 42430 (1970))

Digitized bvGoO^^IC

:urlties Industry raises

Ftest, are the reasons that giva rlsa co cha Glaas-Stcagall
AcC itlll valid today, oe thould cha Glaia-Staagall Act be aaended
M as to Maka It clear that banks may or nay not an$aga In sime or
all of theaa ■•curltlea activities?

Second, is it In Che public Interest to aanetloa the Increaaed
concentration of aconoDic pooer In banks by permitting them Co
enter the securities business and would this create mlalr conpe-
CltionT

Aaong the securities activities which the banks are engaging
la, have tried to engage in, or would like to engage in, are the
following !

(1) Bank sponsorship and operaclon oE open-end Inveatiiienc
eoBpanles (mutml fun

dlslng by banks of pooled funds for managing age

found by Che courcs Co be Che funcClonat equivalent of mutual fundi
In a suit instlcuCed by Che Investoenc Company Inscltute against
the Compcroller of che Currency thl* activity was ^eld by the
Sapreme Court of the UnlCed Scats* in 1971 Co violate the Glaas-
Steagall Act <Ingesemenc Company Insclcuce. et al v. Camp.
401 U.S. 617). Nevectheleas, the American Bankers Asaoclaclon
ha* announced Ics incenclon to seek legislation co overturn the
SSn£_ case and che Compcroller (£ the Currency has announced hi*
supporc for pemilcclng banka to enter the autual fund busines*.*
As recently aa Pebriury of this year, the Chairman of the Trust
Counsel Co^ittee of che ABA reiterated that organitatlon's inten-
tion to seek legislation authorizing commingled managing agency

* Transcript of Hearing on Securities Activities of Co^Derclal
Banks before Subconnlttee on Securities of Senate Comlttee on
Benking, Housing end Urban Affairs, Decenber 9-10, 1975, Vol. 1,
pages 70-71, Vol, 2, pages 12&-123.

** African Banker. February 8, 197B, p. 1.

Digitized bvGoO^^lc

Investnwnt contpanLes having hundreds of millions of dollars. This
activity la presently being challenged In a suit brought In th«
U. S. Court of Appeals for the District of Colunibla by the Invest-
nent Cimpany Institute against the Board of Governors of tha
Federal Reserve Systen (tnvestnienc CoapanT Institute v. Board of
Governors of the Federal toscrv Svstroi. at «1. Civil Action No.
77-1862 (September 23, 1977}). Tha suit seeks a Judlclsl deelara-

(3) Bank automatic stock Investment plans. Banks have at'
tenpted to aggressively market these plans under which ■ depositor
directs the bank to ulthdrau monthly an amount (usually a minimum
of $20 and a doxIibud of $500 per company) from his checking accouDC
to purchase shares of one or more of the 25 companies with tha
largest capitalization appearing in the Standard & Poor's '•25
Industrial Index. The bank receives h fee for its service. The
Hew York Stock Exchange and the Investment Company Institute have
Jointly brou^t an action in the federal district court for Che
District of Colusbia against the Comptroller of the Currency seeking
a Judicial declaration that the Comptroller's regulatiot) pemltttns
such activity violates the Glaaa-Sceagall Act. Suonary Judgment*
was awarded to the Comptroller, On appeal, the Court of Appeals
held that the case was not ripe for Judicial review.** A petition
for a writ o£ certiorari Is presently pending before the Supreme

(4} Dividend reinvestment plana. Banks are aggressively
merchandising these plans under which the banks for a fee will
reinvest dividends of a particular corporation in the stock of th«
corporation and often will permit the stockholder Co add up Co an
additional $1,000 monthly for reinvestment by the banks in such

(S) Sponsorship of REITs. Banks have In recent years sustained
huge losses in connection with real estate investment Crusts becauae
of the banks' Involvement as sponsors and lenders.

(6) tfnderwritlng municipal
CO have the Glass-Steagsll Ac

562 F.2d 736 (D.C.Clr. 1977).

Digitized bvGoO^^IC

It may be azpecced thac such actlviclea by banka In Cha
••cuelclaa buainaaa «r« only the beginning. If Chay arc peimtttad
to go on unchackad. Ic mdy noc be uneea aonabla to antielpaca th«t
U. S. Banks ttlll ulclmately seeic the right to conduct a ragular
broker-daalar sacurltles business and thus doninata such butlnaaa
aa In the ease of many European countries.

1. The Glasa-Steafiall Act

After the Congreatlonal atudy aa to reasons for the stock
■arket dabacla of 1929 and ensuing depeesalon years, Congreaa la
1933 passed Che Glaaa-Steagall Act which aas in large part designed
to divorce the bainking bualnass fron the general aecuricies

While the securltiea activities of banks described above
will present dangers to Che public and Involve conflicts of In-
terest which are likely to differ in degree depending on the type
of activity Involved, a crucial fact Is that these dangers and
conflicts exlac because banks have a "salesaan's stake" in these
activities.

In considering the Issue of Class -Steagall, we take as a
focal point the hezards to the public which the Supreme Court of
Che ttaited States found co exisc In 1971 If « bank were peeaitced
to sponsor and narcbandlse its own Butual fund — haiards which

* See Baker. Waces & Co. v. Saxon. 261 P. Supp. 247 (D.C.D.C.1966),
Aff'd sub. nom.. Port of Sew York Auchorltv v. Baker. Wacts & Co..
392 r. 2d 497 (D.C. Or. 1968),

** To explain in nore detail the intent of the Glass -Steagall Act
In this respect, ue offer to subalc for Che record a copy of the
plaintiff 9 MeiDoranduoi in opposiclon to Che defendant a notion to
dismiss or fcr Skmnary Judgment, in the pending case which the Hew
lock Stock Exchange and Che Invesonent Company Institute have brought
against Che Coaptcoller of the Currency with regard to bank auto-
■atic stock InvsstDsnt plans. In particular, we call the Coonlttee't
accenCion to pages 23 Co 32 of the meoo rand inn on the question of
the Intent of Glass-Steagall, as Interpreted by benking authorities,
with respect to banks offering brokerage services.

Digitized bvGoO^^IC

The poCBHttal danger! Co tha public Hhlch result fron thaaa
activities are hl^ligbtad In the Supreme Court's decision In
Che Camp case referred to above. In finding that "the potential
hazards and abuses that floo froa a bank's entry Lnco the mutual
fund buslnaiB are the same basic haaards and abuses that Congress
intended Co ellmlnaCe almost forty years ago," the court pointed
to specific hasards as followa:

"And thar* are other potential hazards of Che kind
Congress sought to eliminate with the pasaaga of
Che Glass-Sceagall Act. The bank's stake In the
invesbsent fimd might distort Its credit decisions
or lead to unsound loans to the companies In which
Che fund had Invesced. The bank might exploit
Its confidential relationship with Its comnercial
and Industrial creditors for the benefit of che
fund. The bank might undertake, directly or
Indlreccly, to make its credit facilities avail-
able to the fund or to render other aid to the
fund inconsistent with che best interests of the
bank's depositors. The bank might make loans to
facilitate che purchase of Interests In che
fund. The bank might dluerc talent and resources
from Ics comDerciai banking operation to Che
promoclon of the fund. Moreover, because che
bank would have a stake In a customer** making
a particular inveacment decision — che decision
CO Invesc In the bank's Invescment fund -- che
customer might doubt che motivation behind the
bank's recoasendation Chat he make such an
Invaacaent, If che fund Investment should cum
out badly there would be a danger chat che bank
would lose che good will of Chose customers who
had Invested In che fund, Ic ml^c be unlikely
that disenchantment would go so far as to
ChreaCen che solvency of the bank. But because
banks are dependent on che confidence cf Chelr

Many of the same or lubstantUlly the same conflicts of in-
terest that led to che decision In the Camp case Involving bank-
sponsored mutual funds are Involved in bank automatic stock

D„ii„.db,Go(5glc

InmaCmanC plans. For axai^l*. Chare !■ Cb« CMoptatton Co lend
BOneya Co boliccr cha 25 companlea on ths InvaatmanC Use or Co
withhold credit from coBpeClng companies ; Co have Che bank's
cruat or other deparcaenCB Invest In such sCocka Co acablllse or
Improve their prices; and Co oerchandise Che plan to anyone and
everyone without regard to suitability to Che investor, alt in
ordar to make a proflc out of Che service. There Is che further
CempCatlon to profit fcon a "float" by ucillilng the full 30-day
"acqulsicion Interval" parmicted for buying securities after the
cuc-off date established by che bank.

There la alao a serious question of disclosure involved In
Che pocential conflict between the actlvitiaa of a baidc in pur-
chaalng securltlaa under its widely advertised automatic Investment
plan and the activities of the bank's Cniat department in dealing
in Cha same aecuritles. For exaaiple. If bank customers are In
Che process of giving the bank millions of dollars to buy certain
securities under the auComaclc investment plan, and at che same
Ciae the bank, having decided the outlook for those issues ts
noC good, is in the process of selling off millions of dollars
of the same securities from its trust funds and other Inveatmenta,
does noC Che bank have a fiduciary duty Co advise Ita aucoaaclc
inveaCmenC cuacoaers Chat it Is buying for them securities which
the bank's trust departotent believes are not a good investment?
The banka apparently deny Chac such a fiduciary duty exists.

In recent years, we have read press reports which Indicate
Chac aomc banka do not hesitate to plunge into conflicca of Interest
aiCuations when they sponsor or reacue their real estate Investment
crusts. Ue do not know how valid the criticism aiay or nay not be.
However, the relationship of banks Co Cheir REITs appears to have
striking atnilaciciea Co che relationship before 1933 betwaen banks
and Chelr aecuritles afflllatsa, which was instrumental in bring-
ing about Che Glass-Steagall acparaclon of banking and aecuritles
functions. If ao, this is another reason for maintaining the
prophylactic provisions of Glasa-Steagall,

Digitized bvGoO^^IC

InfliMnce our ••curllla* nackact.*

It 1* a truln thac banks are fac and away cha Largcac of
prlvace flnaaetal insclcuclons. At the end of 1976, co^Mrclal
banks had non-Crust assets of 9966 billion and trust aaseta of
9l>87 bllLlon These cooblned co^wrclal bank assets of $1,453
billion exceeded the aggregate assets of all other major financial
In SCI cue tons, auch aa, nutual sairings banks, aavlnga and loan
assoclaciona, credit imlons. Insurance co^Mmles and mutual fmda.
Of these bank aaaata of $1,453 billion, $270 billion vera
accounted for by ownerihlp of i iiimiiiii stocks.

Horaovar, thera la coacencraclon within concentration. During
1976, a reUtlvely sull niabar of banks wlch assets of $1.0 blllloa
or nore controlled 45, 8t of the assets of all insured co^Mrclal

As for potential capacity to dominate U. S. Industry, It
is Intareating to note, for example, that at tba and of 1973
New York banka alone held Che following percsncagea of total voting
stock of the folloutng com^nles, to mention Just a few axamplea;
171: of Mobil Oil, m of Ford Motor 19% of Xerox, 30S of AMrtcan
Airlines 30Z of the Burlington 4- Northern Railroad, I7t of
Western Union and ISZ of Safeuay Stores And superimposed on
such domtnanc stock ownership Is a □ervasl\Fe System of Interlocking
directorates between industrial corporations and banks.

This vast concantratlon of economic wealth and influence
increases che probability that bank «qulcy investments will flow
to large corporations, craaeing artificial pressures for higher
stock prices of Che favored large corporations. The snallar firms
are not big enou^ to satisfy cha huge appetite of bank needs to

* See, for example. Staff Report on Financial Inatltuclon Reform,
House CooDittse on Banking and Currency, attached to memorandua
dated August 15, 1973 from Chairman Patman to all Coamictee members;
The Role of Institutional Investors in the Stock Market -- staff
briefing material dated July 24, 1973, prepared for use of Sub-
cooaittee on Fln^anclial Markets of Senate Conmitcee on Finance;
Disclosure of Cornorate Ownership, prepared by che SubcoimaiCcees
on Incergoi/emraencal Relations, and Budgeting, Management, and Ex-
pendlCures of che Senace Comnittee on Covemmenc Operations,
December 27, 1973.

Digitized bvGoO^^IC

Ona of the argments EhaE banks make in favor of being
petnieccd Co COapat* In the securldes business Is Chat they can
do It better and cheaper. Even if this were true — which Is
doubtful — Che justification for permitting banks to eater the
securitiaj business rnusi: also be measured in terms of the Eaimess
or ijnfaimess of the competition which would be repreaenced by
bank entry Into the buslnasa. Moreover there 1* no lack of
coapetition in the securities industry today For example,
there are over 600 mutual funds being offered today to the public.

It seema clear that, apart from other impact* on the U. S.
•conony. If banks are permitted to compete in the secjcities
buaineas their concentration of economic power will produce unfair
coMpetlclon favoclng the banks as agalnat Chelr coiapecltori .

Some of the reason* for this conclusion are as follows:

(1) Banka wuld have a tremendous competitive advantage
because of their builC-in customer* and their leverage over

ftnanclal decialoits made by these custotnerg National banks have
approximately 14 000 branches and over 18,000 offices throughout
the country and there are nany additional branches and offices
aalntained by atate banks. Every day thousands of cuatooiera Stream
across the threshold of banks for the purpose of making deposits,
making loan*, paying off loans and taking advantage of many other
banking services. The financial health even Che financial existence
of many ot these custodiers depends upon a aacisfactory relatlon-
■hip with the bank. Under these circiiutances, pressure from a
bank does not have to be very direct to enable it to capcure all
of a customer'a financial business.

(2) Hot only are the customers physically present in the
bank, but banks ace permitted to, and do advertise their services
in a much more aggressive and liberal fashion than is permitted to
financial institutions ^uch as mutual funds that are subject to
regulation by the Securities and Exchange Concoission and state
securities administrators. For exam.ple, when the Chase Manhattan
Bank in New York began in 1973 to merchandise Its automatic stock
Investment plan its multi-colored promotional brochure referred
to the plan as a "fantastic new way" to establish a stock invest-
Mnt program, . ."Just fill out the attached form. . .and you're on
pur way to Uall Street." Moreover, the regular monthly ttatements
lent by Chase Manhattan to its checking account depositors were
used to promote the plan by being accompanied by the same brochure

D„ii„.db,Go(5glc

Md having a Legend on the stateiBenl: ItaeLf "CHASE'S AUTOWTIC
STOCK IKVESTHENT PLAN EACH MONTH ALLOWS YOU TO INVEST IN A
SELECTION OF STOCKS. ENROLL NOW."

The merchandlalng of sacurltlei services by Institution)
other than banks Is closely regulated under federal and scace law.
Banks, however, are generally exempt frca the provisions of the
federal securities laws and probably frcn most state securlctes

National banks usually argue that regulation by the Conptroller
of the Currenty is equivalent to regulation by the Securltiea and
Exchange Cooniaslon. But the fact Is that banking regulation !•
designed to protect the solvency of banks and not to protect the
public Investor who accepts Investment advice from banks. To be
sura, the activities of bank trust departments are subject to
Inspection by the banking authorities, but the thrust of such
trust dapartment inspection is not to protect the investor but
rather to see co it that trust department activities are not
mismanaged In a way that will cause the bank to be surcharged so
as adversely to affect its solvency and therefore Its depositors.

(3) The trust department of a bank has access to Inside
Infomation not available to competitors In the Investment business.
Although the banks like to talk of a "Chinese Wall" between the
trust department and the comercial department, there Is far too
much danger that the wall will be perforated — that the trust
dapartmant. In choosing to make or change Investments for Its

, will have the advantage of Inside knowledge possessed

rclal department concerning companies that are
of the conmerclal department.

When pressure Is applied the wall can obligingly disappear.
For example, following the institution of fully competitive stock
exchange commission rates on Hay 1, 1975, the extreme price cutting
of conmlsslDn rates raised questions as to the financial stability
of brokers with whom the banks deal. According to the Juno 9, 197S
issue of the Wall Street Letter, the trust departments of large
comaerclal banks were "discreetly" asking thetr cmniercial depart-
ment to notify them about the checking and lending accounts of
brokers. Ho such inside Information is available to other finan-
cial institutions who also rely heavily on the solvency of the
broker-dealers they enploy.

Digitized bvGoO^^IC

Ih* tnharanC conflict of InHrcac which Is praaenC oheii « profic-
orlenEed bank has a ulcsnaD's stake la Berchandlstng Ics own
tnvaataanc sarvlces will noc only J«op«rdlEe th« bank's ablllCy
to give li^iarClal advice but will also produce an unfair compett-
tlve advantage. If a bank 1* permitted to operate and make a
profit out of Its own nucual fund, is it likely that the bank
will rccommd a coapaticlve mutual fund to a custooMr sacking
Impartial investment advtca!

Looking beyond the question of coaqietitiue advantage, there
la a serious quastlon as to what will happen to public confidence
In banks if Ehey are permitted to enter the securities business
on a broad scale. For example, as the SuprenK Court of the
United States pointed out in the Camp case. If the bank ts per-
mitted to operate Its own mutual fund and racoonends such an
Investment, will custoaer lasses in the bank's mutual fund tend
to affect the customers' confidence in his bank and thus Its
solvency? Or what effect on a customer's confidence in his bank
will there be If the custoaer were to discover that at the same
time he is investing his money in one of the stocks offered under
the bank's auCooatlc Investment plan, the bank is In the process
of unloading the stock of the same corporation frcm Its trust
fimda and other InvestoMnts?

In conclusion, we e^haalBa that It is essential to preserve
the integrity, and not to permit the dilution, of the Glass-
Steagall Act. Moreover, the strengthening of the public benefits
test, as proposed in the bill, is a distinct improvement on the
standards presently applicable to the legitimacy of non-banking
activities within a bank holding company structure.

Re also sugge«t that It might be well for Congress to give
some guidance to the Federal Reserve Board to assist it In deter-
mining what is or is not so "closely and directly" related to
banking as to be "a proper and necessary" incident thereto. Ibere
has been too much costly litigation already with respect to the
non- legitimacy of many banking activities. Ue think Congress
should make It plain that, among other activities, the sponsorship,
managmsent and promotion by bsnks of their own mutual funds and
of autoButic stock Investment plans do not meet the bill's criteria
for legitimate activity by a component In a bank holding company
complex.

Digitized bvGoO^^IC

, ue support Section 301(a) and

David Siltrar

JyMjtA^

: Honorabla Edward U. Brooka
Ranking Htnority Hsmber

Co^lCCaa on Kaaklng, Housing and Urban Affairs
Unitad States Senate, Suite 5300
Washington, D. C. 20510

Digitized bvGoO^^IC

341
Investment Company Institute

HenoisUe WUlUm Fioxmlre
United States Seoate
WaahiDgtOa, D.C. 20310

Dear Senator Pioxmlre:

On June 16. 197S ne teodfled cm S. 72 before the Senate Committee on
fiuiUng, HouBtng and Urban Affairs. We were encouraged by your understandlns
awl evldeoC concern wltta respect to the speciflc Issues of bsnk aecuitOes acttrldes
wUch we (Uscusaed. At the coDcluatOD of our teatlmony you asked tbal ne provide
■ddltlaiHJ Infbcmatioo regarding our fear that onreatrlcted bank sponsorship of
commoo IiuM binds and collective pension funds ultimately would result in a
fiMn/-tai crisis. Our statement Is baaed, nrst, on the eipeiience of history ajxl.
second, on certain early warning si^ials pointing to the existence of currcot

At the outset, bcwever, we might simply note
probtema Involving bank collective funds. The last available flgurea indicate that
■t year end 197S the assets of bank common liust funds and coUecUve pensico fluids
amounted to f 39. 3 UQioo. At that time, the assets of the entire mutual ftmd
Industry were S42. 2 Ulllon. As you are aware, collective ftmds which mingle the
monies of a number of lovestors, pose different regulatory problems than occur
irtien an Investment manager deals on a one-to-one basis with a large, sophiatlcated

Tbrou^Mxit this century the operation of pooled Investment veUdes by
banks and the mass merchandising of the Interests in their collective Suds liave
proved to be a sure recipe for financial disaster. Indeed. It was tor this very
reason that Congress enacted the dass-Steagall Ad in 1933 separating commercial
banking and Che general securities txislDsss. As Federal Reserve Board Governor
Henry C, Wallicb recently pointed out, the Glass -Stesgall Act wsa probably re-
apooelble tor the avoidance of serious problems In Che banking iDdusny In the mid-
1970s:

Digitized bvGoO^^IC

Seoatoi WlUUm Proxmlre

"Then came the receaslon of 1974. which brougtac serlouB losses. At
that time, neniy established bank holdlag companies had been extending
their opeimtlons Into n«w areas of floanclal activity, such as mortgage
banking, consumer finance, and advising and financing real estate
Inveatinait trusts. Tlie holding companies' eipedence Id many cases
was suHlclently adverse to Justify die conclusion diat the banks were
fortunate not to have been burdened, at the same time, with securltleB
affiliates. In 1974, Glass -Steagall stood the banks In good stead", li

The Intense promotional efforts connected with the meichapdIslDg of bank
collective flinds and the types of ataises which apparendy have emerged bear an un-
canny resemUance to the pattern of bank securlttes afdluies in the 1920a and baiok
REITs in die 1970s, and to the dangers which the Supreme Court pointed to in Id v.
Cam£with respect to hank -sponsored muDjal funds.

Bank securities affiliates in the 1920s and beak REITs In tHe 1970s were tuilt
on aggressive merchandising. In the Camp case the Supreme Court warned tbat
"[p]romodoaal Incentives might also be created ty the circumstance tiiat the bank's
mutual fund would be in direct competitloii with mutual ftinds, , . . Tlie bank would
want to be in a position to show to the prospective customer that Its ftmd was more
attractive than the mutual hinds ottered by others. " The enclosed ads Indicate tiat
banks all across the country presently are engaged in advertising campaigns stresstog
the investment perfbrmance of their collective pension funds with scarcely a word
about the hank's fiduciary eipertlae. The Fifth Third Bank of Cincinnati's be«dliDe
Is "Entering Our Second Decade of Outperforming the Dow Joaea. " IBbemla Natlooal
Bank'a headline slates that It is "* 1", The National Bank of Detroit's ad conslBta of
a 10-year chart comparing the performance of its commln^ed equity hinds with the
Becker Median.

These ads seek Co trade on the expenlse and reputation of the bank Itaelt
The ad run by the First National Bank ft Trust Company of TUsa announces: "We're
specialists in stocks, bonds, oil, real estate, and the com^exitles ot ERISA." The
First National Bank of Birmingham's ad asks: "How can a bank from Blrmlngtaam
get this kind of results tor its clients?" This type of adverdalng naturally Induces
the public to Invest In reliance on the sponsoring bank — this Is precisely what
occurred In connection with bank securities afSUotes in the 1920s and bank RBITs

1/ WalUch and H*[vqf, "Reflections on caass -Steagall", Bankers Magazine, Mareh-
Aprll 1978, SI p. 9.

Digitized bvGoO^^IC

SeMCor WUltein Fnuanlre Page 3

In the 1970b. V Pcomodoul Uctlca wUch seek to exploit the buik'9 reputadoi
creaie dw obrtous duiger of ■ backUsh agalDst the bank Itadl when bank-sponsored
Inrestmcnt veUcleg pertorm bcdljr, whether or not throu^ tny bult of the b«nk.
The Supreme Court warned: "Imprudent or unsucccBilUI management o/the bank'i
Inveatment ftind could bring about ■ perbips unjusttlled loss of puUlc confidence In
(he bank Itsdf. " TMb very phenomenon actually occurred when bank securltlea and
RBtTa entered Into periods of poor performance.

Furtbei, whenever hank-aponsored Investment vehldea encounter difficulty,
banks find themsdves forced to use tltelr own aaaeta to attempt to rescue their pooled
ftmda, tberety placing the banks themsdves In Jeopardy. In the Supreme Court's
wonts: "If Imprudent management should place the fund In dlatress, a bank mlgla
find Itsdf under pressure to rescue the fund through measures inconsistent wltb
aoind banking. " hges 26-29 of our testimony detailed tbe banks' attempts to rescue
thdr RBITs and tbe crisis which this produced for tbe banks themsdves. If bank
sponsored collective pmsloa ftinds, which are being aggresslvdy marketed to
luodieda of thousands of small Investors, encounter dlfficultiea, the banks will
inevitably mount similar rescue mlsslonB.

While promodooal excesaes may cause their owd problems, various abuses
of fiduciary responslUlines can also occur In the management of theae lunds. Here
too It appears that certain atxises which took place when banks spoosored securities
affiliates in the 1920b and KBlTs In the 1970s are occurring today. In some cases

V "StocldKilder reaction at the meeting was lyptBed by the observation of a Milwaukee
attorney who InvestBd In the trust's stock when dl signs pointed up, '1 got in, ' he said
'because lUs was being run I7 First Wisconsin and 1 fdt they were a good, orderly

Inrestor-minded organization. Banks are Declared Key to Relief for 'Very Sick'

First WlscODdn KBIT', American Banker, April 22, 1975, p. 1, c(d. 2.

"And justified or not, the feeling may also exist that If a REIT runs Into
difficulties, the bank will stand bdUnd It, rather than jeopardizing the bank's name."
Scbuleln, "Recent Develojxnenu In the KBIT Iiduatry". Federal Reserve Board bnk
of BoatoD, New Ba^aod Economic Review, September -October 1972, at 10.

Digitized bvGoO^^IC

Senator WBUain Proxmtre

book trust depaitmentB purchaae aecuiltiea iBSued by good commeicial cuBtomers
ofthebank, despite the tact that such inveBtments may be Imprudent.^/ The eridence
Indicates that banks use theli pooled Investment funds as dumping grounds for un-
desirable BecurlUes issuod hy good commercial customers:

"For example, one liank crust depHltmenC a few years ago Iraught a
large Uock of boads of a director-Interlocked customer, whose
commoo stock was not on the trust department's approved list. The
bond speclalisi oCtiie benk Infamied the author that this purchase
of bonds was 'expected of the bank' as a quid pro quo for the board
directorship, the bank's award of the role of collection ageac on the
bond issue, and Che generally good customer leladonshlp. A large
fraction of these bonds was put into one of the bank' s common trust
lunils and into a nonprofit trust account managed by the bank; ttut Is.
Into relatively weak and insensitive sccounts. An examinatlaa made
by the author of fourteen trust portfolios held In this bank in mid-
1967, revealed that 'special notes' of the bank's own f^ustomecs
tended to show up regularly In the common trust fbnd and In nine of
ten randomly selected portfolios of small nonproSI aci
only one of three portfolios of major companies, "if

"The company then approsched a large crust bank with which It had
a director interlock and a major customer relatlonsfalp and asked
it to take scsne or all of (he bonds. According to two employees of
the bond depsrtment, the customer a[^ed pressure on the commercial
arm, Including a threat of withdrawal of deposits and shift of other
business. Pressure was then put on the Irust department, wldch had
not been Interested In prlvace [iacements and ordinarily only boutflt
bonds of a higher quality. After some reslscance, the trust department
succumbed, and after some haggling over the price. It evenCuolty
absorbed half of this large private placement."

D„ii„.db,Go(5glc

Senator WlUlaro Proxmlre

Similarly, there are fadicitioos that bank tiust dcpartmentB do oot sell Becurlttes
Uaued by good commercUl customers, despite adverse Bnandil InformaUon
coDcemiDg the companies, i/

There la also evidence that banks give preferential treatmeni to large
lodlvlcbially -managed accouats over Cheii pooled investment vehicles. This occurs
In ttie aUocattOD ot Investment opportunities:

"For example, tlie largest and most Important commercial customer
of ODe bank did not want Its pension fund participating In a potded hmd,
but did want ■ portion of Its Investment portfolio in the same kind of
'bot' Issues. An offlcer of Ihe bank described the situation as follows:
'When the research department came up vMh an idea that would be
usefiil tor Ihe pocded fund, there was a problem with regard to allo-
cating investment opportunities between die pooled ftiod and the
customer's account. Although pro rata divlsioa between these two
accounts was not the general rule, there was some e^icepUons. On
occasion we could favor the customer's account, because It wae the
bank's largest customer and had tough iovestment people who were
very performance oriented.'"^/

But favored treatment to good customers can also be given after the bcl. An loveBC-
meni offlcer ota national bank recently alleged that the bank's common trust fimd had
pjrchaaed securities which Increased Id value and which were then transferred at
original coat to other accounts. 1/

B have pressured commercial

S/ See the discussions of the Air Line Pilots Association suit against Continental
nilDOis Bank and the Penn Central case In Herman, supra, at 54-55: and in Hunsicker,
"Conflicts of Interest. Economic Distortions, and the Separation of Trust and
Commercial bnklng functions". 50 Southern California Law Review 611, at 655-56
(1977).

W Herman, supra, at 61.

s Fall in Their Duties", New York limes.

Digitized bvGoO^^IC

Senator WUllwn Proxmire

A former Condiieaul nilnols Nilloaal Bulk emfdoyee told the W«U
B cctnmonly applied to conimercisl
Ub the potential

Cammercial bank customers are not only pressured to retain the bank for pensloa
management, but many tbeo Hud that the bank uses their penaloo poftfallo ■■ ■ dumping
ground for weak isiues of other bank customers;

"In one such case described to the author by an Investment banker,
one customer, highly dependeit oo credit from a powerful trust
Instltutloo. was virtually forced to [lace its pensloti bind with the
bank. Approxlmatdy 10 percat of the assets of tUs ftind were
shortly (hereafter fdaced In the stock of a financially stricken
customer with whom the bank was deeply Involved and whose stock
was of less than Investment grade. Almost Immediately after
•cqulsltloo, this Issue Idl to a small fraction of Its original price.
The Investment banker believes that a very strmig and alert pension
Itind customer of the bank learned of the etsning debacle and Insisted
that the shares of the sagging company be removed from Ita port-
folio. Because the market was tMn> the shares were [iaced In
weaker ponloUos, The investment banker claims that the customer
knew this but was lew dependent on bank credit (o wltiidraw, sue or
even complain. "1'

Recent studies point to a variety of other problems reminiscent of those
uncovered In connection with bank -sponsored securities affiliates In the 19ZOs and
bank -sponsored REITs In Che early 19706. These include use of inside InformatlMl
obtained from the bank's commercial acUvltlesilB' use by the bank of uninvested
cash of crust and pension accounts:lV and banks using trust and pension 8<

, quoting from Wall Street Journal of January 7,

10/ See, e.g.. Herman, supra, at 73-87i and Hunslcker. supra, at &30-647.
U/ See, Herman, supra, at 107-121; and Hunslcker, supra, at 619-630.

Digitized bvGoO^^IC

Senator Wllli«in Rroxndre

CoasslBt commercial customeis In takeover battles. i~r Citibank's pooled equity
fuad anjareDtly invests in cemflcates of deposit Issued by the bank, a sell-dealing
practice whlcb la prc^Uied tiy the Investmeol Compsi^ Act (or s mutual Bind
registered under that Act.

Full-scale Investigations tend aot to occur until abuHeH flnally result in a
major crisis. Honever, the existing evldeitce Indicates that hank common trust
iwds and collective peasion binds ere embatUng on the same road as prior pooled
vehicles spooaored by banks. An early indication are Ihe aggressive advertisements
aimed at small unsophisticated Investors — advertisements which purposely induce
Investors to rely on the expertise and reputation of the bank itself. Then there are
studies wMcb present Instances of the use of banlc pooled bmds as dimpdng grounds
Ibr securities Issued ty favored bank commeiclol customers and by the banks them-
advea; of banks favoring large Indlvldially -managed accounts over potded vehicles
otfered to small Investors; of commercial hank customers being pressured to oiirual
(heir pension assets to basks who then proceed to unload imprudent Investments into
dielr portfblioBi and of hanks profiting by using customers' uninvested cash, and by
using trust and pensloa assets to assist favored commercial clients of the bank.

We believe that Congress should act to curb the use of bank common truM
imds and ctdlectlve paision iimds as mass-merchandiBed Investment vehicles for
the general pufalic. We therefore urge the enactment of the type of leglslatioD set
forth in our testimony.

We would be pleased to bmlsh any addtUooal information you may request.

Sincerely yours

Jt/i/ —

O-.^

12/ See, e. g. , Herman, supra, at SO:

"One major trust hank, which managed the pension funds and hdd about
5 percent of the stock of a good commercial customer, was faced with
the attempt of a con^omerate to take over the customer. The bank
bought the customer's stock for the customer's CFwn pension fund accounts,
even though the trust department did not like the stock. "

Digitized bvGoO^^IC

34S

The Chairman. Thank you very much, Mr. Silver.

These are two very, very interesting and helpful statements and I
think your last point on the advertising and your examples here are
Ten', very interesting indeed.

I haven't had a chance to think about this very carefully, but you
may well be correct that this does constitute a violation of Glass-Stea-
gall. At any rate, it certainly doesn't seem to be banking in the usual
sense by any means.

Mr. Silver. It is not the offer of fiduciary services, Mr. Chairman.

The CHAmHAN. That's right. Will you pick out one of these adver-
tisements and show us how the banks can do more than the securities
industry can do?

Mr. SiLVXR. Mr. Chairman, if I can start as a whole, no mutual fund
registered with the SEC could use any one of these ads at all becaoae
we are totally prohibited from advertising any performance whatso-
ever in newspapers. So that each and every one oi these ads, were they
to be run by a mutual fund, would be illegal under the Securities Act
of 1933.

Now as far as supplemental sales literature is concerned, once an
investor has received a prospectus on the fund and you want to pro-
vide an investor with some performance information, there are prob-
lems with these ads. First, uie time periods. Some of these ads use 1
year. One uses 1, 3, 5, and 7 years. They are odd periods of time. SEC
rules provide that when you're illustrating performance you must use
10 years, plus increments of no less than 5 years or the life of the fund
itself. So that you're not free to select your own periods.

Second, there must be disclosures as to how the index you are using
may differ or is relevant to your fund.

Third, you have to talk in terms of markets which go both ways,
et cetera. You have to fell everything, disclose anything which is
peculiar about the period which you may be illustrating. There are
some other points which will occur to me. but thene ads under no cir-
cumstances would comply with either SEC or NYSE rules. At best,
they would be woefully incomplete but as I said the major point is
we couldn't use them at all.

The Chaihman. Has the SEC indicated any interest in this because
they seem to be so blatant and so conspicuous, as you say ; "entering
our second decade of outperforming the Dow Jones," "Your fixed-in-
come fund has got to deliver superior results," "It's about time invest-
ment managers were judged on their successes instead of th^r ad-
dresses," in the Birmingham bank with a crow sitting on a directiwis
sign. New York to Dallas, Atlanta and Birmingham, which is a great
place. "Your company's employee benefit plan can't profit from a bad
fit."

These are all banks that have fine conservative reputations. It's
astonishing that they can do this and the SEC has no authority, no
jurisdiction, and they can do that in competition of course with your
industry. It just doesn't seem to be logical at all. Either what the
SEC is doing in restraining the industry is wrong, which I think it is
not — I think it's right— or the banks should be r^rained on the same
basis.

Mr. Silver. I fully agree, Mr. Chairman.

The Chairman. When you talk about competition, that obviously
isn't fair competition.

Digitized bvGoO^^IC

349

Mr. SiLTEB. On its face, it is not.

The Chairiian. Mr. O'Brien, would you comment 1

Mr. O'Brien. I'd like to add (me thing to that. There is of course
the exenuttion which the banks have uni£r the 1934 act. That's point
No, 1. Therefore, this isjust not under the oversight of the SEC in
this area and while Mr. Silver has far more experience than I in this
area, I can tell you that from my own experience of 20 years with one
of the firms that the mutual fund industry — and we have been selling
mutual funds for years — has been trying to get the SEC to somewhat
make their regulations more flexible, basically to little or no avail.
Hiere mav be a slight movement within the recent past, but basically
it has not oeen a successful one.

So the competition is clearly unequal on that score.

The Chairman. Now, Mr. O'Bnen, in your statement you speak of
the capital shortage in the hanking industry. You argue that banks
should not be allowed to invade, as you put it, the smaller securities
industry in order to augment their capital. I certainly agree with you
on that.

As a man of wide experience in the equities market, what can you
suggest to help the bank capital problem f Chairman Bums and Cluiir-
man Miller both termed^ as we pointed out earlier, that the banking
industry is undercapitalized, and we went into a little detail on that
The banks are reluctant to go to market during periods of depressed
prices for fear of diluting ownership. Comptroller Heimann speaks
of a serious capital shortfall in the 1960's, more serious than it is now.
What can the securities industry suggest as a solution to that?

Mr. O'Brien. That's a very tall onler. Senator, but the first thing
that occurs to me — and I dont mean to be impertinent in suggesting
it, but it may be sticking to their business would be of particularly
^ood help: in other words, sticking to the banking busmess would
immediately take some pressure off the capital needs of t^e hanks. If
you're going to get into leasing or mutual fund business or private
placements or a host of other areas, you're immediately goinf to put
greater demands on the capital requirements of the bank. So tEat's the
first and I thii^ most fundamental (me — get back to the principles of
Glass-Steagall.

The Chairman. Now, Mr. Silver, bank holding companies were
allowed to advise REIT's by the Federal Reserve. la your judgment,
would Glass-Stea^ll have prohibited bank holding companies from
engaging directly in the REIT business ?

Mr. Silver. Yes, I h&ve no doubt about that. I think that certainly
if the bank holding company was trying to distribute shares of REIT's
to the public the Glass-SteagaU Act would have prohibited that.

The Chairman. Now do the Federal Reserve regulations with re-
spect to investment advisorv services pose the same potential difficulties
to the banking business as tne REIT experience !

Mr. Silver. I think so, Mr. Chairman. I think that the distinctions
that the Federal Reserve Board and the Comptroller have tried to
draw between pure investment advice on the one hand and distribut-
ing securities on the other hand, and thus giving a very narrow inter-
pretation to the Glass-Steagall Act, was in fact proved fallacious by
the REIT experience.

The banks acted not only as investment advisers. They acted as
promoters and sponsors of the REIT's and, as the Supreme Court

Digitized bvGoO^^IC

g>inted out in Camp, they had a salesman's stake in the distribution of
EIT securities to the public. So to expand on Mr. O'Brien's answer,
certainlj REIT activity has inhibited the ability of banks not only
to use their capital but to raise new :»pital.

As you know, Mr. Chairman, the holdinfi; company parent of Chemi-
cal Bank had to withdraw its securities offerinfi; because of the ^Sr
closures which they had to make with respect to the difficulties with
their REIT loans.

The Chaihman. Mr. O'Brien, in your statement you say
that banks are in a position to accord preferential treatment to users
of tJieir securities service. I know there's a tremendous temptation for
credit customers to favor banks voluntarily with their nonborrowing
business because they think it might give them a leg up when times fi^t
tough and money gets tight and there's a credit crunch. Are there any
specific instances of coercive practices on the part of banks to your
^ow ledge !

Mr. O'Brien. Senator, I remember being asked this question txua
other time. I dont know if it was here, but I remember answering it
then, and I thought about it since then and I still think it's true. I
dont wish to evade the question. I think that the banks themselves are
the most qualified people to answer that question. I'm sure there are
instances which could be set forth.

The Chairman. It's pretty hard to get them to answer it and a frank
and full answer would be against their interest.

Mr. O'Brien. Almost impossible to get an answer. You may be able
to find a better way than I, but I can assure you it is very, very
difficult.

The Chairman. Also you say that the comparative regulatory frame-
work places burdens on broker-dealers not found in banks. Can you
detail the unequal treatment accorded banks?

Mr. O'Brien. Yes. I refer in the statement to the final report of the
SEC where they lay out some of the points having to do with such
matters as sales literature, having to do with quali^ation for getting
into the business, the questions — in other words, the training wni(^ is
required, the disclosure which is required with respect to the issuance
of securities, the overall regulatory framework which has been clearly
set forth in the SEC report shows that the climate for banks is aa one
end of the spectrum ana the climate for the securities industry is quite
on the other end of the spectrum. The attitude of the SEC is cme of
enforcement and disclosure which of course is coupled with tight regu-
lation every step of the way, entry into the business, capital require-
ments, training which is required, and then down to the actual (»stri-
bution of the securities. The attitude in eeneral of banking regulators
has been I think pretty much acknowledged to be an accommodative
one, if I could put it that way. There is relatively little or no re^gula-
tion of security activities of banks today.

The Chairman. Now, Mr. Silver, in your statement you say :

We fear that If Congress falls to act in tbls area banks sponaorshlp of com-
mCHi tmat fuDds aad collective pension funds ultimate!; will result in a Boan-
dal crisis ^mllar to that caused br tMnk spoDSorsblp of REIT's in the early
part of this decade.

Now if your conclusion is correct, it should cause this committee
grave concern. What is the evidence to support this % I didn't find it in
your statement.

Digitized bvGoO^^IC

351

Mr. Silver. OK, Mr. Chairman. I think that the REIT story which
ve detailed in the statement is indeed an analoc to the securities area.
Id our written statement, you will find what thenearings conducted by
this committee back in 1932 uncovered with respect to the activities of
bank securities affiliates in the 1920's.

Now we have heard since then — and I have been hearing this since
19^ from the bank regulatory authorities — that that kind of thing
could never happen again because of the vigilance of the bank regula-
tory agencies. Yet if you compare those misdeeds of the 1920's with
what Uie Supreme Court talked about in the long paragraph which
we quote on page 14 from the Caanp case, as to the purpose of Glass-
Steagall, and the evils that Glass-Steagall was designed to prevent, you
will iind that thine;s haven't changed at all when you come to the
REIT's. Every problem that characterized the banks with respect to
securities affiliates back in the 1920's emerged .in the REIT story.
Human nature hasn't changed in 50 years. So there's no reason to be-
lieve that if the securities affiliates simply take the form of collective
funds of one kind of another rather than the form they took in the
I920's, that the same problems would not occur again.

The Chaihi£an. Well, I think that sounds very logical. What I'd like
you to do for the record, if you would, when you go over your remarks,
is to give us whatever evidence you can in addition to this. I don't
mean what you have given us isn't very persuasive, but I think you
could make it even stronger and it would be very helpful for the record.

Mr. Silver. We certainly will.

The Chaibhan. In your statement, Mr. O'Brien, you say :

Banks possess Bnbstaatlal tax advantages, such as their ability to deduct the
interest cost at carrrlng or purchasing tax-exempt securities and their ability to
set up reserves for losses. In fact, In 1977 major commercial banks paid Federal
taxes at rates substantiallr lower tbao those paid bf the securities industry.

What are the tax rates paid by banks versus the tax rates paid by
securities firms f Do you have that evidence i

Mr. O'Bbizn. Yes. I have some reactions on that. I have seen various
tax rates paid by banks and I have seen them as low as 10 percent and
lower — 12 percent, 14 percent — but generally in that lower range,
whereas the average tax rate which would be paid by a partnership
would of course depend upon the rate of the partners and it could be
whatever the top rate is, but let's just say a publicly held brokerage
firm, the rate would be close to 45 or 00 percent, so there's enormous
disparity between the rates paid by the banking community and by the
investment banking community.

The CHAiRMAy. Now what's the effect on the competition of the
banls' special treatment on municipal securities and is .it one that
should be corrected by legislation ?

Mr. O'BRieM. Are you talking about the question of the revenue bond
questitHi, Senator 1 Can you help me out on that question again?

The Chairman. I am just talking about your statement with
respect to the favorable tax advantages that banks have compared to
nonbanks.

Mr. O'Bbien. Well, I think I understand what you mean then. The
ability to deduct on the tax return the amount of the carry of the
municipal bonds gives an outright advantage to the bank side.

The Chaibhan. Do you see any legislative remedy possible for that!

Digitized bvGoO^^IC

352

Mr. O'Bbien. One obvious one is, I suppose, to take away the advan-
tage or to give it on the other side. The disparity in treatment here is
the disadvantage on the one side and the advantage on the other side.
That's the essence of the problem.

The CiuTBUAN. You see how hard it is to correct that by legislation.
One way you could do it, I suppose, would be by — it's been proposed by
a number of us at times in the past that we substitute for tax exempt
a subsidy to the municipality of 35 to 40 percent and th&n make it
taxable and give them tne option of using whatever they wish, bat
with the recc^nition that the advantage by going the taxable way and
eventually the tax exempts would dry up.

Mr. O'BaiEN. I know. I'm famliar with that and, Senator, I think
you and I may disagree on that option in that area.

The Chairhan. You may, but at least that's one remedy that even*
tually would get you where you want to be as far as this particular
point is concerned.

Mr. O'Brien. As far as this particular point is concerned. That could
be quite diplomatic. There is a problem here and we don't really know
the answer to it, but we know lor sure what the tax rate is on the one
side and the tax rate on the other side. We also know the disparity as
far as the carry on municipals is concerned. It's a terrific problem area.

The Chairiian. Mr. Silver, you point out the unfair advantage banks
have in advertising their investment services. We discussed that to .
some extent. Is it your position that all the bank advertisements
attached to your statement would be illegal if published by a mutual
fund 1 I think you said that before.

Mr. Silver. Yes, sir.

The Chairman. Mr, O'Brien, also in your statement you dis-
cuss the private placement activities of banks. In your view, do these
activities violate the Crlass-Steagall Act and, if so, how ?

Mr. O'Brien. Yes, it is, Senator. I believe that the private place-
ment activities is nothing more than the sale of securities. As such, I
believe it is a direct contribution to the

The Chairman. Has the Justice Department ever looked into this!
I understand the Glass-Steagall has a criminal statute.

Mr. O'Brien. I don't know if the Justice Department has.

The Chairman. Have you complained to the Justice Department,
anybody in your industry?

Mr. O'Brien. I have not. Mr. Crawford may know more about it,
but I can say the attitude of the Federal Reserve has been one of com-
plete support on the private placement activities as being nonviolative
of the Glass-Steagall Act and we are just in direct disagreement with
them.

The Chairman. Mr. Crawford.

Mr, Crawford. We have held some discussions with the Justice De-
partment on an informal level and in a situation where they see two
very opposing interpretations of the same statute they have been un-
willing to take any direct action.

The Chairman. Well, gentlemen, I want to thank you very much.
I think, again, you have made a very, very good record, a very helpful
record, and I'm hopeful on the basis of this record we can make some
projrress. We can try very hard.

[Whereupon, at 11 :4fi a.m., the hearing was adjourned.]

Digitized bvGoO^^IC

COMPETITION IN BANKING ACT OF 1977

FBIDAT, JtmE 23, 1078

U.S. Sknate,
Committee on Banking, Houbino,

AND Urban Aitairs,

Waahingtori, B.C.
The committee met at 10 :05 ajQ. in room 5302, Dirkseti Senate Office
Building, Senator William Prozmire (chairman of the committee),
presiding.
Present : Senators Proxmire and Schmitt

STAIEHENT OF CHMBHAH FBOZXIBE

The Chairman. The committee will come to order.

Today we continue hearings on S. 72, legislation designed to control
the growth of bank holding companies by restricting bank acquisition
by bank holding companies already in the market and by restricting
their nonbank activity under section 4(c)(8) of the Bank Holding
Company Act to those activities that are directly related to banks.

A recent study of bank holding companies by the staff of the Federal
Reserve Board revealed the bank holding company, mortgage bank-
ing, and consumer finance subsidiaries operated with lower capital
ratios than their nonbank competitors. Moreover, data submitted by
the Independent Insurance Agents show that when bank holding com-
panies enter into mortgage banking, consumer finance, and factoring
they tend toward substantial dominance in these fields. Banks may
come to dominate nonbank industries that are characterized as small
businesses if bank holding companies are allowed to go outside of
banking and into commercial enterprises. The banks dispense a scarce
commoditv — credit. They have a unique monopoly over vital forms of
credit. When banks go into nonbanMng fields their control of this
critical credit dispensing mechanism may give them at times a serious
leverage advantage over their competitors. In such a circumstance
the market may get unfair competition. Credit judgments may become
distorted by the lure of nonbank income. In part, the REIT experience
m^ demonstrate the unfortunate consequences that could result

One question before the committee is whether or not those unfortu-
aate consequences may be made less likely if we confine bank holding
companies more directly to banking.

The committee will hear testimony from representatives of the in-
surance industry, the accounting profession and spokesmen for inde-
pendent small business this morning.

Our first witness is a panel which will consist of Mr. Wayne Naugle,

CPCU, president of the National A^sociaton of Profeasonal Insurance

(363)

Digitized bvGoO^^IC

354

Agents; Mr. Joel Shapiro, cochainnan, Committee on Federal Law
and Legislation, \ational Association of Life Underwriters; and
Mr. Thomas E. Wilson, counsel, Wilkinson, Cragun & Barker, In-
dependent Insurance Agents of America.

Gentlemen, if you will come forward to the table we will be happy
to hear your statements. I have had a chance to look at your state-
ments and I think it might be best for all concerned if you could con-
fine the statements to 10 minutes. We will run the little clock here.
The green light will go on for 9 minutes; the yellow light for a
minute, and the red lignt means that's it. If you feel at the end of the
interrogation that we haven't had a chance to cover some part of your
presentatation that you feel is particularly vital, speak nght up and
call it to our attention. Your entire statements will be printed in full in
the record.

Mr. Naugle, go right ahead.

STATEMENT OF WATRE L. NAVOLE, PBESIDEHT, KATIOHAL
ASSOCIATIOH OF PB0FE8SI0KAX DTSUBAHCE AOEHTS

Mr, Nauole. Mr. Chairman and members of this committee, my
name is Wayne L. Kaugle of Davidsville, Fa. I am president of the
Naugle Insurance Agency, and president of the Prof eesional Insurance
Agents, a national association headquartered in Alexandria, Va., rep-
resenting 33,000 independent property and casualty insurance agenta
in the United States, Canada, Puerto Rico, and Uie Virgin Islands.

We appreciate this opportunity to provide our comments on S. 72,
the Competition in Banking Act.

PIA IS concerned with the continued expansion of bank holding
companies into the business of insurance and the lack of interest
on tne part of the Federal Reserve Board in stopping this expansion
in spite of the clear congressional directive to do so.

Senate bill 72 recojjnizes the need to further limit the activities of
bank holding companies in the area of insurance by settiiur up further
tests and criteria for such activities. To this extent, PlA supports
S. 72, However, PIA believes that S. 72, while a step in the right direc-
tion, does not go far enough. By limiting all insurance activities of
bank holding companies to those which are closely and directly related
to banking and are likely to produce substantial benefits to the public
which clearly and significantly outweigh possible adverse effects, S. 72
strengthens somewhat but does not substantially differ from the cur-
rent test in the law. The Federal Reserve Board in both the current
version of 12 CFR S 225.4(a) (9) (ii) and the Board's propo^
amendment thereto, allows bank holding companies to engage in,
among other activities, any insurance that is directly related to an
extension of credit by a bank or to the provision of other financial
services by a bank. To date the Federal Reserve Board has proven
itself unwilling to effectively regulate the activity of bank holding
companies in tne area of insurance under this general standard, and
has shown an extreme indifference to the potential of bank holding
companies to exert undue economic coercion upon insurance agents.
/ Therefore, PIA urges this committee to go further in S. 72 to
'specifically prohibit bank holding companies from engaging in any
' insurance activities except for a few specified types <S insurance

Digitized bvGoO^^IC

355

which have proven to be proper activities for bant holding companies /
and with which we do not take issue,' '

This latter approach has been taken in two bills which are currently
ponding in Congress. The first bill is S. 3087, which was introduced
by Senators Durkin and Hathaway on May 16, 1978 and referred to
your committee. This bill -would amend section 4(c)(8) of the Bank
Holding Company Act of 1856, to prohibit bank holding companies
from providing any insurance as a principal, agent, or broker except
for life and disability insurance on a debtor in connection with a spe-
cific credit transaction and insurance which is offered by a national
bank operating in a community of under 5,000 inhabitants. A nearly
identical bill, H.K, 11456 was introduced by Beprescntatives Hanley,
St Germain, Mitchell, Annunzio, Moorhead, Derrick, Cavanaugh, and
Xeal in the House on March 10, 1978 and referred to the House Com-
mittee on Banking, Finance, and Urban Affairs.^

The approach taken by S. 3087 and H.R. 12614 would provide the
Federal Reserve Board and the bank holding companies with explicit
instructions as to what is and what is not a permissible insurance ac-
tivity for ft bank holding company. We think this is the best approach
since it would eliminate the ill effects of the confusing and inconsistent
rulings which have been promulgated by the Federal Reserve Board
in this area. For the past 7 years the Federal Reserve Board has ex-
pended a great deal of time and energy in this area. However, in large
part due to its lack of concern for the potential of bank holding com-
panies to exert undue economic coercion upon the insurance business,
the Board has failed to carry out Congress' clear intent that insurance
activities of bank holding companies be limited. Furthermore, the
Board's treatment of this issue has been so confusing that the courts
have been unable to effectively review their action. Consequently, the
decision of reviewing courts also allow bank holding companies to
engage in insurance activities such as the sale of property and casualty
insurance, even though those activities are not in tact closely or di-
rectly related to banking and the conduct of those insurance activities
by bank holding companies is contrary to the public interest. To allow
the Federal Reserve Board to continue with this "general standard"
approach would be to sanction bureaucratic inefficiency and unbridled
growth of bank holding companies at a time when the American pub-
lic has clearly called for a more effective use of the administrative
process and a check upon concentration of economic power.

In 1970 section 4(c) (8) of the Bank Holding Company Act w;as
amended to prohibit bank holding companies fiom engaging in in-
surance activities unless the Federal Reserve Board determined that
the insurance activities were "so closely related to banking" as to be

. _B<'"-' "' broker where such tnauniace Is limited to CTHirt life. <:red__ ...

t ainddent laaarBiioe and to InsuraDce Bold in towns of S.OOO Inhabltsnts o

«On Mar 10, J9T8, this bill was reintroduced aa H.R. 12614. O- ■" " •"''

eaiulderaUoD of H.H. U600 (the "Safe Banktos Act of 1977"), — ._

Flnandal InaUtDtion SaperrliloD, BeguUitlDD, and Inturance. with ne«Tlr onanlmoaB
(Bdoncment, adopted the language of H.R. 12614 ai an amcDdineat to title XIII of

■ante at a prtn- /
>dlt health, and (
»nt» or less. >

e, 1978, durlDK-^

Digitized bvGoO^^IC

356

a "proper incident thereto," and that the performance of the insurance
activity by a bank holding company could reasonably be expected to

f reduce benefits to the public which outweigh possible adverse effects.
n 1971, the Federal Reserve Board, citing the 1970 amenibnents to
section 4(c)(8) of the Bank Holding Company Act as authority, pro-
mulgated 12 CFR section 225,4(a)(9). This regulation essentially
allowed bank holding companies to engage in the following insurance
activities :

51) Any insurance for the holding ccnnpany and its subsidiaries;
2) Any insurance directly related to an extension of credit by a
bunk or to the provision of other financial services by a bank ;

(3) Any insurance sold as a matter of convenience to Uie purchaser
so long as this portion of the insurance activity of the bank holding
company was insignificant ; and

(4) Any insurance sold in a community which the bank holding
company demonstrated had inadequate insurance agency facilities or
had a population of 5,000 inhabitants or less.

The Federal Reserve Board, whose members have a strong banking
background, have been barraged with a great number of applications
from bank holding companies seeking permission to engage in nearly
every conceivable form of insurance activity. The reaction of the
Board to this barrage of applications has been confusing, illc^cal,
and inconsistent. Prior to tne recent decision of the fifth circuit in
Alabama Aasociation of Insurance Agents, Inc., v. Board of Gover-
non of the Federal Reserve System,^ the Board allowed a broad range
of insurance activities. These activities included the following fonns
of insurance where such insurance was issued to protect assets fi-
nanced bv the bank holding company or to protect the bank holding
company's ability to obtain payment of loans:

(1) Fire, theft, and other perils;

(2) Comprehensive insurance;

(3) Collision insurance;
^4) Marine insurance ;
(5J Liability insurance;

(6) Property floater insurance;

!7) Homeowner's insurance;
8) Boiler and machinery insurance;

(9) Surety bonds ; and

(10) Performance bonds.*

Prior to the fifth circuit opinion in Alabama Association, the Board
also allowed banks to engage in credit life, credit accident, and health
insurance issued for the purpose of assuring the ability of the debtor
to repay a debt, and the Board also allowed numerous forms of con-
venience insurance such as automobile insurance.*

In addition to the numerous forms of insurance listed above, bank
holding companies made application, albeit unsuccessfully, for still
additional forms of insurance. These forms of insurance include :

(1) Business interruption insurance;

(2) Fidelity insurance ;

■ S33 F. 2d 244 (Pltth ciT. 1976) ; KbMrtng denied, BBS F. 2d 729 (Flfrli eir. 1ST7 : CMt.
dniitd 48 C.8,L.W. MSB. No. 77-«e8. Feb. 27, 18T8.

•^labauM nMndal Oroop, Inc., 30 Fed. Rtg. 20, 648 (19741 ; Flrd V«tlmal BqUI»0
CorfOTAllWi, 39 Fed. Beg. 38411 (19T4I.

Digitized bvGoO^^IC

357

fS) Level term life insurance;

(4) Loss of rent insurance ; and

(5) Mo rtf{af;e guarantee insurance.*

The numerous forms of insurance listed above demonstrate the need
to replace the ineffective general standard with a specific prohibition
upon all but a few specific fonns of insurance.

The Federal Beserve Board's treatment of this issue of permissible
insurance activities for bank holding companies has been so confusing
as to prevent effective judicial review thereof. This confusion is in
large part due to the Board's continued refusal to set forth a statement
of the basis and purpose behind its regulation in this area as is required
by the Administrative Procedure Act. Had the Board in its initial
promulgation of 12 CFR section 226.4(a) (9) set forth its basis for
concluding that the broad range of activities allowed thereunder met
the tests of section 4(c) (8) of the Bank Holding Company Act (that
is, why those activities were closely related to banking and why the
conduct of such activities by bank holding companies would be in the
public interest), reviewing courts would have been more easily able to
ludge the actions of the Board. However, the Board failed to do so in
LKrtn its promulgation of 12 CFR section 225.4(a) (9) and in its recent
proposal to amend that regulation.

That the courts have been confused by the actions of the Federal
Reserve Board in this area is made clear by the extreme difficulty the
fifth circuit had in reaching its opinion in the Alabama Association
case. The court issued two rehearing opinions in that case^ each of
which significantly modified its prior position. In its final opmion, the
court upheld the validity of that portion of the regulation which
allows bank holding companies to act as insurance agents or brokers
with respect to any insurance which is directly related to an extension
of credit by a bank or which is directly related to the provision of other
financial services by a bank. In so holding, the fifth circuit opened
the door for bank holding companies to engage in numerous forms of
pFtmerty and casualty insurance, even though such activities are not
in nict closely related to banking and when conducted by bank holding
companies are clearly contrary to the public interest. The court might
not have made such a decision if the Federal Reserve Board had
constructed a clear record below.

On April 10, 1978, the Federal Reserve Board promulgated a pro-
posed amendment to 12 CFTt section 225.4(a) (9) in order to conform
that regulation to this unfortunate decision of the fifth circuit in the
Alabama Association case.

By allowing bank holding companies to engage in numerous forms
of property and casualty insurance in connection with an extension

Alabama Financial araup, /no., S9 Fed. Reg. ZSSiS ■.! 2S300 (19Ti) ; Firtt VatloHal

... ..,_ ™„.^ i.-_ «.... ..„...« "-"IS (19T4) :Borit«IIBniH» -- -'—■■•-

1260 at 44822, 44624 (1!
44680 at 44683 (1»T0).

„.MlHa Corporatt^, SB Fed. Rer- aS411 at SS412, SS41S <1ST4) ; Bantcll Banla at Florida
Md c£aM Manhattatt aj Vme Yvrk. 40 Fed. Hh. 44260 at 44622, 44624 (ISTS) ; Fan
iwtarievn Banttharaa, Imv., Jflairf, Fla., 40 fti. Jwf. "»"" -* '■■>"•• '<~»-.

Digitized bvGoO^^IC

of credit or other financial services by the bank holding^ ccMapany, the
Board is given an extremely probanking interpretation to the words
"closely related to banking!" When one fully understands the intri-
cacies of property and causalty insurance, it becomes clear that the sale
of such insurance is not "closely related" to banking within the fair
meaning of those words.

The three factors which are most commonly used to determine
whether an activity is "closely related" are :

(11 The functional equivalence of the activity to banking;

(2) The ability of the activity to be operationally integrated into
the bank's lending process; and

(3) The need of the bank to conduct the activity.

All three of these factors are absent in the case of property and
casualty insurance.

There is no functional equivalence between the lending process
and tbe sale of property and casualty insurance. Procedural steps taken
in reviewing a loan application and drafting a loan contract are ^mply
different from the procedures inherent in selecting, selling, and servio
ing property and casualty insurance.

S'urther, it cannot be argued that the sale of property and casualty
insurance can be operationally integrated into the lending process.
Property and casualty insurance is categorically different from credit
life, credit health, and the limited form of credit accident insurance.
These latter forms of insurance are generally written under a blanket
policy issued to the lender without underwriting of individual ap-
plicants. There are no underwriting decisions to be made by the bank
and no consumer decisions with respect to form or scope of coverage.

By comparison, the sale of property and casualty insurance neces-
sitates an analysis of numerous factors, none of which are related to
the lending process. The property and casualty insurance agent must
assess all of the risks with which his client is faced and attempt to
allocate the limited resources of his client to cover the most signlUcant
risks in an economical manner. He must be able to reassess his client's
coverage needs as his client's business or personal situation changes. In
the case of personal property, the agent must design his client's policy
to include coverages for social costly items such as jewelry, furs, and
art objects, not included m the "standard form" coverage. Also, the

Sroperty and casualty agent must be familiar with the hteraUy nun-
reds of different policy forms which he must choose from and often
combine in order to give his client the most appropriate coverage. In
addition to this extensive knowledge which the property and casualty
agent must have of both his client's situation and the form of insur-
ance available which will most properly fit that situation, the agent
must also be prepared to service the policy which he sells. In some
instances, this may entail the authority to settle small claims in the
range of $100 to $6,000 depending upon the company and type of loss.
Furthermore, the agent must handle claims for his client so that the
client obtains the most speedy, efficient, and fair coverage from the
insurance company. All of these skills are beyond the expertise of the
normal loan officer. There is simply no parallel between the informa-
tion and skills needed by the loan ofGcer for the loan transaction and
the information and skills required by the property and casualty
insurance agent for the issuance of insurance. Consequently, the saw

Digitized bvGoO^^IC

of property and casualty insurance may not be operationally integrated
into a loan transaction.

Nor can it be shown that bank holding companies need to engage in
the sale of casualty and property insurance. Of course, a bank needs to
make sure that the property in which it has a security interest is in-
sured, but there is no need for the bank to sell such insurance. A bank
needs buildings and telephones to conduct business, but this need does
not make the construction of buildings or the provision of telephone
service "closely related" to banking. As was explained above, insurance
agents are better trained than a loan officer to see that the property in
which a bank has a security interest is adequately insured. Consequent-
ly, a bank holding company has no need to engage in the sale of prop-
erty and casualty insurance.

The fact that property and casualty insurance has nevertheless been
treated by the Federal Reserve Board under a "general" standard as
"closely related" to banking demonstrates the need for Congress to
specifically prohibit bank hmding companies from engaging in all but
a few specific forms of insurance.

IT. THE FEDERAL RESERVE BOARD HAS SHOWN LITTLE CONCERN OVER THE
POTENTIAL OF BANK H0U>ING COMFANIES TO EXERT ECONOMIC COERCION
UPON THE INSURANCE BUSINESS

Mot only has the Federal Beserve Board found the sale of property
and casualty insurance to be closely related to banking, but it has also
found the conduct of those activities by bank holding companies to be
in the public interest. In making this finding, the Board has evidenced
a noticeable lack of concern over the potential of bank holding com-
panies to exert undue economic coercion upon the insurance business.

The history of the Alabama Association case demonstrates this
failure of the Federal Reserve Board to objectively regulate the ac-
tivities of the bank holding companies in the insurance area. The fifth
circuit in that case was reviewing two decisions of the Federal Reserve
Board, which in turn had reviewed the recommended decisions of an
administrative law judge. The administrative law judge, who was not
from the Federal Reserve System, but was "on loan" from another
Federal agency, recommended that the major holding companies. First
National Holding Co. and Alabama Financial Group, Inc., be denied
the right to engage in all forms of insurance except for proprietary
and employee insurance, and for credit life, credit health, credit acci-
dent, and mortgage redemption insurance.'

The bases for both decisions of the administrative law judge were
essentially identical. Citing "destructive competition through the ptffi-
sibilitv of voluntary tying (insurance with lending) particularly in
perioas of tight money," " the administrative law judge found that
reasonable expectation of public benefits was outweighed by the
possibility of the adverse effects represented by destruction of
competition.

In the Southern BankcoTporation proceeding, two bank holding
companies controlled over $2 billion of deposits m Atlanta represent-

*J>ii. U, 1QT4, rMommended declilaD oF the admlnlBtratlTe
(FIrat Nadonal Holding Co.) iDd Feb. T. 1874, recommeudei. ..
tire Ikw Jad«, FRB docket IA-10 (Southern Baiikcor[M>ratloii).

•Feb. T, 197*, Tecommended declglon of the BdinliiiBtTatlve law Judge, FRB docket IA>10
(SonttMrn Baokcorporallouj.

Digitized bvGoO^^IC

ing over 50 percent of the market. One of the applicants in that case
forecast eamines from marketing insurance in the amount of
$4,712,500 annual premiums. The administrative law judge found that
the adverse impact upon the Atlanta insurance agents would probably
be substantial.' Furthermore, in that case there was testimony that a
bank holding company would be "more receptive" to a borrower's
last offer if insurance premiums were part of the total package. The
administrative law judge concluded that "voluntary tying" of in-
surance to lending was quite possible, and noted that section 4(c) (8)
of the Bank Holding Company Act focused upon "possible" adverse
effects and not "probable" adverse effects."*

In reaching this decision, the administrative law judge also made
the following observation, which although apparently ignored by the
Federal Reserve Board, is in our view the very reason why your com-
mittee must specifically prohibit bank holding companies from en-
gaging in insurance activities :

The proposition reduced to Its simplest terms comes down to tbls: If a bank,
large Id Its comm unity, using predomlDsntly deposlter's funds as caidtal, is
authorized to compete agHinst mostly 9niall insurance enCerpiiseB by soliciting
its debtor-clientele, It is possible, even probable that the mom-and-pop agency
will be driven into merger or out of business entirely ; and, to tbls extent, tbe
American dream of a land of opportunity where every man and woman, with
some skill and good luck, can become a proprietor or a partner, rather than
merely a clerical employee or an Insignificant stockholder, will fade further."

In spite of these alarming findings by the administrative law judge,
the Federal Reserve Board rejected in large part the decision of me
administrative law judge, and allowed many types of insurance activi-
ties which the admmistrative law judge had found to have ptcsented
unacceptable risks of anticompetitive results. In doing so, tne Board
repeatedly stated that it had found no evidence of attempts by the
bank to tie, either voluntarily or involuntarily, the sale of insurance to
its provision of banking services. This inclination of the Board to
require a showing of actual use of monopoly power by the banks
demonstrates the lack of concern of the Board over the potential of
bank holding companies to use their extraordinary economic power in
an unfair manner. Monopoly power has long been held to be an evil
in itself, regardless of whether that power is in fact exercised by its
holder.^*

Sensing tiiis probanking attitude of the Federal Reserve Boanl
System, rank holding companies have continued to pressure the Board
to expand the scope oi permissible insurance activities.

Recently, a bank holding company, NCNB Corp., applied to the
Federal Reserve Board for approval to retain its indirect subsidiaries
which were engaged in the actual uTiderwriting (that is, ultimate risk
bearing) of property and casualty insurance related to extensions of

"So It !■ that moDopolT power, whether Ikwfullr or nnlawfully aeqatred, mar Iticif
titute ID evil aad stand condemned nnder | S {German Act] tvax thouili It remalnt
' "' (brackeU added). VM. v. ffrtjnth, 8S* U.S. 100 (1048).

Digitized bvGoO^^IC

361

credit by NCNB Corp.'s affiliates. On May 12, 1978, the Federal Re-
serve Board denied tne application finding that the activities of the
subsidiaries were not closely related to banking. However, tlie fact that
one Oovemor on the Board voted against rejecting the application and
the very fact that the bank holding company even made the applica-
tion are indicative of bank holding companies' belief that the Federal
Reserve Board will allow them to engage in almost any type of insur-
ance activity.

Further evidence of this attitude on the part of Uie bank holding
companies may be found in the comments which were filed on May 1,
1978, by the American Bankers Association upon the Federal Reserve
Board's proposed amendment to 12 CFR section 255.4(a)(9), that
regulation which defines the scope of insurance activities which may
be engaged in by bank holding companies. In these comments, the
American Bankers Association argued that bank holding companies
should be allowed to issue extensions or renewals upon credit-related
insurance even though the loan which is related to the insurance has
been paid in full. It is hard to conceive how the issuance of such re-
newal insurance by banks can be seen to be "closely related to banking"
when such renewals are issued after the period when the loan which
was the basis for the issuance of the insurance has been paid. Xonethe-
less, this position of the American Bankers Association indicates that
the bank holding companies feel that the Federal Reserve Board might
apply the general "closely related" test in such a manner as to allow
renewal insurance.

VL CONCLUSION

In summary, although S. 72 would tighten somewhat the general
standards contained in section 4(c) (8) of the Bank Holding Company
Act and in 12 CFR section 225.4(a)(9), S. 72 still utilizes a general
standard. The past 7 years have shown that the Federal Reserve Board
is unable or unwilling to effectively limit the insurance activities of
bank holding companies under a general standard. Accordingly, FIA
urges your committee to adopt the approach taken in S. 3087 and H.R.
12614 by specifically prohibiting bank holding companies from engag-
ing in any insurance activities except for a few specific types of insur-
ance activities such as life or disability insurance issued in connection
with a specific credit transaction, or insurance issued in towns of popu-
lations under 5,000. Such an approach is necessary to effectively limit
the insurance activities of bank holding companies and to put an end
to the unproductive administrative proceedings which have oeen going
on at great expense for the past 7 years using a general standard

The CHAinM.\N. Thank you very much, Mr. Kaugle,

Mr. Sliapii-o.

STATEMENT OF JOEL A SHAPIRO, C0CEAIB1IA5, COKHITTEE OH
FESEEAI LAW ASD LEOISLATIOH, NATIONAL ASSOCUHON OF
LIFE UNSEBWIIITESS, ACCOHFANIED BT WILLIAM B. SCHEB

Mr. Sn.\PiR0. Thank you, Senator.

Mr. Chairman, my name is Joel Shapiro. I'm a full-time life insur-
ance agent in New York City. Off the record, I personally would like
to thank the committee for its action on another matter fast week.

Digitized bvGoO^^IC

Senator ScHMnr. I tliink that's on the record.

Mr. Shapiro. I'd like to put it on the record.

The CiiAiRHAN. Mr. Shapiro, I'll be right back. You go right ahead.
Senator Sclimitt will take over. I'll be back in about 2 minutes. I have
to answer a phone call.

Mr. Shapiro, I'm here in another capacity. I am currently chair-
man of the Federal Law and Legislation Committee of the National
A^ociation of Life Underwriters, better known as NAX<U, and this
morning I'm accompanied by William B. Scher, counsel for NALV
based here in Washington.

NALU is a federation of over 1,000 State and local associations
representing approximately 135,000 life and health insurance agents,
general agents and managers. I would like to take this opportunitr to
thank the committee for permitting me to testify today on behalf of
NALU in support of S. 72.

NALU has long been vitally interested in legislation which seeks
to protect the consumer from the results of undue concentration of
resources and economic jMwer in any segment of the economy, from
decreased or unfair competition, conflicts of interest, unlawful tying
arrangements and coercion. We believe that you, Mr. Chairman, have
demonstrated your concern about these dangers to the consumer and
the economy by intrmlucing this legislation, designed to reestnblish
competition within the banking industry while at the same time
insuring that a healthy line of demarcation is maintained between
banking and commerce.

Although NjVLU is concerned with the increasing concentration of
power within the banking industry itself, the members of our associa-
tion have been primarily concerned with and affected by the expand-
ing diversification of bank holding companies into areas which have
been traditionally regarded as nonbanking activities. In our viewpoint^
this extension of the banking institutions of our Nation into a variety
of other business endeavors has resulted in unfair competition between
banks and affected businesses as well as harm to the American
consumer.

NAI.*U agrees with the competitive concerns expressed in a report
of a survey conducted by the House Committee on Banking and Cur-
rency released in 1969 which listed three major adverse consequences
resulting from the mixing of banking and nonbanking activities within
the same corporate structure. These adverse consequences were stated
thus:

<1) There U Inevitably a ationg temptation to hare the banking satxtldlary
of a boldlng company extend large amounts of credit, perhapB nnwlsely, to other
holding company subsidiaries, thus creatlnfr unsound flnancial conditions for the
bank to the detriment of the bank's depositors, stockholders and the public at
large. This Is the kind of activity In which some of the larger banks in the
country were engaged In the 1920'b.

(2) Since banks are the principal suppliers of substantial credit to almost
every Industrial, commercial and other kind of business in the United Stntes,
banks should not t)e In a position to discriminate unfairly against these users
of bunk credit by establishing competing subFildlaries and then denying credit
to the competitors of the bank's non-banking subsldlaj^es. This Is a particularly
(terlouB problem In the many cities and towns all over the United States where
there are only one or two major banking institutions to which baslneas can torn
for substantial amounts of credit

(3) Because many large and small buiflnesses, as well as IndlvldnaU, depend
on bank credit for their economic existence, bank subsidiaries of one-bank holdlof

Digitized bvGoO^^IC

convanles are in a posttton to iiuist or "stiongly BusKest" that U the borrower
wants coQtinued access to bank credit, It should also use the eervlcee of the hold-
ing companr's other Bubsfdlarfee. These eerrices ml^t Include Insurance, equip-
ment leasing, property management, accounting, computing, Investment and
travel aerrlces, or any other bnelness the holding company might decide to
undertake. This would create unfair ccmpetitlon (or non-bank related competitors
of these subBldlarles and conld In the long run substantially reduce or elimi-
nate competition In many businesses to the detriment of the public interest.
[Btatr of House Committee on Banking and Currency, 9lst Cong., 1st Hess.,
Baport on the growth of unregistered bank holding companies. (Cunm. Print

Regarding the possibility of coercion noted in (3) above, I would
only add that such practices have been well documented in past hear-
ings before this committee with respect to insurance activities carried
on by banking institutions and more indication of the possibilttes for
such practices will be discussed later in this statement. There is also
the distinct possibility of what has become kno^rn as "voluntary
tying" which may arise when banking institutions are permitted to
enter fields not directly related to banking. A good description of the
dangers of voluntary tie-ins was provided this committee by Assistant
Attomev Gleneral Richard McLaren during the 1970 Heanngs on the
Bank ifolding Company Act amendments. In his testimony, Mr. Mc-
Laren referred to a situation :

alllllated enterprises In the hope of improving bis chances of obtaining credit
from the tiank on favorable terms, or Indeed at all.

This can be Illustrated by an example. A potential loan applicant might
voluntarily place his casualty Insurance business with a bank-afflliated Insurer
In hopes of Improving his rbancee for a mortgage loan on the Insured property
oa favorable terms. This would have the same effect as a coercive tie-tn. Com-
petition In the tied product. Insurance, would be lessened to the extent that
customers no longer purchased It entlr^ mi its own economic merit. One suidi
merger might well trigger others and, as a pattern of such bank Insurance affilia-
tions developed, market foreclosure In the tied field would become more and
more serious.

Such voluntary tying or tying ettecl. as we called It In a recent case, is the
iwodnct of market structure — not misconduct

This structural problem is Intensifled because present antitrust remedies ap-
pear Inadequate to deal directly with it. There simply Is no Illegal practice or
conduct for a court to enjoin. Hence, we must concentrate on avoiding a struc-
ture which gives rise to such effects. [Hearings on Bank Hiding Company Act
amendments before the Senate Committee on Banking and Currency, 91st Cong.,
lat SesB. (196».)]

Section 301 of S. 72 provides for important restrictions on the per-
missible nonbanking activities which may be carried on by bank hold-
ing companies and the proposed amendments to section 4{c) (8) of the
1956 Bank Holding Company Act as amended are a commendable and
necessary addition to the current law.

While NALU fully supports these provisions, we also feel it desir-
able that the bill be strengthened to state those activities which are
speciBcally prohibited to bank holding companies. We feel such a state-
ment is important due to the fact that there are certain nonlmnking
activities which have been deemed permissible for bank holding com-
panies in the past despite the apparent congressional intent behind the
1970 amendments to tne Bank Holding Company Act of 1956.

For some time, NALU has become increasingly alarmed by the grow-
ing encroachment of banking institutions into the insurance agency
business generally, and more particularly the sale of life and health

Digitized bvGoO^^IC

364

insurance by bank affiliated agencies. While sales of life insurance and
health insurance have not j^enerally been deemed permissible activities
for bank holding companies per se, such products have been permitted
to be marketed by general insurance agencies affiliated with Iwink hold-
ing companies because of a Federal Bcserve Board regulation promul>
gated subsequent to the passage of the 1970 Bank Holding Company
Act amendments. This r^ulation, among other things, essentially per-
mits a bank holding company or its nonoanking subsidiary to market
any insurance in communities of 5,000 or less. In a recent development,
the Federal Reserve Board has proposed to review this permissible
activity as required by a recent Federal court case (see Fed. Beg.

Another part of the Board's regulation permits bank holding com-
panies and their nonbanking su^idiaries to engage in the sale of
msurance directly related to the provision of other financial services
by a bank or bank-related firm. The Federal Reserve Board has in-
terpreted such activities to include the sale of life insurance —

(1) Equal to the difference between the maturity value of a deposit
plan for periodic deposits over a spedlied term and the balance in the
account at the time oi the depositor s death,

(2) In connection with mortgage loan servicing that is provided by
a bank or bank-related firm, insurance on the mortgaged property and/
or insurance on the mortgagor to the extent of the outstanding mlance
of the credit extension, provided, that the mortgagee is a beneficiary
under such types of insurance policies ;

(8) Directly related to the provision of trust services if the sale of
Budi insurance is permitted by the trust instruments and under State
law. (Seel2CFR (225.128).)

While this part of the regulation is also currently being reviewed 1^
the Federal Reserve Board in accordance with the same Federal court
decision noted above, it would not appear that the Board's interpreta-
tion permitting the above-noted activities will be affected by this le-
view. Thus, banking institutions have made manv inroads into insur-
ance agency activities which are not "closely related" to banking in
most instances. Such activities have been permitted by the regulatory
agency through administrative action which appears to be outside the
scope of statutory authority.

NALU would note that the Federal court case which has mandated
the Federal Reserve Board review of various portions of its regula-
tion affecting permissible insurance agency activities of bank holding
companies will, in all probability, have only a minor impact on restrict-
ing many of the currently permissible activities, llie very fact that
litigation continues to occur more than 7 years after the passage of the
Bank Holding Company Act Amendments of 1970 with respect to
which insurance agency activities are proper for bank holding com-
panies and their nonbanking subsidiaries is indicative of the fact that
congressional action is needed in this area.

It is our understanding that the testimony of the Independent Insur-
ance Agents of America will provide documentation of the difficulties
they have experienced in attempting to obtain administrative and
judicial relief from increasing bank holding company penetration of
many kinds of property and casualty insurance agency activities in
apparent violation of the intent of Congress in passing the 1970 legis-

DigilizedbvGoO^^IC

Istion. It is the opinion of M^ALU that it is only a matter of time before
the bank holding companies will begin to attempt similar full-scale
entry into the life and health insurance agency business unless Cmi-
gress adopts specific language prohibiting such activities.

There are additional reasons why NALU feels that certain insurance
Agency activities, including the marketing of life and health insurance,
ought to be specifically prohibited to bank holding companies and I
would like to take this opportunity to point out these additional

First of all, it should be noted that while it is apparent that the sale
of life and health insurance is not "closely related" under the current
law or "closely and directly related" under the proposed S- 72 stand-
ard, such is not the case, unfortunately, with sales of certain credit
life and health insurance products. For instance, it is probable that
the sale of credit life and health insurance, when issued in connection
with a specific loan or other credit transaction is "closely related" to
banking under the current law and an argument would inevitably be
mount^ that this sale of credit life and health insurance would be
"directly related" under the language of S. 72.

Therefore, with respect to credit life and health insurance agency
activities, where confusion may arise on the issue of precisely what
nonbanking insurance agency activities are permissible, it would seem
appropriate to designate those insurance agency activities which are
not "closely and directly related" or, conversely, provide a listing of
the only insurance agency activities, if any, which would be permissible
under S. 72. Such action would be helpful in providing clarification
to the regulatory agency regarding congressional intent on arguably
directly related credit insurance activities. Parenthetically, I would
note that even though credit life and health insurance may be
considered directly related to banking, NALU is opposed to the under-
taking by banking institutions of any type of insurance agency activ-
ity, including the sale of credit life and health insurance. We applaud
the congressional finding in this bill that "banking holding companies
have eirtended their services into product markets beyond those di-
rectly related to banking in offering insurance agency and underwrit-
ing services." Bearing importantly on NALU's feeling that prohibited
insurance agency activities should be specifically listed in the bill is
the deplorable track record of bank institutions in the field of mai^et-
ing credit life and health insurance.

In this regard a recent development by a Federal Government regu-
latory agency would appear to provide implicit recognition of the
dangers associated with permittmg banking institutions to engage
in credit life activities. On Septemwr 23, 1977, the Comptroller of the
Currency issued a final regulation designed to prohibit the distribu-
tion of credit life insurance income to employees, officers and direc-
tors of a national bank and to individual stockholders owning more
than 5 percent of a national bank's shares. The admitted purpose of the
r^pilation was stated as being to curb self-dealing in the sale of credit
lin insurance by national banK insiders.

Kssentially, the regulation was issued to insure that credit life in-
surance income derived through bank auspices would accrue to the
shareholders of the bank rather than to the benefit of individuals asso-
ciated with the bank. However, the regulation was premised on sev-

DigilizedbvGoO^^IC

3W

eral considerations which are particularly relevant to the deliberations
oi this committee in connection with S. 72. XALU feels that the Comp-
troller of the Currency accurately set forth the problems associated
with permitting credit life insurance to be sold by bank employees
when this regulation was issued and the only argument N" ALU would
have with the Comptroller's expressed apprehensions wonld be with
respect to the solution of the problem.

The Comptroller first addressed the problem of unsafe and unsound
banking practices which may result from the payment to and reten-
tion of credit life insurance commissions to bank insiders sach as loan
officers. The Comptroller was of the opinion :

That a loan officer's Judgment on credit quality can and may be Influenced by
the direct financial reward he receives from making a loan with credit Ute
Insurance attached. As one commentator noted : "When commleelons are received
by bank officers, either as outright bonuses or as compensation In Ilea of aalarjr,
the prospect ot personal financial gain Is Interjected Into the lending decialon.
The gain goes to the officer while the risk ia borne by the bank, therrity onder-
mlning risk-reward calculation." The Comptroller also notes that bankers hare
condemned the use of Incentives to generate high loan volume becauM It mlgbt
Inhibit loan quality ; the same reasoning would seem applicable to the nae ot
Incentives for the sale of credit lite Insurance on bank loans. [42 Fed. Reg. 48S24
(1OT7)].

The Comptroller then addressed the antitrust considerations which
had prompted the promulgation of this regulation with the following
statement :

An additional basis on which the Comptroller promulgates this legnlatlon !■
his concern that the use of credit life insurance commissions as an incentlfe
to encourage loan officers to sell credit life Insurance tends to increase the
chances of an Illegal tie-in between the sale of credit life Insurance and the
granting of credit. While the use of incentives to generate sales of one product
closely associated with another being sold simultaneously cannot be considered
a per se violation of the federal antitrust laws or of the anti-tying provisions
of the Bank Holding Company Act Amendments of 1970, special concern Is war-
ranted in credit life Insurance sales to loan customers in view of the wldeapread
Buspldon that such sales are less than fall; voluntary on the part ot the
borrower.

Id view of the extensive experience of the Federal Trade Commission in the
application of the antitrust laws to the sale of credit life Insurance to borrowers,
the Comptroller believes the commission's views are entitled to significant weight
OD this Issue. According to the CommlSHlon. the Comptroller's regulation "wlU
partially alleviate the problem of coercive and dec^tlve credit Insurance sales
practices by eliminating one aspect of a compensation system which tmds to
foster of abuse. [42 Fed. Reg, 48524 (1977) ].

Finally, the Comptroller indicated his opinion that to a limited
extent:

The regnlation should have a beneficial impact on consumers who borrow from
national banks. Since loan officers are prohibited by the regulation from bene-
fitting personally on the sale of credit life Insurance, there Is leas likelihood
that a borrower will be )iersuaded to purchase unneeded credit life Insurance.
With the elimination of direct Incentives for loan officers, the chance Of an Illegal
tie-in of credit life Insurance with the granting of credit decreases. [42 Fed.
Reg. 48D24-4862S (1977)].

The Comptroller has made his case with respect to the very prob-
lems which have conoernod NAIjU about the sale of insurance by
banks and bank holding companies. We would ha-sten to point out
that the Comptroller's solution — to channel the profits from the .sale
of credit life msurance directly into the bank's treasury rather than

Digitized bvGoO^^IC

367

directly into the bank officer's — or shareholder's — pockets — does not
meet tne real potential dangers involved when banks — and their hold-
ing companies — market insurance. This is due to the fact that there
appears to be no viable method to insure that the bank — or bank
holding company — may not offer some sort of incentive— either direct
or indirect — to its employees for their efforts to tie-in the sale of
inBurance with the banking service being offered.

Unfortunately, this sad state of affairs was tacitly acknowledged
b; the Comptroller as part of the background discussion accompany-
ing issuance of the recent regulation wherein it was noted that :

Prorlded certain procedures are tollowed, the Comptroller believes this regn-
ladoD will hare no eubstantlfll Impact oa most ot the banks where credit life
tnBarance Income 1b now paid to Individuals. It the credit life inaurance tDCome
Ifl credited to the bank and officers' salaries are adjusted correspondingly up-
wards to compensate for their lost Income, the result, from an accounting stand-
point, should be a wash. Some banks converting from a salary-plus-eredlt lite
Insurance income pay plan to a straight salary arrangement may Incur minor
additional liabilities where employee fringe benefits have been tied to salary
bat not to credit Ufe Insurance Income. [42 Fed. Keg. 48521 (1977)].

As further evidence of the "enterprising" nature of banking insti-
tutions and their employees and shnreholders when it conies to engag-
ing in insurance activities, KALU would submit to the committee a
partial text of a letter written by the Deputy Comptroller of the Cur-
ren<^ to the Dallas Regional Administrator of National Banks as
pubushed in the May 22, 1978 edition of the American Banker [at
page 51].

The purpose of this letter is to clarify certain questions raised about Hie
new regulation on disposition of credit life Insurance income, 12 CFR 2.

1. It has come to our attention that some bank officers who are licensed in-
snrance agents have entered into reciprocal arrangements with officers of other
Iianks to act as agent for the sale of credit life insurance to the other Iiank's
loan customers. For example, the chief executive officer of Bank A will desig-
nate the chief executive officer of Bank B as the agent for the sale of credit
life insurance at Bank A. and vice versa, with the result that the two chief
executive officers receive the commissions from the sale of credit life insurance
at each other's bank.

Where reciprocal arrangements have been made, they amount to a subterfuge
and will be considered a violation of 12 CFR 2.4(a). Aside from the fact that
the arrangement Is a clear evasion of the regulation, it raises the pcwsiblltt]'
that one of the banks, In an effort to maintain parity of Income for the two
chief executive officers, will step up Its credit life Insurance sales program,
thereby Increasing the possibility that marginal loans will be made to reap
additional credit life insurance commissions and that loan officers more fre-
quently will attempt to tie the sale of credit life Insurance to the granting of
credit These two concerns were among the considerations prompting the Comp-
troller to adopt the regulation, and they persuade us that reciprocal arrange-
ments of this kind are unsafe and unsound.

In light of the above, we suggest that national bank examiners inquire about
the existence of reciprocal arrangements with officers and directors of other

2. We have been advised that some bankers and principal shareholders have
arranged for their relatives, e.g., grandchildren and adult children, to obtain
an insurance agent's license and act as agent for the sale of credit life insur-
ance at the bank and receive commissions. Since section 2.3(d) of the regula-
tions covers only spouses and minor children of officers, directors, employees
and principal shareholders, the prohibitions of section 2.4(a) do not apply to
grandchildren and adult children. However, where it can be shown that the
arrangement relieves or reduces a pre-existing obligation of the bank officer
to the relative in question, we will consider the arrangement a violation of
section 2.4(a).

Digitized bvGoO^^IC

NALU respectfully submits that if banking institutions have shown
a proclivity tor making money at the expense of the American c<ni-
sumer through their marketing methods of credit life and health
insurance, and the record of that is all too well documented, then
banking institutions ought to be affinnatively prohibited from becom-
ing involved in insurance agency activities such as the sale of life and
health insurance where they have little or no experience and expertise
and certainly no justifiable direct banking interest.

XALU also feels it advantageous to specifically list those insurance
agency activities which are not permissible for bank holding com-
panies in order to help avoid any conflicts which might arise due to
contemplated State legislation. Currently, the business of insurance
is almost exclusively State regulated. Several State legislatures con-
cerned by increasing banking institution intrusion into the insurance
agency business, have recently enacted restrictive State licensing laws
prohibiting banks, bank holding companies and their employees frtnn
engaging in many insurance agency activities.

Inasmuch as many other State legislatures will be considering simi-
lar action, a list of those insurance agency activities prohibited to bank
holding companies and their subsidiaries under the Bank Holding
Company Act would provide helpful Federal direction to those State
legislatures who wish to shape their bills to coincide with Federal
laws.

NALU also supports the provisions of section 401 of S. 72 entitled
"Uniform Application of Standards Governing Entry Into Bank
Related Fields," We feel it very important that there be a consistency
in decisions emanating from tne two primary Federal regulators of
bank holding company subsidiaries — the Federal Reserve Board —
charged with the responsibility of regulating bank holding companies
and their nonbank subsidiaries — and the Comptroller of the Cur-
rency— charged with the responsibility for regulating national bank
subsidiaries of bank holding companies — as lar as the appropriate
outer limits for expansion by bank holding companies into directly
related areas is concerned.

Other i)rovisions of the bill which appear particularly beneficial
in protecting the public interest appear in sections 601 and 701. Sec-
tion 601 provides that Federal Reserve Board determinations of per-
missible 4(c)(8) activities— under the Bank Holding Company Act
as amended — will be made on the record and, additionally, this sec-
tion proposes hel^iful discovery rules and insures that relevant in-
formation pertaining to Board proceedings under 4(c)(8) will be
available to interested parties to the proceeding. The general apph-
cation of the Administrative Procedure Act to Federal Reserve Board
rulemaking proceedings is another desirable feature of this section
of the bill.

The necessity for these changes was, in part, underscored by a staff
report of the Subcommittee on Domestic Finance of the House Bank-
ing Committee issued in the latter part of 1973. This report noted the
failure of the Federal Reserve Board to provide a useful record on
which it based its decisions in several important cases involving inter-
pretation of the Bank Holding Company Act as amended. This report
stated the consequences of such failure as being that :

Digitized bvGoO^^IC

[T]he doe process of law Is thwarted because those who seek to appeal de-
cUions of tbe Board are unable to present the details of the Board's flndinga or
Its TeaBonlng for purposes of rebuttal. [Staff report of the Subcommittee on
Domestic Finance of the Committee on Banking and Currency of the House of
Bepiesenta tires on Financial Institutions : Heform and the Public Interest, 93d
Cong., Ist Sess., August 1&78.]

Section 701 of the bill, providing for ongoing supervision of bank
holding company 4(c)(6) activities by the Board, would seem par-
ticularly desirable due to the fact that the net public benefits to the
Enblic offered by bank holding companies are all too frequently short-
ved.

Invariably, as one com[)ares this bill to the existing law, every pro-
vision on a section-by -section basis imposes public interest requirements
on Federal Reserve Board proceedings conducted to determine what
activities should be permissible for bank holding companies and their
subsidiaries,

NALU feels strongly that this is a bill designed to protect the
American consumer of banking services as well as the small businesses
of America from the excesses perpetrated upon them by increasingly
more powerful banking institutions and their expansionary and harm-
ful entry into nonbanking areas.

We urge that every member of the committee ^ve this bill top
priority, and once more respectfully request the consideration of addi-
tional language further clarifying those insurance a^ncy activities
which would be prohibited under tnis proposed legislation.

la closing, 1 would like to present to you an excerpt from a decision
of an administrative law judge assigned to a Federal Reserve Board
administrative proceeding in which insurance agents were challenging
bank holding company entry into a wide variety of insurance agency
activities. Wiile this nnding is of particular relevance to the member-
ship of NALU, it would 1» equally applicable to many other small
businesses trying to survive bank holding company competition.

The judge reached the following conclusion as part of his decision ;

Tbe proposition reduced to Its simplest terms comes down to this : If a bank
large In Its community, using predomlnantlj depositors' funds as capital. Is
luthoiiKd to compete against mostly small Insurance enterprises by soliciting its
debtor clientele, it Is possible, even probable that tbe mom and pop agency will
be driven Into merger or out of the business entirely; a.Dd to this extent, tbe
American dream of a land of opportunity where ever; man and woman, with some
skill and good lack, can become a proprietor or a partner, rather than merely a
clerical employee or an Insignificant stockholder, will fade further .... IRec-
ommended decision of Paul N. PtelfFer, administrative law Judge, FRB docket
No. IA-10 {1974).]

Mr. Chairman and members of the committee, I thank you once
again for permittii^ me to express NALU's support of S. 72.

The Chairuan. Thank you very much, Mr. Shapiro.

Mr. Wilson.

STATEMEST OF THOMAS E, WILSON, COTTITSEL, WILEDTSOV,
CSAOTJH £ BAEKEB, DrSEPERBEnT nrSUBAITCE AGENTS OE
AHESICA; ACCOMPANIED BT EDWAEB EEEHKEB

Mr. WiLBON. Mr. Chairman and members of the committee, my
name is Thomas E. Wilson. I am with Wilkinson, Cragun & Barker,

Digitized bvGoO^^IC

370

Wftshineton counsel for the Independent Insurance Agents of America
("IIAA^'). I am accompanied at this hearing by Edward J. Kremer,
chairman of IIAA's federal affaii-s committee, and by Jeffrey M.
Yates. IIAA's associate general counsel.

IIAA welcomes this opportunity to testify in support of the Com-
petition in Banking Act of 1977 (S. 72). This bill t^tces needed action
to preserve competition in the banking industry, and to clarify and
strengthen the current law limiting the participation of bankiog
organizations in nonbanking activities. We thank the committee for
inviting us to express our views on matters of such vital importance to
our economy.

I. INTRODUCTION

IIAA is a national association of independent property and casualty
insurance agents. The association is composed of 51 State associa-
tions— including the District of Columbia — which represents more
than 34,000 insurance agencies and approximately 150,000 insurance
agents across the country. Members of IIAA vary greatly in size ; most
are smaller businesses having gross incomes of less than $75,000 per
year. The agents are proud of being part of an industry in which small
business organizations have been able to serve the insurance needs of
the public efficiently. This success is attributable to the efficiencies of
competitive i-etail markets which are characterized by large numbers
of conveniently located agencies from which the public is able to
purchase insurance.

IIAA has long been committed to the preservation of the high level
of competition which currently prevails in the retail property and
casualty insurance industry. For this reason, we have been concerned
with the continuing attempts of large banking organizations to gain
entry into our industry. If the enormous resources of banking organi-
^" zations, coupled with the unfair competitive advantage they would
) enjoy by virtue of their control over credit ti-ansactions, were brought
to bear in the retail insurance industry, substantial numbers of ncm-
'^ affiliated agencies would inevitably be forced into mergers or out of
business entirely. The result would be a dramatic reduction of c(Hn-
petition. These concerns prompted IIAA to oppose certain applica-
tions filed by various bank holding companies to engage in insurance
agency activities after the Bank Holdmg Company Act of 1956 —
"BHC Act*' — was amended in 1970. The litigation involving two of
those applications recently came to an end wnen the Supreme Court
declined to review the approval of those applications by the Board of
the Governors of the Federal Reserve System — "Board" — and a U.S.
court of appeals.*

IIAA believes that S. 72 is a f arsighted and necessary piece of legis-
lation. The bill recognizeir that our national economic well-being is
closely linked to the preservation of competition iu the banking in-
dnstrj'. In addition, the bill takes cognizance of the jKitentially enor-
mous'destructive power banking organizations may exert when they
enter into direct competition with the natural occupants of nonbank-
ing markets (for example, insurance agents) . Although S. 72 is a step

> Alabimi Aaaoclstlon ot IniuranM Agent*. Inc. v. Board of Oovernotn of Otr FYderal
ReierTC Syafcm. S3S F. 2d iU (Dtb CIr. ISTS), OD TebearlDR. S4« F. 2d 1245 (IBTT) (ad-
vance ahKt ODlr), OD rebearlDg. 6SS F. 2d T2S (19TT), »rl. denied, 16 U.8.L.W. 3M1
(Feb. 27, 1978).

Digitized bvGoO^^IC

371

in the rieht direction, in IIAA'b view it does not go far enough. As a
result 01 IIAA's htigation experience on the insurance agen^ issue,
an experience we will share with you in detail in a moment, IIAA is
convinced that Congress must decide once and for all what nonbank-
ing activities are impermissible for bank holding companies and write
appropriate prohibitions into law.

Insofar as property and casualty insurance are concerned, Senator
Durkin has recently introduced, and Senator Hathaway has cospon-
BOred, a bill (S. 3087) which would specifically prohibit bank holding
companies from engaging as principal or agent in the sale of property
and casualty insurance, except in limited circumstances. IIAA fully
supports Senator Durkin's initiative and urges this conunittee to amend
S- 72 to include the language of Senator Durkin's proposal, or to re-
port Senator Durkin's bnl out of committee as a separate piece of legis-
lation. As our present testimony will show, such action is urgently
needed to prevent the property and casualty insurance agency industry
from being radically restructed as a result of massive bank holding
company entry.

Substantial evidence has already been presented to Congress on the
economic issues associated with the problem of bank holding company
entry into a variety of nonbanking activities.* For this reason, lIAA
will focus its comments on the specific experience it has had with the
Board's administration of the BHC Act smce that act was amended in
1970. We think that experience will be enlightening of this committee
and will provide an ample basis for the reuef we Believe is crucial in
order to protect the public interest.

A. Background : For many years, the Nation's banking legislation
has required a separation between banking and other forms of com-
merce. Since the establishment of the national bank system. Congress
was prohibited Federal banking associations from engaging in any
activity which was not banking or an incidental power of banks.' When
Congress enacted the BHC and the 1970 amendments thereto, it con-
tinued and extended this principle.^ Consequently, the BHC Act gen-
erally prohibits bank holding companies from owning the shares of
any company which is not a bank.' The limited exception to this pro-
hibition appear in section 4 of the BHC Act, with the principal ex-
ception contained in subsection (c)(8).* Section 4(c)(8) essentially
provides that a bank holding company may engage in a nonbanking
activity if, and only if, it can make an affirmative showing that (i) the
particular activity in which it wishes to participate is "closely related"
to banking, and (ii) its participation in the activity can reasonably be

•For riuviile, on Mir. i, 1970, In connecllou wlEh 8. 2T21. IIAA alone prewnted iDor«
than 150 DBgea of teiClman; and exblblu on this question. Other parties bBre Bubmltted
■ubBtantlal additloniil teadmoajr conceralng 8. TS. Blmllarlr, Id tbe House, teitiinoO]i
was pmented during averslghc bearings In 16711. and again In cocaectlon with the so-
nlled Committee Print In 1BT6 and the Safe Banking Act of 1977. For Ihese renBODB, this
Issue baa been fullr aired before tbiB cominlttee and before oCber commltteea of CanKress.

< Stt National Bank Act. cb. lOS, | 8, 13 Stat 101 (1864) (current version at 12 C.S.C,
IS4 (Supp. V 1975)).

,., »-., «_ .noj "'-t Cong.,

Digitized bvGoO^^IC

la

372

expected to result in benefits to the public that outweigh possible ad-
verse effects."

In 1971, the Board promulgated section 225.4(a) (9) of its regula-
tion Y, which enumerated tiiose types of insurance agency activities
which the Board considered to be "closely related" to bankine within
the meaning of section 4(c)(8) of the BHC Act.' IIAA and various
of its state and local associations subsequently opposed certain bank
holding company applications for insurance agency authority which
were submitted pursuant to the Board's new regulation. IXAA re-
quested that the applications be set for hearings.

The Board announced that hearings would be held on 22 of the then
pending applications.' Eventually, four hearings involving eight ap-
7lication3 were held. The rest were either withdrawn, settled by stipu-
ation between the parties, or deferred pending the final outcome of
the cases set for hearing. Two of these cases ultimately went to the
Supreme Court, which recently declined review. We will discuss thoae
cases in detail in this testimony.' The remaining are cases currently
pending in the courts and, for that reason, will not be discussed.

B. Description of the Applicants and Their Insurance Agency Pro-
posals : The two proceedings which have been finally resolved involved
the applications of two bank holding companies. Southern Bancorpora-
tion {''Southern") and First National Holding Corp. ("First Na-
tional"), to engage in a broad range of property and casualty insur-
ance agency activities across a major part of their holding company
opertions. Both organizations are powerful financial institutions nav-
ing total deposits in excess of $1 billion. Southern had five banking
subsidiaries which conducted business out of 39 offices throughout the
State of Alabama. First National had one banking subsidiary operat-
ing out of more than 40 banking offices in the Atlanta area, and a large
mortgage company subsidiary with numerous additional offices
throughout the State of Gteorgia.

Each applicant proposed to have one insurance agent located at a
central location in Birmingham (Southern) and Atlanta (First Na-
tional) to serve the insurance needs of persons entering into loan and
other financial transactions with their holding company systems.
Neither applicant proposed to offer direct billed insurance.*

The applicants asserted that the types of insurance agency activities
contemplated by their applications conformed with the Board's
insurance regulation and were therefore "closely related" to banking
within the meaning of section 4(c) (8) of the BHC Act They also
contended that approval of their applications would result in benefits
to the public that would outweigh possible adverse effects.

C. IlAA Opposition to the Applications: IIAA's opposition to
the Southern and First National applications was twofold. First,
IIAA contended that the Board's insurance regulation was invalid.
Second, the insurance agents argued that approval of the two applica-
tions could not reasonably be expected to result in benefits to the public
that would outweigh possible adverse effects.

18 Fed. Reg. 6,441 (IBTS).

•an dote 1 and aeeompanrlng tt^> •■•m..

* Direct blUed iDBuraDce li ■ torm ot persoaal llnei laiurancc (aatomobUe and bi
awnen) irhleb li admlnlatered at tbe Insurance company leTel, rather tbao the ag
leveL Direct billed iDiatance gtntrallj oirere conBumen lower premlnma than at* •
able wltb ilmUar poUdM admlntBtered directly by Insurance aseaclei.

D„ii„.db,Go(5glc

373

Specificall;, the IIAA parties argued that the Board's insurance
regulation was bereft of any statement of basis and purpose, as required
by the Administrative Procedure Act, and that the regulation was
entirely too general and impermissibly vague. The insurance agents
also pointed out that, except for sales of credit life and disability
insurance, insurance agency activities are neither functionally equiv-
a^nt to extensions of credit nor operationally able to be integrated
into financial transactions. For these reasons, IIAA maintained that
the activities proposed by the applicants were not "closely related" to
banking within the meaning of the BHC Act.

Insomr as public interest considerations were concerned, the IIAA
parties noted that each of the applicants' proposals contemplated <Hily
one centrally located insurance agent to service the insurance needs of
consumers from all over the States of Alabama and Geor^a. Since
there were numerous insurance agents in the immediate vicinity of
each of the more than 80 offices from which the applicants proposed to
offer insurance, the applicants' insurance proposals were manifestly
inconvenient to the public.

The insurance agents also pointed out that, since both applicants re-
jected the sale of lower cost direct billed insurance policies, they would
be offering insurance to the consumers at higher prices than were other-
wise available through nonaffiliated agents.

Finally, IIAA argued that by combining sales of insurance with ex-
tensions of credit the applicants would enjoy an unfair competitive
advantage over nonaffiliated agents. The ability of a holding company
to control a credit transaction provides it with a unique opportunity
through overt coercion, or more subtle means, to influance a borrower
who must purchase insurance to protect the collateral standing behind
a loan. Even in those instances where a borrower voluntarily decides
to purchase insurance through the holding company's affiliated agen-
cy— because he thinks it might help him in the loan transaction — he
is making his insurance decision without regard to the traditional
levers of the market place — lower price and improved service. The
result of that decision, whether voluntary or coerced, is the sam6 —
it reduces competition in the insurance a^ncy industry.

D. Findings and Recommended Decisions of the Administrative
Law Judge: The Administrative Law Judge who heard the evidence
presentecTat trial concluded, based on his reading of congressional
intent, that the lines of insurance for which the applicants had sought
authorization were "closely related" to banking. He did not, however,
believe that the applicants had shown that approval of their applica-
tions could reasonably be expected to result in benefits to the public,
such as greater convenience, gains in efficiency, and increased competi-
tion that outweighed possible adverse effects, such as decreased or un-
fair competition and undue concentration of economic resources.

Specifically, the Administrative Law Judge found that the appli-
cants' plans to have a single, centrally locatea insurance agent serving
the insurance needs of consumere from across the applicants' respec-
tive States was manifestly inconvenient. In fact, he stated that "[t]he
insurance consumer would be better served by going to his nearby
independent agent for consultation rather to a bank office some dis-
tance from the insurance agency subsidiary." ' Similarly, the Ad-

DigilizedbvGoO^^IC

374

mioistrative Law Judge rejected the applicants' claims that they
would be able to brin^ a greater level of efficiency to insurance agency
operations. On that issue he concluded that, "while [the applicant]
may experience some operating efficiency by adding insurance services
to its banking and nonbanking functions, there is no proof that the
customers will benefit in terms of lower cost of insurance coverage. On
the contrary Applicant's policy appears to deliberately avoid the most
pi-omising technique for insurance customer savings. * The "promis-
ing technique" to which the judge referred was the direct Inlled in-
surance which would be available through nonaffiliated agencies but
not through the applicants.

Finally, the Administrative Law Judge rejected the applicanl;s'
claims that approval of their applications would result in increased
competition in the insurance business. To tlie contrary, he found that,
in locations where the applicants' banking subsidiaries controUed sub-
stantial deposits, independent insurance agents would be subjected to
"destructive competition." > He also concluded that voluntary tie-ins
of insurance sales with extensions of credit were almost inevitable,
particularly in times of tight money. He further found that, in markets
where insurance agents would be forced to compete with "double-
barrelled financial conglomerate [s] . . . the independent commission
agents would have difficulty surviving." ' In this regard, the Judge
concluded that "the clientele [of large bankholding companies} that
could possibly be subtly influenced to divert [insurance business away]
from Atlanta independent agents is so large that many of the latter
could be driven out of business or forced to merge into larg^ units
resulting in decreased competition." ' Ultimately, the administrative
law judge concluded as follows:

The propoaltion reduced to its simplest terms comes down to thlB : If a bank,
large tn its community, using preduminactely depositors' funds as ca^tal, U
authorized to compete against mostly small Insurance enterprises by soUciUiig
Itfi debtor'Cllentele, it U possible, even probable, that the mom and pop agency
will be driven Into merger or out of business entirely; and to this extent the
American dream of a land of opportunity where every man and woman, with some
skill and good luck can become a proprietor or a partner, rather than merely a
clerical employee or an inslgnlQcant Stockholder, will fade further.*

Thus, the administrative law judge concluded that approval of the
applications could not reasonably be expected to result in benefits to
the public that outweighed possible adverse effects. He did, however,
recommend that the Board authorize the applicants to conduct insur-
ance agency operations in those markets where the control of banking
deposits was insubstantial.

E, The Decisions of the Federal Reserve Board : Upon review of the
decision of the administrative law judge, the Board, not surprisingly,
found that the lines of insurance for which the applicants had sought
authorization were largely within the terms of the Board's insurance
regulation. The Board also concluded, in most instances without the
slightest allusion to the contrary findings of the administrative law
judge, that approval of the applications could reasonably be expected

•Kproiiiiiii>n<l«l UimMhIoii. FIrit Salional Holding Corp., FRB Docket IA-8. it 22 (Jan. 14,
10T4) (empbaalB added).

IbIo

IbIdu, FRB Dockel lA-10, at 10-2D (emphaili added).

Digitized bvGoO^^IC

375

to result in benefits to the public that outweighed any possible adverse
effects.

For instance, notwithstanding the manifest inconvenience recognized
by the administrative law judge concerning the proposed locations of
the applicants' agencies, the Board determined that approval of the
applications would result in greater convenience to the puolic. Similar-
ly, without so much as a single word regarding the question of direct
billed insurance, the Board also detennined that approval of the ap-
plications would be likely to result in '"gains in efficiency"' witliiu tlic
insurance agency industry. The Board also found that approval of
the applications would result in increased competition in the insurance
agency business. With that, it approved both the Southern and the
First National applications. The IIAA parties, of course, sought re-
view of the Board's decisions in the United States Court of Appeals
for the Fifth Circuit."

F. Court of Appeals Decisions — (1) "Closely Related" to Banking;
As a result of the Board's failure to provide a statement of the basis
and purpose of its insurance regulation, and the generalized nature of
that regulation, the court of appeals was ultimately required to issue
three separate decisions dealing with the "closely related" issue. In
the first decision, the court determined that several portions of the
insurance regulation went beyond the Board's statutory authority and
were therefore invalid. In its second opinion, the court extended a
portion of its first decision and thereby invalidated another portion of
the insurance regulation. In its third decision, the court retreated from
its second decision and returned the "closely related" issue to essential-
ly the same posture it had been in upon the issuance of the first decision.

Even though it invalidated portions of the Board's insurance repila-
tion, and remanded other portions to the Board for further considera-
tion, the court upheld the regulation to the extent that it permitted
sales of property and casualty insurance in conjunction with extensions
of credit and the provision of other financial services. The net effect
of the court's decisions was to permit bank holding companies to make
major inroads into the insurance agency business, thereby potentially
restructuring numerous insurance markets in a way that would be
adverse to the public interest.

(2) "Public Interest" Test: Despite its ultimate ruling, the court
was highly critical of the Board's application of the "public interest"
standards engrafted by Congress onto the BHC Act in 1970. In fact,
the court rejected the Board's findings on two out of three of the public
benefits considerations enumerated in section 4(c) (8).

(a) Greater Convenience : As concerns the question of greater con-
venience, the court noted that the Board's conclusion was cast in doubt
because both applicants proposed to have their insurance offices situ-
ated in remote locations in Birmingham or Atlanta. The court criti-
cized the Board for failing to recognize the decrease in convenience
which would result from such a situation. Moreover, said the court :

[T}tie Board made no attempt to eiplata vrtiy nonaffiUated Insurance aitents
cottld not effect the same convenieaces through a one-stop shopping system. I^oan
olllcera could (and If there is a genuine bank need to Insure that acceptable cov-
erese be secured, they will) suggest to the prospective loan customer a reputable

• 8m note 1 and aconpanrlDg text lupra.

Digitized bvGoO^^IC

local agent ; If tbe ciutomer ia ffiUlng, tbat agent could be telephoned sod could
iwrforiii the same functions as the proposed holding couipaiiy affiliate agent.*
Til addition, the court pointed out that the administratiTe law judge
had come to an opposite conclusion from that of the Board, and that
the Board had made no effort whatsoever to explain its de^rture
from his findings. Consequently, the court determined that the Board's
findings of greater convenience to the public were not su[^>orted by
substantial evidence."

(b) Gains in Efficiency: With respect to the possibility that ai>-
proval of the application)- would result in gains in efficiency, the court
recognized that the dispute centered around the sale of insurance poli-
cies which were "direct billed." ' The court pointedly noted that, while
the administrative law judge had premised his adverse findings with
respect to gains in efficiency primarily on the refusal of the applicants
to offer direct billed insurance, the Board had failed "even fto] men-
tion the direct billing concept or the administrative law judge's reli-
ance thereon."" Ultimately, the court concluded as follows;

[T)he Board again has failed utterly in its KaponBlbllltr to oontdder possible
sources of efficiency loss and to arrive at a reasoned evaluation of net efficiency
gains. It may well tre that the Board could properly have concluded that a net
gain would result or tliat, as First National suggested in Its brief, tlie holding
company affiliates would in the future adopt direct billing. But the fact remains
that, despite the AdmintstratlTe I>w Jndge's explicit reliance upon the negative
effidency effects of non-use of ditect tiilltng, the Board falls to ao mnch as mm-
tlon the issue. Because of this failure, we cannot uiAold the Board's finding on
ttila issne.'

The Board's decisitm concerning gains in efficiency was highly dis-
appointing to IIAA for an additional reason not mentioned by the
court. When the Board enacted its insurance regulation in 1971, it
expressed the expectation that :

[A]ny holding company or subsidiary that acta as an insurance agency on tbe
basis of tbe new regulatory provision will exerdse a fiduciary responsibility —
tbat is. by making its best efforts to obtain tbe insurance at tbe lowest practicable
cost to the customer.*

Since direct billed insurance is generally available at a lower cost
than agency billed insurance, and since both applicants rejected the
use of direct billed insurance, neither applicant undertook to offer in-
surance at the "lowest practicable cost to [its] customer[s]." For
this reason, the Board's approval of the applications violated its own
insurance regulation.

(c) Increased Competition : As we have just noted, the court of ap-
peals unequivocally rejected the Board's findings concerning the
greater convenience and gains in efficiency standards of the "public
benefits" test. Nevertheless, the court found itself able to uphold the
Board's determination that approval of the applications could rea-
sonably be expected to result in increased competition. This portion
of the court's decision is anomalous. On the one hand, the court found
insufficient evidence to support the Board's findings regarding pos-
sible efficiencies (price) and convenience (service) ; yet, on the other

• 3.f:t P. M Bt 247 (^mphBulM In orlRlnaJ)-

"Id. «t24S.

> B«e not* 11 and accampanylns text lupta.

Digitized bvGoO^^IC

377

hand, it found sufficient evidence to determine that approval of the
applications would result in increased competition. The court's deci-
sion in this regard becomes even more internally inconsistent in light
of its finding that, "[wjhile the evidence on [increased competition]
certainly can be dcsciibcd as vague, we find that • * * it is enough."*
In other words, insofar as the public benefits factors enumerated in
the BHC Act are concerned, tne court ultimately found two not to
have been proven, and one to have been supported by evidence that
was merely ''vague."

(d) Decreased or Unfair Competition: In his recommended deci-
sions, the administrative law judge expressed concern that borrowers
misht voluntarily tie their purchases of insurance from the applicants'
affiliates to extensions of credit, particularly in times when credit is
scarce.^ This concern has also often been expressed by Coacress. For
example, the conference report associated the 1970 Amendments to
the BHC Act states:

Tie-ins occur where a customer is forced or Uidoced to accept otber products
and oerrlcea along with that product wbicli he seeks. Such de-lns may result
from actual coercion by a seller or from a customer's realization that he stands
a better chance of securing a scarce and important commodity (such as credit)
by "volunteering" to accept other products or services rather than seeking them
In the GompetltlTe market place. In either case, competition is adversely aftected,
as customers no longer purchase a product of service on its own economic merits.*

While the Board did specifically address the administrative law
judge's concern r^;arding tie-ins, it totally rejected his findings, even
though those findings closely paralleled fears the Board itself has pre-
viouSy expressed to Congress. In ld6&, for instance, the Board stated
to the Financial Institutions SubctMmnittee of this committee:

[Bjecause of the Inferior bargaining position of the debtor, he may be aus-
c^tlble to tite loan officer's "suggestlans" concerning choice of coverage, premium
rates, Insurer and agent. As a result, the debtor easily may receive the Impression
that his loan application may be more favorably considered If he follows such
suggestions.*

Although tlie court of appeals seemed to concede that voluntary
tying mi^t occur in some instances, it affirmed the Board's conclusions
with the statement that "the total amount of possible voluntary tying
was not of tlie magnitude (.'ongress was concerned about." *

For the court to have minimized Congress' concern over the danger
of tie-ins is inconsistent with the record. Congr^s had long been highly
sensitive to tliis issue. In fact, the traditional separation of banking
and commerce in our economy is a concrete reflection of that concern.
Furthermore, this conunittee's inquiry during its March i, 1976, hear-

3 on S. 2721, the predecessor of S. 72, focused upon the prevalence
dangers of tie-ins. During those hearings, Edward J. Schmuck,
testifying on behalf of six life insurance unaerwriters, read the fol-
lowing letter into the record :

I regret very much the Incident concerning "Hr. X." I based my decision regard-
lug this matter on what I thought to be the best Interest of "Mr. X" and the
bank. As I indicated to "Mr. X", our bank could not accept the loan unless we

U.B.C. Cans. Ad. Ncwi BBSe.

•HHriiim on Coaiiumer Credit InHunnw Apt of ISOB (8. 1TS41 Befor* tbP Subcumni.
on Flaandal laitltotlon of tlie Senate Baoktng Committee, Blit Cong., lit een. IBS (IMS).

' S38 F. 2d ■( 3S1.

Digitized bvGoO^^IC

378

were allowed to write the credit lite insarance. As I discussed br pbone, tbe
primary reason for tbla request to write tbe Insurance, was because this action
Increased tbe return of Income on the loan by a good mai^n. Had our bank been
denied this additional income, we could not have approved the loan. BecaoM of
the extremely tight credit situation, I feel "Mr. X" would not have obtained the
loan elsewhere. Therefore, I believed our bank to be doing "Mr. X" a serrlce
by granting this type of loan under these clrcnmstancee, with credit aa tigbt as
It is at present

I can still appreciate and understand your reasoning and regret tbat "Hr. X"
saw fit to cancel his policy with your company. I am hopeful ttils situation will
not occur again in the future.'

During the same hearings, Edward J. Kremer of IIAA read a
similar letter received by his own insurance agency in Salisbury, Md.:

Dear Bill : The purpose of this letter Is to clear up any misunderstanding that
may have arisen as a result of the recent changes In our insurance program.
We instructed you to discontinue the automobile dealers physical damage cover-
age In the package policies tbat you have so that we could obtain this coverage
through "i" bank. As you know, "i" bank does tbe financing of our new car
Inventory. This In no way indicates dissatisfaction of your service or that of the
company "x". As I explained to you, we feel that we bave to place the coverage
witb tbe bank because we so frequently request special favors of them. Even if
their premiums were to prove a little higher, we would still feel obligated In
this way. Please also be assured that this in no way implies tbat the bank has
forced us to make tltls change in our insurance program. Beat wishes.*

From this and other testimony which has been elicited by Congress
over tbe years, it is clear that the tying issue has been a paramount
concern of Congr^, particularly in the context of the bank holding
company nonbankins; question. For the Board and the court to have
been insensitive to this fact is most disappointing.

(e) Undue Concentration of Resources: Another factor which in-
fluenced the decision of the administrative law judge was the tmdue
concentration of resources which approval of the applications would
cause. In this regard he expressed misgivings over the tremendous
financial power of the applicants in comparison with the insurance
agencies with which they would enter into direct competition. The
Board, once again, showed no appreciation of the economic implica-
tions of this problem. For its part, the court admitted that there could
be "no doubt either that the insurance businesses of the holding com-
pany affiliates Iwouldl be relatively large" or that the applicants eon-
trolled " a substantial amount of the banking resources in the relevant
markets." ^ Nevertheless, the court, once again, deferred to the "pre-
sumed expertise" of the Board on this question and refused to ovettum
the Board's findings.'

nl, CURBENT POSTURE OF THE INSURANCE AOENCY QUESTION

After the court issued its third and final decision, IIAA petitioned
the Supreme Court to review these cases. On February 27, 1978, the
Supreme Court denied IIAA's petition.

Thereafter, the Board initiated proceedings to repromulgate those
portions of the insurance regulation which the court of appeals vali-
dated, and those other portions which were remanded for further
consideration. Parenthetically, it is worth noting that the bank holding
companies are now urging the Board to expand tlie scope of insurance
agency activities that would be permitted under the insurance
r^ulation.

•Tranicrlpt at 24-25. Hearings od 8. 2T21 Before the Senate BsnUus Committee Mth
Cook.. 2d aeM. (March 4, 1914).
*&. at ,19-tO.
'933 F. 2d at 2S1.

Digitized bvGoO^^IC

At bottom, we are left with the foEowing situation. After 7 years of
ifeihaiistive and expensive litigation, the Board is proposing to repro-
mul^ate essentially the same generalized and imprecise insurance regu-
lation which initiated the whole process in 1971. What is perhaps
forse, the litigation has resulted in the creation of an exceedingly bad
aterpretation of the "public benefits" test, created by Congress in 1970
> require the Board to protect the public interest. As the law now
ands, at least in the fifth circuit, insurance agency applications may
a approved even though there is no substantial evidence that such

Bpprovftl will result in greater convenience or gains in efficiency, and
e only evidence that competition will increase is "vague." These
ases demonstrate in classic fashion that the courts generally will not
vertum an agency decision, no matter how thin the evidence may be
npporting it. In other word.?, once Congress delegates discretion to
"1 administrative agency, any doubts which a court may have will be
solved in favor of that agency.

Given the difficult and disftppointing experience IIAA has had in
le administration of the BHC Act, it should not be surprising that
[AA supports more stringent legislation of the sort contemplated by
, 72. Section 301 of the bill, particularly when it is read in conjunc-
on with the congressional findings set forth in section 2, would make
ore restrictive the standards under which the Board could authorize
mk holding companies to participate in nonbanking activities,
pecifically. .section 301 would require not only that an activity pro-
»sed to be entered be "closely related" to banking; it would also have

be "directly related" to banking. In addition, the activity would
ive to be not only a "proper incident" to banking — that is, in the
iblic interest— but also a "necessary incident" to banking. Similarly,
* bill would require a showing that approval of a bank holding com-
my nonbanking application would produce "substantial" benefits to
e pnblic which "clearly and significantly outweight possible adverse
fects."

Section 401 would require that any activity determined by the Board
' be Improper under the BHC Act would also be required to be pro-
ibited lor national banking associations by the Comptroller of the
urrency. In this way, needed consistency would be brought about be-
feen the various regulators of banking organizations.
Section 501 of the bill would establish standards for the sound and
impetitive financing of holding company affiliates engaged in non-
inking activities. This provision would help bring into greater equi-
irium the competitive advantage derived by bank holdmg company
filiated entities by virtue of the favorable capitalization schemes
liich are possible under the current law.

Sections 601 and 701 of the bill are of particular importance. These
ctions would require all Board determinations in the area of non-
inking activities to be made on the record after an opportunity for a
irmal liejiring. In addition, those sections would prohibit ex parte
inmiunications and provide to nonbanking parties needed procedural
ghts which do not exist under current law. Finally, interested persons
ould be given a right to require the Boai-d to assure that applications
' enter nonbanking activities approved by the Board contmue to be
I the public interest.

CoDgic

IIAA believes S. 72 is an excellent bill. Nevertheless, insofar as the
sale of property and casualty insurance is concerned, IIAA believes
the bill does not eo far enough. Over the last 7 years, IIAA has been
required to participate in seemingly endless rulemaking and adjudica-
tory proceedings on the question of whether the sale of property and
casualty insurance is an appropriate activity for rank holding
companies. Notwithstanding the adverse results of the cases we have
described to you, IIAA remains convinced that it has made the case
that bank holding company participation in property and casual^
Insurance agency activities is not "closely related" to banking or in the
public interest. Under these circumstances, IIAA believes it is time
that Congress once and for all decide this issue. This could be done
either by amending section 301 of S. 72 to include the language of
Senator Durkin's 573087, or by reporting S. 3087 out of this oommittee
as a separate piece of legislation. The record has been made. With the
bank holding company industry poised to enter the retail property
and casualty insurance industry, tne time for Congress to act is now.
Further delay will almost inevitably have severe adverse consequences
on the public.

Once again, IIAA thanks the committee for the opportunity to ex-
press its views on these very important matters.

[Additional material from the Independent Insurance Agemts of
America, Inc. follows :]

I. IHTBODOOnON

The Competition Id Banking Act of 197T (8. 72) would, among other thliif*
make more restrictiTe (he atandarda under which bank htddlng companlM
could engage in nonbanklng activities. In connection with a. 72, therefore. It U
appropriate to examine various aspectii of the bank holding compan7 movemeni;
particnlarly regarding bank holding company entry into variona nonbanklng
industries under Section 4(c) (8) of the Bank Holding Company Act of 19M
(the "Act"), as amended In 1B70.

The inqulr; undertaken regarding this presentation was made more comidei
than might have been expected because, since the 1670 amendments to tbe Act.
the Board of GoTernors of the Federal Reserve System, the agency charged with
the responsibility of administering the Act, has Itself never eystematlcaUy stud-
ied either the Industries It lias permitted bank tralding companies to enter or
the etTect of holding company entry on Oiose Industrlee.

The data presented herein relates to tank holding company participation in
finance, mortgage banking and factoring activities, the nonbanklng actlvltlea in-
volving bank holding company entry where meaningful information Is pablidy
available.

Fart II of this presentation provides information coDceming bank and bank
holdlDg company penetration into Uie Qnance, mortgage banking and factoring
Industries. The data shows that, since IMS, bank and bank holding contpany
affiliates In the mortgage banking Industry have Increased their percentage of
total loan servicing by more than 100 percent, from approximately 23 percent
of the tutal In 1968 to approximately 49 percent of the total In 1976 (Table 1).
In the flnancK Industry, bank holding company aOlliated organlMtlons. between
1967 and 1976, Increased their capitaUsation from approilmately 17 percent of
the total in 1967 to approximately 22 percent In 1938 (Table 2). Similarly, be-
tween 1967 and 1976, bank and bank holding company affiliated factoring eom-
panles increased their parUdpatlon in the Industry from approximately 36 per-
cent of the total volume In 1967 to approximately 77 percent In 1976 (Table 4).

Part III hereof compares tbe capitalisation of bank holding company flnance
and mortgage banking subsidiaries with the capitalisation of similar MitlUes
which are not afiUlated with a bank holding company system. An examlnadon
of tbe pubUcly available data makes clear that bank holding company flnance
and mortgage banking subsidiaries are generally more highly leveraged than
the ntmaflUlated occupants of those industries (Tables).

..,z.d.vCo(>t^lc

381

I tiie bBBls of tbe information available, thwefore. it appears that bank

pfcoldliig compan; partidpatlou in the flnance, mortgage banking and factoring

■ Sustriea bas significantly lucreaHed since the 1970 amendments to the Act,

Iklng banit holding companies a significant factor and, in some cases, the doml-

nt toree In those industries.

J Part IV of this paper presents flata wliich allows a comparison of the sl«e of

t bank bolding companies which have entered the fields of consumer finan<«

1 mortgage banking and the finaa which are the "natural occupants" of those

tustrles. One set of data presents current (i.e.. recent past) comperisons, while

tottaer set presents comparisons at tie time of acqulsitioa, registration or boat^

I Tables 1-1 provide information concerning bank and bank holding company
[m1>anlc aubsldiary penetration in mortgage banking, finance {eonaumer. sales,
1 commercial combined), consumer finance, and factoring. The derivation of
t Individual figures in the tables is discussed below.
J Mortgage banking {table 1)

^Mortgage banking firms act as Intermediaries between commercial and !n-
vJdual mortgage borrowers and the suppliera of long-term funds. Typical!?,
: mortgage banker will originate individual loans, provide interim or ^ort-
. -m finandug from its own funds, package or group loans Into larger {e.g.
t milliDn) blocks, and then sell sucb blocks to institutional investors sucb as
bvlnga and loan associations and Insurance companies. The mortgage compan}'
'*1 also service the loan during its lifetime {e.g., collect payments, maintain
row accounts, inspect property, etc.). The servicing activity provides over
\ i)t the average mortgage company's Income.' There are an estimated 1500
Jms in this industry. Banks are involved in this industry both directly and
krough mortgage banking subsidiary firms.

Theoretically, an ideal measure of bank and bank holding company activity
in this industry would require servldng and/or origination data from all of
the estimated 1500 firms actively involved in the industry. However, such com-
plete data is publicly unavailable. Therefore, estimates of bank and bank hold-
ing company market share were developed within the subct a sslfi cation of firms
which represent the largest servicing entities in the business. These servldng
volume figures are routinely compiled and published.

Table 1 presents estimates of aggregated market share attained by bank and
bank holding company firms within the category of the 100 largest servicing
* a in the industry. The basis for these estimates is the "100 Largest Mortgage
(Tvlcers in the U.S." compiled annually liy the .American Bankvr. Bank and
mliank firms were segregated by using descriptive material provided by the
Inrrfcrin Banker in conjunction with this list, Moody's Bank and Finance
^»uat. and Federal Reserve Board Information on hank holding company

1 FIRMS IN

t

.«»

«„

„..

»76

^tTDf lunhorbtnkholdlniMniiunrnnni

!1

39

r.

Si

*7

Pnmm* Df teM wvUlnt t>V MnH or MnK hoMint

Iki oampllM ■nninlly by Hit Amailun BinVlr.
FinantiB {table 2)
The area of finance involves a much less well-deBned "Industry" than
K with mortgage banking. For example, a uumlier of different types of firms
lUoi
L

EtUoitgaEC Banken AbsocIrUoq of Aniprlm, Mortgage Banking: lOTS, Washingtan

n, ■,v..i.,Coi>^r

the

are Involved (Including, of couree. banks as direct partldpaats). Tbeee flrau
may have different tj'pea of Bnance company activities aa tbetr spedallty (a^.,
consumer Bnance, sales Qnance, "old line" factoring, commercial finance, "fnll-
payout" leasing, etc.). The; ma; also have dlfferlnt; mixes of the various Wn«i>r*
company activities coming within the generic definition of "finance" actlTlty. In
practice, there has been a trend towards dl vera! flea tlon and the major firms
In this "industrr" engage in a number of dlfFerent types of finance compsny
activities. Because of tbis dlverslBcatlon, a cautious Interpretation Is suggested
with respect to any market sbsre estimate attributed to this "induetiy," in-
cluding those presented below.

Accepting this inherent limitation to the ntimbers. some estimate of bank hold-
ing company aggregated market Nhare can be derived. However, there is also
the same data deflclency to be addressed which was noted previously with re-
spect to mortgage banking, i.e., the fact that data la not publldy available. Tht
solution In this case is to confine the estimates to bank holding company market
share within the subset of the largest Arms In the industry, a subset for whldi
data la available and pubilxhed routinely. The subset of firms excludes dinet
bank finance company activity and therefore the bank holding company market
share estimates must be Interpreted as additions to the activitiee already en-
compassed by direct bank participation. The subset of firms also excludes flims
which are "captives" {e.g., subsidiaries) of manufacturers and which confine
their actirlties to lending activities associated with the manufacturers' products.

Table 2 presents estimates nf aggregated market share attained by bank bedd-
ing company subsidiary firms within the category of the 100 largest noDCsptlve
firms as ranked by the size of capital funds. The l)aBls for these estimates ts the
"100 Largest Independent or Affiliated Finance Companfea" compiled annually
by the AmcH/Ym Banker.' Bank and nonbank firms were segregated using Fed-
eral Heserve Board material, !Hoodv'» Bank and Finance Manual, and other
standard financial reference sources. For the limited number of Instances In
which firms could not be unambiguously IdentiBed as either bank holding com-
pany affiliates or as nonbank firms, they were Included In the nonbank cfttegory.

Numbtr a( bmk he
Number of nonbanl
BiRh holdini com
ptrctntiiaof tiitit...

. _.. . __ . .. ._ ,_ jy lubtHliiriH* P)

Numbtr sF nonbinti Stnii _ p)

BiRh holdini company tubildlaiy capilaliutlon at a

[ncaplt>liMii>nH'apire«Bla|«ol total ILMIS-e (4.6

1 Ai compllad annually by Iha Amarican Banhor.

'TliMt tliurtt IncluM ai liinli Mdim company I . ..

fimit whfch mliht ml ba coniidoiMl "bank-canlaiad" liinh Mdlii i

munlluilo ol tha bank iiiab anociatod aitti wdi ol ttiiM nrmi (l.o., onr ii.uw.uw,

tlJlllO,(ni].OOa fat CII). howmr. II wu conddatad approptfalo ts tacognln tha bank

■ Tlitf* am appreilmataly 10 fif oit from tha 1W7 "Lannt 100" MacapHvanatwIilcli cannot bo IdtntiAMl lullt Ma-
dard tinancial raforoncot lodi «i "Moody'i Bank and Flnanc* Manual. Tlw inroiatod capitMUtUoii ptfcmtifo ht
tlWM 10 It approilmaMlv Z paicont o( ttio Mai lor ttia 100 ntmi. That* on only 2 llnaa Inn Hio oOior 90 wrkh i>*r« co«-
•idlad bto bank luldliii company ii IWT and ihiir capibliuMB ai a pHMotifo of Uio total fof th* 100 finn «nt 1C4
paicanL Ilia mitlmum concoiyobla bank hold! nf company tabijdiory parconta|o li tbarafon amind IM p«tMt;tiwi-
avor, a Hiura that hifti loami unllkoly.

C. Contumer finance (tableS)

The aggregated finance company market share information In Table 3 Includes
companies involved In one or more of the following : consumer finance, sales
finance, commercial finance, and factoring. Table 3 presents similar estimates for
companies whose emphasis Is In the area of consumer finance. This separate
estimate Is desirable because of the apparent heavy emphasis that bank holding

■The ranklPK and market Bhare eatlmalea on tbe baalB of capital fundi are probablj

enlrabU ihan raoMiiK based upon total receivables. However

■ " ' ' information (or all of the 100 „._ ,

matlc difference in capitalization by bank end noabank

t provide receivables volume information for all of the 100 largeot a
....... .._. ...___ ._ . — . ... >— ... — ,..„ — ._|| gy ijjj

a. the market share estlmj

D„ii„.db,Go(5glc

mnpuulea bave plnced upon entry [u this area relative to otber areas (measured
If Dumber or entrantH) . Tbe basis for tbese estimates and tbe maoner in wbich

^^■nk holding company Scnis were dlstingulsbed from nonbaiik firms is as dis-

1 prevloualy. Tbe firms wbich speclaUze in consumer Bnaiice were segre-

llted using Federal Reserve Board inrormatlon, prevlona studies, discnssions

^th indUHlry specialists, and the destrlptive material in itoody'a Bank anil

tnattfr ilaiiiuil. So firm was Included in Ibis category If there existed any

^^^^■nblKutty as to its proper classification. Because tbe difficulty associated with
Ustlnguisbing predominantly consumer finance firms from other finance firms
bcrcnses with time, these estimates date only to 1972.

' Consumer finance companies make direct cash loans to customers to be repaid

^^ a infllallment basis. They are also called "personal finance" companies and

'1 loan" companies. Tbe activity is to be distinguished from retail sales

Sance whlcb involves the financing of consumer durables through the purchase
dealer paper. As was the case previously, the estimates Imlow exclude the
mbstanUal consumer finance activities undertaken by banks directly and there-
Bbre underestimate total banking Involvement in this type of activity. Commer-
#■1 banks were estimated by the Federal Reserve Board to bold directly 4C
percent of ail personal loans at the end of 1970 and S8.4 percent of all automobile
loftDB.' The estimates presented below are limited mainly because they are based
upon aggregated company-wide data and therefore Include the nonconsumer
■ activities of firms which are predominantly consumer finance oriented.
Udltlonally, they exclude the consumer finance activities of non-consumer
■nance oriented firms.
iD, Factoring {table 4)

e" factoring la a form of commercial finance which Involved tbe pur-

jgliase of a firm's accotmts receivable on a nonrecourse basis. Factoring has trsdl-
llonally been associated with the textile and apparel Industries. Because the
accounts are purchased on a nonrecourse basis, a more Intimate knowledge ot
tte Indnstry is required than would otherwise be the case. The firms Involved
1b this industry Include commercial finance firms, specialized factors, and com-
luerdal banks. Tbe activities are a subset of tbose associated with Table 2
Wwve.

Table 4 presents estimates of aggregated market share attained by bank and
Muk holding company firms in the "old line" factoring business. The basis for
Itaese estimates are figures compiled annually by the Daily A'cics Record which is
" 'rade publication of the men's and boy's cIottilnB Industry. The figures pre-
cepted cfinslltute essentially the entire Industry. Bank and nonbenk firms were
iBegregated using Federal Reserve Board informntinn. Mnidy'ii Bank and Finance
Manual, and the Dailj/ Ncwi Record descriptions. Two firms from the 1967 U8t-
' could not be traced and these were classified as Independents. iH

ik liDlilini compiny Rinii. .

Wcanun ot loUl old [Ini iKtBtiiil nlum* Md br binl
or bull liold)n| WRpanji tirmi..

- -• icU old llM fNtDrini nliinis liiM b)

I BumI upon inlotmitlon puUnhM annuilly by IhtDill) Nnvi Rfcotd.

^OOD.OW.DOO (01 cm, howtvoi. it <
' ~ Md apon ntimMn hMcIi, he m

of Ihesa fomi (i.«., ovtr Il,ro

Itidiliofld Moio. BoMui* o1 Ihi

dt conmf rciil RniiK* oViii Iban old [Int (KUrini.

'Seb. Finance f'acl» Yearbooli. 19TT, publUhed bi- tbe NiMoBal CDDHutner

.iiiH-iallon. Thir loliil comnwrdal bink iThan? of all connuiuor cr«"- -"

utmnobllF loflDe. mobile home Iohqb, ponounl loana, «tc., ntmblntd.

AuociBllon. Thir InlNl riinnnvrrlBl bank iTtiarp of all mniiunior crnlil oulalBudliix (I.
■utmnobllF loflDe. mobile home Iobqb, ponounl loana, «tc., ntmblntd) has increagH ttf
44.0 |wrc«n[ In KITO Co 4T.S perccBt Id lOT''

Table S below Bomouirlsee the results of stndlea wUch have examined lereraf-
Ing by bank boldlux company nonbaak afflUates In comparison with leTeragtng ^
Independent Brms. The studies have been confined to tnortgaKe baakliiK and
consumer finance.

laUey'B comparisons were between sets of bank holding company n*t"wt—
selected from the "100 Largest" lists compiled annually by the Amerioatt Bamker
and aggregated Industry-wide averages. Rice's comparison Included bank hold-
ing compenr affiliate firms end Independent firms, all of which were selected
from the American Banker't "100 Largest" Usts as well as Industry average
flgnres.*

+«

:s-£

■ DfflMd u Itit ntio ct iqultr hi toM n

■ 2 l^mir* pn""'"'"'' ' "" -" "'"'

( banC boldliiico

' THiav, Simuil »■ "
nlrUitntlBii. SZ (Jul* W». K-*t.
' Tiiliy, Saniul H. "Bank Holilini Cnnipany Flnindni," Procwdlnii sf tlw FxIniJ Rn*im Bank ol CMctio'i UTS

. — ■ »„i. «...- ^ij (jomprtilion, ll*-13i.

nniKM SulnidlirtH oC Bank Haldlni CamMDlM, Itli Md »n."

>._.._.. BlOovtrriora«t»tFi*«allta«wn

UiHiMliM itifl atvdt g( Iba Divliionof BinklniSBparvliionand
SnUm. SWL 13, 1»G-

SludyoJthaDlihilDno

A more sojdilsticated analrsts was part of the Rhoades and Bociar study * for
consumer flnsnce firms. Caing regression analysis, these authors found a statis-
tically signiftcant poaltlve relfltlooahip between leveraging and bank bedding
company afflUatlon {i.e., bank holding company affiliates tended to be more
highly leveraged than Independent firms). A separate equation Indicated that
this was not attributable to preacqulsltlon differences.

IV. SIZE COHPAXISOn OF BANK HOLDINO COMPAHT HONBANK SUBSIDIABIEa AHD

•The bank boldloR rompanr ifflUate flrm diti utlllMd In tbese studln Ig being itm
confldrntlBl Btntui by tbe Board wben such wag minntfll by the banks larolred. Ttigrefoic.
no iDdepeudenC (f.a.. non-redfral Reaerve Board) reaearcb I* poaalble.

■ Rbaadei, tllepheD A. and Bociar, Qrecoiy B. "Tbc Perlonnincc of Bank HoIdinE Com-

Blnr AlBllated Flnancg Companlcg." Staff Stndr, Board of OoTernora ol tbc Fgdcral R«wrv*
rgt«in (leTT).

Digitized bvGoO^^lc

those industries. Tabiea 6-8 deal wiili the mortgage bauklog industry, whl
Tables ft-11 deal with the finance rompnny industry. Tsing the most recent data
publiely available, Table 0 presents bii asset size comparison for banli holding
company parents and their mortgage subsidiaries while Table 1) presents a oluilar
com|>ari8on for bank holding comitaiiy parents and their finance company sub-
aldJaries. Also using the most recent publicly available data, Table 7 compares
the size of Independent {i.e.. nonbankl mortgage companies and their DOiibauk
parents (where applicable), while Table 10 presents similar data for nonbank
Qnauce Brms. Table 8 presents a comparison of the asset sise of the parent bank
holding company and the mortgage liank subsidiary at am>roximately the time
of acquisition, while Table 11 presents similar data for finance company acquisi-
tions. Thus, these two tables allow a comparison of the change in siee of the
appropriate de<-islon-making entity upon bank holding company afllllatlon. For
all of these tables the subset of Drms examined was limited to the largest flnns in
the industry as compiled annually by the Anicricon Banter.

|l n inMunilil

ik koMIni tomptny, MMdMr) nurtlita cumplny,

Mortnia BinK hiililint

compin) compmyHranl

ifplmil ' "■■"'"■"' ' "" —■—■■■ ■■■ (j^ J, ,j^ , d^ J, j5,j,

I) *iJvi«tMortni«Ciifp.<Pifiiit:Cltli!ora) 'BlI.iM K4,Ztl,U4

t>ColMiiiM»tii|*Siivlc*Co.(Plnnl:ni1lidMplitlNitl«n«IC*nk) iJOl.ISi 4,311.417

I) Pennimco, ln:.{Pii*nt:Flrt(FWiiuvtniiiiC«p,). 193,807 7,ZI(,aZl

nCiiMren-BrawnC«.(P>cnt:FintUnlanCH|iJ. '143,910 2,30S.3M)

■> -- - „.^,...... -^..., --,ij:7. t! 112 3 jjj, (31

a KiiMl C«.(P>f*m: PiKabBdh HMohI Cmb.^:.

D UnIM Cdihrnli BmIi< (PiimI: WMhr KncMid.....

K jMbBMllli MttaMl Buk>(PmM: Thi ChHlMb.)...

* ~~M MMtH C*. (Pl(«M:)UftlMM Bwcno}

li hlH%tMt «•■ (Pino): Wrib F«» I CiiJ.

HIMtiiliiiiiK Inc. (PlwiH: IndiiifrtfHrtBiMrL^,.. .„.

■'^Tlnii Cof*. (hnnl: Fint C Hmtontt Coip.) '87,014 l,m.63r

Pldte Mgnm* Ctit. (PiiwH; Swirfe rtntc <■ '

130, KS i9.E72,l»

102, J14 sa. Kt

M.Sm B,3SB, 1B1

„ -- —,_— , ., .,- 122. 02S IZ.96e.U4

B MtrHMtiiliiiiiK Inc. (PlwiH: IndiiifrtfHrtBiMrCwpJ ».«M 1,207.970

R FlittlSrlnii Cof*. (hnnl: Fint C Hmtontt Coip.) '87,014

X ,. u_ .^JC -_ -„ ,.._j. . — JE. p^fc CMpJ • U, 712 i=. ™, ,«

* CorpJ. I93.J3S J1.«3,IU

,. , _ ,-->,- 'D.WS },054,8S6

{ISS VIIBMMMil>n.(hnM:VlnMiHUIo(ialBiiiialii(u,lnU 177,492 2.014.008

(ll>AaHlMniUlrMB^|(Ci).m(nt:A»»lcinFltlch*fC*rpJ. IS,aiS Z,29Clil

(17ilJlfMrtBiKk,lae.(nnBl:nMoH,lneJ. ■74.579 3,104,701

lai eMk«AMrtci(PinDl:BuU(iMric»rp). '7t.i«r 73.912.940

-■A HoMlw llHiMtMrt Cotp. <Ptrtnt: dawllUiiirtliii CofiO _ ■69,SM 4S,&37,Zt;

'''-'— ntHMliK Co. (fM«M.'SiHitlMMlBuUaiCMpJ 62, ESS J, 393, MS

l*MortMiCo.CPnnt:WKl»viiCo[p.). S5, 119 3,660,040

_, __ «!»■«. <F«'Mt:>lrtl«lulD(trattCHB J 13,089 7.SSZ,S09

Al*Ml»MC«tpanlingllht>o«lll<pH*il:F1ritilittondBoriBRCorM 161,954 9,491,586

l> BUggi MwUMi Ca. (PMBl: Omkii Hwn Ywk CatfJ > 51.628 26.613,774

~' ilSo<«[Hrariii«iddCare.(p*raiit:CltiMn4SMllitniHcldin|Co.) '58,553 1.169,015

..^ .._ ,. .. ,.«~h,._. 158.314 4,007,112

^ _ r., 204,906 9,406,712

llHtan1^(PHMl:lhrcintlltBaiKOiporalta4_._ '44,451 3.113,190

lu Ci. (PitMt: AMmu B«ncHpontloi4 '43,567 1,930,705

--.-.- - 4^ J2J , jjj jjj

■■ — 1,335.145

S> CWnn t SnSin Fmmd* Core. (Pfraitt:

A HCHBlhrtpp Con. (PvM: NCNB Con.)

rS 1Mb* KMtoMi IM|i8i Co. (Pimit: IMtan Nitianal Carp.}.

A MtRHill* HMtan C«. (PhmI: Ihrcintllt Baneoiporaltoa)

» E«|il MMlV n. (PitMt: AMmu B«ncHpontloi4

A FinI DmimTIimIiw Co. (PWMit: Flril KiHoari BmcotpJ

1} lMlE)«MnaM3ii£liic.(hrHl:nntMrii«nHBMieilimO--.

■^ -^'^ MOitMl Coir. (FiiMt: SMiInt ChbJ •40.101 S.309.S90

M • Bna^ IPL (hiHIt: Flirt IMIdadHiMlai Corp J._ 86,642 2,141.389

ldWlrililiilfcrtB|iCof|.ffirt«LUBlti«¥lr*iHiBirt-

ila nw IM EiEiti Cndtt^mnt: UdooIr FInt Bukt,

......jBMortiwSMtllfPMaCIICKBCsrpJ.

tSSMHllyni9filMlomleHii>(P«Mi:SKU[iiirnelieC»w,} '34.922

>J bdubU VMw BMk a Trut '){Pimt: InduilriM Vdin Buk « TnHQ 134, »7

Z) rHltiM«rt|i8iCD.(FirMt:rnflnHrii0HlBMk)i _. -40,930 966.722

?4.983

, . , ^ 41,719 i.aub.t^

llortiwSMtllfPMaCllCKBCsrpJ. S0,07S 4.007,112

lyniSfilMlomlBHli>(— -"* •-— i--^-. ". — ••

jM VMwBMkiTrBrt''

AtKOMMtMtCsrp.(PiiM:N>*iMrtc«>Bi*ciluriO „J..;7.V../.M '34; 177 '73i[4n

Nm Tort UibH SovJcrni Co. (PHMt: FldMcW, hlcj- '34. 117 3, 104, 704

IMIi« MflH Mortiw (^ (Pinnt: UalM JlfH* Sntt)..,. 33.851 2,0»,S22

Us RMHy Mort^li C«*. (pMtM: CoaUtnttl MMb C«p.). > 31, 509 21, 974, 815

) MortpM Co(».<PirMt: MIin HMmM ConJ _ ■ 31.3U 1, 092. 910

If Hmiin (Ptnat: HwmU BHMnwtllNi. t^. 'U.3t7 1,314, 8K

Mw MortHK Co. (PinM: CnMbf HMtoMlliong. 44,691 10,711.223

• Witn iiilliMa, ttiMB fiiurii ir* Irom tha irhiDuia A lUPflltmanli to Iha FR Y-6 rtporti nr Iran lh« lutildliry'i
■niHiil 6nantial r«prl. Whan npiiai irt univiilabia in Iha Khaitula * luppljmanli, aittiar Bactuii MBfiflantlil iWui
ha»ba«"™autilaiior tiacauiatha rnDrlgiia lubsMiaiy'ifiniKial data iianiiillilaliaDn Iha bink'i b(liK«ihMl.thMa

»P»r«ii(ionipaiiyaii«(tiiuiai «• Irom IN* FRY-t rapofii.

> ThM* Rpiin i(* nliiiiaUd iiiini av«>|a induiliir ii» dau ittiM M aiifU lo wrvKlnf vuluma. (Sh tootnola 1

' TIMM MnklRf wilititi aia Aanlii and ml bank holdini cain»any lubaidiailtt. Tha tiiM itit ii an aitiniali loi a
nortfan cwi>m>ii o( Vn tim* iraitfollii laivicint nduni* *nil la aol Iha Mnk tiM H|iir*. Tlrnt mUimMi axra alia
_ Miaduilni avttif* Induitiy HI* clan iitloi nTiiiil] to lanicina nlHmM.
^L a lod-catM bank not apsaiintlt part M a hiildiii( coniMny trrtam.

H_ r , ; ,C.O(1qIc

1.

(1) iMMt t NttHalM Fiuiiciil C«tp..,

I Tlwti fltum irt otimiM inifli (v*iin Inditlnr lin cImi rttla nl UMta b Mfvidnf mlmiM. Th
Lamn 1 NttMM, WnMin l>Mdtic Fliunciri. ind DMiolt Mortp|i > IMty, hoimvw, in tMl flfum.

'A/MfcDn^iiyiutt Rfum ■rtlnin Mtody'L
' AiirfcfMtf xMf fffur* fvr Mfltr thfn Dm. 31, tin.

Digitized bvGoO^^IC

4G COMPANY AND MORTGAGE COMPANY SUBSIDIARY ASSETS AS OF ACQUISITION DAH

Mipinr pirtnt

III dtt* (tiMuiindi)

a Moiliiii Corp

nrani: Cilimrp

Colnitil MoriuHStivlu Co

Patent: PtilliSalpnii, NatloMlCar«.
Pwmimco, Inc

Piraat: FInl pHiMirlvinti Corp.

ChrM: FInl Unioa'darV.

Tiilnl;Tftl«nii B»nMtp „ .„ ,---.. l,Ha71)S

FintDtnnrMoiteinCD. IKI 6,309 —- iii-g=,

Ptitnt: Flirt ifiBonrt Buiewp i-.^- WOOO

Rul EtUI* riunclni, Inc {") S-MB „--„-

Pii*nt:flRlAlafiliiiBiiicilMrai _^ 7S4,(41

(■•oplH MortpiiCa. - m ~

fidiil: Pniiti NrtoMl BmH ^...-^

SwlintMiirtm*Cocp -— « ~- -—

Pirnil: SMIintCafp - - .—-■■• —

TtHix im BtMlu - - m »MB iriiS-Mi

UniMVit|lni«Moft(it*C<) -- Oct 1, 19B»„... I.IH j-iii™

Pii»nl: United Vlr^nHBinMhirw - ~ IplW.JTS

- «RnlEi&ttCi

Pirtnt.llncobiRntBMiu.iBC...
;. NCNBMartjBHSaMhH.

PiMfll: WNBCom

>. S«cu>ity PacincKiOoiulBinli

Pir«nl:S«aiill*PielfkCatp.

9. induttriiiViUoyBinkafldlruit....
0, AtluMiiittinCOip

TABLE 8,~-8MK HOLDINa COMPANY AND MORTBASE COMPANY SUBSIDIARY ASSEn AS OF ACQUISITION

AcqultWM SvbilAtriM

Bitik Mdlni conipiny lubildliFV mgrtpi* coirptnip— bink diti or »■ unli> <

hDldlnicanpMy ptiMt tnm\ drii (DioMattft)

1. N*wYarkUrbinSwTlcl[i|Co S«pt 30, l»73... M,9K

Pirmi: FMikM, Ik t,tlt,n*

2. UolM Jmn MoripK Ca m

Pinnt: IMM IfiMr Sink*.

3. Rw^ilfc RnRv MMinM Corp Jiw IS, l«l)... 2^197

KMliCoilEioMMlIilnoliCiiip i^w,iai

4.lHllMiMDrtjinC(Np. Miyl9.llO.... UM

Ptr*nt: liidUnl HtBontl Cocp l,»Kln

P»r*nl:CniClif>ll7liOnilC<it|i 4,«mi9»

U. flrakirn Mortpn Coff Apr.2«, U7S... lS,t4e ,

Ptr*iit: MuMhOinn Nitlon*! Coip I.44l.»«

I Tht lit! BrtMirtMl InthliliUawtriMMfflliMfroKKntMrslFiditil Btwfw Botrt wJw* mS fw ■ rmlur
of bink Millni comunv rtfiitritlan itrttrnfoli ind Kqilillton ippliotlon. AddltioHllr. in MM iMtHML K wn
luppllpd dliKt^ b* th< Ftdaril RtMnt Boud u t mt» of i Mrl*i tl FcMdon of IMofxition Ad ttvmltt,tt mm
IntMcM, th* (pqulilM dit> an aol ndbUi. Tht dt mm ntmli itmralhr iBdlctU ritiiufbia wkm ■ bwri dind

ridBElBd •j^^l^dMrnl lt«Mfv« Bnrd raqrimiMli. ■ limirit bbulir piMHtrtton radlHWl McdMtily MMm

■TMMMlwtlMManMlliMMUtnDliHiarilhr tli*urn«MlliiKqiililliiMM*MMMdMwllNaaiMr«l
•Mtfmt.TMMMr*a*iMlip>fwtatliiHrwtuidn*iulwldliryd>*Mitwmn»fNMtllMMMdrii.lalNkaM
wiMra At M^vSUoM wm iHd* prior ta ttw 1170 MNMlrMiib w priM to tin ^M )t iriiU ttw M^
• kHk kiMRt cwpMv, Hii iRlofRutioii ii fMMnI* Oiit coMlMd Id 1 n|iitntlo> iWmMt M aWi Hw ttmt,
to nich tn Indict, ttit MM inoditod with llii dM will not b« Uw KquliWon dMn.

■ Dm on IndvliW NQUilitloM l> not dluomtM.

■dKoiIrM ninlnondont mortan compiny in 19
0 dA It mlliUa on th« •mnlililM.
K^ulritlDn, fnn oporitnl m Knsltt < Co.
mmIiWoi, Unn tporiM «• Cout Moitiiio Co.

Il«n<iitt not nnllibto: mm diti Ii u of Doc. 31, 1971.

,..__._. ....._. .. loeimo • mnk hoMlni ainiptnyonMit.il. lt71.Thiha

tub>id»ryiriHcitM».ll,l»l.

MOfDicil, 1972.

TABLE 9.-BANK HOLDING COMPANY AND FINANCE COMPANY SUBSIDIARY ASSETS

(Ptimt).

WtHorLHritac
(PMMia.

ftsasai..
■■■j,wi,«",.

Si4,'7Bi',-

$7, 413. 74t

m.t»,.

71,«Z,H

Fim rHHiiyiioni* cwp 7,iu,an

..lllif FInMdM Corp «MOI

HtnufoAnn HiiWMr Coip. 31,4K.M3

'— '-* 'iMncid Co(p 1«,S«

■p..._ 4,D07.m

• It atd of MIo.

Digitized bvGoO^^IC

K HOIDINS COMPANV AMD FINANCE COMPANT SUBSIDIARY ASSHS— Cantlniiid

(llMIIUHdl)l

Ok. 31. 1971

Fln«einliSr>lMi>,litc - - -.

», 945,783

*-''^5?S!i:!^U::::::::::::::::::::::::::::::::::-::::::

'''■^Skrt'vii'SSiVci:::::::::::::::::;::"":"::"":::::::::::::

i:746,'iii

i;i4i:3a>

'^■'ll^fflai^i::::::::::::::;::::::::":::::::::::;::::

i:«7;Ms

U.FidricwFrHMMCMlinC«p...-

<M,W7 ..

3.iM;7»

''■^^SSSaiiiiBi*::;;::;::;::::::::::::::::::;::::;:

"■ -i :■ ■:i;::i;n.i-^,n.o^' : :::::::;:::;::::::;::::::::::::::: :::::.. i:466;o»

i;i66;iii

!tc;br«7SSr«"^'°?~::-r:::::::::::::::::::;:::::::::

^^^m..

i;s3;s6

2a Unltri Viilii1l»Fl«ton-^.,..-

i«tt,»i

21 MULoanlFliiincaCo ^

ii'..

m

iioi;™

• 24,914..

FIrit RillnMd IBinklii Co. DfOainli

• 21,342..

SkTots

iTht <hiiiM compinv MiM flfiim in allhtr Irvm thi "AmMiun Bmlitr'i" llitol "100 L»tMI Runet Cnmpiiilai
litfciU.S."ua(0«c3l, 1976(rankidl)ytlrao(uplltllund>ii>rliiHiith*BhM]ultAnippluiintili)I>iiFRY-6re|»[t>.

■ PlCTnt csmnnr UNt RfurM ira from FRY-G rtparti. In inilancn alMr* i» luch fi|iira] nn (■■lbbli|(Ua wiMft

■ Ng| ipflkaU*.

'TMi niur* Inn ntlmrt* dirivtd by uilng in innn Induttry-ilra dm cultillntlon ratio.

Digitized bvGoO^^IC

TABLE UL-INOEPUIDCNT FINANCE COMPANY AND PARENT COHMNY ASSETS

f IntiiG* compiRy PmnlcMipmr

1. HouHhoM FJhiim t3,i!3,83l

(nraoO. _.. W

t Bmncw cxp z.m.m

1. ew«i5rEiIwricciidB"cwe//.ii;;;!;ii"iii!";"!;" i,'oM,'Ms'

hniil;eMMnlEhctrkCD tltOU^no

4. CdMRwnWCfMnCtt. 4,1S»,«8 ™.„

fmnl: Cmtnl IMi C«M. I,K7,lit

i AnscMMCw^of itathAiMriBi l.m,»a ,.

hi«iit:fii«iiid«Miraladiut[iu< 'l,*/!.!!!

5. AW)flM«EW5ml(a.lMi - !,2S9,4tt

PhM: Am CotV.*. I,1M,1U

7, ITT FliiMcW Con __ 1,081,446

PmbI: liMnrtwul Triiphm • Tihinph Corp.._ Il,im.l)n

Digitized bvGoO^^IC

TABLI 10— rNOEFENDEMT fINMCE C

iRdtpMdint nniK* cornpin)— piranl nmiiaflr

r AND PAREKT CDMPAHT ASSETS— Contlnu*d

Fininct tamptny PirMl corr

lINti 11 C« •Xftl

Die 31. W% Ok. 11,

<tlMuundi)< (thouu

»:.si:s£s!SsiiE;;;;;;;;;;;;;;;;;;;::.

«LOii»(ilFiMN*Ci«i|)*n!n.lnc

.::"""": wow

•^'^aKC''.^:::::::::::::;:::::::::::::::::::::

"; (Bf.*^:™::::::::;:;:::;:::::::::::::::::::::::::::::::::;:: _ ::::::/

•^'1!K?!'.^:::::::::::::::;::::::::::::::::::::::

• 64,060

''"m',6u

"'7o;47i

npMtn In Hii U.S." » ol Dk. 3)

PtranI coinpinv mat fiiurn tri [rorn mnwyi.

Not ipplleiblt.

Don not induda finiim umoiTiy tubtidiiiv.

Indiutot usd liiura lor dtta Mhtr than Die. 11, 1976.

Thli filvra li in MUiniM, 4Klv«d by uaini inrlit induitn>-sli* dl

Digitized bvGoO^^IC

TABLE IL— BANK HDLDINe COMPANY AND FINANCE COMPANY SUBSIMART ASSEIS AS OF ACQUISIHOM DATE>

"TKSSSi

Pirtnt: Flnl RiMiMd *nd Bmkliii Co. o( CMrfia...

JS. ConmclocojM

hml: Firat tawtylnnla Corp

tank hddlni company (t|litrMlon iMItimili ind Kquliilkm iparlutlont. AddlUonilhJn mim I

bankhddlnicanipanyitllitrMloniMMiiMiillindKquliilloiiipar
diiKtly b* Hi* fadtiil RtMtn Bond n ■ ruult of t ttriti of Fr

ilsrmitkiii Act nqwttv

lh«H *SHt filuiM «> not Eencrilly the umgiithaiciiulilIlM dill but MMMditiwIDilntppnulinitaly

■ y«r of Ihit tima. n» Hptriti aiMt ti|utM lor tnt pirani ini] tha lubildltry do not almjr) reiHmnt tht um* data.
In Inttincu whtit tht tcqulittloni inra mid* prior to tha 1970 amatidmnti or prior to Ilia Um* at nrlilch Iha porM

Digitized bvGoO^^IC

The Chairman. Thank you venr much, Mr. Wilson.

Gentlemen, I want to commend you on your very strong and helpful
and thoughtful statements. They are all highly competent, I do think
dat while I'm very sympathetic with your position that we ought to
Mcognize what you're asking is that we prevent competition from a
source which you say would be unfair and you say would in the long
run perhaps reduce competition and you say might have an adverse
effect on people who are trying to get into the business, to wit: bank
holding companies who don't know much about it and they would bo
loeers.

At the same time, the Justice Department, as you know, and the
Antitrust Subcommittee of the Judiciary Committees of the House
Snd Senate, have taken a very positive position that we ought to do
ftll we can to encourage competition everywhere, including competition
from big, strong units like bank holding companies, and that the bur-
den of proof must be on those who would oppose competition to show
that this would be ven,' unfair and that there are damages and that you
can document them.

Now, let me go back to the testimony before this committee a couple
months ago on the other side of this issue by the American Bankers
Association first. They said this— first let me read it, and then I'm
going to ask first Mr. Naugle to comment on it. They said :

We believe bank haldlne companjr inTolvement In closely related activities haa
liad a poBltWe Impect tin the Snancial system's responsivenefla to consumer needs.
In ^■ontraBl, we feel projKWed changes In Section 301 would actually decrease com-
petition as well fts Interfere with eBtorts to provide conaumers with a wider range
tf flitanctal services in a more efficient and convenient way.

Then they say :

The expansion of bank holding company actlvillee has provided and will con-
tlnue to provide an alternative source of service that can stimulate competition.

What's your answer to that ?

Mr. Naugle. Mr, Chairman, in the absence of specific documentation
of bank activity in property and casualty .insurance, I can only refer
to their track record in the area of credit life insurance.

The Chairman. Well, I think that's your stronger case. I think that's
right. There's a clear conflict of interest there. It's not just a matter of
stumbling into something they are not competent or at least — or at
least he's the guv that provides credit, and if he goes into selling in-
surance, too, it aoes become a conflict. We know people selling insur-

Mity lMci[M ■ bulk hoUlnt raniM>Vi Hw ItifuimUon It iMtnfly nu cofltiintd In ■ nililiilton ttilim«nt Hid viltn
•I Burl In ladi M iMtiitu, Oil drtN inscMwl wWl tht Mi MH ml b« Iha Kgolilllon dilu,

. ,^._., «mH'lM«iithti(ip(«tirtB»»Miiiilttoiiol!wnkjbirTionbink>nHmi,

, Mqiind jBty IKI. CwiHiUiitil AcC^itoKi C«r«. tcquUd April 1970. IianSouVi'i uwli

MK Dn. SI. UIl MI* tn,W,0«e.Thi ttCNB MM >fi>n HMHiM In tiM bMM It ilM ■> If Dk. 31, 1371.

1370

'■niin laiilni Ciit. I

nd II dT Mc Jl, 1971 loc MrML
nd u o( Dm. 11, ItnKHUI^nt.

304

ance — the bank loan officer, who has made a lot more out of that than
he does out his salary, and I realize there are abuses in that area.

Can you give us any other area where you can document it! Mr.
Shapiro gave us a powerful case there, too.

Mr. Shapiro. Sir, our association thrives on competition. We sell
more life insurance but only when it's fair. We have found in any
dealings with the bank when they have that opportunity of that tie-in
sale evidenced by all of our testimony on the credit life

The Chaibhan. But how about some of these other areas t Credit
life, yes. I think you have made a case. My colleagues may disagree
with you, but I think you have made a case. How about some of these
other areas I

Mr. Shafiro. I can't document anything specific, but the potential
for abuse would appear to be similar.

llie Chairuan. That documentation is very important because after
all, as I say, these people say they want to compete in that area, and
one of the great frrodoms we have in this country, one of many, is the
freedom for business to compete unless there's a very powerful reason
why this would be against the public interest.

Mr. Shapiro. I think we have named some specific reasons in our
statement on the abuses. Mr. Scher, our counsel, would like to comment
on something specific.

Mr. ScHER. Senator Proxmire, the abuses which we have detailed
in our written statement, some of which we also feel represent evidence
of new abuses, have been primarily in the credit life field. To date,
although there is some interpretation by the Federal Reserve Board
that the bank holding companies may engage in life and health in-
surance activities other than credit life and liealth, they have not made
full-scale entry into it. In fact, there's been very little, if any, pene-
tration in this area. That is our concern, that based on the credit life
experience, they will be going into these areas with a poor track record,
and I think the detailed documentation on adverse effects of activities
other than credit life and health will have to come in the property and
casualty area as penetration increases in these activities.

The Chairuan. Let me ask Mr. Shapiro, while you've got the micro-
phone, this statement that they made before the committee goes on to
say that competitively induced rate reduction on banking and nonbank-
ing services is an important direct benefit to the public and leads to an
improvement in the quality of competition and market for the services
involved.

Now, some complaint was made that this kind of competition has
resulted in real damage to some of the insurance agencies. That wasnt
documented. I didn't see any evidence of firms that have been driven
out of business by this. But at the same time, it's hard to see offhand —
and I hope you can provide it for the record— how there could be any
impact unless there were lower rates, lower premiums charged, lower
prices for the consumer at a time when inflation is our No. 1 economic
problem, it seems that any kind of competition would drive down the
cost of anything, including insurance, is welcome. So how would you
respond to that argument, that the bank holding company's ability to
compete induces rate reduction and is an important and direct benefit
to the public and leads to the improvement of the quality of competition
in the market!

Digitized bvGoO^^IC

395

1

Mr. Shapiro. Going back to our comments on credit life, that
lainly wasn't the result produced by bank holding company compe-
^tion. As a matter of fact, it has been demonstrated that the cost to
iie consumer is higlier. So there's one area wliere certainly they
liaven't induced lower rates but in fact they have produced higher rates
About which the consumer wasn't even aware, and that's our concern-
Where is the line going to be drawn ? Are they going to go into other
:|ireRs where through their power they can loan money and loan dollars
» corporations and perhaps suggest or imply they would like to handle
■he pension plans or corporation life insurance or group insurance?
That's our primary concern, and that's the thought we want to leave
With this committee.

( The Chairman, Well, you have had this on the books for some time.
Let me ask Mr. Wilson. I know he wants to comment. But before he
comments, let me ask you this — the ABA went on to say :

, We also believe tliat the Federal Reserve Board's current approHfh to the
kank holding company regiilntlon hns not resulted In the wenkeniDg of the bank-
ag system despite fenrR that the IffiO amendmeDts would unleash the banking
aduBtrj' into dlrergent iionbanking areas; this has not occurred. The Board has
lot gone beyond or In some respects as far as the activities the Senate Banking
>)inmlttee held were perniissllile In the 1970 amendments.

If this testimony by the ABA is correct, you have had 8 years since
be 1970 amendments and you have had more than 20 years since the
(■sic legislation in 1956. Where's the damage ?

Mr. Wilson. Well, Senator, first of all, I think it's appropriate to
joint out that the banking institutions are unique creatures in our
Sconomy.

The Chairman. I sfl.id that in my opening statement. I agree with
that. Tliey have a monopoly on credit.

Mr. TV n-soN. They have a monopoly on credit and they have a
ijarter which permits them to take the public's deposits and then turn
iround and compete against them. Furthermore, you take a look at
Jie mortgage banking industry — what's happened recently in the
Vortgage banking industry? From 1968 to 1976, they have increased
iheir control over the servicing volume by 100 percent, from 23 per-
Bent to 49 percent. In these insurance cases we have described, one of
^e banking witnesses in those cases described the independent mort-
gage company as "a dead duck." In terms of factoring, they virtually
tave taken over the factoring business. Since 1967 to 1976, they in-
Sreased their control of volume from 36 percent to 77 percent,

The Chairman. Now you may be correct on factoring. Where is the
lamage to the public interest in this takeover of factoring? I realize
t's damaging to the people who had the business and lost trie business,
jnd that certamly is a consideration we ought to be concerned about,
lut as far as the oroad public interest is concerned, if a more efficient,
sompetent group comes in that can do a job for less cost and win out,
^^^at s the way the system works.

Mr. Wilson. That may be true. As it turns out, factoring, for

lample, and mortgage hanking ai-e botli iinancial activities that banks

in do directly as opposed to doinj

ing through a bank holding company,
would point out, however, that, for example, with respect to insu'r-
nee in these cases. First National Holding when it presented evidence
) the administrative law judge admitted that within 4 years they

jiiz^d.^Coo'

'^

would have 27 percent penetration level. Mind you, this is a 27-percent
penetration level when they declined to offer insurance at the lowest
practicable cost, which would mean they would have a $4.3 million
premium volume insurance af;ency per year which would make them
amonf; the top 10 insurance agencies in comparison with the current
natural occupants and the members of the Georgia AssodatioD of
Insurance Agents

The Chairiian. It's hard for me to follow this because I just dont
see — are you saying that certain unite in the insurance industry— cer-
tain companies nave suffered because of this intrusion of bank Holding
companies?

Mr. Wilson. Bank holding companies admitted that without com-
peting on the basis of price, mey would gamer 27 percent of the insur-
ance agency market.

The Chaihman. What's been the experience?

Mr. Wilson. We don't have access to that information. The Federal
B^rve Board could get that information. That information came on
the basis of exhibits that they themselves filed in context with these
cases. But, of course, we would have no right to go to the Federal
Reserve Board and ask them to examine this.

The Chairman. Don't you have data on the size and growth or
decline or whatever it is of the insurance companies that are
competing I

Mr. WiuoN. Well, since the 1970 amendments, based on the initia-
tive of IIAA, there have been relatively few banks holding companies
that have succeeded in getting into the business. So we really dont
have that much experience with it.

The Chairman. Why have they not succeeded in getting into the

Mr, Wilson, At least insofar as sales of insurance across the bank
holding company system, the Federal Reserve Board viewed these
oases — the ones I have described and others that are currently pending
before the Sfth circuit — as test cases, and they indicated to (rther bank
holding companies that had applications pending before the Board
that they would process them but that they would require full-blown
hearings on the record, or their constituents could agree to wait until
the outcome of these test cases. So those applications are currently
pending at the Board, but they have not been processed ; that's princi-
pally the reason for it, and it's also a reason why we believe the bank
holding company industry is poised now, given the Supreme Court
decision, to enter the industry.

The Chairuan. The Association of Bank Holding Companies testi-
fied— and I will read a short paragraph of what they said :

In chunglnK the standards for bank holding company entrj Into bank-related
actlvltl««, motfon 301 of the bill adds new restrictive provisions to the preMnt
section 4(c)(6). ^e result. In onr view, will be to effectively eliminate tlila
provision from the act. bringing to an abrupt end the entire beneficial procen
that Congress has permitted since it first decided In 1BS6 to subject bank holding
companies to Federal regnlation. This drastic result would take place with no
showing having been made that there has been any adverse Impact on any seg-
ment of the public. We think Congress should endorse the Idea of vlgorons, talr
competition rather than appearing to support privileged sanctuaries for onr
competitors In the financial markets.

Now, what is the adverse impact on the public, and what segment
of the public is there an adverse impact on ?

Digitized bvGoO^^IC

I Mr. Wilson. Well, I can speak with greatest authority and expert
I ence on the insurance issue. I can just tell you what the administrative
I law judge said; the administrative law judge said it would have a
IflBvere impact if the double-barreled financial conglomerates go into
I the insurance business in these various markets. It's going to nave a
I tievere impact on competition.

I The Chairman. You see, what I'm having difficulty with is the iact
I that — maybe this statement by the Association of Bank Holding Com-
I panies is inaccurate. They say this would result in eliminating pro-
I visions of the act that have been permitted since 1956. Now, that's 22
I years, and if aft*r 22 years you can't show any adverse effect on the
I public other than an opinion of an administrative law judge, it seems
I to me the case isn't very strong.

I Mr. Wilson. Well, first of all, let me point out that under the 1956
I act, the standard under section 4(c) (8) was different. Also, this was
I before the Arnold Tows standing cases, where nonbanking competitors
I did not have standing to come in and challenge applications. Prior to

■ the 1970 amendments, there was not an adversary proceeding. There
I Was an administrative law judge and he reviewed tlie application and
I that was it. So there really wasn't much of an opportunity to establish
I ■ record on that basis. That's the first thing.

I Secondly, the bank holding company movement really got into high
I gear beginning in 1968, and right after that this act was passed, tne
I current law, whicli your bill would amend. So consequently, it's not
I surprising that the situation we have described exists, lliere were rela-
I tively few bank holding companies for a long time.
I The Chairman. Mr. Shapiro, I'd like you to comment on another
Ipart of the Association of Bank Holding Companies' testimony. They
f«ay:

I Id readlDg tbe negative lauodry list of actlTlties set forth In section 2(c) in
rBcbt or the new directly related and oilier restrictive testa proposed in section
KSOl. the bill seems to t>e preacrlbltig a new definition of what coDstltutes banking.
WJlb we have noted, virtually all of the activities approved by the Board of bank
Uioldlng companies have been offered bf banks themselves for years.

I How would you react to that !

I Mr. Shapiro. Well, I think Mr. Scher is better qualified t« answer

■that question than I am, so I'd like to defer to him.

I Mr. ScHEH. Senator, did I understand you to say that they made

■the statj^ment that bank liolding companies and banks may both engage

Kin similar activities pursuant to the Bank Holding Company Act?

W The Chairman. What they're saying is the negative laundry list

■of activities set forth in section 2(c) would proscribe activities in

Kwhich the bank holding companies have been engaged in for years

und th^ say the result of this has not been adverse.

■ Mr. ScuEH. Well, we feel that to answer that in light of the question
nrhich you asked earlier regarding the fact that some of these activities
Hbave been occurring for 22 years; we don't feel that any substantial
bfe and health insurance activities have been occurring for the past
BS years and the property and casualty insurance activities are still
Ubeing litigated 7 years after the Bank Holding Company Act Amend-
fcients of 1970. Therefore, we have no full-scale record on the activities
^vi the property and casualty or life and health field.

B The only record we really have is with respect to credit life insur-
HUice and I think its been well documented that these abuses have

,:,zc-J-,,C,00>

nave

occurred. I think the act itself currently provides that the bank hold-
ing companies must make an affirmative showing that the activities
in which they engage will result in public benefits. Unfortunately, tJie
way the Federal Keserve Board has been interpreting this is to iust
rubberstamp the applications and, consequently, it is our belief there
has not been the required showing demonstrated in the administrative

Your bill would seek to change this situation by mandating addi-
tional requirements such as a more extensive showing on the part of
bank holding companies seeking to engage in nonbank activities that
such benefits will in fact accrue to the public.

The Chaibuan . Very good.

Mr. Xaugle, how do you meet the argument that a bank can aoll
insurance in connection with its loan transactions and that will offer
one-stop shopping convenience to their customers )

Mr. Sl^AnoLU. Well, it is true that the convenience could be a factor.
However, we feel that the anticompetitive nature of the tie-in is more
of ^ detriment. I can give you a personal example of this.

My agency is located close to Johnstown; Fa. We have at least cme
banker m the city of Johnstown who also is an insurance agent. Re-
cently my insurance agency I'eceived a memo from his bank advising
that a charge of $2 would be made for the bank remitting the premium
to us on a homeowners policy, a handling charge of $2. I happen to
know one of the men personally in that bfuik's insurance agency and I
called him and asked him if they were also deducting $2 from checks
going to the banker's insurance agency. They are not of course. This is
one small example of how this is <^ne.

lite Chairuan. How do you meet the argument that in some parts
of the Nation in inner cities insurance is not available and therefore
it's in the public interest for banks to market insurance in those areast

Mr. Nauole. I doubt very seriously tliat the marketing of insurance
in the inner cities would be enhanced by banks being in that business.
It is not a problem of salesmen or producers. It's more a problem right
now of underwriting acceptance of some types of business in the inner
cities. We are currently involved in trying to devise a system of train-
ing and putting in [jlace additional producers in the iimer cities, but
it's a problem of availability, not of marketing or producing.

The Chairman. You may be right. I think that's probably the case.
At the same time, I can't see any harm under those circumstances —
mavbe I'm wrong — if no insurance is available, in letting a bank sell
if tney wish. I doubt if they would sell any.

Mr. Nauglb. Venr probable.

The Chaishan. Mr. Wilson.

Mr. Wilson. Senator, that claim was made in context of the First
National Holding application with respect to Atlanta and a rather
interesting situation developed. The administrative law judge, being a
rather tenacious sort, decided he was going to get to the bottom of the
issue. There's an area in Atlanta, the intersection of Lee and Gordon
Streets, which is apparently in the low income area. First National
Holding said they had an office in that area and there was no adequate
insurance in that area and their being perniitted to sell the insurance
would be in the public interest because these people could get insurance.

Digitized bvGoO^^IC

So the administrative law judge had us call as his witness an agent
who we picked out of the yellow pages. The agent came in and he was
the administrative law judge's witness. He was asked how many agents
were in the immediate area of Lee and Gordon Streets. He said six.
Well, what is the principal insurance sold in that area? Substandard
insurance. That is very high risk insurance and so forth which First
National claimed was unavailable, and that is what he principally en-
gaged in. They asked him if he had ever received a referral for sub-
standard insurance in that area from a nonaffiliated agent. He said no.
They asked him if he had ever received any kind of a referral for sub-
standard insurance. He said, "Oh, yes. from Citizens and Southern
Holding Co.," which is a grandfathered holding company under tlie
Bank Holding Act which owns an insurance agency in Atlanta, and
that's where he got some of his substandard business from. This bank
holding company was turning customers away when in his experience
no independent agent had ever done that.

The Chairman. In your testimony you discuss the litigation between
the insurance agents and the Federal Reserve. How much would you
say the courts relied on discretionary expertise of the Federal Reserve
in supporting tlie Fed's position'

Mr. Wilson. Well, in light of what they said about what the Federal
Reserve Board did, I think that the conclusion is inescapable that when
the Congress delegates to an administrative agency the exercise of
discretion with respect to a given area, the courts are loathe to inter-
fere with the exercise of that discretion, no matter how thin the
evidence is regarding what the administrative agency does.

So insofar as the insurance area is concerned, I think the record.
Senator, has more than been made that if you give the Federal Reserve
Board the discretion they are going to resolve all of their doubts in
favor of their constituents, the banks. After all, we're talking about
the central bank.

The Chairman. Would you say that basically the courts have said
that since Congress has not legislated it's intended for the Fed to make
the decision in place of Congress — we have delegated that authority)

Mr. Wilson. I think that's right.

The Chairman. And you argue that the Federal Reserve, after all,
is the central bank, many of the Governors and I guess most of the
Open Market Committee are bankers; they deal with banks all the
time and they have a natural feeling of concern for the interest of
banks and, therefore, you're not deahng with an objective, fair arbi-
trator between banks and the insurance industry or other competing
industries.

Mr. Wilson. In the nonbanking industries, when they come before
the Federal Reserve Board, the body that's authorized by Congress to
administer the Bank Holding Company Act, are interlopers when
they come there and they are treated that way.

The Chairman. Well, Fm inclined to agree with you. I would like
to see whatever documentation you can give in that respect. It would
be very helpful. I know it's bard to get documentation of true prej-
udice, but if you can come across any

Mr. Wilson. Well, prejudice might be a bit strong, Mr, Chairman,
think that bias is fair. I think there's a clear bias. I don't wai '

ig, Mr, Chairman.^^^^
us. I don't waiUJ^^H

suggest that there's anything untoward that's gone on or these people
aren't honorable men.

The Chairman. I would say bias can be just as untoward as pre-
judice. It's fooling around with words. But regardless of how you put
it, the Fed, like the Comptroller and the FDIC, deals with* banks.
Usually they eet people on the Fed who come from the banking in-
dustry and gol>ac& to the banking industry one way or the other, not
always but often, and they are greet people, iine people, of solid in-
teeritv and decency and honesty but they also have tnat association.
It's like somebody from Chicago is likely to be a Chicago Cub fan and
in Milwaukee the Brewers and so on. If they got a chance to umpire a
game, they might see it a little differently than somebody from the
other city whose team was playing.

Well, thank you very much, gmtlemen. I very much appreciate your
testimony. As I say, it's very expert and useful and we do appreciate it
If there's anything at all you would like to add for the record you can
do it now orally or when you correct your remarks. We'd be happy to
have you do that.

Mr. ScHER. Senator, just one further comment on your question re-
garding banks or bank holding companies marketine insurance in the
inner city. We have been given to understand that oanks won't even
lend in some inner city areas, that there are currently and have been
hearing on so-called redlining" and I think the first thing we ought
to consider before we permit banks and bank holding companies to
commence insurance agency activities in inner city areas, would be to
get them to start lending there. Once this has been accomplished, then
maybe we could think auiut some of these other activities.

The Chairman. That's very helpful. I think it's a good point Wb
have stressed very hard the redlinmg problem. One of the arguments
that were made of all kinds— insurance and so forth.

I want to thank you gentlemen very much.

Our next panel consists of Mr. John J. Gardiner, vice chairman.
National Affairs Committee, National Society of Public Accountants
and Mr, Edison R. Zayas, economist, National Federation of Independ-
ent Business.

Gentlemen, we are very happy to have you here. We are going to
use the same guideline we had before on the light. I might say, q vote
is scheduled on the floor at 11 :25 and I will have to recess the hearings,
but I will be right back after the vote. Mr. Gardiner, go right ahead.

STATEHERT 07 JOHN J. QASDHTEK, VICE CEAIBHAK, RATIOHAI
A7FAIB8 COUHITTEE, NATIONAL SOCIETT 07 PUBUC ACCOUNT-
ANTS; ACCOMPANIED BT JfOHN H. PITCH

Mr. Gardiner. Thank you very much, Mr, Chairman.

Mr. Chairman and members of this distinguished committee, my
name is John J. Gardiner and I'm from Philadelphia, Pa. My title
is vice-chairman of the National Affairs Committee, Originally, Mr.
Rudolph J. Passero, of Rochester, N.Y,, the chairman of the National
Affairs Committee of the National Society of Public Accountants
planned to be here to testify today. However, because of urgent busi-
ness it was impossible for him to arrive in Washington in time for your
hearings.

Digitized bvGoO^^IC

401

I am also accompanied at this time by John H. Fitch, wiio is counsel
for the National Society of Public Accounts,

Senator, I am pleased to have the opportunity to present the views
of the National Society of Public Accountants on S. 72, The Competi-
tion in Bankin); Act of 1977, under current consideration by this
committee.

The National Society of Public Accountants' position on this bill
is summarized iu the testimony and attachments which have been
distributed to the chairman and to this committee.

We fully appreciate the fact that this committee performs an im-
portant function in the banking and legislative process. It provides
a forum for the examination of legislative proposals important to
one or more of the diverse sectors of society affected by our banking
laws, proposals that might otherwise not receive ade<juate attention
from the Congress. It also encourages continuous review of the ap-
plication of the banking laws and thereby promotes an atmosphere
m which corrective changes might be identified and enacted
expeditiously,

Mr. Chairman, my testimony covers five major areas with respect
to the future relationsliip of accountants and the banking industry and
thehapking community in these United States.

Kirst, professional accountants are regulated by State law and must
meet stiingent educational, experience, ethical and technical require-
ments, including mandatory continuing education; while banks and
bank employees are exempt from these requirements.

Secondyrhe type of accounting, bookkeeping, and tax service offered
by banks is misleading and potentially harmful to the public. This is
based on the fact tliat banks rely on the businessman to code Iiis own
financial transactions and which are merely put on the bank computer
and regurgitated back. From these figures, the banks prepare monthly
P&L statements and financial statements which are then returned to
the businessman. There is no professionally trained accountant to
insure proper coding of these transactions or to evaluate the informa-
tion to establish its correctness and reliability, and whether or not it
accurately reflects the financial condition of the business. Tax service
employees of banks, gentlemen, are not subject to the ethical and tech-
nical requirements ofthe U.S. Treasurj" Department Circular 230 and
therefore cannot represent a client before tne IRS in the event of an
audit of the books and records of the companies which are being serv-
iced by the banks. Neither does the employee have the knowledge and
the expertise of tax laws, rules and regulations to adequately, com-
petjHitfy and properly serve a client.

[TTjirn. due to the banks' .substantial investment in data proc-
essmg, it can offer such accounting services, et cetera, free or at less
than competitive rates in conjunction with their banking services. We
would have no objection to the rates if they were competitive; how-
ever, we feel that public interest is not being properlv served because of
the incorrect information conveyed to investors and "because of the lack
of itniependent opinions on these financial statements.

Pmitfh, gentlemen, banks can also use their financing and loan serv-

kices as levers to encourage a client or a potential client to use their
nonbanking services. This potential "Sword of Damocles" is hanging
over the head of the businessman who needs a loan and is enough to

I

c.,i„od-j,Cocfclc

force him to participate in these nonbanking services. This is potential-
ly disastroufi not only for the independent &c<;ountant but also for the
banks, their depositors and especially investors in these various com-
panies^ml the Government of the United States.

E^Sfa^, gentlemen, the most serious aspects of banks doing account-
ing-wdrk for their clients is the potential conflict of interest and loss
of independence of judgment and objectivity which occur. The Con-
gress, as you know, and particularly Senator Metcalf and Congressman
Moss, and the Federal Trade Commission, the Department or Justice,
and the Securities and Exchange Commission, are all extremely con-
cerned with this problem of independence and objectivity of the inde-
pendent accountant because of its potential harm to the company, the
stockholders, the business and investment community, and the
Government,

These agencies are working hard to correct that problem, yet the
banks on the other hand are encouraging it.

Mr. Chairman and members of this committee, I want you to know
that the accounting profession recognizes the fact that undue restric-
tion of competitive rates is a very important and serious problem.
However, we feel that the public interest is much more important and
incorrect information conveyed to a potential investor for the reasons
that I have mentioned — the lack of independence and the lack of proper
coding of transactions — will convey to investors that possibly the
information that is submitted to a potential investor could be erroneous
and therefore misleading.

Mr. Chairman and members of this committee, I want to take this
opportunity on behalf of the National Society of Public Accountants
and my colleagues to thank you for the privilege of appearing before
you today. Thank you, Mr. Chairman.

The CHAraMAN. Thank you very much, Mr. Gardiner, for you excel-
lent statement. We very much appreciate it.

[Complete statement follows : J

Digitized bvGoO^^IC

■•■(202) 298-9040

of the Coranlttee , ny nana !■ John J.
Gardiner. I an a public accountant Iron Philadelphia. Pennsylvania,
a Past Preaidant of the National Society of Public Accountants (HSPA) ,
and currently, the Vice chaicBan of NSPA's National Affairs Comnittee.

I u plaaaail to appear before you to dlscuaa the nerlts of S. 71,
the ■CoBpatition in Banking Act of 19TT.*

The National Society of Public Accountants Is a professional
organiiation of sone 16,000 Independent accountants who represent
approximately 10 Million clients, 3 Dillion of which are snail
buainess entitles throughout the 50 states and territories. Our
■eabere provide a variety of accounting, auditing, Banagenent advisory
and tax services principally to the astaller business cosnonlty and to
the general public.

Because licensure of accountants la governed under separate and
distinct state laws, our menbers include public accountants, licensed
or registered public sccountants, certified public accountants,
accounting practitioners and accountants and practitioners utilising
other titles which are pernitted under provisions of state law.

Our nenbers are bound tO a stringent Coda of Professional Ethics
and to the Generally Accepted Accounting Principles and Auditing
Procedures which have been adopted by the National Society.

As B matter of background infomation, NSPA has previously
testified in favor of similar legislation on four different occasions!
in 1965, 1969 and 1970 before the Congress and in 1972 before the

Digitized bvGoO^^IC

Ooaptrollar oC tha Currancy. DiarafOEa, hlatorlcally K8M has »upport#d
laqlalatlon ohich would rastilct or pracluda bank* and bank holding
ooapaniaa tzcm of faring 'non-banking aarvicaa,' particularly accoun^ag
and ralatad aazvicaa.

Mccountanta In public practle* bav* notioad that within tha paat
aavaral yaara thara have baen algniflcant davaloi—nta In tha banking
induatry which foracaat aerloua consAquencea for tha bualnsaa ccaBunlty.
tha D.B. Traaaury Dapartvant and tha profaaaional accountants in our
oountiy. lb* probln ariaaa fron tha fact that bank* In Ineraaaiag
nuabars ara advartialng and randaring accouatiogi bookkaaplng and
varloua tax aarvicaa to buainaaa finu of all typea and aliaa, «• wall
ai to Indlviduala.

Sank* and othar financial inatltutlona offar thaaa aArvioaa hfaiiaa
of tbair ratbar axtanalva and axpanaiva Invaataenta In data proccaalng
and othar autowtad racordkaaplng aquiiawnt. Iliay ara out to acc«l«rata
thair raturn on Inveataent by engaging in activitlaa beyond thair
axpartiaa. Thia aqulEawnt la being acquired primarily to anabl* tb«
Individual banka to render Bore Bodam and efficient banking aarvicaa
to thair custMMra, and In aany caaaa, to otbar banka. But, banka
are uaing thia equlpaent beyond thair own naeda to provide a type of
aarvlca to tha buaineaa coaaunity which la rather far rawnrad froa th«
traditional concept of banking.

Through varloua aedla, banka are advartiaing that thay ara now in
a poaition to offer a wide range of accounting, tax and racordkaaplng
aarvicaa. Thaaa actlvltie* aay include, but by no Maana ara liadtad
toi payroll preparation •arvicea, accounting reoonciliation, coat
accounting, billing, aalaa raporta. Inventory control, financial

Digitized bvGoO^^IC

1 th* pr«p«ration and filing of varioua t
Umb* aacvicaa ara daacrlbad by tha bank* aa 'bualoaaa ■•rvloaa' to
distinguish thia froa aora traditional banking function*. Bowavar,
thaaa 'buainaaa aacvicaa' sea the aama typaa of aarvlca* which hava
baan, and praaantly ar« balng, conpatantly parforaad for the bualnaaa
co^unity and tha ganaral public by Indapandant, profaaaionally
txainad practicing accountants.

Iheaa 'business sarvlcsa* ars not only outsida tha scops of
noraal and traditional banking functions, but, mora laportantly, they
constltuta a aarlous encroachaent into the area of practice engaged
In by profesalon«l accountants. If the preasnt trend is permitted to
continue without abatsoent or control, and if banks are given a free
hand to offer aore and more variations of 'business services,* there
will ba serious repercusBiona for tha buaineaa coaaunity, the general
public and the accounting profsaalon.

In order for the Caaslttee to understand our problea. I would like
to briefly define what Is generally accepted aa 'auditing or other
profesBlonal services In the field of accounting,' and thalr related
functions as performed by an independent professional accountant, I
will also coanent on the reasons for our objections to banks
performing these varioui

The first group of
installation and supert
terms of nonsy and inte:

An important part
In the field of

functions,
ictlvitiea In the definition is the dealgn,
lion of Internal ays teas of recordkeeping in
lal control of financial data,
the many services rendered by persons trained
ig Is the design and Installation of an
accounting system for a givsn business. The accountant studies tha

Digitized bvGoO^^IC

nature of tha bualneaa, dateniinea the types of transactions that will
probably occur, and designs or selects the necessary forma and records
In which the transactions of the business may be recorded, Beyoixl
that, as the bnaineas grows, it is the accountant's responaiblllty
to review the accounting ayaten fron time to time, supervise the
operation as an expert, and thereby Initiate any desirable oBplificatlona
or modifications.

A key element in thia area of accounting aervlcea la the fact that
the internal Bysteaa of recordXeeping referred to are thoie axpreaaed
In terms of money or finances. Other basic recordkeeping systtms. which
may Involve physical gooda or suppllea not neceasarily related to money
or finances, may properly be Included In bank activities.

A second area of services would be the use of discretion in recording
business transactions of a financial nature . This confoma substantially
to the widely known and generally accepted definition of accounting asi

"...the art of recording, claaslfying and aumnacizlng in a

Significant manner and in tema of money, tranaactiona and

events which are, in part at 1

and interpreting the results t

Profeaslonal accounting requires principally mental skills, including
the exercise of diacretlon and judgement, rather than manual labor.
When declaiona must be made about a particular 'bookkeeping* procedure
or entry, the element of discretion necessarily follows. And, the
exercise of diacretlon in accounting — which recordings to make, when,
in what anounta, and to what accounts — are not declaiona for banks
to make. They are best left to those who are profeaslonal, qualified

D„ii„.db,Go(5glc

It ahould b* notad here that IndBpandant accountoDta In public
practice ax* aubjact to atata ragulatlon and ara bound by atrlngent
t«chnlcal and •thlcal requiromants , including nandatory continuing
•ducation to inaure thalr compatance, objectivity and Independence
which protacta the public valfara. Banfca and bank anployaaa opecating
th* nOD-banking lervicaa are not aublact to thaaa raquiramanta which
could hava a detrimental effect On the buaineaa coi«unity and the

A third catagocy of profeaeionBl accounting aervice* la the
preparation of financial atateiieDta from books of account.

At regular intervals the professianally trained independent
practicing accountant prepares atatements ahcwing the financial
position of hie clients and the reaults of hie clients' operation!.
These financial statasenta are based upon the financial data accumulated
In the accounting records. Such statenents furnish inportant
information to Management, owners, investors, bankera and government
■gene lea.

The preparation and interpretation of periodic financial statements
in a neaningful manner, such as the familiar balance ihaet or profit
and loaa atatament, la a kay service which only a professionally
trained accountant is qualified to provide.

Nhile a good recordkeeping system ia vital to biuineas health,
records in and of themselves are valueless unless they can be properly
analyzed to datemine where a company has been, where it Is now, and
irtiare it is likely to be heading. If the average businessman cannot
obtain a proper evaluation of the message contained in hie records,
his accounting needs will hardly be served. All of the records in the

Digitized bvGoO^^IC

world will do hlB no good nnlasa ha can reljr with contldanoa on a
protaaaionally trairt*d acoountant to tall hi* what tha racorda aaan.
It la only tha aooountaDt who ia txalnad In financial atataaant
picparatlon, anylyal* and avsluation. Banka ahould not ba paxHittad
to offor or parfora thaao profaaaional aarvlcaa bacauae titay axa
unintantlonally misrepresenting thair aarvica'a valua.

Anothar aeoounting function la tha praparatlon of tax raturna.
Including Padaral, State and local. This ia an activity which ia
complataly unrelatad to banking bacauaa of ita eloaa relationship
to accounting. In fact, it haa baan vldaly aald that accounting
1 accounting prlnciplaa ace tha foundation upon irtiich

Hhila it la trua that thara la no praaant Padaral ragulatlon or
control ovar tha coapatency of thoaa paraona or fima who >ay prapare
incoata tax retuma far a taxpayax for a faa, it ia ballevad that thia
ia an activity which banka should not puraua bacauaa thay lack axpartlaa.
It la baat for govarnmant and the public that the aarvlcaa of trained
practitioner* ba utilitad who ara thoroughly fanlliar with the
intrlcaciaa of Federal, State and local tax lawa and tha aecoopanylng
rulea and regulations. It is necaasary that the taxpayer — whether a
buainassMBn, corporation or individual — have the right to look to
his tax advlaor for follow-up. support and repreaantation It auch a
need ariaea.

Since banka are neither attorneys, certified public accountanta, nor
Indlviduala enrolled to practice before th* Internal Bavenua Service
under Treasury Dapartnent Circular 230, and cannot be conaidarad
'indlviduala" pamltted lialted practice under currant Bavanua Procedures,

Digitized bvGoO^^IC

tb«y QBimat rapraacnt a cllant In th« avant that ellant la audltad
hf tha IW. At baat, tha bank aaployaa could aarva aa ■ wltnaaa anly.
It la If^oaalbla tor a bank to oftar profaaatonal Ineeaw tax aarvicaa

It la mt our Intantlon to mtrlct banka In any way fro* preparing
•atata, Inharltanca or fiduciary tax ratums or any othar tax ratuma
whloh ara nacaaaary In connactlon with lawful fnnetlona aa truataa or

Auditing la a procadura by which axparts axa>lna accounting racorda
■nd atataaanta to varlfy and datact and to glva aaaoranca that tha
raoorda and atateaenta have baan prapared In acoordanca with ganarally
aecaptad accounting prlnciplaa.

An Indapandant accountant may naka a contlnuoua chack of work
parforaad by hla cllant'a bockkaaplng or accounting dapart>ant. Thla
activity la ganarally daacribad aa a continuing audit. In addition.

ipandant profaaaional

itataaanta praaent fairly
laulti of its oparatlona.
It only to Rtanagaaient,
Oftan an accountant la

a fira nay call iQ>on tha aarvicaa of an

accountant to detaralna whathar the fiiu

tha overall poaltion of tha buslnaaa and the

llila aaaurance froa the accountant la vital,

but to third partiaa, and particularly h

called upon to axpreaa a profaaaional opinion in hia audit report about

tha firv'a oparatlona aa reflected In Ita financial racorda.

Auditing and the rendition of profaaaional opiniona are considered
to be the hlgheat level of public accounting practice. Conaidarahle
training and experianoa ara required. At no tiaia ahould banks attaaipt
to render auditing aarvicaa becauaa auch activitlaa, generally, would
be outalda of the ability of bank eiq>loyeea. Moreover, auch afforta

Digitized bvGoO^^IC

oould b« In conflict with tha bank's ovanlding t«lktien>hlp Kith a
cuattMiT or proapactlv* cuatoner whara loana or othar financial
arrangement B ara Involved and th* bank would lack tha nacaaaary
independence of Judganant which la 1:he hallnack of the profaaalonal
accountant In public practice.

How do thaaa activltisa relate to the activltlea of banka and
othar financial inatitutlona today? The anawer Is quite allele. Many
banka located tn various states in the country are actively engaged
in aollcltlng accounting buslnsss fron the general public. Tha aarvieaa
offered range in sophistication fron sinple bookkeeping to ratfaar
coBplex accounting services.

There is no question that these services era valuable to tha
busineasnan, but only if thsy are performed by one with tba training.
indapendencB and axperlance necessary to perform thea properly. Baaed
on tha coMplainta tha National Society has received frca Ita siaBiiars,
ths following banks srs presently offering to the public sooe fore
of accounting services. Thsy include Harcantlla Bank of Hiasourl,
Flrat and Harchsnta National Bank, Old Stona Bank, Maiden cooperative
Bank, First National Bank of Boeton, Cape Cod Bank t Trust Ompuiy,
University National Bank of Boca Raton, National City Bank of
Cleveland, Continental Illinois National Bank and Trust Oonpany of
Chicago, Valley National Bank of Arizona, Greeley National Bonk at
Colorado, Continental Bank Data Sarvlce, and other*. Thl* is by no
means an exhauatlve liat. We are reasonably certain that tha problaai
la much more brood than the coi^laints we have received would indicate.

He object to the benke offering accounting servicea on two grounds.
First, thay have neither the independence nor the professional

Digitized bvGoO^^IC

qualltleationa naoaasBzy to parfoxa diaoratloiiBZy aocoimtlng ■•rvicaa
aa teaerlbad aarllar In my taatiKony. Scoondi th«y ara In th* unlqua
poaltton of b«lnq abl* to tia-ln th« landing of MOnay with tha randaring
of acoountlnq aarvlcaa.

Accounting aarvlcaa randarad by bankai which ara baaad on automatic
data pxooaaaing, usually are objactionabla . niay oftan praaant raaulta
which superficially may ba Inpraaalva, but which ganarally ara badly
dlatortad bacauaa tha bank procaaaaa antlraly what tha untrainad anall
bualneaanuin glva* than, niat ia, tha banka raly on tha untrainad
buBlneaainan t« ooda tha aocounta proparly which can and doaa laad to
groaa atrora and ascloua conaaquanoaa. nia old adgaga, 'garbage in.
faibaga out* la vary appropriate here.

nia big problan, ■■ wa saa it, la that with tha varloua brochuraa,
«dvartlanentB and publicationa diatributad by banka, there Is a
dlatlnct i^raaaion created that tha banka are offering a valuable
accounting aaxvioa. But thay ara not. Ihay are aerely doing aona
clerical work, with your parMlaaion, Hr. Chalraan, I offar for the
cacord copiea of advert laenents and brochuraa which exeopllfy tha
typaa of aarvlcaa being offarad by banka.

Merely kaaplag racordi on autooatto data procaaalng aquipaant and
occaalonally reporting tha data atorad In tha eoqnitar la not
profeaalonel accounting, it ia tha function of tha trained profaaaional
accountant to review the raw data, ccnaider It In taraa of the
individual coapany. and laana a flnanolal report baaed upon hla
profaaaional knowledge.

Iba livartanca of financial atatavant aaalyala and evaluation la
pointed up by the fact that Boat fltsa of raaaonable alie have their

Digitized bvGoO^^IC

own •ooonatlng d*part»anU and thalr am ooMpUollara. Ihasa k«r
■tsff parBoaiMl ac* abia to piovld* thalc ocsanlsatlon with prof*««toHl
counaallng and advlca. But, tha aMill businesaman oaimot afford aueh
an axpenaa. Ha haa to look outaida of hia own organltation, baoana*
h* naada accounting and financial advica aa mch. If not ^ra, than
tha blq buainaaa ocganizatlon. Ha, tharafora, turna to tha indapandant
practicing accountant for hia aervicaa.

Thara ia another poaaibla condition which ia llkaly to axiat and
which dafinitaly la not in tha baat intaraata of tha bualnaaa ooiBunlty.
That la, tha ta^tatlon will ba quit* atcong for aoaa banka to taka a
position, subtla as ia might ba, that tha availability of loan tunda
will ba predicated on, or at laast Influanoad by, tha bank bain« «bl«
to provide accounting and reoordkaaptng sarvicaa to tha proipaetlv*
borrower .

For axaiqila, if a bank la anxloua to obtain naw riisl iimsi a tor ita
'buslneaa aervicaa,* It ia not Inconceivable that undue preaaura could
b« esartad on a prospactiva borrower in order to persuade tha borrower
to becona a client for tha bank's accounting, recordkeepinq or tax
aervicaa. In asaenca, a bank could aay to a prospective borrowari
'Since wa know what financial inioriution we want, and how wa want It
presented, let ua keep your accounting and bookkeeping recordat other-
wise, there nay be a sarloua question as to our grenting you a loan
under any other arrangenent.* Or, depending on the coaipatitive
situation that exista aaong banka, a bank could advise borrowers that
If tha borrower utlliies tha bank's "buainesa sarvioas" h* will b*
able to gat bis aooounting and recordkeeping at leaa than what ha pays
his profaadonal independent accountant. Such aa Btataaent would, of
course, ignore the relative values of the services offered.

Digitized bvGoO^^IC

Tha poaaiblll^ ktM axlau that bank daclsiana on loan appllcationa
■Ifhc ba Influanead by tha ovarall profit on tba auBtoaai'a accountt
including bookkeeplncf and accounting aarvlcaii rathar than on long-
aatabliahad atandarda of avaluation. If tbla war* tba oaaa, both tba
uaar and tha non-uaar of tba bank'a accounting and racordkaaping
aarvlcaa could ba hurt, aa wall aa tha bank'a dapoaitora. Tha uaar
would auffar by having uimiaaly obtainad funda and incnrrad an
obligation tbat ha May h«va troubla repaying. Alao, tha non-uaar
would auffar by having baan daniad a loan whlob could hava baen
baoaficlal undac tha circunstanceB, and which could hava baan rapaid
froB tba pxoflta ganacatad by hla buainaaa. Tha dapoaitora could
■uffer by having thalr funda placad witb poor ciaka levan though
potantlally a profitable cuatoawr, baoauaa the bank did hie accounting
and racordkaaptng work) and falling to hava funda placed with good
riaka .

Saall buainaaaaen would no longer ba able to BBintaln an indapendance
in aantal attitude when aeeking profaaalonal accounting and tax
aarvlcaa. Dtay could ba Influenced by the thought that relatlona with
tha bank might auffar it they did not allow tha bank to render these
servicaa. Iba cuatooar might then bacoaa a "captive* client of tba
bank. Buch a aieuation would obviously ba detrlaantal in the long
run, not only to the cuatoaar, but to tha relations betwaan tha bank
and tba accounting profeaaion, bacausa such an arrangaaant would
oonatitute unfair coapetition between tha bank and profaaalonal
■ecountanta ottering eiailar aarvioea.

Soaawhat related to thla situation is tha problaa that would o«cuz
If banka could no longer rely on 'indapandantly* prepared financial
data wban evaluating a prospective borrower. At tha prasant tlaa, banks

Digitized bvGoO^^IC

fAnarally plac* oonaldarabl* iwllano* on flaaaolkl •t«t«Mnta i
by lnd«p«ndant practicing kceountanta . Bat, it tb« baoka th^H«l««a
Milnuln a pro*p«ctiva borcooar'a financial racorda, will thara
contlnna to ba a naad for tha bank to call tor 'Indepandant* itataaaBtaT
If not, anch proc«dura Bight act to tha datiiaant of tha bank Itaalf,
ita cuateaara, and, by tha aaae tokan, not ba lookad upon favorably
by bank auparvlaory aqenciaa.

Not only ara wa conoarnad about th« praaant altuatlon, but tli*
poBsibllity of aacalation will ba evan ooia troublaaoaw. For one* tba
bank gata Ita foot In tha door of a bualnaaa, by providing a portion
of the flrm'a accounting and racordkaeplng naadl. It doaa not taka
Duch imagination to viauallza the bank taking ovar othar accounting
aarvlcaa, atap-by-atap, and poaalbly allninatlng acceuntanta altogathar.

Accounting aervicaa auat ba parfomad by Indapandant profeaalonally
trainad accountants. Mo bank can adequately perfom auch aervlcea
and ranain unblaaad and objective in other boainaaa relatlonahtpa «lth

Banka nay dlsi
accounting [laid,
noving into tha ai
question of unfali
by a financial prol
Independent profaai

An analogy
American Bar Aj
*niBt ba aeparated

any Intent to encroach into tha pnifaaslonal
, tha facta ara irrafutabla. Banka ara definitely
E tha independent accountant. It Is not only a
r coMpetitlon. but the invaaion of a profaaalonal area

Lt-BBking organliatlon and tha allalnatlon of
lalonal accounting judgaaant.

n aaally be drawn with the legal profeaslon. Tha
Lation has long recognised that professional judgaaant
froB thoae that might have a financial stake In a
transaction or who ara untrained In legal Battara. Hie accounting
and legal profaaaiona are alallar. Frohlbitlona that apply to banks

Digitized bvGoO^^IC

offarlng Isgal aarvlcei should apply to accounting ■•rvlcas alio.
Otbarwlaa, if bankt can parfom accounting aarvlcaa. why ahouldn't
thay ba ablo to parfom lagal sarvlcaa?

Thara is at the proiant tine legislation passod by the United
Stataa Oongraas which seena to set a precedent with regard to banks
engaging In professional accounting services for the public. In 1962
Congress passed the Bank Service Corporation Act (73 Stat. 1132) which
allowed anall banks to conblne to form separate corporations which
could own data processing egulpaent. The objective of the legislation
waa to allow the analler banks to compete with the larger financial
institutions which could afford to buy or lease data processing equipment.

Section 4 of that Act provides that 'no bank service corporation may
engage in any activity other than the performance of bank services for
banks.' it Is inconceivable that Congress should have recognised In
that statute the need for bank service corporaticns to be confined In
their activities to servicing banks, and banks onlr, and y«t be
unwilling to have th« sane leBtzictions imposed upon banks themHelves.

During th« debata on the Bank Service Corporation Act, Mr. Chalrnan,
while proposing an amendnent to confine bank aervice corporationH to
servicing the«aelves and other banks only, you stated: 'He are in a
position to have a bill that provldea what the banks really want, and
what the meDbers of the Comiittee feel is justified, and at the sane
tine safeguard legitisiate business enterprises which othervise night
be put cut of business." It's hard to take issue with your cogent
(disarvation.

Moreover, with reference to the prohibition directed at non-banking
activities on the part of bank service corporatlonB , the Senate Com-
sdttee Report on the Bank Service Corporation Act included the following

Digitized bvGoO^^IC

hl^ly ralavant atata^Dti 'tha Bill la Dot intandad ■■ a wint to
anabla tMnka to angaga in non-banking bnalnaaa, and tba Cb^I ttaa looka
to tba bank auparvlaoiy aganclaa to naka aura that banka do not orgaalia
•acvica oOEporationa tor tha purpoaa of antariog Into bualnaaaaa otbar
than banking.' It Congraaa ware ao concarnad that banka would organita
aarvica corporatlooa that would candar non-banking aacvlcea to tha
public, than by tha aaaa tokan Oongraaa should ba aqually aa concacDad
that tha banka th«ualvaat aa prlneipalSi do not antar Into any
activitiaa othar than banking.

And yat, «v*n tn tht> ataospfaara of doubtful lagallty, many banka
throughout tha country advactlaa and proMOta profaaalonal accounting
and tax raturn preparation and ralatad aarvlcaa — activitiaa Mhich
noiaally fall to tha practicing profaaalonal accountant.

Daapita tha quaationabla lagallty of banka angaging in accounting
sexvicaa through tha uaa of tbalr co^uter i natal latlona , pravlous
Ooaptcollaira of tha Cucrency hava rulad that banka iHy angaga in
profaaalonal accounting aarvlcaa on tha baala that accounting la a
parmiaaibla non-banking activity bacauaa it fall* within tba ganaral
eatagory of activitiaa Incidantal to banking.

nia National Sociaty of Public Accountanta antartainad tha
poiaibility of joining in a lawauit chaltanglng tha validity of tha
Coaptrollac of tha Currancy'a ruling with regard to accounting. Until
Juat racantly wa ware diacouragad by a aarlea of court caaaa lAlch ban
hald that one aaaking to prohibit a bank froa engaging In a non-banklog
aarvica la complaining of an econoalc losa and haa no atanding to aua
unlaaa Ooograaa haa spaoifically provided that the paraon bringing
auit la of a claaa apacltically protected by statute. I cite fot

Laio^^Ic

liwtaDda tha oaa* ol Arnold Tonra Inc. to. WllliMi B. amp
(«» F. Jnd 39»). In that ca»a Judqa Aldrloh d«nlM an appMl
froai • dtatrlet oourt dmslalen whieh haU that Arnold Toiira, a traval
agancy, had no atanding to challanga a ruling by tha CoiVtrollar ol
tb« Corrancy paxmlttlng banks to angaga In tha traval agancy bualnaaa.
Ha notad that tbara was no apaclfle laglalatlva provialon prohibiting
banka troa engaging In tha traval agancy buainaaa. Judga Aldrich aaid,
'Coagraaa new knowa that if It wlaha* a particular claaa of
plalntlffa to hava, or not to hav*. atAodlng to aaak ravlaw
of aganoy rullnga. It may aak«, or not aak*! tb* typaa of
lagialativa provlalona diaouaaad aacllar in thia opinion,
and that la tlw and to tha mttar.*

rollowing tha princlplaa laid dom in tha Arnold Tour a c«a«, Judga
Aldrich found In a coaipanlon daciaiont tha Wlngata Corporation va.
Induatrial national Bank. (408 F. 2nd 1147) that data procesaing
aarvica oantara ttara a claia which Congraaa haa apacifically
protaotad. Ba oltad tha 19ta Bank Sarvica Corporation Act (71 Stat. 1112]
which I hava pravloualy dlacuaaad «• tha axpraaslon of Congraaa ' daalra
to protaot aarvica cantera.

According to Judga Aldrioh'a opinion,

'In order to pravant auch corporatlona balng uaad aa a aubtacfuga
for antarlng into tha nonbanklng buainaaa of data prooaaaing, and
to protect tha Intaraata of certified public accounting finu,
Congraaa provided in Section 4 of that Act (12 USC, 19G4) that
'Ho bank aarvica corporation any engage In any activity othar than
tha parforBBnce of bank •ervicea for banka.' Tha lagialativa
hlatory ia clear. Tha prohibition ma initially propoaed in an

Digitized bvGoO^^IC

aB«ndm«nt r«qu«*t«d by ttai
vhlch objactad to tlie
have alloHBd bank aar

bualnasB poaad by the corpori
provision was an obvious
Rac. 1619», iiOJl [1»62);
the CoDBtlttee on Banking
Senate, B7th Cong., 2nd Si
The National Society waa
k* cognizance of this legli

.Btl'

In writing the decis.
a Arnold Toi

rency and the posit.

, we feel that
illy Insured na

National Society of Public Accountants,
iralon of the bill which would
itlons to aetllclt outside
tared the threat against their
Ion's confiutora. The final
latlve response. (See 108 <
irlng on Mlac. Bank Bills Befc
Id Currency of the United Statei
IB., at 79-eO (19621>-'
lat pleased bo aee the
precedent .

ADAP50 we* told that II
;ed eosiputer service*
the Court. Mr.

decisions llluatrate the necessity

B perfectly evident from the

ircuit
upheld

had standing to

tice Douglas

Congress to
rotected and who

the CoBqjtioller

1 of the Federal Reserve Board
America ci

holding compan:
istitutlons should be specifically

prohibited from engaging in accounting services a> we have o
here today.

D„ii„.db,Go(5glc

Mhlla S. 72 do«B not go ■■ far as wa would lika, it i« a step
In tha right diractlon and addrasses ona of the most sarious aapacts
of tbla problmi that of tha antlooapatitiva affaet of bank* offeclng
accounting sarvlcas vis a vis tha Indapandent accountant In public
praotica .

This concludas ay (onnal prasantatlon. I will be happy to answer
any quastlona tha Cosnlttaa nay have.

niank you.

D„ii„.db,Go(5glc

/r\

Mr

Z2 1B7I

OH»...C

^.^

W

1 CLARK ACCOUNTING

yy

102 Soulh 2na 51. — P. 0. Boi

728 - AbwDaan. S. D.
05} 225-8890

57*0,

Abardaap, South Dakota
Kaj 18, 1978

NSP* DapartHut
1717 PcnnaylTan:

Suit, laoo

Uaahinctoo, DC

of SoTerani
20006

It Affair.

Daar

■ Si„:

^■

'^""T

er to Ctaainu

.n Fa«.r.

,'a bulletin on bank

a doing accontlng

Our
bank

and
IRS

offiee baa dona saTeral
■s accountlne or bookltai

audit.

tax rotur
iplng sar.
r tha bank

■ne vhere the olient

:b ooaputsr haa enta
c, that it iu ri^ht

has bean uaing thel
ec H Boot ie that t

and will withatand

r^

What

the bank- 8
UBtanl or ai
infarutioD

laopiitar oparator ia
1 authoritj on Idcobc
juet at our client co

iably has not been i
juat that, • coaput
taxen. The cooput*

nfonted by the bank,

r ojwrator is anteri
ight or wrong.

ia

la a

ddltion. I :

rind that U.

. of our c

llente understand t

he cod. arotn th.1

-€.^^K\is-.

CACeeJ

cspgr tot R. C. Laonard
P. 0. Box 1117
Plarre, » 57501

Digitized bvGoO^^IC

Compulvl peydwcks
Py«prkitad Tknc Sheen oTkiH Cink
Emfikiycc Ennlngi Raconb
P^lchedi Llttv

ReoDnctMkm of payiol checki
P«tn>l Tm Rmrra - W2), W3t, 941>
.. . and a HMy of optfonai I

ACCOtMISRECEIVAKf ToaxiBol
ACCOUNTS PAYABLE To p^ Mi. mi

dn purdiasB racordi and ga

REAL ESTATE!

Rental and condomkUun

For furtlwr Infonnatlon call Ronald CoJoman colloct at F&M
(804)78<-2802artetunitheattachodcar(l

'i •*,>■

V

rMD

NO POSTAGE NECESSMtV D" MAILED IN THE UNTED STATES

■■■llCil»»

Tm * M^y WMniH Bint

D„ii„.db,Go(5glc

ai^B-^jmHjntnsv:,

- .', V - On« ot W^nia^s l&rges banking
'^niAIiont wiihas»IsotoveT.S]£blI&on, (^«n
complete laitgp of cornmerciAl banking »A^a.
uirenlly ove 150 Vu^nla conipanles have Ihek
jyrok piepaMd by Ihe F&M/ADP
g Ihe F&M oHiciBl bank check.

'i oMol and laisM

J

bookkeeping ne«k (^ almoU «v«y Mnd of com- j

meidal or seivte aoMlv - mort Ihan 50.000 J

cbenB. OvB 3,000,000 AmeituM hau* tfwk pay- t
checks prepaied by ADP.

Digitized bvGoO^^IC

The Cornerstone of Business.

Whin you do builneu wiiriOld S(oiw Bank, you
gclskilmonllMn|utlji)oiji<»a<cash Yougd
lh( MiHt ol (Kpenlsc and iniigM '

cameniorK lor your biuin*B

I lor MtMad flsaoclBg.

moiwy, and chootRig ilw nghl comlMiut
hm a dnvnaCic (Red on youi boliom line At
Old Stan* BAnk, wff can pfxnnde you with a
firufidng p«>iag« I ■

accDunU iKtttahlt Snandng [o
aih llgw, a Iruingplan 10 wquitc
iwmiqulpnienl wllhoul a largi capllal outtoy. a
\\nt ol cndR ol a ihon If tm luoiking capllal loin
WliKh«v«r n u, iMlt inaki lui* n'l b«n loi you.
A caranatoaa forf«l>i«|tlan*l«a>
Al Old SlQiu! Bank. u« dun'l claim lo have a civt
lalball BuiwthaveilwiwiiibriMhlng~B
iophlsllcar«d compuler model Ihal can picMde
youi busin«u with a lon^ or ihon rBr>9e financial

Aconwralen» tar powth.

ui butlneo banki with Old Sioni.wc

Well mi

a compreheninfl

MKin opponunniM. and compa
on nw^vKh of financing ll'i thi
Uiupfwidit you wnh toivtighi '

meiOfll Banlung Group that i
linowledgeaHs ptolta
bockiiupMihSlblllloi

Jo»phF Murphy. EMCutwVlc»Preikl«il
274-TBOO 0< wne !□ him al Oid Slone Ban
•tOWeumlnilciSlrwl Provldrncii. R KQilUS
'UMpyo

,.,jXoc

pIKVEfTWEMT SERVICES
peMPyTER PAVHOLLS

KRLflT 9. ESTATE SERVICES
OW ACCOUNTS

|l^Sl^Ess LOAMS

R^nSpiVAL LOANS
AVIMOS ACCOUMTG
ICHECKING ACCOUNTS
iplNAMCIAL^unSGLmO .,
UltfW TAX SERVICE
liAJtEfi CHARGE

^FetjePOSiT BOXES

fl^lfjCAteS Of OffOSIT

jEOMEfAX
'RERA'R'ATIpN

um

iWPORT

.^MBAY

'—.VILLE

ilAfciilCH r.:iRT

09Ti;Kviu.r
'poOasset

•ANPWICH
KXml YARMOUTH

CCI

l^''\

D.,i„.db,GoOglc

1 2^0 ,

Civiston

Vaiki National Bank of Arizona

Digitized bvGoO^^IC

Vfe qWo you montlity :

Imsllclty Canaiil LMgat Min.

Important options:

You gain:

ntilbMIT Our Gwwril

D„ii„.db,Go(5glc

D.,l„.db,'C0(5glt'

429

Vou give us: Vou gain:

For each pay period. Ihe number ol houn ''Oirecl ccsl sa

VJa give you: need Oe uan^
1. Compltlwl, prs-Mgnea piyroll checks

1. A pjjfioll regtne^ retleclinfl employeB pay profil-ielalefl asBi

(UM •nd ehecli eilculaiio™ lor iho pay I'Flenibilily: The st

y, with [heif amployse

■. Al year end, (utomi

accounling syelem. Specal bonus ptyrol

D„ii„.db,Go(5glc

GL-II

GENERAL LEDGER
SYSTEM

OENERAI. INFORMATION MANUAl.

eoNnraOTMi I>3A Services

D„ii„.db,Go(5glc

FAYKOLL RATE STEUCTUBE

1 accoTdance w

proewl<n Chary

Tha prtca aehodula baltnr 1

Incluilva of tha follovliig:

Mo. of Partoll Oiaeka

I- 100

101- ZOO

ZOl- 500

SOl-1.000

1.001 and ovar

MlnlMa Par Cjrcla:

Ona Dollar ($1.00) aacli.
IMoty-flve dollar* (SU.OO)

Ian caota ($.10) aach.

Aceapcad for

Tltla:

Digitized bvGoO^^IC

Scbadula D

TnnMotionPoMinfRi|i«Mr nupdtMfacvn

Tba bMtoMD
A TttBBctliiii Ratliic iUtMn li MitooMlciljr pto- locuorat mmbHi

dood by itai q«*^ nflKliat •*■} tnnnctkn tM«ulydi|a*

duriatawt|Nli*paRkiffBiod, Ttu TnoMctlni hMU) u

diiilii|lh(pM>d,liMnponn(lKl>ik*iaiiiH,4Ma, JMofiol noofd. 11* iMMc i

■Blmowt atMch*Mfy poM*4todu*ceouat,itai ki li|bl of dw hot Am dl <

BldiBnHlllHMidk«bAiiM.WIwniMUc«Mi. Ow ■nmd M|k. whMlM

otiy nptoduotdby Aim

as»

Sis

m

»

SiS

sss

a^

as

t3t«

UlJl

W.M

trut

SiS .

KS

D„ii„.db,Go(5glc

Sohadul* D

ti Hid UiMUUn ■ reflected in tBtkmSltitr

I ShHl Hid Incoiiii Suunant

id ■ppauuhce. StiumeAU, lu

V DonmUir printi npvtt.

D„ii„.db,Go(5glc

ArEX HA
UMVEK3

sW"^

CURREKTASSm

CAinllMniEITFUND

MlMO

NOTES •ECnVAM.E

K

ACC0UNI5 RECtlVABU

lESWLlOW. roil DOUBTTVL ACCOUNT)

■W!t

ACnUED INItHESI *ECBVA»U

IH^K

METAID [NSUKANCE

"MB

NET FUKNrrVKE AND EQUirUENT

•iSS

!gS:Eg..».™,-.u,u»«„

UNO

D„ii„.db,Go(5glc

Schaduli D
Raport Saaplai uid Fdtb*Ci

s^r^«s

11/

.HUTIEtANDEDUITy

SScWNTt MVMLE ■ MXXUED EXKME
TOTAL CWRBIT LUIIUTIES

■1

IIOMU

•OHM rAVAILE-M

■ l>U«

TOTAL LONG TIXM DUT

tMOOO

TOTAL Eovmr

•■i

**M<W

~'^ss5:s^^55J!g!rr"

D„ii„.db,Go(5glc

IB ut imUuud, but thif u

I.UTJtl-

w.

I).I1LM

5S:i!

U1MM.II

D„ii„.db,Go(5glc

YU* TO DATE

iDTALOonoruut

ItllM

lU

"«:«»

n.iM

i«a

tmwi

JMW

*»j

t»}.on

IWI»

MJ

IH^l

Rll^ll U*

t MUJ* UJ

I *JM It

Digitized bvGoO^^IC^

Schadul* B

ptliitxl ■pcnttlji in Uu EifiUy meHoa k arte to

«d cnAl bdmcn in loliled uid biluced to uto. ihav Ihe ncl tffKI of tha UovB aid npiMi

If Itu biput ubmllMd m> nol In bd*iu*, Itw KcaiPB. Thit unouol Uiuhidad fnn UwMrii M

tf(n*aca on bt loaiRuliud In i mpMiM iccaunt void mdudini thi pfodi (Ipin twka ■ tin ■■■•■

far fulun concctioa by die imr. Thb pracvdur* Uon.

tItataiM Uk n*a4 foe Uiyi uid mum wUb If dcnnd. ■ poit-diiuin Btal hiliin cw I*

pBDltttq t)w prtntiBi of bductd, iixanU npoco. praduod.

-1S8

">a

-J

^

•as

"ian

...kS

isas

.fl

•sas

.:

is:

^

!^

.«5

•SSt

D„ii„.db,Go(5glc

n* TkldHmj' nu Mns *dm II

pnnl M|n icecaMi. nUUmy M(b Kcouiiti. Whan mad wlih Oh tnuMtoa pouint mfm, lUt

ad InolB mmbtr or iquhiilHit Ind. TIh mbildl- Uniaa pntMM t tBMplili MMlydi of il «nlriM to

wy trid bAan duwi iBBKll ladfR eontnl uulL Ihi luliildlirr 1>^ dwfeii Oh pailod )wl pracoHl.

Hm mOtUtuy Kcaunl leuli, nd (IT miUMt) Oi* Beeaw )oumJ mlilH lo die cuntnUlnt Kcoinu

hwalcii knl <kUU. Fw uch 1ml of control Ow ite tutonoliully laaanMd by itn compuui, ucu-

"s IBSS i

M- 3- M-

D„ii„.db,Go(5glc

pirlod, ind yeiModitt. Tht imeaiUfa cd vtriaac*
Aaoi bndfei li fftm ta atdi torn compuad,

lit Dipuunenu] Riparttni, Oih nport on IM

••gi it fig as 1

^^££;^n«.

Digitized bvGoO^^IC

Tin OHint iitPiUt pKlod an b* owMfaly,

oaB rf din(i on hi(Ui|U HpiMwit <tion-nii|i ndi ■ thnt ■* iiJilili le Ih

■^t«

"SX JiiS

'IS "»1

r.a .!i !MS

°^^^)Ss,.

Digitized bvGoO^^IC

D„ii„.db,Go(5glc

SiftcanU D

ct SMiplia and Fd
PM* 12 of 18

mUoI)' tor Mtb r«M. TWi r«

Digitized bvGoO^^IC

ScbadoU D

The Dtpttdanon Repon luu the full itilui of >ll
depicaibk mtti, Eidi ptriod. Iht depredaUon f«
uch HKi It HitoniiciDr HMDpuWd uid iBined

Kl Hut GL/ll pqt fa itidf luiiif
> Kharfuli HooL It CM k* Mi4 foi
OMi atd a* «•« ancfe rftM ■

ammt-fk^ym't difitt. doable 1)
ciutomr— directed pi

own method. Esh lu

:,z.d.vC0(>t^lc

•f H*ami*awnU ■Bl0<i|r>,31-Md*y>, <n fiit liii ItiM mil fill rtiirtlin nitiiM ■■!

Ion, drf vnr 90 «qi|. AM fe bMd BpSB Hitiii prin U ifffwlai CWIM bIm. nk faUm «

a I tat Mcft taMclioo. If dWnbk. dn knoln Inri k eo

■ In Mck Um p«nod k

Digitized bvGoO^^IC

n*A<tiiimiltltdfiiynaDatRvin Mialiii^iii pq'nU. GUIl dn, b

pravldi Itu TtftiM tod AccaaailBf Dipvoinit wUh
il tot iwcMory (Of tb* pnpuiiiiM of nrkHU
piynO tu nportt. In ilMdf. CL/D !■ not ■ piyraO

IS^l-ffj-ri: ^^r. ':3'3 Pi^ I i

fffiiSJt"';"

«. KKRUSSl.'^S.

" rSfisaa"'

jJS.H "i^S TuaJwiWdfiiinfl ji

is.sffisia'"

Digitized bvGoO^^IC

Scbadul* D

mon pownful inilyljcil futuTa of tha CL/ll ^neoi.
They can ba uied 10 hnak nki and ccali dcrwn into

pcoduct tinat, ccM cenlan. cotiTnct pfc^ti, reflonal
oituiiKabofU, vie- WhtnGL/tt^idapaftmenulreport'
iot laatuit) an nmbinad wllh Itia (yilcoi'i capibU-
ly for produciiii comolidilcd comptny reporli. Iha
nnnirKitioni rur muldloatknal. nwltidMtiona], or
fnnchiiiiii oi^DtuIiou an unpnodanUd.

EVE

£^i**fI?f^F.l?^

'"'nSiM"'"

CUEKTOtlMlOO

TOKTH

CWUKrrERKKI

rACXi

ULBJ

Sffi,,.,

s

XSo

tlO,M«

ITSMl

HCnfNINCINVENTO

IJW

1.000

tUTaUAUniRCHA!

3:!S

1':™

mmww^txn

USKENHNGINVEN

liooo

6JO0

CROUINCDHE

EXTENSeS

OFFICE 9 AURIES

ijoe

IO.M0

3SSi:^.xF»«,

•00

I.MO

DEraEClATION

110

"k

HUCEUANEOUS

lao

wo

TOTAL eXTEMEa

D„ii„.db,Go(5glc

D„ii„.db,Go(5glc

ScbaduU D

Saaplaa Bul toi
tt» 1> It II

Digitized bvGoO^^IC

Characteristics of CODtinentBrs Payroll System

, all Syilem fdnim, iaaibtd in thdr coliiely, ilgnc would occnm a voimDC lugcr
dun Ihii Ceoeral Inlonnitioo bnchure. Fram in apen^i]iu]ituidpoiat.tbeycBibeiummuindni:

1. Accepti multiple wage rata for eacb empjoyee. u required;

2. PerfornH all Federal. State and local wiihboldiDg l» calculatioin;

3. AUowiforreimbunenieiilofupenMi. sichai tipa. room iEnl,locdi. meab and eolertainnicsl;

4. Peiformi individual depailmeatal. group, or agency payroll cakulatico and reporting;

5. CcDcratci labor diitributioa information ai ■ by-product of payroll inpnt;

6. Accuroolatea italiiBcal information automatically during computer nnw, fadHmci wphisttcMtd

9. Generatcf enipkiyee checki;

10. Aecumulalei and repom up lo Icn deduction categoria per employee:

11. Calculatddcduclioiubyapeitentof carDlngiora ntetiinei houn;

12. Ifiuei employee work ibeeta (feedback report) serving ai employer tu
nUecting pay changes for the ncKl payroll.

Some o( tbe Special Featum are:

I- Wage ciknlatioDi for employee! paid byialary and hourly rates may be intetmlxed freely on
the same payroU;

2. Federal and Stale income lax may be calculated on the basis of the manbci of eiemp6om
claimed or as a fixed amount;

3. Emfdoyees may receive their pH dihcr by payroll check or by direct d^soill to an iiNlividDal
checking or uvtngi account with Cootiaental Bank.

4. Employee maslei listingt may be prepared upon request.

5. Limit dcduclioni will slop aulomatic^y when limit ii readied.

D„ii„.db,Go(5glc

Appendix
The ippendix ihowi sample leporb tnd a brief exfduiition of each. Not all of the reports oi
options are shown. Maintenance reports have been omitted because of their simplicity.

Exhibit

Employee Record Sheet 1

Feedback Report 2

Feedback Report Trailer 3

Sample Payroll Check and Earnings Statement 4

Payroll Register 5

Deduction Register 6

Sample Distribution Jtepon 7

Sample 94Ia 8

Sample W2 9

Digitized bvGoO^^IC

EXHIBm
EMPLOYEE RECORD SHEET

Provides data center with all neceuary
employee convenion infonnalioa.
When you deddc to use Cootinenlal Bank's Payroll System, a inectiiig will be scfaed-
nled witb you and a ciutomcr lervicc rcpfcsentativc who win be aaaifoed to anst
you in ettabliihing convenion [dans. Ccmvenion scbedulei will be estaUiibed for
ttaining employees, coUecting input data and processing your first payroll repottt.
Convenioa to the payroll system can be done at any time tf the year witboot loaing
any quarterly or yeariy tax information.

Digitized bvGoO^^IC

!Li

i I

W

■\i

D„ii„.db,Go(5glc

EXHIBIT n
FEEDBACK REPORT

The feedback report wu designed with your payroll personnel in mind. All die necei-
saiy informatioa for payroll reporting ii ctMUolidated in one report reducing time
■pent oa payroll preparation and eliminating cms referencing eiron. Entriea an
only required for variable pay infomutioo and changes to the em^doyec record.

Digitized bvGoO^^IC

-

ii

1 ! 1

1 •

z

t
i

s.

i 1

1 1

i

: ! 1

1 1 !

i i

!!!!!

Hi!

Mill

illll !

i!ii

Ill

Illll

III!

""

' ' '.;

• • 'J.

1 . !_■ 1

' '-

■ "J

f.s

i!!

i|

>!|

lil !

!l

III

III

ts

e

1

:

1

'

iU

:■.

..

ill"

Ii"

iji"

iii" i

l|"

ill

Hi"

II"

x

.., g

f

-r

'h

11

■ '\

ii. 1

P

iM

iii

M

,,,., ,

J

tc

:-i

l^

!-l ,

11

IM .

jii . I

If,

i'l

iii -

!,'■':

:t

S '.

1 tu;

ii5-

i!i=;

liJsS i

1 u =

1 1 1

1 i,t

■i

ills

11

1 IXE

ill.

!!!»!

II,

!!!

ilL

1!,

:=

lilu

1 1-

11,,

!!!

Ill 1

1 1 •

ill.

Ill

1 1 1

1 IS

•A:

■ I MSS 1 I IBS I I ISS II ISS I I IBS
, THS2 TltSS mSS 11122 11132 '

■ '''si '"ii '"ii '"ii "'Si

rss I ijss 1 1 IBS

tS2 1T122 11122

'ii " 'ii ' ' 'Ii

Vi i 5S| i

nm

III "fU Im sill .iU

mi "ill 'mi

D„ii..db,Go(5glc

456

EXHIBITra
FEEDBACK REPORT TRAILER

Hiis computer print out is used by the

employer to record the ioitiiil payroll statistics

for any new employees.

D„ii„.db,Go(5glc

ill!

III!

!l ill!

?! liii nil nil nil nii nil nil nil iin

|s jlj!

!!!!

ill!

!!!!

!!!!

!!!!

iiil

1

!

¥

!

\i iWi

iin

^Ui

WW

WW

i"i

' ' 'I

ii ii!i

iiil

l!ii

i!i!

!!!!

iiil

liii

M

nil

liii

liii

Illi

lill

IIII

= ''.. nil

liii

nil

iiii
iiii

iiii
iiii

iiii
iiii

iiii

1 I 11

iiii
iiii

silili

ill!

!!!!

nn

!!!!

ill!

!!!i

nil IIII IIII

WW !l« !Hi

Iiil
III!

Hi*

i

iitt
iiii

1 I II

ill! Mil

IIII IIII

lill liii

D„ii„.db,Go(5glc

EXHIBmV

SAMPLE PAYROLL CHECK

AND EARNINGS STATEMENT

Pjrning Statement ihows all current and year to date infonnation for emplo^pca

lecords.

Your paychecks are supplied to you signed and in departmental sequence ready for
distribution.

Direct deposit feature gives the enqdoyee the optioo of depotitiag all oc part ot his
pay to his checldng and/or samgs account.

Digitized bvGoO^^IC

PAYROLL CHECK

« na oaooi or -» JOHN D EICUI

Continental Bank

UioMf^ I noi.60

••ikOi.ior i:i;ei-oiiqt: i^ai-smi.as'*

Digitized bvGoO^^IC

EXHIBIT V
PAYROLL REGISTER

All current and year-to-date informatioQ is one report
Sub-totals by department
Grand totals by company

Digitized bvGoO^^IC

t -SJ '8^ S

r

" ^1 Jl T

£=:i:s:;s t z

;f

3

2t2SSE2 S ;

=ss::s E c"

=-~E = 1

— =- ■ s

CSSESESS i :

?

;

1J=2£2= t C

2 f-Z-t ' J

£

" ' - s

tCiC=t2SC t

sr

=

'.sissct: s

'K"?-;j'St E

;:x£*i'r> i s

;

5

•==•==;==« = f

i

C

5*saeKS 5 B

:e:r x s ee^

Essssi::? : ss £ seesseks :

?£CE5S:£S =

it i siHn-.i c

'.■.■.'.•■.■.'. '. ?

gZ S SEEXfES S Z

'•=H=:- i ■

=1 » =:JS:S5 S S

, I £ ! ' I

I 8 S 8 S S -2 ■

ii-'sa^-Hs

Digitized bvGoO^^IC

L.FJ

s: S3SI 1 6s,.

Digitized bvGoO^^IC

EXHIBIT VI
DEDUCTION REGISTER

All current and year-to-date deduction information.
Sub-totals by department
Grand totals 1^ company

Digitized bvGoO^^IC

C8 "S g 8S

& 'i-

i"

8E £; SS :

St s tsses G

;Si.

r

D„ii„.db,Go(5glc

E if

i

^i

*.'■■

D„ii„.db,Go(5glc

<

s

-£ ..» -£ _S E

== ^i ii I

z si s£ si g| I
I IS ii ii ii i

" 5 ■-

ffi 2 -

X H -

Q :

2 ■

D„ii„.db,Go(5glc

EXHIBIT Vin

SAMPLE 941a

~

l^tn°''>.o"h'i"^

^ ..„., lfc^.1

—

r-r^^t^H 1

-

1 P~~I

=-_■=

•^^S-i^

-^,

'i™

™.

m

^

111 « 4Si*

li-li""' ■

?JitO 00
i\l:1 io

1
1

15ov

1

■= — nl

i.1

_-ll-"

,.',,il

„„,l

D„ii„.db,Go(5glc

SI9E^t *OOOESS
CITr. STiTF 99909

Woge and Tax Stottmant xlASd
Copy B k M iM <M •MwWi nwi iJFSH"

c^^c^

J- 1 "

-cg22i„

1

9

T 5

19.9.

'1 i£=i.

a. 12

•1 'tis*

•1 Js.

■1 »

138 .B7

'1 5X-

-3991

.|^=:r

•1 Ja.

■<1 w

-isw

m^l"^'^

^B.| asi-sr

^

ss=

ai= 1 .^^-i^L-t-

I Tax Stotvment t4jOA

Wag* and Tax Sfot«(nent \

Cep,Ahil*

a

2.99! 138. (

E

D„ii„.db,Go(5glc

OTHER MANAGEMENT SYSTEMS AVAILABLE

• Oenenl Ledger

■ Labor Diilributioa

• PayroU

• Inventor)) Cootro)

• Mtilin) Label Procening

eoiunNENmL DA3A Services

3700 HORTH THIRD AVENUC ■ PHOCNIX. AMIONA tWU

Digitized bvGoO^^IC

National Society of Public Accountants

1717 Pnnirlwila AWHM. N.W.. Wuninfton. D.C. 20006
Pliant (lOZ) itMOtO

My II, 197S

"'-■-"- ■^"*~~"~" Dear Sudyi

,]_„>«,„„ Ky comoentB pertain to Itama 1, 3, 4 and 6 of Sanator

SS«i p«™*'and''bSBir.l«"™*our^coIStr?!^^ a"airB oc ev.ry

If the banking industry io granted peiviBsion to expand
jTri'r°r" their activitiaB beynnd thooB directly related to banking,

''-^■"— " the industry is handed a lever that Can he med to the

g-Siffffli.'.,,. '^'"^"^"'^ °' ™P""9 induBtrtes and the general public.

The awesODe econmic lever given to the banking indoatry
cBSlttSi*' "^"' their loan malting abllltia* oraate a debtor eraditor

iSS^a^ rolatlonihip that could bs exploited aa»ily by bank* to tha

r,„|.|„.„|| detrimnt of the Bccounting profaailon and the general public.

Es^r^ifTiii This debtor creditor relationship hands the banking indoatry

an advantage that, when used, vould place accountants in a
af?garlr J very unfair poaltion for acquiring and retaining certain

D„ii„.db,Go(5glc

the banking industry. Computer generated financial state-
ments produced by bank computers will be incomplete,
misleading and often in error. In this situation the
general public la the biggest loser.

Robert Grille

Digitized bvGoO^^IC

Small companies need bts
c^ tender loving caie And
we have just the bankets
who know how to "mothei^
your assets and hdp you
grow

Th^re managerSL
Th^ manage mcmeu Olhar
people's mon^ Ana tiiey
dott very wdL
They are looking for small-and medium-azed corr^iarues
that they can hdp b^xime bigger.

They want to oSer you a payroll drect depo^ plan that
can pay off in sawngs for you and converuencc for your
employees. ■■*

Tfiey want to provide cornputer aocountinq sentos to
hdp you control your caslTnowanB ~Li
dnpcMnt problem areas that osuld
be costing you profiK

They want to help you with

extend credit oniy where it's due.
And collect your receivables easier i

"Hiey want to provide you with'J
other services you can profitably
use-fle>db!e finandng, forecasting,
export/import services, freight
payment plans, leasing programs,
personal and penaon trusts and more. ,___^ ..

National City Bank is a big bank „ ^ ^ , ,

that understands business Large or smalL Our bankers under-
stand your problems. Talk your lanquage. Hire thoii!

Jik caf John Eustis at 861-4900 and say "I need some TUT

^latkmal City Bank

Cleviand, Ohio M-r.ic

if^

D„ii„.db,Go(5glc

478

Ui ,^^

tlM«WddMi moMV^H alreadyfiiM?

Our freeCash Management Review will help you uncover it.

... J"...ashtrial3lfBady

«(Wt but it now hiding wiWiinlhe
oparatdm otyourtomptny.

Thafs where *« come in, Ow

iMsonedcashmanageiTieniaifl reconcilement services tot ycui

will review with you >Dur current needs, Ihe right locK-box setbfi,

operationsand identify specifk cor- zerihbalance service, data trmsmis-

,-_. — .. pwate needs. Included will be youf sion. or electronic banking.)

ThiiisMixciaiy likely if y«u cdlection system, the way you car» To lake advantage oTthii tree

multiple pimw office iKiHtln, centnte your funch. and the method i«view.iiMtaiveRiiyKe<leyacaiial

eradbankKQXinB.anddi*' by w»>k:hMuditt)urw funds. [617)434-3870.

' ' rpayablestrommany Vbutl then recche from Itw Hcouklbetnecallthatttrts

I mat kind of structure. FlrW3W>ltKn«lMly*is, ..withajr yourcompany looking in the rtghl

ITtrafticularlyyibl that you get the luggeiBcrtl for 'creaMrtf' and places for eitra money.
fulitaryonUttttcashnnanaeement ffi^hinamporatedobn [Pei-
tr«ndsanj imprtwenrcnis, hepiyou^cbeenovertcokingtuch

The First pMipk to talk to ^^Tbe FInt

THE RRST NATIONAL BANK Of BOSTON

D„ii„.db,Go(5glc

get a ittle extra help
fnmi tlie specialists

H«B BLOCK

THEMCOMi1»nOIU '

M t»l>|t icciHiiitbtlilen an allilUclir H 1 1 Moefi
1177 lacena tai pnpantn itnittiMa ndv

. atwiimmtmimitttiimivmnMtmmimtit

iSsii ^ r Freedom

l£»

D„ii„.db,Go(5glc

CONTINENTAL BANK

Hugh Cu»lnx>.. C

Digitized bvGoO^^IC

KANSAS CITY, MBSOUPI 64133

^o-"

Mr. SlMiley Si

Extcutlw VfCL .

Naclonil Socttty of Public Accdunb
1717 PMnsylvmla Avtniw " "
UlsMngUn, D.C. 20006

e ahlch the Htruntll* Blnki hert

Oiare anything being doiw *baut this kind of McroichMi
ir field of widtivor? Flnt tt hi wyroll c*e« witing
. 1s the iiliole bit. Isn't there anything to stop tha?

^Jy^

D„ii„.db,Go(5glc

The Mercantile
Banks offer
3 new

computerized
financial
services.

Accounts Payabi*.

Give us a list of approved bills, and
do Ihs rest. Record your payables.
Project yaur cash needs. AnO provirt
proceGsed checks ready tor signatu
plenty ol lime to meet discount date

reports and any special prini-ouI« v'

General Ledger Accounting.

We car> provide you with P&L statemi

Fast, confidential service.

Pay only lor what you u:

Digitized bvGoO^^IC

Hay 30, 1978

Mr. R. J. Pasaero, Chatman
National Affairs Conoittee
Katlonal Society of Public Accountanta
1717 Pwmsylvania Avanue, H. N.
MhshliigtOD, 0. C. 20006

Mac Hr. Faaaero:

In c«span*e to your bullatin of Hay Bth, t>ra«id*nt
Bill Farvell haa aaked ne to aend you the encloaed copiaa
of correapondence relative to a letter circulated by tha
Dnlveraity Hattonal Bank of Boca Raton.

Included are lettera to Florida Repreaentative John
Levla, copiea of hia correapondence and an IntsrEcetlv*
ruling from He. John G. Bana«l, Ragional Adnlniatratox of
National Banka, Atlanta, Georgia.

GHHirt

cci Executive Ccamittee

Digitized bvGoO^^IC

FLORIDA ACCOUNTANTS ASSOCIATION

v^^

,,\»

BcpnsanUtlVE Jotui W. Leuis
P. 0. Sax JlKd

In cDdJui'.ctlan vitli our AasoclJitlon'i (I'forts to obtain Licensing of
Uia non-ccrtifild acaountsntj, I in soncsrnad ultn iim bankliig
Induatrr 'gtitlng Into the aef,

0 tha euatoiira of th* Ihlvcreit^
IB • TsUd serrlce to faa affordad

Cordl*Uy,

J. V. FanaU

JifFidf

P.S. Hr. Toms L

^*'

D„ii„.db,Go(5glc

Vl KSIIY NMiONM. BANK iW ilfHA itAHiN S^^ .^Th,

^ ■-'- ■-■" — -Ctr ■

near Villi?)! CuiCMoci

Cur ^iik. In cDupaiaclDn wlch Au[3Da:lc Patq TfrKCifcltic, Iw.
ruikri I'jnlliitils tD you iom tiUnlly-cuimiutoclfiiU arcnuni-tne S
Pn"»nll„ A-icniinCH fi^catvi^ln, MCDuDEi PayalilB, ami rrfiri;r.il I,

K>.^h nf cliaa* antvtcas lu callncud to yoiii Individual ciii)iil
tc* respecilva ntch; anil all of ihco ai> diiRlanuJ (or euitpa
■ U alian, who ais dlscovaitPl that "do-lt-yaurimlf" accnintlnr. In
brecnlna ritt eattly and tiurdmaQBc cUan <ivcit,

Aiicc-iacle Data Pioennnlna la [ho nacloa'a ^iioac payroll procMani,
v£ih rars thnn 2^ y^lTS axpoTlcnca and ovpr IQ.Ona payroll, ac«iun[!i
^ oeotvjbla, ncenunta p.ivahl9, arul i-cnnral Isiliicr cltuniH. All of tlwic
■npniffncn and kiwu-haw in nnv at youc dtapoiiiil chrout^li nut baak.

kith riinsa (i*u aarvlMn, you Imndlatoly frao up lilr.li'PClcM pmannncl
foe lUTB crndtruEtira flnnnclnl uar^, and you avoid peak uarK trndn
duiaJ by lllnann, vaenEiaiin, and holidays. Fni cannple. our new mi-
vUa w^ll ptcpiio all your 941A'a and -l-Z'a aa wall aa qu.irr.cily and
^oniial Fadocal, ntaia, nni local ca:i ropurta.

in nhnii, uo now etter you eoaiptata iccauntlsi aarvleos, throurb ywir

.iroci-HKlni; apecfallntM.

Shr^td you utsh CB abEntn nddUliindl Infoiwitlan about thli Bcmlcu,

-..C-'C^.^. *-^-^-^

d^

D„ii„.db,Go(5glc

FLORICM HOUSE OF REPRESENTATIVES

;!"''i'!.i^iJ*" •'■*' ^^' ^'"

Mr. James H. Farwell, President
Florida Accountants Association
2i2l Univemity Boulevard, West
Jacksonville, Florida 32217

Dear Mr. Farwell:

At th« request of Representative John Lewis, 1 contacted
you on February 2, In reference to your letter of January 17,
concerning the accounting services offered by University
Kational Bank of Boca Raton. At that time I infonaad you
that I had requested the Florida Department of Banking and
Finance to contact the United States Coioptroller of Currency
concerning whether the services offered by the Boca Raton
bank were pemisslble. The Departnent did so on that date
(see enclosed) .

Unfortunately, the Regional Adninlatrator of National
Banks did not reply until Hay 15 (see enclosed). In that
response, Hr. Bensel states that if the bank's activities
enconpass only autoaiated bookkeeping services, then they are
peraissible for a national bank.

I apologize for the extended delay in eeaponding to your
inquiry, however, neither I nor the Florida Department of
Banking and Finance has any control over the AdninisCracoe of
National Banks. >

Digitized bvGoO^^IC

Mr. J.W. Farvfell
May 23, 1978
Page 2

0<J <4j}pf•/.CJUp'^^

WH/gb
End.

Digitized bvGoO^^IC

oiricu: OF ooMPT«OLJ-i:i«

STATE OF FJ.OUIDA

February 1. L978

House Office Building
Tallahassee. Florida 3230A

Kegioiul Counsel. Sixth Hatlooal Batik Region, In AclanC

sing our
dUcely upon

Sincerely,

D„ii„.db,Go(5glc

OmOK OF COMPTROLLER
STATE OF FLORIDA

30302
ceounclDg S«r

■■bis Bankln* Activity

Fuciuani to our Mlephose

convgtMtlon of tbls natnlng I u •ucloalat

omplac* accouaclng «mlc«*" u > btnklnt

ibl« DCiivltT fac udsul

pamittcd lot natloni

BFS:bJc
Enelotuc

Digitized bvGoO^^IC

D„ii„.db,Go(5glc

4%>^'. naUCACCOUNTANreSOCIETYOFCOUNtADO .B^^^

•■ «n?»

1717 IiKiniylnnli athuu, N.H,, Sulu 1200
Vuhlngton, D. C. 20006

C*ntl<»ni

In rtHpons* to xouf Inquirr of Hmj S gonctmlng advi

of bulla offflrliig "pon-beaklDs" strvlcaH «uch *■ ftceounUlig CO-

bookluapLnfl, V* mrm ■ncltMlng a photocopy of an adTsrllJ^MIt

niift offarlDB Hould Hoet cartalnly hav* ad aiitlB«ap*titin
■conoalo affact on aany at Iha anoounUota ud booUlHpH* irtio
proTliLa Blallal aarvlcta In Uw Qr^ala; araa aa UwlC frlncllal

a q^rattabla that bvUta of

uoh twokkaaplnfl ayBUBa, 1.

rdad until aM unltaa It cota t^irqugh Um teak aoeo

rtl*d]i ftlsoi tlMt propor Joumala and Iai%«n af« m
«d. It BHAa that tlMy ahould te foroad to advartLj
ayatan la alapllatlc and not adaquata for tha aeeoui

Tourt vaiy truly I

D„ii„.db,Go(5glc

^ ^^^^^^1

Do you spend ^^B
too much time J^H

on Boo&ckeapBog?^M

compuietrjcd bookkeeping svsiem Ihsl will bvb you both linesnd money H'' at tifnpl* u ^^^H
writing a check and ii completely IkiiCile loiurtyour needi. ^^^^H

W^^^'"^'^'^ ATEAM-I ^1

Account does all this monthly: ^H

■Clauitiesincomear>deipefis«i ^^^^H

•Provide<delail«lti>intwmaIio« ^^^1

•G'vnmonVilyand vear-iD-daiD totali ^^^^^|

All you have to do... ^H

1 1. Select incarre and expenuclaiiiriutiant ^^^H
3. CodeeKhdepaiitdndcheckaiititnrilien. ^^^H

fcj^l^^ '- ■-.vri-rrr.-s ^M

^B^MWI^H ' (or tunherinrormaiion call 3^61331 ^^^|

H ESJjCrBeley national Bank ^^H

^^^^^^^^^^^^^^^^^^^^^^^Ki^^^^OO^^^I

The Chairman. Mr. Zayas.

STATEKEKT OF EDISOK B. ZATAS, ECOHOJOST, NATIOHAL PXDERA-
TIOK OF IKSEFENSENT BUSinESS; ACCOMFAVIED BT WIUIAlf J.
DEHBIS, JB., BIBECIOB, BESBABCH STAFF

Mr. Zatas. Thank you, Mr. Chairman.

Mr. Chairman, I am Edison Zayas, economist for the National
Federation of Independent Business (NFIB). Accompanying me to-
day is William J. Dennis, Jr., director of our research staff. On behalf
of NFIB and its 530,000 member firms across the country, I am grate-
ful to have this opportunity to express our views on S. 72, the Competi-
tion in Banking Act of 1977.

Our primary concern lies with section 301 of the bill, which would
restrict permissible activities under section 4(c) (8) of the Bank Hold-
ing Company Act of 1956 to those "directly" related to banking. This
section would require that the activity be "directly" related to banking,
and it would also tighten both the existing "closely related" test, as
well as the "public benefits" test. Activities permitted under section
4(c) (8) would have to meet two basic tests under secticm 301. In the
first place, in order to be permissible^ an activity will have to be "ao
closely and directly related" to banking or managing or controlling
banks as to be "a proper and necessary incident Siereta" Moreover,
it would be necessary that the activity be "likely" to produce benefits
to the public ; it would be necessary that the beneficial effect of the
activity "clearly outweigh" adverse effects ; and it would also be neces-
sary that the activity not have a tendency to lead to an undue concen-
tration of "economic or financial" resources. NFIB strongly supports
this section of S. 72.

Currently, NFIB has approximately 25,000 member small businesses
that are facing competition from hank holding company wffiliat<^ en-
gaged in nonlMLnking related activities. These NFIB members are in-
voked in real estate, insurance, accounting, property leasing, data
processing, management consulting, marketing of securities, travel
services, et cetera. Freedom of entry is high in these industries, and the
business environment is highly competitive. These small businesses
are accustomed to, and unafraid of competition. Furthermore, they
do not seek protection from it. It is simply the view of our members
that it is unreasonable to expect them to successfully compete in the
long run, with affiliates of institutions that have special, and unique
privileges and powers over money and credit.

It is also the view of our members that commercial banks should
not use their eamincs to compete with the business they have been
chartered to serve. Commercial banks not only extend credit to busi-
nesses, they also serve businesses in a financial consulting capaci^.
This consulting service, provided by the holding companies, is a Titally
important input to businesses of any size, and small businesses in par-
ticular, tend to rely heavily on such financial advice. When considered
in this light, one has to question the propriety of bank holding c<Hn-
pany participation in the same commercial activities of the clients they
are supposed to be serving.

To be sure, a fair number of small businesses have probably failed
due to their inability to compete fairly with nonbank holding com-

DigilizedbvGoO^^IC

pany afSliates. Unfortunately, scarcity of relevant data does not I
mit us to document these failures and the casual relationships behind
them. Overall, we at NFIB recognize that as of yet. bank holding
e(»npany competition in nonbanking areas has not significantly altered
the market structures in the industries involved. Even if the appropri-
ate data were available, it would still be too early to detect any
decipherable trends, and attribute observable market stnicture changes
to holding company competition. The point we wish to emphasize
ia that our primary concern lies in insuring competition on equal
ffrounds for our members, and the avoidance of potential conflicts of
interest on the part of the commercial banking industry. We believe
that as a result of the prevalent managerial philosophy in holding
company organizations, aifiliation with banking institutions may pro-
vide nonbanking affiliates with abilities to compete unfairly, with
little or no resulting public benefit.

THE ROI^ OF NONBANKINO ACnvTnEB IN BANK BOLDINO COMPANIES

In discussing the issue of bank holding company involvement in
nonbanking activities, it is important to understand the purpose of
the holding company's participation in those activities. Originally,
the concept of the organizational form of the holding company was
developed in order to circumvent restrictive State branching laws
which are effectively anticompetitive. Generally speaking, the advent
of the holding company has served to increase competitiveness in the
commercial banking industry, to the benefit of the public at large.

In the last 10 to 15 years, however, commercial banks have faced
Btiff competition not only from within the industry, but also from the
ever-growing thrift institutions, who have increasingly been granted
powers previously only available to commercial banks. Consequently,
the commercial banking industrj- has been making efforts to differenti-
ftte their products in order to remain competitive. It is in this con-
text that holding company activity in nonbanking areas can and
should be viewed.

Principally, the role of nonbanking affiliates in the scheme of the
Overall operations of a holding company can be seen in two distinct
ways. First, the purpose of the nonbanking affiliates may be to act as
a profit center within the holding company. Ostensibly, one would
expect the holding company to become involved in nonbanking activi-
ties that are profitable relative to its respective industn,-. In this case,
the nonbank affiliate would behave as a profit maximizer, thus bolster-
ing the company's earnings, and helping to offset the profit decline
caused by increased competition in the banking areas. On the other
band, the purpose of the nonbank affiliate may be to complement and
support the principal banking operations of the holding company. In
this role, the purpose of nonbank activities would be to enhance the
attractiveness of the overall package of ser^'ices pi-ovided by the bank-
ing affiliates. For example, a busines-sman shopping around for a com-
aaercial loan who also is in need of data pi-ocessing services, might be
attracted to a bank that can offer him a package deal. The abifitv to
offer such complementing services, increases the attractiveness of oor-
rowing from that bank. Essentially, this is the concept of "full-serviue-H
Jbanking,"

The maimer in which the nonbanking affiliates are operated is greatlj
affected by the role it plays within the holding compauT. If its role is
to act as a profit center, and simply add to the company's overall earn-
ings, then uic nonbank affiliate would behave as a profit maximizer. In
doing so, the nonbank affiliate would equate its marginal oosts to its
marginal revenues and earn a normal profit. So long as the nonbank
affiliate did not have privileged access to vital inputs, it would be able
to compete fairly with imaffiiiated firms. However, if the nonbank
affiliate's role is to complement and support the banking activities of
the holding company, then the nonbank affiliate would not necessarily
behave as a profit maximizer. Under these circumstances, mauagement
of the holding company would be primarily concerned in maximizing
the profits of the holding company via its banking operations. Con-
sequently, substandard earnings performance of the nonbank affili-
ates—due to submarket pricing policies — relative to its respective in-
dustry, would be tolerated by company management since they are
not concerned with the performance of the nonbank affiliate per se.
Of course, overly poor performance would not be tolerated if its
operations are endangering the soundness of the holding companyj
In this instance, management would measure nonbank affiliate per-
formaoe by the extent to which its existence has made the primary
banking function more attractive to its bank customers.

Akhouffh one can only speculate, available information aeems to
indicate that nonbank affiliates are serving the latter function. Ac-
cording to a Federal Reserve staff study on the bank holding com-
pany movement, available evidence suggests that holding- companies
tend to operate their or^nizations more as integrated entities, than
as separate operations.' That is, holding company management typi-
cally seeks to maximize tlio profits of the holding company as a wnme,
not the individual affiliates. Given tliat nonbank affiliate assets have
comprised only 5 percent of total bank holding company assets, and
have exhibited little growth, it seems I'easonable to suggest that non-
banking activities do not serve primarily as a source of profits to hold-
ing companies. Rather, it is more rea^sonable to contend that the role of
nonbank affiliates is more supportive in nature, and that they do not
act as profit centers. Consistent with this contention, are Federal
Reserve staff studies suggesting that some nonbank affiliates tend to
be less profitable and more highly leveraged than their independent
counterparts,' Moreover, the same study indicated that affiliated com-
panies did not have significantly different operating expensed frran
unaiGIiatcd companies.

To the extent that nonbanking affiliates do not maximize profits,
counterpart independent competitors are placed at a competitive dis-
advantage. In order to make nonbanking services attractive to their
bank customers, nonbanking services of tne holding company are pro-
vided at fees below current market rates. This may partly explain the
relative lack of profitability, given that operating expenses were not
found to differ between affiliates and independents. Submarket pricing
may be particulary evident when the nonbanking services are tied in
with banking services. The nonbanking affiliates are capable of doing

Digitized bvGoO^^IC

I

491

this since tliey can pass on added risk to the parent corporation. If
they in fact do this, seemingly competitive prices are not necessarily a
reflection of greater efficiency in providing these nonbanking services,
Given that independent competitors must behave as profit maxi-
mizers if they are to remain in business, their pricing policies must be
reflective of their operating costs. Independent competitors would not
be capable of pricing below market rates since thev must absorb any
operating losses. Consequently, if nonbanking nmliatc;, are indeed
operated in this manner, independent connterpart.s ai© faced with a
formidable competitive threat, even if affiliated competitors are not
relatively more efficient. Although bdnk holding companies may not be
piu'posefnlly pursuing what are effectively "loss-leader" tactics, the-
net longrun effect could conceivably be just that.

NET PDBLIC BENEFITS

Upon readuigthe iibove, a typical reaction might be to say, so what?
The fact is tlmt nonbanking affiliates of holding companies provide
their services ut lower rates, and are thus providing increased bene-
fits to the public.

In truth, there is nothing to indicate that there are net benefitB to
be had resulting from holding company activity in nonbanking areas.
As mentioned earlier. Federal Reserve Staff studies indicatetl that
certain nonbanking affiliates had somewhat lower earnings than their
indeix-ndent caimterparfg. Given tliat the affiliated firms were foimd
to be more leveraged, one would have expected them to have liad higher
earnings to offset the increased risk typically associated with added
leverage. The fact that the affiliated firm's earnings performance was
not sui>erior to its competitors, indicates that the affiliates pass on the
added risk to the holding compaiw. since someone must bciir that risk.
If this increased risk is to be offset, another affiliate of the holding
company must pass it on. To the extent that tlie banking affiliates pass
on the risk, bank customei-s will either receive lower returns on their
savings, pay more in service charges, or perhaps pay holier interest
rates on loans. This is consistent with findings showing affiliate<I banks
to have higher earnings tlian independent banks — affiliated banks also
had higher costs. It is, therefore, not at all clear, based on the ad-
mittedly sketchy studies, tliat the customers of the holding company
as a whole are any better off.

In addition, three ob-servations can be made. In the first place, by
assuming the added risk of the nonbanking affiliates, and tolerating
their relatively low eai'nings, holding companies may be effectively
subsidizing inefficiency and thus misallocating financial resources.
This would not be true if the existence of the nonbanking services
resulted in more than offsetting profit increases through the banking
affiliates. However, the fact that banks affiliated with holding com-
panies have not noticeably outperformed nonheld banks, would indi-
cate that this is not the case.'

Second, small businesses are also depositors, as well as borrowers at
banks. To the extent that banking affiliates do indeed pass on the risk

.1 '

Eni

associated witlt tlic leverage positions of the nonbanking affiliates,
small businesses are effectively subsidizing their competitors.

Finally, many proponents of holding company involvement in non-
banking areas, contend that greater economies are achieved by the
nonbanking firms through amliation. lliis assertion runs ccmtraiy
to the fln(nngs that were published in the April 1978 issue of toe
St. Louis Federal Reserve Bank Monthly Review. According to this
article, operating expenses of banking affiliates tended to be hi^wr
than those of independents. This was attributed to higher employee
benefit costs and greater "other expenses" than independent baiika.
The author claimed that the more expensive benefit plans are usnally
extended to subsidiaries throughout the holding company, thus rais-
ing the subsidiary's cost structures. In addition, the study conducted
by Rhoades & Boczar on affiliated finance companies, did not find the
affiliated companies to have lower cost structures, relative to inde-
pendent finance companies.* It is important to recognize then that in
many industries, minimum optimal scales of production are achieved at
relauvely low levels. In other words, "big" is not always a necessary
and sufficient condition for optimal efficiency.* Although the data is not
available, it is difficult to believe, for example, that greater eoononiieB —
and thus public benefits — are achieved by travel agency affiliation with
bank holding companies.

To be sure, one must be careful in drawing firm conclusions from
the results of the Federal Reserve Staff studies. The time periods
covered in those studies are short, and some of the methods of analystB
are subject to serious shortcomings. However, it is quite clear that if net
efficiency gains are to be had from bank holding company affiliation —
implying net public benefits — they simply are not evident from what
we have observed. Consequently, to argue for holding company involve-
ment in nonbanking areas, on the premise that they can provide those
services more efficiently, is clearly not supported by the available facts.
Low pricing of nonbanking services by affiliated companies is not
necessarily a reflection of their greater efficiency in offering those
services. Rather, it may merely indicate the nonbanking uUiate's
ability to pass on its lack of profitability to the holding company.
Again, the effect would be to place independent competition at a dis-
advantage, even though they may be offering the same services as
efficiently as the nonbanking affiliates.

coKCLrniKO drhabks

We would like to emphasize that NFIB is not in favor of l^pslaticm
that would serve to dampen competition within the commercial bank-
ing industry. We believe that the organizational ctmcept of the hold-
ing company has in many ways, allowed commercial bajiks to compete
more effectively with each other. The consequent effect has been to
increase the intensity of competition in the banking industry to the
benefit of the consumer and small businesses. In many local mai^ets,
banking affiliates of holding companies have increased c(»npet)tjon,

p»nr

Digitized bvGoO^^IC

and the independent banker's response has also been to intensify
petition.' Commercial banks are now seeking to seire the small busi-
ness sector more than ever before. Much of this can be attributed to
some of the procom petit ive effects of the bank holding company move-
ment. Small businesses depend almost entirely on commercial banks
as a source of external funds, and would thus be hurt by legislation
iHiat diminishes competition in the commercial banking industry.

However, the procom petitive effects of the bank holding company
anovement within the commercial banking industr>'. have not derived
4rom their relatively new ability to otTer nonbanking services. The
^^1 form of the holding company has simply allowed banks to sen-e
^wider geographical areas and compete more effectively with banks
that ipre.viously faced little competition.

Bank holding company involvement in nonbanking activities on the
other hand, has provided no discernable public benefits and has not
■■erved to increase competition in the nonbanking areas. To argue
the contrary is to ignore the existing evidence.

For the re8,sons outlined above, we believe that commercial bank

•ownership of nonbanking related firms is unsound in principle, and

lotentially anticompetitive. We therefore, must favor any attempts to

imit further commercial bank entry into areas not directly related to

the business of banking.

r Mr. Chairman, I again would like to thank the committee for this
'Opportunity to express our views on section .301 of S. 72.

The Chairman, Thank you very much, Mr. Zayas,

Mr. Gardiner, you have a very strong and direct attack on the com-
'petence of the bank operations with respect to accounting. You say
accounting services often present results which superficially may be
impressive, but which generally are badly distorted because the bank

Srocessesa entirely what the untrained small businessman gives them.
Tiat is, the banks rely on the untrained businessman to code the ac-
ICounts properly whicli can and does lead to gross errors and serious
^consequences. The old adage, "garbage in, garbage ouf is very ap-
propriate here.

* That's a pretty powerful indictment. Why are not banks regulated
When they engage in accounting services the same way as accounting
ifirms are regulated by the States? You simply have a bank auto-
•matically exempt because they're regulated by the State banking com-
'mission? Does that give them an exemption and a right to proceed

without the same kind of scrutiny as the accounting firm has?

Mr. Fitch. Yes, Senator Proxmire, the way accountants are licensed
fonder State law is based primarily on the fact that they are in public

nractice as accountants. They must meet certain educat ional, experience
Requirements, and an institution offering accounting services through
*8t8 employees would not qualify within the ambience of a State law
(iicensit^ accountants.

[ The Chairman. That would explain why they wouldn't qualify, but

how can they do these ser\'ices* How can they compete? How can they
rget into the business? It would seem if they aren't qualified they
pwoutdn't be allowed to do it. I couldn't go out without the kind of

'Belar to lootDDle 3.

ci„.,C

J

494

training you have described and say I'm an accountant because that
would be a violation ot the State law. How can the bank get into it I

Mr. Fitch. That's a good question, Senator.

The Chairman. Have you gone to court on that?

Mr. Fitch. No, sir; we have not.

The Chairman. Why not J It seems to me you would have an excel-
lent case.

Mr. Fitch. Well, we've thought about it.

The Chairman. After all, if somebody went out of a bank and tried
to practice law or tried to engage in medicine— they felt they could
take an appendix out or engage in brain surgery — they would be in t
whale of a lot of trouble, and accounting can be iust as complicated
and require just as much expertise as medicine and law.

Mr. Fitch. One of the problems is there is no national or Federal
licensing^of accountants and since the Comptroller of the Cunency
and the Federal Eeserve Board have indicated that these services are
banking services then the State I don't believe would get involved witji
that kind of a situation, but I really can't answer why there has been
no litigation in this area.

The Chairman. In what State or States is this most prevalent! Can
you name one or two so we can get in touch with the State authorities
and follow up on that as a committee?

Mr. Fitch. We've found it in the Northeast, Massachusetts is a State
that participates in this, also Ohio, and Florida.

The Chairman. That's very good. We'll follow up with Massa-
chusetts and Ohio. Massachusetts has an excellent banking conunis-
sioner and very aggressive and highly competent and we will get in
touch with her as well as the Ohio commission.

Now you say further, Mr. Gardiner :

The big problem, as we eee It, Is that wltb tbe variDHS brochnres, adrerDse
meats and publications distributed by banks, tbere Is a distinct ImpreaalcHi
created that the banks are offering a vaiuabie accounting service. But tli«y are
not.

You don't have those advertisements attached. We would very much
like to have them. Are you saying that the banks can advertise in this
way and an accountant could not or would not ( Is there an ethical
prohibition of some kind in the profession or is there a regulation t

Mr. Gardiner. Recently Senator, professionals have been permitted
to advertise and therefore the answer to that question is no. What we
are saying is that the banks should be restricted from doing accounting,
Ixwkkeeping, tax services of any type, for the reasons that the informa-
tion is fed to them by the businessman who is sometimes not sophisti-
cated in coding

The Chairman. I'm not on that question now. I understand that and
we are going to work on that one. What I'm concerned about now is
the advertising, the publications that you say are distributed by banks
giving a distinct impression that the banks are offering a valuable
accounting service.

Now I want to make sure that you're saying there that they an
doing something here, that they are competitors, that the accountants
are not doing and perhaps cannot do. Is that correct !

Mr. FncH. Yes, Senator, until the lawyer advertising case, all pro-
fessionals, including accountants, were restricted under ethical pro-

DigilizedbvGoO^^IC

495

visions from advprtising or soliciting business. Therefore, the b&nkE .
not cominfj under the ambience of this kind of a situation, could
advertise extensively. That's not the case now. Accountants today can
advertise as freely as banks, with certain restrictions.

The problem and the point that we are trying to make here is the
fact that the service that they are offering is not truly an accounting
service. It's more a data processing service because the accounting por-
tion is done by the client. He has to do the accounting work and then
give it to the bank which puts it on their computer and it comes out in
a nice little format with all the information there, but it's not truly an
accounting service.

The Chairman, I appreciate (hat. That's veiy, very helpful. The
teason I'm following up on this and pursuing it is because when the se-
isurities people came in they pointed out that the banks are advertising
lor investors to invest in the banks in various ways and they point out
that there's no way that a securities firm could do it. The SEC wouldn't
let them do it. There are all kinds of specific requirements the SEC
requires the securities firms to comply with, but the banks are free
of that. That's something we want to get into and, of course, rectify,
and you apparently have a somewhat different problem here because
you say the advertising by professionals is now permitted. It's new.
"VVe don't know how it's gomg to develop, but if it does develop it
pertainly should comply with certain clear requirements of truth and
tomprehensiveness and so forth so it is fair, and they ought to be
Wiiformly regulated.

Gentlemen, I'm going to have to leave temporarily, but I will be
back in about 10 mmutes. I have to go to the floor to vote. I apologize
lor detaining you but I will be back in about 5 or 10 minutes.

[Short recess,]

The Chairman. Mr. Ganliner, in your statement j'ou say that "banks
should not be permitted to offer or perform these professional services
because tiiey are unintentionally misrepresenting their service's
value.'*

■ Can you tell us exactly how the banks are misrepresenting the value
<if the services ^

Mr. Fitch. Yes, sir. As I was explaining previously, the banks in
their publications and brochures, and so forth, are indicating that
they offer accounting services, preparation of payrolls, bookkeeping
services, preparation of financial statement, piofit and loss statements,
and so forth, when in fact they are not. The businessman is doing it,
They are putting it on their computer and giving it back to tlie com-
pany based on the way he codes the information or the transaction.

Now this, to us, is misleading because it's not really accounting.

The Chairman. What's the magnitude of this? How major is it?
Would you say they have moved in to the extent of 'I percent, 5 per-
cent, 10 percent i Are they really making major encroacluuents in some
areas?

Mr. Fitch. Yes; they are. In some areas the banks have found that
the offering of these services has not been profitable and they have
discontinued it, whereas other banks — the larger ones or the ones that
are in the smaller towns where they command a substantial portion of
the financial community — are offered them at a greater volume. How-
ever, I don't have the exact figures on it.

xHj.CoO'

gj

496

The Chairman. But your impression is that this is something when
the competition is not as severe in the big cities but in the smaller
towns, the smaller communities, the banks are providing a service and
taking it away from the accounting profession t

Mr. Fitch. I would say that's a fair statement. I think in the lar^
cities you have a greater concentration of the accounting profeemoo
and a greater availability to the public of a variety of accountants
from which they can choose. This still doesn't negate the fact that tiu
tmnks, the larger baiiks in the larger cities, use their financial and loan
power to force a potential client who applies for a loan into their
nonbanking services. It doesn't negate that, but at least there is man
opportunity for competition in uie larger cities because there's a
greater concentration of accountants there.

The Chairman. I'm not sure exactly what you would prevent hero
however. There's no question that if you've got an auditing job that
has to be done and a small firm is to m audited in a small communis
the bank wouldn't audit them. I dont think you're saying that ibej
would.

Mr. FrrcH, No, sir.

The Chairman. What you're saying is that they would take the
data that the businessman himself provides and just put it throng
their computer and I'm not sure how this would take Dusiness away
from a local accounting firm, No. 1. No. 2, I'm not sure that maybe
some of that processing might not be something that would be useful
and valuable and probably ought to be provided and wouldn't be pro-
vided absent the Iwnk doing it, and they do have a computer and very
often the small accounting firm woul^'t have one available.

Mr. Fitch. Yes, sir.

The Chairman, Mr. Gardiner, did you want to talk a minutel

Mr. Gardiner. I will say a word on that, Senator. You misunder-
stand that when the coding of the various expenses such as an item
of auto and delivery repairs to some equipment — if the businesmian
for some reason or other felt that rather than capitalize this item and
depreciate it over a certain number of years it might be advantageous
to nim to charge it off all in 1 year thereby putting him in a lower tax
bracket — and we assure you. Senator, that the bank would not catch
that item as having been an expense item and the tax returns at the
end of the vear are then prepared from the information that has been
submitted by code by the owner of the business. His intentions may
be to not pay the proper amount of tax and therefore if mouf^ of
these transactions were put through the computer when the end of the
year came around and the tax returns were prepared it would show a
substantially lower taxable income and thereby misstating the cli^ita
true tax liability.

The Chairman. What I have in mind is some of the little towns
around Madison, Wis. where I live. There's an accounting firm,
Virchow Krause — it's an excellent firm. It's a firm I used bef<»e I
came to the Senate, and they have a number of offices in various com-
munities. It's one of the most highly respected accounting firms around.
They work verj- closely with the banks on a mutually respected basis.
They don't seem to have any problem with the baiucs moving in on
their operations. They use the banks. They advise their clients oa how
to use the banks and so forth.

Digitized bvGoO^^IC

497

Is that uncommon or wouldn't tliat approach be more common than"
the notion of the banks taking away from an accounting firm business?
Because I can understand why the banks might have a function to
perform here. As I say, they have the mechanical devices an accountant
may or may not have and they could be very useful in that respect.
II Unfortunately, I'm going to have to run again. That's the last 7'/^
■minutes of a rollcall. We had one following another. I'm sorry. I'll be
'ght back.
[Short recess,]

The Chairman. Mr. Zeyas, in your testimony you ix>int out that

%!mk holding company subsidiaries of bank holding companies are less

profitable than their nonbank counterparts. You then indicate that

this may be due to lower prices charged by these companies or as a

result of lower fees charged to these subsidiaries by their parent bank

holding companies.

L- Your conclusion is completely at odds with our information which

HlB that bank holding companies charge higher prices and that their

H expenses — such as higher management fees — account for this decreased

■profitability. Can we have your comments on this ?

■ ■ Mr. Zatab. I'm basing most of this on a Federal Reserve staff study
K^at was put out. Basically, I'm not sure that many people know
B exactly

H The Chairman. Can you give us those Federal Reserve staff studies?
H Mr. Zayas. They are listed in the written statement.

■ The CtiAiRMAN. I've got a chapter froni the Federal Reserve staff
studies and let me just read a little part of it : "Based upon the alrave
findings" — page 9 on the chapter on bank affiliates — "with respect to
efficiency ratios, it may appear that affiliations with bank holding com-
panies" the principal reason for the higher total expenses as noted in
most of the studies was the higher other operating expense category.
It's been suggested by these researchers that the higher expenses may
be attributed to management fees charged by holding companies.
Other expenses reported in this other operating expense category such
as retainer and legal fees and fees paid to directors and committee
members may also be unique to holding companies. Each of these ex-
penses are methods of transferring income within a holding company
system in lieu of dividend payments and thus may not be truly ineffec-
tive of the organization's "which are common in the larger holding
company organizations are another factor contributing to higher
expenses."

That does seem to contradict your observation and it is from the
Federal Reserve staff study.

Mr. Zavas. Yes. I address that partly in the testimony when I dis-
cuss the argument of efficiency gams, but the problem is you have to
ask the question: Why is it that certain nonbanking affiliates have
substandard earnings relative to their independent counterparts, given
that their operating expenses tend to be higher, at least from those
studies that you just mentioned }

One conclusion might be tliat they may be charging lower prices
utd their ability to do this is simply because they can pass on the added
isk to the parent corporation.

The Chairman. Well, I don't see anything in the staff study that
lindicates that they are charging lower prices.

D,!>i,z.db,Cortg[c

|gl(

488

Mr. Zat AB. No ; there's nothing to show that

The Chaibman. In fact, the indicatioQ would be the rerei'se. Any
kind of a competent business — and the banks are by and large compe-
tent— I mean nolding companies — would price their serrices so they
cover their costs or get out of the business.

Mr. Zatas. That's the (}uestion. That's exactly what I asked and
what I addressed. Why is it that they are involved in these businemea
when according to the Federal Reserve staff studies the nonbankin^
affiliates are not performing as far as their earnings performance is
concerned!

The Chaikmaw. The answer is thev don't care about that nuvbe
because they pass them on to the guys that run the company and hi|^ier
management fees and they rip it off.

Now in your concluding remarks you indicate that bank holding
companies have had a beneficial competitive effect in the banking
business by allowing banks to compete with other banks over wider
ge<^raphic areas. But you do not favor bank expansion into n<»ibank

My question is this : Would you then favor interstate branching for
ban^ as a means of increasing competition in the banking industry !
Would competition be fostered bv oanks competing in Uie banking
business rather than in the nonbankin^ business f

Mr. Zatas. I'm not sure I understand your question.

The Chairhaw. As you know, at the present time, interstate branch-
ing is not permitted.

Mr. Zatas. Yes, sir.

The Chaibhan. One way that you increase competition is to permit
interstate branching. If you did that, then ^ou wouldn't have to have
the holding company device and if you did that banks would com-
pete but they would compete with other banks. You would have in
Wisconsin the First National Bank of Chicago comingin and estab-
lishing its bnmch to compete with the Wisconsin banks. They wouldn't
be competing with the insurance business or with the accounting busi-
ness or with the independent businesses that you represent. They would
be competing with other banks.

Mr. Dennis. Senator, our organization is operated on the princitde
of membership participation and voting on various type of issues. We
have not at this time put the question of branch banking to our mem-
bers. Therefore, we have no position, so to speak, on the question of
branch banking.

The Chairman. OK. Gientlemen, I want to thank you very much for
your very helpful testimony. I want to commend you on the excellent
job you have done in presenting it.

Mr. Gardiner, I ^ow you nad short notice and you were serving
in place of anotiier person. I think you did a fine lob and your o^
league certainly did too. Mr. Zayas, we want to thank bom of you
gentlemen very much.

The committee will stand adjourned.

[Whereupon, at 12 :15 p.m., the hearing was adjourned.]

[Additional material received for the record follows in the
Appendix :]

Digitized bvGoO^^IC

499
APPENDIX

l&tnUatt ^{aics ^enale

December 39, 1977

The Hon. Arthur P. Burns
Chaimian, Board of Governors
Federal Reserve System
20th and Constitution Ave.. N. N.
Washinfiton, D. C. ZOSSl

Dear Mr. Chairman:

I appreciate your staff briefing the Senate
Banking Coaaittee staff this morning on the Federal
Reserve's Study of the Bank Holding Coapany Movement.
(See RicMO of Robert A. Eisenbeis to files dated
December ZS. 1977.)

In order that this Committee may derive the full
benefits of this Study in relation to consideration
of S. 72, I would appreciate its completion and

ismission to the Connittee by February 15, 19^.
luld anticipate that shortly thereafter legislative
Ings on S. 72 will be held by this Comittee.

Digitized bvGoO^^IC

Janiary 6, 1976

Hw Honorabl* Ullllaa PraKlrc

Co— ltt>« oa Banking, Hmialns

and Drban Af fatia
nnttad StaCai Smata
Waahlngton, D.C. 20S10

Daar Hr. Cbalnan:

Itwnk 70U fot ycm latCar of Daca^ar 29. Itw Board
waa plaaiad to naka atdiar* of Ita ataff avaltabla Co brla£ your
Coaatecaa'a itaff on our atudy ralaClog to Cha bank holding

A» cha naBbara of our ataff Indlcaead at tba Daca^ar 19
brlcflss, tt la their axpaccaclon that the atudr vill ba co^laCad
by about tha end of Maicli. Iha Board baa aaal^nad a hlsfa priority
to thli effort, but becauie of Iti acope and cc^lezlty tba itudy
probably cannot ba coivl'ted by Fabmary 15 aa raquaated In your
tattat. Mvarthalaai , I uodaratand your need for thlj kind of
backgrouDd InfoiBatton and I hava urged tbe ataff to collate Ita
work on thli project aa aoon aa poaaibla,

I mat to aiqihaalxe that the current atudy la a coaClnuatton
of a broad, long -atand lug Federal laaacre Syatea reaaarcb effort aa
btjik holding coopaalea. Yout ataff «aa given a copy of a recent
Board ataff atudy that provided an aaaeaanent of the bank holding
conpaoy Bavaaent, Including Ita Inpact on coapetlclon, cn—jntty
convenience and needi, afflclaocy, concentration of reaourcaa, and
financial aoundoell. That (taff paper alio Identified a mi^ar
of key Ijauea needing further reaearch. The preaent atudy repreaanta
an axpanalon and updating of tba earlier work and I would anttcipata
that the currant effort will point up areaa requiring further analyala.
I can aaiure you that the Board will continue to encourage ■ atrong
li prograa in thla area.

D„ii„.db,Go(5glc

with raipect to your rafarcoe* to tha upcoMlng b
an S.72, It !■ M7 uulaEStandtng that Cba provlatona of that btU
an Tar; alallai to thoaa of Tltla ZIII of H.K. 90S6, tba Safa
UDktES Act of 1977. Gomrnor Col<b«alI taatlflad for tha Boud oa
thU laglalatlon bafon tha Kiiue flubcomlttaa on Fln>DClal
lutltutlona SuparvlJloa, Kagulatlon and laauiaaca on Sapca^ar 28
of laat Taar. I am aacloaing ■ copy of hla taatlaongr fox yeia
InConattaa. Gomnot ColdMall'a rawfca on Tttla XIII appaar on
pa|a> 13-17.

I hopa that tha Infonaatlon I hara prorldad will be halpful
to tha Coi^tta* In tU coMtdalatton of 8.T1. Plaaaa lat ta kunr If
I cao ba of tarthor aaalataaea.

Stncatalr Toura,

Digitized bvGoO^^IC

fOR BELKMB OM DBLIVEET

by
PHILIP E. COLDHBLL

of thfl
BOARD OP GOVBRNOKS OP THE PBDERU. I

Subcc^ittee on Financial Institutions
Supacvision. Regulation and Inauianc«

of th«

CoHiitte* cm Banking, Plnancs and Ucban Affairs

0.8. Bouse of RspeesentatlTSB

SeptoriMi 26, 1977

Digitized bvGoO^^IC

lb. Chalran, I appc*oUt« ttm cvP^itunltr to taatltr tofora
tbla SuboOBltta* on bahalf of th* Board of ooncnora en B.H. 9086,
tfao Safa Banking lict of 1977. Mfoia I aMtaaa acaa of tha aora l^octant
proriilona of tha bill dlraotly. Uia Boatd ballavaa that It la l^oitaitt
to placa tha bill In tha oontait of prior aftorta.

A* you ara awara. Mi. Cbalnwn, In Saptaabai 1979 tha Boacd
propoaad laglalatlao on bahalt of tba thiaa bank ragulatocy aganclaa
daalgnad to ivco*a auparriaocy efCaccivenesa. Ihaaa prefoaala aroaa
tiam a atudy by tha aganola* nbaaquant to tha ttanklin Vatlonal Bank
telluta of poaalbla laglalativa actlona to aU tha aganclaa In tbait
9oal of piavanting oi uellorating difficult bank altuatlona.

Tba laglalatlon caoonandad by tha aganctaa aaa Inolodad in
tba Financial Rafoni hct and xaa In larga pact aabodlad In B. 130* Hbloh
Ma capoctad out of tha Banata Ooaalttaa on Banking, Boualng and Uiban
Xftaica In tha *4th Oongtaaa. IIiIb lagialatlon wa aubaaqnantly fouad
to ba nacaaaary and aupinrtad by tha Oanaial Aeoounttng Offloa In Ita
atudy antitlad radaial Suparvlalon of Stata and mtlonal Bvika. In
thla aaialon of Oongtaaa, tha aajoilty of thaaa pccpoaala mc* caiioitad
out of tba Banata Banking OoMittaa aa 8. 71 and. In tact, caoaotly
paaaad tha tall Banata.

Iba Board ballavaa that tba pcopoaala aatedlad In B. 71 ata
lalatlvaly nonoontcovacalal and aca naadad In our on-golng auparvlaocy
work. Aa you aia awaca, H.R. 908C oontalna a lacga mabai of piovtalona
wbloh aia malatad to tha haalc auparvlaocy thinst of 8. 71 oc raiaa
naif lawaa. ruthanoca, mav "t thaaa pcovlalOM aca llkaly to ba

Digitized bvGoO^^IC

ooaUoraralal and ■• ua frankly aonoarnad that aooh oontrovatqr viU
Intarfar* with tha paaaaga of tha otbai naoaaaacri nonooatiavacalal
pcovlatODa.

Hany of th* additional tlUaa ableb 90 bayooa tba baalc mifmt-
vlaocy thruat of •. 71 r^raaant a potantial ovaT-taactlaa to raoant
public dlacuaaion of eaitaln praotlcaa. Iha Board doaa not coodoaa
•buaa of a bank foi tba banatlt of inaldat*. In tact, tba aalorltr
of tba ptopeaala raflaetad tn tha Boacd'a original laglalatl** hoob
■andatlona In tba aivarvlaory (laid ac* daal^nad to oiub aooh ^uaaa
and anabl* tha aganciaa to taka aora attaotlva auparvlaory action alwa
•uch abiuaa aca dlacoraiad. Voawwmt, urn faallava that tha adoption of
additional Eaatilctlona vltbout tha banatlt of a full (actual analyala
oould raault Id aigniflcant barm to tha bualnaaa of banking and Intarfara
with tha ptovlalon of cradlt to tha aoon^ir. If tba pcactlova aoogbt
to ba oDciaotad aca Indaad potaotiel^ hantul and vidaapiaad. than
laglalatlve action My ba naadad. Bowavor, If aui^ pcactloaa appaat
to ba aoMtlaaa banadclal 01 laflaotad In only a faw baoka, than aKMlnattcn,
aupaivlaory, and pachapa laguUtocy, action lalnfoicad by tha additional
toola of s. 71 would appaar to ba adaquata to aaat tba pcoblaa.

Tha coablnation of tha axlating pioirlalona of S. 71 Hith tba
additional icattlctlons in B.n. »08fi ara asoaaalva in light of aaiating
knowladga o( tha pcoblaa and too aavaialy caatclot tba ability of bHka
to prorlda loana to ciadlt-wotthy local bualnaaaaa. Puitbaraocai tba
lagialatlon will aavaraly Intatfara with tha ability of financial InatttutlOM
to obtain viallflad outaldo dlcactoia. Tba pcorisioaa ralating to tcautara
of bank atoek by IndiTidoala ara too laattlctlva in via* of tba kno«

Digitized bvGoO^^IC

natoca of tlM proUaa uid muU iatactera vlth th* abllltr of banka
to obtain capabla auccaaaoi aamjiaint thcougb oblch It will aat** th*
oaaaniilt]F. Again, aubatantlal ravlalona ara piopoaiJ in th* Bank Boldlnq
Oo^atv aiaa wltbout a deoDnaEratlon that thaia la a problaa naadlng
to ba iMadlad. Hiaaa portions of cha bill abouU not ba anaotad wlUwut
•xtanat^a analyalB and Btudy of tha ptoblaaa Involvad.

ror thaaa laaaona, aa urga that tha Subiitawlttaa qo foivaid
■Itb tboaa naooontrovaralal ptovlalona of B.R. VOBt Hbleh ara aabodlad
in B. 71 and (or uhlcb th* agancia* ha*« an on-qolng naad, and aaparata
out otbar poitlooa of tba bill foe tuithar atudy and oonaidaratlon.
Board taatlaony on S. 71 laflacta aany of tba pclaa laaaona foe ttila
aupaivlaory thruat and I aak that it ba placad in tha lacord on thaaa

I would now Ilka to turn to tha Boaid'a oaaaanta on aca* of
tba vaclfic [ircwlalona of tha bill, n* bill la, ■• t ha*a alraady
BOtad, ao astanaiva and toucbaa en ao aany l^oitant aiaaa that. In
tba tlaa allomd, I will only ba abla to piovida tha Board'a oo^anta
on aoaa of tha mIoe laauaa ralaad by tba bill. I aa aubalttlng toi
tha laoord a aaotton-by-aactlon analyala of Uia bill which aata foitta
tha BMid'i co^Mnta on thaaa pccwlalona of conoatn to tba Board.

I will now turn to lltla I of tha bill, wbicb Inoarpoiataa
aany af tha propoaad l^conaanta In tha bank aupaiwlaory and ragulatorj
acaa which paaaad tha Banata in B. 71. fta I ba«* notad aatliai, tha
Beard atrongly auppocta thaaa pcovlalona and uigaa thalr tavadUta
Bowavar, tha Board quaatlona tba naad foi acaa of tha

Digitized bvGoO^^IC

ohangas ubieh hava b**n wmtm. Id th* araa of 'Inaldat landing* pactlcularlf,
tlia changa* to s. 71 nblch aia wida In Titl* I at* too caatclctlva and

would unduly cnnatraln la^ltlaata landing pcactlcaa ititbout aaaaucabla
countarvalllng public baneflt. Ttia nat raault of thaaa pcovlaloea nonld
ba to pravanc aany buainaaaaan ttom landing thali avpalttaa to bank

Flcat, Tltla t vould aodiCy tha aggragat* landing pco*lalona
of S. 71 ao that thay would apply to a dliactoc and hla calatad oa^anlaa
wfaathar oc not that directoi waa an offlcar ot 10 pat cant tfiataboUar.
Tha Boacd ballavaa that such a pcovlalon would aavataly Halt tba avallabllltr
of qualified directors for banka, particularly in aaallac oOMwnitlaa.
In auch aaallac caaaunlclaa. it ia not at all unucual for an ontalda
director to control nore than one local bualnaaa. Tbla bill would tote*
tha oucalda dlracCoi to chooae batwean tha local availability ot otadit
for thoBB buBlnaaaaa and hia aacvice aa a bank director. Tha raault
of auch a choice could ba to deprive tha bank of experience and advice.

In our view, tha raquiraaant alaewhata in Title t that loana
to Inaiders be approved by two-tbtida of the boacd of dlrectore and
that euch loans not ba estended unlais th«y are nade on substantially
the sane teraa, including intereat rates and collateral, ea thoae prevailing
at tba tiaa tot ocaparable tranaactions with other paraona and do not
involve Bote than the norul riak ot rapayaant or preaent other untavorabla
faaturea adequately protects against poaaibla abuaea. Dnlaaa a director
ware alao an officer or a 10 par cant or greater aharebolder it la
unlikely that ha would ba able to induce the other dlrectora to aake

Digitized bvGoO^^IC

• quMtlonabl* loan, pcctlouUdy In viaw of tha liability to wblch
tba otbat dicaotori would aubjaot tti«M*l*«« ondai Uw civil panalty
pcovlalona.

Tha caquiciaant that tha aggcagata loan llBltatlon on loan*
to oovarad Inaldara ba aat at SO par cant of tha atatutoty loan limit
to an individual boicowai: alll again ftavUm a ationg dialncantlva for
outaida dlcaotoTB to mct* on bank boarda. onca tha atatnta haa baan
aaandad to aggcagata all loana for a paiticular Inaldac and hla ralatad
Intecaata, It doaa not appaar tbat thaca la any subatantlal Mcraaa* In ilak
to tha bank'a aataty ot aolveney by Bovlng fica 10 par cant to S par
cant of tha total capital and aucplua of the bank.

Tltla I fucthai placaa a calling on aggiagata landing to all
laaidaca. M da not ballave such a piovlalon to ba nacaaaacy or appcopiiata*
Ria aggragation of loana to the inteceata of any one Inaldat la baaad
on tha praaiaa that auch a concentration ia aoce clsky In tha caae of
an Inaider beeauaa those loans night ba aade on less than an arn's-length
baal*. HhlLa an acgiasnt aight ba aada that alailai conaldarations
Of risk fould auppoct an additional llBltation on the aggregate of a
bank's loana to all insldara and theli Intacasts, our expaclance haa
not ahom that an additional llaltatlon la Decaaaaty. In caaaa that
hava ecaa to our attention Iniralvtag Inaldat lending aboaaa, these
abuaaa hava bean lialtad to one or a faw, ganatally controlling. Indi-
viduals and hava not typically Involved the entire boardt partloulaily
its oatsida directors. An additional limitation en tha aggregate ot

Digitized bvGoO^^IC

louu to IniUac* and tteir latarMts, lAlch would rul* out Cba ■■]«[
poitlon of «ueb loans, would ba a Miloua datatcaat to tba ability of
banks to attiact Indwandant outalda dlraotoca. In addition. It aould
[•Btclct a bank'a ability to land to ooafanlas and Indlvlduala baat
known by th« bank to ba oradlt-woethy and would roqulra banka to ratios
ccadlt uong tha dlraetota and ooafMnlas thay oontiol.

In closing tha Boaid'a odaMnta on Titla t of tba bill. ■•
ballava tbat It Is nacoaaaiy to oonaldai tha ciouUtlTa atfaot of tba
pTopoaala which h«n baao aada. In sua. If tba picpoaala ara adcptad
aa prcposad, a bank aay find It Upoasibla to obtain quallfiad outald*
dliactots who aie tequiied by a aubsaquant tltla of thia bill. Suob.
alaost pmatlva, pcorlslons should not ba lapoaad ainca thaca la no
■bowing of any significant nuabai of instancaa whaca outaida dliactoca
bsva Bbuaad tbaU poaltlona. Again, with raapact to othar InaldaiS,
:ha tasndy fai axceeds tha fraquency of daaonstratad

Tha nut asjoc portion o( tha bill on lAlch tha Bdacd wlsbaa
to oOMaant la Title VI, which would cadlcally ohanga tha ground rulaa
for the tranafer of ownarahlp of bank stock by laquiclng prior approval
of the radetal Deposit Insurance Corporation (with input fees tha Caaptrollet
of the Currency or tba Board, as tha case aay ba] before any individual
could aoqulia oontcol of an insured bank, since 19S6, in it* oonsldara-
tion of the Bank Holding Coapany Act and tha varioua aaamkaats thereto.
Congress has carefully drawn a dlitlnctton betwean ooiporate and Individual
ownership. In fact, it was not until 1970 tbat Congress a

Digitized bvGoO^^IC

509

ooncag* of tb* Bank WOUImi Cotranr Mt to partiMiriilpa ovnlng bank
■tooks. llBllar dlltlnottoos bna bMci eoaalatanUy dTwn undiT tb*
XavlDga >nd Loan Bolaliig CB^any lot. Tlwaa prarloua aetloaa en tba
pact of CDogcaaa bava baaloally catlaotad a oonoacn Coc tit* MUkatablUty
eC bank atooka, ■ daalra not to laidalr dlaooiuaga dungaa In tba oootiol
e€ banka, and a caapaot toi tba IndlviduaL'a ilghta to boy oc a«ll
•tort, rartlonlarlr In tha Batlon'a nallac oo^amltlaa, aaooaaaoc
oaoacAlp and aanasMaiit bava to ba caadlly arallablai and aanr ohaogaa
In oontcol and aatwgiaBDt of banka taaglt in aora aftactlva and riapcnalbla
oaaacAip. ara highly daaicabla, and Mnald ba anooucagad.

koy cagnlatoiy raqulraaaDt toe prior ippcoral would naoaaaarlly
i^eaa bordanai ooata and dalaya ohloh would hlndar anob ehangaa, daaliabla
•• wall aa oadMlr^la. caatiiot tba aackatabllltr of baiyi atoofc, and
diaoouraga aoaa loanq pacaona of pnalaa fcoa antarlng tha banking
indaatcy. Iba ooata and burdana of thla typa of radacal laglalaCioa
aboBld not ba i^oaid on tha aoro than 14,400 Inaucad banka In tba
ciouDt<7 wltboot battat diaonatcatlon of a oc^palling naod for tha laglalatlon
or that tha goala of bank aafaty and aoundnaai cannot ba caacbad tbiougb
laaa obtcualva laglalatloD. Ondoubtadly thaca aca loatanooa In irtiloh
ebangaa of oontcol haia lad or will laad to adraraa i^acta on tba bank
ln*Dlvod. Boawnt, tha Board aarloualy quaatlona whathar tba approval
pracaaa mnii^iTkiad would pravant anoogh of thoaa tnatanoaa ba Joatlty
tha ooata InrDlTod. AMitionally, wa ara oonoarnad wbatbac appropriata
atandarda toe tba asarclaa of dlaocatlon to pacBlt or daiv Individual
ownarrtilp can ba drattad which will adaguataly baUnca tha indl>ldual*a

Digitized bvGoO^^IC

ligbtl vlth th« pcotKitlcni of th* Inatltution. Ik ball*** eh* ataadute
ivoMd In tliB Tltla u dcaftad aca too Indadnlta and maid giM too
mieti auUtoilty to tha aupac*l*ocy aatluclty. rurthaci ■ oonfllet «aaU
arlM batwMn tha aUodaida vpliad (or Individual ovnarAlp ladar tbls
Tltla and tboa* liyoaad (at oorporata omacablp laidar th* Bank Balding

In thia ta^ardi tha Board balUvaa that UMr* la a laaa dlargptl**
Mthod by HblDh tha goal ot atta^tlng to pcavant advata* lapacta of
bank oMMiAlp obanvaa can ba achlarad. Saotloo 7Ij) of tha Fadaral
Dapoalt Inauianea Act piaaantly raqulcaa that capoita at cbanga ot
oontrol ot (Inanclal Inatltutlooa ba tllad by tha inatltution «ban it
laallaaa that auch a ehanga haa occuciad. Tha Boaid baliavaa tbaE it
*lght ba appcoprlata ta caqniia filing of ■ rapoct by tha •oqalrlog
paraon no latBi than tha data of oonainaatlan of any changa of 15 par
cant OE BOca ownairtilp. Civil panaltiaa abould apply foe tha fatlora
to (11a auch a lapoct. and tha raport abould eootaln auoh of tha Infocaatloa
caquliad by Iltla VI. in thla unnat. If thara aaic mnf clEoowtanoaa
lagacdlng auch a aubatantlal otmacAlp changa Kblch gam claa to a
auviclon by tha bank ragulatoiy agancy that tha bank Involvad sight
ba abuaad aa a laault of auch changa, tha bank ragulatory agancir aould
ba in a poaitlon to hava ita paiaoonal nonitoi davalopaanta at tha bank
and taka action bafora tha bank auffaiad any aatioua advacaa lapact.
Na ballava that auch an approach would adaquately balanca aupacviaory
oDncarna with Indlvtdiua rights and tha nacaaal^ fat tha aatkatahllltr
ot bank Btock.

D„ii„.db,Go(5glc

Tba Board balla**s that und«c c«it>ln clro<aatano«> Umc*
Is KB* Badt to tha concapt inttoduoad In tha bill of applying a aaigin
taqutraacnt to all bank atocka whaLhai oi not publicly tradad. Bowavat,
wa ballava a iaquiia*ant of > 50 par cant aargln aa prapoaad by the
bin Muld uk* It wttcaBtly difficult to provlda for auccaaaot ownarabip
and Bana^aaant at aaallar inatltuttont In aakllar 'Cn—inltiaa. Mthai,
«• ballava a aot* appcoprlata Hacgln would ba 2S pat cant and that tbaca
ahould ba cagulatoty axaaptln authoilty d^andlng on dw elrckaataneaa.
Such a aacgln raqulriaant ahould vply irtian control la baing aoquliad
and Mhara tba loan iniralvad la frca a ccaaarslal bank. Othacwtaa, auch
bank atock loana ahould ba aat on tha aaaa taraa and oondltiona aa otfaar
bank loana.

With lacpact to tba ptovlalona ralatlng to oocravondant

.cla Vtll of tha bill appaata to ba
froa Influencing tha placMMnt of
nlng loana, probably at pratarantlal
I and tha titla would prohibit bank A,
trtm bank B, froa landing to Insidara
to inaidara at bank B. troa opanlng
account for bank B.
The title goea on to prohibit a bank kaaping a corra^ocidant
anca with another bank froa asking a loan to an inaldar of that
reapondant or a bank having auch a loan tCM opening up a cotravondant
tha latter prohibition, there

balanceii the basic purpoae of
to prevent an Inalder of one bani
auch balancaa ae a aaana of obtai
tarai, team anottaar bank. To th^
which hae a cor reapondant ac
of bank B, or If bank a hai

D„ii„.db,Go(5glc

o ba f«t. It uiri knam oaaM «b«ra banks pcortding eocravonteat

daalgiMd t« pcmaot and h qaaatlon It* naeaaal^.

Hw Board atconglr aunorta tba purpoaa of pravaating iaaUMa
fro* pcotltlag thiouqh tba plac—nt of ooicaapondant halanoaa and wa
bava pfavioualy takan aotlon to att^pt to ioauta that auoh aboaaa do
not oooiB. iba aiposur* to aoA abuaa la pactlcuUcly hlgb In tba eaaa
of an offloar oc oontcolllag atookboldac of a bank. Bonavar, ratbat
tban problblt auoh calBtlonablpa, tba Board baliavaa tbat llalta could
ba Ivoaad on ahlfta of correapondent acoounta or tba alia Of tba aooomta
not juatltlad by aacTioaa randarad. In addition, m ballava that a
ravlcMMnt tor no pcatarantlal tcaatMant ahouU ba iivoaad on all baak
•tock loana abathat oi not a oociaapandont balanca aaiata. Such taqalraaanta
•tmld ba baokad up with elvll panaltlaa and tba Coaalttaa aay oiA
to eonaldai tha daalrabiUqr of auoh a prorlalon In conjunction altb
tha atOEMMntlonad aaigln loquliMant aa an altarnatlva to th« pcoblbltlons
of Tltl* Vltt.

Thm bill, howavar. would alao caaoh 'outalda dlractoca* and
will pravant eiadlt-woTthy loana by banka which hava coiia^ondant
calatlonabipa with the bank on whoaa board thay alt. It auat ba ciaHtMiad
tbat In asRT inatancaa a oorraapondant bank la In tba baat poaitlon
to Judga tha ciadlt of paopla in ■ downatraia coitaapondant. In via*
of tha caatrlctiona propoaad in tltla I talatlng to inaldara boicowlag
Ittm tbaic om inatltutiona, tha piorlalon la ovarly broad and wouU
unfairly raatitct tha ability of Uiaaa Indtvlduala to obtain cradlt.

Digitized bvGoO^^IC

lbs IMrdi tbarXoia, b*li«*M ttMt outald* dlractora. thaC la. dlraetoca
ttlw at* not oUmchIm oftieara or 10 p«r OMit aharaboldara, ahould b*
tmona tttm ttaa pcohlbltlona of ntlm VIII and that only tfca laqulcaMOt
of noi(>i*(«[*ntUl tioataant ba iaatlutad vlth raspaot to loatM to
anob Indlvlduala. That la, tb* loana riMaU faa raqulc«d to b« on M>
■oia taiQiabla tana and pcaaant no aoca tlM of aollaotabtllty than
ooapacabLa loasa to tbUd partlaa.

ka It haa In tha paat, tha Board favora anaetaant of a ctgbt
to tlnanolal pilTaoy bill and on* ahleb aoald, aa aould Mela It. astand
tha dlacloauia prohibition to any pation lathac than juat ooradng
dlacloaara to Qovarnaantal aqanciaa. Ma ara acaawhat conearnad, boaavar,
tbat tbaca aay ba cattain tactanlcal datalla in ttla bill which aould
IVada tba Board'a ability to oaciy oat ita atatatOTT (motlooa.

■action 111D(«) ahouU ba (aMDdad to Mka It claat that tba
tltla doaa not autltoclaa wlthbalding of financial iafotattion ahlcb
cagulatoiy aganclaa hava a •tatuton' right to oollact Dbathac or not
a atatnta apaclflcally laqniraa tha Inforaation to ba rapoctad. ructbai-
■ora, aa balUva that llia(b) abould ba aandad to Inoloda not onlr
aapaiviaoiy but alao aonatary and regiilatoiY tanotiona.

SaotKm 1109 could hava tha onlntandad affact of dlaabllng
tha bank nsarvlaocy agandaa frca axchanglng Inforaatlon batvaan thaaalvaa
oi Ilea Baking lalavant infocBition availabla to tba Dapaitaant of
Joatlea and tba Saomltlaa laobanga CMaaiaalon foe anfocoMNnt pocpoaaa.

D„ii„.db,Go(5glc

F'^^f*! i> tUa titl* proUbits i^ — B«r»l»«y

f na ■vplilng

a< a ragalatioa ok atatMta i^ialiriiil bf Om

W u» coaoMMd. taiMwai, vitk aacUm UM eC t^ UU

ia fa«0[ «< aK* [■ aiaia ii— ■■ b

ia CMrlT ta^m. «v P«i"i*i

Eoctt atiJM* aid Baaak oC ncsiix *itk ^aat ^iw If^ tl| la a

ta — JiT* tiai-iil iMUtBCuaa to p^aclr ui.^iij lAtt tta mi I In

ao Ete: i: aay ha laur i «Ma iA i rt la piiaai fci ail

Ik* ^tla 3< ;=* bill tclatias ta ■■"'^■■^ aap^^as iaov
a iwn: sC pnsiuaaa i*:£=i

a* »w:4 ^mtaaa a« ia» Imii s« Axm r

Digitized bvGoO^^IC

and, HlilU It aM Dot litoarporatad In S. 71, Uw loaid ballmaa it to
fa* ooMplataly nacnontTOMtalal and caaaaaanda its l^adlata anaotaant.

Saetlon 1307 of tha tltla muld taqutca tha Boaid to pcoaulgata
ragulatlona caqntrtng that aach bank bolding cxacwny and Ita banking
Bubatdiarlaa Inclode on tta boaid a 'caaaonibla* lumtar of palaoiw Mbo
aca not affiltatad with tb* bolding ooapany OE ita aubaidiallas. Ttw
Board b«li««aa aooh a piovlaton pcMapta tha pcatogatlva of aliatabold«Ta
undar both national and Stata law. To our koovladga auoh a raquiraaant
ia without pcacadant and w« >ia awaia of no abowing of > ooafMlling
naad to Intactaia with tha ilghta of aharaholdara In thta cagaid.

Titl* IIII of tha bill alao eonuina. In aactiona ISOB tbtough
1113, pcortalona which would draatically alter the pcaaant tagulatory
ach«aa for bank holding eoHpanlaa contained In tha Bank Balding Oovany
let of IfSC, aa awnded. tut I noted in wr tntroduction, the Board ia
quite conoetned that, due to the aiia and ooaplexlty of a.K. >0S< and
the ntBter of tvortant iaaaea coveted tbeiein, adequate oonaidaration
May not be given aa Co the daalrabilitr of thaae aBanteanta.

Iha MHn^hanti would pcohiblt any bank aoquialtion by a bank
holding coapany If it would raault In tha bank holding coi^any holding
aoca than 30 pat cent of the total asaeta held by all banka and hank
holding oCNpenie* in the Stata in which the bank la located. Na aatloualy
queation the deairabillty of auch a rigid aaaat limitation and do not
believe aiqr need baa been ahown to iapoaa auch a llaltation, BaoanC
atudlaa have abown no trend, on a nationwide faaaia, toward incraaaad

Digitized bvGoO^^IC

ooocantratloii during MM thtoogh 19T5. In fnot, agvagkta owio— tr»ttwt

d»oliB«d. rurtbar> during tha period ISGO Uunigb 1974 tbai* Has no
ovarall trand tcward Inoraaaad Statawtda aononCiaCiDn.

hm m 9*DBral Mttar> a rafulraaaDt of tUa natuc* oonld laad
to an BnticospetlcLve iwikat protactlon tor aoaa bank*. rurtiMcnDc*,
aa drattad, the llnitation night bava inafuitabla caaulta batwaan *n[in«a
tanking arganiutlana di^nidliig oo ifhatfaar tb« aaaau war* intarHltata
or intra-Stata or parbipa darivad froa an InternaCionsl bualnaaa, oc
Stata dapoalta, ohleh Bay (Inctuata. Tha focua on Cha total aaaata
apFcoach alao ovarlooka tht l^act at praaant and futuia bank-typa
autborlQ' grantad nonbank financial incenediarlas that night intaaally
coapatltlon to co^Hcclal tanka foe acaa banking aacvioaa.

rurtbati no alngla paceantag* figuia muld ta ancoprlat*
(or all tba Stataa dua to a ntabar of factora, including, aaong aUiaca,
tha matmt of bank and nonbank oo^atttora. eovatltion froa out-of-
Btata Inatitutiona. tba ulatlng alia dlatributton of eovatltora, tba
Taoant hlatory of bank axpanaion, and lagal or aconcalo iapadiaanta
to unraatralnad oonpatitlon anch aa bcaa offloa piotactlon lawa. Itt*
pcovialon furthar intarfaraa with tha right of a Stata to datarmlaa
tba daairabla banking atructura for that Stata.

Ha nota, ho«ai«r. tbat nactlon llOS would allow tba Board
ta dany a bank aoqulaltion wfaich waa not in tha public intaraat •*•■»
though tba anticQopetlttvs affacta of tha ■equlaition would not rlaa
to tha laval of a violation of tha antitruat lawa, )•• baliava that
thia would conatituta a daairabla clarification of aslatlng law.

Digitized bvGoO^^IC

Tb* bill iln HlMa nonroiM ebrntma in Motion 4(o) (8) of
tiM Bank BoUtng CMvwv Mt. A luoAai of thaM ehangaa at* eonatatont
■1th pc«aant Board pcaotloaa or aaka Blnor ehangaa in aatAtaaia iililoh
MOOU baia no aubatantial aftaot on tba aAiinlatiatlon of tha Jtct.
■a MNiU nota. bovavar, that the pcopoaaa raviaad aundacda dalata tha
pcovlaloo of paaaant law that paiBlta tha Board to dlffarantlata batwaan
■etlvltUs undartakan da no>o and activltiaa coaaancad by tba acquialtlon
of a going oone*cn> 1M baliava tha autboiit; to anooucaga da noro
aoviioitlonB baa prsaotad ocapatltlon and wa strongly caciaMand that
It b« latalnad.

tba Board la qnlta ooncatnad vltb tha caquiiaaant that a non-
baak activity ba not only cloaaly calatad to banking, but alao 'diraotly*
calatad and that it ba not only a pcopac Incldant tbarato, but a 'naoaaaary*
inoldant. Ul of the nonfaanklng actlvltlaa preaantly panittad by tha
Board Kara cacatully oonaidarad mdat tba guidanoa furnlahad by tba
lagialatlva hlatoiy at tba 1*70 laanAanta and aftac obtaining aatanalva
public EB— int. ft aajoc ebanga In tba standarda for paralaalbla actlvltlaa
MOh aa that oontMplatad In aaetlon 1309 ahould ooly ba baaad on aub-
atantial tactual avldanca that tha changa ia naadad, Ttta Board's ataft
la curiantly pr«vatlng a catbat oa^abanalva study and lavlav of bank
bOUing ooapaiv activity «hloh imuU aaalat in datacalning vhathar any
Chang* In tba pcaaant atandatdi toe paniaalblo actlvitias wuld ba
In tba public intaraat. Na ballava • mJoe obanga aach aa auggaatwl
in aaetlon 1310 ibould await tha outnaa of tbia atudy and otbac faetoal

Digitized bvGoO^^IC

n« Board b*li«««a that MMloa 1311 of tlM bill ralatlng
to ■aouna and ooapa>:lttv* flnanetng of nonbanklng aotlTltlas* !■ ja— lallj
oonalatant with aslatlng Board authority and pcactlcaa undar ttaa Bank
aoldlng Caapany Act. M do> honararr objact to tba rafulraaant Uiat
Intacooaiiuiy tranaactlon rapocta ba aada avallabla to tba publlCt aa
thaaa raporta contain aanaltlT* intoiaation ooapacabla In anaa raapaeta
to bank asaMlnatloa carets.

Tht Board atrongly objacta to tba additional baarlng and
aAlnlatratlva pcocadizaa contalnad in aactlon 1312 at aaq. Ma Baacd*a
praaant pcocaducaa undai tha Bank Boldlnq Coapany Act aia conalatant
■tth tba MainlECcacive Pionduca Act and piovlda for an adjodlcattva
haatlng on Individual applleationa iihan thai* aca dlvntad qoaatlona
of fact. Baotton 1313 aould d^att tren tba A^tBiatiativa Procadnta
Rrot by raqulilng a loraal haaclng tot tha pioaulgatioo of caqulatlona
and all Individual casa dataninatlona whatbat or not thara a» factual
■Bttara In controvaiv-

Tba ooucta and otbar authorltlaa on atelniatcatlva lav havt
long lacogniHd tha dlatinction aatabllatiad by tha A^lnlatiativa Vtooadura
Act batwaan rulaaaklng and adjudication. Adjudication and a fonal
baarlng aca raqulrad to datanlna facta about pattlculai pattiaa, thalr
actlvltlaa, bualnaaaaa and prepare. On tba otbar hand, a culaaaklng
procaading la laaa (onal bacauaa typically tha iaawa do nob ralata
to avldantlary facta aa to which tba laradty and immanai of vltnaaaaa
■ould ba laportant. M ballava that tha piacadanta in aAinlatratlva
law d«H>natTata that tha public Intacaat la aataguacdad and baat aarvad

Digitized bvGoO^^IC

by aioidltig Um oimbatuamm pcocadurM of foiaal advacnry bMurlng*.
In ooaiMotlon wltb lulaaaklng, tb* «(pa[iaBC« of tbo** few afanaita
«bo (!•• foiatl baatlnga la that auch lulaaaklng pcocaadlnga ara uncaaaon-
ably langtby. itcoardlngly, tm ballava that tb« Boaid'a praaant procadiuaa
■bouU ba eontlnoad.

Finally, h* at* concainad olth tha pcovlalona raqulcing tha
Board to piocaaa a patltlon to Odnaanca a piocaadlng to conaldai tba
laauanoa. aaandMnt oc lapaal of any erdat oi ragulatlon ralaclnq to
nofibajA BctlvlClaa. Na nota that undai tha Walnlatiatlva Piocaduie
Act tbaca la a piaaant ciqht foe any pataon to patltlon tba Board foi
tba adaption oc aaandaant of a lasulatlon. Additionally, tba Board
racogaiiaa It* laaponilblllty to contlniully lavlaw Ita Eaqulxtlona
and aupacvlaa on an ongoing baa la tha ofwratlon of nonbank aetlvltlaa
by bank holding oo«panlai. Bovavar, ■• ballava that tba pcocadina
•atabllahad to challanga the opaiatlon of Individual coapanlaa provldaa
a continuing poaalbtltty o( coiutacal attacka on a bank holding ooa^any
wlahlng to angaga In a bank-ialaCed activity. Tha continuing poaalbllity
of unfoundad attacka could datac aany bank holding ooapanlaa fcoa angaglng
In nonbanklng aetlvltlaa. This In tutn vould ceault In the euttallaant
of tha poaslbla banadta obtained under tha Bank Holding Company Act
(lea BDia Innovative and ooapatltlva aaivlcaa In bank-ralatad flelda.

In conclualon, Hr. ChalrBan, I would again like to aivhaalia
that tha Board baliavea that the prorlaiona of B.B. >0B( abich Hare
originally aabodiad In B. 71 ara conatruotlva and naceaaaiy. Na coBBand
tha OoMdttaa on having Includad thaai In thta bill and raocHwnd their

Digitized bvGoO^^IC

mia tb* BMid l» In ayvathy «itk « noibM a<
objaetivas of Uia additlenal pcorlslons and aigbt avport aodlttad *»(«lMW
of aoa* of tba pcoposalat ■« baliava •xtanal** stuAr rtnuU latabllah
tha Moauity and daalrablll^ of any additional laglaUtlon. tlM loud
would ba hippy **> ooopatat* vltb and asaiat tha Coaaltt** la aigf ancb
■tody It Bay olafa to undattaka.

D„ii„.db,Go(5glc

BDARQ DF BDVERNOHS \ fj^i-f^'\

FEDERAL RESERVE SYSTEM

and Vxbm Afbtra
UdUwI atatM Seuta
WuUngtan. D. C. 20610

Dear Mr. Chalrmani

TOth tUs latter I un Ibrwardiiig two ooplM of Hm aindy that
bu been prepared by the Board's Btafl on the eoonomlo Hid flnandal
ItiqjllcatlanB of the book hotdlog oompaiv movomaat.

As Chairman Bums Indiooted In Us letter to yon of Jimiaiy 6,
1978, tMa stndr draws hesTily from the Federal Reserve ^stem's continu-
ing research program on bank holding aompanloB, It oonalata of a oom-
prehenslve review of tbe available raaeanih on bank boldlng conq^anles and
GOTora tbe princdpal areaa of legislative and regulatory concern:
coDvetltion, pi^lic benefits and communis oonveidenoe and needa, operating
perfbrmanoe and efScieni^, safety and soundness, and conoentration of
resources. As you will see, even with the large amoant of research that
haa been undertaken In this area. It is difficult to draw maaif onamblgDous
ocmclualons about tbe impact that bank holding companies have had to date.
TMs is especially true with regard to tbe nonbanking actlvltleB of bank
holding oompsnles owing to the relatively brief interval since passags o(
tbe 1970 Amendments to ths Bank Holding Company Act and the fact that
most of the data on ouob activities cover the years of 1974 ud 1976 —
a period when the nation was in a relatively severe recession. Hooethelass,
I belisvs that, aver«Jl, the research haa made important coDtrlbotions
to our understanding of bank balding companies.

D„ii„.db,Go(5glc

Tha HononbU WlUlAm PnutmlM

na rtafl Btn^jr sJm IdeiilflM teTend Impoitant a(«u tn
wUah BddttloiiBl work is naedad, and I h&Ta loatmotod the staff to
pnrsDe tbia roBeordu I oan Banire you that the Board will coMnam
to mooltor oloaely tha pertoFmanoe and eottwmio implioattona ^ tb*

IH

D„ii„.db,Go(5glc

loberc A. Elscnbets, Ansoclice Reicarch
<eieaTch and SCaClitUa waa iciponstbU
:hli leudy. Ic nai pieparcd by th* staf
iectton und*! Ch* lupcrvlalon of Jo« H.
thoadca played a major role In gecClng t
raluabte technical advice and editorial
:onCributor> were Jaui BurVc, Timothy J
Cynthia A. Glaisman, Stephen A. Rhoadei,
r. Savage. Robert J. Laurence provided
)Cher meebera of Che ataff of [he Board
■o ihe completion of this itudy.

Divlslim Officer, Dtvlaion

for the

oE th*

genera
Flnan

ial Scruccu

Chief

Stephen A

e study
sdacan

conrl
e. ?

t*d Chtaugh
Incipal

Curry.

Antho

y Cyroak,

John T.

and Donald

elpful

nilgh

al Covecnoia o

lo eontribu

D„ii„.db,Go(5glc

on thB Bank Holding C
Idlng CcBpany (KxreatDt
> Operational Singl* Bntltlaa; A

A Review of tb*

Bank Holding Companlea and CoDccntratlon of Banklna ■
Financial Reaourcei : A Review by Cynthia A. Glaaaaan
and Robert A. Elienbela

Digitized bvGoO^^IC

SwsCloo I
A Ravlaw of cha Evtdenca on the tank Holding Company Hove

Introduction
Seven yeeri have elapsed ilnce ch* piiiage of the 1970 ■
CO the Sank Holdto) Co^iny (BHC) Act ot 1956. During thli tine, beak
holding coopaates have becDoe the predominant organliational foni la
coBiarclal banking accounting for almoat 71 percent of total doiieatlc bank
depoalta. At the aa«* cIm*, uany of these firms have eicpanded Into
thoaa Donbanklag actlvltlea that have been authorized by Che Federal
Reaerve Board under the Act. Becauae of Chair tncraaalng and aignlflcanC
■lie. nultl -market acrucCure and behavioral chsracCerlstica, It la likely
that bank holding company organlraclons will have liqiorcanc and untqua
effects on the operations and performance of Cheir bank and nonbank
affiliates and the Industries In which they compete. It is essential Co
understand the nature of theae effecta because of their potential iiqillca-
tions for regulatory end supervisory policy.

Although bank holding conpanles, as they are presently atructurad,
have been in existence only a short period of time, a substantial body of
research has already been developed that focussB on many different facata
of the bank holding company movepnant. 'rhe prliqiry areas Investigated follow
the genersl concerns embodied In the Bank Holding Conqiany Act, These includi
the effects of baik holding coiii>anles on (1) efficiency and performance of
aubsldlarlea, (2) bank snjndness, (3) competltlo.i, (A) ca.icentratlon of

Digitized bvGoO^^IC

Tcaouica* and (S) public benefits and convenience and needi.

The pucposa of thla cooqiendluoi li to review Che avallabla
publlahed research on thoia aapacct of BHC act[vlty that are relavenc
Co public policy. Specifically, the eight papera In the coapendlua covet
Blx different topic ateaa. The first Ii a backgrcuad hUcory of th* badt
holding coiapany anvament and federal regulation of bank holding coa^aniaa.
The aecond area conalats of three papera dealing ulth the Inceroal operaclona
of theae organliatlons and covers (1) operating pollclea, (2) perforuiace
■nd financial characteristics and (3) cost and economic eCfleleocy. The
third area followa directly from the efftctaocy and perfonaance revleva
and focuies on Che aafaty and aoundnesa Impl Icac iona of the growth of baiA
holding conpanles. the fouiCh and fifth topic areaa exantna the coopettelva
•ffacCa of Che grovth of bank holding conpanles and their efCecta on >.
concentraclon of banking and flna:iclal resources. Ihe laat section deala
with Che public bencfiCs and effecCs on cotnunlcy co^iventence and needa
Chac have reaulted from Che expansion of bank holding coopenles.

An attempt has been nnde Co make chla review of the avstlabla aCudlai
•xcanaiVc, if noc exhauitive. This has s Cwo fold purpose. First, aa part
of a continuing research efforc, it will provide Che Bosrd of Covemora and
the public with s relscively complete and documented suHMry of the currant

policy debaces abouC BHC regulacory and supervisory policy. Second, by
eatabllshlng what Is not known, or reiwina unccrcain, about BHCs. IC will

Digitized bvGoO^^IC

lattng future research effor

proTlda a bails far foi
the Vedcral Reserve Syaten.

It Is Important to emphastic
conclustoBB about the effects that Che
had on the nation's financial systen o
relative newness of the bank holding n
cb*r« are fev sreas tn uhtch a aufCtelent and consti
•xlaca CO allow firm conclusions Co be reached
tn Che nonbinklng area, the lack of dsca, Che i
many activities have bee:i authorized, the paucity oj
fact Chat such of Che evidence Is froKi a period
severe decline In economic sctlvlty, all serve (
«aka general izac ions abouc Che affects of bank holdi
■here there Is strong and conslscenc evidence, thi
considerations which must be weighed in evaluatin|
BHCs. The remaining sections of this sunmary papi
pTincipat findings In the compendium, and the last
synthesize these results.

I within and mtatda

lat this review leads to few unaabtguo
nk holding company irvavenenc has
n public benefice. Given the
present for*,
:enc record of evidence
BHCs. Parclcularly
'ely brief claM that
studies and the
uhlch there was a

iblllCy Co
.ng companies. Even
otfsetcing

Revlev of Che history of fed*
companies, beginning ulch the blanking A
Che Kank Holding Company Ace of 1956 a
leads CO several general observations.

1 regulation of bank holding
of 1933 and continuing through
Its amendments in 1966 and 1970,

^irst, there has bctn a remarkable

DigilizldbvGoO^^IC

holding cimpanles. 1h« princtpit conci
of TCBOurccB and the oulnCenance of thi
coHMFca and (2) che uae of Che banl hold!
elreuBvant Taatrletlon* on branch banking,
than not bank holding ccnpany lava hat
rathar than being directed toward Che
dia praient degrea of regul
by a gralual and aequenclal proeesi ai
were bioughC under the coverage of th<

hav* been vtth (1} cooeaacrattija
laratlon betweea baaktng and
ig ciapany fom ai a seaaa to

Second, more often
tn preveaCBClve in nature
«clon of acCual abuaai. Third,
bank holding conpaotea va* achievad
and more holding co«panica
Finally, It la nor clear

that the f]
significant
organlred.

ixlblllty of the bank holding company form haa resulted In
chengea In Che way In which Anerlcan banking flma are

aar

folic lea. Pertormanee and Efficiency

Operating FoltcLaa
An ln^rcant consideration In evaluating the perfoi
holding coD^nlcs as well as InCerpTatlng che Implications of
changes in regulatory and aupetvlsory policies centers on the
to which BI<Cs operate their subsidiaries as single Integrated
a* opposed to collections of ccramnly-ovncd but autonomous cc
The available evidence Is limited hue suggests chat BHCs tend
their orgs nltac Ions more as Integrated cnCItles than as sepat
nils is reelected In part by the face chac RHCb typically Cry

r the

eraclng policies of both their bank e

Digitized bvGoO^^IC

Ik Bddttloa, BBCa tanarally aKarclB* at laait ■<)■• control ovor various
■pacific operational araa*. HoiMvar, thi* >*«au Co b« an— what !«•• ao, oa
anraga, wlch bank aubatdlarlaa Chan with nonbank aubildiarlai. In
addition, chara appear* to be Bre variance anonjt BHC* In cha dcgrca to
which chay Intagrata their bank aubBldlarleB relative to chair nonbank
aabatdlarlaa. Finally, one factor which no doubt llalte full Integration
of any BHC eyaten la the legal reaCrlctlona that apply to financial
Cranaactlon* between a baak subaldiary and It* bank and nonbank afflllaCea,
Perfomanca
Iha organ Izatlonal acrucCuie and perceived behavior of BHCa
Have led wmy observer* Co expect chat they will have an liqiortant affect
on Cha financial and operating perfonianca of Cheli eubaldlarlea. B*e*a*a
of the relevance of firm performance Co several policy ares* related Co
ceapeclclon and aifety a.vl loundnesa, and becauae of data avallabtlicy, ^
BHC perfoniance la Che moat extensively Inveaclgated facet of Che BHC

Evidence froo simple univariate analyse* a* well as laore
BOphiJClcaCed analyae* ha* yielded telsclvely conilaCenC and conclusive
result*. I'trat, It I* clear that muItl-BIIC* have had s significant effect
on the aascc structure of acquired bank*. HoaC notably, miC banks hold
less cash and U.S. government securltiea, norc state and municipal
bonds and mora loans per dollar of assets than Independent
baxdca. Second, In addition to holding what I* generally

Digitized bvGoO^^IC

Tcgardsd to ba a rtaklar portfolio, tha avldcnce Indleaces cfaac anltl-BHC bMfci
Bxhlblt lower caplMl-co-assat ratio* ttian co^arable Indcpandanc banka.
Third, BHC banks exhibit significantly higher earnings and expenaes -
■ubaaquant to affiliation uhtla their profitability renalns relatively
unchanged. Finally, BHC banks do not grow any faster than other banks,
m short, BHC banks nchlblc rlakter portfolios and mare leveraged capital
positions than slnllsr unafflllsted banks, but their profitability
and growth sra no different.

As with nany of the Issues raised by BHCs, avldenca on tha lapact
of BHCs on performance of nonbsnk affiliates la cKtreraety linlted. Therafocs,
any conclusions aiusc be rEgarded as tentative. In fact, only two of tha
17 actlvltlea authorized have been studied. In turtgag* banking, the
evidence from the one available study suggests that BBC afflllatea are not
aa profitable, do not grow faater and are more highly leveraged Ehan tod^Mn-
denta. tilth respect to the consumer flnsnce Industry, tha two studies straw
that BHC affiliates are less profitable, more highly leveraged, incur
marginally higher interest expenses on borrowed funds and grow faster thaa
Independent finance companies. In sum, the only consistent evidence froa
the two nonbank activities that have been subjected to enplrlcsl investlgBttoo
Is that the nonbank affiliates of BHCs tend to be less profitable and
more highly leveraged than their Independent counterparts.
Efficiency
In evaluating proposed acquisitions by BIICs, the Board Is
required to consider the effect of the proposal on efficiency. This

Digitized bvGoO^^IC

fqutriBint 1* «Qtpllcle mxlar SvcCion «<c)<8) of th* BHC Act and Illicit
iHidar SBCCloa 3(a)(3). Slnca t**^* 1" afflclancr maj ba Tagardad a* a
public bcnatic, posdbla afftclancy galni mac ba traighed ag«tnBt poidbla
advana coqiaCltlve and financial effect* of acquUlttona.

ttia larga alia of BHC oiganliatlona haa lad mmaj obaarvara to
•xpMC Chat affiliation with ■ niC will bad co •co3onl«a of acaU as
vail aa acaooslaa of organliatloa. Ihc avallabl* taiitTlcBl ucrk daala
alHMC antlnlr with bask affillacei and luggaiti tliac a bank caa achlav*
■OB* econoolaa of acala by affiliating with a bank holding co^iaB]r. Hownai
te will alto Incur additional axpenaai. Snail affiliated banka—aapaclally
banka — Bay not ba abla to achlava lavela of ouC|iut luff
Inccaaaad expanaaa until thay caach a aufflclmc slaa.
baoka grai (over $30 to $A0 Billion), Che econoalaa of j
■nabl* holding conpany aubaldlary banka to <^arata ■■,
Chan Indepcndme banka. Theae aana atudlea alio auggeai
In afflclancy capar off aa the afflllatad banka bacons lar|

Leas lophlitlcated "ratio's Cud lea l^Iy Chac sffll
ha** hlghar "other" operating expense raclos tha
Ihia Is probably due to Bansgement feea and other expenses
parent BHC as a nsans of transferring funds with
heoca, should not necessarily be interpreted as
dlseconacnles or Inefficiencies.

there Is only ftagntncary evidence peTtalnlng to efficiency and
the existence of acale cconomlea in Che nonbanklng activities of bank holding

hat, as afflllatad

Ifiliatlon

r a»re, ef flcleii^ty

t charged by the
Drganlca Clonal

Digitized bvGoO^^IC

co^anla*. Iha on* avaUabla BCudy Indlcaccd chac aftiUtCad (IiMne*
CDivaiilaB did doc hava ■IgnlftcanCl; dltfaranc oparactog aitpenaaa trtm
unaff Ilia tad co^anlaa.
Safaty and Soundnaaa

Tlie paae fWa yaara hava aaen Incrauad coneam about Cba
■Cabllttr ot tha banklos «T»ta». particular Intaraac has baan (oenaad «■
tha t^act of BHCa and ncpanalon In tha nonbanklng araaa on bank aataey
and aoundnaai. Thar* are four avanuaa tbrousb iihlch tha BHC form of
organiiaUoa »tj ba axpactad to atfact the riak expoaura of baoka. Iliaaa
include (1) aiqtaiialon of banklnR type activlclea Chrough nonbaok affllLataa,
(7} expansion Into other bank acCtvltica, (3) nltlbaak ei^nalon and <A>
parent compaiqr levaraglng.

With reapact to banking acclvltlea, milclbank expanalon baa
TMulcad In Ineraaaed riak axpoaure through graeter leveraging and rlakl^
portfolioa for aubaldlary banka than for Independent banka. Uhatbar thia
la offset entirety or aBeliorated by tha attendant geographic dtverai float Ion
is not knoun. with respect to nonbadi affllietea, the Iltele available
evidence Indicacea Chat auch affilUtea are tnore highly leveraged Chan Hieir
independenc counterpartB. At the same tine, there is alao aoae weak evidence
of product-line dlveraificaclon benefits reaulclng troa nonbank eicpanslon
which would tend to reduce risk. Finally, available evidence auggeata Chat
parent haldli« ccnipanies have leveraged significantly In recenC yeara. In
tiany caaea, this leveraging has provided equity Iiaiding for BHC benke; however,
even with auch equICy injections, BHC banks aa a group still tend to be
■ora highly leveraged Chan their independenc counterparts.

Digitized bvGoO^^IC

Alchough BHC* My ulnUln ■ TtakUt floanclal poalcton In
Ikalr binktiig and noabaok afflllatei thaa do Independent bank* or conpatable
nonbank flma, Che diversified ■tnicture and legal orgaalEatlon of BHCi
Mkaa It difficult to aaaeai Cha sat affect of thl* Increasad rlak
Bipoaura and whether it baa actually raducad lafety and ■oundneii In Cha
baBktng ajataa. Horaover, it raaaloa Co be aeen vhether tbta apparenc
rIak-taklDg la graatar than i> (oclally daalEabla.
CoapatltlOtt

Under Section* 3 and 4 of Eha BKC Act, the Federal Keaerve Eoard
ia ra^ulred Co coaatdar cb* poailble advscaa affect* of propoaed bank
and DonbaDk acqulaltioiu In deciding irtiether or not they ihould be
approved, Hila concern for Che coBpetltlva effects of BHC acqulsttlon*
ariaaa frooi the recognition that the degree and Intensity of coa^etitlon
In m naiket will datermlQa econonic perfonunce of the Daikat In Cenw of
the prlcca paid and proflta realized. The enplrlcal studies relevant to
asaeaalng the Impact of BHCs on competition have not OKaalned the lapacta
that BnCa have had on narket prices, price-cost .iMtglns or profits.
Kathar thay have focused on Che effects of BHCs on market structure and sad*
Inferencea about market performance from changes In market acnictur*. That la,
if BHCs result In an increase In the nunbec of Independent flnu aperaclng
ta a BBrkat, for example, the Inference la that this Is a poiltlve structural
effect that inist have a procoapeticlve effect on narket ptrfonnanca.

D„ii„.db,Go(5glc

In genaral, beeaatc of the ipparant aggTci ■!▼«•■■ of BRC* and
bccaui* the orgaotiat tonal font provides a convenient BeehanlaB to
ctTcumvent rsatrlctlve branching lav* and other barrier* Co oncry. It haa
bean anticipated chat BHC* would have a procoopeClctve afCact on Baikat
■tructure. Certainly de novo expansion, to the excenc theC tt raanlt* In
nev entry Into mrket*, owsc be procoi^>etlt Iv*. Bank holding eo^tanl** b«**
expanded da novo, but Che aajorlcy of Chla expansion haa been vlchln
■■rkat* la ohlch Mm OTganliatlon already operaCed. SCudlei of Cha atfaeC*
of BHC* on banking sirket concentration — in Inportanc dUwadon of baok
■arket a tructure- -have yielded lalxed result*. Ihe bulk of Ch* work suggeaca
that BHC activity haa had little lyateaHitle or algnlf leant etfccta on -
banking aarket concentration and, Hence, tittle pro or antlcaapaciclva
affect*.

Concluilnns regarding the competitive efface* of BliCa in aoiih»ikIn(
acCtvttlea mat be regarded aa hl^ly tentative, becaufe there have bean ao
tew atudlea and these are aubjeet to aerlou* shorCcoiitnga. uhac avidenca
exists suggeaCB that In conBumer finance, BHCa may have had a proco^atltive
effecC alnce the relatively rapid growth of BHC afEIIlates could be due Co
procoeriecltlve pricing policies. In noitgage banking, however, BHC
affiliates are lass profitable and iwre highly leveraged than Indapandants.
Thta provide* llccla Indication of either a pro or antlcooipetltlve affeec
on prletng behavior or performance. In ahorC, available evidence auggeaca '
chat BHC* have llttlo. If any, effect on competition In banking or
nonbanklng narkccs.

D„ii„.db,Go(5glc

Cene«nt ration of »*"''*"^ ttni Fla«nel«I R««ourc«»

Throuihoiit tb* history of lasldatloa r«sulatiii| BHCa, th*
ConirsH axptaaiad coneani with varloua diBenalona of conccnCcattan--Baikat
coDcantracloo and aggragate or uiuJua eoncantratlon. Thii raflcctl a concan
about l^tleatlona of aarket concentration for coiqiatltlon ana tha
poaalMa lapllcationa of acata and national levata of cone antra clan (or
baalc aspMnU of the econonlc aystaii aa wall aa Che aoclo -political Byataaa.

Bank holding eo^anlaa hava not lignlttcantly tncraaiad thalr
control ov*r aggragata financial raaoureea in tha acoocar ai a rtiola;
Donbanking raaourcai atill account for leai than 4 poreant of bank holding
caftan; resourco*. BHCa now control about 71 parcant of donaitic bank
depoaica, but only about S parcant of thesa dapoaic* are oucatde laad bank*.
Thua, Boat of the recant Incrcaas in BHCa' ihara of doawatlc depoilca la
due to convaralon by axlatlng bank* to the BI1C fom of organization and not
to acquialtlona by axtacing BHCa.

Bank holding coapanies alai
Btton In I I Mini I fill banking at tha nal
Nationally, concentration In banking has decll
■Ince 193A. It has been estluted that betwai
Is at moat 2-3 percentage point! above what
bank holding companiea had not existed. Sli
laval, concentration has declined on average betwei
(although it Increased slightly since 1970} oi
depending upon Che neaauras uaed. Tha gri

ilgnlflcantly increased
mal, state or local levels.
Lnsd gradually, but steadily,
1 19M and 1973,
might have been if
irly. St the statevide
1960 and 1976
It best raaalnad atsbia,
declines, however, have

D„ii„.db,Go(5glc

have b*«D llniMd to th* law and Bodarataly coaeanCnMd ■»!••, Locally,
no aiyitfleaDt, ■yitematlc tncraasea In concantracloa have baan attrtbotad
to bank holding C0BV»ilai. In gaoaral, local Biikets hava Candad to
eidilblt aora c<»pattttve atrucCuraa.

WlditD tha noT* atgnlflcant nonbanklns Induatrlaa-'SOTtgaga baAlnf,
ccnauar floeK* coa^nlaa, laaatng and factoring— in vlilcti bank holdlni
conpanlaa bava baan pantttad to axpand, tha plctura la Bora ■txad. Bank
holding copanlaa have not baan a algnlflcant forca In the laaalng
lDduatT7. SlgnlflcaiC conaolidetlon and atruccural changa have taken place
aaong coneuaer finance coiqraalea, and a nunbar of the top 100 ftr>a have baas
acquired by financial and nonfinancial conpanlaa and banka; but bank
holding coi^antea have not played an Inportaat role In thla procaai. Bank
holding campantaa are taportant awncra of mortgage banking firat and now
account for 42 of the top 100 nrtgaga lervlcersi but vary few have been
acquired alnce the early 70a. Factoring Is the one induatty that nam la
■oat clearly donlnated by banks and bank holding eoopanles trtitch now have
about 56 percent of the factoring buBlneaa and 17 of the top 10 flraa.
Koat of theae ftnna have been acquired since 1968.
Convenience and Heeds and Public Bcneftta

Under Section 3 of the BIIC Act of 195G as amended in 19SG, the
Board la required to consider the convenience and needs of coDBunltiae in
evaluating proposed BIIC bank acquialtions. The Hoard shall not approve
cases ulth adverse conpetitive effects In violation of Section 7 (Clayton
Act) standards unless they ere clearly outweighed by the positive affects

Digitized bvGoO^^IC

Dcadi. Under Saetton 4(c)(8) of the BRC Act, aa aModed
ta 1970, a aaTe ■Crtngant teat appllea; *nd the Bocrd iiuat deny a propoaad
•equlaltlon In ttie nonbanklng area unlao It produce! net public benafltB.

partially becauae of the difficulty of coneeptuallilng and
■Msurlns p«d>ltc btaeflts and conrenlenee and needs, there have bean very
ttw atudlea on the aubject. Ifioae few that have been conducted reveal
aeiMral pointa. Flrat, In constderlns BHC applications, the Board focoaea
OB aevaral public Intereac conaiderattona Including the ability to obtain
additional capital, provide additional or nev lervicea. Increase coopatltton,
aod iBprove efficiency and managerial resources. It Is concluded,
hovever, that If a lerlous antlcoii^eciclvc effect exlsta, convenience
and needs factors scldon, If ever have tipped the acale In favor of approval.
Second, the chief public benefit resulting fron nHC activity has been the
Increased availability of credit to the local cconuntty (through loens
■Dd nuDiclpal finance). Counterbalancing this increased credit availability,
hovever, have been greater leveraging and some indication of poorer
operating parfomance in nonbanli narkets. Third, the one study of post
aci]ulBitlon effects found that BHCa have tended to fulfill moat, but not
all, of the public benefit actions they have proposed — most notsbly with
respect to trust aervtces and data processing services, recruitment, and
loan expenslon.
Conclualona and Dtrccttons for Future Work

The evidence sugsesM the principal eeooomlc effect of the BHC
HTvement to date has been to faclliCBCe increased leverage and the aequisltlon

Digitized bvGoO^^IC

To t

of eha ftnanctal •yicaa. Ucnnvar,
mat be coculdarad, Flnt, Ic 1* i
iTMllvldual BHC lubsidUTtei iiqill'*'
becco* not* risky. Itili would be

e risky aaaota, Balnly for ttie bank aubaldlartaa,

, thla Bay auggest ■ we>k«niiig of Ch« icabllley

a. Ucnnvar, chaia ara a nusiber of factora Chat

<t claar Chat ineccaaed rlak taking by
thac Che overall or|anlaatloD haa
ua only If diare vara no baneftca

f roB arganlcacional and gi
Chars la Ittcla evidence •
rlak through dtveralflcat:
poIoC of view, Increaaed
only be of coneam If It
achlavad Qia aoelally deal
caaa, than tha Increaaad
claarly b* In the public
haa enabled the organlaatl
and acata and local

[laphieal dlveralfleatlon. Unfortunately ,
the extant to which BHCa have rcaulcad In redoced
I. Sacond, froM a auparviiory and public policy
ik taking In the ayatam aa a whole ahould
aasunad Chat the financial ayataa hai already
rabla level of rlak. If the oppoalca 1* the
ilk Chac mlghc ba atCribuCabla Co BHCa would
:. Third, Che increaae in BHC leverage
expand tending, particularly to conauaara
Hhlle aiKh lending «ay be rtakter Cb«n

holding liquid asieCi or U.S. gov

■rly repreaanCa
! of financial

leverage attributable

Bssessnent, Chen, of the effects of
D BHC9 requires a balancing of what

D„ii„.db,Go(5glc

Fav othar aapecta of BHC oparadona jlald aa conaiatanC laaulu
■a Cha lapacta on lavaraga. To Cha cxcant that BHCb have raaultad In
lacTaa**d eo^atltlon, the evidence luggeita It !■ through da novo axpanatoa
or footJiold antrr lathat than b; acqalaltlon of algnlfleant coBpatlclora.
Hi* coMoa argiaMnt, bovevec, la Chat da novo axpanaton ii coatly aad not
aconoadcal. tloraovar, tbara nay ba long dalay* betwaen the cbw an
tnatttntlon ucpaiid* tn thta my, until tt beconaa an affectlTe coapatitor.
Again, hoHver, next to Dothlng ta known about Cha altecnatlva coata of
entry and foothold axpanalon.

Farhepa the least la knmm to data about BBC nonbaalitng actlvlelaa.
Only tw) actlvltlas have received attention at all in the published atudtaa—
■DXtgaga banking and consumer finance — and here the evidence luggeata
llccla about die long run liifiaccs of BHCa. Hot only are Che atudiaa few
In nunbar, chay alao auffer froa the ueakneas chac chay cover a iborc
tlaa apaa aC Che early phaaa of BHC invotvenent In Che acclviCy, Equally
t^orCant—and thta appltea Co Boat of the work on BHCa in general— nuch
of tba evidence on the Impocca of BHCa via ganaraced during Che period Is
which cbe economy experienced Che greaceac decline In econOBlc acclvlcy .
•Incc the Craat Depreaalon. Thus, It Is noc clear whether the results

In terai of directions for future work chat would be rclevanc Co
fonulacton of public policy, Chere are leveral areas that seen critical.
The first relates Co Che operactonal and organizational cha;.-acCerIaCIca of

D„ii„.db,Go(5glc

■ BHC md tha uctant to vhlcb It affects rlak taklns. Ineludad ahould ba
worfc oa tha ralatlonahlp batwaen dlvanlflcaCLm and risk aa wall aa (1)
tha extant to irtiich dak may be tT-anafercad ttem oaa aubaldlaiy to another
la a BHC and (2) tha rola of caplcallaaclon in a E8C and ita affacta oa
tha rlafclnaaa of the organliatlon. Second, additional attention ia needed
on tha co^atltiva effects of BBC affitlation, Exiaclnc mrk ha* baan
dlracead toward tha a£tacta on atruccura and not tha lapltcattona for
behavior, rivalry, and price-coat narglna. Third, tha work on affictaocy
and perfonance naedi to ba expanded with particular t^thaaia on tha aftacta
of altsmativa Maana of tcanafarrlag fund* vtthin a lyacaai on lacaautad
afticiency. Fourth, there hai bean no aaalyais of the effects of BBCa '
on fund flam and allocation of resources.

D„ii„.db,Go(5glc

gMtlon II

A HinuKY or Tfu UHK HOLDUG comuiv

DoMld 7. Savlg*

Id ttaa lait doea'*, tha b«nk balding eo^aay ham bacoH (n

Mlnsly li^oniDC loim ot AMrleu Liiii ireUl baiUot orgBDiutleB.

■iid-1977, baidiB ouMd by holdlni eoBpaali* opariccd ovax OM-balf

1 coHaieUl bndi oHlest aad b«U mnt 70X et all eoHMreUl baak

CI, >B aUUIea, thi I, MS bank bsldUs coapantaa rataUtad b^ cba

CovcinarB of tha Fadanl ftaaaiva SfataB coatrelUd fW-tSS btlllon
t Id panlsaible DoiAaokloi actlTltUa, an aBcu&c oqual to apptwdiiatal;
■ aataCa of Uw coBHrelal banklns ayataa. Ttala pipai tcacaa tha
lilitoiy ol Oia bank hoUlni co^aoy iw*a*ot and thn atatutaa by idildi bank
tupADlaa ace rasulatad.

Foul intaraating cei
It, tfaece baa baan a canirl

la, tb« uaa of the nltlbant
nching vai <

1 obaQnatloD* anairsa frcm rhLi fatstocy.

.nuity of laauo* aver the drcadaa. For

objective at c

ly 1»00> and la atlll an

a today. Llkcvti^;:,

11 of banking hy hsldlog coupan

D„ii„.db,Go(5glc

A third intcEettlnt obHCvacion la the lidgth of tin* ^UHi «■■
raqutnd to obtain coB^rchcnaln Tedaral nguladon of aearlj all bank
heUlug coopanlaa and to aehlan the pccaant degrea of Kparatloo of baokias
and nonbanklnf actlvltle*, Poislbly bacniM lagialatlon vag Urgcl;
puvonttva rathar than eornettvc In oatun, die praaant dagro* of
regulation of baift holding coaplnlaa Haa achieved on an InerCBaDtal basis

Fourth, tha devvlopBeat of baidi holdlni cinpanlet and tb* atatotaa
■ovoinlng their sparacLon hava uB<)uaatloaabl<r had a Ba]oE tapacC on the AaaTteao
ecODongr. It MMia probably that the atncturc of Aacrjeaa banklag aod
ioduiCiy Hould be quite dlffcnut If: <t) bank holding coDipanlaa had not
developed; (2) greater branch banking powara had been petsittad by tha
atatca or by Fedetal lav; (3) bank faoldlog conpanlea had bean allewod to
expend IntetaCace after ISSG; or (4) If the nonbarJtlng actlvltlaa of bank
holding canfianlia had not baan reacrtctod. ~^

The OrtRlna of the Bank Holdlna Coapany
Although often clatslfled ai blanch ayttems, the Fliat and Second
Bank* of the United Stacea aod nany of the atate-ovned haiika ocganlied la
the laOOs vere alKllar to holding conpanlea bccauac the vailoui btanchea wete
able to fxcrclsc conitdrrflbly laoru luconomy ihan the noni'il branch office. -'
n.u aodern form of banV lioldlng company, hovivet, H Boro an ouCgrouth of the
chain bank Chan of Eheac early, govccnnent-eponaorcd ba.iks.

aiain banking, cliarnccciircd as the ovncTaUip of note than one
bank by an individual or iic^ill group of individuals, uaa nose rrevalcnl In
Lhc Hldwrat. Pacific Northuptt and the South. Accordin[^ to Uartlnt.eur, the

Digitized bvGoO^^IC

Mccher chain of biidci. •■tAli*tMd in Hsrtk IMkota In ISM, «u On •arllan
knovn Bbllo binlcliis lyitea. Tha VtthiB-Hanley chain va* ods of On flrat
Ue^ chalna; organlud In 1889, thla chain contalnd over 180 banka Mileh
van locatad prlaarily In Geotgla and Florida. Tha Uicbaa chain I
aa a rciulc of tha collapia of tha Florida land boon in 1926. ^

Croup biAlng, tha aaily Caia for a bank holding cancan]
oHDerahlp of two or hois banka b^ a asparacaljr ottanltad cocparacl
la c( ■onmhat latai OTlglo than chain banklBg, The devalojoont c
bank hoUlng cdnpsny dapandad upon amcndmaot* to atate corpocador
to paialc ona corparatlon to purchaaa the atock of another corpora
In 1889 Hev Jora^y baeama tbc ftiat state to grant thla power Co c
c tine, holding canpanlaa were created by apeclflc act
atiircB. Subaequout to the Hew Jersey action, Ecveral other
ed Lhclr atstuLcs to peimlt Che foiruCion o£ holding companiaa.
oup banking la usually dlBtlneulahed tm chain banking on the
, rather than individual ownetahlp, of bank atock. Tvo cLher
Ins tnctora arc alao cited In the eorly Ilteratuco. Flrat, gx<

The HncrailUu Co:r.pany, 1931) pp. 62-87
l-ubiic Allnirt Pccns, 1955)~p. 10.

Digitized bvGoO^^IC

baric. SkodJ, p™'P banktaf lusall)! had mb* Con of central nMoatniut
HhtU the chain banki did not provlda canCrallsad mcvIcu. ^

Cartinhour dtaa tha Adas Hannah CoopaiiT, OTBanliad Id 1900 la
HinneaoCa, la tha fttat canpanr aatabtlabad Co hold tba cmtTolllas atock
Intaraat In baiic*. -^ Ihe aarl; holding coapanla* vara ralatlval:r iBall
and uaually Identlflad with ona Individual In a aamiaT not dlaalatlUr
froB chain bacdclng aystcBs. Iho ftaocltaly Corporatton prarldaa a alRnlCleast
emeptlon to Cha alta. tana rallaat ton, but ai a lula tha laajDE foicaa tor
the cxpanalon o£ group baiAlna did net davalop until tha 1920a,

tank Boldlng Compantea In the I9«la
Thore arc no data on groa^ banking In the eaclj 19Z0b. ne
aacltcst coc^EchanBlv* atudy oC uroup banking wa> conducted by tha Fadatal
Rcaerve Syatca aa pari ot the 1930 Hcartnga on Branch, Chnln and Croup
Banking held by the House of Rcpk-esAntatlvcs, By that tins, there we^e^
287 sroups and dialns uhUh controlted 2,103 of the 24,026 United State! .
banka. Other datd, which d 1st Usui shed becwc£ii groupa and ehiina,
•Indicated thet thorp vara 28 groupi controlling 511 banks; theae SIl banka
held sppcoxlciatcly 101k of the loam and invoLBenti of all banka In tha United

2/ c..rtlnl,nur.ec. :

3/ Fl;cli-ji, Ccriild C, L'anU ilildiie. ConiunicB (Kew York: Cotum
Press, l'J6I) p. 31.

Digitized bvGoO^^IC

forcai for taOi WoMlnt Cammm EqawKm

Tha groKdi of b*A boUlns eoi^ul«a in Cha 19Z0a h«a bc«D
attrlbuCwl to aavaral factor*. Fliat, Che iiavaa of faltuna anns ihII
rural btnlu durlof tha agTlcultnial depiaailon of tha IDZOa eraatad a naad
for aoBC typ* of aCmetural ehansa to piovlde icabla banfclos aarvleca In
rural areas, Tha bank holding nomfar provldad aarrlcaa In ataaa laft
vlcbout banking aarvlcea •* a natilt of bank fallurat, offared a fora
of saoiraphlc rlak.dlvaraiflEatioo, provldad cxpaclaocad bank aaoagaEa
vfao could dm on tha reaogrca* of tha laad bank Id Ui« boldlng coi^ai^,
and provided cancraltiad aarvlcea for tha :atiibtT* of the ^cetit.

Second, the hl^ level of baalnaaa Barter* during Che 1)20* Is
cited a1 • cause of holding cnipan]r growth. Bankers, Ilka other bualnaaiBan,
deaired to form lacBer fins and Increase expected profit lavals. The
dacllna of local Indapcndent bualncaaea and the groHtb of retail chain
•tore* etlnln.Ued nuiiy ef tlio custonrs of the Independent Basil town
bank and created a perceived need for larger bank* to acrvlce tha credit
need* of groutng nonfinancial bu*iiie*seB.

Third, the e<^eutli of amc b«di holding cor^nlca caused Che
fomatlun of nthor holding conqiuiiie* aa a protoctlvo reaction. For exonpLe,
the usjor banks In HInnosota cl^inHid to hove fonaed holding coopanici aa

Digitized bvGoO^^IC

of Eaitera and Wstten baulu which vera buying lEocli in HtdvMCan btdta. It
»■■ aigued chat by fomliig reglsnal groi^a tha doaluiicfl of credit BaTkats
by the Haw York banlu could be avoided,

Toarth, [•itrlctlona on bcanch baoktnt have almya baan eltad a*
a najor eauaa of hoIdinB co^any E'owEh. Hlth unit bankli«, tte cantrat
city baidi couU not follow It* cuttnaeca to tha aubutba. In addition, dM
hoiM or Bcpectadon that branching lava wnulil ba llhacallied s
or nationwide baaia encoaraged tha fomaclon and grouth of holdins o
aa a foundation for future branch banking ajataas.

Finally, the rlalng atock urkct of tha 1»20> fad
aale of atock by: the baA holding conpanlea and offared pmfltiaaklag

ayatcBia did not have aa easy acceaa to Che capital marketa and the relative
edventege of the holding company torn of nilclpte benk ownerafalp iDCieaud
aa the public becane nore intareated In boric holding eoi^any •ecurltlae, -^
Aa bank holding conpanlea grew, there waa aLao a growing coDcam,
especially on the pair of bank rcgulatois, about the Inplleationa of tba
group banking movement. A baalc concern waa vhethar or not Che banka
owned by an unregulated holding company could be etfoetlvely tupeTVlaed;
groups csr^oscd of Btaie and naclonil banks and banks located in iiany

D„ii„.db,Go(5glc

Minjr regulator*, Moi luay todcpwideot baAars, cxpiaaaad th*
faac that group banking uouU reault in an eicceiBlvc conccntii
badctng raaourcaa. Id raaponaa to theae faara, sane atatea p.
forblddiDS tha OBnarahip of bacAta by holding caDpnnlea. ^

Until 1935, bank atiKUioldeiB vcic lUble to tha b>i
for an amunt aqual to tha par valua of theli; atock. The e£f<
this doubla liability pTovlalon Haa queatloaabla riioo the aoli
waa a hoUlog coiquny vlth no aiaat* otber Chan bank atock. 1
gcoiipa held added aaaaca to enaute that the holding company ci
ita obligation aa a book atockholdei, othei groups made no pn
■Htiog thla obligation. -' Gone acatoa lequiccd thee bank h.
aaaina tha double liability tesponclblllty. ^'

Other coDcerni vcri: expiciaud during the 1910a oa bunk holding

baric to support null holding conpany EubsldlaTiea, apeculatlon in biA
holding company atock, and the transfei of had ssaeta betvoen tha varloui
b«&a in the group. -' The prccsute for regulation of (roup banking via
growing but action uaE Co be delayed until the dcpresalon years.

8 creditar

iloi for
.ng coinpanl

1/ Hogeneon, Oji. clt , , pp. 11-11.

1/ MIlUt, Oe. elt,, pp. 197-199.

3/ Caitliihour.Oii. eic . , p, 246.
4/ U._ld, pp. M2-25*.

Digitized bvGoO^^IC

Ili« l»«pr«i»len Jnil t»iik Holding CB»«inr K«»ul«tlmi
Th* 1930i bcou^c bink (allursB and •coDonlc crlal* on ■ *cala
p*irat baton •xparlanccd Is the United Statai. m* lactlon outlloaa tba
tapact of tha depiaialon on b>i^ boldlnt co^tnlei, itato baA holdlnt
coHpaojr totl*l*tlon, and tba snactaant and ■nfoccoieat of tha bank holdlss
eat^Bj provlaloaa of tlia taidiins Act of 193}.

The laoact of the Decreaaton

Tha bank fatlur«a of the 193aa had both positive and DOgaCtvo
effect* on the baA holding coDpRoj noveBent. KaCuially, sanj bank
BubaldlorlaB and parent holding coopanloa fallod. The holding coopai^
■ubaidl^rj bink fallun rata ippeiri, homier, to be about one-half the
faUure catc foi all banks. If the fitluTca of tMO l«ge EWtrolt bank
holding coiDpanlet^' could hnvo been averted, tha survival cata ol bank hotdlsg

for iieErly one-half of the $1.5 billion of total dsposlts In Buspendtd
gta.p banks In the years 1930-19M. During the 1930-1934 period 201
bank* In 40 groups failed.

Aa of the end of 1931 there vote 97 gioupa vlth 978 bonk*. B;
the end of 1936 ther* inre 52 G»ups vlth «79 baidta; 62 of Che 51 groopa had
b?en on the 1931 llct of groups. Ten neu gtAips Here added during the period
and 55 "Cfc dtoppid {torn the llEt, or the 55 groups not on the 1936 list.

The holding coap.in'.ts dcpli'tcd
insider loans and Ir.mr-. sccur.d

Digitized bvGoO^^IC

34 ««■ dcoppad bauui* of holdlat coapaBjp iBMlvaacjr, 17 «*e* dcoppad
bacauia of Eba convnilon of buka to bitDCfaa*. ud U wan axclodad bwauH
of ncluaiflMCloo* or dtaablutlon of tho holdlni cof^.

Tha 55 bank boldlos co^anla* ahlch oar* droppad trim tha boUIr«
co^aoj lift bctvaan 1931 and 1916 controllad 367 banka. Of thaaa banka,
190 autpandad payHnc, 100 wn coDvartad to bcanehaa, 34 wi* aartad,
abaocbad, eonaolUated or votuntarlljr llquUatad ai

allatnatad

tha dopraaaioo yaat* provided aoaa axp
bank holding coafi*nle*- Iranaanatlca Corpora

ked by tha Cavanwr

e banking ttrv

fundi
IIT ban

thalT asa]
a In 39 gri

clo*ail BaDy ol tba i
bank'i afllllatioBt
lacora confidence in tba bank
lad banks of holding cog^anlci tM»
lubBldiarls* and prevanC 1
ipt auapcodod; thla rapreaenti

of 19,375 bank*. ■
th* aotl-holdlBg c<

i'* baoki. Id otbar
a Idrga holding ctm^aj
•nd a run on the bank.
I able to provide aufflclant
falluraa. In 1932-1934,
:ad 13X of gioup baika.
:a rata was 2B.U, or 5,510
ip bank! tended to w*ak*G

roup Bardclng in the Unit

e Pullpttn (1938)

Digitized bvGoO^^IC

Stiit« BeaulJtlen of B«nk Heldta« Copynlet

Preisure for ths regulation ot biuk holiltii« eg^moie* aToia vary
early tn tba devclopsKne ot group baid(li«. Id 1909, the ConalaaLonar of
Bndclng In Hlsconsln waiwd of the threat of BanopolT control of bn^Us
and cited tbe putchaae of several Wlacooiin banka bj tb« Hlnnaaoti hoUlas
cn^uile*. He advocated teglalatlon "to dIacouEago thli avll In evarx
pEOpac aaiiD«E." -

Several state* attempted Co control specific ptoblens associated
wltb the holding conpany novenaat but these efforts mte not Judged to b«
very effeeClva. A fev states, such as Ken Jersey and Ueat Virginia,
alBply pEoblbttcd the purchase of bank atodc by Jioldlng conpanlei, but la
Host states legislation vss not enacted or did not prfvent holding ccHf>any
gtouth. ^

In 1929, UlBcoosln passed leglBlatiOD ubJcb extended double >
liability provisions to the owners of bsnk holding compsny stock, required
out-of-atate holding companies to quslify to do business tn Vlsconsin,
and subjected hsii holding companies to the suparvlslon of the Stste Sanking
Deptiruicnt. =^ Tlie UiecooBln legislation uas probably the most coofircheDalve

IrtlnhOur, Pe.. elt. , pp. 201-206.

..,z.d.vCoot^lc

FCJ«r»l L«iil»UHon In 1933

the dapnBilon o£ tha 1930a ind the Mialve bank faltuna a( tba
period traaafemd the pccaiuni tor action fia> the itatea co the Federal
laval. Iha quaacian of the value of bank holding ccnpanlea beeaBa
CDtaneled vlth the ■naljrale of the caueai oE bank falluraa and the leirch
tor aon atabla foraa of banking atructuie. All of the pieeiurea and
rrobttai cane togecher (n the 1930 Hearlnga en Branch. Croup and Chain
^iittnit ^ held b;r the Comlttoe on Badcing and CurTenc7 of tba
■ouae of RepTeiantatlve*.

Five bilU wore coaaidaxcd within the context of the 1930
Beartom; theaebilla ranged Eros providing for nepanded axanlnattaiia of
holding coBpaBlea to tho abolition of holding CDnpaniea. -" The flrat

Federal bank holding canpaoy legli
Banking Act of 1933, vaa IntTodi

corpoi

nted In the

While Che Banking Act of 1933 ^

is rcDteabercd mainly for oetablishing

the bank deposit insurance ayateu, it els

started the proceaa of regulating

ned « holding coopany aa:

y Itouae of Roprosf^ntaclves of the Unite
Coimittee on Banking and Currency, Branch
ConijroES, 2nd Session. CWnshington. D.C:
Prlntlnf. Office, 1930),

StaCcB, noarlngs before the
United States Covcrnncnt

2/ For details of the varloua blll^ see:
„. W.61.

Fischer, Bank lloldinK Comanlca. On.

D„ii„.db,Go(5glc

...urf eorpbratloo, builnui tnut, acHKiatlon or otbar atBllBr
argaBlzatioa - (1) Hhlch owni or eontroli, directly or iatixaetlj,
■Ithtr ■ ujaritjr of the (liace* of cipLtil acock et a ■— har
bank DC noes tbco SO pei cenCum of the nudier of (bare* votad
for the election of dlncEoia of any ou bank at the pcacadlnc

y aaonm the election of the Bajorlt;
c (Z> For tba baoaHt of Oioa*
nibstantiatty all the capital
of a Hnber baiA: la held by tnataaa. 1/

this definition of ■ holding cotpany has seraral key faafencaa,

f iitilcb UDCe to cause aubaeiguaDt pcobloa. Flrat, najorlty onwrablp

bardt vaa the basic aCsodard for defining control of the bank,

only those holding eo^anlas nhidi

A group coiqrosed exclualTaly of state

provlsloni of ths Isw. Ihus, sny

rngulatlon could co..v«c Its

Second, th

1933 Act covers

owned s Tedersl Res

rve i«.ber bank.

holding rotupsny vhlc

d«slr-d to .s«

narlonal bsric* and s

ate vaixx banks

Third, ono

bsnk holding coov

TWO years later, the

Banklns Act of 1

In wst oiw-banh hoi

Ing conpsnlcB be

Act, Ihe BunVtna Ac

of 1935 ex^p"

...nny org
. of the Fed

rlMtlon which 1

iniBs ware soverad by th* 1933 Ke^
IS Included a provision vhlch resulted

d by tho Board of Gavamors
ho .toek of, or inansBing

scat. 162 {1933) u2c.
Stat. 68'. (1935) §301.

Digitized bvGoO^^IC

Iha Tadaral KaMEv« Interpratad thli ptsvlaloa to t—wpt
OTganlcatlaiu lAlch vere technlcalljr not «n^ged In tli* |roup bciiking - .
basloaBB. Ooa bank vab not A grcn^ flod Boat of the VKO^tloni grsntad bj
tha loacd iMi* toi ODO-bink holding cn^Mle*.—

Ib« holding eoBputaa mbjoct to the tct vsre nqoired to fplj
to Che Fodaral Becatra £ot ■ penlt to vat* tholt itocjt for tbc alUctlon
of dlTcctoTS of lubBtdiaTy banki. In acctng npon appllcatlOBa for votlni
pamtta, tha Board wa* tequlred to consider tha applleant'a financial
condition, tb* dianctai of nuwgaBBnt, and tbe effect of Qis (ranting of
■ peralt on the aubaldlacy banka.

At • Oondltlon of reeelvlDs a pecnlt, tha lax raqulrad that:
(I) bai4c holding coipuilci, » i»ll ai tlielr oubitdlai-y baiJu, be aubject
to emloatlon; <Z) all (ubsldlaiy baidcs bo sublact to cuaLoatloo Individually
atlon of other aubsidlacy bank* and tlfp
conaolldated ataLSBanta oE condition of
Ishcd and made available to tha lesulatota;
<4) the holding coopan; maintain a reserve fund of nartioteblc aacet* iihlch
Hould eventually grou to ISt of the par value of bank etochi ouood by the
hotdlne coopany (thin provlsioB waa reducad by the BniAlng *ct of 1935
which elininnted the double llubillty provlalona of national bank stock
and reduced the nocesaary amount of holdinfi company reserves); -' (5) bank

and In conjunction Hlth
holding cciipBnyi (3) Ind]
anbaldlary bank* be publl

Digitized bvGoO^^IC

hsUlng coBpany eiiipti>T*aa b* Bubjccc to th* erIiilDil pcDalClas appllcabla
to bank eaptoyceB for ctIbu auch la falaB eacrl«i;. (G) aacuilclaa coipanlaa
be (epitated ftoii baidc holding capaalca ttlthla 5 yumTt; and, (7) bank
holding eoapanlea not pay dlvldcnda froa funda othai than thalj; nat ■amiasa.^

Th* BanklBg Act of 1933 alao wnaDdBd tha Fadaral Keaaiva Jtcl
bj adding Section I3A to control loana }r> backa to thalr affillatea and
to other holding eoo^aajr aftiliataa. Ihe genaial rule tlut a baidc could
not tend aota than lOX of Ita capital aad autplus to any one affillac*
and no Bor* than 201 of capital and aurplu* to all affillataa cnblnad
ma intended to limit probleas auch ■■ thou uhldi had arlaan ftoa badt
finuicing o£ afUliated ■ecuritlei fima.

Actins under tbe 1933 Act, the Federal Koaerve Gyaten developed
Tcgulatlona -' and considered applieacioiia for voting pamica, Aa
■ppllcatlona were recolved, the Fsdocal Ratarv* (xamlnad the holding eonpai^
and ita affillataa before lasulng a voting penalt. Record* indicate that
125 general voting pamlta ver« Iceued In the 1934-1956 porlod. Hore
freqoDntly, the Federal Reaeivs iBBuod limited voCtnti permits pending
the latlafoction of conditions Inpoaed upon the boldiDg conpany. In the
1934-19S& period, S17 liiaitcd pernlts w^re granted; nmst of the penlta
were ItBUfld prior to 1936. -' In addition, under the Bsnklng Act of 1935,

■u States," On- elt. , p. 98.

p_Systcm, IB34-l')5t.

Digitized bvGoO^^IC

Om Board of Qamnois flnaptad 102 orMBi"tl«>ii ■nttj ooa-badi hoUlas
eoii«nl»«, tTOB lasalitloB nndar tba Act.

nuia the 1*3) Icsl'l'tlOD mMimti to— of tht profalHS
limBtltiai bj tba ccltlea of th* bank boUtni covanj aotaBaBt, aany
dlHlnltiaa roaalaad to b« racooiUaiwl to futun UiUlattoo. OUMt
than balnc raqutrad to dl**at afftllataa angaBad to tha DDdanfrltlng
oc distribution of aacurlttaa, bukboUlug eorvanlaa van atlll fro* to
ansaga la ai^ etbai Una of csiaarca. Tha lataratata aparatlooa of holdlaii
coBpantaa mc* not llnltad aod no provliloni mra Mde to cegulata nau
bank aeinlaltloDa by holding co^anla*. Aa Isdleacad, ena-bank boldtsi
CMpanla* vera uaually ciB^Cad and froi^a coa^oaad aacIualvBly at non-
■wbar baAa Vara not TegnlaCad. On tba laitar point, Laub Indleataa that
"In a fav iilnoc Inataneai group banka haTo vlthdrawo fnn nMbcrahlp
In tha Faderal Kaacrva Syatcn to avoid the need tor voting pctbU*,.

-^

Tho Bank Holding Company Act of 1856
Iba Banking Act of 1913 late problaaa unreaolved and the praMun
for greater regulation of bank holding conpanlea conllnued. This taction
enaalna* developaanta during tha period between the Banking Act af 1933
and the 1»6 Act, dlacuisaa the Bank Ualdlng Company Act of 19S6, and

Digitized bvGoO^^IC

Pr«»«Bir«» tot LagtimioB. 1933>1M6

Itia pniniia for an laglilatloa couttDncd ana thou^ tba
caUtIn ■!» aod Ii^tcanea-oE baA holdles eoiapanla* did not InemaM.
on til* BUBbar of budt holdtnt eopaalaa an aot anllabla on a cos-
ant daflaltlonal baaia. In 193C, tbace nn 52 botdlai eo^anlaa
load aa (roupa contalAlos tbcaa or ■>» banka) (bldi oootnllad baiiu
holdlni in of coi^rclal baA depoaU* la tha DnlCad SCatai. Br IMS,
ualitt tha tJiraa bank datlnltiM), than wan 33 bank boldlat co^aDlaa eon-
tToIllns IIX of dapoalta. Aa of 1954, tbara vera 46 holding co^anlaa eon-
tnilllDg ontT SI of dapoalta even Choutf) a bank holding coapaor «aa datlaad
on tba baala of .ounlng 251 or aora of two sr aora banka, Thua, glvnn'that
tha daflBltlon of a bank holding eo^an; for data pnaentatlon vaa
ItbatallEed over tha pectod, tha Eelatlvo Liapoitanoa of boldlos e«ii|iaal«a
appeara to hava deelinad. ^ . -^

Iho 1933-195S period btouEht a cenclnulng flow of propoaad bank
holdlns company legislation. In 1937, Senatoi HcAdoo propoaad llBlttng •
bank holding conpany to owBBcahlp of lOX or leaa of tha atock of a aaaber

bank;. at the aane tine, he
national bank*. In 193S, F
alt holding conpanles — bo

Cing gro

er brimeblDg p<«*c* for
et tha ollnlnatlon of

nccrn with bank holding

Digitized bvGoO^^IC

ud pnpOMd' "Elut i^Mdiata Uslslatton bs taacfi pnnptlDs tarChar
•■paiuIoD ol ■zlstlnc b«di hoUlns ccBpiBlM oe tb* cmtloa ol an bank
boldlnt cavntca." ~^

In tba poit World Wat II period, Iniacaat la aaw leglilatlon
coMlmMil and (r». Batwaan Btd-1H9 aod »id-1955, ftftaan bank holdlns
mniiig bill* van Incioduead In tha Congia**. Support for nav laslalaCion
waa laeraaaad to 1933 vbaa tha Suptaaa CoueC (allad to aat aalda tha Court
of Appaali' dacIalOD .agalMt the Eoaid of Covenora In the Tianaaaarlca caa*.
Tb* redanl taaarva had cbatgad that Tiaiuaaerlca had vlaUtad Sectloa 7 of
tha ClajftOD Act by Ita purcbaaea of baAs Id flva Weatem atatea. While
ttaniaaeclca did hoU aahatantial paTcaDCagea of total dapoattE In rheac
atatea, tha ftoatd felted to iIicm avldeoce of a reduction ot coHpetittan in
locel BaEketa, Iha Board'a uneueceaafal caae ma baaed

eoHunlClai and tha uJOTlty of Tranaaaarica'e purcheaea had beei
lAere the eo^anjr had not acquired other baolia, -'

Tta forcoa HOrklng for and agalnat enactBent of a bade holding
cospany bttl vera fairly ctmatant over the period. In the later ycara, the
taeue of niltlbank holding cospanLca ea D aubrtltuto for hreiichiog

boIdlDg coapanie* beca<ae a deatre to Incrcaac ragulattoo.
■HintcnsrKi- of copctltlon In both banking and nenbanking

Syatea. p. iT.

2/ t-lBcltor, bjnh ItoUlnn d

of the Pederel Rcaerye

D„ii„.db,Go(5glc

coDClBiad onr th* parted. Dalar* Id tb» pasugB at m UgiilMlsB
niultcd tm tha lack of tlcaltlcant biidc'hoUIng empaor abDiaa. qoaatloaa
ralatlva to tha dtvliloa of rcgulitorj ratpenalbltltisa bacuaao tha Vedaral
badktnv aBaactaa, and cooceTn ovac tha rola at atata bank hoUlog cimftar
raBulatlim*. ^

pi* Ban^ HolJlM CcMpanr Act of 1956

Aa Baidi lloldliia Csvanj Act of 1956 vaa a ea^ra^aa bantaao
tha varlou* intaraacad srovp*. nia Act aolvad Maa, but Dot all, ot tha
probleaa ancounteiad b;r tha Fadacal RaNm Syata> In tea adnlBlatiatioa of '
Cha 1933 lagUlatlOB. By l»t, tha Boacd of Govarnora uaa atTaaainc tba naad

foT ehansca Id tba holding co^i
holding compaiitaa axpraiaed In

JeflnltloD of a Bank Holding Cmpany.

Act vaa achlevlni agti

finally anactsd, the
ig 151 ot noca of the
tfied that ^01 ounerat
cat of cha baidi, but ui

my lax, rathac than tha oppoaitlo

In aubuquant leglalatlon, a kay part of tlia
on tha definition of a bank holding eenpMv
fined a bank holding cnapany at ao oiganlaattoa
ick ot two or Boro baidca. Tha Tadarat Kaaerva
irauld be an adequate cut-off polcC to Indicate
opp-iaed to Che m definition. Th*
holding coapaniee under the law in ordet
>f bank and nonbanklng acclviciea. The Csogtaaa,

E COTnwinl'-a, pp. cit. , p. 69.

D„ii„.db,Go(5glc

hotravari dioa* to aieluda cli« one-bank lioUtng cmpiDlea. -^

Iha deflBlClon of ■ bank holding ccopan; 'inctudcd thoia cisea In
liileli tb» coapany vaa abla Co control tha alectton o£ a oajorlty of tba
dlTBCCora of c» or oorc banki. or a trust vhl«h held 2SI or nora to the
itock of tvo or nora bink*. Exai^tlonB ware granted tor: (1) ftdacUry
nflMEahtp of atock; (Z) coaptnlea ragiltarcd under Che InvaBtment Cos^ny
iet of 1940; (3) tharet held during a eecurltlaa undennrtttna or tor
proxr (otlcitatlont; .(A) eaiaa la vhidi SOX ot the aaaets of the conpany
Her* Id agriculture; (S) rallgloue, educational or charitable oreaaliatlon;
and (6) partnerahlpa.

II. Coverage of the Act

The Bank Holding Cosipan;

e Syat

baldlai^

rlor approval of the Board of GouBrnoc* vta required for any organliatloa
1) bacime a bank holding coapany; (3) acquire stock In ■ bank If the pureh
Duld re>ulc In DuncrEhlp of note Chan 5Z of tlie bank's atock; or (3) acqul
lie aeteta of a bank or nsrse vlth another bank holding co^^any.

III. Bxpanilon of Bank Holding C'
The Sank HoldlnB Compon;

c of 1956 eacab
Wo ring appllea

■tundardi for

a fOTD bank holding

t/ "HeiH>randui> of Che Views of Che Board of Co
Sytten Regarding Bnnk ttoIdiiiK Conpany Leglalatf
BinklnG aniJ Currency Conultteo on July 5, 1955,

Digitized bvGoO^^IC

»t.; (3) t
, Buds ud
■nd (5)

eoHputem aol applleacloD* for tb* acquiiUloa of ■ h>A by ■ baafc holdta(

coipuir. Iba t«etOE* to b« cooaldocod wre:

(1) cha flDaaclal histoid ud coadltloa o( cba c>

ccapaalBi and tha banka coocemed; (2) tfaclr pro

diaracEar of EhalT aanaiaBant; (4) tha coavaolaa

walfare of the coiBunLclc* and tha aiaa coDcenis

vbathac or not Iha effact ot luch acqulalCLon or laariar or

COMolldatloD wwld ba to aipaod cba alia or axtaat o£ tha baA

balding ciapaiiT sjacaa Imolvad bajpond llalt* CDnalaMM oitb

ada^iata and aouDd bailing, tba public iDCaraac, apd Eha

preiacvaclDn of co^atlclop In che field of baAlug. y

Tbe tint four factora Co ba conaldatad iMta valatlvalj cUai bst

tba tlftb factor aatabllahed no guidelliua and ptovad to be a ptoblaa ta

tba aobiequept admin isCEetloa of tba Act.

Itia Act alao tlaltad bank faoldlng Eonpanj expaaaloa by prohibiting

futuT* Intaiatate baab acqutnltlon* by holdlns coopanlci unlaai audi ■

acquialtlona ware ipeclflcally authorlted by the atatutca of the itatt

■ tatc had I atatute auChoHilng

, tha foraatloQ of natloairUa

■ ttng Intaratatr haldUtg

In which t

acqulaltlona by oic-of-atata holding

holding coBpary ayatana vaa ptevaotei

eoivaniaa ware alloved to retain the!

Tbe potantial expaniloD of

rlghl

holding enapany ap

Ilea

lona bcf«e tt

ofCo«rnors. Ih.

Bo»r

d wa, 01.0 raq.

bailtlnE -gcnclce I

tfao CwipCrollor of

the

1/ IMbUc Uv 511

<3.j

ptpr 240. Eith

Ing ccopanlaa vai alao United
ct baiik holding coapanlel. Ttrai,
or could pasa on lodlvldsal
the appticaclon caaa bafora cba Board
to aeak the opinion of atata
ihaicercd baoki or the opintoa of
ivolvlng national baoka.

CCS, 2nd Seaaton, II. R. 6227 | 3(c>.

Digitized bvGoO^^IC

IV. aonbanklBs Actlvlctai

Obc of th* lanE-icandlng obJscciTCI, i*ilch «■ necaBiiItihad bjp
th* 1956 Act, wai cha tepnttlon of ncnbank-ieliteil nctlvltli* ft« nltibank
holding compaDlu. The «et piohlblted ounaTihlp of sh^rei Id noobanV:
corpocitlona, othvr than appconcd bank-ralitcd acclvtcics. ami lequdad
bmk holdlns ccmpaDlca to dime ibani ot nonbank-relatad buaiiMMet within
two yeara.

The 1956 Act allowad nultlbank holding cospanlea to engaga In
cartaln actlvillaa — eiining and managing bsnk holding company proparty,
providing aerrlcea 'to aubaldlary banks, oparaclng ■ aafa dapoait coapany,
or llquidaclng pcppacly aequlrad by aubaidlary banka. Beyond thaaa apaclflcatty
paraiCtad aetivitiea, the Board of Govarnoi* vaa permitted to alloa other
noDbanking activltlea uhlch were "of a financial, fiduciary, or Inaucancs
nature" if theaa acrlvlilai could pan the cost of being "ao cloicty ra-
latad lo the buainaaa of banking or nanaglng or controlling banka •■ to be
a proper Incident thereto." =' -' Thu>, the boaic principle of aeparation
of banking and other tinea of cowierce ua* eaCabUslied for nultlbank holding

V. 01.h«r Frovl.tnia of the 1956 Act

Digitized bvGoO^^IC

Btarly all tianuctlsnt batween bank* anil hatdlng caaptaj •fflliaua uUk
■tDDE uceptton* In c*«e* of [raDUetiooa baCHccD alacer bank tubaLdiatlM.

Be^Iatlon Vnin tha Bank llolillnK ComHnv Ait of 1956

Durtne the period I93&-196S, th* Board of G^vcraori conildcced 21
application* for the (ouatloa ol bask holding coapanla* and appnxnd IS
of the** appllcatlsna. In Che laiit paiiod, 95 appllcatloni for the
acquisition o( barit* unicr Section 3(a)(3) wro filed and 80 were approved. ^
SavcntMn of the 95 acqalaltlon application* nan to acqutr* navly fomad
bank* and the remalDder uert for exlatlng banki. -'

Ball'i analyala of the Boacd'a actions durlns the period autgcata

that applications Uhlch did not change the existing atnicture of the MiVeC

caia approved and those applications uhlch changed ngrket itructucc vcro

denied.- He indicated that the Board had elvcc llttl* ucieht to the banetlta

to tha tomianUr or the barks, had evaluated coapetltlon In leruia of llie

effect of the piopised acquisition on other banks, and had neasurad all* -'

as either: (1) ovurlap of markets; (Z) dcpoaiCa involved; (3> rank of the

banka In their markets; or Ci) tesourccs conCrqlled by all holding coapanle*

In the uarkct arc?.

If Annual data uro found In Jessp«, nichacl A. and st^vtii A, Seellg, Danh
t tteKlngco.!, Hosa.i Leirtngton

Books. B.C. llMth f, Co. , lD/7) p.

2/ Cortpllcd fru hltcorlcal record* at the Federal Reserve Baird, Waahlngton
D.C,

3/ lliill, CeoTf.e ». , "BanU ILoIdlna Company RCEulatl-on," Sojthfrn Economic
Jojrivil, XXl (April, 196S) pp. 342-355. ""

y SlKe rifpiu here Lo th-. "...slr.i- ,mC i-^lcnc of the b.";U holding lonpany
ayr.tf.-j. ..■• [.:.L j.iovldtd for the l.isl or tie five fn.loia lo bt eoi.Bldrred
by the ItiK-ird in f-voliiat Liic h-.,'.b holdln:i cojip.inv applicBCi"ns.

Digitized bvGoO^^IC

Id Uu FInt Hiw York Cacparacioo c<
of dapoilt* involved to b* ch* lapoitant [(cti
ban craatad ■ orftaia tvic* ■• blR aa the naxt larB**1
MDunt of dtpoalc ovallap, and itM tal
faceeci la tha danlal of tb* HsTgan Haw Toil Stata eai
th* aaikat, aHHnC of dapoaltt In tha >arket contcotli
■nd iffact on eenpatlcoEa vara cttad ■> faeci

BacloMa alto wtaainad tha aarly cai

found abaoluca *1m
a tha piDpoaal would
ajat^. Hm abaotaCa

•. lalatlva alia In
id by holding con^nlaa,

In tha Pipaaton* daclaion.

daeidH undar tha 1956 Ael

V

Backsan Indicated that tba conaldoratlon of flnuclal hiatotj and coadltion,
proapact*, •»! ■miagaoiaBt had bacn ^o fo[»a and ware alwtr> found lo b«
■atlifactonr. Ka alio arsoad that "a given degree of cooeauttatloti haa
bean vlevad a* laora anclcoapatltlve Mian accountad iar bj a balding co^Hmi
than by an Indep»ni3ent Irniy." "

On tha poobanklng aide, only flTS coiIpaDlaa uecj affected by V>e
dlveatlture nqulTongnta of Che 1936 Act. Smeral eospanloa vela exacted
by CoDgrcaa In order to prevent haidlblpa. Tba largest ocganliatlon afteetad
vai Traniasrrlca Corparaclon; Indcod. TranataSTlca , aa wall aa at laaat
one S«aatBr, felt that the lav uaa xrlttcn with Iroaiaiirlra aa ita prlaiary
target. ^ TranlDncrU* fom:<! First nine tica Corporation to aaa-jin lt»
banking assrts, dlcttlbuted the FliatiKClra tcoek to tlic Transaniertca
Btockholdc-rc, and cc.iied to bp a bank hotdlng company.

J/ "all.

B-J51.

Digitized bvGoO^^IC

During tbs period 19SG-19G5, baok holdlni ctHifBj opaulon vaa
lalMivaly ltalt»l, ind th* boUlns eopaDj ihira of MCil boik daroalts
iU not ahDir » alBBtfleaDt aaniDt of growth. At tb* •nd ol 1956. thaia wn
AT Mparat* baok boldtof eanrpanir Broupa (aftar allaliiacliit duplleaciaoa
aclalos fm tb* cwnarabip of ana boUlni coavasj b; anotbar boldUi rn^any).
Tbeae AT troopa coatnllad 4ZS banfca ti.n of att loaurad e^icUl baaka)
and 1,211 banktns off icaa (5.71 of all offlcaa of inaarad cn—arrtal baaka).
tn tana of total dapoitti, baA holdtna ce^anj nbaidlary baoka bald
T.61 of total dapoalt* In toaucad badu.

At the iDd of 1H5, thera vara 40 aaparita baidt holdtnt eiBpantaa
cantrolllns 4M-banki (3.SX of tcauiwl cohicUI baoka) and 1,954 baidilns
offlcaa (6. ex of alt banking offlcct). Dopoilti In heldlng co^obt bank*
wiF S.3X ot total depoilta In all Inaur^ banks.

B; the end of 1965, aultibank holding co^anla* r*|Iatar*d un^
the 195G Act veie opcratlni In 32 atatea. In 10 of theaa atataa (16 atatea
In 195G) bade holding eoapanlea bald aare than 101 of total coaaeTctal bank
dcpoBlta. m 11 atatea (10 atataa in 1956) the; bald Bare than 30X of total
deposlta and in 3 acataa (3 atatea In 1956) ceglatered bank holding coHpaniea
lietd Bore than 50X of total dapoilta. ^ ^

In aplta of the fact that bank holding eoivaiiy grnitb In tba
t9S6'I9£5 period uas not very grout, presaurc contlmiad for levlaioni of tba
195Ei Act. Ihe ptoblcas oC Lhc 1956 Act are dtacuaaed in the following aactioB.

kuiirvr Syitcn, P97C] pp. 133. «44. and 453.

y Fo; adJod aiiilyals of the ccorfth ol m.illtbnnh hojdtr

Digitized bvGoO^^IC

c a-lJ^-,^ '— —BT ACt Ot Wt

lb* pasus* of tlw Mik Holdlni Coapi^ Act of 1956 Uft ibbb
la*iHi uarwBlnd and tb( fivnl Mi*m cneauatand acaa difficult!** with
tha ISH Act. nil Mctlon covara tha problaM of ch* 19ii Act, ite IMC
Aaan^aBta to tba Act, and pellej actLon* usdar tha Aaindad Act.

RiSqi

fmblawa a,f tha HW LBglalatloB

Tha 1956 Act raqutmd tha Board o
yaaca of tba panata of tba Act, a raport to tha Congnaa daacrlblot an;
dlfflCDltUa with tba adBlnlatratlon of tba Act. Tbia nport,
OB Htj 7, Hit, eootalnad IS datatUd MCtnMDi
elarlflEatlODi of, tha Act.

Tba flrat probla* eltad bj tba Board
balancing tha eomaDianca and aacdi, tlBaDcUl
pcoapacti, and wmaienant faccoi
approral m tha public Intaraat, tha alii
and the preasrvaCioo of eoa^atUfon.
a bank holding coipany having ■ larga

Vhat trada-off ah»ld bo mait brtvacn th<

I tha diffleuttj of
itory and coodicioai
ftb factor, tba otfoot of
ind ritant of U» holding conpanj
Da caaa Is iihldi
:he iHrkot appllai to
tloMl banking aartleaa.
iIcDsa and naad* of tha
of tha holding ocnpanrT

D„ii„.db,Go(5glc

other qiMKloM and Itnaa nttad by Cba Board Iiuludad: (1) Uu
mliht to be stvan to aC*te bade hoUlst co^iapj Iwi; (2) tha raatrtctloaa
placed oa tcBBaaetlona betwaan baoka In a holdlni ceapaqrt and {3) the laaua
o£ lac*.ualon af ona-baak holding coiipaniea,— '

The 1966 Aaandaanta

Iba 1966 AaeBdmeoC* •llmlutad sou at die enaptlona Iiam tba
195fi tct and aicpandad tha aunber of oTganlutlos* contcd b; tba Act. Si*
■UJOT eHiqitloiia elbilDatad war* tor raglBteia'd lavestment ccopanlei and
their Bfflllataa, lellsloua, charitable and educational InatltuClon*, and
nonbuiineia long tana truata. The two aajor organliationa brought under
tba provlatona of tha amended Act vera the Alfred 1. Dupoat Batata (which
coDtrollad 30 banka aa nail aa many nonbanklag ancarprlaaa) and Financial
GBDtial Corporation (Hblch throu|fi aubaldlartca owned 21 banka in five
atatea and the District of Columbia). *>

Iha 1966 Aaendseata eliminated the voting certificate taqaireaanta
applied b; tha Banking Act of 1933. In addition, the 196« Asntaenta
repealed Sectloa 6 of the 1956 Act. Section 6 had been Intended to prevent

the aubiidtar; baidia and the parent holding coa^any, ^t had prohibited
all nornal banking trnnsactioos b^tuMen tha lubatdL.iry banka, except for

D„ii„.db,Go(5glc

. ipptlad Section lU al th* Fadtral RiMm Ace to traiMactloa* bctvaca
• aubildiar; bank and It* pamt boldlns eia^oj and alatar aiAaidlMtaa.
TrarnactlDo* bacwaas aiatac bank aubaldlaTlca iihieh wara aicaBittad ftem
Bacclon 2U vara Cha pravlously penitted dapoalt ratatloiuhlpa and tha

Iha aajor portion of tha 1
ef lavlHd atandarda for the evaluatloD of holding ccapaBy appllcatlooa.
larly In 196S, tha Cengreaa had aoandad tha Bank Hirgar Act of 19&0 In
OTdar to correct for tha different coapetltlve •tandarda applied by tha
throa Fadaral banking agandea and to adjuat lor the Suprema Couit'a
nltnt* In the Philadelphia National Bank and LaxlngtOB Bank caeca, -'

tlia cospetltlvB atandarda applied to bank Bargera by tha mfi
AiMnd»nta to the Bank Herger Act of 1960 vere alio placed In the 1966
Aaendaenta Co the Bank Holding Company Act of 1956. Thaae atandarda noM
raqutie the Board of GovaTnoia to deny;

<1)

an* acqulaltl
aoetlon whlcb
be In furth.i
■wnopollK «
banking In ai;

on or lerger or eoniolldation
L vould reault In a Bnopoly,

■ancc of any eoablnatlon or co
' to atteiiipc to Dunopotltr tha
ly part of the United Statea,

under thla
or vhlcb iNwld

.-..piracy to
bualncaa of

m

any other pro
under thia te
may be Inbete

.poaod acquiiltlon ot wcgiE o
ccton whose effect In any ace

intlalty to Ie»en ccnpctlclon

r conaoltdattcn
, or to tend to

z

Charlca r,
>hington. D
:n?r. Entt '

r..iiUp«, Jr.
.C. [ The Boil
k", and Hugh C.

K-rzer IceisUtlon and ca»>,

. aee: Kail, Geoi

rgaB.

(Va<

'. Ilanaco, "A Review of tha Uf-

. Rcacrva Systea,
r of Bardi Hecgetl
[December, 1971):
M: A Legal and

"! .Jq".a^?, ^*v

I96«)|

A,"*

.■•i.:. oi'lho I9i

M4recri and the Public Intert
.1. ]l»k Jfcrgcr Act" &..^L".3_k!

D„ii„.db,Go(5glc

the '

It* • Banopolir, or lAldi la ai^ oUm ■■niwr «Buld I

xcltlvc tttnett of the piopased CrauiECiu an cU
nlghed tn the publle int.ere»t by Uie p»babl« itfci
■m»rtlng Uli

ninlty t.

Ria D*H ■CandiHs apply i
bank boldins eofiaay latulattoo,
»)iUh would <noliC* tha Shanan Aci
BactlOB 7 of Eha Clayton Act caana

a Shanan Act tai Clayton Act
a BmH caonat apptovB aiQ appltci
Applteatlooa lAleh would vlalati
be approrad onlaaa tba loacd

anttco^atttlvc aftact* ata clsatly mtiMlihad by tha convanlaaea and
da of tba ccBBUDlty.
Icy Aettona and Bapk Holdtna Conpanlea. 1966-1970

Duriot tha year* 1966 thtou^ 1!
giaw qulta rapidly. By the and of 1970,
co^anle* controlling B95 baidca (6.6X ol
baoklna offlcaa (ll.BTl of all banklnt oftl
bank* weic 16. 2X of total dapoilta li

170, Bultlbank holdlnf c

were 111 aeparale bank hoUiOB

id ccBHTclal banka) and &,!»

Dapoatta In holding coi^any

irclal banka. ^ Betveao tb*

E 1965 •

i the end of 1970, tha wltlbaidi balding c

. 13», Ml, ASS.

Digitized bvGoO^^IC

tool daposlti had BMiIj doublad. ^ Durloi Mils (IM y*iT pntod than
vara tl appIlcatioDa to [on mm b*il beUtns coapanla* eo^rad to only
11 In tb* rr«<rl«u« 10 jaara. Iha nudwr of appllcatloni Cs aeqalra banka
alao ioBTaaaad rapldlj during tha pailod; 3fil ■ppllciElona vara cmiUaTad,
aoapiTad to onlj 99 In tha pnvtoua 10 juia, -' IWtDCr-tvo of tha tpplleatiaa*
to aequiia banka vaca for da nmc haifca erganlud by tba applicant boldlag

Iha 1870 toandinnta to tha Bank HoUina Conmur Act ot Ui6

Tba 1970 taandnnt* aitaodad coMraga of tha 1936 Act to iocluda
dM nmarahlp of batti* by pattnaTahlp* aad gara tha Boaird of Covarnora tha .
potMT to dataiBlne that aa 0[|anliatloa 1* a bank boUlns coayaoj by vlitna
of Ita abllltr to coatToI ■ baidt without aimia( 2SX of tha atock. Kaflacttng
tha rapldlj iliiii| nuiabaE of ono-haidl holding cou^antea la tha lace 1960a,
tha toeua ot tha 1970 toendBanti «■> on the ngulatlon of ona-baok boliilng
ooapanlaa aod tha Doobankint aellvltlat of hank hotdlos cnpanta*.

1/ Tha iwi bank holding ceavaoj t> canaldaiad In tba n
2/ Jeaaea and Seallg, 0^. clt., p. U.

Digitized bvGoO^^IC

The CriHrth of Oii«-»«iit HolJlm Ci

Mtar ou-biDfc holdlns co^anU* had bMn axavtad, by tha land,
froB ChK holding ccBpinr provision* of th* Batklng Act of 1933 anl tfaa 19St
Act had txeludcd eae-bailfc holding cooptnlei torn legulatioa, MoiC ono-baok
boUiog caqkiDlaa exiactog prior to 1956 tnca ralatlvclj mall, wua located
in unit banking atacaa, and chair nonbaiUc activltiea -- nalnlj real oatata
and iniunncc agenclea -- voce pilurily local aetivitls*. Id 1956 than
vera onlj 117 unreguLatad ona-h^njc holding coo^anies vith total dapoaita
ef $11.6 blllloa. - hj 1965, there ueie 550 one-hank holdinc ca^Mniaa bat

In 19»-t960 Ehace mra 53 one-bank holding canpany foraaCiona, but to
1960-1966 there ntc 291 fotnltlont. froa 1966 to June 196S, 201 »!« ona-
bank holding ccnpanlei Mre formed and Itm June 196S Co tha and of 1970
thece were 693 more new one-bank holding caupenlei ciaated. ^ -^

StmB reasons tax Che rapid eroHCh of one-oank holding co^anla*
can be cited, but there bb; be others. Those cited include: (1) the ability
to uaa the holding company as a neans of railing funds free fron the

1/ Upshsw, Hllllas
Part III", Monthly H.

pp. 3-a.

Digitized bvGoO^^IC

coiutralnC of RcEulKtlon Q Intereat rate celUnga ■nd Regulation D reuiva

nquir«H>r>t* (uDtll 1973); (2) the •conoolei of acale acblBVid by ualns

(3) the legal obilaelcs and court challaogci to attRnpted badi dlvaidEleitlon
Into oChGE octlviClesi ^ and (4) the geograplilc expaualoa acroaa atata llnai
lAilcb va* panlitlble for nonbaok actlvltte* but not for baiAt.

The grovth In the nunber of one-bank holding eonftoiet and cba
formation of ona-bank holding ciKipaDle* b; nanx of the nation'a largatt
baoLs arooaed the feara of bank regulator*, the Congreai, tadependaot banks,
■nd the Independent ccoiietltoia of the nonbank (ubaldlarlea of bank holding

paolea

taff report of the Banking and Currency Cmmtc

House of Bepreatntailvea in
one-ttank holding companies

discilminate BgaLnsc the co
(3) force bank oi.to^ota to

id Coagroslonsl concern thi
Ld: (1) re<iulre the bank Bub;
-lea; <2> force the bank aubi
.tors of Che noiibsnk EubsldUi
onlze the other coi^BDlct In the holding
'Ing credit £rom the bank aubaldlary. ^

regulated

Bllou

ng the tines of tlie

St Con«ct8 l8t Session (Haahlngtoa,
cln^ OfCicc, February 11, 1969) p. 1.

Digitized bvGoO^^IC

japUMH iMlbitni. Finally, tbar« m* eoDcam ov*r A* abllltj of pon-
boldlns cnpan; banka to coapate vich tbe Hlda ranfa of financial aarvlMa
oftared by th* oaa-baak holding coapaalaa, -'

Iha paaaaga of cha 1970 JuandatDCa to tha Bank noUtnf Cn^anjp
Act of 1954 Involvad B long and complex political atcuggl* and cbcra mta
lubttanttal chaogea In tha foia of tbe orlsloal bllUeonaldecad by Cba
Congnaa. Coograanan PatMUi'* bill v(g Introduced on Februaiy 17, 19M,
but final laglalatloq vaa not enacted until Paceabar IS, 1970. Faaiaga
of a bill vai delayed by controveralea over the dlvlalon of regulatory
leaponsibllltlea betucen the varlou* Federal banking agenelea, poaalbU
emotions fnr mall bank holding coipaalea, aatt-cylng provlalDn*, atteapta
to prohibit Btoa. nonbsidclng activities, and "grand father" previa ioM. ,-'

Pfovlalona of the 1970 AnendmonCa

Hie folloving (ubaectloni deal xtth the provlalons of the 1970
AiKndacDta, as enacted, and soste of the various alternatives cooaldccad In
the Icgtalatlve procesa.
(1) Covoragc of One-Bank Holding Co:npanleB

All of the bills considered by the Congress extended regulation

bank holdlnfi co.npanlca and conElmitcatf s Eton the eovcrage of Section & (dealing
1/ KoiES, Stcvtn J., "uank lloWliic Companies .nd Public Policy, "Hw England

Digitized bvGoO^^IC

■eclvltlai) but chia provlaJon na* altslBaCad by th*
Confar«itc« CoaaltEa* and tha Board of Govaraora wa* glvao ataCutocy fonai
to eiicivt oDa'bank botdlDi eoHpinlst under corliln conditioB*. ''
(2) HgnbanfclBs Aetivltlea

Tb» Rova* vwtalOD of ctia bill raatiietcd th* daflnltlon of
peiBitted nonbanfclng aettvlclaa and inclndad a list of prohiblcad aeclvlclai,
Tlw final Act left tha detenlnarlon of penlttad actlTltlaa to the Soard
of Covatnora under the condlCIona thlt: (1} actlTltlae miat be "ao eUael;
related to baidcing or HDiaglnK or contTolllng bank* aa to be a proper
Incident thereto," and; (1) that the perfontnee of an; actlvltj bjr a
hoUlEC coapasy 'nibsldtaty nuat "netonably be expected to ptoduce benaflc*
to the public, auch e# greater conventence. Increased coipetitiona OT<
■alna In efficiency, that outweigh poaalble advetae effect*, auch aa
undue concentration of reaouicaa, decioaaed or unfair coopatltlon, conf^lcta
ound banking practlcea," =- In addition, the Board of
rlEed to differentiate betveen appllcatlona to engage
tigh a de novo aubsldiary aitd application to anga^
activity through the acquisition of an existing flna.

Digitized bvGoO^^IC

(3) GriBdfttheted aetlvlclaa

Tb* GtniC* noloD of tha 1970 AwiwlfTiti allowad bank haUln(
compantea to conClnue engaging in thoae nonbuklng actlvltl** bagun bafors
June 30, 1968 and thla approach vai Dltinatal; lelectad orer tha Booaa
of Kepreaentatlvea' •pproach, vhleh muld have re^ilrad dlvaatitut* of all
]A|M»IaaibIa acclvlcl** bBSDO after tha paaaag* af the Bank BoUiug
Ccapai^ Act of 195t. The Board «■ given tvo jeara to revlev tha grand fatkersd
■cttvltlea of bank holding coo^ntea with aaaeta in exceai of $60 ■tlllBn,
Bai&i engiigcd in Bctlvitlea not peroltted b; tha Boevd of Govamora vara
glvu until DeceilHt 31, 1980 to dlvaat aithtr thatr banka ov tbalr I^enlaaibU
(ctlvitl**.

(4) Antl-tylng ptovlalou

Ihe 1970 AaandMiDta included the Eeiiate pcahlbitlon* (gelnit
bank holding coapaniea requiring the usera of bank ar^rvicea to also ua»^
the services of nonboaK subsidiaries of the holdlug ccjni^ny,

(5) Adalnttration of the Act

the Bdminis tret ion of the aaended fianW Holding Company Act of
1956 Has left vith Che Board of Governors of the Federal Scaatva Syttn. Aa
/.dalntiCrntlon's origli-al bill wuM have divided the n.figlstoty rospoculblllty
betueeii the three Ft-dtrnl hmklng agcncICB, ns In Che rcgulntion of bai*
iwraecs. Ochtr propnssls would hav<- divided iho tcEponslbility for

quirit

1/

Digitized bvGoO^^IC

Nlth tha paius* <■' 1x 1'™ ABtndntnta, Che tw> imJoe obJ*etlv»i
d( bank hoUluc cmpany rtsulatloo Her* aehlevad; naat bade holding coipuii**
vara Mbjaee to ragulaCloa, and acatutorr and ngulacoiy cootTola iMia
placed OB Che expaaaiDD of baak holdlog con^alBa iato otliar buaineaaoOt

lUali Boldm. CniDBanlea and Baaitatton afcar tha 1S70 A«nd»Bnt»

Th* jaara 1971-1976 wEre active /Ears for t:b« fomatloa and
sipaDBlon of bank holding coiipanlaa; Che Dunbers oE aev fomaCtona and
■cqulalClonl roaa throug)! 1973 and Chen conClmiad ec lowec levela Chrough
the leaC of Che period .

In the period 1971-1976, 745 epplteaclooa to torn holding
eoapeniea Here approved and 57 were denied. Approvala of baidc acqulaltlona
totalled 1,377 (lacludfng ZSS ncqulsUtons oE dc novo banVe otganlnd bj
holding coT^aBlea) and aoothec 92 apptlcatlona wetc d«nied. -f

Pot nonbauklng activtcies, the Board, In the period 1971-1977,
approved 17type» of nonbonk activities and denied 11. For the period 1971-1976,
there inro 2,753 approved appIlcaClona to engage In Cheae ■cClvlclea. ^ ^

By Che end of 1976, bnnl: holding companlee vcre operating In all
SO Btatoa and the District of Columbia. 23.87. of all bmkt weiE ovncd by
luck holding conipanles; one-bank holding conpantcs omwd 10.21 of all banks

It, , p. lA end 1D76 *nnu"I R

ilUd

410,
410.

Annual

t the

1/ J.

SeellE,

SB- £ii

..,.

36 •

Board oC

In Lhc

3/ Fc

Period

r nddd d
K Co.oi>ani

i-tnll o

n cnlry

ll.C» l>

SI'

•i 11

:mk«

D„ii„.db,Go(5glc

and aultlbank holding copuilei cwiwd 15. £t of all hnka. In tana of
banklDB oftieaa, SO. 21 vara OHMd by boldlnf eoBpanlaa «Itti tha dlvlalatt
baiot 2i,3l by niltlljardc boldlng co^iaiilea and 23. n cwpad b; ona-bank
holding copanlaa, Bjr tha end of 1976, M.U of all cooarclal baA
dapoalta vara hald by aubaidiatlaa of bank boldlng ctapaolaa. thilttbaidt
holding coapaofaa hald 34.21 of Colal dapeaica and ooa-batk boldlag
hald 31.n of tocal conarcUl bank daposlc*. ^

llthou^ bank ho
and of 1976, depoalt ahan
lOX or let* of total depoa
of holding eoi^anlaa i
501 depoilt ahara vaa
Id Che Sn to 751 lao.

.ding coapaDla* opatatad In all atacaa by tha
I varied vldaly. Kai^ holding eoapaniaa hald

only ona atata. In aix atataa, tha abar
lOZ and 30t 6[ total dapoalta. A SOS to
a atacaa and In 26 atata* tha aharo aaa
acatea the holding coapauy ahara of

Covemora davalop^d maa;
policy, which baa bee
holdiug cDBi>any ahoal

ink Holding Ccnpany Ace, the Board of
I to cover aptclflc cypea of caasa. Oaa
cooatatcnt concern of the Board, la that a bank
a Bouice of attcngCh Co Ita aubaldiary banka
aCe capical in Its aubaidlary baika. The Board'a
Iceled lu th* adoption of the "go aloa" policy
nerd denied applications to ongago in foreign

Ulaest l''72-1976 (llaihirgcon

Digitized bvGoO^^IC

^•Dtuiu b; tankUBtlca CorpoiactoD, '' Firat ICatianal City OnriMi

Invsa^MDC CorporatloQ, -' and Pint Chlc«p> InUiiittioB*! Financa

Corpnatlon. ^ In «11 of Ch(i« eaiaa, cb« Board Indleatad that it muld

pralat Co lea fund* davrtad ta taprovlns th* capital poaltioa of tha

•pplieant'a aubaldlaiy baidu. Civeo that the** application* vara tor

lalativalj iaall aubaidiatia* o£ «*ry targ* orgaDliatloua , tha daaiala

rapraaantad ■ claar policy non.

In DacaiAai 1974, Gorarnot Bollaod " apallad out tha pnbltaa

of coneacn to the Board i4iich bad raaulted Id tho adoptioa of tha "go alotr"

policy. Th« Board uaa concarDad altii bank fatlucea, tha datailoratton of

bank capital, heavy callaneo on liability luiugtaant, aitMaalva loan re— ifa

deterioration in tha quality of bark aaaeta, toiaiga exchaDga riaka, and

tb* ala« raioluClon of problen bank caaai. Covainor Holland tndieatad that:

the policy ia evident In cate* In ifiich ve have fait that t

either in ocginliition'a capital or ita lt<iuldlty poiltloni
have been itretehed. We have denied. Id auch caaaa, application*
~ ' " Bi in pamladble line* of activity,

liave also refuaed, for the tlaa
Clvity to the parmliilble ll*t tor

e of application*

fer acquleitloDS of othe
auepL uhen we felt ths
were exceedingly itrong.
being, to add ne» line*
barA holding cmqiBntca.

A. of the end of 1977, I

»*•

1, at

le*.c pattially, at HI In

1/

60J
60 V

■cdoral Bcaervc iullelln M

V

edcral Keacrvc Fkilletln (1

(1»74) pp. 517-519.

let In (1974) pp. 519-521.
Holland, Kcnbcr, Board of

Digitized bvGoO^^IC

eccesHd In the jena iftcr Che institution of the "go lion" pollc; and
ha numlMr of nn parEtasLble ponbai&Lng actlvttlci — scbar than thoH
0 b* con*id«T*d oa a csM-by-cate bail* — had not.axpandid.

D„ii„.db,Go(5glc

a* Bullae In o

JuB*, 196)}.

70 St«tuM« 135 (1956>.
t6 of 1966. BO Sftut«» 238 (1966).

te of 1970. B4 St»tut«» 1760 (1970).

t of 1913. 48 Sft

■ 1«I (1933),

■ 6e« (1933) .

1941-1970. Mighlngton,
t Reterve Sysccn, 1976.

Syi

: Board oE GovicBon o{

D.C

1 Bo«rd of CovcinocB

y UElslacIon Sul,Blctc<t to lh>. Sen
iBf on July b, 1955." U.S. Congr*

Ir;.. 1l.aflii»s, fcefori a SubcociMltc

Digitized bvGoO^^IC

BMtd at Govarnn* of tba fadaral Kaaarve Syacaa, Stataawic of Bobcct C.

Holland, Hauber, aoard of Governoi* of Cbe Fcdenl Ratsm Sjata
bcfoi* tha ComilttBa on Baoklng and Currency of cha Houae of
Rapreaantadvea oC the U.S. CongrEi* on DectnAai 12, 1974. 60
a auUaeln (1974).

Boctac, .

GraBoiy B. "mie Grouth ol tliiUlbank Holding Co^>anl<a: 19S6-197S."
Govarnoca of cha Federal Reaerve SyaCaa (1976).

Mrtlriiour. Calnea thnum. .Branc^ CF°"P. "^ O"*" Banking. Kan Totki Ih.
Hacmlllan Coqiiny, 1931.

BdMrda,

Franklin R. "Bank Hersera and tUe Public Intereat: A legal and
Econoolc Aiialyala Dt the 1966 Bank Karger Act," Banking I,«ir
Joum-I. UaOtV (Septeaber. 1968), 7S3-796.

Flacbec,'

Carald C Anerlcan Ranking Structure Mm Tork- Coliaabla

Dnlvaralty Preaa, 1968,

Fiachar,

"Gfoup B.

■nkino In the United Statei." 24 Fedorel Raaacva Bulletin (19381

97-101.

Hall. Ga<

:pxi (April. 1965), 342-355.

Ball, G-.

Anonclfi. VaehlnFton. D.C.: The Board of Govemore of Che Fi»erat

aoEanaon

. Palntc T. The Ecnnwtca of Croup Ba.-^l-n. UaahingCon. D.C. j
Public AfCclcs Fre>3. 1955.

Jcaare 1

Pi.blle Inlcrcut: An Kcononic Analysis. Le*lniHon. Maai.:

D„ii„.db,Go(5glc

rick, Itou Jersey; RutKers
I AnendHDCe." SB Federal R

t.ff Report. Weihlngcon, D.C

VelM, Steven J. "Bank Holding CrrmpanLc

FebniarjF, 1969)1 3-Z9.
VllllE, Virgil, r-d. SelecCJ AiCiclea o

D Coopany, 1930.

Digitized bvGoO^^IC

SacEtia III
CM >■ Opcriclsnal Glnalc

On* st Ch* Borc intercitlng quiiClen* nictins to the bank
holding cinqiany (BHC) aavBunt ccmccrna th( mtcot to iihlch BHC* operate
their subaldlariea aa a alugle Integratad anttCy, aa oppoacd to a collactlon
ol cefUBonly-oiflied but ■utoooaaiil companlca,-' On tho one band, aonie cibaatTcra
have argued that a Tatlona I. holding coopeny win vleu tea tubaidlarlea
aa Besdieta of an Invtetnent portfolio.-^ thua InplylTig Uttla or no role

On the other hand, the fact Chat BRCs often pay "large" ecquleltlon

pienlua* for their bank aubaldlarlea-^ tuggcate Iniuch caaea that the parsic

alillaty thnn chat bank can generate In an independent atatua. Thia, In
turn, Impllei at lentt lome role for the parent i:ai,ipcny tn aupetvleing the
affaire of cheac bank aubaldlarlcB.^'

To date, hbuever, little enpirlcal rcaearch has been specifically
djrcctnd Ci> the op'smtlng poUctcB of BHC groups. Rathe7, Boat echalari

1/ Hm ircplicitloi.5 of tl.is quPEtio,! tojch upon a nur'jcr cf toiportant
VJ'tiO:i5 ri'lutln^ to BIK expansion, tnclndt-s financial Mrkct structure
tad co.petitinn, inC^rrcsionel fumi flous, EHC tc<mot»ieE of scale and

..!.> «nd St«n1.y [!.'.] .-.nd

, ..■,. linni'-n (5; Gj n.i.l PIia
::" [J^t .n., ->.■...<., cl,.- ;,,-.,„;i,i

tiryT"ll.i('.^l''^"'l'i^t''pHc

Digitized bvGoO^^IC

fatva choaai to skirt tbl> queiClon nid focus liutud on th* poit-
■cquliltlon ptilotmrxKe of BHC ■ubtldlarlcs.-' Iliere (te savnal paaslbla
TWton* foe this. Fltat, psrfocniuice iCudleB provide a •icaoa of focuifng
directly on th* tnd n*ult of BHC affiliation without having Co link th*
final effacta of affiliation to tha operating pollclea of holdtnt convany
■aaaganant. Moraovar, It Hj' be arcued that to thv cxtatit that BHC* are
Intagiatad aa siDtle tntldoa, any algnlflcant changes in tha oparatlsna
of the subsidiaries to confon olth the patent caapRnj's policies should
be reflected soneuhere In the Bubaldlsrles' perfomancs.

Second, the Ecu atudlEs at BHC oparattng policlei naeessarlly
focus on foraial pollciaa dtilgnad to Integrate the holding coBpany geeup.
To th( ntent, hewrver, that the holding conpany systtai Is velded together
less fomutly, the pettormance of the various subildlarlei Kay itlll be
affected, even though unattended by formal IntegraClng policies on the ^

V y

U St-., for ci:aT>i|>1c, perfnnKsncc studies bv Johnson and Hfiii«tcr [17],
Maync [JO], end HIngo {2I].daslIng vilh thL- ctfeft of BHC ntrillatlon on
bank pEi-fOTTiancc, und studlm by I^oadeo .-nd Bocmr [2A] and Tallay [2?],
dpoHiiE with the iiipscl of Di'C affillntlon on nonbsnk roopany pcrfonunce.

2/ (ViF» [29], for cxnipplc, notca that "...s feeling of gro..p Identity, which
nori oi- let!, pervades any liol.llng conpiiny Dtganliatlon, Is conducive to

the holJliig rmcp.-iiiy," This la underscored by Jrsarr and Fiahcr [IS] uho
report, "Although Ihc degree of conttol vnrlcs widely aooiig the twelve bank
holding, companies questioned,... all twelve have, over the years, establlihrd
fcV [rial end error, by prccedi-nL. and simply by tradition, a set of under-

D„ii„.db,Go(5glc

■CudlcB of parent coopany op»raclDt pollele* typlull/ Invelv* ad hue •tunny
work, Che niulta of xhlcb oftan do not land thoaaLves

FloallT, pt*MM Uu liidca flDaoclal CcaiuaetloB* batvaaa
■KCei baiik* irlehlii a BBC ayacc* aa nail aa batmen theaa bank* and sthar
•otlclaa ulthln Cba haldlot coopai^ group. =' Id addition, Chan an
reatrlctlona on the aaouat o£ dlvUandt that a bank can pay out during
■ alogle year, " To the astenc Chat Chaae ceatTlctlona llatt ■ BBC's
ability to function M a alngU intagEaced astlty, they necaiaarlly
co^llcaco ai^ iavcatlgatios of BBC oparatlng policies ainca any eoDclualooa
mat be vleued Id the costaxt ef the vailoua regulatoiy canitrainta.

Still, Che atiidy of BHC oparatlns policial tetwt a uasful
coaplmtcnt to ch« itudy of poat-aeqj lilt Ion aubsldlaiy perforiHiice, fOE
several reasons. FlraC, knowledge of BBC operating policia* (bould *uggaat
areas In vhtch to look for perfomance changes, although not all per£or:ianca
effects nay be "predicted" by alifily axaalnlDg (fomet) BUC operacing paliclaa.
Second, to the extent that operating pollclea are not reflected is perfeiKanca

1/ Sac

tlon 23A of t

hi Federal Kcaerve Ace generally llmlcs a

bank's fleancial

tiona vlth 1

ct of the bank'*

capita!.

and surplus

and liolts cransactians «ith all afflliat.

es combined Co

thnn ZO fcic

cnt of Che bank's caplcal and sucpluo. Ii

n addition.

loans u

□ f credit friBi a bank to Its alflllBtoB .

are subject

rcquiruj.rnCB. (For further discuislon o

[ Secclon 23A,

see Bds

rd of Covcino

« HI an.lGol™bo [2],

2/ Nat

j.on:il banks a

nd BtaCc mcTnbcr banJ:= ate UnUed by law

di^i.ds ChaC ch

ey can pny In any year Co Che net profits

plg« ....

aouunt equal

will..- 1

tery approval. Moreover, Catea l3l arguei

. Chat "[ijn

pr.--: ■■

i\ n bank Ir.

liailted fron p.iyins out nore Chan a roeuli

, nnd a good

culG of thuiub niaht be Co question the su

seal nubility

D„ii„.db,Go(5glc

cbaaf**, tc may ba usiful to look far tu*ou ubr th«y (r* oot. Third,
■liathor a bank'* 'eoTporac* vtll" can ba placead toe tha baaafit of tba
cTcdltora of Iti parant holdlof i iMfianj or anothoT atibaidlary of tba parant
(•aaa likclj to dapanil aa tha axtent to iihleh the lUC ijatia U oparatad aa
■ alalia antlEj." tlnia, iBfimattoa on BHC opautlna polleiaa ihauU ba
■aafal Id ataaail^ Iha >laBlfleaaea of thla paiCieulaT rlak to BHC banka,
Floally, In via* of tlia varloua lasat Taatrletlona an IstTa-BBC floaaclal
tranaaatlow, axamliucloB of BHC i^aEatliis policial mt ahad lisbc en tba
afCactlTanaaa of tbeaa raattletlona aad thalt ligiact on BBC operatlem.

In tha roialadar of tfala pi4>a« »* ravlait tha raaulta of tba fan
atudlaa that have focuaad apaelflcally an thn oparatlng polleiaa a£ BHCa,
In ao doing, m focui in SacCIon I oo tha banking aid* of Cba holding ee^aa
In Sactton II, on tha nagbanktng alda. Within aaeh taction m look ti tha
daglec ef parant co^ianr (or laad bank) control aa raflected both in or-
ganliatlonal atnictura ai well aa in apeclfic opacatlonat aiaaa. Baaad en
tbla revlaw, va should ba able Co Mika ams tentative genera 11 latlona 1b
Sactlan 111 ragaTdlng tho axtaat to ifblch BHCa ar* prrnently oparated aa
•Ipgle entltlea.

Btudlta fa baaed on
prlnarily on d.acrlj
flndlaga at dlEfeter
degree a( cant rot ai
bank aubaldiartea vl

caution la In order. Becauae each af th* aavaral publ
irvoy and/or peraonal Intervlev reaulta and rellea
Lve analrili, It t* loa«tlMa difficult to coovora

■cudie*, particutacly iditn It ccnaea to aaaCEilng tha
xlaed by aoat patent holding conpaalaa over their
■■-via clielr nonbank aubaldlailai. Accordingly, the

e Ouap [4], Schotlnn

Digitized bvGoO^^IC

■P«clfic Elndliiei repariad

I. BHC Operjttng Pollclt* with Keapcct to Sub»tdlTY Bink«
In all, thsre havo baeo only five publtihcd itudlei of BHC
epeiatlng policies vlth reapect to subsldlai; bauke. The earliest of
these vsB published by Flaehtr [9] ia 1961;-' next cane woilu by Helsa [29]
In mS,y Uwteme [18] in 1971.-' J-«et and Fisher [15j In 1973, «id
Stodden [26] In 1975. In e.eh case, Infomatloo was taken fion airtveys of
varioua holding ctmpany groups: FUchec, 27 BHCs (apparently natlonulds);
Welis, all reglatcrcd BHCs In New England (a totil of five at the time);

1/ In a (obsequeat published eomiant, Fleeher[IOj btlaily sunuitltos the
findings of his study with respect to the degree of centralized control
that BHCs etnerally eMrclso o-iei their bsak subsldloclea. In addition.
Fischer reported In 196S [E] that ■ddltIo:ial i;ue:itionnslre aurveys condvTctad
in IKi and 196$ revealed f» aajor changes In BHC operacine policy floa
that uhlch he origlnBlly reported in 1961.

1/ Weiss acknoutedges that his findings are based largely on nsasrch
carried out by Thorus H. Ho^Ges. Kodgea reports his findings la tw un-
published papers I12l 13'..

3/ A unique feature of Laurence's study is his design of a measure of tha
degree to vlilcli each nf several policy areas Is ccntraltxed In Ihc parent
holding c^pany (or its tend bnnk). In addition, he calculntea an o»ratl

my, includina (1) the deposit size of the holding
banks contiolled by thp holding ctwijsny, <3) tho
holding co,iipfloy's opc^ritions, (4) the size of
hank relative to other h.inks in the organisation.

Digitized bvGoO^^IC

Luinne*, }2 etafuiU* nattonwldo: Jeaier and Fltber, 12 BHCi natioratldc;
and Stoddan, 16 holding cmpaalei In Tcxai.

Taken tegatbar, til* flva atudtci caver a wido vailaCy of npeiaC:
at*aa. Still, thara la eonaldaribla ovarlop with gaaeralljr conaiBtant
flndiuga. SubaaqucDC dlactiaaloii, charafora, li dealgaed to praasnt a
coapoBltc plcCuce of typical or "aveiaga" BHC operatlnt policy vltU raipn
aubaldtary bantu vlth ■iBlnm ttfennca to apaclflc atudlaa. In thla
Tcgaid, one fact that 1* m^hailied by aoat raiearchcri li that tha auuoi
of fonal control exnceiacd by BHC^ over their bank aobaidlarlea vallei
■faarply aaong different caopanle*. ften very llttia control In aone caaea
to •xcrcBcly tight contral. apprmlnatlnt that of ■ branching ayatea. In

overall concrol exorclaad by th* parent boldlng cMnpany aa mlt aa the ui
of control marciied In apeclflc operational ara».-^ Ihe aienifieanc.
at thla finding In that It neceiaarlly CDnvHcatca afforta to generalltc i

"average" BHC, tlncc any *ueb "avaiagt" la attended by a suhiCanClal varii

1/ Thla li consistent with evidence presented by Fraa* [111,
■ignlficunt dllf.renccB among BKCa In the perfoi - -

banka. However, ohen Hayne [21J oscd L*<nCTica'i

Is reflccCc.) In subsidiary bank perfotrunce. ahi

1/ Korcovcr. available evidence offcra tew clues
lot Chiii variance at «s to uliat type of miCs nay b
riachcr not.s Chat boldlng coii>i'anlcE ulEh a large
■»re liki'ty to shift officers nTnans subsidiary bin

cralUa

oHcj

.rally

foun

ittl.

rail

.at

ion.

thcrid

entl

fU

a"or

rotlng

poll

cie

a res

D„ii„.db,Go(5glc

1. OTMHlftloMl Btructur.

Ferhupa Che aoic iiqicircuit ■!■• tat puirpocM o£ dctcCHlnliit tha
4bb»> of Dparatlonul tntii(»tl<ni ralatu to tb* p«rMit ceapaiv'a orarall
control thcouth organ liatlonal. atEuctuTa. It appaar* that oaual MC praetlca
ia to Cry to anaure that tha aubaUlair buki' ■aaagtiMCit phtloaophy ^h1
broad opacacloiul pollclaa ace conalatenc vlcb thoae of cha pareac coapraj
but otharwls* to gl** the Individual bank* eamldarabla antononj, pnnld*d
that thelE profit parformance li coDaUtent vlch cha pareaC covany'a
cxpecCationa.-^ To thia and, aevaral practicea ara Boat coaDit. Flrat.
EHC* gancrally atta^t to aialstaio tha local chacacter of tha boatda of
dtretetora of their aubaidlary banka by alloHlos Cha aentor Baiusisent of tha
baaki to ooalnate Uielt own dIracCoca, irlth tha holding cogqiany uiuallji
retalalng final approval on all aueh noalnatlona. ' At the aaac claa, loaia
direct rapreientaClon b; the parent holding coBpaay on ICa aubstdary bank*'
board! t> noC unuaual. Ofcen chli la accovltahed by expanding the alia ^f
the hoard vlth additional anber* to represent the holdini eoBpany rather than
by reptadng local director)." Second, ^ay holding cDiif>anies have foraat

1/ ^t Jcascr and Flaher report, "Of the cvelve holding coa^anlca queationc
nine ellu-'i their chief executive to be f.-.irty Independent although when a
benk la not doinji well, the full weight of Che holding coapeny la hiought t

>ff)ri

ccinfis o

patent co.gpa.i
ity In cho vsr

toua banka.

tul.5i

nkt on Che par
Integrating t

cnt holding

he organlaacloo.

D„ii„.db,Go(5glc

coaalctaaa Bids up of lentor sauscBcal of both the pacmt coqHiiy ind th*
•iib>li]lmi7 biiDlu to deal »lCh ipKlflc opnaclau or poller arauj (Dch
eomiltteu topically neat BDnCbljr or quarterly, nnally, it appear* to ba
uiual practice for Che parent holdlus coopany to hav« final lay la the
••laetlon and pioBOtton of icnlor ■aDaaenaiit of It* *ub*ldlary bank*.
Con*l*t«Dt vtth thli broad overall conciol 1* Iha fact that
(requcDt ftnuiclat rapartlsi by the n^iUIacy bank* te tbali pareat coapany

th* paisnt cOBpany to iciiuln and revlm Individual budsata of th* varloo*
bank lubddlatle*, Horcover, a centnllaed audit depaitnent aanacad by
tb* patent holding coiipany ti not BncOBaon, aod holdiat eoBpaolaa {ax
thait lead binka) eftan provide accountlnt (atvlca* to tbalc aubaldiaty
bank*. All af cbaie aetivltis) undoubtadly faellltat* a BUC'* ovetdthc of
Iti aabildlary banki' pertominee vlthouE Tequlrtns a direct role foi tbe
parent c<»pany In Banaglng the operatlona of Individual bank*.

2. Specific, Offeratlonal Areaa

Srlll. there are aoDe operational areaa vhcrv the parent holdlns
company (oc Ita lead bank) exerclaea greater control than In other areaa,
or at Icait Hhero It aaaunea a algnlflcant coordinating role. Principal
■Bong thtiD areaa are (1) Invastncnt incuritlpi laBnaBcoient, ineludlnfi
federal funda manaarmcnc, (2) corflpondent relationship* Mllh bank* out-
*lde the holding enniiniiy ayitcm, Including Iiian parclclpatlona itlth -iuch

hifil.ly cL-nciallied n,-.i: riie<n
in tlifcl. «!»..,■:£ oil hsLling
., Is aloo nottd by Holsa, Jr

Digitized bvGoO^^IC

Ona area uh*c« tha dagraa of conUol li aubjacc to aooa dabaC*
pertains to broad lean policy, particularly Icua »tic. Botb riacher and
Wolii argue that luit BHCa axardaa aone control evar general loan
co^oiltlon, and both cita aa evidence tha fact that cany BHC* have
"enoouTaged" their lubildlary bantu to expend further Into the field of
conaiaer lending,^ Stodden, on the othei band, clalu that BHCi do not gat
involved In subsldUty bank loan policy unles* tbare i* a shortfall In bank
profit peifcriHUice. UVmAtt, Lawienca classifies loan portfolio unagaMnt
aa a decentralized policy area and clalas that hla flndinga are at variaoc*
with those of Pischer in this regard. In fact, bowavar, Lawrence's finding*

rated centraliied and ooderaCely cenCrallied [idiich includes three-quarters
of his sanpl*] Cake an active role vlth respect to nanageaent of the loan
perctolio," vhich seeiu rntlrely consistent vlth tha findings of Fischer and
Helts. In final analysis, it seems safe to conclude that Boat DHCs probslily
do »»cItB at least eons control over broad loan policy of their bank
subsidiaries, chough the extent of such control luy vary CDnsldetiibly among

y In

, his 1966 vor

k Fl.cL.

c. [B] vt

Ices

"Probably the

least

eentcalUod

of all

activities i

n'[BHCj

s the

Icnillng funcH

ho»avc

r, Kikes clGfl

■king p

i-toitlly of 1.

;ndlng

policy »Ith

rcspoc

t to InJlvl-lu

al loan

appllcati

thcr than br„<

>d loan

mix. Indted,

iai fields as losBlng, t
[boldinc conpsny] head's v.nrlcrs i" £r<^ucntly very active, encagcaeing and

D„ii„.db,Go(5glc

In addttton to th« abov* policy areaa, uny BNC* (or thair lead
banki) ptovlda vartou* (arvteaa to thalc bank Bubtldlariea, the affect of
Mlitcfa la to halp tla cogathar tha haldin^ cospany ayatea, Tfaaao aarvtcac
^y Includa principally data pTocaaalnt, advartlalng, aarkat leaaarch,
tnteniatl<n>l and tiiut aaivlcaa, and the prDcurenent of equlpaant,
Buppllca, and Inauranca.

TUmint to arsaa of j
■aia to be Boat co^un. Tbaaa laeluda (1) aatttng prl
aanrlcai, (2) evaluiElns Individual loan applleatlona,
■aklng vlch napect to lovac li
■ttribucea bank prlcins auconooy to the

^ and O) daelaloi
BHCa for- tba

1/ In fact, Placher Inpllta that ■

at BHCa do not avea aat aaxlaun landlns
d Vclis [cpoEtB that Che parent eet^any
■kay exprct to be eonaulted only before an "unuiually large oi complicated"

D„ii„.db,Go(5glc

oiCltnit Ii^lIeattaiB of ewrdlnatid pricing poltel**,-' Ukortsa.
FlBchar r«pott* In hli 1968 vork > ainllar coaura mtb r«*ptat to dMlitoa-
aaUnt en Individual loia (pplicactana Aa (or lubitdlary bank tndapaadnca
In tha ar*a at lomr laval ■aoacaaiDt and paTaoonal, tbi* may ba lai* coaMn
la recant jaar* Chan In (tw pait, aa tha Bora ncaac atudlaa report traaCar
lnt«E-bank nobllltT ft afflcac*. Bora cantcalltad »BaageHnt tnlolns pro-
txaaa, and a eactaln dagraa of anlfontty tn aalacj achadolat- and frlafa
baMflca. Still, tba rol* of the parent holdln( cor^anj appeara to ba
BOnildarablr laia In thla area than In other Bsr* eaatrallaad pollc; araaa.

Ona tapoTtant area lor eraluatlDS or^nlaa clonal lotatratlon
pertains to tnlsE-bank traaaaetloni idthln a BBC (jataia. In Chat ragard,
LaHrauia raporCa two alanlfleaot tlolinsi. Flnt, lAlla tha ISC (or
Ita lead bank) often take* an active role In handling federal funda
traniactlona ot Ita bank lubaldlsrles (■■ pact of tha parent cos^an;''*
omratl progEaa of tnvaibnant aecuilclai Banageoaot for It* bank*),
puTchaaaa and aale* of federal fiindt aiaong atater banka In a BHC ayatai
are rar*,'=' Second, interbank loani ■• wall ai purcha*e« and aalaa of loan
papsc anong alatcr banka are also care. Taken together, these results are

tn hia piper to anllyilng thla

of priBUry linporcance 111 sattln
and Visher alio uoCc the Import
ilcicinliifi Lha piy scales of Jon
DB*c tln.3, they iilEO report a i:
officers and oCrLccr candldaicii

Digitized bvGoO^^IC

caaaticat wl.a th* h^rpoth**!-* ^^t *^ tlattaciou 1^0(*4 bf Saetloa
2M of U» Pnlanl tmm Act [arniac u •(facCln comtraloc od
flBmcKl tcauacEieiu bsCiMaa «f[lll«Ced bmk*, nok to cha cua sf BBC
(rovpi due B^ otbanil** be tlgat-ticaatlf ln£*(raud. Isdaad, LnnaBCB
•fMlflcally polsta to Saetion 23A u tha hJot factor llalclnf Intarbank
loau batvaw afflllatad banka.ul Gsla^a [2] notaa Cha dlfflculcia*
liVoaad b; SaettoD IM on bnk afflUataa that vitb to oigaia In
fadaral fund* Ciauactloiii or purdiaaa and lalaa of loan papac,-' Ifciu,
It lOMN »afa to coBcluda that abatavat fiaanclal istascatlon of alaur
bak aabaUlarlaa Bltht ba daairad by Cba pacanc holdlnt ccn^any. aach
Intagratlon la •((actively cmutraload by praaanc law, axcapt to tha
•itaot that It eaa ba aatlaftad through loan pardclpatlont tmaot tha
affiliated banka."

of taction I3A~ KDwevet. In the caat of eucbi non-iectmrt* tcanaacttona,

tbat tho purchasing biuh duplicate the ippcaieil work of Che ■clUng bnnk
and thereby : .. .<. l.-. ..'vniagci auoclated vlth any luch purchue/iale
innaactl^ni. In vlcu at Ltic 4iCfll£atlon of the puichiBlng and aelllng

Trcmd-, i ,. any >ui:h tr^sal:Elon9 Bouevcc the -ibasnce

of.uthil;- ■ . . :.-i uith (bo foot (hit Lank .ubstdtirtei are genera

tharcCnra, iIifv nay be rse Inclined to cooperate In thta regard than their
nff llUtitni uoiild aChamUc auggcit.

2/ Evidently, loan participations ooiong afllllatad banki are Increaalnc.
Thli la aeen In the fact that FiscLior and V~iEB [cportL^I tlttla of thla

activity In [hla area, lautanee, £oi cxaiq.1o trpL^tii. li-'n pariielpatlon
■a an area of eentrWlUod pollcy-wiklnB in tltat uosi F'Ks inpoae aoau type

Digitized bvGoO^^IC

II. .BBC ODTjtliut follil«« vlth l!«pect to Baiibjnfc Snb»Ml«rtM
niec> hii lieu oalj on* published icudy Df BUC opcntlns
policial wlEb c«)pBec ta nonbink subildlartei. That atudy, by Lovrsnca
[19], Involved pufonal Intervlwt mth acnlor afllelal* at IT bank Kaldli«

boldlng esiqianle* In Uia naclen. —

In CDnUait te the flndlnss of til* vatlaut atodtai daaltnc nitk
BHC concrol ever bank aubsldlartei, tiwr*ac4 ttud* conBidarabl* hoaegaDaltj
rcgardlos BHC eontisl cnrar nanbaak nibjldlarlet. Spaclflcally, h> flsd*
diat all of bis bbm^U holding co^anlaa <or Cbeli lead banlia) Herclsa
■ubstantlal control over their nmibank aubltdlarles , though there Is aoaa
tendeocy to alleii greater autonaay for acquired aubiidlariet, paitlcularlj
the larger ones, than for de novo subBldiarleg. In part, thia haaiganeilr

of Boat of Che lanple BHCg, though Ihli point Is no doubt subject to dabate

In vlw of Lw
bank auba idler

t [18] oi

caClon of c

1. Organizational Structure

generally appeara to go beyond tlie parent
the lunat^Giiient philosophy and broaJ opera

mJDClty of Che iiicihcc^ of the boaids of
aldlarlcs arc usually otticUIc of cither
lead bank. In addition, frequent (at lea
bol'litig c.q.ii'.>i!y .nid Eubsidj^iry olfJcials
typically cover all a=pccta of a sut>.-.ldlo

onpany's talo in coordinating
onil policlr* of Its bank
[Kipally in the fact that the
Lectors of Che lionbank tub-

Mica luiin final say over tha ■election of aanloE effleen of ttialr nonbaok
nAaldlatle*. though, aa noted earlier, thla practice aeiH Co be coMon
vlth reapact ta bank (ubaldlailea aa Melt.

Otber lapacc* of control that are ienerallr cs^bd to both bank
and oenhaak nifaalcllarlM Inetuda a rarlev of the bud(eta of ths varloua
•ubaldlarlra and a centrallcad auditing prograai. In addition, a altablo
n^et, tbou^ not a majoilty, of ceopanlaa roparced that they cantraltt*
tb» accounting Cunctlon in the parent co^any (or It* lead bank).

I, Sflcctflc Oparattonal *r*ai

of hla aamila BUCa detenalne tbe liability and capital atructurc of
their nunbuok tubaldlarlca, and nany ralae all of tbc fundi of their aUb-
aldlarlca, IncludLne bonk ccEdlE.^ ^

Chirda of the car.:['anlcg In Lnuceoce't es'Eple Is th« "liulldtng block" approicH,
vhlch "...holds tbat the liability and capitnl atracttro of a aubaldlaT/
ahoutd approxlcLite thv llabtltty and cnpiLal *erueCu» tAl:h wsgld b*
ragardcd as acceptable for (hnt fin If It were an Independent entity...
A vacl.irlon of th'.s appcouch Is that, viillc rich anb^iidlaty need not be 'aogndl
caplLollicd, the nppiopiiata cunaolldatcd pnsttlon of the ocganlanelao la
■pproulrmted by the sua of uhot uAild be the 'bjLldlng block' liability

by onc-ililrd of Laurciicc'a sample BHCn.hnlils thai the "approprlaco"

"...lilelicr di^bt- CO -equity taiiiD than chat iihlch wojld bg appiaxiuced by

D„ii„.db,Go(5glc

Othai areai of ■Ddarsce panne eoapai^ eonlrol Ineloda (1)
■•ttlns naxlnn lendlnj Ilolta for tbe aentor offlcera of ciaJlt Brantlog
■ubBtdlaTlei. (2) •hirlns of BHC lacllitlei, aipaelallr cooputar faelllEiaa,
(3) paiimmal manageaant , including aactlns (alary ichadulaa, and (4)
tb* croii-ialllng of aervlca* prodocad by dlfferanl (ubaldlarlaa. On Of
other hand, area* ^are xaCa eurelia the leaat Influanca orar tbalr Doi^aDk
aiAaldlarlet luclud* (1) tha pricing of norAank anbaldlaty latvleaa,
(2) urkatlns, and (1> aalcctlng outalda banklog coimactlana,'^ -'

In theae areaa, chare 1> nieb ainllarltj vlth BUC traatunE of
hank aubaldlariea. BBCa exacelaa eaiuldetable control over tha capital
aianagaiMnt ot both tbalr bank and nonbank lubaldlailei though tha parane'*

aldlarlea. In addition, aharing of ccaputer factlitlaa I* c<anm) to both
type* of BubBldlarlaa, lAilla pricing declsiona are uaually Isft to tha
individual aubaldlariea In both easea. Marketing lecu to be an area oC aoiM
dlffarancc: ■HO aenetlBaB aupply market Ing/advartlalng aervlcaa to their

aidlarla*. CM tha other hand, BHCa rarely aec naiclnuai lendlnc Itailli

1/ The fact
(ubsldiar iPi '

that BHCa p!<

' oitalde
i^Igniac

. ganerally «ercl.
banking connection

e little control over their
9 likely reflecta, in part ■

atudy found 1

;<,ulred%

to compare theae r
ion atudy of nl«e c
arcaa of vrlnclpal

it llwa. Specific

osutt. with Ihoae of a 1972

opcroling polity change vltb
udlting, iniuraiico, and the
ally, the paiont roavnny gar

D„ii„.db,Go(5glc

rlRht to
BHCs gsw

.11, 0

■ of their lubaidlar, buks but 4a ecercluthls
D the cue of chair DonbiDk lubildtarlci. Finally,
t a Bedarace role In Infer level pariionnal Banatnan

(n the oae of nonbank aubaUlartt* but lltcla or no role In thl* araa with
Teapect to bank aiibaldlarlei, though thli appaara to be changing in TBC«nt
year* a* pueni holding eonpiuil*! take on >ore reapanilbilttj in' thli area.
Lawrence slv«« no lofotBation regarding the degree of interco^an
• invslvlng aoabank tubildtarleB. Bowerer, tn vl» of the
Bal later-bank traniaecloo*, due to the teacrlccloiu Inpoaad b;
ion 23* of the Federal Baierve Act, It aeen* llkaly that traiuaeClona

e Section Z3A appliei to theae tranaactloni as well.

III. Sue

and Cone lua ion

The purpoae of thti revieu was Co pro
the quae t ion of whether BUCs generally operate
• Insle Intccrated entltx or Hlnply hi a portfol
available evidence la limited, it niwertheles*
trying to nannga their arganliatlons as Integrate

to cxerclso control, through organizational str
phlloiDphy and broml aprrallng policies of both
nbsidiacicB. In addition, BtlCs generally cxsr

Digitized bvGoO^^IC

!C Co Hhlch they int*sr>C> Chelr bank subsiillacleB telaclva ts
Ik Mibstdlailai. However, It itiould be e>>(>hHUed tb«t tlieM
■n bMed on itudioi that have fociued on BHC opcntlng policlu

: degree of contiol exercised by the •■« group of BHCb over
unk and aonbink eubltdtarles. Finally, ono factor uhlch pa
I full IntBECBCtDD of any BHC tysten la cha legal Teatrlctton*

bank and nonbank afflllac

Digitized bvGoO^^IC

■oard of Gov*]

'nor* of cha Padenl itaiacn S^ftn."

IS] Cuut H. Golambc AMOClatta, Inc. "Loani bf Banki to Their A
the Federal Rcserva Ace." Kaport pnparad
elation of Ka|lat«r*d Bank BoUlni QamptaL

(3] CaUi, DarU C

[4] Cba», Simitl

"III* Ba«k Heldlni Cca^nj — A Supcdoc Davlca

AetlvitlesT" pDllelti for a More Coapctttlvg FlnancUl
dloga of a Conference, Pcdornl Bescrvu Bank o£ BoaCon,

(S] Darnslt, JacoM C. "Bank Hergarii Price* PaU to Manrlaga Fartnora
redtral Raaacvc BaiJt of Ftilladalpbla »u«lnc«a Kavlcv. July, 1976,
pp. 16-25.

u.

CMity Pure..

St-1

, Arthur C.
r Ee.on™l=.S

"TTie PcrfornnHC
Ldirs, Ho. 64,

of Individ
oard of Gov

Heu York: Columbia

llKCet,: Branchei or
1 (January, 1964),

1 Baii<i Holding Compar

D„ii„.db,Go(5glc

bd(a>,' TiKiMa B. "An Ontlln* of Uw OrnMlooal Policy of Fm
S*A Holdlns Conpiadu In Of Flnt F*d*nl >■■•»• DUCrlEt,"
Vadaral KaMm Mok ol BoaCon, unpoblUiad, Juu. 196S.

ColUta, IUTdi> 196a.

JaiMi, Bdmcd A. Jr. and latamO, n. FlibcT, "OtUaltaM for Baric
Holding Coopiny KaDiE""'"'/' —iJUTa Wmaaliio. IM. lo. 3 («iJMir.
1973), pp. 13-20.

JohoaoB, Rodnty U inil David B. HalD«t»r. Tlie Farfor
HotdlDg Con^wy AcqulalClons: A Multlv»rlllo Analysi
MBtnaaa. 48, Mo. S (Aptll, 1975), pp. ZM-212.

L«ire«Be«, Robert

pDltele* of Bank lloldlog Coapuia'k —

II: honbaflklng Subaldlwlea," staff EeonPTgLc Studle«. No. »l.
d of GovsrnOT* of ttw Fadaral Raseive Syscen, March, 197«.

Haync, Lucille E. '^A Cooparmtlve Study of B^nk HDldin^ Cooipjiny
"flltatca aod Indapendant Benka, 19W-197J," The Jsumal of FlMcca.
— -.. 1 0(sich, 1977), pp. 147-ISB.

. 37-48,

"KaDagarlal Hoclvci, Hiiket StlucCun

Digitized bvGoO^^IC

ta] Plp«r, ThoMi «. ■»* St««o J. ttalii. "n>« P»»ftt«bllUy of »•
AcquUItioD* by )*.ltl-lMBk HoUlag c<^«nle.," F*4aral >«Mn«
Bvdt of BoitoB — w EiuOmi geotwie SaiMm. S«pt««»»r/Octoli«r,

IMJ Khoid.., !t.i*.D*. .nd Cr.(or]r E. toemr. -Th. ?.rfo™«DC. ol
HoUlDi Coiqxay-UfilUOd Flruuica CoBjMPlai.l it*f|.j£S^!|£
atqJt«». Bo, 90, torti of Gomri ' ~* '"

■ Fadaral kaccm Sy^tsa.

(151 SchoclnBd, Ko» A. "Mdt HoWlnB Coiip.nl«« inJ Public PoIIbj- ToJay,-
CowrtJlM of P»D«T. nn—nua tot th. FIKt Study. U.B. "'"• "'
ii^HODtatlni, Cm^ctic oa Iinklnt, Curnncy uiiJ Houdnt, Mth
Ceuciii, ■•cood ••■■loB, iMk I, JuM. 1976, pp. 233-1S3.

[26] Itodden, John R. "Survey of th«

^f h nnpf-rfnc. on Bank .'Hn.ctu
Boiik ot Chicgo. 1975, pp. 253-.

[2*1 Tdley, S«ucl B. "Biak Ko1dIt>g

Flnanec uni Mortgig* Banking," ^___
UI, Ko, 7 (July. 197«), pp. 42-44.

Digitized bvGoO^^IC

Sac C loo IV

Timothy J. Curry

Introduetton

Sine* tha pasiBge of Che Bank Holding CoDpany Act an
axEenalve body of research onalycins Che perfomance of bank holding
ccop'nl" lis* bacn publlahad.— InCereac In bank holding coopany
perfamance haa been gamrated by the atnictural changes In the
Aaerlcan flaaaclal ayatem lutroducod by Che expanaton of Cheae
organliaclona atnce 1970. As of mid-year 1977, bank holding
coinpanles concrolled nace than 70 percenc of the total doneitlc
coraserclal bank deposits of the nation. In addition, tlie 1970
AiMndmenCa Co the EBnk Holding Company Act of 19SG led the vay for
dlveralflcaclon by bank holding companies Into choic nonbank
actlvlcle* dotermlneil by Che Federal Keaerve Co be "cloaely related
Co banking."- Until nov, there ha* been lltCIe empirical evidence
ahowlng the ImplicC that bank holdlr.g conpantes have bad upon
perforraenrc of fivioB acquired In the non-banking, financially related
induHCrles. The Iiu-k of research in this oieo is likely explained

1^/ For purposes of thjE pajier, i.trfomnnii' rclcro to profiCablllCy,
expsnce, income, anrt v.irl.ius other linan^iiHl characteristics eueh
as capital fintion. loaTi. eapaslLy, retas ci i-itunt, rtc,

a/ Umik h.ldlng conponlcs hiivt sh«™ i;- ; -catest Interest in
entering coi.!.u™:r avd com-.H^veisl finan-,-. ... .ctf.age Limking, and
leaElnc ind'tscriifl.

Digitized bvGoO^^IC

ty ■•«•<• daca llaltatlooa and th« fact that tba Hivaunt Into tha
Bon-baidi aphata la ralaclvaly raeant. nia next aactlon trill
ravlaw a^ltlcal atndtaa of baidi pacfonunca. Iha third lactton
vtll rsvlew tha a^Irleal raaaareh oa tha parfonaoce at non-bank
aobatdtarlca of bank holding coapanlaa.
I. Bank RoldlOK Coapantea and Dank Perfonnanet

HcMt of tha aarlj atudlaa analyiad tba parfomnce of

holding ca^tnj anl
tlon changai In ti
fiTH relative to
banka. The atudli
oparatlng pollctaa
banka through din
ah eat and Incnaa ■
aaaet atractoce, 1'
cxpenaaa, 4} eapll
Any algnlftcant d:
in the poat'aequli
holding cc^Miny afl

n thea

the loeial coati
•tatiatical ncthotlo!

ildlety booka by focoalog opon the poat-acqulal-
portfolto and oparatlng ratio* of tbaao acquired
control group of coi^arahly-alaad Indepwidant
mleiMd analyse change* In portfolio and
of holding cD^any aubaldlary aad non-affi listed
'acton of changaa In varloua balance
ratioa Including those reflactlag, 1)
loan portfolio eai|>o*ltIoo, 3) eamlnga and
atructuro^ 5} pmfltablllcy, end 6] growth.
ireocea In thaae ratioa between tha two groupa
:lon period ware attributed to tha affacH of
iatlon. From an analyelB of the algaiflcant
ating ratio*, conclusion* vara drawn about
benefit* of thl* novcaant. In taraa of
logy, the earlier eapirical atudle* aafiloyad

D„ii„.db,Go(5glc

a ali^pla mlvattatw autlttlcal •naljrata ("t" Mat lot dUtoMnCM
In (roup neaiu).-

Later anpirical •Ciull«> caployvd mora •ophiattcaCad atatlatlcal
tachnlquea utilising varloua (am* of lultlvarlata analyala to
OT«rc<» ths datact* of earllar atudlaa. Ragardlasa of tha
■atbodology, bowaVar, both groupa of atadlaa, for tha Boat part
found alallcr rsaulta, Althou|)i thera bad baan aoaa raaaarA on
cho parfoivanca of bank holdlnB coaqMnlaa aa Bait; aa 1961, tha
bulk of tha ai^Irical avldcnca ra thla topic haa baan publlahad
•Inea tha lata 19M)'a. Oivaa tha lairga body of c^Lrlcal atudlaa
In thli area. It la no* poaalbls to draw aona conclualooa concatnlnt
tlia perfoTBanca affacta of thaia organliatlona.

Aaaat Structure '

' daory auggaata that dlvaralf Icatlon reducaa rlak. Theiafora,
It haa bean arguad that berauRa the holding conpany vahlele paraltr
gaographlcal dlyetatf Icatlon in banklne. tha ovarall lavel of rlak
to tha fliB wonld be louar than to the non-dlvaralf led f In*.
Thla fact nay allow Dora riah-taking on the pait of Individual
aubaldlary unlta of bank holding cooipaniea relative to camparably alaad
non -divers if led independent banks. Thla change In behavior may be
reflected, for cs.aniple, by the choice of a bank's asseta. It haa

certain ecteria

D„ii„.db,Go(5glc

606

■!•« bMn acatad thmt tba atcltadaa tamti rl*k prafanoou aty ba
dl(fw«nt for aanasara ef hoUti« coavany affiliated bank* efaaa foe
lodapaBdntt bmika. Ikat 1>, tha foraaEloa of tba holdini coipaiqr
par la. idilch paiatta a^asaloa, say tndicata >a<ca aafxaaalva
Moagatlal bdiavlor. If thla ta aa, It My ba taflactad In tba
eholca of a rlsfciar pocttolla and opataclns policlaa of aequlrad
ttrm. FiMlty, le haa baan poaitad that al^ly tba changa In tba
OTsantiatlonal •ttnctwra of a bnk fraa an iodapandant ftta to a
aiAaidlary of a b«nk hoUlni coivaay my laAica briiavioral changaa
Is poccfolto policial on tka bank lavol ainica tadtvidual unita of
Oia holding ccnpany ixoup could abwya cum to tba paraat tor
financial and >anaBaxial aaalatanca it oacaaaacy. For thcaa naaona,
in part, affiliation £ar aa, aay pcoduca nora riafc-taking bdiavio^
on tba pact of aubatdiary unita tn tba post-acquIiltLon parlod.

In llna vith thla bypothaaia, tba ovcfwIiRlmlns niatbar of >
M^lTical atudlca analyiing tba pacfaraioca of holding coopany
lobaldtary unita Indlcata that tba aaaat itcucCura of tbaaa firaa
raflecta graatai Tlifc-tafcing bahavlor in tha poat-acquiattion
pavlod. Iha reaaarch inplioa that aubaidtaTiaa of bank holding
coeipanlca hold aignlticantly laatar aaounta of caih aaaati than
do cmpatabla Intlopendant banks [10, 13, 111. In addition,
holding coaq>any unita alao hold clgolficantly fawac U.S. gov
aacuritlea [1, 13, 191, II, 21, 23, 3A, 30] and ligniflcantly

Digitized bvGoO^^IC

■or* >taC* end nmtclpal aecurlcle* than da ctaparabla Imlriptiiiiliin
<mlM (1, 15, n, 22. 23, 25. HI. Also, the e^>lrleal itodlM
outDtntnE ch« post-acqulaltloct •■■«! aCnutttTe of hcildtng eatfaj
toilta clcacljr .ahow Chat baok holding coopanir lubaldlarlea okibtt
atsntflcancljr higher loan-ca-aaist ractoa than do lodapattdant
bmka [10, U, 13, IS, 18, »].

Therefoce, th« axtmalve coplrtcal srldenea IndLcacaa
(airly codclualvely that the peac-acqulattlon aaaat atructitr* of
acquired lubaidUt^ banks dlaplays a graatar rlak orlantatton a«
raflacced In the changea of their portfolio ratio*. The flndlnga
that holding company aubsldlariea Inveat a hi^er proportion of
ttaeii axetl in loani, indicate* that bank holding cofvaide*
MOTC than likely extend irore credit to their local conawiiltie*,
Lom PoTEfoIto CoDpostClon
Kany *tudlea that have analyced th* post-acqulalcton loan
portfolio pollclea of acquired aubatdlaiy banka, find that bank
holding coifi anleK have had an tnportant Impact upon the loan
Btructurc of acquired banks. Bank holding companlen tend to sake
worn of all tjrea o£ loan* except fsm loans, Tvo early empirical
Htuilles found that bank holding coinpany subsidiary banks make more
consumer loans (IS, 34]. However later, more sophisticated cstplrlcal
studies have found no evidence that holdlns coinpany banks lUke
Biorc consumer lonns. The empirical evidence on the effect of
holding company amilalion upon other types oC loans la mixed

Digitized bvGoO^^IC

or incoDcluilvB. Existing atudlas have foutid ■ atatlatlcally
•Igotflcant difference betueeo holding ccnpany ami iodependeDt
banks In only tvo loan categories (bualnese and real estate).
Om study shovs Chat holding con^any baidis nake significantly moiG
buslneas loana [231 vhlle two studies shov the reverse In [21, )S].
la addition, tvD atudlei found that bank holding ccopanles exhibit
■ significantly hl^er real estate loan to total assets ratio than
do co^scable iDdependent banks )21, ]5].

Ovarall, the evidence fron an snalysla of tlie post-
acquisition loan portfolio of holding company subsidiary units
' clearly auggesra that these organisations pursue more sggresalve
lending pollclea then Independent banks. They commit a significantly
higher portion of their total aaaets to loans. However, the evidence
la nixed and Inconclusive regarding holding cocspany aubsldlary bunks'
choice of particular types of loans.

Earnings and Expenses
Because bank holding companies tend to have more rlslcy
asset structures than their Independent counterparts, it la likely
that thsHC organizations would exhibit slgulflcantly hlglier levels
of total operating revenue to assets than the nocv-of fills ted
Independent croup in the posc-oci]ulsltloo years. This Is indeed the

Digitized bvGoO^^IC

cua, Muy caplrlcal atudlas have found tbat thus oTganlsatioiM
•IgDltlcantly Increaaa Che eanlnsa aCxa^ of aqqutrad aubaldtaiy
banfca tlO. H. tS. >1. 381.

Studt«a have alao fooad tbaC baok hoUlag coafxuiy inb-
aldlaxy banka cxhibic ■ algnltleantly bl^ec laval of total
oparacing expaoaaa to aaacta than Indapendant banka (IS, 19, 36].—
Iha aouice of thia tilghar cmpsnae atiaaa CB> ba ta^lainsd parCly
bf th* fact that bank holding coBpanlaa pa; algnlf leant Ijr hi^wr
e^loyaa benaflta (191, pay algnlflcantly hlshci intaraac on cljw
and aavlDS* depoatt* [5, 11]^ and have a aLgnlfleaotly hl^ar "othar"
currant expanaaa to total aaaota ralatlve to IndapandaDt banka
[10, 15, 19i il, 34], The aource of aueh hl^ "other" eapenaaa ,
reported by these banks ha* been attributed to Binigtatant teaa
levlad aeainaC the tubaldtary for aervlcca rendered by the i^

holding coaipany, Froo thla evidence. It la clear that after acqulsicloa
bank holding eoifianles algnlflCButly Increase both the earnlDgs
and expensea of their subsidiary benks.

profitability

UhllE ban?: holding company subKlcllarics c>:|>arlenccd both
a significant inccpaic In the total revenue to assets and the torcl

1/ One study i

:o.ind the r.

sucrse 121].

2/ Hfluever. t<

1 the extern

: that tbii Uighoi inter

est psld en rime end

savings dt posit

s Inflects

s different mix of thes

c dcpoilis, then It is

banks ace in (act payin

E higher Interest ratet

nn*".nr!""'",''^

N.-vcrchcl

less, al. '.ra^c three St..

ilic-i have found for the
ol C.-<^ and ..-.vlngs

deposits Lo cot

Bl Jc-poslti

1 h.'Lwccn nrrillafcd aii.l

iiHlcpbiidciit banks (lO;

D„ii„.db,Go(5glc

•xpana* ta •■■•t xAttoa, th» nac affact upon pmftcabtltty la
mknom. IM ctudia* hava found that holdlog oeapmj bank*
axparlanca a algnlfluntly lovar net *~"t^ to total aaaata ratio. .
than Indapaodant hank* [5, 191. On* atudy found Cha ravataa 121).
IMd ottaax atudlaa hava found chat bank holding eoi^aay aubaldlacy
Milta to^arlanca a alfntflcantly hlf^ai nat InenB to total c^ltat
TStlo Own Indapandnt baoka t^l. 2S1 lAtla one atudy found tb«
ravaraa 11S1. Bomvar, th* nat Incoaa to total caplul ratio ia
not sanarally ragardad aa a aatiafactory aaaaura of profitability
-bacMiaa of tha dlacratlon that banka hava over their capital
aoeounta. Moreover, In tha ca*e of bank holding coiq>anla* tha rolM
of parent and aubaldlary bank capital and debt are not claar beoauae
of double leveraging. Finally, due to the uae of eicpn:>e generating
Methoda to transfer Incone vlthin.e holding conpany ayateB, IC
caimot ba unairiitBUOudy concluded that bank holding coapanlea hava
aubatantially Inproved or reducad die overall profitability of
their aubatdlaiy banka.

Capital Structure
A priori. It la difficult to assess the likely tspact of
the effect of holding coopany affiliation upon the capital structure of
acquired lirms. On the ono hand. It is probably easier for holding
Ganv»V flma to raise additional capital since these firm are uaually

Digitized bvGoO^^IC

bvCCBT known and their atock 1* wote wldaly traded Aan aaallar
tndcpandect binka. Thus, BOr* capital fundi should b* aada avallabla
CO lopplcaent tha capital baaa of tfaa acvjlrad nifaatdlarj banka.
Comaraely, geogTSphlcal dtvaraltlcation throol^ tha holding
coipany lyitoi nduc** the ovacall level of riak. Ihua eonalatsnt
with this lower level of Elak.holding coapanlea aajr hold lower
capital levels la aubaidlaiy banki. In addition, since holding

ay subsidiaries aay view the parent holding ccavaoT as a
i«fet7 valve, this My explain the ability of subsidiary bank*
Intaln lower capital Co asiat rstlos.

Several copirlcal atudles eonflra that bank holding coapany
lubaldlaiy banka exhibit ■tsntflcanlty lower. local capital to total
:a (12, 21, 25] and rqulty capital to i
con^arabla independent banks. Next ti

il asseta ratios {S, %, 12]
:he enptiical llteracure

the post -acq Ills it

■let atructure of ac^J

CB from Bbidtes on the sspltsl atrucCuTi
he mast consistent. The lower capl
lubsldlary unlca of bank holding ccojianl
lonalstrnt wi di the lousr levels of rUV
Whether this offseci or aiiiellorac

d banks, tha

if these orgsnlEattoas
los exhibited by
louttver, say be

a the diversified
.ntly

Mincrcial banks (riskier
<s} is noc known.

D„ii„.db,Go(5glc

IC has besn BrBuvd that bank holding conpany •yaCvm ususll; pMacaa
OD ths 'average nore financial and nanagerlal rcaourcea, and tend to be noxe
aggcesaive and expansion nlnded Chan Independent banka. Thui, holding eaufttf
banks ahould experience higher gcovtli ratEa aa ceasuied by deposlta or aaseta,
aian Don-af filiated flniB. Although this lounda plautable, there Is
no evidence that ■fClliaCed banks gr:m faster than independeat
flnaa. Of the studies tbat have analyzed this- question; nona.havit found
a atgnlflcsnt difference betveen the growth rates of holding cmpany unlta
and Independent banks.

II . Bank Holdlia Cooipanlca and the Ferf OCTiance .of Hon-Banfclng Affiliates

Since the passage of the 1970 anendnencs Co the Eank BoUlng
Conpuny Act of 1956, the Federal Kcscrvc Board has pemltted bank holding
coDpaiilcs to enter a range of financially related activities. Moat of "*
vhlch, however, were elready permitted as activities for nstlonal banks. -
Too of the iraat popiilst :ypes of acClvlclea for these organlEsCions to
enter have been icortgagc bar.lilng end consnmer finance. Since data on
individual non-bnnk subsidiaries of bank holding co:iipanles are r;ot generally
reported, there have been few emulrlcal sCuillcs analyzing the post -acquisition
perfoTutancc of Cheat firms. To dote, there have been only three empirical
atudlcs analyzing two Cypca of activities (raartRase banking and consumer
finnncc) which have ottcmptcd to determine the impact of holding coapany
arriliation upon porfornance [30, 31, 35], Attho^igh these Studies sro a
IniiiKrtnnl fJr^t stop. It Is too early to reach any firin conclusions because

D„ii„.db,Go(5glc

of th* very llalud «aptTical InfomaElon and th* relatival; abort
parlod that bank holding co^iaiiiat hivo been ngagad In aoaa of thaaa
actlvttlea, Ihla aactlon vUl ravlaw tha aa^Irlcal lltaracnra on thU
■ubject.

Mortnaga Banttiut

Mortgage banking baa bean one of the ■
Induatrlea tbat bank holding coayaalea have antared
sf Decaobai 1976, aooa of tha largeat aortgiga flni
affillatad with bank holding caqwnlei. Under S
1970 AaanilDanta, bank holding engpanlea Bust dei
■cquliltlon of a non-baaklng financially related fit
public beneftta. Thua, bank holding coaip<
^ipltcatloni for ptIot approval to tbt Federal Raaer
nade auny claina that public beneflta would flow fro
of Chelr aequialclon. Sone of these benefica tnuld
IsqiToved perfonance in Eem of (1) profitability; I
atructuie; and (3) growth. Ibcse ire discus
profitability

Bsnk holding conpsnisa typically c
a mortgage banker Kill provide the nortgage flmi wit
funda at a lower coat, because the parent cooipany a
to ralae futida nore easily than the Independent firm. If thia Is ao,
then the lower borrowing cost shojld Inprove the profitability of the

popular

alnca 1970. Aa

m 4(e)(8) of t1
rate that tba

.m would produce

tllng thalT

:oa conauamatloa
flow froB
(2) capital

afflllat

I more capital

ihould b

Digitized bvGoO^^IC

613

^rcgag* banking afflllau, MorMnnr, holding coapanla* elala that
Oisy can laprov* Che optratlsg afflelaney of Uieie finu baeauae,
thay poaaeaa auparlor tDonaKortal Taaoaveaa. If theaa aiaaTtatlona
ara Crua, than holding coapanlas abould hava tsporCant aCface* opon
tha poit-acqalattlon profitability of acqulrad Dotcgaga afflltaCaa.

Una Btudy haa exanlnad Chla queitlon I3S1. Tallay aCudlad
tha par(arB>wa of 4! Borcgaga banklog affiliacea of bank holding
coavantsa for Cha yiiTm 1973 and 197*. Tallay'a finding* indlcata tiiat
■artgaga banking kfflllataa of bank holding coapanlci vara laaa
profltabia than tha rnortgaga banklog Induaery a> ■ whole for both
1973 and 197*. ItoiMver, aa tha author tndlcataa. tha raaulca ahould
ha takan with caution linca tha ralatlvaly b^lcf poat-acqjlittlon
pattod tliat Bortgaga CitM vara afftltatad with bank holding coa^nlaa
io tbta atudy It not IndUatlva of the long run perfoxaaTtea of thaaa
firM. A wch longar poat-aequlaltlon hlitor? 1* raqulred. Alao, ?
becaoaa Tallay navar adjuaeed for Che pre-acqul«ltion operating parforwanca
«f acquired flroa, the atudy via not totally capable of laolatlng
the effect* of holdlnt coovany affiliation. It la poaaible that
bank holding coopanlea acquired lercgaga fir*) »ith operating
charactcriitic* noC repreaantetive of tha Induetry aa a irtiole.
NcveTthKleis, thia Halted inforaation doei indicate that ncpaetitlon*
concerning the poit-acquialtlon profitability of nortgage affiliate*
of bank holding conpanta* vere not, for whatever reaion*. reallced
over the porlod covered by thia atudy.

D„ii„.db,Go(5glc

CaplMl ScrucCura
Itia affect* at biulc holding conpni; aftiltatloa on
capita Itiatlon of tha acqultad firms la again dtfllcult to datamlsa.
To the extent that additional capital funda ace nada avalLabla to tha
■ortgage aff lllatea, thtse flnu may exhibit hl^or capital to aaMt ratios
than non-afflllBtod fima, ttnrevac, to th« eKtant that dlvatalfleaclon
lowaia clik to tha holding conpaay iyaten, than tha pBEant holding i if iii|
>ay chooa* to laveraga their aubaldiaiy mortgaga fliaa bayoad Induatty
atandarda .

One study hai Investigated this queitlon to data
[3S]. The finding* Indicate that bank holding coapaoy subsidiary flnu
leveraged their moctgags affiliates beyond industry standards
for the yeara 1973 aod 1974. In this respect, Tslley found that the mxtg*^
affiliates of bank holding coopsaies eidilbited lower equity
eapital to total assets ratios than did the industry a* a «hol« dutlne
these tw» years. Although these findings are tentative, they are caaslatent
with cnplrlcal research that thaua Oiat holding coaapantes significantly
Increase the leverage of their barii.lpB subsidiaries «a discussed in the
first section of this papor.

Growth
Bsnl: holding companies clslii that affiliation vith mortgage bsnker*
«111 significantly increase the flow of funds into the residential looctgage
marltet. If tliis Is true, then affiliated morcgsge barlters should experience

Digitized bvGoO^^IC

fa*t«r grmrch cacea in terna of the voluna of orlginaciona or loan
•errlcing Chan Independent DCTtgaga flnia.

One study analyEed thla Issue bj comparing • sample of
■ortgaga banking affiliates o£ bank holding conipanlei and a group of
Indepaadent iiortgage flms |30). Giowth was measured by the change
Id the servicing porcfolto far 32 acquired and indapendant flms for
the year* 19£8 to 19TZ.- A BuICtiils rcsression woiel vas used in
order Co consider the Influence of other variables on the servicing
portfolio as veil' as to hold other factors constant. The results of
this study Indicate that aorCgase flroa affiliated vlth bank holding
co^ianles did not grow taster thsn canpaiabla Independent flnts as
Hieasured by the growth In the volume of loan, set vicing. This study
also fou3d that the bank eubsldiarlea of holding cOT^antes did nof
fncr«»ae or decrease the level of their real estate loans outstanding
npon acquiring a mrtgage banker. Thus, although the findings ere *>
tentative, at least one study indlcstes that bank holding companies,
contrary to their original claims, have not increased the relative
flow of funds to the real estate msTket when con^srcd with independent

Since 1V70, banV holding conpanleg have acquired a nucAer of
cons'jmcr finance corapantes. As of Dccenbcv 3'., 1976, a few of the
lorger consimir fintnce companlea have bcc- ■ nffillntod with bank

Digitized bvGoO^^IC

holding eoopaai**. To date, thar* hav* bean oal; two coplzlcal
■Cudlca that hava axamiiwd tlie (1] axpanaa; (2) pEotltablllt^ (3)
capital ■tnicturejand (4} growth effacta of bank holding eOBpany
acqutiltlona on tfaa patforaanca at ccnaioiar floanca coavmlaa (31, 351,

On« atudy found aoaa Indication that cmauoar tinanoa co^asgr
afflltatea of bank holding coa^iaalaa ai^ariaDCa hlghst cathkc than
Icwar borrowing coata than Indapandent fllaa 131]. Tbla finding 1*
aurpctalng alnca holding co^anta* clalia that tbey will lowar
borrowing coata to tha afflliata and chat thasa galna will be passed
on to the public In tha Iota of lower prleea oc better quality of

Profitability
As In Dortgaga banking aad other Don-bnnklng actlvIClea,
bank holding conpantes Maka clalna concerning the public benefit*
that wjuld flov froB the acqulaltlon of a finance Eobpany by a bank
holding company. For exaiBple, these organitatlons cIbIm that through
thalr auparlor borrowing capacity they could Incrcacc tha supply and
reduce the coat of loanahlo fund* to their affiliates. However, In
the one study that IHS Invcstleatcd thii quest Ion there uas no evidence

offJllnLed connuiner finance conpanlei [31). In addition, holding
CDirimntPS also claim ilioc they are capable af irjprovliie the operating
efficiency of aequlvci! finns by provldlnj co^n^Jttent iMnagetient and by

D„ii„.db,Go(5glc

■uppljrlng aaivlc*) to dia aftlllaca ae loner ccMt Chan tba c
tlnance affiliate could produce theaselvee or purchaae traa anotber
aourca. If ai^ part of cbeae elalaw are Erua, t)i«n holdlni eoqMDtei
»7 be able to Ioikt Bcpan>eB aod Improve Che poeC-acquiattlon
pratlUblUtT «f theae ac<iuU«d finu.

Talley [3Sl found that conauaar finance coapany aubaldtarlaa
■ce 1*BB profitable than noA-*f till* ted independent fima. Ba
used a aaiple of 14 aejor conainMr finenee conpany afflliatea for
the yeari 1973 and 1974, In both 1973 and 1974 the flndlnga
ahow that etnauBar finance coopany afCillatea of bank holding
coB^nlei had both lower net Incona to equity capital and nat
ineoMe to aaaeti ratloa than did the aaifila of Indepandent flia* in
tba atudy. Aa in the previously diecuaeed etudy on nortgage banking,
theae flndinga by Tallay ere only auggeatlve because of the diort poat-
acquisftion period of the affiliated group under hald<ng compaiiy
control and the failure to adjust for the pre-acqulaltlon perfomance
of thii lample of acquired finw. Of course, lower profitability, by
Itself, could be due to increased eggreastveneso rather than reduced
efficiency.

A later study [31) used nultiple rcgrcsslu.i nnolysls end
adjusted for the pro-acquisition perform=nce of holding eorapany
affillaLed consim-.-r finance cor.i;<antt'3, but the r»uUs vsre similar
to the Talloy stuC.y. The nuLhors selected a satqilR of 37 flrro

Digitized bvGoO^^IC

(23 iadepeudant and 14 ■tflliacad) for the prs-acqul*ItIoa t**t and
38 flm (23 independcnC ind 15 ■fflllaced) for th< po it -acquis It loa
Ealt. Ttie; Caund that tha conauntT finance cn^a^ afflllataa of
bank holding conpanla* vara algnlflcanCly leas profitable than tha
Independent group for tha year 1974. Hhlle diis itud; vea sore
•ophistlcBCed than tha Tall^ atudy, it atlll focused on only oaa
year of poat-acqulaitioD experience for tha affiliated group
0'74). Ihui. tbia flndiog mat alao be conlldered tentative.
Navardialeaa, boUi itudlea Indicate that Che £ priori axpaetatlona
concerning the poat -acquisition profitability of affiliated flnanca
compaDies were not reallted in the Initial sanplea of flras czaatned.
Capital Structure
Given that risk Is likely to be reduced vlth diversification
It is poBilble that holding conpanleB vould choose to leverage their
consumer finance cooipany afflliatea in a fashion slnllar to their
banking and noTtgage banking afCillatea. The two atudlea |31, 35]
find that bnnk holding cuqianle* leverage their conauToer finance
covany affiliates sore thai on-afflllatcd independent finns. One atw
found that for both 1973 and 1974, consu-Jisr finance company afflliatea

uhole (351. A second study Sojnd similar results |311. ■n.erefor^,
tt appears Iroji the available evidence that bank boldlnc companies
iLVcrage' chelr co^isumer finance affiliates to a gTester extent than
non-affiltsud firms.

Digitized bvGoO^^IC

Ooa itudy found that conauaet f Inaoca cmpanj ■fflllatai of baA
holding coqanlea gmr faiter than non-at filiated ladepeodaDt finance
gcwyanlB* vtWTe (Towth li iiaasured b; total aaaaca (311.

III. Siiimarr and Conclualnna

Given the lac^ body of eiqilrlcal raaearch on the pecfoimanca of
bank subildlariea of baid: holding co^Mniea, It Is noH posalble to drav
Maa eonclualoni concemltig the poat-aequialtlon perfoi.'nance of these
flnia upon being acquired by ■ banl: holdli^ ctnpiny.

1, TAie Dost consistent eaplxlcol ovldeoce analysing the post-
acquisition operating policies of bank sufaaldlaclea of baidt

V
holding coopanles suegcsts that bnnk holding coDpantes have

had the atrongost Inpaet upon die aaset structure of acquired
flnts. It Is clear troa the evidence that bank holding
co'jpany subsidiaries choose riskier Invectoent and loan potlcle
In Che post -acquis it Ion period. These flms hold less cash
assets and U.S. governn^nt sccurltlFs; hold norc state and
nunlcliial securities nnd mal-e oore loans per dollar of
assets Chan do their Independent counterparts.

D„ii„.db,Go(5glc

2. 11i«ra ia no svldance chat the coi^raslttmi of the
loaa poEtfollo of holdiog eo^aoy subaidlary
bank Change* axBtauclcall? mibBequant Co
affiliation.

3, Bank holding company iubBidiary bimka nditbit
aignlfleancly higher poac- acquis It Ion camtnga and
expenae acreastt than do coaparabla Independent banks
irtille th* overall leval of piofttablliey of cheas
Etma is relatively unchanged In the poac-acquiaicioa

Bank holding conipanleB li
algnlflcantly Bora than i
niDober of the «iiplrical i
company banks exhibit aignl

The fiVldencp chove ths
average do not grew any fai
as measured by the grovCh

ige their aubaldiary banks
able independent banka. A
la ahow that holding
:antly lower capital to

ig conpeny banks on

• then independent banka

lotnl depoitti of these

Digitized bvGoO^^IC

Dnllka th« llteratur* en tha pott-acquULtloa parfonu&ea of
; Bobitdiorlta oC b«cdc holdlns co^antes, homver, tha reaaareh on
.aon-bank flnaaotally r«Iat*d ficpa tbac hava baea acqulrsd bj
: holdtng ci^iaiilea la vary llaicad. Itiui, tht conelutioiu
a trvm laseaich In this acas tDuaC be conitderad tencadva
«at.

1, To date, bank holding conpaiiea have not had ■

■tgolflcanc poaltlve Inpact upon tha pott "acquisition
operating perfomanca of non-baiiti affiliate*. Tm
eaplrltal atudles analysing tha poEt-acqutaitloo
perfAr^nea of aoTtsag* affillatea of bank holding
coBpanLes find that thaae fltna are not aa proflubla;'
do not grow any faater; and arc hlghni leveraged than
tha laduatry a* a tAiole.

Tht available evidence vlth
conauaer finance coaqtany affll
coBpanlas alto Indicates
claim* by bank holding cc
Tha llalccd evidence Indlcatei
affillatea of bank holding ci
profitable, more highly lovoi
Intercat expense on borroued
Chan IndepondonC conEumer fli

to the perfoTBBnce of
latea of bsok holding
t least to ^tc, the
:G have not been fulfilled,
that consuiwr finance
anles are: leas
,ed. Incur htghar
inds, and grew feEter

D„ii„.db,Go(5glc

Carter H. Golemba Astoetstes, Inc., "Ih* FuCuce of Reglitcred Bwik
Holding Companlas: Operation, Regutatlon, and Potential in a Chaaglnt
Financial Enviromcnt , " The Aesociatlon of Keglateced BaA Boldlnf
Compantea, March, 1971.

, Columljla Univeratty PccSt,

5. Frfias, Arthur G,, "Hie Perfonaace of Individual Bank Holding Co^anlaa,

Staff Eeonoffitc Stuiiies, No. 8A, Board of Governors of the Federal
Reserve Systea, 1975, A euaoiBTy of Chia paper appealed In the
Fodernl Reserve Eullgtlr, Vol. 61. 1975, pp. 47?-A73.

6. Cody P.lchotd !..,

StrucLure In Ohf
Kovembsi/Dectmbnr, 1971.

7. Heggcstad, Arnold A., "Riskiness of Investnicnts in Konbanlc ActlvltU*

by Dank Molding Comanles," Journal of Econcmiics and Buaineaa.
Vol. 27, Spring, 197S, pp. 219-223. A slightly modified version of
this paper vas alto published aa "Divorsiflcatlon, Slak, and the
Sank Holding Company," Bjii1:i-r's HaR3zini^. Vol. 159, Winter, 1976,
pp. 109-1 IZ.

B, and John J. Miiiso, ".Capital ftanogeraent by Holding

Hoffmiil, Stuart C, "I'he ImpncC of Holding CoTipsny Affiliation on Baidc
Fcrf urmancc : A Case Study of Tuo Florida Multibonk Holding Companica.*
Uetktnp. Vnput Scrn.!-.. Federal Ri-servo Bank of Atlanta, January, 1976,
An earlier siicim.nry ,.f this was publichcd as "A Florida Case Study:
Po JorniHcp of lloldiiis Conpnny Bonks," Manthly Bevlev. Federal Reserve
Bank of Atlanta, Decoir.ber, 1S7S, pp. 202-205.

Digitized bvGoO^^IC

In, Lexington, Hang

Johnioo, Bodnay D. and David R. Helnster, Tha ParfonuDcv of Bank
Holding ComfttJ Acqntaltlons; A MuIttvaTUta Aoalyata," Jqurnal
of .Buslno»« , Vol. ZLTHI, J^rll, 1975, pp. 2M-2U.

_"Ati. Analysis of Bank

.dona; Soos He chodo logical

jh. Vol. IV, Ko. I, Sprlne, 1973, pp. 58-61.

Federal Keserva Systcn, Apill, 1971.

Baaed of Govarnota of the Fcdecal Re*«rva Syacaai, Kaich, 197&.

, Ho. I, January,
19. Light, jack S

Hayoc, Uicill* 5., "HanaBCKot Folici
BanV Pcrformanee," Journal ot Banlt
pp. 37 -4a.

Digitized bvGoO^^IC

>1. XXXtl, No. 1, Harch, 1977, pp. 147-138.

12. HcClaai?, Jm v., "B*nk Holding Coovinlei: their Gcovth and tvttotmatt*,'
Ibctthlv BevlMi. FadcTBl RaaeTVC Bank of Atlanta, OctAaC, 1968,
pp. 131-138.

23. ■ "Absentea Ovoeri

Coc^MDy Ferf omance , " HonthlT HevJ
Atlanta, August, 1969, pp. 99-101.

24. Klngo, John J. , "Capital I

Holding Coaipany Banks," Jojtml
Vol. X, Ho. 2, June, 1975, pp. 1

Koyer, R, Gbarlea and Fdiwrd Suaina, "EtBtateced Bank Holding CoapK^
'vsl.a."'Joiim»l ol Pliumeial

Haantltotlve Anal.yals. September, 1973.

Na-3cr R, and J BtoKo, "Dlacloaura
Activities of Bank HoldloE Ccnpar
Croup, Vaahington, D.C., June 30, J^/e.

FlpoT, Thimaa R., The Bconoalca cf Bank Aeoulg^tlon* by ReJ^l■tel^ad
Bank Holdtng CojpiinleJ. RcaesTch Report No. 48, Fedaral Reaerra
Bank oi Boston, Hnrch, 1971.

tthoideo, Stnphcr, A., "llic Effect of Bank HoldtnK Coc^inr Acquisitions
of MjrrRSEC Benkers on Morteage LonJina Aetivity." Journal of
Business. July, 197S.

Digitized bvGoO^^IC

_ and Gregocy E. Boccir, "ttia PerfonHocr of Bank

32. Rom, F.S. anl D.It. FraseT, "Baafc Boldtds Ccopany Divers If lot Ion Into

HortBaga Banking and Finance CaDpaDiea," Banking Laii Jouroal.
Vlnter, 1974, pp. 976-994.

33. Schotland, Itoy A., "Sank Holding Coopanlei and Public Policy Today,"

CoagendliM of Faper» Prepared for the flNE Study. U.S. Bouae of
KapraaontaClTM, Coaalttee on Banking, Currency and Houilot,
Vitb Coogrea*, Second Seaslon, Book I, June, 1976.

of the YedarslRaserve Syatea, L974.

Saij, 1976, pp. 42-44.

Cleveland, Hardi/Aprlt, 1973.

Welas, Steven J.^ "Bank llotdiog Companlea and Public Policy," New
England _Eeoiianic Revlev. Federal Reserve Dank of Boston, January/

Febtuaty, 1969, pp. 3-17.

Digitized bvGoO^^IC

Ifae Kauk BoldLog Caapmoy Act of 195«, ■■ uended ia 1970, diMeCs

the Tcgulatoiy igenclas Co conitdar Che probabla effects of ■ MEsar or

acquliicion ui>OD coopetitlon, An^ flDllns* of llgnlflciBt antlccapotltlve

effect* H7, hoHBTer, be offiat bj a nuaitnc of coiuldenclana lAlch Indicate

that, overall, convcDlence and needs In the case of a bank acquldtlon, md

Uie public interest in a nonbaDkiDg case, mcld-be servsd by appcoval of a

particular coabination. ^ As stated explicitly Id Section 4(c) (B)

of Betulatlon 1, one of these offsetting factors it "gains In affl«l*ac7"

^ich vould be achieved throu^ bank holding coopany acquisitions of vcn-

biob firma. Although "efflcleociei" sre not specifically nentioced in

SietloQ 3<s)(3} of Regulation Y, whldi pattsins to bsnk acquisitions,

it Is Btstcd therein thst:

In every case, the Board shall take loCo considocatloD Che
financial and minagerlel reaourceB and fuCiu-e protpectt of the
company or ennpaniea and ttie banks coacarnad, and the canraoienc*
and needs of the cciounlcy Co be served.

Since the financial ccaouices and future prospects of an acquired

fing can Ind.ccd be affected if efflclenclcE 3re rcallwd. dis toard has

often made icfoicnccs to economies of scale ti sssasstng Che narics of an

sciju Isle ion. Ihc nsicd has also recoEnl:!L'<' mmC II^c public miy benefit

Digitized bvGoO^^IC

dlnctly. It' fin* provlda becCai saTvlcaa or Iswar Um pdoes ehargad

nil pa^r nvUn 'tfa* tzliting evldBDM altb n*peci
•ehlrrad by both bad:* aod ethar flimi afCer tbay an aoqulxad by bask
hoMlns ooapBDla* (NK*). " In Sactlcn I acudlai ^Idi petcalo to bai
■evlaltloB* ara caviesad and Ben-bank aeifiilaltlDiu an diaeuaaad In
SKttOB II.

I. BaiA Acguliltlona and Efficiency

EcoiKnlc efficiency, as It hoa been intei}
In Uil* area can pactaln to both aconomteB of icale
oiganliatiDnil atiuctun. Econooles of acala occur
to Ineraaaa ita output of. aervlcea by aoaa aiiounc hI
proportionate Increaaa In costa, i.a,-a per unit coat
Increaae In Blie. OrganlEatlonal econcoilai, hotfavoc.
attributabta to affiliation with tlthet a branch .xyi
GonpaDy ortanlEatlon.

There ara a nuiaber of reaaoni uliy reaeardi
bidiBta have code to expect Increased efflclcncleE t

1/

FTC V. PrQCt<

: Court has Indice

n both

1/ Although there la an extensive body at reae
of scale In banhinB. only Chose studies vhlch p
ccononlel of lidding company affiliation (by ci
dcpFodlng upon the saniiloa uac^

uhen a bank ta able

refer to Iwar o
n or a holding

i; bnoks affiliate

Digitized bvGoO^^IC

Hitb holding coBpnlaa. Attlltatloot alsMt alvrr* Involn clMat Clai
■1th braacb-llk* natwack* et banki, anally ei^iiaad tff a larta laa4
bank and anaial gasgrapfalcally dliparud afHllataa. Caeh aiAaidlarj ea>
drav npoa tha axpaitiaa add raaeureaa of tha laad baalt aod DEhai afflllMaa
and e^and Uialc outpat of variou* *ar«tcaa. Ttia pannt holding ctapanr,
aspaciall]> If quit* alaabla, aajr alao prorlda addldooal capital aad I^cava
upon tha aaBagaaanc sf acqulrad bank*, Manj haldlag c^ipiBlaa alao ptevUa
tor eaBtralt»d pucdiaalDi and advartlalog a* wall aa U|b1 eouaaal and cm
adviea.

A. Coat Btadlaa

Althoosb tb* litaratnca daallog vldi •cooaalo* of acsala In ba*tis .
la lary antanalva, thara hna boan TOlatlvalji fa* Mplciul atodtaa ableh
focuaad apodflcallT npo° tha aeoBinlei of acala •■aoclaCad vlth faelding
cmpony affiliation. Tba HthodoloEr alloyed In both of thaae anaa of
acudj uat aaaaMlaltjr alallac. Host at Oiasa atudtaa a^loyad Fadaral
Rattivc Functional Coat data^ rather than citptna* data fr<a tba taportt of
Condition. Tha atatlatlcat taehnlqnaa alloyed In thaaa atudlaa wtra taoaralljr

liaad by holding cimpa

D„ii„.db,Go(5glc

■uch lur* iBvhlsCleatad thu cha pnrtlDlio ncta atudla* Hhldi at* t

In SaetloB B. In ■oa* iMUnc** ■ ilnsla eont fnnetleo oi prsduetion funetUa

■■■ aaUaacad uhlla In othar JCvdiaa a dlaagtraaata approach ma oaad,

tlM dinggie Bated approach cnquita* tha aatlB«tlati at aaparata fnnetlMW

lot vatloua bank outputa, :%., tlM dapoalta, dasand dapoalta and aacuclUaa,

Kaliafc and Ulbart (71 inra awnf tha Utac raaaarebais to <^ltr)P
tC* daca In a coat fanctl.en apprsMb. tpacIflcallT d(>lta*<) Co coat for
ottanlEaclanal aooBc^aa. Oucpvt «aa daflaad aa total aainlat aaaota, and
•«*[Bta eeica aa nat ■omul opacaclns axpanaaa. In anotbar aatlaaclon,
ootpaE «aa daflaad aa groaa raTonua and a«*[aaa coat aa cba ratio of
cavcnua to Mt opatatlng axpanna.- It im* found chat >ff lllatad back*
wan onKanalj noiB affldant tban iBdapandaBC unit bask) and Cbat lar^ar
afilllatad buAa uata aora affldant than ivdapandeot bcanch aa wall aa

2/ Studlca e( tbla aort which enploy only ona output dl>anitan tathar
than oiti»llo| coat Euaectona (or aavaiat bank ■•■■» remit In blaaod
•allBatea of coat ^(flciaocy In favor of banka nhieh hold (roatar pio-
portlent of ■•tot* oltb towr coita.

Digitized bvGoO^^IC

ABOthci rU atudj (10) by LoiwbEak* asd Ba*lM toeuiad Mir

upon Ch* deiund d«pc
■cala of output and
amruij affUlaca. 1
account balanca and
banka b«va lowr epi
iDdepepdant bacfca.

In anotbai
toi (even dlffannt
dnund dapeiica. cii

.t functloo. Coaca van analraad In nUtlan to tha
la fon of urgail'atloD - unit, btancb bmtk, or boUlag
tbl* (tody it «aa almo laoad that idiaB tha avaraga
la mabar of acceiuitt p» offlea at* lacfa, afflltacad
It log coat a par dallar of davod dapoalta than

itudy by Lorigbiak* and Jobnaon [11), coat finctlOBa
itagoTlea of aaivlcaa van eatlHtod, Ihaaa iBcladad
depoaita, ImtalHat loana, bualMM leana, cell

Iti, and aafa depoalt
HhcD offlct ata* la 1

nka. AffllUtcB wti
i functloni which cai

holdloE

mice* by expanding office alta, unit

:anLisl croiio^icE uMlc unit non-afflll

It vaa [mod aat unit
of branch bufca oi beldlag
than tlO otllii

:h leaa than }10

Digitized bvGoO^^IC

BenltMi anl Unweek (11 ■!» esCIiiiatcd nu^Eoul c«t funccton*
for clw psrtod 1969-74 using FCA data. The nsulcs Indicated that Chrou^
atflllaclon, iDdepeadcnc banKa taay nducc averaga eoata In acvaral ioftnttat
banklBg AmctlDBB (dMund dcpoalca, raal eatata lending, and adnlnlatntlve
•■ETice*). For axaqila, BBC afflllaioa an averaga tendad to have (bout ■
12 parcmc Imar ancaga eoac Chan lodapaodniCa for tha dcBiod dapoatta.
fuDcclDB. Ika Eciulta funhec Indicated that baoka affllLatad with largat
BHC organltatloD* tead to have tmec avaragc coat*.

lfallliieiniKll2) la a •tud7 prlaarllx coacatned vlth coat dlffanncaa
betiiMD bcaneh and unit banka alao partormid a atatlatleal taat to datsoxLne
vfaethec holding 'conpany affiliation had any effect upon bank coata, Rla

that theae were not acatlstlcaliy algnlflcanc. For branch binki.huwevac,
affiliation wai ahoun to Increaae coats. Itile Utter finding, houevar.l
li not tuTprlsln& since as many roiBarchers have sugsKsLed, there nay be
mma dupltcatioa of functions involved In cooiblned branch -ho Id log cobpanj
ayECeias. The sauple of banks used In this study vere located In Federal
Sesorvc Dlbtrlcts 1, 2, and 3 vhcre such ccublnatlons are cooBon.

In another cost function study vhlch used 1961 Reports of Condition
data fron the ninth Federal Reserve District (Hinneapolis) , SchweltHE [U|
found that banks In the $3.S Billion to $23 million aaset slie class, vere
Bora efficient than Independent banka. The organ iiiat tonal cconcoiUa,

D„ii„.db,Go(5glc

■DCS iiAaunclal lor ■fflllatci of laif troopa, nnait due bdlUnt
ca^taj alflllatlBa aftordi udIc baafca mtat at th* bnafit* fr—<m%t t«
ba aiaeclacad vtch braneb banklnt.

Tha aCBdia* ravlawad In cbli ••££!«■ mmuc that banka iifaieh
Btfiliaca with holdlas ctar**^** tnaa asaa axpMW* *■ ts coata et
caaCralluetaa. Swll aalc baaka mMj not achlna Inala ot oucpat nfflctaac
ta offaat Chaaa axpauaa. Bomrai, ■■ ■(flllatad banka bauaa largar,
{ovai }30 to U ■lllton Id dapoalt alu) aeoiMBlaB of afHliatloB aoabla
holdlBt ecB^nr aabaldlary banks to aAlna tOHOc o**rat* eaata thaa
*1 Hilar (l>*d iDdcpandaat banka.

■. Portfolio Ratio Studtaa

Although Cbey wcro not apcclflcall; claalgncd to aDalraa boldlDC
eODpany (ftielencir, thera hav< hcco Kvccal aiudiai vfaoia toautta bear
upon tbc liaua. Tbase gCudlaa focuaei] upon holding caopanj parfoiBanea
tn ganaral bjp ciaiparlng ■ nuBbar of •fflllatod bank* vich control gToupa -
of Indapondeot banka. Ihajr analTsed diffatoneaa In aaiac itTuctuT*, oparattat
pallciea, pclcca and aarvlcea, *t uoll a* ■arnlnti and ciipan***.-

.V^

1/ Ona eould aipict, a pilot t . (hal
holding coapanlct havo'iuir* to gain
vhidi ■» nlready part of branch nrf
that ai» holding coi^any atflUated
econoolca o( tcilc than brunch bunka

a the Cnii;olld(l:rd Report

rfonuncc ?itud)r concnincd

icri, 11 in not dUcuaacd

Digitized bvGoO^^IC

Dm MTllMt brMd-kawd itMAr of tU> mic m> coi^laMd l>j
LntrapM IB] In 1967. B* analyMd 32 flaiBClal tnlM of 43 biuk pain
locatad la icvacal tUMa. Ili« oaij ai^wi** cbMiott 1b «blch holdinc
co^nv ■ffllKCa* bad alvlf leant 1; hi«licr ratios waa "ochar"
opatatlitt axpMaaa. TalU; [U] Imtmt ea^Ucad a aiBllaT atudr iliisb
lootud^ ai pain ofbackaaiad afaln tlw tljtdlnsB ravaaUd Aac aUllUtad
badca had hl^ui "otbar" op*r«tlti| ai^aaaaB. Im Dthat atudiaa coallnad ,.
to tha itataa at Floilda and Oiio, nipactlvalT, alia IndlcaCad that
holdlag ao^a^ atflllacsd basfca had hl|tMr opMaClas axpaaaa*. Iha Florida
•tudr by Botbia ID caparad 19 Hanita* of baidc parfotMaca for a aa^Ia
of 13 t'i^ctt afflllatad and Indcpandant bapka for ait^ of Ivo botdlns eon^aalaa.
Iha lobaUlartai of ona of tha holdtas caapiDlaa ai^arlaDead altaiflcancly
hl^icr oparatiDt at^anaea chaa afflllata* of tha othar; hcwavaci both had
■caawhat bl^ac ai^aiuei than Oia IndapaodaDC baukt. Tfaa bli^ar coat
vaa aialn Bttilbutabla ptlnarlly to tha "otlier" opatatlpg axpanat catagorjp.
Nan [16] In hU Ohio itudy conpand 27 pscfonuiiea ratloa for U affiltatad
va. ladapaode&t palia of bank*. IB fcaaplng with the flndlns* of othar
ati>dlel II HIS found that acquired baidi* had a aliolflcaat poat-acqulattlOB
incresH la "other" oparaclne cxponaot. In aoothar acudy by l.lEhc 19) Aleb
Includad ■ aai^ila oE 1S2 d> novo banka locDtad In 24 (tatci, Ic waa ravaalad tb*
holdlni conpanj afflllaCci have hltfier total operating •xpcniua, Fuithai
■nalyali revealed Chit these higher eosti usrc In laree part attributable Co
the Bub-coLeGorlaa; hiehor employee banefltiB and hlglier other expenses.

Digitized bvGoO^^IC

BaMd upon th« abor* finding* «lth t**p*eE to ■ftidnGy Eacioi,
It may appHc chat (fflllacton vlch a bank balding eo^iaDjp raaulta Is oc*
tanttatlffiul dlaaesnaale* lathat tbaa ocganlueli
principal reaion for tbe higher cocal cxpaiiHa ai
atudlaa »ai the hlghai "ethar" eparallng axpana* cal
auggaatad by thaaa laaaarehac* that dia hlghat axpaiua* amy b* atcrlbvMd t

n aioat of tha

-agory. It baa baaa

d by holding co^a

thlt "athar" operating cicpeDae eatagoiy,

1 feaa paid to dliactora and coanltte

holding coivaDtaa. Each oE thaaa axptn

oldlng eoBpany ayi
Tuly reftr

anpanaaa rap<a;tad is
:alnat and lagal faaa
Baabaia, nay alao ba ooiqaa to
■a aca aathoda of tEanataTTlDf
rldeod pajHBota and

contrtbntlng to hl^ar
The finding!
HGlnater ISJ bscau

asGaoptlon that pa
provide! an adoqua

Ilea of dl
liatlon dli
on and aa^loyee bendflta prograaa i4tl^^
coapany organliatlona are a;ielher factor

•tudtes hav* been queatlonad by Johnaon and
iBtlcal methodlr^gy eaplc^ad, Eai± uaed a
arlnte differenctrB In group fiaana. The
llaced bank vtth a ainllar ilied local baiA

Digitized bvGoO^^IC

n. Boa-— ak Aecwflttoim

Slnca piitagQ at th* 1970 AnindHnti to tb* tatik Holding Coapniiy
Ace ttw Saacd ha* ■ppr««] 17 acclvltles ai paralialbls far bank holdlas
eo^anlaa. In appllcaclou aubadLtted ta tha Board, heldlog csopaalaa
tjpleally elaln ■■ ■ public benafica that a propoaed acqulalclon will
nautc IB lo«r ccat and Incraawd sparatlng affidsncx.-

Alchough there la carcentljt iwcb loterctt In Efaa poac-acqulaltlon
parfonanc* of holding ctupany affiliated non-bank flna thera ta a paueltf
of a^lrlcal Itudlaa ralatlng te thla aubjaet. lb* naaon foe chla lack

nadllj arallable. In addttton, sany of theia acqiilalclona Hare made
quite racantlji tbua, the poat-acqulaltlon period of analyala would not be
of aafflelent duration to dariva ncanlngful rsmlca. Tha only pufaltabsd
eapirlcal aEudy to dace In which aoM reteianca to efflclenclai ta nada,
waa recently coapleted by Shoades and Bociar (13) of Che Federal

1/ Sta Je«sce and SaoUg 13].

Digitized bvGoO^^IC

RcMrva BuH staff. The authoca cag^and Cha opatatlDs diaracttilatlci
al a laupla of IS Indapciulcnt and IS bank atflllatad ccmniMt tlMOC*
conpanlaa^ In kaaplng «lch holding co^anj clala* It ■■■ hyfwthaataad
tbat coat* wculd ba.lowaiad ainea cha acvnlutlons ecmld prorid* aecnnct>|
co^Dtac, and paricnnet Hnicca to Che finance aubaldlary latbai than
havlag tha aubaldlaty p[«lde Iheaa aarvle** [or Itaalf or eoBtract fa:
ttaoa with an eutalda partj. The reanlta Indicated that ptler te theli
■cquialtlen, the aEfitlatcd cavanlaa mia not altidfiGantlj different turn
the. ladepeDdeot coo^anlea In tama oE peTfeiBanea and financial aoundoeaa.
After affiliation. It vaa dateninod that the holding eoi^iany aubaldlaiiaa
BCllI did not have lovai; operating anpeoaea than Independent coapanlaa,
Thla atudy generally doea not confln the argunenta of bank holding
cOB^antat that their entry Into tha coniuoei finance tnduairy «1I1 yield
nuseroua puhllc benetlta, ^umg than lo«eT opacatlng eosta.

Ulih raapect to coat efficiency, thect la a good dMl Bor*
oaplrlcal evidence reUttng to holding conpany aequlaltlona of baidia than
non-banking fitaia. The flndinga relative ro non-banking flnu ausC
be Judged ai In the preliminary itagea. Although aone portfolio
ratio xudlfi of acilulr>d bunks tndtcate that afftllacci have higher trfntf

Digitized bvGoO^^IC

coaC Bfflcledcy or coita related to the production oC (pacific ban
Studlei Atcb hav* luad maia laClnad aCatlaClcal machoda and fasvc

aevaral araaa of luak eoata, (uggeac Chat ■Icheugb affilli
iocui cootdtniclon cicpenaeB ttity alio raalli* aconOBilaa ii
of aavaral bank •arvlcai, Llk* ion nallar branch bank of:
holding compaay afflllataa ma; not have aufflclent voli
of Chcae ceDtnllutlos expanaaa. but aa they expand DuCpBt
for aany Bcrvlcea arc ilgnlflcantly louer than thoaa li
unit baoka.

Digitized bvGoO^^IC

BsutDd, C, cDil Baiwaek, G. "A Swucy lapoic « BukHoUlns Cimfnr
Affiliation ind Econonle* of SeaU," In Conteranea ea BaA atnietnf
and Co»«eltleii. Oiicato: Fadaral Kaaam lank of Chleaio, 1)77, py.
158-168.

Bof&Mn, S. "Hw Ii^act ef HoULng Coaipa:^ Afftllatlon on Bank FarEoE-
HDca: A Caaa SCu^t of Tvo Florida K^ltllwak Botdlot CoapaBla*."
Horkldg ?ap« Satlai, Federal Kcasrvs Back of Atlanta, JaDuary 1976.

Jeaaaa, H. and Saalls. S. "An ftnalyBls of the Public Bcnfflta Tr.t
of cha Bank Holding Company Act," Hanthlv ReIveh of tba Fadatal
Kaaaiva BaA of Hew Yoik. June tSJ^V, pp. lSl-tJ2.

Jdinaon, K. and Heinatar. D. "An Analyali af Bank Boldlnt Co^aaj
AequlaltlDnB Sciir.e HithodolagicBl laauaa," Joucoal of Bank Baaaartli.
a (Spring 1973), pp. 58-61.

Johniao, Rodney D. and KelaacaE, DavU K. "lbs Porforaaoca of Bank
Boldlns Coinpany AcquHltlon*: A HuUlvarlata Analyita." Journal af
■nalaan. XLVIII (April, 1975), pp. 204-1!.

Kallah, L. aot) Gtlboct, R.A. "An Analyali of Sella and Oriaolcaeloul

Fon In Cotm-cUI Banking," The Journal af InduBCrUl Econoaic.. *

Vol., 21, July 1973

pp. 293-307.

Lavnoea R The Pet

otnoncc of B.i

nsnlei. Vaih., D.C.t

Board of Governors

I the Federal

Reserve Syot

Llf^E, J. "BffeetH o

Holding CoTip

oy Afflliall

B on Oc Novo Banka,"

Chicago; [edrral R

serve Bonk of

Longbrnke, V and Has
Banking: Hie Etfec
Coat of Producing D

s of sue and

mand DcpoBlC S
a.iklnR.

ervle«»," £o

onlea of Sea
uly 1975, pp

ncy In Coawrcial
thcoalna. Journal of

Longbrakc, V. and Joh
BW.Ino nt BTk Ad

5on, M "ECO
Inal tret Ion. J

c In Banking,"
32-38.

Longbrake. W.."DtEle[e
Hulti-Fln Org»nlia

clal Fffecta a

f Slnglc-Pl.

t, Multi-Plant, and
ncy m Cornerclal BanI

D„ii„.db,Go(5glc

IS. tkilltMauii, D. "BciDCb T*
Coitl." In Ch(osIJig Peo
lailjtBti," THchnlcml Psp.
FhlUdalphU, 1973.

IS. Scbwalttar, S. "EcorunLc* of Sea
Budcing," SouChem Ecopowtc Jou

t of Binka Acquicod by Huttllxpk HaUlng C

Digitized bvGoO^^IC

■a* Efface of tliB Bank Holding Cooipanj
on Dunk Safety and Saundiwaa:
A Lltaratura Review

John T. KQH

In t*caDt jraar* eeaaldarabl* concttn hai baen npraaaad In vailav
quarceia icgardlog cha itablllcj of dia Aneilcan banking ajratui, Thl*
concern nej be attributed In lacga part Co the tlie In the mnbei ot bank
falluiaa, paitlculacly the falluia of tevaral relatively large banka. In
addition, Cbe lecular tread toinrd greater aggreaalveneai tn the banking
Industry, ai reflected In declining bank capital rattoa, more aggreaalne
Baiiagenent of bank a»et and liability portfolios, and rapid eKpanalon by
■wny banks Into.forelsn oiarkets,^ have no do-jbt contributed Co public
intarait Id Che aounrineaa of the banking aygcei. ,

The bank holding coupsny (BHC) noventnt, too, has railed queatlon
rcgardlnn bank safety and aoundnesG. Indeed, Congteia ezprraaed amc .
coactrn In tht» crea ulien tc enacted tl>o Bank liolding Coiipany Act by
requiring that the Federal Reierve Board give attention to the matter of
bank aoundncsa both in deciding bniik acquisition ceics as uclt as In
doCerolnlng dierhcr BltCs shoutd be pcimlttcd to engage in vsclous nonbankln
actlvlclcc.-' Knrc recently, intcicJiC lu the risk exposure ot KHC bniiks

loi> 3(c) of the B.-inU lloldli^ dLipany Act rvQulrcs th.-.t in every

a Ij.inl- n.-qulaitiou urJor Ilic Act. the Federal r^i.rve 'loord "...shall

o cunVi deration tli^ finaneinl aiJ u>inaLorlRl n-truttrot and fi'iurs

a of the company a,- c'CM:?nnlc!i ond the banks conccrnid. .." Tn

, Section 4'.cKG} of Che Act "Rqnirei that In detetnlnlng uhcther ■

tl.e'ii-"rrofhi.i.:i .: ot Lhc arlivii;. b)F J'n .■■r[tU.,Ic o! a liatdlni- cPTpaay

pOMlMi ndv<-isp rftecl.' ■ .,Hi us, , .m^.-.-.d hiinkln;' Piacticcs."

Digitized bvGoO^^IC

baa received In added boost aa BHCs have. In the SBsregaCe, acquired a larga
nt^icr of Dcnbanldns aubalcItarleB, aome of which ace engaged In aetivltlea
that ate prohibltad ta banka. Horeovei, scoc of the larger
{over $100 alllloo aaaaca) bank fallurea o( recent years Imnlved BBC banka,
and tw of the thra* largest bank fallurea vera BHC aubaidlarles.-'

Vw pcaient study addressea the queatloa of whether the BHC
aovenent has served to Heaken the stability of the banking systen, Hore
specifically, this study explores vhethcr the otganlzutlonal/ financial
flaxlbllity InbecenC In the holding conpany fon of banking organization
haa reaultad ta an Increase In Che risk exposure of BBC banks.

The flenlblllty of the holding coiqiaay form often four avenues by
vhlch the risk cxpOBure of BHC banks may be affected, Tlieae Includa (!)
expansion of banking activities via conbanklng affiliates,-^ (2) BRC ex- .
panslon inco nev activities, (3) nultlbank expansion, and (4) parsnt caapany
leveraging. In the rmaloder of this paper, eocli of these avenues la ex-
amined In a separate section. IMthln each section, the foIloHlus appear:
(A) a stnniary of the prlaclpsl theoretical issueai and (B} a revioii of any
reltvanc cn^ilrleal evidence,

I. .BxBanslon of Banking Aetlvllles Via Honbsnklna Afflllotea

One avenue by which the flexibility of the holding conpeny form
aflect bank risk exposure purtalna Co the opportunity for BHCs to exp

2/ As used m Ihls paper, the term "afflUutc" tcfcts to the parent holding
a Mubaidlnry of the bank.

Digitized bvGoO^^IC

carUtn of thalE banking activities via n«d>anklns afflllatM, In
partlEular, holding co^anlu enjo; tvo mutaa for nich — T"****'. iB-
eluding (1) ■plnalog off banking actlvlcloa to nocbanklag afflIi«tM mat
(2) aoqulring eoBpanlaa BDgaged la aottvlcla* tliM ara alxaadj paotfaalbl*
to banka. Each of tbaaa routea la dlacoaaad below.

1. SntimlM Off BanklM Ac tl vie lea

One route opan to the BHC to oapaDil ita bankisf aetlvltlaa la to
apln off cortaln actlvltlea fiom the bank (■hstber thc^ be Jyartjinta
wiChlD Eh* bank or lubaldlarleaef the bank) to a nonbankli« afflllata(B).^
tj ao doing, A* apun-otf acdvlty la rcllsvad of tlia gaegraphlcal natilctla
that applj to banka, thaieby facilitating ezpaDaion of tlia acCiritjr into
not geographic oarkata.

The iafiact of auch apln-offa on bank riak eacpoaura ia twofold.
FiEBt, the bank vay experleocB a change in Ita direct rlak tnpoaurs (i.e.,
the Elak aaaociated with the bank'a own activldea). Depending on i4ietli*t
tbe tiaklnoa of the apun-eff acttvltr (na Daaaured by the coaffidest of
variation of activity ptoElCa)-^ la gtaater oi leaa than the aveEagc
riaklncBS a( activltiaa TOBlning in the bsok, bank liak eiqioaure coald ba
decreasBd or incieabed, reapecclvtlj, Horcovet, to the sxtant tbat tha

also InpcrnlBaible for nation

1/ He»

irly .

111 qI

the Fed

il bai

by the

1 as p

banks.

[10]

1/ Th.

"coi

>fflcl

variability

prof lea

.cd on

D„ii„.db,Go(5glc

dccrwuad dMeralfleatlos of bmk actlvlClBB retulclns EroB any neb aptn-
offi iacreasu tha cTcllcal varlacton Id bank eatntnga (ifcic to Iiparfact
eBrvalBElon bflCweea th« aatiilnga variability ef a apun-off aetlTttT and
tha acttvlttas raaalulng la tba bask), bank risk opoanra aboutd ba IncreaaedA^

Sseoiid, Inch apln-offa Ealaa the apacter sf financial loaa to
tha bank due to dia "n(n-«tB'a>-leiigth" relatlonahlp chat exlits batmen a
bank and tc* iwnbankttis alfllUtaa, The rlak of inch leia, hereafter
rofecred to *a "affiliation rlak," baa thtaa dlHnalona.-^ Flxat, there
I* tha risk Chat It the affiliated coe^aay falls, the bank's "corporate
veil" eould be pierced and It could be held liable for the debts of the
lAaolvent cen^i^. Uhlle there la d^ete en thla quaatiaa^ the conaansus
ot lagal aplnloa aeeoa to be that banks are generally protected from
creditor claliis and suits aealnat the parent holding coipsny or a sls^ter
nbsidlary, provided ctiBt the bank and lu efflliatcs are clearly operated
as separata bualneaaaa and are poicrayed aa aucb to Che public 16; Ai; 51].

1/ These tuo dlnenelons

of direct risk eitposure ere d

I.CU

iiaewhat different cent.

« In [13],

i/ Actually, afflllaclo

n risk for a bank elrcedy oxis

CS V

Cho3o activities tint ec

(Co the cxccnE that they

^luB

prewlouBly eoitdueted by

a subsidiary of the bank, at.

bank i»y be so«wh.t red

uced with these activities c--':

ocate

afflUete [AA], On the

other heud, to the extent th.'.c

Chc-

Chan they «ere as a sub

Idiacy of the bdnk, afflllatlo

n rl

■ay be Inereased.

:sk for Che baift

Digitized bvGoO^^IC

The ttetiai iimnmloa ot ■(ftltacloo rl<k wxj b* tamd Ch* '^tl■k of
•MOclacioD." SpecUiulIy, It ta argiMd by BBiy obscrvars [6| T; Mr U| 48|
that siren If ■ paient holding eoofiaay oparatta Iti cubaldiaitaa aa
■apataca bmluaaaea, tha fact that a bank and a fliuaalally croublad
affiliate ahara cmiBini panntaga (aad perhapa alaitar naaaa) mtj craata
imeaccalney in tha pidilic'i alad aa Ca dia bank'a lalvBiKT, This, tn
turn, nay praciptcata a nm on the milnaurad d^oilta e( tha bank,
poaalhly caoains tha fallura ef an odianrlse aoond bank,- Plnally,
bacanaa of tiie tlak of aaaoclation, BUG baoka ara KaDaiallv tbauiht to ba
auhjact to a. third type of affiliation ilih.naBaly, tha Mlak diat tha par^t
holding taa^tstj will uaa tha taaouccaa of Ita bank aDbaldiary ta try to taacna
' a failing affiliAtad co^any In ordar to ptotact the BHC froi rapatation danaga .

1/ Foe «»aq>la, vhan Beverly Bllla Bancocp, Los Angelea, ancouatarad
financial probleau in 1974, ici Ungto imk subsldiaiy expciiesced e
aignificanc loia of doposiCs, ruultlng In the eventual fovced natgar
the bank [U; SO].

Digitized bvGoO^^IC

laiHDlo [6iSBi lAiiM

-' Hhtl* auel

It could alto faacktiT*

nd raulc in

th.b«*.l'

- Tl» >lgalflc*

i« of afmi.

tact .that It luy b* tac

-»aad DC daet

r^lMl «.t

uCenC. chorefoTe, that

capital {lout

t Tcaciia sparatloD nliht ba auceaaifal,
a faltura of tha antire BHa IncludlDf

on riik 1* aaan partleularljr Is cha
aad enca a ipun-off activity la

nonbaDklnt afflllatta
ccloaa on thcli activltlsa. To tha
ECucen Birkati ara laai than parfact.
o ncv geograpble niacVaea ahould aneoth

atutoE? reitrletlona both od tha

can have otth an affiliated c
Jivldenda do allow for full p

by ■ ngnb

r ■>: a

gnlft

unt "iDOpholo

'■ 3

Fl

ally there

Jir

no

•8*1

llBitatio

l,er a

-nues by whic

4. BH

r,*y Bid a t

ffltl

<a.g. tht

«.gh th

paynl

nk s

holding I

Mpany)

though the exwninacion p

sudi avon

Bhcs nay pa

tlclp

a"back-=ci.

range

ng th

It >o

ildlary bar

e back

nonbaiik subsl

ch othii.

Ch= faUu

k lubeldlery

o£ th

participating

IHCe

could

impact ad

«Kly

on th

banks In tha

othec

B1ICB

(381.

2/ mrf

U aU

tha

Irt that becfl

» of

ngt

H „

at ion

■hip bcnn

"cfn

favo

"fa

«fft

a. the hat.'
la ted <:ottpa

a'l"

a"od

46-) , lu «dd

the b

nk (ould p.

seibly B

Qd

(12

would Impact

aly or

tha bank'*

tl

dltloa.

xanple, Hamilton Hatic

Digitized bvGoO^^IC

due tin afflllata's ucnlnj* varlatlra mwihat. Aa ■ tanilt, cha dlcact
tlafc expoaun of the afftllace ahouU ba rcdocad, altsg vlth tha
afflltacloD rlak of cha bank(a} in Che hotdlag caapanj.

At tba aaiaa tinB, once an activity 1> apun off a bank. It la na
longac aubjact to tha aaae legal and regulatorf appantua applicable to
baaka,-' Tfaua, unleaa aqually ttilngeat raiulatloo ia pvE Id focca far bob-
banklag afflllataa, the spun-off activity may be conducted Id a ilaklat
■anner than It wu vhan It «ai lodged Id the bank, Cherabj Increaalng
afflllatloa rlik to th* budi.

Finally, cHaogaa In affiliation rlak for the bank nay caault Id
cc^tenaatlDg adjuataeata la the bank'* dltect rlak expoaure, a,g. , tha bank
Hy ba villlng to take on »ie direct tick aa aa offaet Co taducad afflliatlei

2. AeaulrlnK Companlaa Emtaged 1ti Acclvttlca cliac arc Pernlpatbla to Banfca

t -aecond louce. opan to cbe BIIC to expand Iti banking acclvltli^
la to acquire on-golog and/or da novo nor.banking conpflnlea that are engaged
la actlvItloB already pemlsslblc to banka, thli route auggeata no cffaet
on Che direct risk expoaurc of the bank (except pcrhapa for adjuacannt effaeta

D„ii„.db,Go(5glc

th* estenC that (ncIi acqulBltlona lovolve product' I lui: (nd/or geographical
dlvcrdflcatlon lor th* acqulTliig SHC,-^ chc cetult: should ba to nooch
sue tha aanilngB varlacloa sf the parenc holding cmpiny, tbarcbr lovcrlna
Ha parane'i dlracc tl*fc axpoauia, with aa attendonc reduction Id tha
•fflliaEIon rtik of tha bank.

At the ixna tine, once a nonbanklnil canpaiiy t* acquired by a BBC,
tha acquired conpaiDr Itself nair bs vtlllng to take on laore direct risk, for
■•veiat teasooa. First, aecea* to the reaouieea of Its alstei bank In
tlKBa of finsaelal strata may eaeourage the acquired coqieny to Increase
Ita own risk eiqiosure, depending, on (1) the effectlvcncBi cf the various
constraints on financial transactions between a bank an) it* affiliates
and (2) the propensity of bank regulatots to protect nonbanklng affiliates.
BO as to nalntaUi confidence la the subaldlary banks .- Second, the
■snsjinsnr of the acquired coe^any nay ect In a riskier manner under holding
COBpBiiy control because there la greater "saparatlon" bsCveen the eanage-
•ant of the canpany and the ulclnar* ovnert (I.e., the ecocUioldcrs of "the
2»C) U a holding camptay orgmlMtlon.-' Finally, holding cooipany s»i>agers
■^ be Bore aggressive and less tiBk averse than managsra of todapandent
ea^aalea'l2Z). Indeed, the fact that chs B1IC Ioth permits both geographical

that th* mc foia nay Itself be IndltnMvf of an nggresslve imnflgorlal

3/ This hypaclmsis Is discussed ull.li rtsprct to hank
and li'blcd cnplritally In (37). The :>ii..lysc found su

Digitized bvGoO^^IC

■plitc lT;-tfi). To Oit ncCaot, thuafen, diac Uia acqulrad eo^am
InerUH* Its direct rltk sipOBurs, any raductlon in bank afflliatliM
rlak du* ta grutar d In r* 1(1 cat loo bj tfaa BHC aheuld ba actaosaccd.

B, EnplrtcJl Evldanct

EBplitcal avldcDca partalnln) Co Cbs rltk affecti at baok
OKpanalan via nonbanklng affiliate* la aeanty, Foue itudlci
prnlda iDfanatlon In chll araa. Tbrca of tbcaa acudiaa [11; Uj 4TI
deal vlth Che risk exposure of IBC-afElll*ted consiaei finance coifMniea
(CFCa) and. In ona Instance, aortgage banking cmpanlea QOCs} ~ tin
aeUviclaa that ace penalsstble id botb nactonal banks^-' and BNCa,
Koroover, In each study the ssa^le of BHC-affl listed eOBpanles is Bid* ty
<Ki>tl7, if not coDpletelj, of coopanles that veie acquired fcon iDdepsndent
status (as opposed to being spun off a bank),- The feurth stud; 112)
piovidas evidence as to the effect of BHC nanbanking expsnsion on Che d^c

rick axposuEC of atftllsced banks.

1. Effect of BHC Affiliation on Honbahkin^ Ccnpsny Rttk E:

The first scudy in this areajAT) sxmtlDed Che exConC of financial
leverage of DHC'Sfflliaced CFCs and MBC*. The asi^le of vfClllated co^aniaa

incli'dtd 1A mnjoir CPCi and 4Z of the lacfcsc HBCi. The results suggest

Digitized bvGoO^^IC

Clut BHO-wUiliacad HBCs mad CPCs tend Co be ima highly lovengwl and,
diavatora. In a dskleE posture Chan their reipectlva Indiutrlea. H«r-

■hethar tha affiliated c«viaiaa Might hara been htghlr laveragad prior

to their atstua aa BHC aubildiarles. In addition, no evidence 1> preaantad

regarding aaaac Klak of the afflllatod coiqiaiaeB.

The aecond study I43) axaulned rlak dlffaicnca* — ■» reflected
Id loan loaa exparlcnca and leverage — • binaen 15 BHC-atflllatcd CFCa ~
and 23 Indapandent C^Ca, all of laall to aedlua ilie. Multiple ragreialon
analjisla waa uaed to eou^re affiliated and IndependsnC con^nlel, both
prior to acqulaltlon aa well as after acquisition. Pre-acqulsltlou
reaulta lodleata no dlffarenoos In rlak expoaura; however, post-acquUltloo
leaulta shou alenlflr^ndy hlghar leverage on Che part of the affiliated r.naf
Indicating gceacer tloli eicposure.

The third study |!l j used multiple regression analysla to compare
risk differences between 14 BllC-afflliated and IS Independent CPCs, sll

llqoldlty risk, and credit rlEk,- KesulCa indicated a s igiiil leant ly lower

1/ OJly U afflUaCed CFCs were available for tl* pte-acijujHlcIon test.

J/ Capital adrquacy is BfBiurcd ^y the ratio of equity capltal/rlflk assets;
ddJt levera£c, by the ratio of nonflpfosit dcbt/ECOsE ciipital; liquidity risk,
by thg ratio of cash assets/total assets; and credit HhU, by the ratio oC-.
nfit loan lossis/grosa loans.

Digitized bvGoO^^IC

660

ricto of B^Uy eapttal/rlak bshCs for BHC-afflliatod (TCa. ■ ttiiiUi«
conalaUDt with tba tvo piovloua acudlai.

In lun, avallible M^tlrlcal OTiduiGo pcdiUa to (taatar drti rtHiti
u ceflectsd In gnatcr Icvaraglns, on tb* part of CICa and poaalbly tOCa
acquired bj IHCa fru IwlapciidaDt itatui, Thla, In Cutd, muaata lucraaaad
affiliation riak for tha banka afflllatad with thaaa eo^antaa, Miatbar
Chla taault can ha gaaaralltod Co other nonlMidEliit actlvltlaa,
hownac, la unclaar, -> Hoc la It Iohiwb iilutber tha acqotaltien e( (uch
CMvanlea reaulcad io aoy offaettlng ndnctloa In book affiliation rlak
4ua CO producC-ltna and/or BeogEa;litcal dtveniflc acton for Ch< acquiring
niCa. Finally, there li no eivlileal a<rldeiiee a* to tha rlik effeeta of
acdvltloa that nay hav* baentpunoff froa banki to nonbanlElng afflllatf*.

The fourth aCuily noted abova [22] provide* linlced evldanca a a to the
effect of EHC nonbanklng expamloii on bank dlrccc riak expoiurc. In paHl-
culat, the author* aatlmatcd aevaral oulclpla raKreaalon cquationa, uaiug data
(nu 237 radcral Rraerv^ aember banhi from Hew York and Hew Jeraay, to
detenilne If BHC banks are greater risk taken than Indspandenc banka.-
In CO doing, Ihey Includsd j» b pogilbla explanatory variable, tocal
nonbanklns c^-np^'V ai>,:tB as a percentoge of total ElK aBMtB, In order to

1/ Onu nwbanklnc

Digitized bvGoO^^IC

ilak BqKWDici of tb* BBC'i baidu. (So attaipt m mda Cc
baCmMi nonbaakios actlvltlu thaE ■■:« panlaatlila ^ l^aialaafbla to
banks or baCvaei afflliataa acqulrad trtm bank apta-offa or froB in-
dapaDdant iCatBB.) Iha raaults sbond no alfnlficant affact of th( bob-
bankiog aettvittea on anj of tha aeaiurei of bank riak axpoauro, Thli
augseaca diat BHC bank diraee rlak tn]ioaBCa ta imatfaetad b; tha nKoat
of BHC aspanaton Into luribuikiQg actlvlttea (liteludlng all tjipea of inch
npanaton]. Of eourac, thai* flndlngi aay nothing about tba affaot o(
■och asqiaailoa on bank afflllAtton rlik.

II. BBC Bcjanaiog Into Kwr tctlvltlea

A aacond aTemia throueh which th* flektbiltC} of the holding

new actlTltlei, i.e., aettvittea that are liqiemliatbla to banka.^ Sucti
expaoatOR stay occur through thn acqulsltlaa of on-going and/oi,' da novo
noobanklag conpaaiea and may affect the risk expasure of the aubaldiary
bank In levenl «ya.

1/ Only two act

ilvtUBs approved by the yederi

il Reserve Bom

:d since the

:t are lopernii

national banks -

.- Induatclal bunking and undei

life, accident

and health Insul

Che 1970 flBcnc

liiicnta, BHCa

dxpnnded into a

nuihber of actlvitio that «dti

: iBpccrilsslbl.

. to bank!. <Po

a liitlag of tht

. prfor to the

.EC POJ.) Dcp.

■ndiiig on uhcthEt these actlvli

:Ics w«« ac,ui

.red by th, BHC

befotu or after

June, 1968 (but In all caaea (

irlor to 1971),

they ata

"grandfathered"

cither on a penanent basts or

until 1981.

D„ii„.db,Go(5glc

rilBC, depandlDS on nhachar Che ttAlaaf ot a nMI MtlvlCj (u
.muMutti by tb* eocftletcat ot varUtlon of proflc* of Cb« activity)
li gnutar or laaa Chan Che avacaga rlaklnaia of tha BUC'l •xiatlag aettvltl**,
tha ovarall rlik of tha BHC or|>iiliacisn CDuU ba InsraMad or daeraaaad.
Ihla, In cam, laptlaa a chanfe In cba dlcact il(k axpoaiua of tha parant
bsUlns ooapanjr, wlch an Bccandauc affect ea th* altlllatloa tlik of cha
nibtldlacT bank.

SaeoDd, Co cha escanc that Cha aacnlnga vaclacloa of a navly
acqulrad acClvLty i> laaa Chan perfaccly conalacad vitb ChaC of axlaclos
nc acClvitlaa, auch producC-lina dive ral flea don should aaooch ouc Cte
cyclical variation In BHC •acnlata. A* « reaalt, chc dlract il*k avpoaura
of Che painoc holding co^any ahould ba reduced, along wlch cha aftltlatloB
rlak of ICa bank.

One IniiorCanc caveat (hcnild be menCtDnetl. That la, purauaot Co
Cha 1970 AmndiMnra to che Bank Holding CompCTiy Ace, parnltalblc nonbaaklog
c> for BHCa are required to bo "cloaely relaced Co banking." Al
, the nagnlCuda oC the risk rffeets noted above fm DHC ei^aniloa

BS are to banking. The mora closely related chty are, cha Icaa

Blgnlfica

Hill be chcse rla
Finally, the nonbeii
Isk follOHine DHC acl'

Ion" becveet. the n^inn

.ult of O) any Icweclng of

Digitized bvGoO^^IC

MOiacan ralattva to tbat of Huutgan of taiepiadmt nnAanktiig eoapuilM.
toy tueh Incraiaa In th* rlilc enpoiuCB of BBC nonbankluB m^Bldlarlsi
■hsuld. In turn, Increai* Che altlltatlcni dak of BHC banlu.

B, Biltlc*! Brldence

a^liical erldcnce ralactug Co the rlik effects of BHC ej^ansion
Into octf aetlvitie* it «l*o ■care*, toot ■Cudlai (Hi 13; i^tj Z4]
hava broadied [hi* area, and ill four ban llnltad thalc-analTila. Co
BonbaBHiig cxpuwlon ■■ ■ naaoa of lawtrlns oretall BUC rttk uip««uT«; dodo
hai eonddared cha Inpllcations of BHC acquisition an the diiecC rlak exponiTe i
alCher Che acquired nonbaokins coopanlee or Che affilleCed banka, Hsreovar;
■11 tour aCudlea have sized acClvlCtes Chat are boCh peinlialble and
liVa:;iaisEUile to banks and. In aonc casaa, aetlvlclei Chat ace both penalaalble
and li^enilaalhlc Co BUCa.-'

One atiidy [13 1 looked at aeveral actlvlcf ee In xhleh oae-baok^
holding coi^ianleA vera engaged prior Co Che 1970 AmeiidnicnCB, Doing
•gSCDgaCe induaCzy data and two ncaeurea of risk ~ (IJ Che coefflclenC of
▼adaclon of acClvlcy proflta aTid (1} corcolaClon of nonbanklne octtvlcy
profits with banking profits — Chc study reporCed two flDdlogs. FlraC,
fcankliiE Was found to be amanit che rlsklcat of a
(M>aftic.tcnC of variaclon of profits. This suggests

1/ Tm of Che studies [13l!ftl Included »
In by oncbenk holding cu:npanlca prior to
have aluce been ruled by Che Federal Rcscr
tar BUCs (cxcopC where "grand fa chorcd" loc
(III scpllclcly included lone acclvlclas
as pcrnlsHlbla acClvitics far BllCs In ordc
the dlvirclficacion bcncflcs for GHCs If I
Tli= fourcl. study [;!l luupcd iill nonboukln,
■ ttcnpCing to dlstlnciitsli betveeu jccivttli
to BHCs end chose chat are "grand feliie red"

Digitized bvGoO^^IC

Into ■any of tb* axailna^ Mnb«tikiB( ■<
coipanr il*k. Steand, ai^^l* eomlatlon of acclvltj profit* with baBklnt
proflti jUliei aixei teiults, with lltcla dlmilfleatlon lain (ioh BBC
•i^analon into buatocaa ac parional credit actlvtclaa but mm tain ftoa
cxpanalim lota various othst actlvltlea.

The lecond Btudy [24) lookad at vlrtuallj tbo aaaa gtoup of
■etlvltlga <alaa ualnt Induatry data) aa covered In tbo fliat atudy, focnalag
on tha "... rlik-rsturn eharaeterlatlca of oonbaidt actlvltloa tn oooMntttaa
with each otbar and ulth banking."-^ Iho flndlnga of thla analjata ata
■ananlly atatlax to thoaa reponad in 111] , both la tena of the claktnaaa
of banklnt vla-a-vla other aetlvltUa aa mlt as the dlvaratflcatloo tain*
fnuB BHC cxpanalon into esdi of tha varloua oonbaolElDB actlvltlas. Hmiavar,
furUnt snalysls of filK eipanalon into all of tha DODbaokliic actlvltlas
eodfcliiad, using portfolio slnulatlOD tochnlquea, ytaldad coaffietcncd of
variation of proflta (t^ich Incoiporace cbcsI dive ta If (cation banafltaj
for the almulated BUG veil belov those of banking alone. Thla sugg>ata
that there are Indeted beneflta to ba gaiHd by the parent holding coiqiany
by combining bsnklng ulCh various nonbanlclng activities.

The third study [II) nay be viewed a> a further extension of
the two previous atiidles In that it simalates dlffennt holding oxfAaj
portfolios combining banking wich various accivlties that have bean approved,
di^nicd, and not yet ruled on by the Koard as penaissible BUC activities.

2/ In addition to (.he vi

Digitized bvGoO^^IC

n »txA tctt*±tj <!••• than
data, banklos la again abon
I of the CMtflelaat at

«laEl:r

th* "afflciant" hoUlns co^aqr
I Cb* fact that Cheaa npEaHot

Dalos a vccy aaall aa^la Df fin* at«aged

10 flna Id aoat ciMa) to eatluU Indus

to be cm* of Ilia rtiklar BctlvUle* (la t

vaElaclsn of profit*).-'^ Bo apeclfic d

covariaBca of aaTnlnss between batiklng an

latloD Tcaulta baled >olel7 on panalsilble acClTlelea

Interaatlnt In that cm nDobai&lai aetlvl

■DEtsafe liai&lnS"do not ahon np In (07 o

portfolio!.^ this, bawarac, aay ba dna

landina acaaa Uiat ate alraadj an li^octaat part of baoklni; banc*, there

Hj b« tittle dlveral fleet lOD fain froa cc^lnlBg theae actlvltla* wltb

baaklBS to a holding eoapan; ayataa.

nnaUy, the fourth acudy I2Z] exenlniid "... differences In the
•ffaet of dlveralflcatloD on the volatility of earoliig* flowa batvaen*
coneolldated bank holding cos^ulea and independent baaka." Dilng nultlple
regraaiton anal^ala and a ae^le of £7 BHCa and 167 iDdepandaat banks Mm
tvo atates— Heu YoA and Hen Jeraey—the aniljsts toated (1) vheUicr UCa
have • Blgnlticancly la«r coefficient of verlatlon of profits Chen

1/ Jlctviilly, Cbo author reports baDklng Co be the leaat risky of the

-aetlvltlpa BKaniiiT=d 1 - --

dividing the profit V
acclvicv (liilch Rives

of V

of Che
of aetlvlty profits).

■tivctly rlsliy activity.

only wlCh rrapecc to ectlvitlea chat

Digitized bvGoO^^IC

. tndciMiidcot bai&* Jnd (1) whatbar tba telatlva BDanl
bualaaaa of tba boldlos eaapanjr liipaeta alsnUtcaatly on BUC aarnins*
variability. Bielr taaulta, hmever, confin Mlthar hTpothaala. In
pact, thli Ha; be dua to Inpmpai nodal specLficatloD: nana of Cb*
iBdapandapt vailabtaa waa gcntliclcslly ■Ignltlcanc. In addition, to
tba axtant that boldlnt eiMqiaay afflllaclon raault* In srcater dak taklos
bj tho baok ai^ Mnbaditiv aubatdlariaa (a* aug(a*tad to oEhac aactlona
of thla nvt«v), cha raault ^ ba to offaat anj nductian In BBC •arnlnaa
nUItlltjr dna to noobaditng dlveraUicatloo. In that aajiaa, tha inalcnl-
flcant ataElacical reaulta raportad abova mtf la fact b* lodicatlva of
a caal dlTcralfteacIoc affact; otharulsB, I8C aacnlnta volatlll^ sii^t
bam Incteaaed a* ■ result of tiBatec rl«k taklot by bank and noobanklng
■ubatdlaila*.

Takaa tOEathcr, thoat four itudlaa provide Ilsltad evldanea that
mc eMpanaloo Into naw actlvltlea nay Indeed teduca the overall clak aipoavt*
of tba BBC orEanlaatlon aa veil a* yield dlvcrslCUatlon beneflta In lolk
laatancaa. Batiever, the fact chat toduatcy data vere uaed lo tbta* iCudlaa,
tachar than data fm actual coaipanle* acquired by BBCa, la a aailoua Aatt>
ccalng. Also, the fact that all four aCudUa Included aoM acclvltlaa that
arc poinlsalblo to banki llmlta the usafulnesa of Che icaulta iagaiillD| the
tilua of miC expaiitloD Into mv acclvltlci. In fact, ubat la needed la an
analyala of actual cecpaalca acquired by BHCa Id nev actlvltlea, looking at
both the divots I flea t loo cEfpcta of auch enpanalon along with tha poat-
acquIalEion risk exposure of the acquired companlaa.

D„ii„.db,Go(5glc

657

III. MiltUwrnk BmtiMton
A. Hi«irBtie«I laaua

A tbtm ■vcnu* br wblch Cba flcxUlllCr of tba holdlns o
foiB B^ li^act m bank risk csipatuv* pertains Co oilclbuik c
thnwEli the Mquisltlon of on-galng and/oc ds novo baok*. To the
•XMDt that tfac acquired bauki (re locanad in diffciaot markaci
vlth t^atfect upi^l flowa ■noiig Chaas Barkata, such gcographtcal
dlvenificaCioD should nBoch cue to tone ottenC the vacietioa In eanlnca
for th* ^toof of affiliated benka, therdi; lovering the direct ciik exposure
of the parent boUing coi^iui;, vlth sd attendant reduction in the affiliation
rlak expoauie of the individual baok subsidiaries.-^

As a result of thla reduction In affiliation risk for the ,■
Indlvlduul bank subsidiaries, ^ese banks my be Killing to cake on icia
direct risk.. In addition, oCher factors may contribLiCe to Increased risk
taking by BHC banks (as chey nay for BHC nonbanklng subsldlarlcsX inciting
(1} greater "saparation" between bank nsnsgoneat and the ulclnate ovnera-^
and (2) less risk aversion on Che part of holding company nanagccs celaClTe
to that of Independent bank annngers. Also, the "larg^ acquisition

s that BllCs often pay fot their bank subsidiarios may force a holding

banking nflilloten i 3 ; ft I.) Of coutac. Co the extent the flaw of funds
woiig sioccr banks in a BHC gcoup were freer. Che bc.icflta of geogrBphical
diversllieation would be more pionouiiced aa the earnliiEs of the individual

Digitized bvGoO^^IC

eoapai^ to operate lt> acquired bank* In a rlaklar mubmc in oHet to
Juatlfj th* htgb purehiH pclee [31]. rlutly, there ti ar. laccntlTa for
tht paraitt holding coopai^ to upstreaa aa nuch of ita aubaldlaiy banka'
eamlnsa a* poaalbla (I.e., to alnlialt* each baiA'a retained •amlnga and
Incraase tha bank'a laveias*) in ordai to have the eamlngi available to
dounttceam quickly to any bank (or nonbanklng) aabaldlary that atad* financial
aialatance 1141.^ Such upatreanloc of bank eainlTiEi ihould Incraaaa tha
d Icect riak enpoauT* of tha bank riioae aamlnga are upattaaaed, bat
alultaaawBly taduca that bank'a affltlatlM rlak by Baklni theaa aaraioca
available (thiough the parent cOBipany) to ptotact- other lubaldlarlaa In
the >HC lyatn.

C. grotrteal Evidence

To date, no e^ilrtcal acudlei have focua*d on Che gcograpblcal
dlveiaiflcatlon aipecta of nutclbaak holding ccopany expanaloii. On the
DthCE hand, nmcrout itudUi have anamlned the impact of BNC affiliation 0«
substdlaiy b.ink )iccfo(iiaDCe. including bank clak caklne. Koreovat, In
recent yean acvcral atudlcs have apeclflcally oddresaed Che qucatton of
BIIC affiliation on subsidiary bank risk axposutc, With one exception, howavar,
all of Chaac studies are subject tc an liq>ortsnt linicarlun. That 1*. they
analyse the Impact of BHC affiliation on bank risk c>i>osuTr ulthoiit expllcltl; tckir
into account In their statistical ptocedutes the fact that part oE any obaecvad

Digitized bvGoO^^IC

■cudici amy ba eoDvnlntly dlvldad InCo tw iroupa,
accardlng Co cb* ttaClstlul t*efaalqua taplvjei. Vailaua earl; tCudlaa
[IG; 33: 34; t9i 33) eoapacad (a^Ua of mc-affillacad ana IndapaodaDt bank*
drawn froa a (lafLa atata, a aliel* radanl ll«**iv* DUtilct, or tha aoCLra
counter, Hm atatlattcal tactmlqua vna iml'rarlat* (mw* teat) and Involvad
aavaral flDancUl nclaa for afflllac*d ud, to Boat caaaa, palrad
mM tha raaulta >liaHnd. In vacloua atudlea. that: BHC
fcanka tand to hava altnlllcantly Mca loan*, psEttcularl; Inntalant leant,
and atata and local tovanaaot accailtlea and laia U.S. Covacmant aaeurltta*
and caah aaaata than thalr Indapandeat countcrparta , all of nblch aau**ta
rlaklar aaaat portfolioa foi BHC banka. Capital tatloa, boircvaE, u*E*
found to bo not atgnlflcaatly dlffaraot bati.«ao BBC-affUiated and In*
dependent banki tn any of Ihaaa atudlea. The atatlattcal tacbntquc of
three of the aCndlea I26i 49; S3) corrected for poaiibU pn-aeiiutaltlog
dlffrrancaa batvaen aftlllacad and independent banka as aa not to blaa
the reauLtB.-^ Still, thia technique la plagaed wltb aeveral probleu,
tha HBat aarlous of vhleh la iLa univariate nature [ 2J].

1/ Other recent ■cudiea have alao uaod uitlvarlata toeh^lquei but only for
pur^Ecs of ccrsparlnc the results L-lch Clit: rejultc nbc.ilned fioa nlttvarUro
Bul/Kln. Since iniltlvarlace tcaulti should be superior, othjr chines equal,
the univariate roiull:: obtained in those ctudies ai, not dlocu-.scd; rather,
diicuttlon of the iqeuIEs of theae studio la Itultcd lo the aultlvarlat*

2/ A ncpnr.itc study [5^1 o[ the
sitoillcantly different from non-

DigilizedbvGoO^^IC

Hon rccantly, Eoni Btudlca [19; 15; 29; 12 I h»* uaad ailtlvartWa
■tatlatlMl tcdinlquaa Ce look ■( pceIsimdm dUfanacai b«MMn nC-
■fttliated and fndapendent bnika, S*ap^> *■" drawn ttoa Biltlpla atatVB
In all ioar itudtea, vith paired aaaplai of affillatad aod iDdapandant badu

BMd In thna of tha atudti
to d& novo baflka charteTed
ualns mltlpla ntrc
B 1 gn If i candy lattal
Hinlclpal aacaTtEiaa and ■»
eountecpacti. Ala fiDding
varUtc uial^Ba and aut
addition, one atudy [31 1
- nlatlvs to rlak aaaaca
Tiak foi mC banka, B«
■Isntflcantlj lowi loai

banka, Mitch luggeats i
of BHC bank*. Finally,
banks acquired from lodepai

Ittet" (primarily n

>. One atndy P» ] ■pacifically llidted th* MM
ilDC* 19BS. Of the three atndUa [ 19; 29; 32]
lalyala, vailiiaa onal found that KC bnfca haw
I of loaiu, eapaelally naldentlal ■ortcagea, a
illet BBwnti of liquid aaaeta Chan tbalt
Is Bonarally cooalataac vlth that of •arllar sbI-

. Tlaklat agaat atrni

id BHC banka to hare ai^j

independent banka, again

IT, tbac atudy aloo reportci

laaes nlaclv* to total loai

ly lsa» etadjt rlak In
■ther of the atudiea whoi*

for mC banka. In
ficaotly leea capital

BHC banka to ban
I than IndapendaBt

>plea Included

ndent banks.
[2^), ualng oultiple diacriminant analyal*,
> have Tolativcly more loana ind "other
ilpala) than independent banka. In addition.

Digitized bvGoO^^IC

tfcla tcudr tested the affacca en peTfoiBance of the Ungth of tfa* piMt-
■equialClon pactod. Dilng fouc pcrfonunca ratloi (eapltal/depoalta,
louu/aaaaca, D.S. Gavammaat wcuTltias/ aisatE, and caab/asaeta),
t^ analjst* fnuiid tbat two ^reaia foUaulng acqulaltlon, BBC baidia ragla-
tared altolllcatit diaassa Is balance aheet structure with the Boat
Jb^dCtant changea being ■ daelloa In c*tb holding* and an Incieaae In
toaiM, Alio avldant vaa soaa daclln* In acquln^ bank*' holdings of
DiS. CovemiatDt accvirttl** and capital. Ovec tvo nore yeara of acipilat-
tloa, the changea In asset structuc* continued *d that after fouE yeara

of aeqalaltlan. chatre vece algnl:
and indapandenC haidu,as leflec
1*H U.S. Goverment aeeuiltles
affiliated bsnlu. Moreover, pr
significant differences In the
too, are eonsUtenC vltb other

ferences betveen sf filiated
ad In leaa cash especially as wall ea.

Bore loans, and let* capital for
'acquisition tests Indicated no
ivfomance racloa. These reaults,

■uggeatlng nore asset risk for affiliated

Digitized bvGoO^^IC

bsidw •■ mil ■• poMlbly mam rl*k (xpiMur* la th* fina ol laa«

2. Spjcltlc StuJlai Peallna vlth MC Bade Rlak Enwrora

rouT icudle* [14; Zl; 3G; 37] In nc*M yMca h*v*
tDcuitd ■peeiflcally on tfaa quaatlan of uhtcher EUC ■fflllBClon advaracly
■ffeet* ths dlracc rlak •xpoaun of tubaldlaiy banka. Alt four itudta*
ban ua«d tmiltlpl* rcgnaaioo anilyala.

Oni *tudy [37) lookad ac both ths isaat atruecun and eaptcal
ppattim of 3B4 •fflllatcd and IndependaDt banki of niatlnlj Mil atw
drawo froB niltlplc atatea. Tba raaulta indicated that BHC bai&a t«id to
leveraga to a algnlflcantly gceater axtcnt than lodapaadent bai&a. In
addition, BBC baoka utre (ouiid to bold mot* r«al aatace loani and ainlcipal
aecuTlttea than their Indepeadent counterparta. Thta atudy na tollOMd
by a lecond by the (an analyit li6] to test ulietheE nail BHC banka had

1/ IVo additional pcrformai
they aprclflcBlly looked foi
•tudy (15) compaced if filial

Die hi

Id aicnif Ic

. Howcv

=apU,

laed ,

wltiple

irfiliatcd bH

1*8

?hoIc

Indepcn

one atudlea ihould

peihKps be neDtloned a>

rencea betvsen BBCa. On*

ted banks held by t

-0 Iflcgo Florida BHCa. Vilas

tudy reported that .

acquired banka to only oiM

:a>1i and iwre toano

ttian paired lad«p*adent

St til no sign if lea

nt differences lo aaact or

BHCa. Ihe rt.-r.ond study (12)

slysla to look at v.

arloua financial ratios of

E'Snks aggregated lo a acata.

to have aignlficar

tly Bore cEah end U.S.

capital In both states than

accountina foi the various

;tter 8t-li>M-:=lty

> diffi-rmc.--,, It I.

a dlffldult to EOnerallxe

D„ii„.db,Go(5glc

«i9ld racto* dlffannt trom Cha» of Chdr Indipandcnc CMidCaTparCi

pdoE to ■cqulslctoD. In fact, tbe luult* fndleac* (llihtly hl^ar

pta-acquliltlon capital racioa foe BBC bank* cdaclva to IndapeBdaoC

baokai hoHnr. tha caault La not ■tcoOs atatlttlcallr.

'a third atndr U^l ecn^atcd Cha capital ratlea and rata of capital

lovaiCaaBt of a aa^la ot iti of tha largait banka In tba conntTy. Tba

naulta ahowd that BBC binki tand to hava algnlfUintlj Io«ar capital/

aaaet ratloa, and add to capital at atomr rataa, than do IndapBDdant

banka, MonsMr, thaaa dlffacaoEaa ara ■uCflclaat to ontwalgh anj

pra-acqulflclra dlffatancc*, Indicating that BRC afflllatlan doaa Inciaaaa

haak lavaiasa.

Tha la*t atudy [IZl looked at fouc neaauioB of back riik aspoaura,

loclndlnt capital adequacy, debt leTcrige, liquidity rlak, md credit

Tiak.— ^ DalBi a »B^l» at 231 Fadaral Raaarva aiaaliar bank* fran tw

etatea ~ Raw York and Hev Jeraey — Che analyata found BRC banka In Hew

Tork to have ilakieE balance aheet atnicturea In tenu of algnlflcantly ^

lea* capital, hlghar leverag-s, and noia liquidity rlak than their Independent

councarpacta.--' Koreovar, by loeludlng aa a poatlble explanatory variable

total nonbaiiking con^any asaeti aa a percentage of total BKC asaeta, tha analyata

csplicltly rccognlEed that part of the Iiiq>act of holding co^any afflllatlao

on aubaldlny bank rlak eipoure aty be due to the nonbanklng bualnaaa of

the UIC.-^^ No atto^t vaa lude to look for paaaible pTe-acqulBitioo rlak

dllftrencae between affiliated and independent banka in the tvo atatea.

1/ Capital adequacy is maauted alternatively by the ration of equity capital/rlak
aaaeta and ^roaa copltal/risk aaaecat debt leveia^.c, by tho ratloa of. loog-tan debt/
grocs capital and total debt/groea capital) liquidity rlak, by the ratio of Interest'
aenatttvu fund s/ahoit -term assets; and credit ilsk, by tha ratio of net loan loaaes/

D„ii„.db,Go(5glc

In nn. rciult* of Mgctlci o( BUC biok rlek txpoiaic* an laBacaltr
eonattcaot vlth cha raaulca of gancral parfDcmaiica aCudlea In wbawtat
that BHC bank* tend Co hlra llsnlf leant ly riaktai aaaet atncturea Chan
Ind^andMit banka. In tanu of awca loan* and ninlcipal MCurltla* and
laia U.S. GovamBanC (acairlttea aid cadi. " Moraovac, risk atndlaa
alao auggciC graatar ctik axpoiura for BBC baidu In the fora of lowt
capital ratio* (graatar levaraglns), a flndlna that 1* auch laa* obvlona
In th« E«Mral psrfoniinca atudlai. Of eouraa, part of chla dlffaranctal
In bank tlak aicpoaur* Bay ba dua te tha nonbanklng actlTltlca of BHC*.
HCKWVar, tha oaa acudj Aleb atte^tad Co eorraet tor auch nonbaokina
buaineaa atlll found BHC banka aubjact to greatci dlract tlak ai^oaan thaa
their Indapendenc counteiparta. Still, tha quastlMi ravaln* aa to (diathai
thla IneiMta In direct rlak axiiaaure la ofliet to an; extant b; laaa ilHllatlaa
ilik frou geographical dlvcraiflcatlon thieuEh mltlhaTik aKpaiulon.

"■ PTent CoBpany, Eoveranlijn ^

A, Ihnoretlcal ISBuea

nia fourth avenue hy vhlch the flexibility of tha holdli«
coi^aOT fom may effect bank rlak expoaure ±9 through parent holding coi^aoj
leveraging. Suppoae that the parent holding coopany Isauea debt In order
CO provide additional fund* for one of Ita bank subsldiarle*. - Tb* roault
la an Incronse In both the debt/equity ratio of the patent Covany aa uell
ai the direct risk expoiuce of the patent. Tlil^ In turn, (hould iDCieaaa the

1/ Of couoc, the loclal coct of thli. iMCeate In asaet risk for BHC
banko Eust be uel^od against the benefit of Increased bank landing and
graitct bank financing of aunlclpal debt.

2/ Such leveraging could also be used tu acquire additional subatdtarlcR
fftl; '.8) or to i.ilso liiuds for nonbaiiklns subsldjnrlra [;b]. (Altovnatlvnly.

debt vith the parent coopany gunranteelng Lhat dibli [48].]

Digitized bvGoO^^IC

dlnct

affiliation rlak of tha bank, Bowvai, If cha proc««d( of cha dabc laaua

aca doboatTaaiBad to t^a baidc In utdianga fov tht baidc'a ovn dabt, thereby

iBCEeaalos Che baik'* dabt/aqulty catlo. tha bank ihould a

dtraet ilak axpoaura for tha dabt laaua In anchaniia foi ■

tu affiliation ilak. On tha othar band. If tha procaadi

to tha bank In the font of additional equtty, ^ tha bark'

•J^oauro diould b* Kcducad unleia It diooaaa to laaua additional debt ICaalf.

In the lactar caaa, the additional debt taaued by the bank put* an added

atrala on tlia parant holding coniiany to aarvlca lea own debt [I7l. A« a

laault, tha rlak of fallura of tha parent ^ould be Inereaaed with a furUur

Ineteaaa in tha affiliation rlak npoaur* of tha bank. -

Ihere are tHO potalble aouccaa of llnltatlon to parent holding
coBpony tavcraglng. Ftnt, the Faderal Baaarve Board, s« adoLnlatiator
of the Dank Uoldiog Canpaoy Act, nay Impoaa limitations. Second, the
sacket aay function to limit *uch leveraging by ralaing tha BHC'a coat
of dabt and/ot deeiaaalng the pclca/aainlnga ratio of tha BUC* atock, S«b«
analyst*,, hovever, hav« CKpicaaed concaTn that tha naiket nay tall to
ragulatB BHC loveiaging, ralylDg lutaait on the Boaid to aet appioprlatc
linttatlona [71.

1/ Ibc practice o£ dounstrMnlng borcoved funds to subHidiacles in the
fo™ of eiiuity is generally referred to as "double leveraging" [5; 27?..
2/ LikevUe, if the proceeds of Che parenl'g debt iMue arc channeled to
a rcnbonblng suhsldinry as equity, upon which the subsidiary issues additional
debt, the risk of follure of the parent is increased, thereby Increasing
the affiliation risk exposure of the subsidiary bank. On the other hsnd.

chln:iellng the proceeds to a nonbanklng subsidiary in the fono of debt
should have no additional effect on the affiliation risk cxposute of the bank.

Digitized bvGoO^^IC

B. B»1t1c»1Ev1J«i««

Kvldcae* Indleitaa thic durlns tha 197p'i BHCa hna
nll*4 alBMC cnclcely en art* ai a saure* of fund*. In fact, em aiulyat

[44] rapocci chat of tha total ■nauat ef nan RIC HnaBclm (dabc and aqulcr
aaeurltlM) batman I»71-75 (97.9 Mlllon), M parcaat naa aciiulrad thrau(h
botiOHliv. Horaonr, dabt ItniiDC* br pacant haldlns ec^anl** baa taanlMd
In a ilBnlfleant Incceat* la parant eo^any l*van|lB(. team tba W taiiaat
holding ctofanf parantt.tha dabt/equlty ratio ransad ftm aaio to MB parcant,
ai of yaai-end, 197J, "Ith a iMlshtad arnai* ratio of 4S paretat for tha SO
parant eeiqiaalci (4G). Flully, parent ccoritilea have double lavaracad la
order to increiie. the equity e( thalr aebaldtary badie. Evidence ce^l'led by
one enalyet 1441 tndleatee that beCveen 1971-75 total iw BHC equity aMunted
to |S9T Billion, Boet of rttch «•* lieued by parent cenpanleei .however,
during the aaae period BHCa Injected $1.9 MItlon In nev eqalCy lato thel^
(ubaldlary banke.^ On the haeli of Cbeea data, therefore, 11 vould appear
that tlwre haa been a elgnlflcant Ineieaie In BHC baniL aftlllatlan rlik aa a
teault of parent conpeny levereclng-

Whecher there haa elao been en attendant reduction In direct
Tiik eKpc-fum of BIIC bunka [h.it reccivsd equity InjccFLona frcia their
pacanC ci^pantcB Is Ici^s clear. Certainly, aone boiiks have been elded In thla
way. KiMcvci, In other casea 11 oppunri [hat UHCt have Intentionally
pushed ilnjx Ihe caplcnl roclct o[ chirlc b.-inks and thrn added mora capltel

rln;. I97J-73 the par

r.lll.im In nCH tq-jlt;

Digitized bvGoO^^IC

regulator*' totcna* (27]> In luch c««e*, tha leault ahooU not b« vlHcd
■■ Bu* of laductng BBC btnk diteet rtak cxposuTa, ilnoa piMuatbl; the
capital ratio* of thasa bu^ vould not have been puihed lo low had the
bai&a not been able to count on their parent compaolet for additional e(|ulty
Injection*. Bather, tb* teault *hould be vleved a* aqulvatant to that of the
theoretical alCoatlan deacrlbcd earlier In vhlch the parent esaipanr Initially
doanatreaned the proceeda of Its debt iaaue to Ita aubaldlary bank In the foin
of nev «ult]r, after vtaiofa the bank taaued additional debt. In that eltoatlon,
tb* direct rlak enpowre of the parent conpan^ vaa Increaaad, along vlth the
afflllatioB rlak of the bank, rlnalljr, avldeDce presented In the prevloua
Bccttoa icgardlDg dlffarancea Id the capital catloa of BBC-afflllaCad and
Independent banka Indlcatea that evcm vlth maj equity Injections froo their
parent coQipaniea, BSIC banka aa a groop atlll tend to be nore hl^ly
leveraged than their Independent counterparts.

A feu eDvlrtcal atuillei have addrssaad the iguestlon at lAathar
BBC Isveiagtng lnvaeta on Che coat of bonrtiulne of the parent cooiiany or
the price /earnings ratio of the parent's stock. In all caaea, the studies
have uatd mlclplc regreialon analysli, uich laverage generally ueasured
OB a consoHdaCcd holding company boile.y Four acudles (I; 31; 41; 541
looked Ht the rdlaclanahlp bccveen leverage aiid Che parent'! cost of loDg-
ten borrouJ.ng. Ihrce of these studies [31; "l; 3A) fouod no significant
retstlonchlp; hovcvci, the fourth study rcportsd Che expected
positive algnlflciuit relationship in tvo of the three yeara
cxmlncd. Aa for the relatlonslilp bctvecn holding ccmpany tevcrags

D„ii„.db,Go(5glc

■todl** (41) alio wMnaaad chla igaaaclon ■»] tcmnd tbe

■ignlfleant rclaclonahlp In tws of tha four yaara aiaBlnad, Bowaiar, «natbar

■Cudy (2) iililch lookad aC Chla laau* found no al(nlflcut tlUtlcufalp la

•^ of tba thre* yMcaaxcaiMd.^ Fiutly, ona atudy llS) ha> ■ppTuldwd

dia qnatclon uatnt ■ (InuttaBiaua aqiuCloa syataa to •lion tor ch« affaet

sf lanraga on the coac sf both debt (iDCludint bath abort- and lonf-

tan debt) and Equity, aa wll aa to par^t cheaa ceita to hats a "fa»d-badt"

«f£«E on tbr iBval of laveraia. Ataln. cha flndlns Haa bo altalflcnc

relationahlp betmaa lava»|a and tba catt of alchar dabt or atutty.

la »uia. avldeDca ladlcataa that BBCa ban lavaracad litBlf leanCly ,
auggaatlng an attendant claa In affiliation rlak for BHC banka. Id aam caw*,
thla Icvaiasing haa provided equity fuadlna for BBC baAa. However, nhetbac
thla additional equity haa tanarally a*iv*d to Is^Tove the direct rtak
•xpoiuT* of cheaa banka la unclear in viaH of the fact that-nany BHC* ham
apparently puahed dovn the capital ratioe of tbalc bank aubaldiatiea, ralytnt
Bn tba ability of the parent ceapany to itaua debt and dounatraaa the
pcocMd* to the bank >a naedad. Finally, Halted aapirical avldeBCe
pertaining ,to the tola of tba oiarket In regulating BHp lavaragtog ia eoo-
tritdictory, chough Che Mjuclty of the recesrch auggeac* that the naihet haa
failed CD cx<^cclse ■tr.'itficanc dlicipllne In thla acce.

1/ In artditlorvatudUB have looked at the rclationBhip bct«oon NIC Icverag
and both the dividend yield as i/tll as Che prlcF of pac-nC conpnuy atock.
Evidence Inditace. BJ.-iiKniflcanC relationahlp bocv«e^ divIJend yinld and
l«vtra6« I2l "L "" ih* other hn-><t, e neKacive nfEntf U":. rel-l =n=htp
VIS found bctL-ccn price end Iftverage for several ot the yeara e«p.[nrd
12; 201; h<.-<wjr, the prUc-lcvcrnEe modLl ch-it «*» used has been ahanily
criticised [I7i 181.

Digitized bvGoO^^IC

T. Bn^Mnr tad Conclmlaa
la (•cant yaara eonildtrabla eoncara fast bacn evldcocwl »tardlBg
lb* ■ubillt; of tb* AHrtean banlclni aratea, Includlnt the liqiaec of tha
bank holdlnt eaapai^ (nC) BOvaaant on baok laltcjr and touadnaaB. This
acudy addraaaaa tlia qugactm of vh«th*r the BBC ■ovitnt ba* tarvad Co
■aakan tha (tabllltr sf cba binktae ayacoi hj lacraadns Cha rlak *■-
poMua ot BHC-afflllicad baoka. In |Mitl"l*t><l>a ao^ rcvlan four

a by vfaleli tha flextbllltj of Che holdlnt e<

n Bay Inpa'ct on tha tlak enpoaora of SBC banka. Ibaaa locludi
.Itataa. (2) BBC
ind (4) parent

{1) azpaBalon of banklos wllvltlea via iioid>ankliii affi
axpaulon Into na* aettvitlea, (3) mltlbaiik *i|
coapaagr lavacaBlnB. Each of thaaa aveaoaa la,
luptlcatlona foi betb tha dlraet rlak axpoiure i
rlak aiaoclatad vlth Cha baok'a am actlvltlaa)
liak thae auch banka taca aa holding comfMny aul
rick" referi Co cha rlak of financial loaa Co cl
holding couipaiiy afflllaclon vlcli a financially I
Of the four avenuca tlicad abova. the
expaaalon by BHCa are perhapa Cha noat difficult to ai
to aay chat utalle auch nonbanklng axpanalon iwy lupac*
■xposuto of BIIC banka. tba principal effecC vnuld appi
to Che affiliation risk Co ublch auch banka are expoai
nonbanking ci^analon Cacllltacea gcogtaphlral and produi
fDi: th* BHC, vhlch In turn laipllo a reduction In bank i

fora of banklD)

a (I. a., the
the affiliation

vlth DDiibaVAIng
Sofflce It
tha direct rlak
be with re (pact

Una dlvaraitleatlon
( nation risk.

DigilizedbvGoO^^IC J

At On ■«>■ Hmt, BBC afflllBtlon offers cha oppartunity for locrMMd
risk caking b]P acqulrad nonbtnklDS ccii|i«nlc* aMIittwcafsra, graacar
afaiiarioB ritk for boldlnt etm^iar baaka. Empirical avUaaco U oc«T Is
botb aiaaa, Bowovar, Oio littlo ovUoaca Chat 1* avallabla candi to
•uppott bocli of thaaa aiiuiMnta.

Th* third avania by yblcb cha tlaxlbllltT of Cha holdlBi etapa^
EoiB ■*; i^acc OD bank ilik aicpoaura pactalns to mltlbank aapHialaa. !■
that latacd, Chcocy luuaaca Chat UIC affiliation Mj naslc la Iscraaaad
dlnct ilak uipoaDia for aDbaidliTT bank* but laia affltiaclaa rlak'dua to
■angcaphlcal dlvaialtlcatlon. livlEleal avldanca ralattnf to dlract TUk
mpoaura of SHC banka ia •ubacanclat and auucaca diat >BC afflllatlan baa
tndaad raaulCed is gEaacac liak caktag by aobaldlary bank*, •• caflactod
In rlskior auet aCiucturai and giaatai lawcrailng by BHC baaka vla-a-rlB
IndopaodoiC bank*. On tho othar hand, no aifilrleal ocudlaa hiva toeuaad an
cha gaoecaphlcal dlvccaltlcatlon aapccca of Bilclbank holdlns cn^any as-
pandon. Thua, It ccsalna to b« Man to idiat excanc cha obaccvcd Increaaa
in BHC bank dieecc clak axpoaiu* my ba otfiac by leia affiliation ilak fros
Bultibink tcographUal dlvtralllcaclon.

The lasc avanua through vhlch BUC banka nay axpeclaocc • cJiange

Ir riak axpoiuie prrtalna Co pareoc boldlDg coipai^ leveraging. In

t-llicd, evUenc? indicatea chac BHCs have levciagad algnlflcsntly

:™t y-^ara, auggeaclng a algnlflcant I.ncresit In affiliation Tiak for

banka. In luny caioi, chls IpveTaglng hai provided aqulty funding

IC banks. Micthor aueh equity Injections have generally redoeed the

D„ii„.db,Go(5glc

WaruanT, avm with SBch aquley Injection* , KE badia ■■ • treup Mill
tand to b« BOT* hlgblj lavvnttd chin th*lr IndtpciHlaM eouDtcirpart*.

In copclailoBi aratlibta cHplTlcat avldnca to t»t* point! to
bod) UenaMd 'dlnet rUk. exponin for IHC buka «■ wall •■ iliBUlcwit
■ffitlatlon rUk dua to extanalva parsnt dBpauy laveragiag. Still, than
■ra ln^artant diaanaloni of tbo EHC nvaBeDt — particular!? ralatlnt to
SBograiihlcal and prodvct'lIoB dlTeralflcatloa — that (uggaat poaalbly
lai* Etak ai^aKiia for BHC bank*, but for vbldi then la aa y«t little
or no aaplrleat evldcDcc. Hot until thasa latter *raaa are fulljr explored
vttl Oa total tiipact of the BW ■■iiiiiaaiil on bank rlak expomt* be unvalUd.

Digitized bvGoO^^IC

IDV.>

, John H. Boyd. «d Don-ld P. J«ol... "»•* lydtl- «d

fUrrnk Perceptloru: So™ Enl.ltmenti for C«pIMl Ad.qo.<T

Csrtai H

«Ion 23A oi Che Fedcrol R^soive Act PropoMd by Uw Iwrf of
Doiri of the Federal Rfterve SyBtm," 197B.

.Colenb.AB.ocL.tes inc. -Lmb. by B»k» to Bi.lt « (lll-tM
cetlon 23fl of the Federal Tlewr« A=C." B^port pwp«™J «t Mm

KesUUr*d Mdk hoUlui ConpinlH,

ink HoldlDB Conpiny -- A Supei
Exjundtng Actlvitle»7" Pollclet for » Hote Competitive Financial Sy.tm.
FroceidLngi of ji Conference, Federal Raaerue Sank of SoacOD, June, 1972,
pf 77-87, Aa earlier veraloo of thl« paper v«e publithei! ■■ "Tha
Sank Holiling Coapany Bi ■ t>evlce for Sheltnclng Banki from Stakt,"

- - - e on BanT; Structure and CmipeCltlon, Fadaral

Bank oE Chlugo, 1971, pp. SS-AS.

"Bank Ko

e_i

Itlons:

-Bast-W

The lolc

AfflUat
WS), pp

a," IQe
30-33.

MHRaUn

on. LI.

;.i';";

CO Atte
-» Bank

t Two De
of Chic

cad

a of Ret

DKeol.0

. isjs!

■N<.nb«ikl

tlo> of

Bank Holdlna Ccopani

■ .'■

tlv-.. F

of Chlea

o, March

D„ii„.db,Go(5glc

Kit, Arthur 0. "Th* FartorMiBe* of lodivliliul Bank BoUins Conpanla*,"
ttJff Eepnoate Stuiltai. Ko. H, Surd of Conmort of ttw radoral Riiir
STitM, Auguic, 1975.

197S), pp. 219-223. A tltthtl; widlllad vcrtiop of thli pipac vai

alio publlihcd ai -lllvaralflcaclon, Rlik, and the ftaiA IlDldlni Co^woy," The

tanlMH HinaatM. 1S9 (Vintar, 1976), pp. 109-112.

Bant*." Journal

D„ii„.db,Go(5glc

chDMB, RadMy D. and IMrtd R. Mtlnatcr. 'Ab tiimljtU et Bndc Hntdlas
C«v«iV Ae-IuliUluu: Soh HatbtMlalotlcal U*»(." Jountfl et tonfc
faMJrdi ■ 4, Ro. 1 (Sprlns, 1973), pp. M-tl.

"Book Boldlnf CoapiDlu:

ind Saual ». TallaT- "Ad A(*ea*MOt of Bank HoUli*

Cot=[«rl«m," SC»f£ Economic study. Board of GfuernorB of th« Fodoial
teietve Syttna, Fgder*! BeeotTO Bulletin. U, Bo, I (Inttary. 1V76),
pp. 13-21.

, Lamar. Kuten* H. "Ttiraa Ftna

Jounuil. V, Ho! 2 (July, 1977). pp. tS-71.

32 Mayoa, Lucllli £. "A Conparatlva Study of Bank Koldins C
and Independent Baifts, 1H9-197Z," Hia Journal of Fiiw
(Match, 1977), pp. 14T-ISS.

J3, HcClcaty, Jo* H. "Abaentcc l>

ParforMneo," Hotichly WevL
Aucust, 1964, pp. 99-101.

Digitized bvGoO^^IC

e HMitttoa Tailed," ItK B«rt»r«

3t. HLnto, Jehn J.. "CIpltal Htnlgennt and Profltibllity of Frospectlva BoldloE
Caapin]i Baalci," Jeuraal of rip«i«l«l anJ QuJntltatlvt AnalYala. X, Me. 2
(Jana, 1975), pp. 191-203.

37. . ■Waoagartal KoCtvci, Harkat StrucCurca and Tbe Faifsraance

ot Holding CKapany Baoks," Eeonoadc Iimulrr. X19, Ho. 3 (ScpEcaber, 1976)
pp. 4tl-42«.

(rabruary, 1976), pp. 52-58, (Harcti, 1976), pp. 43-47.

39. Hadmr, Kalpli and Jonatlian Broini. "Dlscloiurc and Baidc SoundM**:
Honbank ActlvlCtcs ot Bail Holdlns Cmpanles," Public Intenat
■•aaacoh Croup, Viihltigton, D.C, June 30, 1976.

ank Holding COTspan

, llo. 3 (A.jtu-M, 1975),

Digitized bvGoO^^IC

,. "DBvelo^aanta is th* Ikifik Roldlnt Caapaay Iton— nt,"
nn» of ■ Conference on Barit Stnjcture and Co:»p«tHl(in. Federal
Bank of Oilcago, 1972, pp. 1-13.

J **Tha Effect of Holdicis ConpAiiy AcquLsltloiu on Beak

OCB," Stuff Eeongjte Studf i. »d, 69, loird of CovernoTB o{ tb*

RoBeive Syitem, Fehrusry, 197!.

Geng niac Couldn'c Bank Stial^t." Forbea . Jim I, 1974, pp. 17-18.

Hacc^-Aprll, 1973, pp. 19-28.

eaver, Anoe 3.' and Chaylia UeTzIg-Hin. "A Cos^Bretlve Study of ao Effect
of Leverage CB Rlak Premlniu for Debt laaue* of Bank! and Baidc Holdti^
Coi^aaLe*," ReaearRh Paptr Ro. 78-1. Departmeot of Keiearch, Federal
Reserve Dank of Chlcaio.

D„ii„.db,Go(5glc

Ifaa Efface of Bank BoldtoB Coopaolai

D Ctn^tltioii: A Ravlm nf ttia Evldanc

Stcpfaan A. Rhoadai

I. iBtroduetton

SlfnUleant atmccueal oc Inatltncloul dianca* In ABarlean
induacrlas oftca bav* ti^llcatloiu for co^cttcloa, Thua, tha rapid
cOBvacaloQ of tha UMOwrclal baAlni tDduatiy to cha bank hoUlns caa^any
CoiB of ortanliatlOD ant tha acco^anylnB BOvaBaDC loto nonbanlilcig actiwlttaa
baa rata«d tha laaua of Ita affect on conpatltloo In baidctog and nxi-
baidttns urkata. Undar Sactloni 3 and 4 of tha Bank Holdlnt Covanr Act
(1956) ai ^Ddad, Che Faderal Baaona Board la luhjoct to logltlatlvo
■aadatea to coaalder tha coapatitlva affecta of propoMtd action* that It
rocalvaa froa tha bank holding con^anla* It ragulata*. Ihl* paper Tovlawa
atudiea that hava devalopcd enplrlcal evldeoce ragardlng the effect of
ha idc holding coopanlet (BHCa) on ca^i#cltloo in banking and nonbaidclng.

II. Hie Analytical Framework of Thg gevleH

Ih« laglslattve concern with competition arlica from a recognition
that the aconoolc concept of competition haa Inpllcattona for nntkct
pcrfomaiice. the bade theoretical nodela uaed to analyse coci;iatltlon aie
■aiket nodcla nfilch luegeaC that tbe baalc atiucturo of a niTkot vlll
dcteiBlno the economic porroruance of the aarket. According to tlieia
■odnls, the economic pcrforoancc of a wirket la reflected In the long
Tim profit rate (price-coat marctna) and, cutetla parlbua. prtcea In the oarkct

D„ii„.db,Go(5glc

A Ealattv«ly hl^ profit lac*, or, c»t«rl» pTibua. price. Id a aatkK
■uggestB that a iDonopoliatlc atmeture «xlata, vhila a ralatlvaly low
profit rat«, or prle«, lusgaita that a conpatltlva atmctuTC pravalla In
tba sarkat. TheEefora, Id analysing the compatltlve affacta of BBCa, it la
appropriatB to focua OD profit ritea and prlcea aa Indicator* of pTtofanca
Id theaa Barlceta. — ' Morcovar, ainco tbaory auggeata that Baifcat Stxuctuta
li a detaralDant of narket parfsimaBca, It la appraptlata CO focus oa
■arfcot •tcuctucs. -'

Id ordac to rely on bd aatabliahad thsoretieal ftaaawDrk, thia
revleu wilt focua on atudisa that bava found ovldaiice on tba cffact of BBCa
on narkat profit rattr, prlcea, aoi atnictute, -' Before purnilns tba.
empirical evldeoce on this l»ue, it la uaeful to Date the argueat for
expecting BBC (ubeldlarlea to have a unique effect on coBpetlttoB and to
outline the social coats that amy acconpan]' the pocalblc effects oD
compotitlon.

BBCa night be expected to have a proconfetltlve effect on BBtkot
pei'fomsnce for any of three reesons. First, vith respect to banking, the

i/ Uhlle nonprlcc campctitlon nay be ImpDrtflnC In
theory provides no basis for deteTslning the effect
of most fon-E oi notipvlcc competition.

2/ Thccc is a nubsCantlal body of cmpliir.al evidence Ind lea t log that
rarket scrucCucc effects performance in banking and manufacturing Industrlea.
Foe a icvleu o£ the evidence in bankln^L, see Stephen A. Rhoadcs, "Stcucture-

" laft BcoBOmic

, 1977). For manufacturing, see
Ics BelatioDahip in ADtl-Trust"
rnJnaj. eds. H.J. Coldschmid, H.H.
, Urown, and Co., 1»74) .

0 noi directly BucRost

e not rovitwed In thin
Iitm by TfiKithy Curry.

D„ii„.db,Go(5glc

■8C provIdeB a ■ediinltn tor elrcuBventlDg restrictive brancblng laws,
!•••, l*gal barrlara Co antrf. Itiis should be condticlva to naw entry Into
local tailceta alncaeatabllBhed firms can expand throD|^out a atata. Ihua,

there would be a proconpetltlve effect
banfca ma;, paibaps, be able to operate

iMrket atructnre. Second, BBC
t efficiently than other

baidci becauie of centralization of certain operatlooa and becauae of (upeTlor

■anagenent. To the extent that opetal
would be an effect on prices that
on narket perfonsance. — ' Third, baal
Buch as relative aggresalvcneas In
rapid groutb nsy have a pioeonfietltlve
perEomiance. Otli-r things being the .
atructuTc or perfonsance must be lega
bcwevcr. If the procoapet It Ive effecti
they may be asioclateil with social co:
bank safety and soundness. Thus, tbei

ilonal efficiency la adileved, there
conatltute a procoapetlclve effect
behavioral cbBracterlstlcs of BHCa,

-ttollo nanagement or a preference for
iffect on naiket structure and
lie, a procompetltive effect on >aTkat
■d as a social benefit. In fact,
leacrlbcd above should natedallv,
t; both to coopetltlon and to
nay be antlconpetltlve effects due

to the Dultl-narket operations of firms. These effects may come about froi
the development of linked oligopoly and froio certain facets of undue

1/ Available evidence doea not augBcst that B}1C banks achieve significant
gains in oiicratlooal efficiency. For a discussion of the evidence on BBCa
and efficiency, sec the paper by Jim Burke elseuhcTe In thla compendium.

D„ii„.db,Go(5glc

concentrstioa, auch aa unfair ecchods of coopacltlon. -' Asm poaaUila
anClcoopfltltlvc effecta nay or nay not offaat tha pbaalbla piocoayetlciv*
•ffecta of BRCa. But even If thay ia not, ralatlvely ilak; bebavtoe bj
BBCa ia llltely Co ba reflected In a tlal^y portfolio and IO0 lewla of
capital tberaby reduclDS the aafaty and aoundiiaaa of tha baDking ayaMM —
a clear aoclal coat. -' In vlev of theaa conalderaclona, it ia ^patant
that any procoofwtltiva effect of BUCa cannot, becauaa of attendane
development a, be regarded aa an UDadd>iguouB aoclal beiwfic.

Ibla paper proceeds In two parea — Section III la concaroad witii
cocqwtitlon in banking marlceti and Section 17 with competition In non-
baiddng markets,'

III. CoMpetltlon in Banking Markets

Ihere have been relatively few empirical atudlea oC tha effecta
of BHCs on coniietlclon in banking markets. All excupt one have focuaad 'on
the market structure effects of BHCs, Uhllc there have been nuueroua
studies th^C analyzed BUC effects on the performance of Individual flraa,
none of these studios extended Che analysis to exanlne the BHC effect
on performance (In terms o£ prices and profits) throughout tlic Baifcet.

ssad by John T.

Digitized bvGoO^^IC

th> itudtas thst hav* analjsad Ae airket ■eiunttiEa afCscta o£
BHCa havs nunlped elttiei' changeB In maikat concentration (or an altamatlm
■eaaura o£ atmcture) or iftanBca in naiket aharaa of Individual BHC banka.
Resolta of tha ■concentration change itudlCB hava dlraeC Inpllcatlona for
coapatltion and pcrforaaDca alnce tSiaory and enplrlcal evidence iDdlcaca
a celatlonahlp between concentration and perfoiMnca. Retulta of the aarkat
ahare atudtaa, by indicating the relative grondi of BHC banka, are
augceatlve aa to diaoges In naiket concentTatlon and Ox* eoaqictltive
bdiavlor of th« tSC Baifti, Thaaa two tjrpea of itudlaa are rcvlamd bel<M
in chFonolostcal order.

Concent rat lop Channe Studlea
There have been aeven empirical studies that have analyzed changes
in Barket concent rat Ion. the first of these studtea vas conducted by
Shull, -^ Shull's study Is unique Id that his study attempted to detenalne
the effects on local market structure from a relaxation of restrlctiona on
aulttple-offlca banking. The analysis focused on New Vork and Virginia
ubere restrictions verc lifted In 1960 and 1%2 respectively. According
to the author, most of the subsequent googriphlc expansion, through 1970,
was attributable to BHCs. The analysis revealed that the rate of liaA
consolidations Increased as did concentration at the state level. For the
eleven local markets (SMSAs) used in the study, Shull found no systenattc

1/ Bernard Shull. "Multiple -Office Banking and The Structure of Banking
Karkcti: The Hev York and Virginia Experience," Conference on Bank Structure
and ConpetlClon (Federal Reserve Bank of aiioaso, Octoher 1972).

Digitized bvGoO^^IC

cfaang* In th* nnidiai; of baidtlng arsaotxicloai or in tba I«*al at con-
caaCratlon. That li, tbc nnilMr of flima ind coacaatratioo lacraaaad
Id about tha aan* nurtcT of Barkaca aa tha; daccaaaad. It la falc to
eonclud* troa tha flndinga of tbts itudy that tha adaptation ta libaralind
banking lawa via tha BHC davica doaa not hava a ptoce^atlctva atfaet
on local aarkat itructuca. Nhila tha atudlaa piovlda no evtdanea
of an advaria affact on mackat attuctara, davalopaantl at tha atatc lovala
i.a., favac fina and bi|)iai concantration, nay hava advaria affacta.-'

Itia firat of the Boxa racent atudiaa ««■ conductad by Ll^t. — ^
Ha focuiad on county and oulticounty aceaa in thcea atatai lAicb paiait
tulti-BHCa — iDua, Hlchlgau, and Hisconiin. Oila atudy attwpta to
determine to t.'tiat extent concentratlou (neaiured by a Harflndidil todcz)
haa iDcreaiad due to fhe "holding company etfeet," Ihla affect "cosaa ahoat
only whan a aultlbank holding company (or conpanlcs) acqulcea Bora than ooa
bank in a banUing dlatrlct," The author constructs a atandaid Herfindabl
Index and a Herfindahl Index adjuited so that the scqulrcd banka are treated
as independent o;^^ganiaatlons as of December 31, I97A. Results of the
tabulations revealed that Bsnaursble increases In the Hcrflndahl due to

2/ Jack S. L1f;iC "Bank HoldLnp Com,.anic» - Coocant ration Uvels in Three
Diitvlct StatiiS," Iiii3ln.::5!i Conditioiia (federal Reserve Bank of Chicago,
June 1575).

Digitized bvGoO^^IC

' tha iMldiiv co^any affsct" occum) In vary tav of tha 243 baoklng dlftrlcca
OMikata), and chase dtangaa vara tjpleally inall ■usgaitlog Chat BHCa hava
ItCtla aEfact on bank Barksc acructuta,

A atudy by Wat* analyaaa conccntcaclon ehangaa la local banktos
■BTkaCa In Cblo ftoa January 1970 thitiu|)i Daeai^r 1974. -' Aa tabular
analyata focuaaa upon II SKSAa and 16 rod SHS4 couottaa that coaCalnad
tiw or Baca aubaldiary banka a* of Che end of 1974. Qiangaa In tba thcaa-
baik concantcatton ra,tlo and Barflndahl iodaz exhibUad alifhc dacllnei In
a aajorlty of tha 12 EHUa, Coocantration dacreaaad tn leaa Efaao half ef
tha county aackats lAlta tha Usrfindahl Indas daereaaed In half of theaa
aaiketi. Thaaa 'finding* laad cha author le coucLuda BHC baoks hava not
had a datriBcntal affect on coopatltlon in local banking airkcti.

Th* third atudy oE concaatratlon changes wta conducted by
Hhltahead and Klag, It also uiaa a tabulci analyila of niirket atructuc^
changoa and it focuaaa on local nacket* (baied ou Federal Reserve Board
daltnltions) in thtae states — Alabama, ]?lotlda, and TaonasBea. -^ the
atudy BCadured cbangea in tha threa-ftra coocenCracion ratio and Herfindahl
lodax froa Juno 30. 1970 to Dcccnbcr 31, 1974, in those 9S saiketi vith
•C lease three banking organliattons and one Bultt-UIC as of Deosfter 31. 1974,
Only about 10 ppiccnt of these iiarkeCs e::pcricQced a

2/ David D. Hliitt'li
Local i^cket Conc^n

April iy>f.).

Digitized bvGoO^^IC

tl.c G«ncntratton ratio ox Herflndahl Indax. Ihe aotboc eoneludos tbat
thcro la no evldenca ftat wltl-BHCi causo* local oarkac concantrattoc to
Increasa .

Ibc lourtb tnveatlgacton of nactec concenCratlon cbans* eovatt
a broadar geographical area thai Che earlier atudlea and It ums a Biltiple
regraaatoii model for teattog pucpoMB. It too. hoiicver, covara a raUtlwly
ahort tin period. Thla atudjr, by Heggaatad and Khoadea, praaeot* a etoM
aactlon nulttpta regi^eaalon analyala that atCevpts to eiiplalii diangaa in
uarkat atluctur* fniia 1966-1972 In 228 SMSAa. -' Iha atudy uM« a thiM-fizm
coDCcDtiatlon ratio and a Herflndahl Index aa altamattve aeaBures of
uarket atcucturs. The regression node! Includea a binary variable to
dlatlDgulah betveen EMSAa lo states that parslt niltl-BHCs and SHSAa ,
In ctatcE that do not. to account for factors other than BHCa diat
nay affect narket structure, the Bkidel Includei the Initial level of ~^
concentration, growth In aiarhet deposits, average baok size, nuid»i of
aergers and acqulaltlons, and duniiQr variablea to distlnqulsh between SHSAa
In unit banking. United branching, and statewide branching states. Result*
of the analysis Indicate that from 1966-1972 cDnc?ntr.itlon Increased sore
in SMSAs in states permitting milti-BHCs thao in other SMSAb.

A different approach to nualyzlng coneenCrotlon change focused
on foothold acquisitions. RtioatJcs attempted to dctccralnc whether foothold
acquisitions by BlICs between 1966 and 1972 hud a systfrnatic effect ou narfcet

Digitized bvGoO^^IC

ikgas, ^ The u^la Incbidca SB St6&> that axpartanced foothold
■equlatclcMM durla« tha parlod, and 54 SMSAi that did aoC, Oiaiigaa In
tbna-ftm concoDtEaeloii and the Rerfladahl Indue an uaed aa alternatlv*
^Maara* of itruccura in a Bulcipla ragreaslon nodel, k binary varlabla 1>

locludad to dtatlncutafa batwaeu aarkcti
and tboaa tliac did not. To account foi
thM «labt affact BickBt acructact

dapaaiti, dapoalti par baoklnt office
and diD^ varlabla* to Indicate tha jti
acqalattloD oiwurcd In a urtwt. Kasul
foothold aci|ulatctoiia do not hava a aj
atructura. Tha Tolactvely ahoit tlaa
(j^Ktrtant vhan aoalyElog foothold acqul
quite mall, and therefore. It maj take c<
tn a atiuctural change.

Iha Boat recent study of concent rat loo change ta a caae atudy
b7 Schwel'tcer and Greene. Thay aou^t to deterolne the effect of entry
(1970-1972) by a Urge Colorado EHC Into five banking maiVete. -^ A
tabulae analyals reveals that aarket concentration declined subsequent
to entry In the two markets that experienced entry by sMall scale ocqutsltloi

t3iat experienced foothold acqulaltlona
factors other than foothold acquisitions
nodel Includes growth in nirfcet
the Initial level of concentrstlon.
In Oiich the first foothold
i of the analysis indicate Chat
!Mtlc affect on bank uarkat
leriod covered nay be especially
.altlons which ace, by definition,
iderablo tine to be reflected

Digitized bvGoO^^IC

'«btl« conecDtxatton did not thangu In th« tlir*« aatfcati Mhaxa aatry by
acquisition vas on ■ largai acals. Ihe anthoTa coDclnda Qiat tba aMlI
acal* of enCi7 vaa raBpoDatbla Soi th* obaarml docoDcantratlon.

Ihla aeetlon haa bilallj rarlcved hv«d atudlaa that hava davalopad
aaplrtcal evldanca on the atfeec of BHCa on Barkat coneantrat Ian. All al
tba atudica ara aubject to liqiortanc Aoctcoalnga. Thus, flva of tba a«m
atudlaa e^loyad a ali^ita tabular analjatai and charafora, did not control
far factoca other than BHC* that pa; Influanca ebanga In Baifcct eoaeaiitt«clan.
In addttloD, Che tmt five atudtea covarad varj Itnltad teografiileal
aroaa ■alctng ganerallKatlona haiardoua. Finally, all aaran atudlaa analysa
a ralatlvaly ahoTt patiod of tlna. Slnca natkat concantratlon tanda to
change very alowlyjall of the scudlea may be biaaed agalnat finding a
change In concentration,

Ibe findings of Che atudlea on change in concentration era >
■Ixad, One of the atudlea found evidence that BRCs lead to Incraastng
coneantxatlon In banking narketsi one study found evidence of decreaalng
concentration; and five studies found no relatlonihip batvocD BBCa and
bonk narket structure. Thus, based on existing evidence, it say be
concluded that BHCs have no effect on D-irkct concent ret Ion «

D„ii„.db,Go(5glc

1/

m licet Share CImiute Studl«»

tlie aecket share change studies focus on the grovtfa of Individual
banks In relation to thelz BaikaCs. The relative grovth of the bank* Is
soggeatlve of their bcbsvlor.

Id bts stndj, Goldberg tests the hTpotheals thst banks scqulied
hf B8Ca increase their naifcet sbaiei because of alleged econcoles of scale.
Uls aDBljsia la based on the change In the ahare of oarket deposits of 71
banlu acquired by VKa betveen 19fiS and 1<I70. The author used ststtstlcal
tests to detemlne nhether the 71 baidts as a group experienced a statistically
slgniflcaut change in narlcet share. The anatyals used four different a»asuras
of narket share end also analysed the effects on laarkct share changes dua
to BCijulsltlons by big SHCs end by smaller BHCs. Keiults of the analyite
revealed no statistically significant cfaenge in the market Bharca of acquired
banks. These findings were conflmed by an unreported multiple regressloa

Bofban conducted a case study of two Florida BHCs. — ^ Be
aoalyied various pcifonuncc measures. Including market eheresiof 13 pairs
of affiliated and IndcpcDdcol: banks for eadi holding coMpaay both before
and after acquisition. Hlv tests for differences in group menns revceled

1/ Laurence C, Goldberg, "Bonk Holding Cooi^iany Acqulsl
Impact on Market Stnres," Journol of Honey. Credit end

2/ Stuart C. Koffuian, "The Impact of Holding Company Affiliation on lU
FcrlormaiicG : A Case Study of Two Florida MuUlbaiik iloldlDg Coupanles,"
Research Paper Series (Federal Reserve Bark of Atlanta, January 1976).

Digitized bvGoO^^IC

no algnlficant difference to Miket ihare* betwsen tha aff lllaUd and
Independent bankabefore or after ■equleltlon for etUier of die BBC*.

A recent atudj by Buike aoalyaed the poit acqulaltloa aaifcet
Aare change of 217 baoka acqulxed b; BHCs betveen 1962 and 1970. "
The autSior used a el^le tabular analyala to asavloa the noabBr of katfta
that ■Kperteiieeil locreaaea and decrpaaei In ■aiket ahar* and the mOaOt
of change over a ihort peElod and a longer period of ttae. In addlttoa,
aMtket aliare changea.for three different alie dassei of banks ware
axaalnad. Stattattcal teaCa for dlffereitcea in group Beaaa Indicated tbM
for all banka there was so ayatenatlc AanBe tn market riiare. Ibe resalta,
however, did reveal a tendency for the waller baidca to Increase aaricet
diare and tht larger banka to decrease BMrket share. Theaa results Honld
suggest that BHC entry, and peihaps non BRC entry, od a ibsII scale My
tend to have • procoi^eCltive effect on beck narket atructure. This 'k
finding is consistent with the case study (Schwelteer aod Creetia) oa
concentration diaogea but not with the cross section atudy of the effect
of foothold acquisition! (Rhosdea) or. concentration diange. Reyer die less,
this dlatincitloii betueen small and large scale entry appears to be vorth
pursuing in future research on concentration and narkot share changee
by BDCa.

Digitized bvGoO^^IC I

The only acudy of ttie effect of BHCs on conpacitlOD Chat has
not. fociued oD stroctucal change li bj Heggescad and Rhoadea.'- Thay
attaapted to deteralna vfaether the degree of rivalry in a niackec can be
explained by eoncentTatloD to the narlcet. The preaence of BRCa In
the Racket ua* one of the Independent variebUs included Id the multiple
regraaaloQ analyaiB covering 227 SHSAa. The study did find that mackec
cooeentratlon had a cona latent system! tic effect on rivalry among banks In
tiie aarkst. The BBC pceience variable bad a Bignificant effect on rivalry
Id bobb of Che testa conducted. The authors conclude that these results
suggest that small scale entry by BIlCs 'Wy have a procompetitivo influence
on rlvslry at least in the short run." — ^

Aa vaa the case with the results cf studlsB m concentration
change, the studies of market share change (Including the rivaliy study of
Heggestad and Rhoades) yield mixed results, TVo of the studies iiidicat^
t^at BHCs have no systematic effect on market shares of their affiliate
benka, tdiile the tuo others ere at least suggestive of a pro competitive
effect on market structure. In short, existing ciqiirlcal evldenca on market
diare. changes provides no conclusive evidence that BHCa have a systematic
effect (either favorable or unfavorable) on competition in banlctng markets.

U Arnold A. llcgge
Stability in CtrMcr
(Hovember 1976). B

2/ Ibid., p. 4S0.

Digitized bvGoO^^IC

For raMicdi pucpa*Bt, the amllabl* avUmaet laads oo* to qa««ttoa
: As £ priori raiioDB (t.a, , etrcosvaDtloD of lagal tMrrtaca to antiT, b^icvlor
or •fflctenc; dlffarencai) for expacxlag IBCi to hava any antqua affacca
on c<sii>*titlon. Horaorar, In vtev of th« fav atudlaa of Chla Lamth and
thai! vactaui weakneaaai, addlttonal reiearch In tha araa ••an* warcantad.
Tha thaory undarlytng tha BHC-coaq^dtlon liana saada work and a^lvlnal
atudlaa afaould davalop BOdeta that ata apectfieally daatgnad to gat at tha '
coBqMtltlon liaue.

IV. . Ccppatltlon In HonbanklnK Harfceta

Undar Section 4(c)(8) of tha Bank Holding Coapany Act (1936) aa
aaended In 1970, BHCb ara parmltted to antcT those noobank acttvltlaa that tha
Board hai decldad aca peralsalble undec tha leglalatlon, lo date, tha
Board hat approved 17 nonbank acClvltteB aa peniilaalble for SHCa. B«cauae
of the BubBCantlal degree of entry by BHCs Into sane of these aceivltta*,
■ost notably mortgage banking and consumer finance. It Is Iiqiortant for
policy purpoaes to understand the effect of BHCb on competition In non-
banklns markcCs.

There have been only three systematic empirical studies that
are relevant to the Issue of the SHCa' effect on competition In nonbanktng
markets. This cKtrcmely limited body of research Is attributable to tha
newness of the Issue and the very limited data available for reaearcfa
purposes. In fact, the only three st-jdles that are relevant have not,
due to dnt.-i limitations, focused on local markets even though local Markets
In these activities are most directly relevant to the Issue of ca^>etltloa.

Digitized bvGoO^^IC

Aim, tb« raaolta of Ch«*a (Cudlc* ar* augsaattva of cba mc alfaet ea
. cMpvtlCtoa only by uay of tnfarenea.

na aarllaat B7at^tle acudy inveatljatad tha hypothaaia diac
»ott(aa» banking flm* afClliacad vlth BHCa vlll (law faicai than Indapandani;
■orcytia banklns tlnu.— Tha analysii, by Ihaadaai 1( baaod on 16
•ttlllacad and 16 Indapendent flTw and tha gTOWtb rata of Chair larrielng
pOECfolio ovar cba parlod DacaabarMSes CbTOuih DcHaber 1972. A Hilclpla
rairoaaion aoalyila, which accountad foe tlra aisa «■ mil aa affiliation
acaciw, foood chat naitgata banking flima aCCIllatad wicb BHC* graw BOia
almtly than Oia Indapcndanc flTsa. Thou raaalta auggaat that EHO affillacaa
have not baan pacticularly auccaaaful in tha iMctgaga banking bualnaai.
Ihua, at laait Ifi the ihoct nin. It doea not appaar Chat BHCa will baira a
pcocoapetiClvc affacc.in Mortgage banking. MiattieT or not >HCa will have
aa advene efface on cc^ietitlon through wnaurkec acclons (e.g., ii^llcit
Cie-lna, piovlaion of ccedlt count eccycllcally, croa* anbaidleation aqd
cradle latloning) are queecloos cbac reaaln co be inveatigated. Several
abottconinga of the Rhoadea study are notable. Plrat, due to data
ItalCKtlona, It does not focua on narketa and It uaea growth in servicing
Instead of growth tn orlstnattonE. Second, lir la based oii a limited aaii^le.

1/ Etcphi-n A. BhoQJca, "■Ibe Effect cf Eaok lloldlnu Car^any Acquisition
of Mortgage Bankers on Mortgage Lending Activity" Journ.il of Bueineaa
(July 1975).

Digitized bvGoO^^IC

A ccniiaT'lsoii of Che groop perfomanca of BHC ■£{ lltata* la
BaEtgtge banking aod consumer finance with the raapacttira Industry avvniSBa
VBB ccMtducted by Talley. ~ Die psrfonunce characterlitlM oMd Id the
•Endj are lenrSBe ■nd jiTotltabillty tor 1973 and 1974. Since proflcablltty
nay be lodlcactvc of competitive perloTnaoc*, only thli will b« dlscusaad.
Yh* data revaal chat la 1973 and 1974, both Mortgage bad^lug and conaiMar
finance affiliates of IHC* expeElenced aubatantlalLy lower ratea of return
on equity capital than the reapectlve Induacrlea ■■ a vhol*. Tha taplloaclwu
of thas« flndlaga for conpetltlon are not entirely clear. However, elnc*
the findings of Che Rhoadea study on nortgage banking found no evldeaca
of nore rapid grcmcb by BUG affiliates, tho low rate of return found In
thlB study nay be due to Ineffective coHpetltlon or Inafflcieocy of the
affiliates, — Hils possibility Is supported by Che fact that, ceteris
paribus. Che greater riskiness of BIC affiliates (Indicated by higher
leveraging) should result Id higher profit races,

k recent study by Rhoades and BocESr ccnpared various perforaance
chSTBCtcrtstlcE of 14 coasuioer finance conpanles that becane affiliated vich
B EKC by December 31, 1974, and 23 companies that remained IndepcndenL. ^

3/ Scrphen A. Rhoades and Ccezoty E. Bociar. "The Performance of Bonk
Holding Corapany-Airil idled Finance Conpiinits," Staff Kcoiiomlc Studies. Bo.
90 (Federal Reserve Foard, 1977).

Digitized bvGoO^^IC

1ti« study BMd roultlpl* ragraaaion aaalyala «o that It could account for
ttia affect of ca^any aiu and loan alia in addltton to the efface of
affiliation, Pra-acqulaltloh and poat-acquliittan coMparliona of patfotNnca
batman tba two lata of coi^anlai van conducted, Rcaulta for three of
Ota parfonaanea naaautea uaad In the atudy ara auggastlva aa Co uhachar their
bafaavlor will have ■ pro ot antlco^atltiv* eCCect. Thaaa are profitability,
fltB growth, and new offlcaa opanad.'

Regrcaalon.Taaulta Indicate that prior to affiliation thara vara
no dlffereneea la parfomanca between Uie two isti of conauincc Itnanca
coopanies. Subsequant to afflltatloQ, howevel, the affiliated ccoipanlei
•■pctlcnccd ■ lower rate of return, a higher growth rate, and did not -
open nare offlcaa. -* The Irrjsr rate of ictum 1* conalstcnt with ftndlnga
of the Talley study. The additional finding of cht* atudy that the BHC
affiliated consumer finance coopanlea experienced a higher growth rate
■Ight lusEest that the lower profits are due to the BIlCs enphasls on growth.
Since this study found that the affllliited coapaoies did not open more
offlcea, the loner profits and higher growth are suggestive of procompetltlve
pricing policies.

Overall, there is very little- evidence regarding the effect of
UICb on ronipetltioii in nonbanklng markets. The three existing empirical
atudlcs provide only Indireet evidence. Die tentative conclusion to be

D„ii„.db,Go(5glc

diaaa fcoa Chla evUaDca Im that UCi asy havB • procaapMttlw* •tfaet
In tbe coiui^i fioinca Indiutty bat do doc 1b tbm ■«rtc*t* bnUng
IndiwCTT. tor raMardi porpoaaa, tlw problava of Om cxtatlsK aCodlM
Indtcatfls the iwfld to formilaCa ■cudlei an^ attsapt to eooatnaet ^Aat
lavet data that focua apcclfically itpoa lft« coapetlcloo laaoa.

T. Plrectlon lor Futura loaaatch on tha Coapatttton laaw*.

Ihti ravlm of itodlei on tha affact* of BBCa so cmpatltloa la
bat&lng aid nonfaaiiktDS aarkata revoala tiiat tbate baa not b««n a fitrnt
daal of r«>eaicb, bat what than baa baan inssaata cfaat IBCa hava llctU,
If »Bf, affect on Barkac coapacttton, and Eh« findinga ara not c«nclaalM. .
Becauae of the ilgnlflcanca of tha BBC aa an organlxatiooal fom In *»— "t
and ita Increaalog role In nonbanklng aeclvltlea. It la bqiortant to acblnt
a batter ur.de rat and log of the coapctltlve affect*. Putute ceaearcb aliht
ba BOBt productive tf it procseded along tuo general llnea. One vould
eaploy the standard theoretical nodela ai a baaia for analysla vhila die
other VDuld focuB on dlneDsIona of cospetltioa thct are not derived
directly (ram traditional theoretical nodela.

There are two types of studies using a traditional theoretical
frameHorfc that would reflect the inpact of BHCs on ^rket coapctltlon.
One uould be Btudles that attempt to dcternLnc Hiiethec and in lAlch

D„ii„.db,Go(5glc

direction profit rates, price*, and atructuE* In a narkcc change aa a
Eeault of entry (de novo or by aequlsltian) by BHCb, It mutd be InpoTtant
Ia thla type of atudy to dlatingulah between short-run effect*, ohich alj^t
Eflflact a dlaaqullibclim aituaclOD, and long-Tun affecta %diich woold b«
Mora indicative of the likely influence of BBC*. The other type of
atudy weuld ba one that analyxas difference* in narket profit rataa, price*,
and atructnre between aarfceta that hav* BHC bank* and aarkcts that do not.
In atudlcs of this type. It vould be desirable to account for difference*
Id coat condltiona (e.g., gaaaral vage rates) between markets.

Another line of raacarch would break away from the standard
Bieoretical nodela eapeclally in studying coapetltloD In nonbaoklng
activities. Such studies would focus upon the coiiq>etitive effects cl.it
have been uniquely asaoclated with the pheuonCDon of diversIficatloD,
Thua, Buch studies ml^t, for example, develop working hypotheses froo '
tbe aajor elenents of Corwin Edwards' well-known conglooerate power hypothcsla,
Hia hypothesis holda that a diversified firm structure la conducive to
tie-Ina, cross Cuba Idlaat Ion, and linked oligopoly, which have significant
invllcations for competition. Since so little evidence has ever been
developed In this area, lindlngs of studies on BHCa and their notdiankltv
activities Hould be relevant to public policy beyond the banking Industry.

D„ii„.db,Go(5glc

BuEfce, Jla, "B«dk BoldlDg Coqaor Behavior and Stru
/oamal ol Baidi Rgacareh (Eorthcaolng) .

Beggsatad, Arnold A, and Shoadea, SEephen A,, ■ 'Concent rat Ion and Flna
Stability In CooMCclal Banklnt," RevleM ,ql EcoooiiiIcb and Stnclctlca
{Noraiaber 1976).

Bof faan, Stuart G. , "Itia liquet of Boldlog Coapaqr Aff tllatton oa Bank

Faxfanuuice: A Caae Study of Ivo Florida Hultlbzuk Holding Cnapanl»«,"
to—ardi Paper Serlea. <TedeEal Rerarra Bade of Atlanta, Jamary 1976).

Lt^t. Jack S., "Bank Holding Companies-
Dlatrlct States," Buslneaa Condittoni
Juna 1975} .

Mortgago Bankaci
(Jul; 197S).

Shoadea, Stephen A., "SCrucCuce Pel
and Evaluation,'" staff Economic
1977).

RIiDadeSi Staphcn A,, and Bociar, Gregory B., "The Forforatance of Bank

Boldlng Company-Af f iliaicd Finance CoJ'paniea," Staff Eeoneolc Studlea.
Mo. 90 (Federal Reserve Board, ]977).

Ltlple-Offlce Banking and Ihe Structure of Booking
' Vork and ViiginlK Experience," Cooference on Bank
npetltlon (Federal Reserve Bank of Chicago. October 1971).

Digitized bvGoO^^IC

a-Proflt* RilatloDBblp In Antttiuat,"

Self Learntnu. cOi. H.J, Goldsehald,

B.M. lUoD, aad J.F. Veaton (Boaton: Littla, Broini, and Co., 1976).

VhltabBid, David D. and King,
Local HaikaC Conceutraclon,
AtUnta, April, 1976).

Digitized bvGoO^^IC

CrothtB A. ClmsiBtn (ail Robart

Sine* tha earlj 1930b policy Bakara at both dia atata aad
fedaral Icvala hava bean codcottmiI that tha giawth o£ ailtl-bank
koldlns coapaalaa would raault in the concantratlon of banking
rciDUreaa.- SlBllacly, In tta deliberaelani on tha 1920 inamhaiira
to tba Bank Uoldtns Cat^an; (BBC) Act of 1956, Coograaa waa fearful
that bank holding coopany aEpanaion In tha aonbaoklng arcai VDuld
laad to an undaaiiabla Incraaae in tha eoncantration of aggregaM
tlnaoelal reatnircaa.— The Conference Report nccoapanylsg tha
leglalation Indicates tiiia concern; "Ihe danger of undue concentra-
tion of econoaic raoources and power Is one of the factora Which
led to the utactHnt of thta leglalation and conscltutea e aignlfieant
threat to the continued heelthjr evolution of out fiee econoq^."— As
a result the 1970 ameiubien U provide that under ccctioo A(cH8} of
the anended BHC Act, one of the factors tililch Che Federal Reserve >,
Board oust consider. In acting on a proposed nonbenklng ecquialtion by a
BBC Is whether it will result In an undue concentration of resources.—

Implementation of chia requiremnnt, hovtver, has proved
difficult for the Board. This results hecause of the leek of

1/ See the di

::tion by Ssvtge as well as

Wlllct (1930).

2/ This eoAfe

w Japenese c.rn" "Mlbatsu"

problem uhlch

This term uaa first public

applied t^ Che

BlIC BovciTinL by Chain

=in Hums. Hearings oii Bank

Hold int. Coi.pnn

V Act Aitod^cntn. \lai:r,-

. CoTO.Utcf Sn^lng »,«1

tur.-eiicy, 91sl:

CongTci*. lar. Session

<li)69) p. J6. Scu Sehotland

CI976) p. 23J fn.

3/ tl.H. Report Ho, 91-17A7, p. 17.

A/ No sliallar woidlnc is contained In Section 3 govemlnK bank

acqiilsii.ini:j. bi.t ilik principlu^ t^.'iodl'^.l In InC^vpt'ocUii; the gencml
cntjlr.i-c ■ ■: d.- .ipply.

Digitized bvGoO^^IC

BuldMea, «ltbMr In •oowalc Aaorj and Cha r«l*t«d ■ovtrlcal voifc oe

In lagtalatlvA and JodlcUl dsllbatatloai. ■> to iihat typaa of

■equlsltiona or iibaC Uva^a of concentration conatltuta "uaihi*"

eoDcent rat Ions o( raaourcaa, Ihia difficulty can b* aaaa in th*

Bond's atacaaanta nlating to tbe appllcatloa bj BaokAMrlca

Corporation to acqulra GtC Flnanca:

COKsraaa did not provide spaclftc cclcaria with raapact
to tba alaa of acquialtlonB wblch should be dlsallowad
to avoid undue reaourc« concentration. Rather, It
hBB pointed to the dangers Involvad, particularly
thoaa Involving concentration of power relating to

consider "nil reasooable ramifications" In applying
the standard of t 4(c}(B). 1/2/

LaBlalattva diacusaion* of "undue" concanCration aupporC

any of ttarao poaaibla intarpratatlooa ol the tarm:-

<I) that It rafeia to coacoatratlon io particular
geographic aod product market* and/or define*
coodilnBtions irtiidi sight tend to create •
■onopDly in such narketa;

(2) Oiat It deacrlbea the evils Inherent in Che

eoinbinatlon of banking and coopnercp to fom
. economic power centers contrary to tradltiooa
of the U.S. banking industry.

ppi

raval of the

Francis

Fenr

..ylvanl

August H,

2/

"A« the

■majority scat

provides 11

tt

le guidance

idlcates, Che legislative
c meaniRE of the teno 'un
tlon of resources,' Co.icurrlnR StatcMnc of Governors Mitchell,
Doane, and Gheehan in the application of ganktoerica Corporation.
Son Francisco, California, to acquire GAC Finance, Inc., Allentown,
Pennsylvania, ScpCenJier 5, 1973. p. 1.

3/ S'.e Heattngs on the Bank Holding Company Act Ainandmenla, House
Eonwlttee -..o bankiua and Curri^nT;."91sc CongrCB. 1st S^s7lou (1969),
HB, Reps. Ho. 91-387, 115 Cong. Rc£. H 10559 (Nov. 5, 1969), Hesrlnga
on S. 1052, S.1211, S.1664, S. 3823, and H,K. 6778, Before the
Senate Coeslttee on Banking and Currency, 9Ist Congress, 2d Session,
(1970), M.R, Rep. 91-17A7, ' Sli-t CongroBS. 2d Seaslon (1970).

Digitized bvGoO^^IC

(3) chat it e _

ftnancial rasource* Hhlch c

poinT so vaat that ICa vary ntatnca ottandi

tlia public Incetcit.

lbs tlrac tnteTpratadm focoau on che rclatlonahlp

batwacs siTkaC itTUcCura as BaaaaTMl by conceDtratioa tai apsclflc ■■!

■nd tha poaaibla affecta on partoiBBnca. Iha aacoai] deal*

vlch Che ■alaeanaikca of cha aapacacloa b«nn«a *■— ■'■''■b and

coaaarea.- Tha laac reftacca coocaca foe tha poeantlal abuaa of

povaCi poaalbly axtandlng bajund aconoaic activity to aica^kaaa

•ocloifolttlcal dlaaoatona aa v*ll.

Ihia papar focuaea aalnly on tha firat (Dd third of thaaa

tneantratatloiis and acaBlnea the I^ract of tha holding co^any

■QiT^MDt on cone cntrat Inn of both banking raaourcaa aa vatl aa

noabinklog roourees. The reaalnder of this reviev Is dlvldad Into

thcaa aecttoiii. The next aectton briefly outllnaa the econoaic

oelo -political dlmenalona eid>odlcd 1

The third aectlon exanlnes the evidence on the extent to
vhlch the beak holding company novenent has contributed to the

ntradoa of financial resources. The last section contains

inclusions.

Urgely dealt with In the 1970
holding cofcpanlcs are only pcnilttcd
t are "cloafly" to banking.

D„ii„.db,Go(5glc

lb* BCQoamic liaua* aaiociaced with tha caocantraCtoo
of r«souTe*a ara ralacad Co Che growth In Cha abloluta alia and powar
of a aaall nindnr of flrwa. Concam 1> ganarallyfocusad on' tha
lapltcaclona of >uch a Craod for (I) bahavlor In particular oarkaCa
ineludllil tha affacta on antr? and exit, tha typa and Intanalty of
CEOvaCltlon, aa wll aa on tha baaie behavioral aotivatlona of tlroa,
aocfa aa profit ■axintratlon and (I) Che bade fuoctlona of en aconoalc
•7«t««— efficient resource allocation, marlcet dlaclpllnc, eiqiloyBCnC,
etc.

Harhec Effecta

Ifa« narket effect* of Increasing concentration are of Cvo
C3FpeB, Ihe firaC relates to the level and changes In concentration '
within apeeUlc narkacs and the In^llcattons these aay have for
behavior, prices and performance, nieae Issues end es^lrlcal evidence
have been explored by Rfaoades in aooCher pepcr In this coipendlun.
Iha second aet of narkec effects relataa Co the laqiltcBClona Chac
high stateulde or nationwide concentration In various product
lines or activities have for perlonMnce In particular markets.—

T? Much of this discussion Is derived fro.-i Edwards (1955), Seellg
(1976) and Rlioadcs <£orthcomlng).

2/ The state <■ often regarded as an Important geographic area In
analyilng banking because backs are limited by state Isw and the
HcFedden Act to Individual atatcs In establishing offices.

Digitized bvGoO^^IC

For •XK^la, tt ■ f «f larga baidu opstate tn Boat of tha local Baifcata

throu^out ■ atatc than tha thaoEj of Mutual tarabaavaoca, or llidcad
oligopoly, augsaau tlist bahavtor and parfonance In IndiTldnal
■■ikaca Bwy ba differaat trtm that indlcatad by cha atcuctora of Cba
aarkata Chottielvaa,- Tbia tbaory l^illea chat Khan tins faca aack
Othac In aavaral aaTkatB aach EItb !■ !«*■ llluly Co trj Co diaa|a Cha
atatua mm In ona narkat for faar of tatallatlon In otbar BBTkaca, In
Chia mj parCooymcaa wldiln glvan aarkati ara "Ilnkad" togathax.

Iliara ara a nunbar of poailble advantagai which wj accrue
to tltwm that oparata In nult^la nacketB, particularly If thay ara
large and widal; diversified. Ihaae may allow a relacively larga
fiTB to exart coopetlclve influoice and affect narket behavior
far beyond what nlghl: be aiiggeated by ita narket share. - In •

addition, eoDfie ting In more than ona iMrkac panics poaaibllltlaa
for cross aubaldiiatlon of the operation in one narket fron tfa*
oparaciona In other aaikec. A flia aay, for cxanplo, be able to
•uacain Che offer of lervicea ac a price below Che coaq>eCicIva
nerkaC price, and parhepa at pradntory levela. In an accenpt Co
Increaie Its share In ■ given markcc. In Bddtclon Co placing
cxlaCing smaller competitors At ■ dlssdvantege, the pocenclal for
cross Eubsldlzaclon may also increaie perceived barrier* to entry

l7 EeTlduards (1955) and Solonan (1970) for dUcusalons of the

2/ See Wiltehead (1977a), for nn einiirlcol Cast of the hypothesis Cbac
large mult lira rket firms have a competitive advantage In individual Barkect.

Digitized bvGoO^^IC

by otli«rs wUhins to eatabllah ecopctlnc llxam, A* advantagM of
larga ■!■■ and oparacinB la Hilclpla aarlut* axcaiid bayond
abaoxblDB loaaaa dua to aalu balow covstlttva naricac prtcaa
ia gtvan aackata and Incloda: (1) eaiiat accaaa to capital Matkata,
(1) tha abtllt7 to cake advantaEe* of an; «clatlii( acala aeonoalea, (3)
obtaining favorabla dlacounta fron auppllara, (4) ^a eapablllQr to
flnanea la> aulti arlalng fran poastbla prsdacorj pricing.
Ecpnony-Wida Kftac
c of 1

nia «xiatanee of a avail
dlvacalflad convanlei accounting for algolf:
natton'a aconoDlc activity, Haana that any i
affact tbcBBflrsa may hava acTloua rlppla <
antira econongr. For exaqile, elie poaalbia fal
flr^ B«y hava piTcelved ot reel conaeqaencei
goveiTDKit may be reluctant to permit that tsl
CoBKrclal bank* are already afforded prot.
because of their unique role In
to ensure profitable operations; bank exanlna
and rlik[ deposit Insurance protects anall de|

portlona of tlia
le evanta which
:a throughout tba
re of one of tbeae*

significant that tha

In the public Inteteat
econooy. Entry Is resCricted
ons monitor parforasnca
sitorsl and

IT tho rescues of Pann-Ccntrfll and Lockheed are ejtamploa of sue
govfrninenCel In Lenient ion. Iho Federal Reserve Board approved
BankAnerica'i partial acquisition ot Q "

that the ueakened condition ot GAC, and poesib
hava adverse etfecca on the comnercial

s fatluce. Might

Digitized bvGoO^^IC

f leadtns facllltte* an aniUbla If DMdad la ch* fom
of accats co A* Fedaral Ksaarv* diacauat vtndov and loaaa froa
the FDIC, Aa a naulc of Che praceecloa aCfordad coaaarcial baoka,
tha axpaniloa of BHC* Into tha nonbanklng araaa v»j teai to raduca
tha pascatvad riak of chaia ae« actlvltlaa and atlaulata Invaataaac
Cbat Bight othaiwtae not occur,

Ihe and raaulc of anch • peotacttonlat policy 1« to
iBSuIata thaaa fliaa from tha affects of naikat dLadpllnc. Iha
ultlmto eoniaqoahca of thia Inaulaclon Is an alvaraa l^>act on
resource allocation slnca auch fliaa are no looget effecClvaly
accountable Co Investors through failure for unwtaa, latbacglc,
at rialcr operations. In addlttcn. Increased concentration tends
to hlEhten preaaures to aupsaot the econoolc objectives of the firs
each as profit max imtra clou, with no:itconaaie objectlvea. The
reaalt Is Interference with efficient narket BachanlsMS and less
than optlasl resource allocatioD.

Lastly, It Is also arguad that Increased concentration,
particularly to the extent that It la associated with Increaalog
dlveralf tcatton and siie, tends Co lead Co the loss of InforBBCloo
about perfomance in Individual acclvicies. Uhcre products vera
once provided by independent firms vltb KcparaCe accounting reports,
aggregation and concentration results In tmich of this Infomatlon
remaining either internal to the Urge diversified flvna or
submerged by consolidated reporting. The loss of this type of data

D„ii„.db,Go(5glc

dipzlvaa th* aailcac ot accurBCc tafomatfon aa parfonttnca In apacltlc
BCttvltlaa which la ao necaaaaiy to efficient raaourc* allocacltn.
Eocto-Polltleal laauea

Iha long iCandlng dtiCruat of conccnttntloa of acoaoalc
powai In tha Aaarlcan ecoaamr reflacts ttiu balief th»e auch coDcmcva-
tlon b«>td«a powar Cranacandlng tha econaaic ayataH. In ahoEt,
•conoBtc pomi wy ba tranalacad Into poltclcal pcwar and tha
ability to inCIuanca public opinion and policias, cultural Inatltu-
tlona and ultliMtaly penonal fraadou.-' Thua, tha traod tcnard
coacBntTBtlon o1^ reaourcei la thmighl by oany to hava ilgnlftcant
and detfliiiental Inpllcatlona for tha fabric and Btructura of the
antlra aoctaty.

III. avirtcal Evidence

Tha lack of veil ipaclfiad thaoratlcal frBmeworki baa
gaoarall; haEq>erad direct testa of (1) hypothesea about the ralatlA-
•hlp batveen ccDpetttion or peTfcraance In specific aurkata and
concent: rat ion of resource* in banki and h«ik holding coiqMnlM or (2)
broader hypoCheaea about the etfocta of "undue" concentre don.
The only relevant worlta to date teat Che linked oligopoly hypotheala
as it appliea to banking; there has been no work looking at the efteeca
of agBregaCe BUG concentration In r.onbanking activlclea. HeggaaUd

TT For empirical teats of the effects of ec
politico, see Salanon and Siegfried (1977) a

Digitized bvGoO^^IC

and Rboadaa (foithccMiing) lookad ac both branch bank! and bank
holding co^anla* buc did not dlf f araat tats batwaan Uw two Cypa* of
oxganlcaclooa. Using a broad iai^la of U7 SMSA aldMtl, thay fouad
that th« frequmcy of nilci-iuifcat link* had a acatlitlcally
•IXntftcant lifMct on coopatlcloa Id local avrkata. Conalataot
with Um llnkad oligopoly chaory thalr rasulta auggaat that
the gcaator t> the ni^ier of BBTket lloka, the Icaa co^Mtltlva
bahavlor aaaa* to bo. Haraovar, tha laqiact la graatsr whanaver
tha fliaa ara ralatlvaly aore iaportaac la tha othar aaifcata In which
they operate. Ilia aecoad atudy b; Uhltehead (1977b) uiing • aathodolofj
Uaotlcal to liiat of Haggeatad aad Hhoadci Eocusaa dliactly on tha rol*
of bank holding compaiilaa in teating tha linked oligopoly hypothaata.
UhiCebead exeuined 47 banking urkeCa in Florida in 1974, Since
that atate had unit banking, but peraltted nilctbank holding
conpaniea, the holding conpanlea served aa the organlaatloaal fora
which linked the narkats together. Hla results suggeat that Miltl-
■arkat links through multibank holding companies tend to increasa
rather than decrease co^ieCIcion in Florida banking markets. Thus,
contrary to Rhoades and Hcggeatad, Hhlcchead fella to find aupport
for the linked oligopoly hypothesis. Hia results iaiply that
bank holding company market links nay have different behavioral
Implications iron branch bank market links. However, due to the
fact that the study ues limited to one state and covered a limited

D„ii„.db,Go(5glc

tta* r«rtod daring irtilch bnk holding eoopnlaa were ncpudlns verr
rapidly. It is not elaar how generalliibla thli infacanea nay be.—'

Hi* panclty of ai^irlcal «ork preeludas draalng aora SNBial
Gonclnaloni about (I> Bftatbar biskloB la "undoly" eoneoitracsd,
(2) flliaeliar Cho bank holding eoaipatqt novamBiC baa reaulted In an
-nndiM'' eoQcenCratlon of financial reaoalcaa 0* (3) tba poiaibia
effaeta aiOiar atght kara on the ecoiuMqr. that la Maaurable,
boMvar, la the extent M which then haa been a trttid toward
eoocencratton of raaourcea and the rote that bank holding cn^anlea
.moj hare played In that trend.

Trend a In Benklng Concentration
mticnel Level

Since tba Creat Depreaalon there appaara to have been a
alow but ateady decline In the aggregate concentration of banking
ruoureea at tha national level. Data In Table 1, for axanple.
Indicate that the ahare of dcmtatlc depoaita of the 100 largeat
U.B. banking organltatlona declined troai 56.7 percent in 1934
<59.* percent In 1M0> to 45.0 percent in Did-1977. Slxllacly,
tlie ahar4 of the 10 largeat declined from 23.7 percent to 18.3
percent In thla aane period.^/ Only Talley (1974) hea esflninod tha

1/ A third study by Graddy fl97B) employed the 5 firm concenCraClon
Fatlo as a ncosutc of market links, and found support for the
linked ollEOpoly hypothesis. Howevi^r, the measuri- of market links
does roc enable as direct a test of the liypnthasis aa the Beaeuica
uaed by Hcegestad ond Rhoadcs or Whitehead.
2/ The top JS'a Bhore dropped froa 31.9 percent In 1968 to 28.0

Digitized bvGoO^^IC^

rola that mlel-b*nk boUIng coivaiiiu hava plajad Is this tnnd.
Tallay tjtiiIh-^ tha parlod batwaan 1968 and 1973 and atte^tad ta
dacanaliia dia lapact that Bultlbaiik holdlos ca^ray acquUlttooa
had on tha daellna of eha 100 laxsaac organltatloa'a Aata of die
naclcra'a doMitic dapoaUa trtm A9.17 pazcant 1a 1969 to 47.0
pareant In 1973. Hi adjoatad tba 1973 ahar* of tha 100 latgaac
ortanlMtloDC for bade holding ca^maj aaqutatctoaa ovar tba parlod.
Talley concluded that 1973 natlowida eoncantratlon was 2.3
parcancaga polnu'abova tba laval it would bava baas had bank
. holdiog coapai^ acqulBltioai not bem panalttad. It HunlA ba .
noted that thU flguia probably oroxatacaa ilta effact of BBC
acquiaitlona on concentcitlon for tha parlod .alnca It la likely tbat
BHCa vould hava ai^nidad Internally and by do no*o ecquialtlona ts
WU9 Instance! had they not baan pemlttad to expand by acquialtion
of axlating flni.

Hhlle there nay not heva been a trend toward inciaaaed
concentration In baidcing anong a few large flnia. It la a fact»aa
noted by Senator FroKnire In Introducing the Coopotltion In Banhtog
Act of 1977, S. 72— that an Incrcadng portion of tha natlon'a banking
reioureea have cose under benk holding eoa^ny control.— However, rac<
expansion of bnnk holding conpanlea' ehsre of bank deposit! ha* been
due principally to conversion of existing banka to the holding
company fom snd not to acquisitions by ■ulcibank holding cCBpanles.

1/ C.R.--S. 272-3, January 10, 1977, 95th Congress, lat. Session.

Digitized bvGoO^^IC

FKlMT (1969), for ouMpla. iliaMd thac dia ihan of eaatrelml hmak
da^oilea hold by ailElbank holding coqiaiilaa incroasad fnn 7,5
parcait In 1956 to 13. B pmxoat In 1968.- Mora racaot data
Indtcaca that tlita paTcantagc InerBaaed a eoupla of parcantaga
polDCa bafora dioppli^ back to 34. Z paicent la 1976.- All ragtatarad
bai* holding co^antaa loeludlng bocb one iMnk aad mldbaalt
co^anlea, ahara of dogmatic dapoalta Incraaaed fron about 16 parcanc
In 1970 Co 70.S parcant In Bitd-1977, but approilnataly nra-t^Irda
of dita Inciaaao raautcad Ixoa tb« azpaDalon of tha covaraga of tha
Bank Holding Conpai^ Act in 1971 to tnclud* Bora Chan 1,100 ooa bank
holding coDpanlaa.-' Equally I^ortant, all but about 8 paTcant of .
diaaa depoilta ara la tha laad banka of holding co^Mnloi.

It appear* that thare haa been a long and gradual decline In
aggragate concantraClon In banking, deaptto the Ineraaa* In baift
reiourcei coning under bank holding cooqiany control. The avldance
auggaata that tha principal Impact of the bank holding company on
aggregate concentration has been to Doderate riiat alght othaivlie
bacn a (lightly greater decline Id concentration. It should b«
eiQihAslied, however, that aggregate conceotrntlon changes very

17 Bociai <1975) updated this aerlee showing a grouth to 3^.2 per-
cent by 1973.

J/ Federal Reserve Board. Annual Statistical DtgCBt. 1972-1976.
3/ Rhoades (1974) indicates thot the cojAioed share of both one
bank and nultlbank holding coapanles was 62,6 percent In 1970 and
68.1 percent In 1974.

Digitized bvGoO^^IC

■lowly nd Oa tank holding coapnqr wovmrnA In Ita pruant ton U
a Talaclvaly raeant pbaBoaanaa.
8Mt«ifU> 1ct«1

Th« SBMra of cha diansaa 1b stacaHlda banking coDcratrattoB
ovar tiaa t* mra cenplax than at tha national laval. Aa t«
Indlcatad In Tabla 1, tha Chtaa fin ratio daellnad ovar tbm lMO-76
parlod to avaraga of 1.4 parcaDtag* poiata ahlla tba ftva
tin tatto Isciraaaad .9 parcantaga polnCa. Both tattoa daellnad
ovar Uia flrat tan jMn and than Incnaacd allghtlj bat<M«« 1970-
1976. Iba graataat dacllnaa, howavar, occnTrad In tba loaat
coDcantratad and aoit concantratad atatai. For axa^la ovar tha
1960-76 period tha Ouea and five fin ratloa daclinad in 77 paccMit
of tha 13 Boat concantcatad icataa nid In 95 peccant of tha 20

:ratad atate*. In cootrait, tha tbraa flm concantratioa
laed In 50 peccant of the IS nodemtaly concentrated '^
•tatea and tha five ftia ratios incralaad in 72 percent of tbt*
aUtaa. Overall, it la hard to conclude that concentration haa had
an unfavorable trend at tha itatcwlde level over the 1960-76 period
particularly in these ataces chat vare anong Che un>t highly concentratad.
At the lame Cine, the upwiird Cond since 19T0 algnala a possible
reversal in a trend and repcesentn a ilcuaclon that Is of concern.

A« was the case with nationwide concentration, lallay'a atodr
<197iV) is tin only one specifically emmlnlng Che inpacts of BHCa on
trends in staCcitlde concentration. Using Che same procedures outlined

laaac concent
ratloa Incrai

Digitized bvGoO^^IC

prsvtooaly, h« adjuated Die changa In the five ttni cancentratlon
ratloa b«tw*CD 19&8 and 1973 tor acquUltlon* by aultlbaiik holding
ccB^niea, Aa •hown In Table 3, hia reaulta Indlcaced Que BHC
acqulalEima had a Talativaly aoall effect on conccntratliia la atatei
petplttlng atatevlda branching and «l«'at no lapact In hl^ly concentrated
•tacecr Incrcaaaa In concentration due to BHC acqulaltlon* vara
limited to low and aodarately concentrated atatea. Overall, Id all
bat S of Oieme latter state*, Uie effect of ERCs on incraaiad
concentration waa' Halted to 5 percentage polnta or leas; none waa
greaCar tliaa 15 percentage polnta.

Stailar reaulta were obtained bj Light (1975) t«io atudlad
the effecta of back holding cos^ay expansion on concantratlan over a

longer period (1957-1974) but in only three acatea'-Iowa, Michigan, and

2/
WlaconalD,- By 1973 all of the largeat banking organisation* ware

bank holding eon^anlea, but the abarea of the five largeat flrma were

reasonably stable over the period, see Table A. Therefore, Light

concluded thet BRCa had little effect on atatowide concentration

in those three Btatei. Hare (1974) examined the l^act of holding

csD^any activity In Ohio beCueen 1969 and 1974 and concluded that

bank holding compaaieB resulted In some Increase In atatewlde

concentration. Ihe three firm ratio Increased from 2i to 24 percent

T7 ConaistoRt findings for Just Mlsaciuri end Tennessee ere presented
by Dwyer snd Kfblack (1974),

3/ The BHC l3HS uerc dlffarenc In the three states. UUconain
pemlttcd BHCe since the )920s, BHO were not pernitted in Htchigan
until 1971, and DHC laus were liberalized In 19/2. During this period,
louu uaa a unit bunking eCBte, (Ilchl~an had llmli-pd brandling, and
Wisconsin chan^pd from unit banking to United branching 1968,

Digitized bvGoO^^IC

and tlM 10 fin rmtlo rosa fitm 44.1 to 52. S parent. -

Shull (1972) found Chat atatnrUe concentrnttsa In Hav York
and -Vlrstnla Incccased between Bld-1961 and Bld-1969 aftar Oiaaa
•tacea llbacallied tibetr pollcla* toimrd ezpaoalon.- Hsat of dia

raaulttng ai^analon la tha geographic opaMttoas of tha acataa'
larger banker organlEatlona cook place hy way of batdc holding eo^ai^
aequtattlona. Over tha period, the 3 and 10 ftra concentmtloQ
ratios la Haw York locrcaind 2.4 Co 5.1 percentage polnca raapactlvely.
In Virginia, the Incraaaaa vara aora atrlklitg with Uia 3 fllv ratio
rLalng by 14.2 pcreentase polnta and tha 10 fliv ratio tncteaaeil
26.1 percentage poinca.

Aa waa the caae at the national level, an locreaalng ptoporcton
of most atates' banking ceiourcea haa been held by atflllatea o£ baidc
holding coivaalea aloca 1957, tea Table 5^' Recently, howairar, Moat.of
thla Increaae was due to converilon of axtatlng organlietlooa to
the holding company tarm and not. In noat Inatancea, due to acqulaltiona.

change In coitcentrat:

2/ In 1960 Kew York lifted a maratortuGi on bank holding coopaay
expansion that haJ been In effect ■tnce 1957. Hev York Banking lau.
Act, 3, Sec. 105 (Supp. HcKlnney's 1970).

Virginia permitted stotevlde branching by merger In 1962 and atat*
law neeuied to encourage BHC expansion. Virginia, Code Anaotcted
S6.1-39 (1966),

3/ Tabic 5 updates Fischer <1969). Kellcy (1972) showed that In Taxaa
in 1971, all BUCa held 41S of the State's deposits.

Digitized bvGoO^^IC

Baoca, It la qukaclooabla trtiattwr thlm ttand waa •conoalcally
attolflcanC vICb raapace to taaua* rdacad to concantratton.
local Layala

A CGaptah«naI«a atudy of traoda Id local Bazkat c
tion and atructura waa that by Tallay (1977). He Dcamltud
4W local araaa Incliidlns 213 SKSAa aod 233 countlaa (i.«. Oiaaa not tn
SHSAa but with 1970 population la axcaaa of 50.000) ovec tha parlod
1966-1975, tba atody racogaliad tha prcaanca of BUG* and focuaad
oa tadapaadant baiifclng organizations — atchar banks or
bank holding coopanlaa ratbar than Juat banka — oparatlng la cha. araaa,
. but It nada no Bttcai|iC to laolata die changaa In atructuce due to
BHCa. Dia naulta auggtst that the najorlty of theaa SHSAa and
countlaa Eanded to become leaa concentiareil and to e^lblC
a nore co^etlttve atructura baaad upon an analysla of
(1) changes in the nuvbet of arganlEatlona, (2} change* In the direl^
flEB concaotratlon latlo, and (3) changes In the Herflndahl Index.
For axa^la. In the STSAa, tha nuiAieT of independent competitora
Increaaad tn 153 SHSAaideellned in 31 and renalned unchanged In 29. Iha
ttarea-flm concaaCTBtlon ratio declined In 184 SKSAi by an average of
6.5 percent polnti, from 7^.8 to ^9.3 percent, end the Herflndahl indeic
fell in 183 SMSAi. In the counties examined, the nuabcr of firms
increaaad in 123, declined in 41 and remained conatanc in 69. Horeover,
three fim concentration also fell in 163 of cha counties by
an average of 2.8 percontage points from 81.2 to 78,4 percent.
Finally, the Herflndahl doclloed In 178 counties. Equally

Digitized bvGoO^^IC

tlulMt. A* sraaccBC dagraa of prcoapatltiT* duagaa occorrad le
tW «aik*H chat «■» B«oarall7 watt eoncoiCEatad In 19U md,
«twll*rly. In thoic ■£>(«■ oldi unit and branch banking. BoMrvnr,
It !■ not koom whatiMr BHCa wars raapooalbla for tbaaa cranda or
••rvad at a ■oderatlng force.

Light (1975) In hla itndy of cDaeantraUoD In loM.
Mtehltao and Htacnuln cmcliidwl that bank holdlns cMvaor ^^naloa
had Itttla iltnlftcant Inpaet «a of 1974 oa local dlatrlct coocaotiv-
tton. Kara (1975) Indlcatea that dia tliraa fli* concantratioa ratio*
dacllioed In 8 of 12 Ohio SMSAa batwaK 1969 and 1974 a^ In 7 of IB
non-SMSA countlai. Tha HetftDdahl index doclined in 9 of the SIGA*
and In 9 of th« coiintloa. Be coocludad that bank faoldins coapany
activity had little effect on local aarket concentration. Finally,
Shull (1972) obaerved tbat Hie Virginia and Hck Toik enpacUnc*
indicated that mlti-offlca banking had a nixed but probably favorable
Impact In local nmketa over the period studlea. He noted that <1) cha
nuBbar of larger organliat lona operating In local Barketa lacreaaed
and asall organlEBttons deereaaed with no overall ayataaaatle change
In the iiunibcir of tnstlCuttone in local areaa, (2) concentration declined
in Bore loca] markets in Hev York than it increased but the opposite
was true for Virginia, (3) entry by larger, outalda fims had a
daconccntratlr^ effect, and (4) there uas no apprectobla decline In the
pool of potential entrants.
Trrndii in Kon-BonHnn Concentration

Section 4Ce){8) tlic 1970 amendironta to the 1956 Bank itolding
Ccnjinry Act restrict Che norJiank acClvItlCB Co Ihase Cliat the

Digitized bvGoO^^IC

or —mglnl or eontrolltng baidi* >■ to be • proper ioctdaac tharato,"—
Tha Fadaral Raacrve Board hii approvad 17 nonbanktng acttvlCIa* aa
batng pcmlailbla for bank holdlos conpanlaa — 12 by rulaaaklns aad 5
by ordar (Saa Tabla 6),— Excapt for imdarwrlclns of cradle life
liuuranca Bad oparaclog aa Induacrlal bank, all of Che approved
actlvltlaa vera eaaanclally petataalble for netlonal baoka, vhlle
those deoted, aKcludlng raal aatata brokarag* and travel agenclea,
vara not pamlaalbla for national banka.— the affect of the
proTlalon In Section ACc)<B) baa been to nalntala tha aaparaclon
batvaan banking and ccameTCe and to nirrow Che poaslblllclea for bank
holding coiqiany expansion that night lead Co concentre Clone of
financial reeources acrosi a broad range of acclvltlea.

To dete there Is little evidence to suggest that 4(c)(S) '
actlTiClM hove rasulced In a algnlflcant expanslcn of bank holding
coBpany reaources, Honbanklng asaets of BHCs still aoounc Co leas

r ABsocIatton v, The Board of Gevemors of the Pe
, August A, 1975, Itic U.S. Court of Appeals for tha Dlscr
'i Bui^ellnea for determining whether an activity la
aanklng." To qualify an activity mst (I) have b«a
erelly provided by banks, (2) be functionally or operationally slmll
banking services, or (3) be integrally related to bank services so ■
require thslr provision In ■ specialized fami.
2/ An additions! 11 have been denied.

3/ FurthetDoro, in many eases, the scope of the activities peroilcted
was neverely limited Co those Chat wsre bank or finance related,
and In soms instances, the services could only be provided to
euaConers in connection with a bank related service.

D„ii„.db,Go(5glc

Um $55 bllltoa and Mcouot far tesa Ehn 4 pnvant at bank boUiag
co^Mny ■■••£>. Koraovar, mra antiy In tha nanbaitlng azaa, at laaat
In taraa of nudwr, haa been da nom Chan by acquisition,
Or^t 3,100 JaTiOTO nonbank notlflcaCloin irara reeairad b«tiM«a JaoMry
197I~aDd Dace^ar 17, 1977 irtieraaa 670 appllcactana for propoaad
acquisitions of eKiatlng flEBi itaTa lacalvad In thla parlod and 497 ««ra
approvad,— HoaC of dia noabai*lnB acqulaltlon activltr baa baas In
■iTtgaga banking (83), coaaiaar finanea (123), and tnaaraaca •soDclas.
Of chaaa wattgav' banking and flnnice ca^ianlaa together tficb laaalng
and factprlng—all cTcdlt ralatad lararaga cypa activlttaa— ba*a
accounted for Che bulk of BHC acqultcd aaaata.

Alchougli bank holding co^iany ezpapilon In Eha nonbanklttt
area appcata aaderata in teiai of Che additional raaoutcaa brought
under bank holding caaqwny cootrol, the pontblllty reawlna that bank
holding coofianT acqulsltlona vithin ipeclfle rjmbanklng activltioa^y
have resulted In Increased concentration In those industrlea end/or
•Ignlflcanc dontnation of exlatlng firma bjr bonk holding ccavaalaa in
ll«u of do novo entry. The renalnder of thla section looks at tha
r principle leveraged ac Ciw It les— mortgage banking, finance
panics, IrSBlng and factoring— to dctennlne «hse Impact BBC
activity nay have had on concentration In these Induatrlea.

and the resulnder were either

Digitized bvGoO^^IC

MoctMga Banting

Tha oorCsaxe banking Induatiy cmialata of ■ore than 800
ftnaa irtilch are ensaged pElnclpally (1) In oTlglnatlng emutraeclon loaiu,
•artgagaa aecared by 1-4 faslly rsaldenclal propacclea and lo*u aecurad
by Incoaa producing propacty and (2) in larvlclng BarcgaBea for Chair own
aceonnc and for othexa. Kuiy of thaaa flma Bra afftllatad vlch other
eorporatlona IncludlDg boCh baoka aad bank holding ccnqMlniaa,— In
1973 (or axaa^la, 39 of Eha largest 100 Bortgage aetvleea were
affiliated witli cowrclal banki or bank holding coe^nlaa. Hlnatean
■Boog the top 100 were aubaldlarlaa of other dlverae coapanlei Including
nnlnaoarlcB, ttatlonal HoiBca, General American Oil, Weyerhaeuier, Bowery
Savlnga Bank, TranBaaertca , IDS, taerlcan General Iniurance, and D.S.
Steel.

Scboclsnd (1976) reports that' bank and bank holding campany
share of the nBTtgaga banking business was 45.9 percent In 1975, up
from 37.9 percent In 1971. Holland (1975} IndicoCes that In 1974,
bank holding cooqxnlea and nonbank subsldlartea accounted for 32 parceac
of the volume of industry receivables In the top 100 aortgage banking
firms. No data are readily available which permit eatimates of uhat
proportion of the Industry CoCala are accounted for by bank holding

D„ii„.db,Go(5glc

718

Bctwaan 1971 and 1976, ovoarship *boii( clia top 100 BOTtDit*
■•Tvlcen did not cUng* ■Ignlfluncly; acquisitions of Mxtisga buklai
tlT^ VKTB sppEoTtd by th« Federal Keaaxva Board, bat aany of Onmm
did not Inrolvt ftnw In dia top 100. Br tha «nd of 1976, 41 of tha
top loo urcgaga servicers ware affllletsd vlch banktog BTganlsatlana;
1* as eubsldlorlea of banks and 31 as afflllataa of bank holdlag ea^ aulas;
21 achars ware otmed fay othar corporstlons. Of tha Coy 10, tm mra
subsidiaries of banks and 4 (Including Advsnca Hortgaga <Aoaa
ratantloa application by Citicorp was denied by tha Basrd) wsora buk
holding cos^sny subsldlarle*. Table 8 Indicates that aaong the top
50, 11 are sabsldlartas of banks md 11 ate subaldlarlei of bank
holding coiiq>snles (of these 3 are Indefinitely grandfathered, 5 nead '
Board sppraval for retention right* before 19B0 and 1 Is held under
Section 4{cK5).) Although BHCs have had approval to acquire a<na
rather large nortgnge banking firms, thrae SHCa have not ranked
■Bong the top 20 U.S. banking organ! aat Ions, the only Inatancs where
a top 20 BHC was granted approval to acquire s nortgage banking
coifiBny Bptong the 20 largest mortgoge banking was Sec-irlty Pacific's
acquisition of Kosslcr >fnrt'EBge.~

nild not maintain It*

Bul'lectn. pagn 368), The Board denied nn oppl :< TZ-cet

Hanover to acquire Cltlion Mortgage (1973 Feiki ■ in,

pngc 532) and cppl lent Ions to acquire relatively modeat at»e £lras
by fi cr.bxir^h Hntlonal and nitladelphla National vho already held
slEi-ablc mortgaEc batJting flnna.

Digitized bvGoO^^IC

OMT'lli IC wmld appaar that baoka «ad bank holding ea^ianlaB
ba«a coaa to plaj an I^orcant role In tha mDrcgaga banking Industry,
•Idiar dlt«etl7 thccugh ^u operattims oC banka and Chair aubsldlariaa
at tbroogh bank Iwldlng coopany lubaUtaflai. Ecmaver, tba Induitry la
not donlnated by dia natton'a twanty largaat banki nod/or bank
holding co^^aal**.

Ftoanea C«npanlaa=-
Tb« •tructura of the consuaar flnaoea Induatry haa changed
-mpldly alnca 1960. Iha nu^er of flnna haa declined fron about 3,800
to 1,900 over the period, due In large part to failures and BergerB.
In addition, depoaltory financial Inatltutlona hava aicpandad Into the
cooaimar credit field providing Increaaed cciq>atitlon to finance conpanlei.
Tbla lacreaaad coqwtltlon, coAIned with conaolldstlon In the Industry,
haa led to a decline In finance caqMnles' share of consumar Instalment
credit frcB 49.7 percent In 1965 to 30. A percent aa of HovenbcT 1977.^'
In addition, •■ la ahovn In Tsble 7, bank holding companies have eicpandad
Into the Industry both by significant da novo entry and by

..,ui,..<.,.2'

1/ Much of the dlacuBslon In this section Is based upon RhoadeB and
Boczar (1976).

!/ CansDerclBl banks are the largest Euppllers oC consumer Instalment credit
vlCb AS. 8 percent. Credit Unions have 17.2 percent, and retailers have
9.3 percent. Source, January. 1978 redera! Rcaerve Biilletin. A42.
3/ Tnblc 1 overatstes bank holding company acquisitions, since nany
acquired finance companies had Incorporated affiliates that operated In
separate states and each una coded as a Bepsrate acquisition when the
parent company vas acquired.

D„ii„.db,Go(5glc

In s«o*i*l, baidu •nd baidc boldlas co^anla* Im« not aeqnlxnd
ch* naclooa* largast tlnaaca co^ianles to tba •«■■ iagetu ■• thay
have «0rt^«a banking £lm.'- labia 9 ahowa tliat Boat of cha natloa'a
100 largaat fliianca cm^anlaa bava baan acqulcad by Induatrtal and oikar
typaa of holdtng coapanlai ainca 1968, Daly 3S are IndapandanC, 2 ara
afCIllatad vtth bank*, and 23 ar« affiliated vltb bank holdtns coapaalaa.
the top to only one la affiliated vtth a bank holding coe^Mny, 10 are
Indapendant, end 9 are iubaldlarlaB of other tjpai of coopanlea. Of
Ota top 50, two are bank afflllataa and only 4 ara aubildLexlaa of bank
holding coa|>anlaa.

Overall, the evidence (uggeata that lAilla there haa baan
■ tgnlltcant contraction and conaoltdaclm in the ttnance ioduatry,
badi holding coopanlee hare not been ao lefKirtant lector In that procaaa.
Holland (1975) cattiMtea that a* of 19T4. bank holding coi^niaa and
bank aubaldlariai account for eboaC 9 percent of finance conpaiqr "%
receivables, Hie bulk of bank related expanalon In the consiaMr
finance Induitry has bean through direct bank co^iatttloo,
Laaainit
. Bank holding eocnpany aubiidlfry eccivlty In leasing U
Itnlced CO full pnyout lenses, most of vhlch Is on transportation
aqulpment, computer equipment and other general equipment. Such laaaea an

e penoltced to own finance conpany

D„ii„.db,Go(5glc

' tb* functional ■qulvalent of ■ 100 percent aacured tarn loan. The
pKtnclpil ■eller* of !•■■•■ are leaalng etxspanisa, ■*!•■ financ* convanlaB,
I iwm iilnl banka. Bud tha wnutfactureiB and dlatrlbutora of •quLpaenc,

Biarc la Itttla avallabla data on the laaalog bualnes* ahowlng
tha extODt to lAlcb bank holding coofianles bav* acquired a algatflcanC
abara of tha bualnaai. Holland (1975) eatlsMtad that bank holding
ctapanlaa acconntad for laaa than 10 parcaat of loduttrf tecalvablea
In 1974. Ihua, It would not appeat that bank holding colony activity
has ceaulted la algnlfleaat concentration oc doalnanea to data,
7ac Coring

The factoring business Involves the non-rscouraa purchase
of accounts receivable. Ilta bulk of the buainaas la related to the
textile, apparel and related fields. The Industry la co^^)rlaed of
acDe 35 larger factoring flms, several smaller factora, and cosmerclal
banks. ^

Banka and bank holding companies have significantly Increased
tticli share of the factoring buslneas from about 33.8 percent In 1970 to
56.1 percent In 1975, according to Schotland (1976). Bank holding
coqianles or thett bank sublsLdlarlea controlled 17 of the top 20 factora
and 19 of the 30 largest fa 1976; st least one other. Itself a factor,
owns a bank. Most of this Increase was due to acquisition of existing
ffngs (See Table 10) by bank aubsldlarlcs of bank holding conpantes. Ihua,
uhllc bank holding companies have cone to dominate tlic factoring business,
this vss largely accooiplishcd through bank acquisition Hhleh could have
taken place within Che holding conpany orijanliat ionel fora.

D„ii„.db,Go(5glc

lavLaw of th* •vldaoe* of tta« ii^aee of baidc holdtoi coapanj
ncpaiMtoa on concaotratlaa Indtcatas thac baidi holdlot c
h«T* not BLgnif IcanEly tncroaaod ttaalr control c
financial vaaoureaa In tha aconoagr ■• a lAola. Noobanklng raa«
■till account for leaa than i peccmit of bank faoldtng mjayanj
rcaourcai and only about 8 parcont of bank holding c
dvpoalca ara outaide lead banfca,

Baidc holding eoopanlai have also not •ignltlcaDtly
Incraaaed concentration In coanarclal banking at alAac Ox* national,
Btata or local levala. nationally, concantratlon in banking hoa
dKllned Bxaduany, but ataadlly atnce 19M. it haa bHn wtlMtad
that batman 1966-1973 eanaantratla] la at mmc 2-3 p*r«anuga po&ta
abova vhat It night have been If bank holding co^ianlea had not
uitated. Similarly, at the atatewlda level, concentration h«B

•Itghtl)

locally.

average between 19S0 and 1976 {although IC Increaaad
nee 1970} or at best reiiained atable, depending i^oo
a uaed. The greatest declines, however, have been In tlie
est coiicmtraced states. Large Increeaes In
on dl^^ctly attributable Co bank holding coofiany acqutattlon
tatlced to che lou and noderately concentrated atatea.
no algnlflcent, syBtcmatic tncreaaea In concentration have
rlbutcd to bank holding eompanle*. In general, local

D„ii„.db,Go(5glc

w»Anf bavB tended to edilbic ■ore ccnpetttton ■tnicUiTM,

Within the Bore algatficeot oonbanktng Industries- -smCgaga
banklag, finance coav>Di*s> leasing, and factoring — In ufatch bank
holding Eoqwates have bean pennltced Co cx|>and, Che picture la
■ore Blxed. Bank holding cos^aniea have not doolnated the
leasing industry. Significant consolidation and structural change
have taken place among finance companies, end a nunber of the top 100
fins have been acquired by financial and nonflnanclal eoevanlee, but
beaks and bank holding cos^antss heve not played an inpoTtsnt role
in this process. Bank holding coo^snies ere important holders of
aortgega benking flras and now account for 42 of the top 100 Bortgegc
aerricerei but It does not appear that the Industry has yet becone
controlled by the nation's !0 largest benlcing firms. Factoring Is
the one industry that now is most clearly dominated by banks and
bank holding coapanies which now heve about 56. 1 percent of the factoring
business end 17 of the top twenty final, tfost of these firms have
been acquired since 196B.

Finally It Is tnCoresClng to note that thoEc Industries
which are leeaC dependent on a local presence --foe Coring and to a
lesser extent mortgage banhine — end hence are most easily entered by
holding company bonk subsidiaries regardless of their location, are
the ones that have seen the greater acquisition activity by bank holding

Digitized bvGoO^^IC

coD^ntl**, On Oi» other hand, the ftnanc* tnduatry, uhlch la wjtm
local tn natura and hanca the noat Itketr candidate tat bank holdtag
coBpany acqulalttoni to eacape geosrephlcel raatrtctloea on direct
parttclpatton b; their bank iubaldlarlaa, haa aeen relatlvdy little
acqulattloD activity by holding ca^Mnlea.

Digitized bvGoO^^IC

t)«7*r> Cacald P. Je. and (ilblock, UlllLim C. "Branchlnt, Haldlut
C«av>iilaa, sod Bdnklng ConccntraElon in th* EtghC DtiCrlct."
Monthly Bevleu. Fadaral Rasaiva Bank of St. Loula, July, 1974.

BdvardB, Corwln D. "Conglomerate Blgnesi ag a Source of Powec," tn tha
NBEK coofarence ireport, Bualneai Conci-iit ration and Price FoUcy.
FElneaCoB: Princeton University Freae, 19SS,

Ftachar, Carald C. "KariuC Extaatton by Bank Holding Co^aataa: History,
Econoolc Impllcatlona, and Current IiBue:i, " In Procaadlnw ef a
Conterence on Bank Structure «nd Competition. Fedaral Raaerve
Bank of Chicago, 1969.

daddy, Duana B, "Sarvlca Pricing, Profitability, Ki^aaaa-Preferaiica,
and Risk Behavior tn Scatawlda Banking Markati." Contarcnca
Papers Serlea #30, Bualnas* and Econostlc Raaaarch Centar, Mlddla
Temiaaaee University, Karch, 1978.

Haggastad, Arnold A. and Rhoadsa, Stephan A. ' "Multl»rkat Incarda-
ponrience and Local Market Coo^ctltlon In Banking." Rnvleir of
Eeononlcs end Stntlatlcs, (f orthccolng) .

Bolland, Robert C. "Ba.
Journal of F

(Novembev, 1975).

, Coiqietltlon, and Aggregate

and Cocopetltion. redttal Resetvt Bank of Clitcago, 1974.

, "Extending Merger Analyals Beyond the Single

Market Fram:uJTk." Board of Govenors of the Federal Reaarva
Syacen. 1976, Staff Fjonomtc StuJtea. Ho. 86.

Digitized bvGoO^^IC

laaoa, LesCer H. ■nd Slegrted, JoJin J "CorporaCe Follclcsl mCloMca
*nd American Public Policy: An ^iplrlcol Aii«ly«l»." torlean
Follttc*! Sc<enc« Rgvlw. S^C«*n 1977.

ling. Home of Reyreacattativas, MCh
CoogTeii, second aesalon. Book I, June, 1976.

Saaltg, Seavm A.' "Aungata ConcaDtrattoB and tha Bank Baldlsg
Company Havvment." tforfclng Papar in PUuaclal Econoolca. Ho.
7602. Fordhaa Dolvaralt?, Haw York, Jnly, 1976.

Sbull. Bernard. "KuUipte - Office Banking and the StTUCtora of

Banking Markets: The Nev York and Virginia ExpeilaDca." la Prcc«adtap
of a Conference on Bank Structure and Competition. Fadatal Raaarva
Rank oC Chicago, 1972.

SoloMm, EllDor Hartlt. "Hmk Karsar Policy and TtAlcam: A Ltnkat*
Theory of Oligopoly." Journal of Honey. Credit, and Banking.
August, 1970.

Taltey, Sanmal H. "The b^aec of Holding CoopBny Acqutalclooa m
Aggregata Concentration in Banking." Staff Econoalc Studies.
No. 80, Board of Govaniara at the Tederal Reaerve System, 1974.

Hhitehcad, David D. "Bonking Market Perform
the Linked Oligopoly Theory." Preaenta
Association Meetings, 1977a.

, "Holdiiig Coopany Power and Market

A NcH Tndex of Harket Cone onC rat ion." Working paper sertas.
Federal Reserve Bank of Atlanta, Dacesiber. 1977b.

Digitized bvGoO^^IC

D«.

, 31,

, 1934*

56.7

23,7

Dm,

, 31,

1940*

S9.4

26.9

Dm.

, 31,

, 195S

49.3

20.7

Dm.

. 31,

1957 3/

46.2

M

Dm.

31,

19'6I>

49.5

Il.I

Dk.

31.

1961 3/

49.4

HA

Dm.

31,

1964

48. 0

20.6

Dm.

31.

1966

49.3-

HA

Dm.

31.

19(8 3/

49.1

ID. 4

JioU 30,

1970

49.9

19.9

Juni

' 3D,

1972

46. a

19.1

^

D.C.

31,

1973 if

47.0

NA

D«.

31,
3>.

1975 2/

1976 1/

48.1
45.3

20.9 4/
18.4

June

30.

1977 3/

45.0

18.3

•Continental V.S. Only

: iri

md Ihrnosits in i
icre indie^led.

111 eoi

nnereUl

1/ FDIC
bm*., J.

une 30, 1972 except

1/

Ccp

Peterson, Hunfcrd 0,, '
cCltlon in Bmiklog Act
ler 1977, p. 38.

■Agl

'^X'" V,

,k Con.

[1 Bank

tfon and

the

1'

Cill

Report det«, Bo«rd ol

f Covertiori

of the F«dcr.I Rex

■rve.

!•! :

June

3D,

SuBsary of .'.ccount
1975.

BMlloble.

:» 1

ind Deposit

■ '" '

111 en

inerclal

bank!

D„ii„.db,Go(5glc

.1 4

it

-S3

'I

::;:■::: ;:-;:s:-:;'j

sisiiiiiiisis
iiiiiisisiiii
iisiisiiiiisi

ISSCSSSXS.K

: ,i:;=i,i-.ii

I iniuiiijiil r iiiilhi I

-■"'-■'•■"37'
ssssSsss

S553SRS3

-".-.-.'-.t^S

3S333a33

Digitized bvGoO^^IC

A 4

n h

m ;

J- s.=

is I ■

11 1

2«<; I---;

RS33a433SS RS5S

siiii

n „.

3

dlisf ll.lll

llllljjsl 3 HIsllislllsl

Hi

Digitized bvGoO^^IC

,-SJ

i

m.

11

730

asKSSS3 3

ill

m

m

Digitized bvGoO^^IC

a"
1-8

2S33

ajHssas

D„ii„.db,Go(5glc

1 '^S ss
I 5§

I 5"

. = ?

5

3?a

3

-- rj „

S^S.

3 -3 gj;-s s

P

g

si S>.od3S e„?S3S'' SSoJ; 3

S«3

«

' «SS 2j< ind^njiii^ " oiac^

■" " B

r=si5S3i:4-5S!sssigsi?

ill

^

g

,'!:i-;?«sssss2«sss«s;ssjss

ii«

D„ii„.db,Go(5glc

733
Table 4

5 Flxm Concentration Ratios
(percent)

1957

1961

1968

1974

lOVM

20.8

19.2

17.4

19.8

Htchlgaii

52.9

50.0

48.4

47.6

Wisconsin

31.5

33.3

31.9

33.4

Source: Light (1975)

D„ii„.db,Go(5glc

Tlbl* 5

tank noldlng Coo^an^r Cioupi' Deposit! aa a Parcantaga of All

Coomrclal Bank Dapoilta for Saleecad Tears 1957-1976

t«« in Vhlch t^n-Ttt^ft at Staf 'a

Alaba^
Ataaka

""

Ariuma

3B.

Arkanaa*

California

T.

Colorado

6.

ComwcticuC

DlaErtct of Colinbla

FlQlIda

11.

C«irgU

».

RaiMll

Idaho

W*<

llllnoU

0.

lodlana

1.

tova

7.

Kanaaa

9.

Xaatuakj

7.

Loulalaria

Kalna

5.

Haaaachuaeto

20.

Michigan

HlDnoota

6.

HIaalialppi

KlaaouTl

B.

Kontana

53.i

Hebraaka

10.

Nevada -

74.

Hew Hanqishlrc

9.

New Jersey

Nev Mexico

13.

Noif York

s.i

North Carolina

North Dakota

37,5

Ohio

6.

Oklahoma

Oregon

44.

1967

1970

1971

1976

..

2£.«

60.3

9.S

10.9

33. »

32,9

54.4

53.6

8,0

19.2

20.2

9*1

9.7

75.9

92,5

2Z.8

31,2

71.3

78,3

3.S

98.5

71.7

19.2

23.t

10.4

11.4

25.8

49,0

34.2.

48,6

61.8

77.6

34,5

33.0

53.0

49,0
69.9

42.4

40.6

41.3

53,4

1.2

0.2

50.9

35.5

1.0

29.4

32.4

9.0

10,8

38.3

45.B

27,4

40.4

10.4

9,4

10,7

24.8

29.9

32.3

20.0

45,9

53.1

72,7

2.9

7.5

27.5

72,0

21.3

22.3

70.9

87,9

1.1

8,7

69,5^

58.7

59.7

69.7

68.8

25.3

27,6

4.0

27.7

57.8

89, «

53.3

52.4

69.1

68.1

10.2

9.1

47.3

59.9

59.3

62.5

69.7

64.8

16. S

13.1

27.2

34.5

16.8

36.1

55.6

13.5

19.4

67,3

55,8

19.6

23.9

89.4

86,4

2.3

66.0

69.4

38.4

39.7 .

44,8

44.3

12.3

20.9

37.8

64.4

P. 7

41.1

52.0

42.4

42.2

82.8

79.2

D„ii„.db,Go(5glc

Table 5
It Botdtng Co^any Groups' Dapaatt* aa « ftrcmtas* of All
COHarclal Bank Dcpoatu far Salactad Tear* 1957-1976

SuMa Id Uhlcli

?aTcantaR<

: of Scaca'i Dapo*

ilEa

CKH^a Opera t a

wsT

1962^

1967

1970

-n97r

T976

Pouurlvnla

..

..

„

.,,

40.3

51.5

Ihoda laland

95.1

96.3

South Carolina

25.1

51.2

South DakoU

31.9

34.0

33. J

43.2

5S.2

64.2

3.5

3.3

3.4

e.3

36.3

54.5

l*Jtaa

3.0

i.t

5.J

7,1

44.8

5S.9

Dtah

5J,7

52.0

48.0

45.7

73.8

81.8

VeiBODt

S.5

25.9

VlTglnU

1.6

9.6

37.0

43.8

«2.9

78.0

WBBhlnsCoci

13.6

13.0

IS.B

IB. 6

44.0

68.8

Weit Virginia

4.6

6.2

Hlaconils

10.9

34.6

35.2

43.4

49.5

49.7

HToalng

IJ.l

17.4

16.4

21.7

45.4

60.0

Wotaa and Sour

Source £or 1957, 1962, and 1967 data Fader

a Bulletin. October

1958; July 1963[ and Auguac 1968 quoted in FLichar, 1969, pp. 66-67.
e Federal Reierve Syate

Source for 1971 and 1976 data Board of Govaniora of the Federal Beaarva
Syatea, Annual Statiatleal PUeat 1971-75 and 1972-1976 p. 267 and p. 311,
respectively.

Rote: Holding companJLea comprlae the fallowing: Those rcglatered
pursuant to the Bank Holding Con^any Act of 1956, am] v1io»e so defined
In the Bank Holding Coopany Act of 1956 bb aoendad (except that In 1970
the figures do not Include canpsnica as a result of the "Bank Holding
Conpany Act Anendnencs of 1!»70" approved Drcember 31, 1970), The
date for deposits arc for those banks of uhlch the bank holding coifiBnlea
ouned or coaCrolled 25 percent or oare of the outstanding stock.

D„ii„.db,Go(5glc

FenBlCtad by cegulaclon

1. ExCBiitoai of crsdlc

a. Mortgage banking

b. Finance companies:

c. Crwiit cards

A. Factoring

Industrial bank

InvEscment or financial advlslog
Full-payout leasing of psraonal and raal property
InvestBents In eoaaunlE? valfara projects
Providing bookka oping or data process lag lervlcas
Acting as insurance agent or broke r^-prlmaTlly tn

credit tKtenslora
Undervrtcing credit life, accident, and health
Providing oourlet aarvlcai
Hanagemont consulting for unaffiliatad baaka

Perattted by order

1 general purpose variable de^ionlnated

5. Itnderwrltlng certain federal, state and tunlclpal s
Acclvltlea denied by the Board

6. General managanen consulting

7. Property management

$. Computer output microflln. sei-vic
9. iJndcrvrlclng mortpago juaranLy i

0. Operating a siviucs onJ Uan sbb

1, Operating a travel ogtney

Klati^n**

•Board orrtera found thesp sctlvlclci
di-nied pripur.cd acquisitions as pBrt

closely relat.-d to bsuVlng b
of its "go-Slou" policy.

Operatliia a tlirlft institutions, Rt

odo Island and Sou KoBpahlre

D„ii„.db,Go(5glc

Ill ,.= ..

1 1

n

sit
i

»3

,1

!S

13 ll?1

lit!

!

ill

il:

ill
III

"El

D„ii„.db,Go(5glc

S£3

|i . ' U%. 1". ^S J

-? - !l=;f-:l SlJi^H-i

<:!s]

13=33

D„ii„.db,Go(5glc

. L

Hi*
1 1 111

I iMl,

llj

1

!i!i!!i njiiiNijiiiiiiii i i

lijil lililiilM HflHji Ili

i i!l ill i e(i i E !> Hiis; = ilil :: iijfl!!! Ms

D„ii„.db,Go(5glc

,A .!...==>=

j jli M |H Ml M hi .,
iSif H Iffflll li'if il

Digitized bvGoO^^IC

d racter* AeqalrWI bj Inklac

■pArlscn of Factoring V«li^ i

of Aci|ul*tcl<m va. 1973

*HllUttmi Amnti

iDdoiciUl Nat. Bk.

tht ton 30

PKiorlM

oluf.

yMr .cijulrtd

T^

i.Jn

J.Sl

.78

l.U

.36

1.B4

.M

.73

.6i

*.»

.13

.Si

.V,

.S5

07

3.01

s '

«

.31

49

3.M

01

D„ii„.db,Go(5glc_

vaalanca utd Nacd* and Public B*n*tl£i
1b the B«ft BoUtns Ca^aaj Act
Anchoay Cr.iuk

I, IntroJuctlan:

iaoag tha provtalani of tha Baidc HaUtnt Co^ur ^^ "^ l-'K
«■■ (wa to Sactton 3(c) lAtdi raquicad tha FOdanl Rwarva Board to cooaU
f tv* factor* ttitla acting oa aoy bank holding eoBpaor prDpoaal. BiHa
taetoTi mia elaaily atatad a* panot tba Aeci

(1) tha financial hiitor

ind coDdltlen of tha c
concarnad; <Z} their
nanasancDt; (4} tha c
if tha eORiEinltlea and tha ai

of th(

vtch a

on WTuld be to expand tilt titt uc extan
ovpany ayaCaav Involved beyond llnlta c
Bad aound banking, tha public Intotaac,

'f conpetlclcn In the field ol banking.

Ihe (oeuj of thla paper la the f.
Althouih the 1956 Act Mtely required that

vlth r

ipect

th of thise five (a
ept " "public l*ne
c Board "consider"
n 1966 m^t 1970 ere

lad;

Ion of the pjbllc intorcat. Part twa of thil «tud> vlll
clo^mnc of Ihe convenlenco and neois standards of tlie Baok Uolding
Art of 1956 ana subsequent aundr^iics to IhlE provlalon. Part three
pfixjer conprlscs a review of those studies that liave atteatpLcd to
Lhc iiDpact of tha public Interest vcqulreacnti since the psisagc

D„ii„.db,Go(5glc

of tbt Act.- Hm fooui of till* iKvUn will bo to vumUm throo tOHnl tjpM
of avlilc*! otudlM: ftrat, tbou tlut hno •ualnod *DJ utasorUod
piOillc latonat coaotdoratlco* 1b ■pacific uiMi In ordtc to datatalBO
iihot wol^e Uw Board haa placwJ on thua faeloia Isdlvldualtr <|nHp i);
Hccnd, thoae atudlaa iiUdi daal primarllj with paat-scquLsitlon pacfoiBaBca
of (ubaldlarloa but that ■!• calavaat to public Intcroat conaldaTaCioa*
(group B); tiiiallr> • alocta atudy chat atca^ta to coapara, ia indivldiMl
appllcatlooa. pie-aci]ul>itliHi lutantlona aod poat-acqulaltlOD laplMNntaCtoo
of public iDtataat conaldeiatloiu (group C).

t Standatda

Tha 19S£ Ace roquliad that Oia BaaEd,.lii acting OD aaeh holding

coopar^ propoaat, conaldar the "eonvenionca , naad*, aad velfcTO of tha

cosBinltia* and the ana conceincd." Altbou^ preacnt lo tha Act, tha

pnvlalon a^iodled do apselflc laqulreHnti aa to tha might that miA

ba given "eoavanlanca and need*." la light of thia, tha Fedatal Kaaem.

Board adopted ■ policy of veiling this factor on a caaa-bycasa baaU.

A clear ttatemnt of the Board'a position with respect to convanlaoe*

and needs factora sppeara in a 196Z stataaat by Govscoar J.L. Kobsrtsan:

...these factora do not eonttltata a standard to govern the
Board's acttona, tha only requlr
b« given [he factors naned; the '
is coaplately vithio the Board**

D„ii„.db,Go(5glc

aBl7 'atindiTd' undsr cha Act; Cha ennamtsd faeWH ara
Mitcar* Oiit HUt ba cauUsrcd bafora the dcclalon la aid*,
but A* avtileDca undaE aadi 1< to ba |lv«i audi val|ht —
■itchi llttla, or moa — a* tba Koard raiarda aa varraMad. [L]

Itiua, tba 1356 Act provided tha Soacd with Ilctla, If (or,

■utdanca In tba ■altet of Judglos the iaportanca af eounnlanca and naada

facWn. Miila chla lack of apaclftcltjr accoidad tha Board vlda dlacTMLoa

In tha •▼■luMlon of eeimnleiica and neada. It alio prorad troublaaoaa.

For aiEaiipIa, la t9SB', aa part of Ita taqutraaaat undar tha 1956 let, tha

Board aubolttad ■ laport to Congnas In tdilch tha Board cltad tha dlfflcultj

of evaluating coavaolanea and naada. Of particular concara to the Board

vaa tha queatlon of "balancing" convenience ead.Deeila factora agalnae

cxpacled anticoBpetltlve effacCa ^at sd^t reault fioa an application. [1]

Tha Board*! raport to ConBteaa oade clear the need for a "oora preciaa

atataaant of the putpotea of the atatuta" vlth raapeet to the eonvanla^s

and needa provltloo.

1966 AiiendiMnca '

To aon extent, the ahoitcoutng of the 1956 Act In providing a
balancing test betiwen anticompetitive cffecta and e(>nveiilennc ani needa
vaa raiaedled by the 1966 (aendiiients to the Bank noldlng Cufiai^ Act.
Speclflcall;ri the 1966 anendnenci to Che Bank Holding CCEpany Act do longer

D„ii„.db,Go(5glc

aanlj InMncltd At Bond

■ propoMd ■■ICl-bank hoIdliiS uwpaajr mcqutaltlon

liistnct*d th* Koazd to •pacltleallT ifj'

b« subicintlilly Co leiten ccuBpecltlon

rcBtnlDE of tride, ualesB It find> th
affacts of the plopoied CcansicCion an
tba pnblte InceteBt by tha prolubl* cf
in aaetlnt the convanlencB *Dd nctiili a

tkua, U» BoaciJ waa 1

iIm saaa ccafMClClve atandatd a

udUs* It found thac tha connn

be •ufflcloDtlj «i*aBead as ■■

and paad* In ciralBattnc

Che coiminicy to ba aarved, (3)
■n appltcatloT^ applylnf
7. of tha Clayton Act,

the ana affected uould
■ulcln) antlcompatltlve

Additional changes la the public interest ratiuireoents Hat
tn 1970, The Board's laaponalhllltle* ullh raapact to convanlenca a
need* under Seecton (3) of the Act, houavar, did not chant* aa a raa

bacALin^ t

s orlglneted trca. the 1966

rger Act of 1960

The purpose of aiKndlng th

log the eonpatlt

eriolo nnlforni

y and to provide cons id era tl

ruling In the Phi

adelphis KacloHt Bank and

D„ii„.db,Go(5glc

«E tJH U70 MMnlMDt*. Km Bo«t4 «*■ Mill ablli^ to eouUar ooBvutoasa
■nd p»«ds in araEy ca*e and to dan; a Section 7 Clajrtsa Act vlolactoa of
eoipatttin lUadcida ualaia It found ootoal^lag codmoUdgo aad aoado
conaUaritlona rioMDtt

Hh Boacd, hoH***!, did lala addtttooal aad li^oEtaae MapoBatbtlltUa
for protactlog the public tntoraac aodac Soettos (4) of Aa Act, taang
tha pTlauy al« ot tba 1970 aaandoama to tba Bask XoUtos Act «w to
lueluda 00* bade boLdlns so^aalaa Id tba daftnittaB of a "bii* boLdlnt
coapaiqr" and to pnAlblt holdins ccopany enCry Into Dca^baiftiDS fialda.
Sactlon *(o)(B) of tba Act, boinvar, did psnuit holding eaapaniaa ts ONO
■haraa of cbaaa noB-bank ceapanlaa daaaad oppiopriata b; tba Board.
Id dataEBlolss riitch actlvltlea muld ba approptlata, tba Board «••
caqulnd to daclda If tba actlvltT vaa:

...«o cloaaly n

tlMtm

id to banking

or

.naglBg cc COBI

baoka aa to bca

pTOfitr locldant

tha

i>». In dctcr>

iDlOg

■hatbar a paiul

It aeclvlEy I

prvpar Ineldanc

to baakia*

or nanaglng or i

■oUlng banka

: Board ahatl conaldai i*..tbar

by •

<a afflllaca

1 holdina co>pai><

E«aioD>t>ly ba ai

lad to produc

e public beneflta ti

1 Cha public.

•uch aa sraater

ranlaooa. IBC

..d coapatltloa.

or Baiaa In

effUlCDcy, chai

: out

Mtlgi posalb
at raaa.ru>

1( advacac affeeca.

,r^!

confllett of Interei

it 1

lacking practical.

Sactlon WW of tba Act, thanfote, aatabllahad tha additional public
Interaat reigulKacnt tbat the acqulaltloa of non-baBklng ccapanlea auat
teMiIC, Id alt caiea. Id expacted public bcoefllt before approving aigr

D„ii„.db,Go(5glc

•ciritiltlaa mdai tbl* pTDViflon.

lb* practical ■ffKC of iKtIm 4(c)(S}, chanfon, ■•( to
T^mii a Bon rlfomu public bwwflt* teat on lUD-lHiik •e^lclclm*
Chu h«& leqaliltlaaa. ODdac Section (3) mmi, tha BocH U r*qulnd
to dan]r ■> application onlp t£ axpactad coavaolaDea and naada canaldarationa
do not ounmUti ■<> antleo^atltln affact nblcli la tarloua aaouib to bo
■ Cla^toD Act Tlolatloo. Laaam ant.leaaiptclt.ln affaci
Daad lut ba ovtwalihtd by eoovaoloDca and oaada fastori
coBtrait, tba public beaaflta raqulnHota at Section 4
asp and all ^plleacloBa wat ylald public baoaflt* that
■i^actad aacleoapatltln affact, no uttst ho

.{c)(8> acata that
axcaad dia

Mtlanala for Section *(e)(a) StaaJarJ

Scaa raieaichara have cletaid that the itTlnganey of tha Section
4(c}(S) public bcneflta teat 1* 'Sinlipie to baidi boldlnc cn^aiqp laBulaclon."
|4] Honoirei, It la clalned that the bank holdtna company baa bean alnglad ou
a* tha baarar ct an uncomoo burden ttvoo that antlCEuat lava In geoaTal
do Dot require thet tha ouCcona of a *argei or acqulaltlon produce a net
public benefit but Berely that the public Intanat not be hansed. !() Tha
rationale for the Inclusion of ao rlgoroua a raqulmMnt , diarafarOf oould

D„ii„.db,Go(5glc

In (MlttDS at ntloulc for Chl* prorlsloo. It 1* pntlaaaC
to HOC* chat BBMii th* niMiis that Convnas ehaoied Uw laalc BoUlot Coi^ady
let Id 1970 «■• bacMM ef a mcIou cooean omt heldtsB Lu^aiij aatcy laca
Don-tMBklng actlvltl**. SpMlIieally, Coiwnaa vlawd ■> potaottatly knafel
tha tTMloa of tb* tradltloful Mpaiaeloa banaan baAlsg and "toalaaaa"
that bad baan occnTliig In the jaara prlot to 1970. In Taapnnaa, Constaaa
wanted to Inaut* that any poaalbt* ban Aat bI^C ba dona to tka -
public Intaiait by pamlttlog hsldtsg caafiaDlaa to antar noo-bank activlttaa .
vai affaat by pcobabla benefit! to the public, tbua, ttaa provlalm that
holding eoBpanlea ba required "In advance," aa It wia, ta co^anaata
loi; thi future «xpacc*d "coata" to the public of tbair oanarAlp of boo-.
baiAlng films, v«b ■ way In lAlch the effects of any futura dansiea to
tha public tntcceit could ba oiMlloiDted. The outeona of Conctasiloiuil
effort* to IDSUH thi* *1b oaa the ptovliloo In Section 4(o)<B) lAldi Irv
become knoun a* tha "net public beneflta" teat.

III. Intact of Public Intarast Standards — Eaptrlcal Studies

Since the passsge of the 1956 Act, there has. been nueb dlseusalon
of the rationale and legal requirements of thoa* portions of the Act,
as amendad, relxtlni; to convi^nlencc and needs and public benaflta conaldaratioDi.
Ihate has been, howevet, only ■ United oumbet of InvestltaClODS attei^tlDg
to analyze the Inpact that these tuo icqulcemnta have bad in the baidi holding
iMvencnt, Of those that ciclst, they nay be divided Into three groups.

D„ii„.db,Go(5glc

rlxat, than an Hvanl atudtsa (gimp A) lAlch uculM th* nl* C
th«M poblle Intcnit concUcntLens bin hid In accuil Bi
In faMral, tha iBthod of thai* atDdlea hai ba« to aualna BoaH dacUiooa
vr*r ao^ eIh period and to npocc en tha ^p«* of connnlanc* and uada
and public buaf It* tactora eltad Id giargan and ■cquliltloo* acted oa b;
tfaa Boatd. A s*D8Eal aln of tbaa* itudlaa baa baac to (ttaovt to Idantl^
tba C;p«a of public lDteT*>t coDatdaTatlona dMMd If^tUnt b; tha Board,
A aacood group of ttudlaa (group 1} icte^t* to d«t«rmlaa, 1£ In ganatit,
boUIdg covaDy eoBtral of baok* and certain Bon-biDk actlvltle* hai
■etuall; raaulted In (ptcltlc baoaflca to di* publU. Finally, tbele h»
bean od> scudr <Kroup C) of Board declalou that hai attenptad to lUCdl, '
through direct eoapaTliuin In Individual eaaai, tboia clalned or lat*nd*d
beoefiti vlch beuflti actually dailvad froa • particular afflllattoD,
The remainder of thli paper eicaalnea these tbrae groupi of itudles. -.

Croup A Studlai — Facton Cited by the Board ii Important

To date, then bin* been very fev itudle* that have lyiteutlully
exanlned the typei of public Interest considerations cited by the Board
in holding cDBipany acquliltlons. Ihc first lueh itudy, by Bsckman, wai
published In 1963 and basically attempted to Identify the specific tactori.
Including convenience and noedi, given uel^it by the Board io nsiltl-bank holdl

Digitized bvGoO^^IC

e«^»V pxopouts. (5) Aa addicioul eoacBni of tbla Uaif m to ludga
Ch* coiuittency of Boird accloiu la KHiilng baift holillDg ces^u^ acijulaicieu.
Bafkaan'i lEudy eonnd cfa« porlal (rai 195S to DaccBbar, 1962 and axratnail
61 Board dsclaloiia on applleatlODi iBvolvlng li* foinatloB of naw hoUlBs
coB^ntaa, tha eatibllaliaaDt of de, novo banks and tba acqulaltion of

Vlch ragard to pcopoiali to foia nav holding coipanlaa, Backaan
eoocludad that to nona at th* 12 applLcatloni did eoDvanlanco aod uaada
conaldecatlona appaar to ba a coDtEolllng factor la the Board'a dcdatoD.
Aaong tha fictota cited, houavcr, via tha ability to ohtaln capital aota
leonoailcally (5 caies), the ability to nake (ddltlooal oi lar^T loaaa
[6 eaaea), tha ability to provide IncTeaaed or nev saTvicea aod tha
iMllCy to ptovlds for UDagement succeaalon.

la hlB exB^lnatlon of Bond deelaloni on da novo baAs, BaclmaB
lad that of the 12 such appllcatloni acted upon (8 appicvita aod four
ilals) froi 1956 to year-end I9S2, the Board did glvo priaary eaphaala
convenience and needs factors. Among ttie factnrs cited In tha approvad
as v«ce "ln:rci9ed convenience" (5 casei). In the denied ipplicatlona,
:hc Board's tindtnsa with respfct to cDnvenlmcc and needa conilduratioBa
Ited thct cither the need for a neu hank In the CDOniintty vaa not great
that another inntltutlon uoutd iatlsfy existing needs <4 cases). Backmn's
!r*ll conclusion from this portion of the study uas that "the Board gives

Digitized bvGoO^^IC

cooaUarabl* mi^it to eonvcolcnc* , iwada, and uclfirs. Ilcn>a«T, Wian
poaslbU Um Bond prefcn to hav* thoia nsada uc: by the astabllihoaBE
of M« bidapaDdenC banks rathai than by a naw (ubaldlary of a holding
coapany," (S)

BacImaD'a atody of eonrvpivnca and naeda also wunlnad Board
tecivtona on applicatlona to acquire exlatlng banJCB. During the study
pcilcd, 37 auiA applicatlona vite acted upon by tbe Soard. 0( thaat, 30
vara apprvnil and atyeo denied. It 1« Baclosan's conclualon that in a
elaar aalorlCy of thcae caaca, coavenieoce and needa faetoia of May kind
van not a decisive factor in the Board's decision. HiDagement aueeeiaioa
vaa Boat often diaeusaed, however, being mentioned in U of tbe dedaiona, ~

Tba overall cddcIuUdd drawn by Bnck&an in this flrat systematic
look at ll-i' cole of convenience and needs factors vas that, except for
applications Involving de novo banks, these factors played an unlmportanf
role In tlic Board's declslon-naking process. This conclusion Is straight'
foruarj and la not unexpected In ll^t of the 1956 version of the Act.
Aftcrall,. there waa, at the tin'! of Bactman'a Invest Isat Ion, no foinat
balaoelDg teat In effect. The statute nocely raquicad the Board to

the flrac effort In this area. It was, however, as even the author
noted, subject to ifiverll limitations ~ all Imposed by the necessity to
rely on the Bovird'a public statenents aa tha sole source for hia evIdeDce.

Digitized bvGoO^^IC

■eanliifa In dUfarane contnit*: tbit ■■>>; daeliloua' Hinlr — atlM a
eoBnaianca aaS nwds factor vlthoat attachlns any vat^C to tt; that
dia daclaloBi covarad applications lnvelvlBS both Bnrl; faraad tni*a anJ
ultl-bllUoD dollar IialrlliiE ce-^*al*t.

Iha 0DI7 Bthar atta^t to lalata pobtlc Intanat conaldaratlODa
and Board daclalooa aa Individual holdlns coapai^ appHcatlau vaa co^latad
after both tha 1966 and 1970 (HadMnta had baen enactad. Thai, JaaM*
aod SMllg'a atud; [t] of the piAIlc beoafltB teat aaaaaaad Uu Board'a
behavior undar a atrletar and aara eoopidianaln aat of public
tocaraat conaldsratlont. Aa In Backaan's atndj, an as^tnatloa of
Board deeliloD* IM* eonductad over a period of aavaral ycara, tn thla
caw, from th* beglanlng of 1971 to Bld-yeaT 1974, and covarad both batk
and Don-bank caiaa. Reflaetlng Che Inereaaad holding coapai^ actlvtty^
of thli period, thla atudy iocluded i3S approved biidc acqulalttosa, IM
approved Bon-bank leijulaltlODa, and 47 bank and con-bank appllcatlona

Jeaaee aod Scallg'g (Cudy concluded that the public bcaeflta dead
in BiMcd dedalons could b* generally clasalUed Into alx broad catetortaa.
Tbeae included: "(1) Inpraveuenca rcUtlng to convenience and Mada of
ch« cemunlty Co be aervad, (Z) Increased coi^Ktition, (3) improved operatiantl
efficiency, (4) «Kpaaded financial resourcei (or the fim to be acquired
end/or the holdlfig company, (5) improved managejDant for the acquired fira,
and (6) other MueCIts unlaue to the particular case," [6)

Digitized bvGoO^^IC

tha acopa of J*««M and SmILb's atod;. tbantora, la KnnAat
than BaiAMD'a Is Chat It eoaaidara Dot oalj cooTCDlaDca aod Baad*
bat alas othac (pacific public Intaraat eonddantlau aa wall,
a, tbU la D«t auTpEialng ainca Qie 1966 •ml 1970 amandmita

a crlcsrla to b« cooaldacad b]r tha Board. Vlth caapaci
da, the Jeiaaa-Saall) atudy ccocludad that du
factiira ^t oftan dtad by tha Boaid van tlallac to thoia of tha Ba^MW
•tody. Ihaaa Includad OM er uqiindcd financial aarvlcaa oi id aqianalon
to the Baotrafhlc acopa of tha urrlcaa offarrod. Othar public intaraat
factor* cltad by tha Board In nuaaroua caaca mn iKtaaiad cooipctltiDn,
loHor ratM od loina aal othar aarvlcaa, tba Injactlon of equity capital,- -
tai acooo^aa of acil*. Budi factor* vera cltad' In both bank and non-bwik

a n*t publii
Saallg Ci

coapatltlva,
Spcclttcallj

t thniat of the Jcaaae-Saallg study U DDt
have b*aa dtad by tha Boaid but alao to i

■ bav* played In outiwl^lDg antlcoBpstlCl^
baoafit. Ulth regacd to thli> Mcond objcc

lit that tha Boaid'l ullllngnesE

lie benefit it inveMCty ralateil
tlnanclal, and managctlal probl

only to determine
lececotne uhat vtitfit
>a «ffectB and providing

:o attach slgnlflclnce
:o the a*v*clty of the
i( «s«aclated »ith Che :

claJn of probable benefits

o the public and approved

D„ii„.db,Go(5glc

tiM acqntiltloD. JfliHa ana SMllg aalBCaln, hoMiar, ^Mt tx la ootabla
that Hm tanii appaan navat to hara foandthat tha pcapoaad pokllc
ba»ftt* of to ac^laltloD wan anfflcUat to ooti«l^ tba BBfavoiahU
■ffaet* of ■ aobatanttal laaaanlni of ooHpatitlon, unaouni baoklns praatteaa
or an uodna eoocantracloB of rviauTcea, 16 ] to tba antlioi* Cbt* •inuaMa
tliat lDcraaatiigl7 (abatantlal evldaitca of pnbtlc bcMflta la naadad Co
sals approval of eaiea, partlcolarlr to nufa loatancaa nhta adrcroa

Iha Ja*M*-Se*lic atodT tt nora coapvahaiul** la aeopa than
BackBao'a stad; and daala wltb a larger nunbav of daelalon* and lnn>l«*a
both banka and non-bankins flna, Bwavar, tt too la llMltad la tba validity
of its coDctualoDa vUh rega'd to tha Board'a IMant on Individual ^pllcationa.
Bila baalc llnltatlon derivea fron havlnB to nly on wait or laaa unifoiB
atateaanta about application* often InvolvlDi vaatly dlffiiaot clicusabaacaa.
nma, any concluaiona regarding Board IntsDt on Individual appllcatlona
mat iiacaaMrIl7 be limited.

. The avtdenca preacnted in tli«a* two acitdlea wggait* that thaia
bay* boon a mmbai of factota «hleh have been tepeatedly cited aa public
Intareit conilde rations lAileh velt^ In favor of appiovlng * boldtns caapany
applleaclon. Ai»ng these hHa been the ability to obtain additional capital,
ptovlde additional or nev aervlces. Increase conpatltlon, and iHprova

Digitized bvGoO^^IC

affiolancjr and MDatarUl nuu
Oat Cha pmue* of thcM ban*
Board' a daciaioD-vakis^ procaaa

»a. Bath atudiaa, howai
Lea vara not tCBarally l^ortant In tba
and In do caaa did chaaa publle b*M(lC

oonaUiiratlDDa aarvc to ouEnat^ ■ aarlou* anticoivatttti* aflact.
Crow ■ StuJta* ~ Poat-AemiUltlon PatfoiMBca and On Public Intara

Ih* lUi
quaattoo of coimi
ol nvlavlDs Boaci

darlvad froa holding
of tha actual bcMflti

aflUtataa. Thaaa atu.
bjr atCarIng th* bchavii
banallttad tha public.
Farfonunca
eaaanllX ahowD that b
credit to the local ro

uainad in thia nrwiaH apprsachad tha
aod public baaafita froa tha ataodpoinc
It axpaetad public InCaieat conaidaratloDa.
lOtion of the follovup or actual baaafita
ia<r altlliatiOD. tb» bulk of tha axiatins tvidanea
Ived frca aff lliatioa- ia contaliad to a nnbar of
poat-acquiiitioD parfonnanca of hotdint co^an;

w tha axtaot to thteh holdti^ coapany afmiacto
iquirad bank* and non'baidi ccapaniaa, aaji bava

of baidi aequlaltiona, for axa^ila, bave
l^tni] hy hcldleg eoapaolo* of ten prnlda sora
lolt/ th«n da non-afflllatcd banka (7. 8, 9, ID, 11,

idiich all of thcae parlomanc

n by TlBDChy Curry) in

Digitized bvGoO^^IC

iIsD been shDWB to pay ht^^Mr Inttrait OB C
an no affllliOd bmUkt (8. 13).
njr sfftllaclcn, howavai, hu alio baaa Amn to 1
Ch respect to Che public laEaraat. 1
ks tac exanple, hava feui^ Chat afflllatad baeka
[ deunil depoalE* aarvlcai [10, 13, U] aad chat
cion hu also genarall; lad to lOMt capital racloa
Id Independent baoks. Gpaciflcalljr, both total
t^caplCal to total aaBeCi [6 lA 151 and oqi^Cj capital to .total aaaata .
' tG 13 16] bave ottea fslliD ni i result: of acqulaltloa.

Hw pjbllc bancfltl Chat have arisen fra holdlns coapait;
aftUiatioB mth DOD bank flnu ban bean mora difficult to asMaa than foe
bank atfltlatlon. The prlaaiy obstacle to sasesslns the actual banafits
daiivad haa been a lack of data. Hanachelaaa, a fev studlaa hava '^

-. .att«*pted to aafca atataoaDts lagicdlng public beoafltt baaed on an
•xaBlDatioB of tha poat-acqulaltlon peifomaoca of non-bank coopaptea.
Tallaj, for exaapla, uaint a alapla tabular (naljrals, found Chat affittacad
■octgaai banking fliaa mta lavaiagad aubttantlally Kte Uian non^afflllatad
ones and that affUIatad [Ins eihlbltad lovar capital catloa s* vail [IT].
Tallar'a atatlatlcal nathodology, houever, eoaslatcd o£ a simple unlvaitata
test <"t" tast fot dllfaTcncas In group uani). As such, the flndlnga of
tha atudy auat ba ragardad as tentative alnee eat art a parlbua aasua^Cloiia

D„ii„.db,Go(5glc

^It^l* ngnHloD analyda W ocaln tbm qiMition of lAtcthei affUlatad
^ntvW badciiis tliaa an abl* Co aAanu tba flan of fund* Into cb*
naUntlal ■aresaia ^ubat to a vraatM aztaat than noa-affiUaMd flima.
ttoadaa' UdnHqiM to eoapan tha ■nnrth of aaEvlclat voliaa batVMo
■fHUatad and Bon-affLliatwl uorcgage bauklos aDbaldUilai, durlns Ui*
yMM fiw 19H to 1972. Bioadaa' findlog* tndlcacad that afftllatwl
ttiM did not grow (aatac aad, thiu, than U no baala fnt concludlns
that afttllatiaa haa laenaMd tha floii of BDiiay to tha ml aatata uikat.

Saiaral atudlaa bava atao liivaati«atcd pecfonaDCe-Talatad
pobllc baoafita- f loirlDg fToa holdlns eampvef scqulaltlona of conauMr
(tBaaea coiqiaBtaa. Talley, for ocaMpU, ciaBlaad th* profitHMility of
atdltatad coniiaiar flnaiwa coopaotaa vla-^-«la lodapendaot. onei. (17)
Proflfabltlt^r, Ic can ba arguad, nay b« a neaaun oC hov wall holding *>
ea^anlea can baneflt [halt afflllataa (and tha public Indlractl?) bj
tusraaalns the auppl; ot asd raduclng the coat of loanable fuoda, lallay'a
oeavnlaon ot a aaiaplc of afflllacad and Indepandacit ftnas during tha yaara
fns 1973 to 1974, houevai, found that the affiliated flrai Hera, to fact,
laaa pnfitable than tha affiliated on**. Although Talley'a raaulta
cover a V017 abort pojC-ac<iul»lCtoE period and did Dot adjust for pra-
aequlalcion peeformanee, the raaulta auggeat that affiliated consuDai

Digitized bvGoO^^IC

■ b«a K*lacliMl7 poocar pi

A nbHqiHBt atudy bjr Bfaoada* aod >ocBar. tI9}.'-
■Huril quaatloB, vqilayad ■ Hon aofbtatlutad MattMlcal t
(ailtlplB ratnolan) ind adjaicad for pia-aetolaltlaB farforaaiiea. Oslas
■ ■«Bpl« of nearly 40 caoauMT flnaoca eo^Milai In ■ pra- and poat-
•cqalaUloB coapaciaoB, tbaaa aadiOTa alaa tana' Qiat pMC-ac^laUlso
paEfonanca ha* baao nlatlnty poorar Chan pra-ac^laltlon pailanaKa,

ii^BaT7 o( atudtaa laraatitatlns parfamaaca-ialatad
public later
Id cha eaae

rabli

■ bean in

bank aequlaltloni, holdlut co^any affiliation ha* had
affacta on the public Intaraat. Bia pciaaiy aEvaa at gain

ovidlns mre ctedit
evidence, hoiMvot, that holdlns te
elfectd OD acquired flima, aepccli
poorer operating perfotnanci

have'been poor perfonMra, ahould
of the abort time pcrlodi over tdil

o the local cneMunlty. Tbera ta aoBa
may aftUiatlon baa had aoM D*|aci<ra
jr aa regarda reduced capital tatioa and
non-bank area. Ccncally, hcaivMK.
d that holding conpany afflllacaa
accepted coodltlonally becauae

D„ii„.db,Go(5glc

Hie readtas exaBtaoJ earlier la thla papar hava inveiClgatcd
tJia genaral quaitloD of public Interest eouIldetitloD* by -»—'"'-; the
factor* eltad by the Board Id apactfle declilona or bjr *[udylii( poat-acqalaltlon
patConuDce. Ideally, homver, to ffiUBlne tba queatlon of tdwthar holding
eeapany affiliation. In Iwllvlduat app Heat loot, doaa raawlt ta pabllc
btnnttta, CO* vould bave to ccnpata pn -acquit tt Ion intaotion* Hich
peat-Bcipiialtion action*.

To date, only one study hai taken this approach in analjiing the
public banefit* liaua. Specifically, SossMn and King exaaloed 109 applications
Involving 21 bank holding coapoeie* filed troi June 1970 to Deceabar 1973
[2t>1. All of ttta BpptlcatiDBi involved atteiqitt to icqulre binki and van
•pptovad by the loard, Iha basic technique employed by Kossnan and King'i
atudy «■ to systennatlcally record the atatod intcationt of the appltclnt
holding cccDpanles and cotegoriie then aa to type of public benefit. For
exBiylo, the study noted idiether the applicant intended to impleaent tiuat

operations and otheis. Although, in RoanrRn's and King's JudEmenC, rheu
services Bore directly banafited the acijuliad bank ratber than the public,
the authors included thea as public beneflcs since they- would result in
on increase In "efficiency, responsiveness or reduce the bank's risk" 120].

Digitized bvGoO^^IC

Tha 11 hoUlns coBpaul** >cST« Umd Mk«d to ccoplata ■ quaittoBnaic* la
iibUli they wen adced to tudlEita vhsttwr tha pn-aequlaitlan iDCBntlou
had b«*D futfllled.

Smaaan and Kins pndacad aavnal flndlDca, Viiat, thoaa piAltc
banafita Kwt oltta propoaad vera one* idiicli ara cloaaly IdaotUled >tth
lars* baA opaiactona. Tha» Inclndad toao patclelpacteBB, data procaulag,
and ImraBtnant, markecliis, aDd andlelDg adutea. Sacand, In ucaa of tuUllllBt
their intentlona, KoamaD (nd King found that the holding co^aniaa "took
aeCloo tn th> vait ujorltjr of caM* In i*>ldi It vas Intandad" [2i^|. In
pacttculaTi holding cmpanlaa vara ganatally lallabla to jflwmitlin
"tnist and data proceoing servlcea, recnitBant, and loan expanatoa,"
The [espondnnt fltisa, h.-wever, uere leas miccatiiful In realiaing Intanttsoa
vidi leapacc to extending bank hours and providing industrial dovatopasnt
asgiatanee. 51giii(icantt]r, in no caat vas no action taken by • holding,^

The study, houever, is subject to sevsral llultatloti*, dir«* of
idiidi are iMntlonsd by the authors chemaelves. First, the atudy does not
question vhcthcr the holding coopony's actions vould sctuSlly benefit tha
public. Second, because of obvious cost cons Idarst ions the suthors vara
tj)t able to cross ckeclc ([uestlonnplre results but vara forced to rely aolaly
on the holding coopany's statenRncs about inpleiKotatloo. Finally, no
control group vas used to deteiolne If similar services vould have been
carried out In the absence of holding c<i:apany affiliation. An additional but

Digitized bvGoO^^IC

mnoldabl* pcoblla of d» mcudy ni the InCaipTaCacloa and catagorlaatlsn
of holdlnt caniany tBUnttona. Fa* baldlas co^aotaa dlacutiad piopeiad
ptAllc banefica In Cam of »DC»t* pro^aaata. Thua, tb« auchora vara
folsad, ia ■<>*■ eaaaa, to Infar and aunlia a* ta an applteaoC'a sxact

Cocci mloa

Tba anbjact of pnblic IntaccaL atandarda 1e

Act ia net, aa thla atudy daBonttrata*, ona chat haa

aCUntloD aaoiv Inveulgacocs. Two acudlaa, bawavar,

■ttlcallj mlotwd tha Board'a aiatcMnti oo (bit aat

thai* aaplTlcal atudlaa vhlch hava aadi ttaCHtanCa ai

banaflCa darlvad- frog afflUatlsD, vlrtuallj all h«v(

,■■17 focui aad canecm tha pot l-aequlal Clan pccfoi

;b*r than public baiwfits sSL !*• ^' addition, arte

detamliw If public Intaraat ■catcaenta Mda la li

ra actuilly baan fulllllcd.

Bated on tha nature and Eladlnga of theae i
lonatMta that dia public lnt«»at atandacda Of the
intlal cffact In tosterlnB tha public welfare. The

.cieat conaldetationi that may be condderad-of ber

ire have been sonc bfneflts ul.lch have accrued to (
-f afflllctlon. Finally, nvallablB ei'ldencc Indlcnt.

Baak Haldlns
icalvad vtdaapread

Id aa their

ICC of •ffiliata*

ir atudy haa attaaptad

.Idual applicatlAi

' L/pes of public
: In. holding coa-

Ihat holding cottpan

D„ii„.db,Go(5glc

r.J.tll K€.e

HtopsEt Dndar Buk Boldfnf Conpaigr Ace," r«d«r«l ««■«« ■ulljtta. BMzd
of Govanori of the Fcdanl SiHrn STitu, Haibinstoa, D.C, July,
DM, pp. 776-796.

SO Stat. 237 |3(e): U.S.C. TItl* 12, MC. IMl.

J«»**, Mlchul A. *Dd Saaltg, Stwan A.,
the Public iBf mt. Lexlngten, Hh>.:
&Co., 1977. n>. 47-48.

Jaiia*. HlehMl A, and Saellg, Stano A., "An Aulyila of tb* FublLe
B«Mtlta T«*t of tba K*A BoldlDg Coapaoy Act," ttenthlT aCTlaii.
redflral Reaacva Bank of Ken YoA, June, 1974, pp. 151'IG2.

IlotfBlD. Stiiarc C, 'Iba lapacc of Boldtag Cfnpany Afllliatloa « lagk
pBEforaanca: A Caac Scud; of TVs Floridi Nilclbaidc Boldlsi Cat^aatrnt,'
Hcritlnii P-ipet Sarlea. ^odara] Beaarve Kiidi of Atlanta, January, 1976.
An eacller sunury of chla vaa publiahad aa "A Florida Caaa Study:
Perforaaoce of Holdlns Con^iany Saofca," Honthly RevlBV. Federal
Belerve BaA of AtUata, DeUDbat, 1975. pp. I0Z-Z05.

and David K. Kelnster. "The Fctfonance of Bank
Acqaltitlona: A Multivariate Analyala," Journal
. XLVIII, Aptll. 1975, pp. 204-212.

li Report No. 4S, Fed>

Digitized bvGoO^^IC

lis Aithuc C, "Tbe FerfociUDC* -at Individual task. HoUIog Caapaulaa,"
icttf Econonle Studlej. No. 84, Boitd of Gov«mori of the FeAmfl
iUHrve Symten, 1975, A siamry o( Oil* p«p»r appaacad 1b cha
fedtral Bgatrvt Bullerln, Vol. 61, 1975, pp. *7I-473.

Affiliates and Indnpendisnt Banks, 1969-1972," Tha Journal of f Inanca.
Vol. mu, Ko. 1, Hairch, 1977, pp. U7-1SS.

Klo^, JcliD J. ''MaDsgerlsI Hotlvca. Market JtrucCuica and the PctfOTMnea
of ■vUtog Comsiany Baalcs," Economic IngiiiCY, 'ol- "V, Bo. 3,
* ■ ■ , 1976. pp. 411-4M.

Tallay, Samel H. , "Bank Holding Canpany Fartonaoca in ConauMr Flnaiiea
•nd MortMl* Banking," Iha H»m»1m of Bank Admlniat ration. LII, Ho. 7,
Jul;, 1976, pp. 4Z-U.

■boadaa, Staphao A., "Itw Effaet of Baidi Holdins Coapan? Acquioitiona

of Hottgage BsiJcers on HotCgaga Lending Activity," Jourcal of
ftualwu.. July, 1975. *

Rhnadcs Stephen A. and Gregocy B. Boctar, "Itaa Perforaance of taA
Holding CoiqMny-AfEillatEd Finance Coiopenleo,'* Eraff Ecpncmtc Studlca.
Mo. 90. Board of Govamora of cha Tcusral Kesei-ve Syst«ii, 1977.

Rossun, JoHph >. and Klna, B. Trank, "Mnltibnik HoHli« Coirpnnlaa:
Cwweolonea and Heeds," Econowlc Bevteu. Faderal Heiaiv* Bank of
AcUnta, 3vly/ku9,it, 1977, pp. 83-91.

Digitized bvGoO^^IC

TBSTII40NY 07 JAMBS A. HZLLBR,

PRESIDEKT AND CHAIMttK OF THE BOARD

AHERICAH SOCIETY OF TRAVEL AGEHTS, IMC. lASTA)

ON S. 72

SENATE COHHITTBE OH BANKING,

JUNE 23, 1978

Hy name is James A. Miller. I am a trav«l agsnt
from East Lansing, Michigan, and also President and Chair-
man of thB Board of th« American Soci«t:y of Trav«l Agents,
Inc. (ASTA) , the world's largest professional travel associa-
tion, which is cOK^rised of over 16,000 wombers in ov«r 120
countries representing all facets of the travel and tourism
industry. The Society's purpose is the pronotion and ad-
vancement of the interests of the travel agency industry
and the safeguarding of the traveling public against fraud,
misrepresentation and other unethical practices. HeKbers of
ASTA in more than 8,000 travel agency locations throughout
the United states arrange the travel plans of over 40
million American consumers annually who spend approximately
$12 billion each year, in business and pleasure travel.

Mr. Chairman, I am grateful to have the opportunity
to offer testimony in support of S, 72, a bill designed to
abate the expansion of financial institutions into non-
banking fields, a trend that has plagued travel agents for
nore than a decode.

Digitized bvGoO^^IC

When I oelglnally aeeaptad th» CcMMiltt** ' a ottmv to
pr«Bent t««tlnony on S.T2, I fully anticipated that my
ramarka Mould be largely dsvotad to a diecuaaion of the long
and arduoua afforta of traval aganta, tha courta and Nem-
bera of Congress directed toward the allminatlon of unfair
competition from national banking inatitutlona in the travel
industry. Happily, however, this goal was finally achieved
earlier thia month when the Cwiptroller of the Currency or-
dered that national banks operating travel agencies divest
themselves of such operations within three years. Thia order
of the Comptroller — iaauad June 1, 1978 1/ — coupled with a
aimilar ruling of the Federal Reserve Board with respect to
bank holding companiea, 2/ removes the laat veatagea of this
unfair competition from thaae important financial institu-
tions regulated by the federal government.

The issuance of the Comptroller's recent directive,
however, by no naans obviates tha need for S 72. Quite to
the contraryi It servea to underacora the pressing neces-
sity for passage of the pending legislation. For more than
ten years, travel agents have fought for repeal of tha 1963

1/ Banking Circular Ho. 108.

2/ The Federal Reserve Board's ruling was upheld by the U.S.
Court of Appeals for the Seventh Circuit on January 23,
1978, Aasociation of Bank Travel Bureaus, Inc. v. Board
of Governors of the Federal Reserve System, 568 F."~n
549 <7thiilr. l»fll. ^

Digitized bvGoO^^IC

opinion of th« Coi^roller that traral agmner epaxatloas
««ca parmlaalbla actlvltlaa for tha national banka nndar tha
Comptrollar's juriadlction. Tha Comptrollsr retuaad to
aaiand hla action deaplte a aariaa of court declaitina to
the contrary and daapite b Bimilar prohibition against
bank holding co!^aniaa engaging in anch activltlaa.

Tha pending bill would aaka claar tha Intant of
congraaa that unlfontiity la daairad in federal banking lawc
ragarding the pemiaslble acope of non-banking actlTltlas
In which national banka and bank holding coBpaniea may
engage. Such unltomity will preclude the poaaibllity that
a single federal official such as the Controller can,
in the tuturet unilaterally eatabllah and maintain a policy
that docs not comport with a ludiclally-auatalnad roling
of the Federal Reserve Board.

Although tha burden on the travel industry haa
bosn lifted by the Comptroller '■ order, s*v«ral other in-
dustriea are still In need of the relief provided by S. 72.
Insurance agents, life underwriters, leasing, accounting
and courier aervicea, data proceBaora and security sarketing
servicea all continue to face distorted competition from
banking institutions. By limiting the scope of the non-
banking services a bank holding company may offer, and by
requiring that these activities be (1) directly related
to banking and (2) provide significant public benefit
outweighing possible adverse effects on competition, S.T2
provides critical relief for these various conaercial

Digitized bvGoO^^IC

induttrlcB.

N« floe no need for federal financial inatitutions to engage
in these non-banking activities. It ia not necessary for the
Mell-being of the banks, nor is it in th* public in.ereat.
Since financial institutions, by the virtue of their depo-
sit and credit services, possess leverage their commercial
industry coi^etitors do not, competition based purely on
quality and price does not exist. Such a condition is
unhealthy for these industriea and ultimately unhealthy
for the public.

Hr. Chaiman, ASTA commends you and your Comnlttee
for your efforts to restrict the non-banking activities
of banking institutions regulated by the federal government,
and encourages the Congress to speedily enact the pending
legislation. I am pleased to have had the opportunity to
present ASTA's position on these matters.

In an effort to help compile a complete record for
the Committee's undertaking, I am attaching hereto a history
of national bank and bank holding company involvement in the
travel industry. This history graphically Illustrates the
need for prompt reform in the regulation of federal banking
institutions.

Digitized bvGoO^^IC

In 1963, without at^ hearing or notice, the Coiqitrollei
of the Currency promulgatod and lncorparat«d into hie Maiiual
for National Banks, an Interpretive ruling which purported to
authorize the operation of travel a^nctea by national banks.
Paragraph 7475 of the Conptroller'a Manual for KatlMtal Banks
(1963) which is now codified aa 12 S.P.R. 17,7475 readei
'Incident to those powers vested in them under 12 O.S.C.
24th Seventh, national banks nay provide travel services for
their customers and receive compensation therefor. Such ser-
vices may include the sale of trip insurance and the rental
of automobiles as agent for local rental service. In connection
therewith, national banks nay advertise, develop, and extend
Buch travel aervicea for the purpose of attracting custoaera
to the bank.*

Following the prcraulgation of that ruling, iriiich was
adamantly opposed by independent travel agents throughout the
Nation, large nunbera of national banks entered the travel
agency business, most often through the acquisition of exiatlng
travel agencies.

For example, in November of 1966, the South Shore
National Bank of Quincy, Hasaachusetta , acquired by purchase
the Kellealey Travel Service of Wellesley, Haseachusette .

Digitized bvGoO^^IC

Bank traval offlca* war* thaceupon astabllahed At thr«« loca-
tiona in tha Boaton vicinltyi aach located adjacant to or
actually within an offica of th« South Shora Bank. Almost
ianedlataly, Indapendant travel aganciaa In tha araa ba^an to
loaa cuatonars and businasa to tha bank-funded South Shora
travel agency operation.

On May 8, 1967, «2 independent travel agencies filed
auit in the U.S. District Court for tha Diatrict of Maaaachu-
aetta seeking an injunction againat tha operation of a travel
agency by the South Shore Bank and a declairatory judgwent to
tha affect that Section 7,7475 of the Ccmptroller'a Manual
for National Banks was Invalid under the National Bank Act.

The plaintiff a in that suit, (Arnold Toura, Inc. v.

Ca»p) ware provided with legal and financial aaaiatanca by ASTA.

After five yaara of litigation on the threahold ieaue of legal

atanding, the caae was renandad to the Diatrict Court, trtitch

ruled on February 22, 1972, that the operation of travel agan-

clea by national banks waa clearly illegal and that the Ccnp-

troller ruling waa clearly invalid. That deciaion waa affinaed

by the Court of Appeals on December 13, 1972. The deciaion held

that I

". ... it is illegal for a national bank
to operate a full-scale travel agency.'
'Since auch -an operation ia not an exer-
cise referred to in [12 U.S.C. 24th Seventh).
For the aane tedaon the diatrict court did
not err in datemining that 13 C.P.R. 17475
ia invalid to the extent that it ia conatrued
by the Coi^troller as authorising a National
Bank to operate a full-scale travel agency.'

Digitized bvGoO^^IC

On Svptwibax 19, 1973, Hx. C*rl L. H«lgr«n, tbm
President of ASTA, appeared before the Bouse Couilttaa on
BanXing, Currency and Housing which waa at that tlBM con-
sidering bank i«gulatory refcm legislation. Aftar recounting
the Fcotcacted history of the Arnold Tours litigation, Mr. Helgres
expressed the following concern i

'Still, at this lata data, tha Ccoptroller has not
coBplied with the clear mandate of tha fadaral courts. Ho
action has baen taken to require national banks to dlwst thsH-
selvas of all travel agency operation."

It Mas three nonths after that haaring on Dacanbar
21, 1973 before the Comptroller Issued an 'invitation for
cossaants* on tha coattar of banks In travel.

Another year and a half passed after the Arnold Tour
court ruling without any action whatsoever on tha part of tha
Ccnptrollar ' ■ Office.

Finally, after exhausting every conceivable adMlnis-
trativa and Judicial avenue short of initiating Bore than 120
individual lawsuits throughout the nationi ASTA filed a new
suit in tha U.S. District Court for the District of Colunbia
on March IS, 1975. In that suit, ASTA sought tha isauanca of
« writ in tha nature of nandavus to ccnpel the Controller to
bring his manual into compliance with the national Bank Act as
construed by the courts.

D„ii„.db,Go(5glc

T«Q daya after the institution o£ ASTA'a lawsuit,
tha Conptroller'a Office iaaued a 'proposed revised interpre-
tive ruling.* On May 18th, 1975, the Ccnpfcroller filed a
Btotion with the D.S. Diatxict Court hers in Washington, asking
the court to dlsmlas ASTA'b conplaint.

On October 2, 1975, counsel for the Comptroller indi-
cated that the Comptroller had still done nothing with respect
to the matter of national bank Involvement in the travel agency
business. The court characterized the defendant's delay in this
aatter as 'unbelievable,' and inatructed counsel for the Cooip-
troller to tell his client 'to reaolve the matter In two weeks.*
A further status hearing was scheduled for October 17, 1975.

On that day, counsel for the Cooiptroller waa obliged
once again to inform the court that hia client haa failed to
take any action whatsoever but that he had been authorized to
represent to the court that final action would be taken by the
Coa^troller on or before Novendier 2S, 1975. The court there-
upM) issued the following order: 'That the defendant Conptroller
of the Currency shall either issue a revised interpretive ruling
on travel services or repeal the existing ruling, on or before
November 28, 1975 . . .'

On Hovetnber 2S, 1975, the Comptroller Isaued a
'notice* in which he announced that 'the Conptrollsr intends
to laaue a revised interpretive ruling on this subject.

Digitized bvGoO^^IC

P«nding th* Isauanca of such a ruling, national banks should
consult with their own legal counsal aa to the range of p«r-
nissitale travel services under applicable statutes.'

After eleven years of expensive litigation, beginning
with the Arnold Tours , Inc. case of 1967, the continued delay
on the part of the Comptroller with respect to this matter was
absolutely shocking.

In ASTA's view, the Comptroller of the Currency's
blatant disregard for our federal courts does nuch to explain
the public's loss of confidence in our bank regulators and
emphasises the urgent need to impose upon our financial insti-
tutions a new system or regulation which will be responsive to
the Congress, the courts, and the needs of the public.

A discussion of bank holding company Involvement is
relevant at this point. As has been indicated, national bank
Involvement in the travel business was first declared to be
illegal in February of 1972. That decision by the D.S. Diatriet
Court for the District of Massachusetts was one in a long line
of court decisions striking down the expanslMiist rulings
which flowed from the Comptroller's Office in 1963.

It was largely as a result of those uniformly success-
ful legal challenges by adversely affected competitors that
national banks began to look to the one-bank holding company
as a device by which to avoid judicial scrutiny of their involve-
ment in a variety of non-bank activities. Indeed, the Comptroller

D„ii„.db,Go(5glc

of ttw Currency I Hr. Canp, enphaslzed this point In tOBtinony
bofora tha Banking Coavittatts of both tha Senate and the Houee
ot Repreeentativee at hearingm held in connection with the 1970
anandiMnts to the Bank Bolding Company Act.

In teatlfylng before the Senate Connittea on Banking
and CurrencYi Hr. Camp atated:

'Coranaccial banka, tiring of the continual harraasment
froM lltisation, brought by a variety of non-bank competitocB,
attended to devise an organization form which might be iiraune
fron such suits. The device of creating a parent holding com-
pany, under whose corporate umbrella a number of bank operations
could be spun off as holding company subsidiaries, seemed Co
provide a possible answer.'

Aa more and more bank holding ccoipanioa became active
in the travel busineaa, the Federal Reserve Board was forced to
consider the question of whether bank holding companies are per-
mitted to engage in such non-banking activities.

On January 26, 1976, tha Board of Governors concluded
that the operation of a travel agency is not closely related to
banking oz managing or controlling banks, and therefor is not
a permissible activity for bank holding companies under Section
4(c] (81 of the Bank Holding Company Act.

The ruling resulted froa a First Bancorp Inc. appli-
cstitn aubaitted on Septeoober 7, 1973, asking the Board's
approval to continue operating a travel agency. X hearing was

Digitized bvGoO^^IC

held thra* yeara later on January IE, 1976. lAMn thm Board
decided not to adopt the operation of a travel agency aa a
pemiaBlble activity. The Board concludadt (1) the nature
of travel services offered by present ''day banka is aignlfl-
cantly different frai that offered a century ago to iMiigrantsi
(2) the numberof banka currently providing travel agency aarvlcas
la only about ISO or leaa than one percent of all ca^rcial
banks in the United States, and they account for leaa than
two percent of all travel agencies in the nationi (3) nearly
two~thirdB of all travel agencies affiliated with banka have
bean established within the paat fifteen yeara.

During the rulemaking proceeding, the Board interpreted
Section 4(c) (8) of the Bank Holding Coo^any Act to include two
distinct teats. First, the Board nniat determine whether an
activity is 'closely related' to banking, if the Board deter-
nlnes that the activity is closely related to banking within the
meaning of the Act, It then must decide irtiether the activity is
a 'proper Incident' to banking by weighing the benefits against
the possible adverse effects. In the First Bancorp caae the
Board found that the activity of operating a travel agency wee
not closely related to banking and therefore they had no need
to consider the second part of the teat.

Petitioner, First Bancorp, contended that Section
4Cc] (8) contemplates only one test rather than the two-tier
test i^>plied by the Board.

Digitized bvGoO^^IC

Th« Boazd noted that tha two-tlar taat hod b«en
adopted wtd endorsed by every circuit court In considering
the queation. Horoover, the Board's interpretation of the
statute Is supported by the legislative history.

The Court held that the findlnga of the Board were
not arbitrary, capricious or an abuse of discretion which the
petitioner had contended and consequently denied First Bancorp 's
appeal on January 11, 1978.

It is clear Ixom this decision that the courts and
the Federal Reserve Board are In coa^late agreenent that it
is unnecessary and illegal for the banking holding companies
to be in the travel bualneas. And it is clear frco the Arnold
Toura Inc. v. Camp case that It la illegal for national banks
to be In the travel business. And yet, Conptroller of the
Currency, J<dui ReiKann, refused to take action.

Last June, during tha Conptroller confiraation
hearing of John Heinann, the issue of national banks and bank
holding companies in the travel business was discussed. Subse-
quently, an exchange of correspondence followed between Cos^-
trollsr Beiinann and Senator Proxnire on the subject. (Exhibit A)

E.g. , Alabama Ass'n of Insurance Agents v. Board, 533 F.2d
223T~235, 345^« (BtlTdir'.l

F.2A 1229, 1232-33, (D.C. Cir. 19751; Independent Bankera
- of Georgia v. Board, 516 F.Jd 1206, 1215--16 (D.C. CiE.
Banh America CQrp~v. Board, <91 F.2a 985, 988 (9th Cir,

Digitized bvGoO^^IC

A) Additional letters tron Senator Bdward Brooke and Conqress-
■uui Fernand St. Germain again brought these recant court d«ci-
■ion and Board rulings to Mr. Reinonn's attantion, yst he still
refuses to costply with the law. (Exhibit B) Consequently , over
^0 national banks continue to own and operate travel agencies
(Exhibit C) in an ever expanding way.

Finally, on June 1, 1978, John Beinann, Ccaqitroller of
the Currency, issued Banking Circular No. 108 which ordered that
'all national banks which are currently operating travel agencies,
thorugh a bank department or subsidiary, divest theaselves of
such travel agencies within a reasonable period of time not to
exceed three years . *

A5TA conmonds the Ccmptroller for finally acting In
this natter. He anticipate that the Coaiptroller will take all
steps necessary to assure that his directive is obeyed by the
banks Involved.

ASTA appreciates the chance to provide its views to
your Subconmittee and would be happy to provide any additional
data which you might find helpful. Thank you.

June 23, 1978

Digitized bvGoO^^IC

Exhibit A
^JCnH.a Jhlc.U= ^eiT^.U

Hie ronotsbla John Heinann
Cor.ptrolltr of the Currsncy
409 L'Enfsnt Plaia

5esr Jolin:

This letter rstatss to a subjact that you mi I
discussed when you appt»rsd before my Coraaittcs on June
9, 1377, in fonnection. vith your nomination to be-
Co.iptvoller o£ t>.e Curvincy; At that ti;.i8 I fais>d
the 7,ss-je of .ion-b;i]!lcini actlvitiss in vhich scte
national bar.>:j have been eojaaad.

Spccifir-ally, I refer-*d to'court rulings to the
eifict t>.at the opeTation of a travsl agency ii not
nicessiiy and incidintal to tha busi.Tsss of b?nki/!g,
and is therefore sn iaporai«iible activity for r.ational
^inks undei the Ma-ional SanJcing Act- >hile you uere
at that tiae unfa=>ili»r with the extent of sjch. aciivitl-s
on the lart of bajijci wi-:hr!.::-7our iurisdiction , you in-
di<:Etid a i^sirs to scquai.it ymrself ^nore cs.r.3l*:»ly
with those activitiis, a:id to tatts aeiion lo assure that
such activities vould be diicontinued in order to eosply

agency business in violation of law. TLnely action on tJ

illagal under the Katicnil Bank Act.
tha: tiaely action is needed.

Digitized bvGoO^^IC

:{o.-ior*bl» John Raiatnn

Octobar 4. 1977

In thic connection, it uould be htlpfnl for this
CoEraittss Co \-.-ioh: 1} How nmy nitional banlis ■>•
a:-ctinT\y ensii-sd in tha txavel «(sncy business, I]
'hich tanks «/e they «nd ..here are they located, ind
i] hew laTgs is thsir traval butinett and hov iianjr
travel lEencies does each bank operatat

I ippxeciat* ycui
wurk'of this CoifLiiitti

ThasJc you for yoi

mtinuad coopeiatlon with th»

km

D„ii„.db,Go(5glc

_■; .-.,;■•- ■-.-•i.-.i" ,J.' *-^fc,' -- ■■■.. ;-r -'— A-4v^?. rj-
X vrita !n re*;>ori3« i-o your latter of Octobnr Jr 1977 i'.cimcex^ii^-'?:
t>.a position o£ this OcfLca in r»ga=d'to ;iAtion«l iianh o^rat^
trAV->l Agi^ncloSt- enclosed In your. leCtsf vas r:otKii»poiiicz:cA _to "
•""• fzKi.Shal^on S. Kscta«d,'Pra»liont of Yo«r Travol^jone, :>,'-,.'..
' - - - - - - — i^tMvetiy^*'-

. at ii/ conficnsti.on.haarln9'.abotifc traval aqencie* .ooaratad.iiy:.* . ,
■ TiationaL tsrAs. According' to'tho txar!»crlpt of y.y. henring,' I> ".'-
aaM th«b : van not rciilly faislliar with the details o£ tha' ' ''

cebato ovAC travel B^cnciea oparatcd by national- b*ni:9. I did
, not inulcatci a daaico 'to taV.a action to r.ssuca. tha^ accK •ictl- \
:..'vlc£ds'.vpuld ba ^l»contlnt:ed-i.V order.' to 'ccKsply'ui tit. th<»- .court''' .r/V
.'^eclstoB.*. Kar'did X'atjrfia.vclthya statanint AtCributod.'co.you-by'-':
■i-TraviliMofclY.jthat ltt.i3;lllas«l, foraationnl-;bonVsjto.iTS3;_traval.tV

Sew thaf.r b&va ,talEea':oS?lca.,U)d.h'a\'ii' >.af.«n' opportunity. 'ta' locic;*^'

into this issuo furt^cs, XTind thalcatter ot.tha lagali^ oS..';,-.'v;

' r.fitional bftnha. o^scratiof travel agendo* to'ba <{ultc.'. co;»;llcat^,^

. and i'::oettlod. 7>s irJlcated ty tJia history OJtllnsd'-helow/: tha ^>i,

.. couits have not roolvad 3ar:y tpications auxiourKJin; this acti-- '-i.

vlty, t:id It dcos not. appear that tha Co.■^ptrollor ' a Cftlca enn'da^

90 without senftratlng soro. difficult questions a=A ooro laysiiit«,->

''Th« perfcrsanca'of traval' sarvlces has'fcocn a pact o'-Xaropa&n^*'-','^

■■' !^a:;king fros a.arly 'tiae* and 't«o t»n3t»'*mri» oporati.^g■travel'. '^jV

a^^ncics ift this cou.-itsy.as ocrly as IS&S,' tha y^ar nftsr the~-,'S-

■pasxa^a oi the :{atiocal. B.^nk Act. By 19i% at Inast .::3 catlonal'.^vr

!;An}:E Vi^ri* acting aa txav^l agents. . Iii tha aauia y-iar, iii^_r' .^.■•i

;■ Cotr.ptxollar 'ralad that cnrtain national beaks vhosa travali^-*'"^;-'=rt

;.''..3*£vic'as .had hs^n dlsputaJ by a Cincinnati travel agant wara '. '•'^'■j

'■'.■■ec-ting' lavfully, *, Since that (lata, no. contrary, ruling^^has bosn'.?^

D„ii„.db,Go(5glc

/=>--kinfl * B.Kiulai nnrv.v/ .^f natlai:^! !>An}:* arul wit;i t.'i» bq:i«flt-i>C
a 2i psfti ftowa£an'Ju.i £rcn Vts A-.«Tie»n !!nrt«tv of TVnvel V^nts,
(:!i« &«t:]tcall4r :iian<aq3tAd splint a-.>^iitqallv Iiocnno P-irAij-rA^ '7^t

lii-J veclnu^ Lcav^l •acvlco'), =iich «s r-rlil.-.P tr.n-elord' ch'-cfca

avi i-iyviilTu; In tro^ tint Ions onJ .v'.v cc fc-ll".* ^cspast to fcrfiiin
■„m.J:j nnd VDSi:)'ii:st>*. Tf also r.:ccoiL?«J thai eickn hfl.ik« In
Bcrw titet'is havfl ts.'ulitlmalty tiisfoniod '.'ift (-i.tctloi *>! t»v4l

I,-. 1372, nn ttpFall«ta RO-.irt lioU tlwt 12 CPil ?.741S la "InvalW
ro (.!)« e*>:t«.~.t tliRt it la cona:ru«d Isy tho Ow.j>ts(,i[i,or r,^ n^^
fAOKisln^ • natlitnnl bank to apoc.-vto « full-eeala tXAVoI Mneccr "-
■'■rnolO^ Tour* v. C.----g <7i r,2i 4:7, <S5 (Jst Cir. U7t) . if- Mtn '
tv.ae Chin itTcision voultl linvc MftOtait ^tfoct »Mly in t>,3 F'ri*
J-4-jLclal Circuit. VIw coi.rt tfl-t not 'Ts/lno a 'Tull-oBale l-xav«l
a^iicY"! ncvivor, va i:AliftV4 the caiict h^vl In rlnC th« •'osczlp-
tlon of jji ia>;nL profoaolonal, Ko-tam i:rAvcl .ig-iricy otnratton tvt
forth in Cootnota t ofi tho ooart'n opinierft (at pngo «5) .

i-1-.llo Zfol.'^in? t:iat th« oiMsxatioA of .i trj-.v.-l Afcncy a-ich «« thai
of tho (ioSsntlJwit S-'-j.-.l. s::o:« Ttleniil P--V wsb not Ba>-harlifif<
*JY fchn .■..-ticiial -i.-.nk rut, cho coitt alro l.-j*icAtf.-l t.'wt Pijch"
Iravnl s»cvle<-a as "wtin^ a» colIretiv:i nr*!i.t tor n oiftor^lrla,
r~ilroc<< or uthor cosyay" (*..g. ^ol iw-irir..-; tlcVata aiui nlaci.-M
t1«i awwnt collecto.*. to the cJSTlt of uTio rosfany) ; '^^c ttaXo of
tcavolora* cIioc)>.o ani! foraiyiv e;irro.iev" "tho ^nviig of i-.rcv*l
Io.-mifi 't*=u«r.ca of lott.ara of •rr.^fJlfc*- 'inrt providir.o ers>'ls
travel inlorSBtlon' could lawfully bo provlria,! by r=£loi«l barfta

Oi, &ouv::hcr ;i, 1&71, tlio Cnr.;>»roll»r colicito! tt.i vtavs of ill
ints»c3tQ-l T'lTtica on a i^nr.lbln rikviaio.t of 7..tor»ro»ive IhIIr-
7.7*7S, 33 lV-,t. ,1.^. 3SOI3. -in a roat.lt of tli* ei-^r.ta re- '
cclvod cr^i staff cnalj-aie, Sl!!t r^-^pkx*>ll-,v p.bitj.h.:.: a i-.i-opos'ifl
rcviatoa of Ir.tuzz-rativv r.:'lirij 7.747S awl UvltcO B^^:itlo^al
ecrjr»nt. 40 7^,1. S^g. «7ri7 (A-.rll X, 1575). STto;wlVa a«-
t-LCIor.al cOiWiot* wfsre xcociv.^i In ramons'? '.a '1,^ pzopoijof
rcvlBion. V!.tf3o ew.Torts «l5«: .-. n.£^b.T o' v^:r/ cor.plos proble^t
tnlatiif; to r.;>':<:lflc travel a-rvi^ss vhich, ■ir.fortuaatcly, vn:e
raisod but :.ot rccolvia l:y tho cc^irt in tin j^.rr.r;ld Tr-.tr» i-ioljiw. ,

init-j niio:itia.i4 r^'.Jilr na to 0!ii j'tS:»rlohy of cirtnla soedflc
f.rav»l 3^ivJco=, tha C-r^ttrollsr nf tJin C -rro-;cY haa s-atod In
■ffiv'nvlta fllcfi in t!.a ca^a of S crionn .icol^W "- -C'-r

Ao-ittta. Inc. V. n.-.n> -' ' — ■ — ^-^ —^ ' ^ — = —

F.aTociatlof., 355 F.

Digitized bvGoO^^IC

uill tint /Lccft,>t any Appllentior.s TZoa rational t-Anke t.4 cs-
' tAMlsh an a^ar.itlAf nii^aldlaxy to offer travol cervices. Xn a''

tiep:iKatm c.-isi, cVs CocjtroHor rniprosentod to th« rovct th«t t>,»

OrMc« uould, on or bofore Vcv^nt-KK 3t, 1973, nlthar Isauo a
■ r«vis(td interprotlv* ruling or rapanl ttia i.^latlng ruling, in

X4ia;;t.~.7 vlth .this ropcoaontatlon , lr.t*K?sotiva ^.ullnf 7.7175 »es

raaclnded on tlovcElMr 39, J97S.

Tha 7.';<;eral R;;ierva s-j«x£ last year dati:r.-iln«(I rtAt tS^ op»ratloR'-
oC a tr4V4L a^ittcy Is not ao elojisly related td tan!ilr,9'of
rvwa^lntr or controlling barJia as to b4 « nrojjor inclCor.t thessto,
41 rntt. -Ic*;. 3134 (r«!>. 4, 1!>7S) , TNa eCtact 'of th« Beard's
ri:llr.9 is to f.roMblt tho operatlort of tr«v»I Ac«nci49 by bn-lc
holJl:.^ co.i;anin3. iToucyar, tho Soord's ^oclsion i:«s boon
ap^2lf:d to the Seventh Circuit <!-3ort of KppcolSr vhlch tiedr4
oral fr^uxcnt last •Tsnuary, arc] ;:o ifoclsion has !>a«n lBSk:ai£ by
that Court to iatv.

In iTnnucxy 1976,- tha P^iloral jl'isexva floardj basart. on data sub-
:-.itt<*d by tha Assoetntlon at ScrJc Travel Ouranua, cstljsatcd theb
At that tlSQ tha ncofccr of baKJcs, both otAta-chact'irefi and
netlciial, providing travel a^ancy sarvlcea nmberod only about
139 or loss than oaa ^ercanfc o£ nil constorelal Ivn^is In the
L<.ilt«il 3«at*s And 'l-?cs than tu-o percent of all «<f*nclcB In the
:;«tle.i. Wk i;otu that scea of thoss bank opoxated traval Agenclos
))&va been closed si:ico that tlno. 7or InEtence, In tha late
ayrlng o£ t;»l3 year Ir.<llana ir.ttlonal E.ir.lt rtlvcatftd Its trnval
Rtf-^r.cy operation of uore than SO years > ^leihapc t>>* lA£»st
travel . "IcpaE taunt la th* eoontsy at t!vo tlT.o of £lv«stit.iica.

I «i£) sum that yoa appreciate that vhil* only tvo parsant of all
trcvel «<:e.-ici.e9 ara bA.-iKc (a srcat nusbor of vhlch ore >tet«~
chartered), naay of tbca hcvs bc^n in th« travel 'liuslTicss for a
long tl=^, ai>d sosa offer tha only travitl **rvlcos avsilable in
thii oomitinlty in vhlch they ar» located. Viiernfoea, this
Offlco, It It vorit to revlsa the Intorpritivi! xullrt?, vould hcvo
to consider ;iot only such cacon £s ArnoTi Tours, bat also the
•ffact of such n culln? on iisall banVs una t.'-.e ^Jofitionltics tboy
»osve. w... si.'intl.on also tliat Hnny utatas ?icvo sjioeificolly
■tllcwed Lar.ks in the state to opecot* travel •genclcai national
bcnka wouli ba -.lut at a con^tltlve (tlsoSvD.-itaga in such states
if forced to divast or not allouod to Ir.stiitufo the operation of
travel Bfeneles.

Caned upo.-. tha wlda variancii in opinlo::s 1.1 th'a corzienLs e^sbalttod
on our anrlicr proposals an-1 th3 necessity of s.-:clyulng each
travel lervica' soparatsl^. we axe not convinced tJiat a naw
Iritarprotat^on or ijuidallnaa on the subject of travel service*
should be issued by this Office, tfn V:ellave that national iania
gonernlly are o'-'aro of Ifco ?irrialg Tmrs ctccialon and of tha

Digitized bvGoO^^IC

CiM|>tcalloc'a position puranknt ti-tha fl^ycLmlan, that a trav«I
a-iQ.itiy sach a« that i:ivalvad In V.\a fjcimlj Irivve caas pcebahlr
could rot ba Dstobliahaf' un4«r tba Kutional HanS Act. In bha
alisanea of a nav xulinft wa hava urgad national batiks to eon'stilt
thalr own lagal counial on tb« ranga of piixielaBibla traval
aaivlcoa undnc a:v|pllcabln atatut^a. Of coursa, tha obseneo of
an Interpcatlvo ^ullnq <!caa not Ivctunlaa natlor.al banks fzwi
lawault*, uliathnr brought undor t.ha rlntlonal V-fH\ Xct or otbav
lava. In adiliblon, aa pravloualy noted, tha CoT<ptrollaz*a
Offlca vill not acca;>t any applications froo a national hank to
odor ixKval snrvlci^a through opar/ittn^ snbiidlariaa pursuant to
lntcii«otlva nulinij 7.737C (12 C.-R 7.7375).

X jat^Ttt noto in cloaliiq that thi H-itlonal City r«nk Traval
Surdati ha) liacn in oparation for approxlnatcly fart?-ona years.
yux£h«riaor3, tlia Ohio L-~glslatuc>t has specially ijrantai] banXs
tht) 'fowar to oporato travol aganclas. fafor to Ohio PT-siacd
Coda $1107.31. .t!3tlonal City a-^Tih Traval 3iir<Kau la a re^is^erad
Ohio Tcaval \;ency undar Otilo Rcvlsad Coda S1333.9a. It is our
ur.daz standing that this batik oparatad trsval agency doaa no
advertising, has no.nav buslnass division, and doca not actlvaty
solicit business. Wa hevo also beon InfoiTncd by a raprcsantatlva
of tho bonk that tha G^noxal Rloctrlc Coapnny-L^.-:,p Ouainesa
Cioup has bocin a custo:AaE of tho ba.-.k and that this bar>. cu«to7;ac
was unhappy with the, sarvlcos of ¥?ur Travel A(,-Tnt, Inc., and
ccntactad bunk pecssnRal concemlitg tho travel agoncy aevvlccs
offered by tha bank.

I trust tha above will sarvo as a t:aoful guldo to tho currant
stAtus of tha leu vis-a-vis national ba.-J:s in the traval agancy
araa and will asaist you In caspondlng to your latter free*
Mr. HncLsod.

Vary txoly years.

John S. Unifflonn
Cc.-aptrellsr of tha Cozroncy

MilHa-a FroiSHira
U-,itad States S.-.nata
Washington, 3. C. 30910

LKSKITBihbw - Xl/J/77 t01S72

Digitized bvGoO^^IC

'3iCiTiIc& ^(rtfc-s -Sonrtla

Nov«i4bar 13, 1977

Tho Honorible John H«i>-«nn
Cofflpiroller of tho CuiTsncy
'-09 L'En.-snt Pliia
Mashinston, D. C.

Dear Mr. Kaiinann:

At your confimation h«aringi we had a colloquy
:«mii-ig the enforcensnt of the law by t?ie Office
of the Conptroller. I raised this question because
of this CoBimittee' s experience with the operation of
the Office of the CoiaptTollar by your predecessor*.
I specifically pointed out to you the illegality of
national banl:s engaging in the travel agency business.
In the context of the travel agency natter, I asked
you vhethjr you would talce steps, if confirrned in
the post of Coc.ptroller of the Currency by the United
States Senate, to assure that the Comptroller ad-
ninisters the law in an evenhanded manner. Your
response than was a reasurring "Absolutely, Sir".
Your letter of November 10 fails to carry out this
reassuranca on that precise issue.

There is no doubt at a!l under current lav that
it is unltwiul for a national bani to engage in the
travel agency business. yo-.;r letter ac'snowltcses as
xuch. But you indicate that national banks are aware
of the Arnold_7ours case and that your Office has
advised national banks to consult their own legal cou:
on the range of pemissible travel services unSer

In ay view adainistration <
handed aanner with respect to t>

requires the Conotroller to do !

Digitized bvGoO^^IC

784
Honortbla John tteininn -Z- N'ovenber 1}. 1977

(1) develop the facts duTing the exM>in«tl'^n procets
of pBTticuliT national banks relating to travel atsncy
opcvatlons, ,ir.d (2) proscribe by ceasa and dssist

order any such operations under ■ ragulation which
inpleoents the Arnold Touts case. To do less will
result in an incourage.font "by your Office to national
banks to flout the law.

I would appreciate your prsvldlng this CcKnittee
with a list of all national bir.ks which engage in
travel agency activities which violate the Arnold
Tours case. I thanV you in adv.nce for your continued
cooperation with the work of this Com.T.ittee,

Digitized bvGoO^^IC

U.S. HOUSE OF REPRESENTATIVES

lUMITTIC ax FINUKIAL IMTITUTIONf

niuoN. KteviiTioii ;ikd imuunci

Haich 33, 1971

Tha Honorabltt John G, Hainiann
Comptiollnc of tha Cunoncy
190 L'Enfnnt Plaia East, S.M.
Waihln^ton, B.C. 10319

Dear Kr. Haiiunni

X ±.-1 -■'[ttinq In refare;vca to tha contlnuod
op'!i'«tlon of traval aguncica by cartaln national
bnnks. As you know, thii mattac haa ganaratad lub-
itantlal debate both pcior to and aubiaquont to tha
dociston of tha Court of Appaali for tha First Circuit
in Arnold '^oai%^v. Caing, 02 F.ld 427 (1971), which
dntSii.iJiica "that thJsactivity la not nacessacy snd
Incldantal to banking and la tharafora Illegnl.

X> a laiult of tha recant decision of tha
Seventh Circuit upholding tha d a tami nation of tha
'odairal Sasarva Board that such activities ara not
'closely ralated to banking,* and therefore are
piohibitad under Section 4(c]|B) of the Bank Holding
Company *ct, there Is no longer any question that tha
sania proseeiption ifuit apply to national bank activities
u.ider tha National Bunk Act. It js my understanding
that you have infonr.ed Pcasident Jan^cs A. Hiller ut
the American Society ot Travel Agents that you would
carefully consider the Seventh Circuit's reasoning
in that casa when reexanlning tha policy of your office
with regard to the operation of travel services by
banks under your Jurisdiction.

I strongly urge you to immediately and expedi'
tloualy undertake this reeianinatlon, and proceed to
declare banlc travel egeitt operations of any sagnltuda

D„ii„.db,Go(5glc

Hon. John 6. KaliMnn -1- Karch 13. !•?•

bink holding conpantaa ara forblddan to parsna. X
would appzaclata laacnlng praelsaly what etapa you
lnt«nd to taha to aaaura that tlioaa national baniia that
contlnua to anarata traval aqanclaa dlacontinua that
activity foKthvlth. I aak that you 9lva av Subeoisnttta*
tmcdlata asaucnnca that you intnnd to •nfoeira tha
piovlsloni of tha itatlonal aank Act In accordanc«
with tha I'ocjnt ddctilon of iht Savonth Circuit.

Slncaraly youra.

D„ii„.db,Go(5glc

'^fnifcb ^(nfi's ^e«nt«

vr<"nii'cir "fcUrleV," vfclrt ■.*1« WaVL ".~." it i»""iliii:Vl~Iir » ~

•if.itlt t.\a rtcM sf tb* rtCiritl Mtwva teird U Ikr luik bPl«l/u;
r.?t cIomV nlftil Vo kuO^lBf. r-.U niMtt vouK irn to 1« •

Digitized bvGoO^^IC

CwniitroB« of IhD Cuironcy

MnMilnfa ol HiMen»l g*nM

Juno 1, 1978

Lta 400

(hin^lon, D. C. 20006

list of national

> your IcLter o( Hay IC, 1978, cequo^tinq

1 fie Jata you "nava taquc«eoa tor Emtposi;* of I
Senate BdnVlny Corjnittce on June J and 6, 1971
jnata ii that about 70 of the iMc« than 4,700 t
:»• th« couotty currently aro ericaglng in trav;

by each national bank. These lervicc
changing in nature and scope. Of coi

t provids you
■ Irony before
Our be.t

ageney-iolated

ivel-ielated seivices a

pfiiodicBlly aiiosied in

to provide you with a

be helpful ae you prepare
Vary truly yours, /

D„ii„.db,Go(5glc

ConatraMr a( tM CUmnn
Mnlrwtnnr et NWcnM einM

WTMiglai. DC 20818

Jiin* 1, I«7B

Banking CircaUt »o. lOt

SUejeCTi Natlml Bank Tnval Agancla*

H* haraby raquaat that all nattonal banka which ara currantly
oparitlng traval agajiclai, through a bank dapactaant or aub-
■Idiary, dlvait thuaalvai at such traval aganclaa within a
teaaonabla pariod of tiaa not to ascaad thraa yaara. Tha Air
Traval Confaranca of ksarlca daflnaa tha tana 'bank traval
dapartnant' a*:

...» apacial dapartaant ^aratad by a bank
•xclualvaly for tha aala of paaf*ngar trana-
portatlon and ganaral traval larvicaai inch

ai tour Itlnerarl*!, ilghtiaalng arrangaBant*.

nklng Clicular la liialtsd to tha typa of traval agancy
■ ancompaaaad within tha abova daflnltlon and ii not
d to Halt In any way tha provlalon of banking aarvlea*

In Arnold Toura. Inc. v. Caap, «72 r.Jd 417
tha Court held that tha opacatlon of a full-
wa» not vtthln the incidental powara confarr
by 12 U.S.C. 24(7). Tha court did point out

Digitized bvGoO^^IC

foralgn c
Ralylng upon t

a> th* »la of Cravalaca'
» Bcklng ot traval loans,
nd providing gratia trava]

InfoniBtlon.*
[let court In San
national bank could not
traval aqancy. Aaarleaq

7.T47S a
aubaldlarlai
.7176 (IJ C.P

Ir. 1978), the Court of Appaala for t
Aeld tha Faderal Raaarve Board'! rull
npanlaa could not eatabtlsh or aci]uli
■ nonbank ■ubildlariai. Tha Padaral Raaarva Board
Ion naa baaed on a flndtnii that tha actlv
ncy ara not 'cloaaly ralatad to banking'
tha Bank Holding Coaipany Act (12 U.S.C.

Ib1 davelopaianti, Ha baliava thai
■1 agancy by a national bank il
lank to a aubatanttal rtak of c<
leat that national banka diveic
■a Hlthln a raaaonabla tlna.
will ba raviawed In tha couraa of raguli

tha conttnuad
lapfroprlata
itly lltlgaticn.

:h— aalva of

loh^^T^SMa

coaptcoller of tha

Digitized bvGoO^^IC

(Stntnnttbc of Vanlmtg Jtutttutiatu on Vtuatton

ibla Wllliu F

extract tzati ttw April, 197G ii>u* of the V
int nagailna, luklng an unstaahad aripeal to
hnrlta to you In (upport of G TI ■■ It ralata
aparatlon actlvltle* of hanks. The public a
' inl'i ofCeilng t*x (ervlcei luda tl'a following arrfunentai

vlthin tha purvlaw ot ban It chart an
irlce offarad at lest than competitive rata*
I: pacaonnal not technically qualified

la reply to the
nher banks of t
t forth In the
office

9 argunenti li written on behalf of the S
inlttea of Danklnc) Inatltutlonn on Taxatl
led monherahlp liat. Va era an aaaoclatl
jclary and corporate. Our prlnary concer
( prapacation of the banK'a own tax return and the tax r
■• •atatas, trusts, auardianihlpi, comlttee ships, conie
todians whara tha ban): acts In a fiduciary capacity. He
one can fault the banks for prcparinfT their own returns
lleve that since in a nuzubar of our manbarship inatituti

Idonce of technical qualification can also be praaunad.'

1)

Since Bost of thair Invastnant

D„ii„.db,Go(5glc

record* ar« alraody with tha bunk. It haa been a natutal
avolutlon over many year* that ve then prepare their tax
returna and the retuma for their fanlly and ataff.
Clearly thla long standing practice of tax return prepara-
tion haa Ita orlglna in the bank relationahlp and la
demonstrably bank related.

2) luat bank charter* are broad enough in their scope
to enconpass activities such as tax preparation as activi-
ties incidental to banking. One of our nenber* vaa origin-
ally chartered a* a uater company but It* current charter

inatitution* and la as conpetltive aa the ratea anong any

the Public Aeeountants would dany tha tax preparation fl«ld
to all conaercial tax preparers if less than coapetittve
ratea la to be a criteria for authorliatlon to pertora tax
preparation work. Thla argument would not appear to be In
ttia public intareat.

*l Raving D*de the point in the Introductory paragraph
that WB prapara significant nuirbar* of returns in a fiduc-
iary capacity, some nualification nuBt be presumed. In feet
BOat of our ataff either have acadsnic or on the ]ob training
to qualify then as tax preparers and they are full tine career
oriented enployees solely enployad In this work In the larger

SI Tax preparation within a bank is subject to the
same regulationa aa any other banking activity and typical
annual exatilnatlons are Bade by either State or Federal bank-
ing auditors, the Certified Public Accountants who audit the
bank, the bank's own audit staff and the internal audit of
the Tax Department itself. If anythtng. the banks are over
regulated.

SI Bank personnel are held to the aane degrees of ethical
■nd behavioral codes as the Public Accountant. Me conton to
the Bane regulations governing tax preparer* including those
statea and cities that have enacted their own codes. In terns
of raaponslbllity for our activltiea, bank* aa a wlwle offer
more protection to the general public than any other profeas-
lonal preparer, including attorneys, certlflod public account-
anta or cocimerclal tax preparation Clm*, a* we place the

D„ii„.db,Go(5glc

Hithout cit^rcaiing a vlav on th« narlti of G 72, as an Amaoclatlon

latad actlvltia* ami In the bait InteieaC of our cuatoHn anil tha
Unitad SCatal Traaaury which has an Interaat In proparly preparad

''hank you tor the onportuntty o( prasantlng our viawi.

D„ii„.db,Go(5glc

Clearv, Gottlieb, Stcen a Hamilton

'Gottlieb, Stcen a Hamilton •>

April 24. 197B

:>rney Oeneral Sheneflsld i

=t: 11 U.S.C. S1828(c) (511

Thi» aoeniJt

llriB* IJ thcough 23 of S. 72.

Bank V. FDIC (347 F.Supp, «59
Hr. ShencTIeld stated that th*

but anticonpetltive
adverse to the publ

You Hill recall Cha

natch 7, 1978,

[led In tupport

(SMition latcMS)

>pears on page 4
ipparently 1*

nk Herqer Act of
0 apply to a bank
to be In the public

adopted bv the

D„ii„.db,Go(5glc

Bon. wllllui P

and CuETBncy Co^lttB« and by tha S

but would have given the AncicrusC

Miger coLild take e feet The t^66
■• (innllv snorted required that t

Isit Mill

feet
o biLnq

. . , I pubUc nterast

to t» ■•rv*d.

Throughout the entire leqlelatlve tilmtary of the Bank
Heiqer Act tram l9S9 to l>Gfi, It has alwaym baan the poaitton
of the Senate and kolibc ftankinq Coaailttaa* and the Sanata and
the House that a mereieir ihould not be approved It Ita overall

f th

• Wasli

Inqt

n Kuta

1 CB(« haa

tha affe

t that

:o the

iTDst Huat b« approved, the

decision i

oo[r«:t und

r the-BIKk

Herger A

the Act ihe

uld

» ame

nded

«r, I do no

t think

thU i» a

oreo

ct atateMn

t of the effect o

the Haihington

Mutual caa

«ne

:ose a

randiH

which dlacu

Btea Che

backgto

and effect

of t

cludin.

^tand!!^

bef

a the

inq°facti

"'. ""

not con.ld

red

by the

and the po

itio

aide red

■antleonpecltiv

e- by

the A

ntltru

t Dlvlaton

in 1970.

I alao enclois coplea of th* AnCitruat Division latter
of August 13, 197D coanentinii on the competitive effect* of

Annual Reporti for 1970, 1971 and 1971, and the opinion* in
th* Dlatrlct Court and Court of Appeal*.

ny memot
lng(on Hut

The effa

Digitized bvGoO^^IC

■ of th* Olati

eonsideced, t

EE* Court* do** not
th* proposed changa
Conqraa* In 1966.

t Court* aloi
■ could b* I
ba conildared slnply a* Cavora]
■utral aa to eoapatltiva (actor]

■ of tha finding* in tlia Haahliu
Lha banking factor* and tha con]
ne that th* tMrgai waa tiropaily
t. Accordingly, tha approval d:
MB to aa to provlda a aound bai
1 tha itandard* aitabllabad by i

I am **ndlng a copy of thla lattar and ny i
■nefleld. I balleva it vould ba balpful to
BE and the ancloiurea In tha hairlnq on S.

Raspact fully •uteli

Hatthaw Bala

Digitized bvGoO^^IC

April 18, 1978

At page 12 of hia prepared atateRnnt on 8. 72,

Mr. Shenefield made the following statement:

'The Haahington Mutual case did not receive
Supreme Court review, and ve doubt the
visdon of its rationale. The effect la
that a merger which ia neutral with respect
to 'iMnking factors', but anticompetitive
and thus overall adverse to the public
interest Bust be approved."

If this statenent is correct — if the Haahington Mutual

caae holds that a bank mergec trtiich has an overall effect

contrary to the public intereat wuat be approved — the purpoae

and intent and provisions of the Bank Merger Act Amendments

Of 19GG have indeed been frustrated. However, I do not think

the facta of the Haahington Mutual caae support this statement

of its effect. I question, in particular, the word 'neutral'

as applied to 'banking factors* and the word 'anticompetitive'.

The Court of Appeals opinion stated (482 P. 2d. 459,

'In the case before us the FDIC found the
banking factors favorable and improperly
rejected the merger on the basis of alleged
anticompetitive effects.*

Digitized bvGoO^^IC

The District Court's opinion pointsd out that on tlM

basis of the banking factors (and the competitiva factors)

tha merger had been approved by the State Supervisor of

Banking, and approval had been reconnended by the FDIC

Examiner in charge, and the FDIC Division of Rssoarch and

the FDIC Board of Review, the latter two citing iMprov^Mnts

in services offered to tha comnunity and elimination of a

management succession problem, resulting in more agresalvo

management. (347 P.Supp. 790, 794 and 482 F.2d. 459, 460-1)

The District Court a^^ieared to agree with ths plaintiff's

statement that the FDIC Board (347 F.Supp. 790, 000):

'has already found, from its review
of the banking factors, that ths ai«a
concerned would benefit from a merger.'

The PDiC's statements in its 1970 and 1971 Annual

Reports, representing the conclusions of its Board, are lass

favorable, talcing tha position that tha additional aervlcas

were already available in the community and tha managenant

succession problems were not critical, and that both of these

points could be solved otherwise than by the proposed merger.

Tha PDIC's conclusion in its 1970 Annual Report were that:

"No finding, accordingly, can be made
that there would be significant improve-
mento in banking service in the Abardaan-
Hoquiam Ai6b or that these inprovaments
esn be achieved only by SfcL's merger with
Washington Mutual.' (Page 143).

'Hhlle the financial and managerial
resources of both institutions ara con-
sistent with approval, they lend no
decisive trei^t to a detamination on the
ai^lication.* (Page 144).

Digitized bvGoO^^IC

The FDIC Board seems to hav« E«cognla«d that tha sierfer
Mould result in in^rovenants in banking services (even if not
"significant*, and even if these benefits could be achieved in
other ways) and that there were benefits from the correction of
the management succession problen [even if not of 'decisive
Msight*) .

Dnder these circumstances, it seems to ne less than
an accurate and complete statement of the situation to describe
the proposed merger merely as 'neutral with respect to 'bonking

II.

* Ant i compet It ive '

The District Court summarlied the reports of the

Attorney General , the Federal Reserve Board and the Comptroller

Of the Currency to FDIC on the competitive factors of the

proposed merger as follows (347 P.Supp. T9a, 794):

'£ach of these agencies sutnnitted its
report as requested, none finding any
significant anticompetitive factors,
either present or potential.*

The Court of Appeals used the expression 'reported

favorably" with respect to the comments of those three agencies

(4B2 F.2d 459, 460-1).

The text of the Antitrust Division's report of

August 13, 1970, on the competitive factors involved, was as

Digitized bvGoO^^IC

^•rrh-ll tSI'ATES VKl'AUTMKSr OF JU&'llCli

.4acmt U, 1970

Honoroble Frank «illo

Choirraan

FcrJcml Dsposlt tnsuranco

D«ar Mr. ChatmuD;

Thin ia In reply to your letter of June 19, 1970,
reriu;ntir.j a report pnrsunnt to Section 18(c) o£ the
PotlcrRl. U^pusit Inr.vj-r.ice Act:, on tli3 ctr.ipetitlva
tc!C\.ovc invol\-i.(j in ths prapsr.nA ccnr^olldntion of the
Wushinnton i-j'.inel Si:viii3c Hw.U, Senctlc, «c'j)iln;;ton
and a rautur.l ecvln;^? bcnlc created by the conversion
ol the C-tyc HsrbM" Savii-^s end tocn Ascocletlon,
Ab2r-:l2cn, Vrshinston.

I. TtiL. Er.nV2.

im ir.ig, oiirctcc ?.-/. i>n

ir.;li=i- llv.-(--.-;ioot tha I.Vj.ir. ol

Hsrhinston. A~, of Ejcj:

■•.bav 31, lESS. it hsC total

depi-oiti <,: SV25 uillioi

1 MiO i.jt Icuns tsn 6Ucy.\?ite

ol SfiKfl i,.iUio-.-.. ivo r.:

St opif^tiii- Iiaosa in 19G9

KC-. 50 L'Syjitmi Itu pvn

i-nC'-i ii-t cpsrcting Inctr^ in

l9S'i~6 vi^K S3. 6 ■.iili.^ow,

Th~ Cr.-iye IJnrboi- Sr.vlnsc end I/nnn A*jsocirtlo-ii
("As roc?, nil on") tMS or^cnixaG in I93't. It hes Bubnittod
an rTir'llcrtlv.i tci tits '..'jialiir^il-fn Stcto EupErvieor of
DanUiiv; to co^ivsi-c to c rutnnl ei.vlnsn bent-.. Ac of
DECPi.-sr 31, 195'J, ito «7j olflcE had totr.l d=F''=i±c
of $'•.?'> rjillicn anil mt lonns muJ iltecounte of Si. 35
million, ltd rat ero»Titi«5 iwcori In 1959 rpa $1:3,000;
its nvM^nec nst opsrntlns inaoiia in 19o'i-C ucs S37,BO0.
It is tliB t:inllGr.t of thrac finvln£c end loan aasocintioiis
located in Absrdccii,

Digitized bvGoO^^IC

Abirdaeti is a tovn of 19,300 ijKopln in Grays
Barber Countyi which lies Co the aouthwaat of the
Saattle-Toconia aiva on the Pacific Ocean.

3. ■gffnct nn Co-nTr-titlon

of its daposlta fron

•t. Effect on Potfttittal Cpvpatttion

Bank could enter th« /.berOcen area by opsnlng a
new office (RCi» 32.0i).O3O}. Aasociction Is the
eDolinct of the three sorvin;; the /.hirij^Gn bimq, end
it hcc lent thiin C p:i-i.* cent of the Ciposits in nlil
anch dCRocintions In Abarilaon, Hence, this eiineoli-
dation i^ not Il]:ely to hcvs any ci],T.lf leant ly odvarna
effect on poteatlAl competition.

of thin report is attached.

Sinccroly youre ,

Antitrunt Divl^f

//J'AK

D„ii„.db,Go(5glc

5=1

»,,.,...

.,..

^::.

GrnnHwtwiSwinpind

Aberdeen

807,335
5.148

33 1

1

Summary npon by Allorncy Genvil, Augusl 13. 1970

Ab«rd««n ii about 40 milM VMM ol Olympid. Ow locilNKi ol tlw nven
oHic* at Th* Watfiington Mututl Stvingi Bcnk ("Bvik"! Bwik nitri->nroi.
titnt in imignificint portion of in dipoiiti fnjrr- the tmtiat «•■ of Tfi C- r,t
Hirboc Sivlngi •"<) l-om AnociMion ("AnociMion''),

B»k Eould mtv tht AbmMan vm bv opaning ■ n«H oHic* incVi^
33.04.030). Amciilion tt th« tnwIlMI of tht ttWMnrving Ow AbatdnnMi.
«Hl it hM In* thwi 8 par c«ni of iti* dapotiti in •)■ udi MMcinion i ,
Alwtdetn, Hance. thii comolidition it not likely to tWM wty ■ign'liifniiy
MtMne itfan on polentiil conpttition.

Bnii tor Corporation denial. December IB, 1970

Wiriunoton Mutual Sningi Bank. Sentle, Witfiingian ("Wajilinon
Muluat"). an inured mutual lavinjs bank with total depotilt of $744,000)011.
hat applied, pursianl lo Sectkin ISIcl and other provivoni ot the Cderal
Oepotil Inuienca Act. fu the Coiporalion'i prior apprwd to coniolidM^ oriih
Grayi Harbor Stvino) and Loan Auociation. Aberdeen. Waihington ("SU."I
which hei lotH withdrtwabl* bt<«ic« of S4.70O.0O0. The iiwitutioni wiid
oonwIidiM undv Ih* cheno end till* ol Wttfiington Mutual and the jntr
office of SAL would become a branch of Wathington Mutual, increeeiff tie
number of iti officn lo IMenty-thrae. Fiva of theae brenchei reiultad Irani
n*r^nappro*ed in 1084 end 1966.

Competition. Wa^inglon Mutual ii an ably and aav^euiMlv nwia^ nv-
ingt bank. It i), by a wbttantial margin, ttie laigait muljal thrift nvtibfMn
today in the State of Washington, holding approiimatelv 23.9 parcani ol the
iDtal dtpotiti held by uch inslitutiom-e percentage rfiar* which hai imaaaail

D„ii„.db,Go(5glc

MMdilv OMr Uw pMt man v«ri from tha 1 7,9 p*rc*nl tfwn Md H yMr-«nd
1963! T)w iwxt Ivgnt (nutuM thrift InMltutktn In tht SUM if ■ mlngi *nd
iMn mociaiion. tmdquvNrKl in Tki>it», Int than on«-Ihitd ttw tin of
Wtihlngton Mutuil. holding ippronlmattlv 6.B parctnt of ttw toul daptHid
hdd tiv uch riu-ilt initilutioni. Only Itm olhir thrill inililudoni sxCMd S1D0
million in dtpoat tiie. Hrtiil* thi ramaimng 71 rtnga from vary tmill mtltu'
tions up lo S85 million >n depotit Hi*.'

Saving) bankt and uvingt and loan aBOcialiont in Waihinglon mav btancli
Oe noro or by marge throughout tha Stata. Mutual lavingi and loan asiocia
tioni under Stale law may Decom* mutual uvingt MnlK and the two typai of
innitulioni may merge with one another following luch a converiion,

Waihington Mjtuai o|Mratat twenlytwo oll<cu throughout tha Statt, and
hH thrac additional officat authorind but unopancd. III office nearett to
Abardeen, whera S&L ii locaiad. it in Olympia, tha State capital, filly milas to
iha aatt. Neither initliuiion derivM more than a nominal amount of buiineii
from areai pT«tsnllv larvad by tht olhac. and thair propoiad margar. accord-
ingly. Mould not eliminata any mtaningful aiitting competition,

S&L it the fourth largeit of lioe mutual thrift intlilutiont lerving approii-
nutaly 82.500 people m the Aberdaan-Hoi^jiam araa. Tht three larger mutual

alimiruta th.

andSALin theAbardaan-Hoquiamaraa.

More importantly, tha propoiad mar^ would eatabliih a lignificant pre-
cadent lor tiw approval ol addltiotul mar|pri in highly concanlraiad mirkatt
■n tha Stata of Watfiingion and (IwwtMra, among eommarcial bankt at well at
mutual thrift imtitutiont. with tht cumulativa affact of furthar concantrating
tht banking rtiDurcai of a ghan market in tha largati innitutlont which opar-
ata thera. Ai lueh concentration continual, dw publlc'i choice ol alternate
KHircn of banking •ervicai ii likaly to diminiih. Given tha fact that Wellington
Mutual Ii mora than tluaa timai tht tin of tha naxt largait mutual thrift
injtituiioii in tha Slite and that it alrMdy controli 21.9 ptrcant of total Uirifl

Digitized bvGoO^^IC

to HUnd ill Wwten tyium into naw trtu bv Uw mit||ir rouia r<th*r thm by

increoing tht pub(>c'i cHoiCB of tanking illtiniiivn in tach iru. A dvniil of
itM oropoMtl margac, on ih> olh«r Iwrat, nnDuid tncou'tg* S&L lo mk out ■
(lilfirinl mergw pnlner from ■mong 1h> SlaLc'i 73 olhei rrulual thrift Imtltu-
lioiH. thofbv dio ptsurving ihi poiobililv ol moit effcclin compslFIion
«giinil Washington Mutual I'l the futiirr tio"i *<Tung the Sut? t sine thrift

Tht Corporation betiavirt thai iha Banli Matgai Aci a> amaniled ceouirei
coniiciaradDn of tha longurm competitive imDlicalioni of a proDOtad nwrgei
M well ai iti ihori-ierm eflectl. In lilumiani wti«a one o' the innltutiont
involvad in a twopoHil merger atraad/ hai such a large ihaitf ol itt potential
rrarkei ai Waihingian Mutual, the Corporaiion turihrr oalievn iiiai adttitKini
bv mergw to itt exiiting itri
provemenli in banking tarirrc
prooovid margar or lii) the :
thai an immMiate rnoluiion of <ti protilafTu apoaait to be ne(«)ury to prwani

rrargar would bung lo SiL'i cuHomeis ceilj.n mniLn not pTicntly oKei^i

Kinal Iruti larvKet. sludani loant. and curiam other ivpei ol pecwnal lo a
MTvicn. all of which Wathingion Mutual can and doei oM« m accordance wiffi
Stilt law. fto claim ii mad*, howner, ihai anv banking na*di of (h* cuUk m
Vh Abardaan-Hoquiam arai are going unmet io<tav, and each o' thai* smi-n

commareiai tianki wilh otficei 1:1 ilie area. j&L dnd jVariiingtoo Mutua'. r>
ovar. pay tha lama rata of mieratt on itgular dcpotiti. i.e.. the hiifian lai-
miitad undercurrant Fadeial cailingt and S&L alio ollert b'i parctm aniR
pacant caciiticateL Tha Uight benefit in convenitrtc* of haoingona mora local
tourca tor tha aarvicei otftrad by Waih.ngton Mutual but not bv S&L coutt
alKi be Khiemd by 5&L's merger with a number of On other mutual tav4i|»
banki in the State. No finding, accordingly, can bt mada Ihat there wouldiie
ii^ilicant impronementt m banking wfvice in the Abardaan-Hoquiam araaor
Ihal tha« impravementi can bt achitmi only bv S&L'i margar aiih
Waihinwon Mutual.

Finmcitl tnd MtntgentI Haioiircet: f-uliin niitpeta. The Corporauvi'l

iht tecuriliai account, decent earninjt, sdeaLiiIe turplui. and a recsrd of Aw
depoi't growth ovai the yean. The only weaknais in S&L'i current condiuea
involvai Itie advanced age of rti two princlfHl operating offrcart (t>olh of who*
havs baan with S&L lince 1924) and a lack of ir

with approval, thav Ian
fact^ ttie Corporation eoncludtt that approval ol

D„ii„.db,Go(5glc

nM..'<«

..n-.^OH....

op.ir>.o..

oJ.°"«

Gr«yl Hi>lH>; Sxingi wid Loan

■ B07.335
5, MS

'

Slatamant upon raconiideialion, July 30, 1971

Watf>ington Muiual Savingi Bank. Satttla. Wathington l"Waih>ngian

Mutual"), an Imurad muiual lauingi bank with total dapojlti o' 5744.000,000.

I '( prior approval toconfoli'

*■■ dKiicd on Dacambar 18. 1970. the Corporal

data ttrith Grayi HartMi Saving and Loan ABociation. Aberdaan. Wa^inglan
("Sai"). wi FSLIC-inn>r*d innitulion widi total wittidrawabla balancn of
54,700.000. Warfiington Mutual and S&L ihan peiitionad the Corporation to
raconudar ill originil dwiial. The Corporation't Board of Diracton, having
done to, atfrrmi iii original denial with the lollowing additional ttitemant.

The ipplic«iti requetted reconsideration or^ eiwniiallv three groundi: (II
that the Corporation improperly ulillied a line of commerce limited to mutual
iwingi banki and lavingi and loan auocialioni in meiiing the compeiilive
Impact of thair propoaed merger; (2) that the Corporation niade certain ertori
ot lact with regard to the potential competition itiuet prataniad bv the appli-
cation, and 131 that in any event the likely benefits to the convenience and
naadi of the community lo be wrved and the retolution of S&L'i n^anagemeni
lucceuion problem are wch ai to warrant approval of the application.

Lint of Commerce. Whether or not commercial bank time depoiili under
$100,000 ihould be included wth thrift institution deposit loiali in asaeuing
tha competitiva impact of a merger between thrift imtituliont uniler the Bank
Margir Act it a much-debated quettion among lawyert. economitis, bankara.
and public otficiali, Tha Corporation recogniin, of course, that commarcial
bank* and thrift inMituliOm are all deposit type inttitutions and that in aMnat
Ihay can all be laid to compete in seeking to aitraci Ute saving of indhMua
member) of the public. The Corpoialion also recognizes thai no definltin
annii>e< to this question hat yet been given try the United States Supreme Cowl
in Its ^iiiont under tha Bank Merger Act n amended in 1966, all the daci*d .

One thing at leaat ii dear. Tha United States SupreriK Court, with miannl i
finality, hat determinad that commercial banking constitutes a separate Knc i
of commerca" for purpoMi ot analyzing the compelttlva atpecti of cn< — .«<M
bank margara,* dnpila tfw arguments presented to it tttat deposit loan

competition from financial institutions other than commarcial bank. viM '
also be coniiderad. Iti eiclution ot thrift institution deposit! Has partii. 'r*(
■triking In tha ^Ullptbv/t case, where the bulk of aach bank's local d«|Mli. .
npmenlad lime depoiits under $100,000 and where tha bulk of each hBli''
total loam ware real eitale loens and mortgagn-an asaet and liability mkiw
loo dissimilar Irom that ot mutual savings banks and savir^ and loan aMasT
tioni. The Supreme Court expressly found error in the District Cobt'tnt'V
Am tinea Iha activllla of the merging banki made ttiam much rrtora '■!>-
Mviny institutions tlun like so many ot the larger commercial bania, ativticn
had to be given in tlw competitive analysis to different groupings ol praducti

D„ii„.db,Go(5glc

In <ti originil ikniil of thn application, ttx Carporttkm ilimiiiMil M
•xclud* conimerctai bmk time depoirti f'om iti (ndviii of tht compaMM
cflact of ihg pfopoml mirffr, looking imtnd tolaly to tha dvpuiti of laaial
tm'vngi tHnki and the wilhdinnabl* iha'ti of uvingt and loan aiiociaIiDi«.Th*
Cnporation dlad in uriiar dacnion involving tha propoiad matoar o* (MmI
Mitud Savirv Banli and Stxa Mutual Savingt Bank, both haadquanarad in
Tacoma. Waahington. wheiein it had uid:

In tha Slate of Waahington. wtiere mutual lavingi and loan inotiatio<w haua

end of 1969). where both Ivp« o' inilitulioni mav uay inlereil on depoiils
below S1 00,000 at the ume r^iei dnri each m rjiethighrr Than romn<e«;rai
banks. i,vtwte ai laait tome dillerential in iniereit iat« ha« perinifd be
twean thrift iniiiiuboni and commercial twnki al almon a" timet ihrough
oui the poiI-Woild War II period, where both [ypx ol intlilutiont aie
identified by the public ai thrift imtiluiioni engaged ptimaritv m mortgage
landing, where both by ttatute have veiy limilsr powen, privileget, •etlr-c-
tioni. and liabilitiet, it ivould appear thai the tWeiiiw linaol commerce for
Bwuing the compelilive intplicationt of 9 pcopoied merger ol mutual i*v-
ingi banki ihould be "thrift indiiution banking" jt of fend by tavingi bank*
and iBvingi and loan atiociaiioni. Ai indicated, in the State of I'.'aHtinglon.
■avingi banki an<t tavingi artd loan atwcialioni aie uniquely able to compete
for depoiil) under S1O0,000 and are generally considered interctian|pable
allernalivai for thrifi-type depoiilt and for deposit iniiitulior>i emphaiiiing
home mortgage lending.

The Corporation adheret 10 this view of the appropriaie "line of commerce"
for purposes of the proposed merger ol Washingion Mutual srxIS&L

There is no doubt that in the Stale of Washington as elsewhere, commercial
tanks, espacially those in major meiropolilan areas, aggresively advertise their
offering of aocallad conumer time deposits, whidi carry a rate of interatt
M^wr than tha raW of iniarait paid on rayiiar savings accounu. A member of
•ha public rtitaraited in tlw highest return available to him at a depos<t-tvp*
intlitutlon, however, ii likely to turn to a mutual lavingi bank or tavingi and
loan anocialkin, which, tinea tha end of World War II, have generally paid
higher rates of interest than commercial banks on the same type of account.
Under Federal regulations currently in force, these types of thrift institutions
may oflar a re^lar savings account, increasingly available on a "day-of-de-
poiit'to-dav of -withdrawal" batit, at a ma'imum rata of interest of G percent
per annum {compared vtith a 4H percent mBiimum rate at commercial banks)
«Ml a rata of interait on time c)epotiti % percent higher than the tnaiiimin ma
payatja by cMnmarcial banks on account! of last than S100.000 but of (ha

Mutual savings banks and savings and loan associations, moreover, compete
for the puUic't fayingi under operating rules that ate different, in many basic
iwpecti. from thoae under which commercial banks operate. Bendei their legal
aUlltv to offer hH^iar maaimum interett ratal than commercial banks on com-
pKabla dapoalti, thay are not raquirad to maintain minimum reiervai against
Ihalr lavlnff dapoaiti, thay hay* no holdan of common itock to whom racier
Itvldand paymants must b* provided, and they an permitted to Mt saida
Mbttantlailv hi^Mr tax-fra* reaarvH for loan loaaB than commercial banks.
Thaat diffaraicM In operating rules asalit mutual thrift itiatitutions to pay tt>e
M^ier ratas of inlarast aultioriiad by Federal reflation, to resht disinter-
madiatian, and to continue tiKir rota as the nation's principal source of resi-
ilMitiel mortgage money. The fact that legislature and public agencies treat
mutual thrift inMituIioni C)uite differently from commercial banks supports Itie

D„ii„.db,Go(5glc

to OIK •nstriuiiDn and may. lor thn tnton, dBlibextaly forajo Ih* (dditionil
incrnneni o( iriwr«I avsilshle at muiual uvingi banki or tavlngi and (can
aHociationt. depoiiting even ihtir excea mingi ai the coninitrcial bank ih*v
aim urili/e tc checkiiiq acrniintt or toan; xtiich the mott mtrictid thfifi
imtinilioni cai'nni otier. The raprd growtti o( lime dipoiitt at miiual ihrih
Inttiiutiotn, including tliote in the Slate o' Wnhington," and the itability ol
nwir regular t^iingt deposiit, make ii clear, however, that the mcranwntai
intereji aAiantage ottererf by inch injiitutiont a a mesningtui <>ittBrencB to a

lncorw«iier>c« involved to depoiil their tavingt in a ihnfi imtiiuiion rather
than a commercial bar

HTifficent portion o' the publ ic.

thrift imiitui'ons to of'et a highei rate of miereit IHan commercial banki dn
coouMTur tavingi, the ditfarencei m the ri,l»« under which »uch inilitutioi^i
Operate, arid the djfferentiBikin between them which is made by a iutNtmtitf
portion of the public all ivairanl Ihe nealment of nuilual thrift intiiuiionin]
wptrate "line of commerce" for purpows ol the Bank Merger Act.'*Th« Cw
poration further notat that an agency deierminalion to include commerce!
bank time depoiili under 5100,000 with the depoiiti of mutual thrill irHtiaj

Ponntiil Compftilion. In iti original denial of the application, the Cc <a-
lion indicated that neither Wnhington Mutual nor SAL derives rtnre i > a
nomirul anwuni of buttneti from areai pratntly served by the other, tm. w:
their propoteO merger, accordingly, would not eliminate eriy meaningful e. at-
ing compelilion between (hem. The Corporation further founO, hoMKver, MM
ttie proposed rrerger wouW eliminate the pouibility of future
bciwHn the two institutions (i) throu|/i ale novo brar>ching into the AI

Digitized bvGoO^^IC

HMUiim am on tha piri of WMhington Muhi*l, Mid (ill throu)^ «n ilwr
■KtH rargH- on (ht p«n of S&t with anoiher mutual thrift imtitution which
anitd not hw* Warfiinglon Mulual'i 32.9 parcani tfiara of all thrih iniiitution
Apoata in tha SUM of Waihingion and which would pretane the pouibiiiiv of
Mora aflactiv* oompalitlon agatnat Waahington Mutual in Itta futuia from
■long itia Staw't othor thrift Inatitutiont.

A rwriaw ol Waihinaton Stal* uiparviaorv policv i" aulhorliing da noro
intiitm for mutual Hvtnpi banki, togmhaf with Kich peninent facK k tha
MHiiiiad aconomv of U>a AbardaanHoquiam araa, iti alow growth rate and
laaar Ihan auraga incoma lavalt, and Ih* proant population lapfvoiinutalv
IXQ paraonal par thrift imtitution office alraadv larving that ar«. has cauiad
A* '' "location to ravin iti opinion that Wnhinglon Mutual "could in tha
n .rraa antar tha AbardaanHoquiatn am" bv da noro brarKhing if the

p : nargar it daniad. Thar* appaan to be linla likalihaod of uich entry

k iminediate future if SAL margai wiiti a mutual lavinga bank otfier than
V jnglon Mutual, allhau^ tha longer fanga poaaiblliliat of da noM> entry
Mum be totally diKounted.

The CorporaiiDn'i eorilar conduiion on (hit point wai not. however, itie
pbietpet teewn for iti denial of tlia ipglicnion. Trnt reaaon wai sated in itw
■Iglnal Bmii for Corpontion Oimtl m lollowi^

More importantly. Ilia propond merger would ettablifh 9 significant pn-

ledent for the approval of additional mar^Brt In highly concentrated mer-

■m in tha State of Waahlngtim and elaee^wre. among commercial bantu ai

■nil a mutual thrift imtitutloni, with Itie cumulative effect of furttiar

OOncentrating tha banking rauxircet of a given merkat in ihe largatl initltu-

tfon whidi operate there. Ai luch concentration continuei. the public'i

ftioica of altamate lourcai of banking tervicei it likelv to Oimlnnh.

Ha the Corporalion'i original denial pointed out. Waihingion Mutual hai

More than 22 percent of all thrift imtitution dapoiitt in tha State, a percentage

A>e three limei larger than the lacond ranking thrift imtitution." Where innl.

Htioni In tiM tame line of commerce may branch or merge an a ililewlde

taiii, the Corporation believn that tha entire State thould be considered one

«f the relevant geographic areai in ataetiing the likely competitive impact ol a

BMlewide market me pennitteO to make further acquiiitiom vmthoui com
pelling raatoni bawd on puWic convenience and needs, two related ranitli are
Nkely: (f ) more luch mergart would be encouraged both among thrift iniiiiu-

ing resourcei ol a given Stete into fewer and fewer handi, and 13) effective

in H^iich could hope >n time,
lergen, og^eeiive Die noro branching or tnih, to offer tignilicani
I the former throu^oui wide areat of the ume State. Indeed.
igton Mutual li denied any further mergen, only three or tour

D„ii„.db,Go(5glc

othei thfill initiliiiioiK ol ■ liie *ppro>im*telv m)im< Io th«t of W«hington
Muiujt could b« CI died tiom dl tht ihnift imiilution dcpoiitiin thiStiteof
JVxtiinglon.

The idvcrir pr(c«l«ni which ihe propomj mtfgn mii^i MMbliih, bcouM
if mr (hire ol tile potmiial (tsMwids nurkei ilrudv Md bv Wrtingioti
Xulual, can Iml lir >lluitr*Md t>v nolin^ th«t only 77 comincicitl binki in Ih«
oumrv, out ol a total ippfoachint 14,000. have 10 percent DC more of th*
}UI cofninetciiri bank depoiiii m Iheir rnoeclivc Statn wxt onlv 79 hive

I Iheir lespectivs Slatn. Even fewei miiual thiifi iniliijiiont wouW h*v« •
milw tfiare of itftrwide thti'i rnstiiution *po$it totali

The CorrxHsIion <i not pHHisiMd bv any ot Ihe n^aienal lubmiind on
comideialion Uut S&L ■> liiniled to * vov lew mttgw dieimtivn od th«t
'Mhington Mutual ii tfw man logical al Ihne. Tlwce are 7S«the> rnjlud
irifl imlituliDm in llie SiHe of Wnhinqlan, including tome 70 Hviny and
>fl enociBliom, from n^iidi S&L miy legdly fsek a mergir [Mnnir. Tfieir
p*city to abtorb SAL't nwitg*ga portfolio may nary, becwte ol iinutocy or
^Iftory rntrictioni, but the effect of Ihne renriclioni hea dunged nan
ilhin the put yex. The CorpootJon ii coofident thet S&L'i director! an
id * utii'tctorv allernatiut to thr merger propoted 11 it it tgwn deniM.
FinaMv, the Corporation would reiioiie the view eipreoed in iti original

^fogk

Swnl«, WHhinglon

SuiTinivv noon by Anurrwv Gantril, Auguit 13. IS70
Alxnlwn ii iboul 40 mlln tnit at OlympU. «it kKilion ol tlw flMmt

offic* ot Tbt Watungion MutuH Sdringi Bmk rew*"). Bv* Currvntfr ok-

Uini in irajgnilkinl portion of ill itapoiili fnxn Iht Mcvlea MM of Thi Oram

Harbor Stvingt vid Lom An
BmK cou4d annr tiM A

32.M.(I30). AuociJiion ■> tl'

■m it tiw iMi th«> a pti cent of th* dipatlli in
AbordMn. Htna. ttiti conwIidMion it not lilitlv li
kMim if feci on pountiil compciition.

Sail for CoiporMion ipprDvil, Ocmbar 15, 1973

WMhingtan Muniil Swings Btnk, Sottla. WnhinBtDn. ir iniuicd rnuDHl
uviiigt bmk wiih loiii depoiiii ol SI. 172. 759. 000 b of Jun« 30. 1S73. Km
■ ipciliBfl, punutnt to Saclion IBIcI and other ptoviiiom of itie Ftdaril Dvpoiil
Imunnce Act. tor ttin Corporttion't prior ipprovil to contolicJ»le with Gran
Hirbor Si'in^ and Loan AnoDaiion, AhMdan, Wahington, which had loul
dipatiti ol SG.300,000 » of IMvch 31. 1973. The initiiulioni would con-
HilidMc undar ttw charier and i<llt of Waihington Mutual Savinp Bank, aid .
Iha only Difica ol Griyi Hirtior Sav'ngi and Loan Aiuciitian would tiK«nt a
branch of Warfiington Mutuil Saline Bank, Prior to tta coniolidition, Gtw/i
Harlrar Sivngi and Loan Auociaiion propOMt to convert lo a mutual laoingi
bank.

The Carporation deniadttx luliiect application on Dnviriber 18. 1970. anr,
upon iMnni idem ion. altiinied its denial on July 30. ^92i The rtatoru ft; i
ilioK aclioni lie lully detailed in the oiiginil Baii> lot Corporation Den*> I
11970 fDiC Annual Repan Ml), the StatnTwnt.Upon Reconiidefalion I1H7I
FOIC Annuil Rtporl 164), and in the briefi lubmiited by the Corporati'i* to :
■ha U S. Oiiinct Court lor the Wcilern Diilricl ol Watfiington 1347 F. •3«p.
790) and the US. Court of Appeal! for the Ninth Orcuil (Civil Action ■: ,
73-2972).

In view ol the adverM deciuont ol thoae two couru and the de'irmi tlon .
of the Solicitor Ganiral ol the United Staiai not to petition tht Supier ' -jit
of tfie United Slaiei for i writ of certiorari, the Corporation it Ta< j w
conpiy with an order to approve the uid merger rnusd Octobtr 25. . ^by
Aa U.S. Dwtrict Court for the Wattarn Dittnct of Waehmgton. ttia at. Hm-

n«H ol wtiich WH itayad throu#i October 10. 1973. pending nilaiiiia iil

Wiomappellaieilapi but ■lhic^ ieiKiwIulhr altaclivt.

Hie maroer •!, aocordinily. vprooed.

D„ii„.db,Go(5glc

WASHmGTON MUr. SAV. BAKK t.

parative neglisence. Jeter was familiar
with the condition of the dock. Yet, at
the time of his accident, he was wearing
a pair of unlaeed tennis shoes. It is un-
clear whether the soles of the shoes weie
smooth or had treads. It is clear, how-
ever, that on at least two occasions on
the day Jn question Star's vice-president
warned Jeter prior to his accident that
his shoes were unsuitable for walking on
fish slime, that he should change into a
pair of shoes with cleats for better foot-
ing, and that if he continued to walk on
the pier In the shoes he was wearing he
was going to hurt himself. These warn-
ings went unheeded. On remand, the
district court is directed to make find-
ings of fact and conclusions of law re-
garding Jeter's comparative negligence.

With regard to the district court's
judgment oi maintenance and cure to
Jeter and the award of attorneys fees,
we have carefully reviewed the record
and find Star's contentions to be with-
out merit. In this respect, the court's
judgment is affirmed.

The case is remanded for further pro-
ceedings consistent with this opinion.

Affirmed in part, reversed in part,
and remanded with directions.

PEDEStAL DEPOSIT INSUBANCB COB-

POBATION, Defendaiit-AppellMit.

No. n-QOVL

United SUtea Court of Appeal*.
Ninth Circuit
July 12, 1973.

FEDERAL DEPOSIT INS. OOBP. 459

i 150 (10731

two thrift institutions. The United
States District Court for the Western
District of Washington, Morell E.
Sharp, J., 347 F.Supp. 790, entered or-
der enjoining the FDIC from withhold-
ing its approval of barvk merger, and the
FDIC appealed. The Court of Appeals,
Choy, Circuit Judge, held that FDIC
does not have power under Bank Merger
Act of 1966 to deny a merger applica-
tion on basis of competitive standard
more stringent than antitrust taws of
the United SUtes.
Affirmed.

Principal aim of Bank Merger Act
□f 19e6 was to curtail discretion of
banking agencies. Federal Deposit In-
surance Act, 51 2[18] (c)(2). (2)(C).
(1 5), 12 U.S.C.A. 3S 1828(c)(2), (2)
(C), It. 6).

1. Monopolies *=^lVn

(ingress, in enacting Bank Merger
Act of 1966. intended that all bank
merger applications are first to be sub-
jected to traditional antitrust analysis.
Federal Deposit Insurance Act, §S 2
[181 (c)(2). (2)(C), (4, 6), 12 U.S.C.A.
§S 1828(c)(2), (2)(C), (4, 6): Sherman
AnU-Trust Act, f 1 et seq., IS U.S.C.A.
§ 1 et seq.; Clayton Act, S! 1 et seq., 7,
IG U.S.CA. 51 12 et seq.. IS.

3. Bulks Mid Banking «=>S8S

FDIC does not have power under
Bank Merger Act of 1966 to deny «
merger application on basis of competi-
tive standard more stringent than anti-
trust laws of the United Statca. Feder-
al Deposit Insurance Act, %i 2[1] et
seq..2[18] {c)(2), (2)(C), (4, S), 12 U.S.
CJk. §g 1811 et seq., lB2B(c)(2), C2)(C).
(4, 6) ; Sherman Anti-Trust Act, 1 1
et seq.. 16 U.S.C.A. S 1 et seq.; Clayton
Act, ES 1 et seq., 7, 15 U.S.C.A. » 12 et
seq., 18.

Payne Karr (argued), Martin T.
Suit for declaratory judgment seek- Crowder, of Karr, Tuttle. Koch, Camp-
ing review of decision of FDIC denying belt, Mawer A Morrow, Seattle, Wash.,
aiqtroval of proposed consolidation of J. Witliam Via, Jr. (argued), Edward

Digitized bvGoO^^IC

482 FEDERAL KEFOSTEX, 8d SERIES

Branailver, Gen. Counsel, Eric F. Kap-
lan, Atty., Fed. Deposit In;, .Corp-.
Wuhington, D. C..' Arnold & Porter,"
I' 'WisEington, D. C, for defendant-appel-
-hnt- - —■ ^jj

John D. Hswke, Jr., Washinston, D.
C. (Briued), Louii H. Pepper, of Aihley,
Foster, Pepper & Riviera, Seattle,
Wuh., for plaintiff i-appellees.

Before CARTER, CHOY and GOOD-
WIN, Circuit Judges.

CHOY, Circuit Judge:

The Federal Deposit Insurance Corpo-
ration (FDIC) appeals from an order
enjoining it from withholding it* ap-
proval of a Ijank merger. We affirm.

I. THE CASE.

Wuhington Mutual Savings Bank is
the largest thrift institution' in the
State of Washington holding fT44 mil-
lion or 22.9% of the deposits as of June
30, 1970. Washington Alutual has iU
main offices in Seattle and twenty-two
branches throughout the state, principal-
ly io the Seattle area.

Grays Harbor Savings & Loan Asso-
ciation is one of the smallest thrift in-

stitutions in Washington holding $4.7
million or 0.1G% of the depoaita. Gray*
Harbor is the fourth largeat of fi*«
thrift institutions in Aberdeen, Waah-
ington and is located flfty miles fmn
Washington Mutual'* neareat brandu
Because of a management aueceMlon
problem. Grays Haibor sought out Wub-
ington Mutual as a uergn' partner ia
1970. After Altering into a merger
agreement both banks sought KpprvnX
from stato and federal banking antliori-
ties.

Washington law require* tbe approval
of the State Supervisor of Banking. 11
U.S.C. £ lS28(e)(2)(C} requires the
written approval of the FDIC when the
acquiring bank is a nonmember insaicd
bank.* Federal law also requires the
FDIC to request reports on the competi-
tive factors involved in a bank merger
from the Attorney General and the two
other banking agencies.*

The Washington State Supeniaor of
Banking approved the pxupuatA merger
on August 14, 19TD. The FDIC fiM ex-
am iner. Division of Research and the
FDIC Board of Review oil reported

. Thiift intti

I Id \Vsih[ii|ton *n

c)<Z) pravlclH ufol-

HlUIale with taf other iaiured huh
*lti*r diHctlT ot Indirectli-, icqnitc
■sitta of, or umnii- liabUjir ts pi;

(A) lk( Complrollcr at tlic Currncr
If the BCquiriDi, uaunlDft or mulllDC
Unk la to be ■ nitlonil tank or ■ EMa-

(C> th« CoriKiraiioii II
uniniliif, or reiulllas b
DODueuber iDHureil bank
trio bSBk).

urea bj 11* FDIC b<

I Bnarva S^tMB nor

national or DIalrict U

12 VSX:. I 1S28|C>MI p

the reipmalbla afiocf, miliaa it tinda
thai It moat act Immadlarcl)' In aider
to prevent the probaUa talliir* of oqe
or the baaka lBt«lT«d, ali^ ra^naat
report* OB the coapetlclTa iKton la.
mlreil rnm the Attonwj Qnaral ami
the oiher two banUnt aceude* re-
IrinU la In this aabeectloa. Th* r*-
perti (hall be InralihRl wllhin tblnj-
calendar dayn at tbe data on v^ilet
tliej' are ravwalfd. or vlthin ten tal-
" " " Qch datef"

advlnea tUe

1 Cm-

DigilizedbvGoO^^IC

WASHINQTOH Hint. SAV. BASK 7. FEDERAL DEPOSIT IMS. CORP. 4$1

favorably * on the proposed merger, at
did the AntitruBt Division of the De-
pjuiment of Justice, Comptroller of Cur-
rency and Federal Reserve Board. De-
q>ite these unanimous recommendations
of approval, the PDIC Board of Direc-
tor, by a vote of 2-1, disapproved the
proposal on December IS, 1970. After
reconsideration, the Board affirmed its
dental on July 30, 1971. The Board de-
termined that althouth banking factors
were conaiatent with approval and the
proposed merger would not violate the
antitrust laws of the United States, the
merger would be a significant precedent
for approval of additional mergera in
higlily concentrated market*. The
Board's decision to apply a competitive
standard stricter than the antitrust laws
was grounded m) the Bank Merger Act
nf 1966. 1ZU.S.C. i 18ZB(c)(5).*

Washington Mutual and Grays Harbor
commenced an action to compel the
FDIC to an>rove the merger and sought
a declaratory judgment that the Board's
action was arbitrary, capricious and not
in accordance with the law. Summary
Judgment for the banks was granted on
July 21, 1972. The district court's
decision* was based primarily ou the
FDIC's failure to apply relevant factors
under the antitrust laws as Congress
bad intended in enacting the Bank
Merger Act of 1966.' On remand to the
PDIC, the Board conffrTned that the

proposed merger did not violate the anti-
trust laws of the United States, but
refused to approve the merger, alleging
discretionary power to impose stricter
standards. The district court, on Octo-
ber 2b, 1972, enjoined the FDIC from
continuing to withhold its approval and
this appeal ensued.

The parties raise a number of issues,
only one of which we need discuss in. de-
tail: Did the district court err in hold-
ing that the FDIC does not have the dis-
cretionary power under the Bank Merg-
er Act of 19GG to deny a merger applica-
tion based on a competitive standard
more stringent than the antitrust lawa
of the United SUtesT

Prior to reaching this issue, a review
of the history of bank mergera and the
antitrust laws and the role of the FDIC

II. HISTORICAL BACKGROUND

a. Pre-lteO. Although this country
repeatedly suffered from unregulated
and uncontrolled competition in the field
of banking,^ there was no effective regu-
lation of bank mergers through the anti-
trust laws prior to 1960. The Sherman
Act had bttn considered inapplicable to
all but the most serious restraints, while
the Clayton Act was a dead letter so far
as bank mergers were concerned. Sec-
tion 7 of the Clayton Act proscribed
stock acquisitions by corporations, but
bank mergers were normally aceora-

4. Tn» dlitrkt mart did not abou tti
(BscretloD la oHorins productloa of tfao
FDIC* -^isrul tlW after its fa fm-
era LoipectEoB.

5. 12 U.S.C. 1 lS28(c)<5) provida •■

or wlilcb wodM bt la hnlienoc or

tb* bulBU* of baaUnc la aay imrt of
ths Ualtad Statu, or

•hall lake Inlo coDetderatloB the QBali.
proapecti oE Ibe exLatlot and propoaed
ncadi ol Ihe comainDity to be lerred.

(B) auT otber propoeed mtrpr

■. 84T F.SOPP. 790 (W.D.Waih.l»T2).

tia» of the eoontrj. may b* nbataa.

7. S.R*p.X».10a. SCth Cong., lit S«. 10-

18 (1B59).

D„ii„.db,Go(5glc

tSS rEDSRAL KEPORTER. Cd 8SRIE8

ptished without an "acquisition" of
"atock."* To reach undue concentra-
tions of economic power or monopoly in
their incipiency, Section 7 was amended
in 1960 extending the statute's reach to
any "corporation subject to the jurisdic-
tion of the Federal Trade Commission." *
Since banks were not subject to the
Commission's jurisdiction, the prevalent
view was that bank mergers bad suc-
cMsfully eluded the grasp of the anti-
trust laws." Congress became increas-
ingly concerned with this problem in the
1960'a."

The Federal Deposit Insurance Corpo-
ration was created In 1933 to insure de-
positors against loss resulting from
bank failures and to restore public con-
fidence in banks.'* The Federal Deposit
Insurance Act was amended in 1960 and
for the first time the FDIC was re-
quired to approve all mergers and con-
solidations between insured and nonin-
sured banks." But the standard for ap-
proval was a purely mechanical one
without any guidance as to the aignifi-
caiiee to be attributed to the anticompet-
itive effects of a proposed union. The
upshot of congressional concern over the
increasing concentration of banking re-
sources and the absence of standards for
the bank supervisory agencies was the
short-lived Bank Slerger Act of 1960."

b. Tkt Bank Mtrgtr Ael of 19S0.
The 1960 Act was intended t« effect
greater control over bank mergers by re-
quiring pre-merger approval by one of

1. UflsBd. Tbi Snpnna Canrt. Coosnn,

■ad BsBk Uertcri. 32 Law £ Conlimp.

Prok 19. 16 (IMTI.
9. CliTton Act. 1 T. 15 U.S.C. | 18 (1951).
14. CmdhmdI, TL< 1060 AmeDdment To

TIK Buk Utrcer Act, 66 ColumJiJliv.

764, 7fla-«7 (liwei.

t, 171S.

II. Unltal States v. PhilndFlphli
Bank. SH VS. 821, SH, 83 S.C
10 L.Ed.2d BIS (11)63) (HarloD.

II. Rindall, The FDIC - ItrKiilaliitj Fudc-
tUnu and PbllonpliT, 31 I^w h Cgn.
tHap.Pnib.COC (1960).

IS. »t Stat 8B2 (ISSO).

the three federal bankint
Seven factors were to be balanced by the
appropriate agency with no controlling
effect given to any one factor." There
were six "banking factors": financial
history and conditions of each bank, ade-
quacy of capital structure, futara earn-
ings prospects, general ehamcter at

the community to be served, and **— ijit-
ency of a bank's corporate powera wltb
the purposes of the Federal Dcpoait In-
surance Act.« The seventh factor «U
the effect of the transaction on conpati-
tion. In the interest of unfform reiuta-
tion and to preserve the integrity of the
dual banking system, the Attomer Gan-
eral and the other two banldnf ageneica.
Comptroller of Currency and Fadcnl
Reserve Board, were required to aubnit
reports on the competitive affecta of a
proposed merger."

Congress determined that alnea banks
had traditionally been the aubjaet of
special regulation and a bank fallnre
was a community disaster,' the afarlct
rule of section 7 of the Clayton Act waa
inappropriate." An anticompatiUve
merger could be approved under Ibc
1960 Act if, on balance, public fntenat
demanded it**

The I960 Act not only failed to accom-
plish its purpose of curtailing the num-
ber of bank mergers,** but pi«*aited
uniform application by the banking
agencies becaiise of the abaeaee ol
guidelines for balancing the eenn
factors.'! Then, in a surprlilDf daci-

14. 74 StsL 130 (UeO).

15. 8Jtep.,HpnD0Me,at21,Z2.

16. 8.Rep- »ii*r. Bat* 6 at & 32.

It. aji*|L. »pro DM* S, It 10.
I>. KRep.. M^rs Mte 0; « Sa

30. OiMiiHBt. ufru BOM S. ■! T7IX

31. J«(l>litloD, Tha IDOS AbcbiIbisM (•
the Bank Uct|ar Act: Ecoaumk Per.
>p«:tlTe and L*c*l Aulfi^ 20 YamLL.
Btr. TSa, 3IS (1966).

Digitized bvGoO^^IC

WASEINQTOII HUT. SAV. BAIHE v. FEOEEAL DEPOSIT INS. CORP. 463

alon, tbe United States Supreme Court
nullified tbe Act almost completely.**

c. Tk* PkilcdelpkUt Bank Decision.
Tbe draftamen at the 1960 Act had op-
erated from the premise that Section 7
did not apply to banlu. Indeed, the
Sberman and Clafton Acts were left in-
tact as CongresB sought to provide ad-
ministrative rather than judicial control
over bank mergen.** PhCadelphia Bank
undermined both the provisions and tbe
Uuory of the 1960 Act by holding that
Swtlon 7 did apply to bank mergers.
Tha Court criticized the absence of a re-
quirement to give particular weight to
tlN competitive factor in the 1960 Act**
A bank merger that violated the anti-
tnitt laws could not be saved deapite fa-
vonble weight attributed to banking

d. Tke Bank Merger Act of tset.
The 1966 Act was a direct response ia
tba PUIadelp&ia Bank decision and an
attampt to reconcile the goals of the
1960 Act witb the antitrust Uwi. The
1966 Act provides that a single set ot
■tandarda for bank mergers be uniform-
ly applied by the banking supervisory
afenciea, the Department of Justice and
the judiciary.** The standards are the
Sherman and dayton Acts.*'' The exact
language of the principal antitrust laws
was incorporated into the 196S Act, not
Iqr coincidence, but to draw on the sev-
enty-five year history of their Judicial
construction.**

[ Xil-S2.

U. H.RJtap., Mpra noM IS, at

M. PhDsMpliU Xat. Buk ■

n. Philidilplita Nat. Baak at 3T1.

M. BJLIUf.Xo.1321. BMb OoBc. 2iid Sum.

1, U.S.Ondi A AdnlaJfan 1906. p. ISSD;

lis CobkIIk. 2440 (1086) (RtPUtrb at

ODBiraBOMa SmlUi).
IT. 113 CoBfJIee. 2441 (IMS) (Remarki

Bask Uerian; A Nnr SliuUrd of
BnlHllDB?, 46 TtUR L.tln. 81. 85

tained, but Congress made an exception
for certain bank mergers. If a proposed
merger would violate Section 7, the
banking factors, represented by "conven-
ience and needs of the community to be
served," are to be balanced against the
competitive factor.** In contrast to the
I960 Act, competition is preeminent.**
If the anticompetitive effects are out-
weighed by the convenience and needs of
the community, tbe merger can be per-
mitted.

The requirement of reports from the
Attorney General and the two other
banking agencies on competitive factors
involved was retained to insure uniform-
ity and avoid a particular agency's being
either too lenient or too strict.

The Supreme Court has had several
opportunities to construe the provisions
of the 1966 Act In United SUtea v.
Third Nat. Bank, 390 U.S. 171, 88 S.Ct.
682, 19 L.Ed.2d lOlS (1967), the Court
noted that the 1966 Act was designed to
make substantial changes in bank merg-
er law. Regarding the application of
the 1966 Act, the Court sUted:
We find in the 1966 Act. which adopt-
ed precisely that 3 7 Clayton Act
phrase [ substantially to lessen compe-
tition] as well as the 'restraint of
trade' language of Sherman Act g 1,
no intention to adopt an 'antitrust
standard' for bank cases different
from that used generally in the law.
Only one conclusion can be drawn
from the exhaustive legislative delib-
erations that preceded passage of tbe
Act: Congress intended bank mergers

11967); Edwsnji, B>nk Mtrfen kai
Th> PobUc Islinit: A Lcfal ud En-
Booie Aniljwi* Df The 1968 Bank Vttf
cr Act. 86 BuiklBf UJ. TSS, 7M (196S).

1. H.R.Rti>.. wprs now 29, it Bj 112
Conf.llH. 2144 (imtO) (Kfinirki of Coo-

30. 112 CDBfJtoc. »41
ol CoBfnuinin Pil

Rfc 2441 (isaej I

Digitized bvGoO^^IC

in FEDEBAL BEFOBTEE, Bd SEBXBS

lltttt to be subject to the usual anti-
tnut analysis; if a merger failed that
KTUtiny, it was U> be permiMibls oaly
If the merging banks could establish
that the merger's benefits to the com-
munity would outweigh its anticom-
petitive disadvantages, (at 181-182,
88 8.Ct. at 889).

Although there has been vigorous dis-
agreement on the Court as to whether a
particular bank merger violates the anti-
trust laws, the Justices have been unani-
mous that Congress intended the two-
pronged aiiproach enunciated in Third
NaHanal Bank. United SUtes v. Phil-
lipAurg National Bank, 899 U.S. S60,
SS3, 90 S.Ct. 203S, 26 L.Ed.2d 668
(1970). Set oito PkUUptburg at 374, 90
S.CL 2036 (Hartan, J., dissenting).

III. ANALYSIS.

The scope of our review in this case is
limited. There is no dispute that the
FDIC acted within the scope of its au-
thority. Therefore, we must determine
whether the FDIC'a action was arbi-
trary, capricious, an abuse of discretion,
or otherwise not in accordance with law.
6 U.S.C. 5 706(2)(A). Citiiens To Pre-
serve Overton Park v. Volpe, 401 U.S.
402, 416, 91 S.Ct. 814, 28 L.Ed.2d 136
(1971).

The FDIC offers a number of argu-
ments in support of its claims of discre-
tionary power to deny a merger applica-
tion on the basis of alleged anticompeti-
tive effects which do not violate the an-
titrust laws of the United States. The
FDIC argues: (1) the Bank Uerger Act
of 1966 did not replace the 1960 Act and
thereby divest the banking agencies of
any discretion they had under the I960
Act; (2) the 1966 Act cannot be inter-
preted ao as to make the antitrust laws
the sole competitive standards; and (3)

II. CODtnrr

rOIC, then h» bfrn i1iia([«in«it

Uircrr Act ot 1069. In L'nltfd ?tal»
V. fint .VatlanBl BuMrpantloii. 410
U.S. 677. g3 S.C[. 1434, 3* L.E<l.2d IWT

(1»T8). XonhtrBit Bonnirporaiion,

Fcd-Rn-Bnll. — tF>b. 26. 10;3) sod

the 19G6 Act authorizes the banking
agencies to consider the convenience and
needs of the community in every caae.
that concept including antieaaipetitiw
effects which do not violate tbe aatj-
trust laws. In light of legialative histo-
ry and Supreme Court decisions, w« dia-

[1] The principal aim of the 19M
Act was to curtail the discretion of tbe
banking agencies. There had been rig-
nificant variances In the application hj
the agencies of the seven factors fa the
1960 Act and agencr-ahoiiplng was
feared. Congress sought the unitorm
application of a single set of standards
by both agencies and the couita. Re-
ports from the Attorney General and the
two other banking agenciea on tbe eon-
petitive factors involved in a marger
were to insure uniformity. Att*"***
of the FDIC position would make nnl-
formity fortuitous and though it Is a
possible interpretation of tbe I960 Act,
would directly contravene the thraat ot
the 1966 Act

[2] Legislative bistoiy and subse-
quent Supreme Court interpretation «f
the 1966 Act IndlcaU that all bank
merger applications are first to be sub-
jected to traditional antitrust anatysia.
If a violation of either the Sherman et
Clayton Act is discerned, a balancing of
banking factors and anticompetitJTe ef-
fects is made. Congress specified that
Uie antitrust laws be the sole competi-
tive standard not only to inaiue nal-
fomity, but also to afford the banking
agencies a discernible body of law upon
which to base their dedaiona. Tbe
FDICs contention that a competitive
standard more stringent thsn tbe anti-
trust laws can be applied la not
acceptable." While it is true that the

Fint Florid! I
Rh.BuH. — (FchnuTx 18. IVTSI. ih*
Ftdtral Ra*m Boari mlMUri ih*
propoin] bunk incr(m la trnn of Ike
Elljenrin md Clajtin Act*. In Untml
Stmttt T. lIiilH BannrponlioB. Ctifl
Xo. 287-7103 (ir.D.Wuh. Juiuij 11.
IBTSj. Ihe Comiit roller b( Canrocj ap-
pHid ■ itaiidard teied on tha sstllraal

Digitized bvGoO^^IC

HEEK8 t. CBAVEK

1966 Act specifies a stricter comprtjtive
BUndard than the I960 Act. the o\-eral1
effect of the 1966 Act Is to afford banki
apecial treatment, leu risorou* than the
dictates of the antitrust laws, by allow-
ing bank mergera where antieompctitiva
factors are outweighed by banking fac-

Convmience and needa of the commu-
nity baa traditionally been regarded as a
banking factor. Congress lifted the
term out of prior regulatory legislation
for the 1960 Act.>* By 1966, Congress
regarded the traditional banking factors
as archaie and substituted "convenience
■nd needa of the comntunity" for all of
them in the 1966 Act. CerUinly In the
broadest sense, the convenience and
needs of the community concerns
competition.*' But the history of the
bank merger proviaiona indicates that
banking factors artd anticompetitive ef-
fects are to be separated and balanced
against each other.

The final paragraph of S lS2a(c)(6>
reeognitea that the FDIC retains its tra-
ditional role of evaluating banking fac-
tors. All bank supervisory agenciea can
reject merger applications if the bank-
ing factors are unfavorable whether or
not a potential antitrust violation is
present. In the ease before us the
FDIC found the banking factors favor-
able and improperly rejected the merger
on the basis of alleged anticompetitive

C9] The FDIC does not have the
power under th« Bank Merger Act of
196S to deny a merger application on the
baais of a competitive standard more
stringent than the antitrust laws of the
United SUtes. The deciaion of the dis-
trict court is affirmed.

Walter CKAVEN, Warden, Appellee.
No.7t-l>tL

United States Court of Appeals,
Ninth Circuit
July 20, 1973.

Petition for habeas corpus was de-
nied by the United SUtei District Court
for the Northern District of California.
Charles B. Renfrew, J., and petitioner
appealed. The Court of Appe^ Alfred
T. Goodwin. Ciitiuit Judge, held that pe-
titioner was not entitled to relief where
Judge permitted petitioner to represent
himself for purposes of making certain
motion and where, in response to ques-
tion of Judge, after motion was denied.
as to whether petitioner still wanted to
represent himself, petitioner's answer ~I
think I will" did not constitute the nec-
essary unequivocal demand to proceed

Affirmed.

Trask, Circuit Judge, concurred and
filed opinion.

1. Criminal Law «~MU<I). IMUl

A defendant has a constitutional
right to represent himself, and complete
denial of such right in a federal trial is,
per ae, reversible error,
S. Criminal Law •=>«(U(1)

Federal statute providing (or pro ae
representation of a defendant has no ap-
plication to validity of state convictions.
28 U.S.C.A. I ieS4.
S. CriBdnal Iji.w «=>«L4(1)

An unequivocal demand of a defend-
ant to proceed pre it should be. at tbe

kwi wUlt ILi FDIC PtdtrkI B*w-rv*

n. Connnt, n^ xti 9. « ns.

Board ami AncitruM DivlakA (,: il.> Dc-

M. Tfc» ^■DIC r» .Ir.w hhih hii«r tor

ivrtntnt of Jsntln adrontf^ ■ <iitn>l-

■r4 BMn Mtiamt thn the ■i.riiruiit

lU po^lios In mcnl la* rwkn. CoB-

L.RcT. npra aau Sft n 32S-27.

br lb* i34ivMB*i

Digitized bvGoO^^IC

H7 TEDERAL StTPFI^HSm

such a requirement in the itatute con-
ferrlns Jurisdiction on federal district
courts. Probably most accurate, bow-
ever, is the conclusion that cases dealing
with aspects of section 205(g> other
than the "final decision" requirement
■re simply irrelevant to the issue pres-
ently before this court.

This court's considered Judgment that
mlew by the Appeals Council on the
merits of a claim is not, per se, required
to establish jurisdiction does not rest
upon mere technical subtleties of Ian-
fuage and analysis. Rather, it Bpringa
from what appears to be one of the first
Judicial efforts to meaningfully inter-
pret the Intent and purpose beneath the
"^Inal decision" requirement of section
206(g}, 42 U.S.C. S 40G(g>. AfUr ex-
tended deliberation, this wurt is re-
solved that that requirement is function-
ally designed to insure that a claimant
has fully explored and exhausted admin-
istrative channels of redress before com-
ing to the federal courts. Absent a de-
liberate effort to disregard or Bvoid es-
tablislied procedures necessary to effi-
cient and orderly adminlstratiTC action,
DO timeliness element can reasonably be
Inferred from the statutory requirement
of a "final decision."

[8] la this case, plaintiff has assert-
ed and the govenunent has acknowl-
edged that an administrative hearing
baa been conducted, that the Appeals
Council has been ariwd to reverse a deci-
alon of a Hearing Elxaminer, that the
Appeals Council has denied relief to
plaintiff and explicitly designated the
Hearing Examiner's decision as "the fi-
nal decision of this Department," and
plaintiff has promptly moved to secure
judicial review of that adverse decision.
Given the facts that plaintiff and her
counsel have earnestly pressed for full
administrative consideration of her
claim and that plaintiff has caused no
excessive procedural delay as well as all
the other facts and circumstances of this
case apparent fnnn the record, this
court is satisfied that plaintiff has nev-
er delitterately bypassed any sdminlstra-
tivc procedure or body and has not pur-

posely disregarded any administratlvs
rule or regulation. Therefore, defend-
ant's Hotion to Dismiss is henbr de-
nied. Defendant shall produce for the
court and counsel for idaintlff ■ nm-
plete adroiniatrative record so that the
court may proceed to review the inertia
of pUlntifrs claim for dlaabiHtr bcM-
(ita.
It is *o ordered.

Qnys Haifeor Sninss M L

United States District Ctnnt,

W. D. Washinsted.

July 21. 1972.

Salt for declaratory JudgnMat Msk-
ing review of decision of Federal De-
posit Insurance Cori>oration denyiflK ap-
proval of proposed consolidation of tm
thrift Institutions. The District Coart,
Sharp, J., held that it was arbitrarr to
apply a competitive teat utilisiag the sa-
tire state as the relevant ceograpkle
marlnt for determining poaaible anti-
trust effects of proposed eonaolIdatloB
of the largest thrift Inatltutlon in the
state, which institution haa II bianchaa,
and institution which had ^tpraxlmately
0,16% of sUtewide deposits in thrift
Institutions and which did not compete
in same geographic marltct; fact that
state banking law would allow acquiring
institution to branch statewide did not
make the entire state a nievant uaritet.
The Court also held that detenainatieB
that vproval of merger miglit be ^aee-

DigilizedbvGoO^^IC

WASHDrOTOir XUT. BAV. BAHK v. FEDERAL DE?OKrt IHS. OOKP. 791

dant eneourasinK aUtewide mncentra-
tfcm of thrift InatitutioD KMurcea wu
■rbltru7 where inttibition to b« ac-
quired hkd ■ Mrioui nuuusement bug-
ccmIob problem and would hav* ta nerire
l« MirvtvB and pouiblUty of acquiring
imtitaUon branchinf da novo into the
tatter'a acrvies area wai remote due la
•Mnomle condition of area and praaent
population per Inatitution.
Raveraed and remanded.

Judtdal review of dlaapproval of
reqnaated conaolidation of Inirtitutiona
aubjeet to Bank Uerser Act of 1966 la
aubatantlally more limited than review
of appnval; the court ahonld apply the
guldelinei provided for review under the
Admlniatrattve Procedure Act Federal
Depoalt Inaurancc Act, | 2 [18] (c),
(c} (7) (A), 12 U.S.CJk. i lB28(c), (e)
(7) (A> : 6 U.S.C.A. I 701 ct seq, 706
(« (A-D).
i. Banka and BNikInc ^>SM

Judicial review of conaolidation of
financial Inititutions under the Bank
Merger Act of JS6e la t« be made on the
entin administrative record that waa be-
fore the responaible agency. Federal
Dcpoait Insurance Act, | 2 [18] (c), (e)
(7) (A), 12 U.S.C.A. I ie28(e). (c) (7)
(A) ; S U.S.CJV. f S 701 et aeq.. 706<S)
{A-D).

limitation ii due to the locallaed nature
of banking actlfitiet. Federal Depoait
Insurance Act. t Z [18] (e), (c) (7) (A),
12 U.S.C.A. i 18Z8(c), {e) {7) (A).

6. HODopoUca «>M

Compliance with established anti-
trust principles Is necessary in passing
on requests for merger or eonsolidationa
under the Bank Merger Act, first and
fundamentally, In order for there to be
uniformity between the agendca charged
with applying the Act, and, lecondarlly.
In order for buslneases to make enlight-
ened decisions in the area of merger
tnuuactioD. Federal Depoait Insurance
Act, I 2 [18] <c), (c) (7) (A), 12 U.S.
C.A. I 1828(c), Cc) (7) (A).

Where banking activtUea are the
Bubjaet of propcaad merger or eonaollda-
Uon the relevant market for antitrust
pnrpoaea U genanlly defined aa the
area aarved 1^ the aeqairad bank; such

DIsUnguidiiDg between thrift tn-
atHntioBs and coaunerdal banks aa sep-
arate lines of commerce in aaaeaaing com-
petitive effecta of bank mergers under
tba Bank Merger Act of 1H6 accords
with accepted antitrust principles. Fed-
eral Deposit Insurance Act, | 2 [IB] (e),
(c) (7) (A), 12 U.S.C.A. I 1828(c>. (c)
(7) <A).

It was arbitrary to apply a compet-
itive teat utlliiing the entire state aa
the relevant geographic market in de-
termining possible antitrust violations
of proposed consolidation of the largest
thrift intUtution in the aUte. which in-
stitution had some 21 branchea, and In-
stitution which had approslmstely 0.15%
of statewide deposits In thrift institu-
tiona and which did not compete In same
geographic market; fact that atate bank-
ing law would allow acquiring institu-
tion to branch statewide did not make
entire atate the relevant maricet Feder-
al Deposit Insurance Act, J 2 [IB] (c).
(e) (7) (A). 12 U-S.CA. { 1828(c), (c)
(7) (A).

Determination that approval of
merger of two thrift institutions might
be precedent encouraging atatewide con-
centration of thrift institution reaourcea
waa arbitrary where institution to be ac-
quired bad a serious maBagameot sncces-
alon probleni and wonU have to merge
in order to survive and poaslbllity of
acquiring institution braaehlng da novo
into the latter'a aarvlca area was remota
due ta economic condition of area and
present population par Inatitution. Fed-
eral Depoait Insurance Act, | 2 [18] (c),
(c) (7) (A). 12 V.8.CJi. I lB28(e). (e)
(7) (A).

Digitized bvGoO^^IC

M7 FEDERAL

Wbere Federal Deposit IniuranM
Corporation failed to apply relevant fac-
tor! baaed on ntabliBhed princifdee un-
der ant! tru it iawa in denying request for
conaolidatlon of two thrift inatitutloni,
reviewing court wai required to remand
notwithstanding that it might have been
of the opinion that only proper decision
on baws of files and records was approv-
al of conMlidation, Federal Deposit In-
sOTUice Act, S Z [18] M. (e) (7) (A). 12
U^,C.A. I 1828(0. <e) (?) (A).

Aihhy, Foster, Pepper tc Biviem,
Louis H. Pepper and Richard E. Keefe,
Seattle, Waah., Arnold & Porter, John D.
Rawke, Jr.. Washington, D. C. for plain-
tifft.

Earr, Tuttle. Koch, Cam[4«1l, Mawer
A Morrow, Payne Karr, Seittle. Wash.,
WilHan B. Hurane, Gen. Counsel, J. Wil-
liam Via, Jr., Counsel, F. D. I. C, Wash-
ington, D. C, Ford R. Paulson, Regional
Counsel, P. D. I. C, San Francisco, Cal.,
for defendant

SHARP. District Judge.

This is a suit for declaratory judgment
filed by the plaintiffs, seeking review of
a Federal Deposit Insurance Corporation
decision denying approval of a proposed
consolidation between the two named
plaintiffa. The matter is submitted to
this court on motions for summary Judg-
ment by both plaintiffs and defendant.

[1] The case Is one of first impres-
sion under the Bank tlerger Act of ldE6
[12 U.5.C. S 1828(c)]. as it deals with
disapproxai rather than approval of a
requested consolidation.' In the case of
an approued merger, the reviewing court
ts epecificatly required under the Act to

I. The eoart bikm [hit sccorcUoi [g Chair-
man Bpnicui gt tU VDIC. DiLi liUsntliiB
Is velcaiDn] bj Ihe FDIC In ocilcr to ilc-

review de novo the dctemfnatloa of tht
responsible agency [12 U.S.C. { ISZa(c)
(7: (A)]. However, the Act !■ silent oa
the uietbod, standarla and aeope of n-
view where the agency denies a DMrger.
In this court's opinion, tbe ml«w ia
substantially more limited and the court
should apply the guidelines provided for
review under the adniinlstrative Proce-
dures Act (6 U.S.C. i 701 et seq.). As
staled by this court in its oral opinion
of March 3. 1972. the se^ie of review
is limited to the atandard* aet forth
in 6 U.3.C. g 706(2) (A-D). which pro-
vides:
To the extent necessair to decision
and when presented, the reviewlag
court shall decide all relevant ques-
tions of law. interpret constitutional
and statutory provisions, and deter-
mine the meaning or applicability of
the terms of an agency action. The
reviewing court shall —

(2) hold unlawful and aet aside
agency action, findlnfS, and conchi-
sions found to b« —

(A) arbitrary, capricious, an abuse
of discretion, or otherwise Dot in
accordance with law;

(B) contrary to constitutional right,
power, privilege, or immunity;

(C) In excess of statutory jurisdic-
tion, authority, or limitations, or
short of statutory right;

(D) without observance of proce-
dure required by law;

These standards were discussed recently
by the United SUtes Supreme Court IB
Citiiens to Preserve Overton Park v.
Voipe, 401 U.S. 402, 41S-416, 91 S-Ct
814, SZ2-8Z3, 28 L.Ed.2d 136, 161-lU
(1971). There, the court directed the
reviewing court to engage In "substan-
tial review." a "thorough, probing, in-

'irhether tlie ntfllntarr nsmHca mnj
ibnf neittr spiilk-allaaa evia Ikanch
i-i'iliilou ol HmisD T of thf Cbriaa Aet
■re not fouBiI." FT>IC Neai Rdeur,

Digitized bvGoO^^IC

WA8HIK0T0N HUT. SAV. BANK r. FSDERAL DEPOSIT INS. COEP. 793

depth review." The reviewing coart
■hoDld fint determine whether the re-
•ponslble agency meted within the smpe
tf its authority, which determination
require* > delineation of tbe scope at
that authority and discretion. If the
agency acted within the ictqw of itj au-
thority, then the reviewing court muat
determine whether the choice made was
"arbitrary, capricious, an abuae of die-
cretion, or otherwise not in accordance
with law." 6 U.S.C. g 706(2} (A). In
making this latter determination,

tbe court muet connder
whether tbe decision wae based on a
consideration of the relevant factors
and whether there has been a clear er-
ror of Judgment Overto* Park, n-
pfd, 401 VS. at 4ie, 91 S-Ct. at 828-
821.

[2] The review must b« based upon
the entire administrative record that
WH before the responsible agency, li.
at iSO, SI S.Ct at 826.* From this rec-
ord, tbe court must make its determina-
tion of the propriety of the PDlCa de-
cieien to diiapprore the proposed con-
■Dlidatioa.
Althongh thia inquiry into the facts
1b to be aearching and careful, the ul-
timate Btandard of review is a narrow
one. The court is not empowered to
stthttltute its Judgment for that of
the agency. Overtoil Park, eupro, 401
U.S. at 416. 91 S.CL at 824.

a. la rwpoBM t» ■ prior diaoorerf motka
of pIllBlUfi, tUa CDBrt, otct tlx oUk-
tka <( the PDIC, itquired dIadiMnr* at
anrir all e( the neord whlcfa mi bafim
lb* PDIC at Iki tin* of la onuldH*.
tloB ol tbJm applleatlm. Tho eauit rca.
■DUd that it *onM be laipdnlUc to
4etninlM wbttter tk* Boaid coaddROd
ay ef tlH rtlnmit tuton vltkooi tarn-
lolac tin aitarlal Iha Board tntldnvd.

With the above standards fOr review
in mind, the court now turns to the ap-
plication of these atandardi in the pres-
ent case.

Washington JIutual Savings Bank la
the largest thrift institution* in the
State of Washington, holding some $744
million in deposits comprising 22.9 per-
cent of the deposits in such institntlons.
It has its main office in Seattle and op-
erates some 12 branch offices in the Seat-
tle area, and 9 more in various location*
throughout the state. Its nearest branch
to Gray* Harbor Savings A Loan Is In
Olympia, SO mile* to the east of Gray*
Harbor Savings & Loan's officea.

Grays Harbor Saving* £ Loan (S&L)
is a small savings and loan institution
located in Aberdeen, Washington. It is
one of the smallest thrift institutions in
the state, having only some (4.7 million
in withdrawable balances, or about 0.16
percent of the statewide deposits in thrift
institutions. It ha* no branch offices
and is fourth in aiie out of five thrift
institutions, all savings and loans, serv-
ing the Aberdeen- Hoquiam area.*

On June 10, 1970, Washington Mu-
tual filed with the FDIC an application
for approval of its proposed coniolidation
with Grays Harbor Savings h Loan.
Shortly thereafter, aa required except in
exceptional circumstances by 12 U.S.C. S
1828(c) (4), the FDIC requested reports
on the competitive factors involved in

Thla iKDrd. nmlnhii of » HKtltri
-pabUe tilo- ud ID -tatmial file.- *U1
W nfnttd to hereto to dw tnlilds -PE"
■ad -IF" mpMtlnb.

3. Tkrifl loMltntlaBa, u natd Is th* cod-
iBit of tbli opiuloB, rfttr* to BDtnol
•aTion boaki ood nTlB(* ood loeiu, ■■

la otrrlBC tk* Akiidow-Hotnl-

1. AbndHa Pod. >*L

2. let Pod. 8 ft t of AbotdooB
a. IM Pod. SALsf Heeoka
4.'araT* Harbor SAL

B. Capitol SAL

Digitized bvGoO^^IC

TH

S4T FEDERAL SUPPLEHBNT

the proposed consolidation Irom the At-
toracy General, the Federal Reserve
Board, and the Comptroller of the Cur-
t«Dcy. Each of these aeeneiea submitted
Ita report as requested, none lindin; any
siKnificant anticompetitive (actors, ei-
ther present or potential* For example,
the Comptroller of the Currency stated
in hia report:

The aiie of the Grays Harbor Savings
and Loan Aaaociation is its basic lim-
iting factor as a competitive force.
The addition of $4.6 million in aaseta
to the charter bank will have no sis-
niflcant effect on concentration of
banking resources in the sUte. The
effect of the consummation of the
proposed transaction will be in the
Aberdeen-Hoquiam area where it will
introduce a bank more able to com-
pete with the other institutions in the
area and better able to meet the needs
of the community. PF at 60.
The State Supervisor of Banking for
tha State of Washington submitted his
■pproval of the proposed consolidation
■vreement on August 14, 1970. PF at
82. Competing institutions were con-
tacted by the FDIC Examiner in Charge,
and no adverse comment received.

As the FDIC (unlike the Comptroller
of Currency) provides no hearing proce-
dure, the processing of proposed consoli-
dations or mergers consists of staff in-
vestigations, with recommendations to
the Board of Directors of the corporation.
These findings and recommendations
seem particularly important when there
is no opportunity tor interested parties
to be beard. In his investigation report,
the Examiner in Charge for the FDIC
stated:

. . . Its already significant share
of the state mutual savings bank busi-
ness would not be materially affected
by this proposal. The resulting bank
would be the smallest unit of the thrift

S. Rctcn

other

IB FDIC GcBtrnI Filt :
Aitonitx Ccncnl Paie 5D

Coniitnller of Currencj Pace 01

IVikrtl RcMrv* Burd Pa«t 64

institutions in the Aberdeen-Hoqui-
am service area. The prt^Kwed conaol-
idation would have no adverse effect on
competition. IF at 19.
Further, he atates:

The resulting bank would make avail-
able to the residents of the Grays Har-
bor area certain types of time deposita
not presently offered by S&L. Also,
other bans and aervices not being pro-
vided by S&L, either by design or stat-
utory limitations, would be availabia
at the resulting bank. The realdanta
of the Grays Harbor area ahouU bene-
fit from more aggicsaive management
responsive to the needs at tbs com-
munity. IF at IE.
In conclusion, the Examiner ncommsnd-
ed the application be approved, and the
regional director for the FDIC concur^
red in bia recommendation.

The FDIC Division of Beseueh. In
reconunending approval and finding that
positive benefits aa to the eonTenlmca
and needs of the community to be sarvad
would result from the marger, stated:
Merger of the applicanta would hara
a positive effect in terma of cmven-
ience and needs and other banking con-
siderations. Uoat importantly, a sav-
ings bank with ita full line of aervicea
and higher limits on time deposit in-
terest rates would operate in the Grays
Harbor market for the first time. In
addition, the management sueeeaaion
problem which presently ezista tor
Grays Harbor Savings and Loan
would be eliminated. IF at 29.
On November 9, 1970, the FDIC Board
of Review voted in favor of approval of
the proposed consolidation, aubmittitig a
proposed order to the Board (or ita ap-

The Board of Directors for the FDIC
Issued its order December 18, 1970, deny-
ing approval of the proposed merger.*

a. Two of Ihr thnc Rirmben ol tbe Board
lOted OB ih« BiipUcntloB. Tk* thlnl nxn-
bn ITbs ComjitnUeT of CamDcr) ak-
naloed InssMUct a* U* appronU as
QDOted aboTc. had aliaadr bM> n^i-

D„ii„.db,Go(5glc

WASHINOTON WUT. SAV. BAKK v. FEDERAL DEPOSIT INS. CORP. 795

In its opinion, after finding that the
proposed consolidation would not elimi-
any meaningful competition but
could eliminate some potential competi-
tion by de novo branching of Washington
Uutual into the Grays Harbor service
area, the FDIC states:

More importantly, Ibe proposed merg-
er would establish a significant prece-
dent for the approval of additional
mergers in highly concentrated mar-
kets in (he State of Washington and
elsewhere, among commercial banks
89 well as mutual thrift institutions,
with the cumulative effect of further
concentrating the banking resources of
a given market in the largest institu-
tions which operate there. As such
concentratiDn continues, the public's
choice of alternate sources of banking
services is likely to diminish. Given
the tact that Washington ^^utual is
more than three times the size of the
next largest thrift institution in the
Slate and that it already controls 22.9
percent of total thrift institution de-
posits on a Statewide basis, approval
of the proposed merger could easily
lead to other merger proposals on the
part of Washington Mutual to extend
its branch system into new areas by
the merger route rather than by the
establishment of de novo branches,
thus losing successive opportunities
for increasing the public's choice of
banking alternatives in each area. A
denial of the proposed merger, on the
other hand, would encourage S4L to
seek out a different merger partner
from among the State's 73 other mutu-
al thrift institutions, thereby also pre-
serving the possibility of more effec-
tive competition against Washington
Mutual in the future from among the
Stale's other thrift institutions. PF
at 104.

Thereafter, on December 29. 1970,
Washington Mutual sent a letter request
to the FDIC for reconsideration. On
January e, 1971, a similar request was
made by Grays Harbor Savings & Loan,
Subsequently, the FDIC granted Wash-
ington Mutual the opportunity for an

oral presentation of its application for
reconsideration. An informal hearing
was held, during which presentations
were made by certain officers of the two
banking institutions, and written memo-
randums were submitted by the Wash-
ington State Supervisor of Banking.

On July 30, 1971, the FDIC issued ita
opinion again denying approval of the
proposed consolidation. In this second
opinion, the FDIC discussed the "line of
commerce" question distinguishing be-
tween "thrift institutions" and "commer-
cial banks." It also withdrew part of ita
prior, decision, acknowledging there was
tittle likelihood of Washington Mutual'!
branching de novo into the Grays Harbor
service area due to the area's slow growth
and present population per banking insti-
tution. The opinion then acknowledges
that this fact was not the reason for the
denial of approval, but, in fact, the main
reason was that the merger would be •
significant precedent for the approval of
other mergers in highly concentrated
markets, as quoted above from the first
opinion.

August 27, 1971, the complaint in the
present action was filed seeking judicial
review by declaratory judgment of the j
actions of the FDIC,

The authority of the FDIC to approv* J
or disapprove consolidations or mergers ]
between certain insured banking int
tions is provided by the Bank Merger Act J
of 19G6. 12 U.S.C. S 1828(c) (2). which J
provides :

No insured bank shall merge or
solidate with any other insured bank 1
or, either directly or indirectly, acquire ]
the assets of, or assume liability to pay 1
any deposits made in, any other i:
Bured bank except with the prior writ- \
ten approval of the responsible agency, '
which shall be—

(C) the Corporation if the acquiring^ 1
assuming, or resulting bank is
be a nonmember insured bank. J
(except a District bank).

Washington Mutual Savings Bank i* lil

nonmember insured bank.

.„,.Cc

MT FEDERAJ. SUPFLEUEMT

Section (c) (fi) of the Act provides:
The responsible a^ncy Bhall not ap-

(A) any proposed merger transaction
which would result in a monopoly,
or which would be in furtherance
of any combination or conspiracy
to monopolize or to attempt to
monopollie the business of bank-
ing In any part of the United
SUtes, or

(B) any other proposed merger trans-
action whose effect in any section
of the country may be substan-
tially to lessen competition, or to
tend to create a monopoly, or
which in any other manner would
be in restraint of trade, unless
it finds that the anticompetitive
effects of the proposed transaction
are clearly outweighed in the pub-
lic interest by the probable effect
of the transaction in meeting the
convenience and needs of the com-
munity to be served.

In every case, the responsible agency
aliall take into consideration the finan-
cfal and managerial resources and fu-
ture prospects of the existing and pro-
posed institutions, and the convenience
and needs of the community to be
served. 12 U.S.C. g 182g(c)(5).
This Act was passed in 1966, and amend-
ed, in fact replaced, the Bank Merger Act
of 1960. The purpose of the 1966 Act,
as stated in the House Committee Report
#1221, 1966 USCAANISSO:
Your ciHnmittee has attempted to fur-
nish both the agencies and the courts
with more definite guidelines for deal-
ing with the foregoing problems. Ex-
isting taw (the sixth sentence of see.
18(c) of the Federal Deposit Insurance
Act) provides that in the case of a
merger transaction the "agency shall
also take into consideration (in addi-
tion to the so-called banking factors)
the effect of the transaction on compe-
tition (including any tendency toward
monopoly) and shall not apprm'e the
transaction unless, after considering

all such factors. It finds the t
tion to be in the public InteresL*
The intended tegal effect of the bill is
to modify the foregoing provision in
three respects:

First, it is intended to make clear
that no merger which would violate the
antimonopoly aectioD (sec. 2) of the
Sherman Antitrust Act may be ap-
proved under any circumstances.
Second, the bill acknowledges that the
general principle of the antitrust laws
— that Bubstantially anticompetitive
mergers are prohibited — applies to
banks, but permits an exception in cas-
es where it ia clearly shown that a
given merger is so beneficial to the
convenience and needs of the commu-
nity to be served — recogniaiug that
effects outside the section of the coun-
try involved may be relevant to the
capacity of the institution to meet the
eonvenience and needs of the eommu-
nity to be served — that it may be in the
public Interest to permit it.
Third, the bill provides that this rule
of law is to be applied uniformly, in
judicial proceedings as well as by
the administrvtive agencies. 1966
USCAAN at page 1862.
Congress, in enacting the bill, was con-
cerned with the applicability of antltnist
law to bank mergers, and the Act was
aimed at delineating the scope of their
application, with emphasis on eonsis-
tency between thn various amis of
government dealing with sueh mergers.
Congressman Beuas of the Committee on
Banking and Currency, in explaining the
purpose and intent behind the 1966 Act
sUted:

The inclusion of the very language
used in the Clayton Act seetioo 7, and
the Sherman Act section 1, in HJL
IZ1T3 was not merely a coincidence.
This language was intentionally used
so as clearly to indicate to the bank
supervisory agencies and to the coatts
that tbe antitrust standarda lAieh
have been developed over the last 7B
years on the basis of case law defini-
tion of these statutwy p

Digitized bvGoO^^IC

WASmNOTOH WJT. SAV. BANK t. FEDERAI, DEPOSIT INS. COBP. ?97

Intended to be incorponiled io the ap-
plication of the proposed act. We are
not establishing new standards which
depart from well develc^wd antitrust
itandarda. We are, on the contrary,
■tatinr that these antitrust standards
should continue to apply to bank

. . . tUa bin would nake the com-
petitive factor as deTined by the anti-
trust laws, the primary factor to be
used both by the bank supervisory
•geneiea and the courts in determining
whether to approve a merger. 112
ConrRec. at page 2444.
It ia aniarent from the opinions of
the FDIC that it has determined it has
the authority to deviae tesU of the anti-
competitive effect! or "ImpHcationa" of
a merger never contemplated by the Cos-
greaa In enacting this legiaktion, nor by
the courts In their TB years of deviaing
standard* applicable to antitrust As the
Supreme Court stated two years after
the IMS Amendments:

Only one conduaion can be drawn
fnun the exhaustive legislative delib-
erations that preceded passage of the
Act: Congress intended bank mergers
fint to be subject to the usual anti-
tmit aaalysiB .... United
States V. Third National Bank in
Nashville. S» U.S. 171, 182. 88 S.Ct.
88^ 889. ig L.Ed.2d lOlfi, 1024
(1968).

The FDICa determination was ostensi-
bly aimed at what it eonaldered a
mcaisary basis for curtailing possible
anticompetitive tendencies in their
iactpicncy, which is precisely the dlrcc-
tjim in «4iich antitrust principles under
the CkytMi Act, | 7, are aimed:

- Having determined the relevant mar-
ket, wa EMM to the ultimate ques-
tion under | 7: whether the effect of
the merger "may be substantially to
ksacn competition" in the relevant
market. Cleatly, this is not the kind
of question which is susceptible of a

It require* not n

rely an ap-

praisal of the Immediate impact of the
merger upon competition, but a
prediction of its impact upon competi-
tive conditions in Uie future; this is
what is meant when it is said that the
amended { 7 was intended to arrest
anticompetitive tendencies in their
"incipiency." United States v. Phila-
delphia Nationsl Bank, 374 U.S. 321.
362. Sa S.CL 171S. 1741. 10 L.Ed.2d
915, 944 (lSfi3}.

These standards were plsced in the
act to insure compliance by the banking
industry with the polidea embodied in
the antitrust laws, with an exception al-
lowed due to recognition of the type of
industry which banking is and the effect
of bank failures on the communities
served. The banking agencies have no
peculiar apertlse In the sre* of competi-
tion and antitrust Their area of
expertise is in what Is termed the "bank*
ing factors," i. e.. convenience and need*
of the community to be served and the
strength and ability of the banka In that
community to serve those needs. In thla
regard, while the Board found the
financial and managerial resourees and
future prospects of both institutions con-
sistent with approval, the Board opined
that these factors are outweighed by its
determination as to anticompetitive ef-
feet* of the merger.
The Corporation has reviewed again
and reaffirm* its eariler flndings on
the benefits to the public which may
be expected to occur if thi* application
i* approved and also its finding* with
respect to S A L's management sue*
cession problem. It eontinnea to differ
with thig applicants as to the weight
which shotUd be assigned these find-
ings in reaching an ovenD eoncIusioB
on the application. PF at 243.
The Bank Merger Act of 1966. as did
the Act of I960, provide* that "[in] the
interest* of uniform standards" the re-
sponsible sgeney vrill request reports on
the competitive factor* involved in .the
proposed merger fmm the other brro
banking agencies and the Attorney
General. In the legislaUve history

Digitized bvGoO^^IC

H7 FBDEBAL SUPPLEHBin

Your committw agreet that every
effort muat be made to avoid ■ situa-
tion where one Federal asency !■
"touffh", about mergers and another
one is "easy", where there might be
an inducement to arrange mergen so
as to result in the kind of bank where
approval could be easily obtained. To
help guard against this kind of
development, the bill provides that the
•gency having Jurisdiction over a
proposed merger shall request a report
from the other two banking agencies
on Uw competitive factors tnvdved,
unlets it must set immediately to
prevent a 1>ank failure . . . 1960
iraCAAH I99S, 2000.

Common aenac dictates that the only
way to have uniform application of the
Act to the mergers sought is to apply
uniform standards, which standards were
Mt forth by Congress In this instance aa
the standards embodied ia the antitrust
laws. When an agency applies entirely
unprecedented standards, having do
bads In logic or reason, as ia this case,
nnlformi^ of standards, and their ap-
pllcaUon, Is impossible.

[3] In its etatement on reconsidera-
tion, the FDIC dwells ioitially with the
"relevant line of commerce," distin-
guishing between "thrift Institutions"
and "commercial banks" aa aeparate lines
of commerce. In this determination it
relies upon the decisions of the Supreme
Court closest to the subject These
cases have lield that commercial banks
are a distinct line of commerce from
thrift institutions in assessing the compe-
titive effects of bank mergers. Such de-
lineation is generally accepted due to the
differences in services offered by the two
types of institutions and different
regulations controlling their activities
and lending limits. United States v.
Philadelphia Nat'l Bank, 374 U.S. 821,
SS S.Ct. 171S, 1737. 10 L.Ed,2d 91&

(1963); United SUtea v. PtailU{Mbuiv
Natl Bank, S99 U.S. 350. 90 S.Ct. 203B,
2041-2042, 26 L.Ed.2(l 663 (1970). ThcM
determinations by the agency were based
on accepted antitrust prlueiplaa and will
not be diaturted by this eourL

[4-7) However, without
reason, the FDIC proceeded to apply lis
compeUtive test utilltlng the entire Stale
of Washington as the rdevmnt geocraphic
maricet affected by the pnpoaed conioll-
dation. There may wdl be aibiatJaBs in
the antitrust context in whldi an entire
sUta is the relevant marlcat area afftat-
ed. However, where banklnf aetivitlH
are involved the relevant market has
generally been defined •> the aiw
served by the acquired bank due to the
localised natnre of banking aetivittM.
U. S. T. Phillipsburg Natl Ban^ ti^ra,
399 U.S. at 86»-362. 90 8.CL at 2041-
2042: U. S. V. Philade^ihla Natl Bank.
SHpnt, 374 U.S. at 3S7-SBB, B3 S.Ct. at
173B. The mere fact that WaaUngton
State banking law would allow Washing-
ton Hntnal to branch statewide does not
make the entire sUte the iclenuit mar-
ket

Permissive statewide brandling mere-
ly extends the political h
which a bank ma
local units, to vpenta in local n
It does not bring to any particular
bank or banking unit depoallora er
borrowera from all over the atale.
"Individuals and corporations typical-
ly confer the bulk of their patrooage
on banks in their local conununtty;
they find It Impractical to conduct
their busineaa at a distance." {citing
Philadelphia, svpra]. United States
V. Crocker-Am^o National Bank. ZT7
F.Supp. 133. 173 (N.D.Cal.1967).
The effect of the FDIC opinion in this
case Is that Washington Mutual may not
by "foothold" acquisition, offer its
services to cnstomers in the Grays
Hartwr Savlnga A Loan service area be-
cause it might be a precedent enoourag-

DigilizedbvGoO^^IC

WASHIHQTOH UUT. SAT. BANK i

The record before the Board o>at«iai
daU lor a furtber breakdown of Uw
relevant market concentratioii. 1970
nsurea show that of WashingtMi
Motual'a |740.1 million market share, it
deHved (643.1 million from tbe
Sottle-Brerett service area, or appRod-
matdj 87 percent of ita statewide
departs.* Statewide, excluaive of the
Seattk'Eierett area, Washington Mutual
faoMs ontr 6.6 percent of deposits In such
institutions, and Grays Harbor Savlnsi
A Loan, which iuts no market area out*
sida the AI»erdeen-Hoqutam area, has 0.3
percent The merger of the two would
then nl*e Washincton Hutuat'a share of
this maitet to 6J percent These
flgurea ahcnr the inaccuracr and unrein
■ouabteneas of applying almple gtoas
percentages to determine marliet con-
eentratiofi and competitive effect While
It U true that Washington Mutual is the
largeat thrift Institution in the state
with 2Z.9 percent of the depoeits, this
figure by itself does not truly indicate
the competitive impact of Washington

1 It nIailTC t
ilwM of tb* rriaviBt ■■riMt ■!-
1 bj nicb Dvrt«r. ^it nitrsar In
irlHt la Icnntd •

Ik* vradnet ana at lb* Mhar.) Tb*
ani(«ni bteoiaa ong (hca o[ "polcotial
xniMtlrio*'* Dwler DeiiaitneDt at Joa-
rice nwf]Etr priiMlws. and tMa aac la
far bdnr aar ad or br that tftacr.
N'ota: Dim. of Jodn ittrwa Onlde-
ilna*. K( lartli ia imrl 9, pasH 30^3,
o( PIniBlirra' EiUWU to UraiartiHlaa.
L Coinad (bi tba EDIC atiMd (a tki*
court on oral arfunnt that tlx bm rf-
ftet ot thU ileclalga I* that Waiblnstoa
Miitunl b piMtndtd tran nr (anher

imminent cotiapar, baniDic It la Ih* tarw
Ht tbrifl liutltntleii In th* italc Th*
H draWD tiom ttila
t ia tbat tB th* */** ot tb*

.FSDERAL DEPOSIT INS. OOEP. TW
rp. no (1ST3)

Mutual on the thrift institution marieats
In the SUte of Wadiington.

. . . We pointed out in PkUadtl-

phia Bank, tvpro, at 362, that a pr»-

diction of anticompetitive effects "is

sound only if it is based upon a fim

understanding of the structure ot the

relevant market; . . " U. 8. v.

Philllpsburg Natl Bank, tttpn, SH

U.S. at 366-366, m S.Ct at 2044.

It is therefore the opinion of this court

that the PDIC failed to take Into account

truly relevant factors upon which a

rational opinion as to competition could

be based in line with the established

principles of antitrust law as written br

Congress into the Bank Merger Act

Such compliance with eatablished piind-

plea is necessary, first and fnndammtal-

ly, in order for there to be uniformitgr

between the agencies charged with ths

responsibility of applying tbe proviaioM

of the Act, and, secomlariiy. In order for

bualnessea to make enUghtmed daclaioBS

in the area of such merger transaction*.

In addition, even were thia cmart t«

accept the relevance of the statewide

percenUgea used by tbe FDIC, the

POIC, -'Usnta'- la par

ar«. Tha Smkant s.
npM. and the rrdtlnli
apmd thrODsboat Iha at

D„ii„.db,Go(5glc

800

ntluuJe of itt opinion eteipMthitHnirt.
The optnion sUtea that:

■ppnml of the proposed
mtTgar eouM eaaily lud to other
merser pn^Maals on the part of
WuhiDvton Mutual to extend its
brand) votam into oevr areas by the
merger route ratlier tlian by the
otablJihnie&t of de novo branches,
thus losing aucceaaive opportunitlet
for increasing the public'a choice of
bankins allamatives in each area.
. . . PFBtl04.

Tills atatement, incorporated in both
the original and final opinions of the
FDIC, not only disregards its own con-
tinuing control over future merger
, but overlooks the facts in
The Board, as veil as eveiy-
oae elae eoneemed, recognizes that Grays
Hart>or Savings ft Loan has a serious
management auccestlon problem and will
undoubtedly have to merge with another
inatitution to relieve the difficult.
Tlierefore, whether this application is
granted or denied, there is going to be
one let! thrift institution in the State of
Washington and the same number in the
Aberdeen-Hoquiam area. The Board, in
its second opinion, recognizes that the
possibility of Washington Siutual branch-
ing de novo into the Graj-s Harbor
service area is quite remote due to the
economic condition of the area and its
present population per inatituUon. To
claim, then, that the approval of this
merger would be a significant precedent
for future mergers is not logical, since
this is not a case of de novo branching
versus merger, but a case where the only
potential realistic possibility is the entn'
of some outside firm by merger with
S ft K In future lituationi which may
ariae, da novo branching may be an
actual viable possibility, which raises the
question of potential competition and
may be dealt with under established anti-
trust principles. A determination such

H7 FEDERAL SOrFIXMEST

as the Board's in thU eaae must Iw let
aude as art)ltrarr where there ia no
logical connection between the facta and

The only queatlon remaining at thia
point ia the prm«r r«mady. Plaintlfte
aaaart that this court abouM iaaue its
order compelling the FDIC to apvnrc
tba merger, pointing out that the ncord
ia thorough and complete, and tha Board
haa already found, from its review of the
banking factora, that the area ooneamed
would benefit from a merger. The FDIC
eontenda the proper remedy k tft nmaad
to the agency for consideration of the
prcqposed conaolidatlon :
with the opinion of this eonrt

IB stated by the

that the function of the reviewing
court ends whan an einw of law ia
laid bare. At that podnt the matter
ooca more goes to the [agmiv] for
reeonsideiation. FPCv. Idaho Power
Co., S44 U.8. 17, 20, 7S 8.Ct. SB, 81,
97L.Ed. 16. 20(1962).

The court's decision in this caae Is
baaed primarily upon the failure of the
FDIC to apf^y tclevaut factora based
on established principles under the anti-
trust laws, as intended to be applied by
the CMigrcaa In enacting the Bank
Merger Act

[8] While thU Court may be erf the
opinion that only ene dceiaion ia pr^er
on the basis of the files and records
relevant to a determination in this case,
it is not the province of a reviewing
court to make the final Judgment once
the law la determined. Instead, the
remedy Ia to remand the matter to the
responsible agency for determination in
light of tlte court's construction of the
governing legal principlea.

Digitized bvGoO^^IC

.,2.='^'

Honoctfil* Hillian P

Dear Senator

RE: S. 72 - nm Coapetltlon i

.^jriiis

, Ltie Contaranc* would like to

! concern to the Conferenca whoia
ititute tne primary chartering
:y of the Nation '» nearly 10,000

r bank holdlnq

atantially frc
limitations or

expanelon (e.y., Tennessee,

D„ii„.db,Go(5glc _

Kissouci, Vaw Kaapihlce *nd MM J

«Mndards eondiet with the 20 pe

ridcJ«n. In other states, out-of-

tate banks have a significant

>han of the bankino business and

not nece«»«rily relevant neasores

of banking competition.

Ttie la- as It presently exists al

owe states in a seaningful way

banking structures, baeed

upon local conditions and the Ice

liavas this situation is desirabl

such a way as to dilute state aut

ority or to pensit the fedacal

eraine the banking structure

in a state. It is the position o

CSBS that state banking eu-

Chorities as the pEinary cegulato

sions, including subject pec

ccntage limitations, with respect

(2) The Power to Deny "Antl-Cimpe

itlve" Meraers and Acquisitions

This proposal, as set forth in Se

tlon 201. would grant extraor-

dinary powers to the tedsral bank

mitation, would underline the

ability of states tn regulate the

r banking structures.

A useful illustration of the prob

ens which could arise under this

proposal is contained in the fact

al background of the well-

kno-n Hashlnttton Mutual case. Ha^

ion: Hi f.UKi (Sth Clr.

15T3) . ThSfVaVo-rnVolved a propc

aed merger between nrays Harbor

Savinqs and Loan Association, the

smallest of four thrift insti-

typieal of uny small flnencla

face acute nanageMht problMU

at the end of their first generat

on of operations. Its two

executive officers had been with

he institution since its found-

inq in 1924, and neither officer

iBhed to continue in an active

and because ha deeised the

pierqer pro-conpetitive, the Super
approves 'the mSrgeV." '

isor of Bsnking in Washington

The POIC's regional officials on

he Hest coast reached conclu-

Hashington Bsnking DeparCHnt.

Die's scaff-iunned board of

review in Hashington concurred.

he PDIC Board, however, denied

D„ii„.db,Go(5glc

■ and reqion*! officials

foe the Ninth circuit stepped in to raverea tha FDICa action
Tba ground Soi the Court's daciaion waa that tha FDIC had axe
ed Ita statutory authority.

Sections 101 and 201 would now itmova all llBltatlona on tha

and ■cquieltlon applications. If enacted, tha pTopoaed aMnd
neata inevitably would lead to the klrd of anonalous situatio

through Its regulation oE holding conpanias. Thia effort to
usurp the authority of the prlBiary ragulatora (i.e., the Comptrol-
ler and the stats bsnfi supervisors) has clearly been disruptive
of the efforts of the primary regulators, and beyond the author-
ity of tha Board.

!i by t

of GOV.

■the Federal f

S£0 F.id JsB

(Ti

ar^

Ctrcu.l

:l (Hill

. This case i

nvolved a

by

the Fii

Inwood Corpora

BDl of

the 8 toe)

1 of the Fir«t

lod,

Illlno

Because the Board

I position of

the «ank: a

stock,

re seen pcoblen

Board c

lenled thi

f proposa A 9

not being

in tl

He public int

ersi

it.

n* ioi

irt noted

in this case

that the p

ropo.

sed a=quialti

on <

lid

iticompetiTig t

s acquisition

, of

the Bai

Ik and FiCBt Lincoln«oc

Id ruled th

B(

It we do 1

lot find any i

ndioation

that

conaress aea

mt

■hi a inquir

nd to oonside

need apart f

<ould be alter

ed by form

loldlng compar

srs -ere aire

5di

) the comptrol

'l« oF^the

lEus

rency In th.

Digitized bvGoO^^IC

Sactlon SOI nov propotea fomnlly to extand to tha Board author-
ity to do what It ha* unsuceaaafully aouglit to do in tha paat la
this Biea. The Confarence of State Bank Supervliori i* aupport-
Ive ot the above judicial decision that the authority to ra^ulat*
tha capital ot banka doa* now, and should continua to rsaida vlth
tha prinary requlatora oF banka, tha Office of tha Coaptrollar of
the Currency for national banka and atate banking departaanta tor

avEcnca b'. Kraldai

ilii''-^

D„ii„.db,Go(5glc

Ndtiond
Consumer
Law Center

L„ Eleven Beacon St,
inC BostcfvMAOSOe

mk?A2-i PH4>0I

^ril 19, 1978

I?, and Urban Affairi

I am very troubled by the falluT* Of the Fa^ftral Rsavrva
Board to adnlnisteF the Bank Holding Company Act appropriately
as it conoemo the activity of selling or underwriting conauner
credit insurance. I am well aware of your longstanding intereet
in credit insurance and the Federal Reserve Board. Therefore
I hope you will do whatever you can to atop the Board'a out-
rageous practice of sanctioning millions of dollaca in credit

Aa you know, the Board Is called upon from time to time
to approve bank holding company activities of reinsuring credit
insurance policies or of selling credit insurance as an agent
or broker in connection with the extension of consumer credit.
These activities can be approved only after tha Board considers
whether they will benefit the public. Nevertheless, the Board
routinely approves applications to engage in these activities
in which no public benefit exists and which actually exacerbate
overcharging practices.

The worst examples of isproper Board practices include
the following I

1. The Board approves credit insurance rates that s
are among the highest in the country although Insurance is readi]
availabla at much lower rates. In many instances the saiM
holding company (through ita aubsldiarles) may already be
selling credit inaurance at lower rates at a very healthy
profit. In all instances, highly reputable inaurance coa^anies
in the market can provide the same coverage at leaa cost.
The Board does not even require a justification of the

Digitized bvGoO^^IC

approves application
only 3t to 131 below

consuner banafits

1 navarChalaaa roatliMly

h pronlaa tha aala of cradlt Insunnca at

DanexiE eo sancEion aucn overcharging on cna grounai
negligibly less excessive than before. In fact, th(
generally promisea an expansion of busineas so that
overcharging is forecasted.

hardly a pnblie
■ ■■ ■. It ia
.loation

The Board routinely sane
los of 2D1 to 10«. This
9 absorbed by the creditor

to the purchaser; """

states have established i

credit insuranct

that eot to am
nsurer instead i:
1 AsBociation ol

50» loaa ratio,

itantially highor ra

rata a genera tinj
' each pcaatiua

4. The Board never requires a showing that the applicant has
made any effort whatsoever to provide credit insurance at lower coat
to the consumer. When the Board amended Regulation Y to parait book
holding companies to act as insurance agent or broker in connection
with consumer credit, it explicitly expressed the 'expectation' that
the conpany will 'exercise a fiduciary responsibility. . .by making Its
beat effort to obtain the insurance at the lowaat practicable cost to
the cuatoner.* Vet traditionally no such showing of any kind baa baen
required. In fact, much lower cost insurance ia readily available in
the aarket and frequently within the bank holding c
itself.

5. The Board always approves wit
excess, unneeded, non-usable insurance
have little range of choice in credit
coiapany subsidiaries regularly sell cr
amount of the loan but -■-- - -^ -

lince conaunwra
bank holding

irned finance charge t

e consumer reasonably believes he is buying only
the coverage necessary to pay off tha debt, tie has no uaa for in-
surance on unearned charges. If tha consumer diaa, the 'pay off* ia
always confuted by subtracting the unearned Intereat fron the total of
unpaid payments. The sale of insurance on unearned charges can
drastically raise the cost of credit insurance without any increased
benefit to the customer.'

! the Board has forbidden the Bale
tnt credit because the excess cove
1 of credit, it apparently haa nev
I forms of excess insurance.

D„ii„.db,Go(5glc

I an awace that £zoK tina to tiae you conddar now
legislative approaches which are needed to correct the abuees
saaociatad with credit Insurance. Howvvar, the Federal Reserve
Board presently has the authority and the responsibility to
Bddraaa aooia of these problems as they occur anonq the activities
Of bank holding coii^>anies. 7his constitutes a large segment of
national credit Insurance business. So far the Board has failed
to exercise Its authority in this regard In a responsible
Banner and must share the blame for millions of dollars of credit

I hope that you can obtain the proper adninl strati ve attention
troa the Board which those credit Insurance activities require.
Becanse the abuses are so conmonplace and expensive It Is a
Battar of aoma urgency. Thank you for your attention.

Sincerely,
Hillard P. Ogburn

Digitized bvGoO^^IC

BEFORE THE BOARD OF GOVERnORS OF THE
FEDERAL RESERVE SYSTEM

In ee: Application of Hanufaccurar* . )

Banover Corporation for Prior Approval ] SUPPIXHIMTAL TILUK

on Acquiiition to Acquire ' } IH SDPPOW QT PIOTESI

Firat Credit Corporation and Firat ) BT SECHtCIA LEGAL

Cradlt Corporation of Georgia ' } SERVICES PBOGUK. UK

Of Counsal: PAUL E. KAUFFHAHH

WILLAKS P. OCBUBB Georgia Legal Service*
National Conaunar Lav Center Program, Inc.

Eleven Beacon Street P.O. Bos 176

m, HaaaachuaettB Colu^ua , Georgia 31902

,.- .-. ^^^ 404-571-7456

617-523-8010

Digitized bvGoO^^IC

IHTRODUCTION . ■

On Noveaber 1, 1977, Georgia Lagal Servlcaa Frograa, Inc.
(?rac«*tanc) proceited the application of Kanufaccurar* Hanovar
CorpocflClon (Applicant) to acqulra FlraC Cradlt Corporation and
First Cradlt Corporation of Gaorgla, Ac tha aaaa tlaa Protaatant
■ubnittcd a atacaiBent of facta to ba allcltad fron tha Applicant.
Since Chan counsel haa Infomad Frocaitanc by celephone that It
la Applicant' a paalclon chat Frocascanc haa ralaed no iaauaa
requiring Board action, and that aa a reault of caking thla -'- ~'
poalclon, did not ballave at that point It would ba In a poaitioB .: ;
to fupply. Proteatant wltb toy Inforoatlan regarding thla «att«r.
Since that telaphona conversation, a letter w«a aent to Applicant ^
making Frocaatanca raquaac for infonutlon mora direct and
apedClc but no reaponaa haa been racleved by Frotaacant aa of
thla date. The Information requaatad la aaaantial to aatabllsh the
excanc of any public benefit (or lack of public benefit) and
poaalble adverse effacta arlalng fron the propoied application
purauanc to 12 U.S.C. I18<'i3(c)(8)({4(c)(8)). Protaatant raaervea
all rlghta to aeek aceesa to information within control of
Applicant relevant co to application. A renewal) requeac for a hear
Ing ia alao being suboiittad aeperataly. In Che meantime, Froteat-
ant aeta forth herein for protesting this acquialclon on tha
baala of information publicly available^ so that tha Board nay
act accordingly. Aa noted In the Frotesc, Information available
CO Protaacanc concema Pirat Cradlt Corporation of Qeorgla only.
Similar Information concerning Che North Cerollna coDpany ahould
be available to the Board.

Digitized bvGoO^^IC

The Application In ICi prasent farm should be deoiad. Th*
public banafits claiaad far th* proposed appllcatlcD sza llliworr
«nd in soaa Lastance* consclcuts s continustion snd exaccrbacioo
of dctrlDsntal prsctices. In propoalng to vngags in conaowr
financing activity, the applicant claias greatly incraasad
efficiency and plant to Ineraasa the aaounc of total oncscandins
loans lAich is nearly rtak Cr«« but proposaa no raductioo in tha
coat of credit to conauwra. In proposing to offer to sail ecadtt
insurance coverage* aa an agent and to underwrite such inaurane* ■
as reinsurer, the applicant plans a concinuaCion and azpanaion
of patterns of ovecchacgLng and overreaching. Koreovar, Applicant
has Ignored entirely the Board's expectation that applicant "naka
Ita best effort to obtain the Insurance at tha lowaat practicabl*
cost to the customer," 36 Fed. Bag 15525 (August 17, 1971). Finally,
there is enough evidence to suggest staff inquiry into appltcanta
intent and ability to effectuate the reduction* oC rates pledged
in the application.

I. The Applicant Will Sot tteduce Finance Charge* "De^pita
Prelected Savings.

The application is based in large part on the proaiaa thac
the proposed acquisition will result in a substantially nor efftciant
consumer loan operation in Georgia. Tha efficiency presmably
will arise from an increase in the *i>e of the average loan, an
increase in the voluEW of business, and an infusion of aconoatc

I froB Ritter Flnancla' Corporation<Rittar) . Theae savlBga

Digitized bvGoO^^IC

■r«, of couEia, cited aa ■ public benefit, lo one night expect
Chat they would be passed on to the customer in Che fono of
reduced Finance Chargca. In fact, the applicant doaa proniae Co
loimr rates by 4Z in North Carolina. However, although tha
efficiencies planned for Che Georgia office* are daacrlbad in
the exact same language aa those for tha Norch Carolina Offlcea,
no reduction of finance charges la anticipated in Georgia. No
explanation is offered for the failure to allow Georgia consumers
the benefit of sBvlngs arising from the proposed acquisition in the
form of reduced credit charges.

Horeover. industrial loan finance chargaa In Georgia are
aiDoung the highest in the country, ^pllcanc haa pledged Itself
to a small (At) reduction of charges in every other state In
which Ritter does business. 1973 P. R. Bulletin 42 (Dec 10,
1974). Maximum statutory rates in eaxh of Choae acaces la
subecantially lower than Georgian ratea. (Chart on following
page)'' Nevertheless, no public benefit In Che font of lea*
expensive credit will accrue to Georgia consumers from Che
proposed appllcetion, and no explanation is provided for the
proposed continuation of tha very high loan rates. In this
respect the application is deficient.

The Applicant apparently plans to continue financing
certain nearly rlak free portions on consumer loans at Daximai
rates. When s creditor auch aa Rlccer aella credit insurance to
consumers, the entire cost of Che insurance Is added to the
amount of the loan and financed at tha same very high (in Oocgia)
rates. High rates for small consumer loan coti^aniea are Juaclfled

Digitized bvGoO^^IC

1^-

e g e B-

a a a a

il

I » s

i i

; :
d d

a 3 9 a

8 3

r 5

3 S

d d

s a 3 s; «

fSI § I I i p

D„ii„.db,Go(5glc

cradltlonsllj by th* high ri«ka Involvad in thi« typ* of lo«a.
Hcmever, virtually no riak 1* involved in miking ■ loan for Ch«
■nount of credit Insuruice premiua*. Thle ii becauae any unaanad
pranlua will alwsyi be rebated by the inaurer upon a cuatoaars
default. 3 Never Cheleaa , under propoied tema of tha acquiaitlon,
Che coat of credit Insurance will be financed ac aotae of the hlghaat
loan ratca in the country.

The amount of nearly risk-free financing aC high race* by
Flrac Credit Corporation of Oaorgla (FCCG) la hardly negligible.
In 1976, FCCC extended only 3039 Induatrlal Loana but with a total
of $254,143.03 Groaa credit life and accident and health pramlma
financed:^ Moreover, the applicant propoBaa to Incraaea the eiaa
of tha average loan mora than 49x' and to tncreaaa the voluae
of buaineai as veil. Thui, more inauranca of minimum (if any) risk
will be financed at racaa of 301 and AOX and higher and sore
people will be subjected to this unfair practice.

The acquisition should not be pervltCed without a pledge
of a aubstsntlal reduction of finance charge rates on conaumar
credit cranaactlons. In addition, tha Board should scrutlnlta other
unsupported calima of expanded capacity, service, product aaponalon,
and diversification, and Increaaed competition.

II- Ptooosed Credit Inauranca Practices Are Wot A Public Benefit
And Do not conform to Regulation 1.
The Applicant seeka approval to conduct businaaa through
ita Bubaidlary by acting as agent for aale of credit 1
and by acting aa reinsurer of that credit Inauranca. Reg.

Digitized bvGoO^^IC

11225. 4(a)(9Kll)&(a)(10). However. th« sppllcaclon falls Co
damonstrate •nj' public baneflc froa elthar propoaad activity.
Instead, the proposals are advert* to th* public In savaral

A. Credit Insurance Marketing

Although credit Insurance 1* big business, It Is not an
Issue about which consuaicrs have mich knowledge. It appeaes •• •
relatively snail part of credit transactions, and althougti It la
theoretically voluntary, the conaimer la usually prasantad with
a cooplst* contrsct which include* credit Insuranca charges and
financing and'la told to "algn her*, here, and hare."

Studle* by the Federal Trade Cotolsslon show that maaj loan

compantea sell credit Insurance with virtually all of their loan*.

The way they do it ia by giving the cuatOM*r no real choice. A*

one loan coDpany executive put it praising his two bs^t Banagcr*:

Th*y both state quite simply regarding life and
A&K that they Include it aucoDstically on the loan
{both types) They only retract or avlteh after malt-
ing every attempt to sell the customer on accepting It
in Che loan as it Is. They do not soft pedal It or give

written Into the loan. Th*lr epproeeh is aiftoaatic and
positive. °

The consumer has no choice of where to buy, and because his accaa-
tion is focused on the main transaction, the loan or the sale, cha
consumer has little opportunity to consider i*eth*r he wants
Insurance or wants It at the price being sold. In fact, a study
done by Ohio University, financed by creditor* and Insurance com-
panies, showed that even though though the purchase is thaoratically
voluntary. 251 of snail loan customers who hkd purchased cradle

Digitized bvGoO^^IC

Insurance choughc It was rsqulrad and 9Z of all purchaiara mra
noc even «vare chat chmf had bought It.^ Although con*mera are
demonstrably unlnfonud about credit Insurance, It Is of crucial
Inportsnce to the creditor. First. Che creditor Is the bene*
ficlarjr of this Insurance. I decreases bad debt losias or
Increases the value of Che paper ic assign*. In fact, credlc
insurance was once generally provided free to cuatODiera and still
today some banks and moat credit unions offer ic without a separate ^
charge. Second, the creditor aalling credit increases the alia ot „i-
the loan and finances the premium. Third, and most inpartantly.
the creditor directly or indirectly reclavaa aubstantlal coiqian- .
sacion for every sale of credit Insurance.^ In 1976, more than "j'.
1/4 of FCCG'e gross income was co^snsation for the sale of
to.ur.„c..»

This financial stake in the credit insurance aale coAined
with the relative inconipicuouanaaa of credit Insurance leede to
the worst abuse In this field, reverse coi^etitlon. Creditors
have a scake tn aeeklng the moet expensive insurance oo which
they can earn the greacaac amount of money.

The phenomenon of reverse confiecician is we 11- documented

and well eccspced. The Oaiced State* Department of Justice recently

concluded that:

., .competitive forces cannot be railed i^on Co
control the price of credit life end heelth Insurance.
The problem i* almil,ar to that experienced In title

insurance-- reverse competition. 1''

Virtually every other study of credit insurance, including the
definitive HAIC Staff Study of Credit Inauranca. aaveral Ceagtit-

DigilizedbvGoO^^IC

•loiMl haaringa, court caaaa, and admliilatrattv* raviawa, haa
raached cha aaaa eonclualon.' becauaa of raveraa cooqiattcton,
extraordinary effort* ara neceaaary to pravent abuaaa and to
keap prlcaa at a fair laval.

The Board vaa full]* awara of the problaaa eauaad by ravaraa
coapatitlon when it ruled chat the activity of actin aa inauranca-
agent In connection with extaoalona of credit by holding coi^anlae
or their aubaldlariaa waa cloaaly related to banking under 14(c)(8)
of tha Bank Holding Coi^any A«t. To coimteraet the praaauraa
cauaed by raveria coapatltlon, that la to aaanre that credit
Inauranca would be aold aa a public benefit end not prlaarlly aa
a creditor benefit, the Board atated chat credit Inaurance pro-
vided by or through a bank holding coiqiany Miat be aold at the
lowest practicable racea. Specifically, tha Board acatadi

(Tha Board enraaaea) che expectation that any holding
coinpany or subaldlary chat acts aa an Insurance agent
on the basis of the new regulatory provision will exer-
cise a fiduciary reaponslblllty---chat la, by making lea
best effort to obtain Che insurance at the lowest prac-
ticable coat to the eonauaar.

36 Fed. Rag. 15525-6 (Aug. 17, 1971)

B. ^ipltcant Propoaea to Overcharge Conatowra for Credit

Applicant stataa that IC will charge conaimera for credit
life Inaurance at lOt par $100 par annua and for credit accident
and health Inaurance 92. 9f par annua par SS.OO Monthly benefit
or 4. 851 of the fece anoimt of the loan irregerdlea* of tars.
These are very high rataa and barely leaa than the Mximw peislcced.
It la hardly la Che public Intoreat to proods Co overcharge only

Digitized bvGoO^^IC

slightly lass chan before.

Abeolucely no ■hawing (or even cl«lm) la ■■<!• chat applleent
has Dsda its beet effort to obtain tha insurance at the loveet
practicable coat Co tha consumer. 36 Fad. Rag. 15526 (Aug. L7,
1971). For this reaaon alona, the application should be denied. .;

A 70^ per 100 dollar per annua cannot be tha lowest prac-
ticable rate available. In fact, the applicant setla ainillar
cradlt Inaurance at leas than a discounted 50i par SlOO per
annua through Ritter'a Pennsylvania offices.

alBGLB PREMItM HATES PER jlOO ■;

Teni(nioBthB) Pennsylvanif Georgia proposals

Mixlnuna^''

36 1.3S 2.10

These Pennsylvania maxlmuB rata* are higher Chan Chose actually
charged by RltCer. If RiCcar can provide credit life insurance at
one race to its Pannsylvania cuaCotMra , chare is no reason the
asms race cannot be uaed in Georgia.

Another iieans of collaring rates is to conpsre loss racioa.
As long ago aa 1959, the National AseociaCion of Insurance Com-,
mlasions stated Chat the minlnun lose ration for credit life Inauranc
should be SOI. HAIC Proceedings- 1961 Vol. I, p. 300) see also NAIC
Proceedings- 1966 Vol. II, p. 575. Since Chen, nany atatas have
adopted higher loss ratios. Pennsylvania employs a 60X loee ratio
and California has proposed a 70X(80lfor credit unions) loss ratio.
In 1976. FCCG had a lose ratio of only 21.49X.^

Digitized bvGoO^^IC

Tha losi ratio for FCCO In 1976 via only 31.5X1^3 on tha *
baala of perhapa tha higheat rataa In the country. Thla •sain
fall* conaldarably ahort of avan tha nlntaun NAXC atandard and
more ao caEq>ared wltb oChar atataa. Applicant haa not dtvulgad
loaa ratloa and othar credit inaurance ai^arlance for Uttar
In each of the atataa In vhich Utter currently operataa. However,
It la clear that tha proposed rates era totally uajuatiflad.
They fail to aeet the expectations for an agent Bailing credit ini
anea Rag. 1 |225.4(a)(9)(ii) or tha niniDel public benefits under
f22S.4(a)(10>. moreover, applicant'* pnnla* to Incraaaa the
■ice of the average loan end to deal with tiora twrrowara only
auggeat* graaCar ovarchergea for nora of Cha public.

C. i^llcant Should Hot Be Pamitted to sell excess,
unneeded Inaurence

ConauBwra have littla choice In credit inaurance aactara and
one reaultant abuae haa been tha aala of exceea coverage. Uttar
and FCCC resularly aell credit insurance not only on the aaouDC
of tha loan but also on the unearned finance charge and on the
preniun itaalf. The conauaar haa no need for inaurence on uneeroed
chargaa. If a parson diea, tha anounC need to pay off cha
debt ia alwaya conputad by subtracting tha unearned Intereat.
Thia practice alao creates the possiblUcy of one other abuaa--
the failure to pay the anount of coverage of uneemed cherges to
the aacond beneficiary or tha insured'* estaC*.

The queacion of excess credit inaurance coverage was brought
before th* Board once before, on the issue of selling level teiB

Digitized bvGoO^^IC

Inaurance on Inatallmanc loanB. Id that •Ituatlon, tha e

is offered Insurance of a fixed anounc for the duration to the

loan even though the aoDunt of indebcedncaa decraaaea wlch each

monthly InstallDent. The Board clearly atated that auch practice .

Is no pemlssable under Regulation Y: . .

(The Board) does not regard Che sal* of level
term life insurance in connection with an
installment lending as directly related to an
extension of credit under |ZZ5. ^(a) (9) (tl) of
Regulation Y.

In Re; fidelity Corporation Application to Acquire Local Finance
Contiany . 1973 F.R. Bulletin A72-3. J^pllcant has said It trtll not
sell level tern insurance, but has not aald It will provlda cov-
erage of onlyehe amount financed.

Conaumera purchaaing credit inauranca believe they are
buying only the coverage necessary to pay off Che debt. Few,
if any. understand the subtle difference between amount financed
and total of payments coverage. None hava a naad to inaura the
unearned charges. Such exceaa coverage, like that associated
with level life insurance, is unrelated to the extension of
Cradle under Kegulation Y and Is an abuse of the public rather
than a public benefit.

A clear example of excess coverage proposed by the would
occur in loana with a cash advance of leas than SlOO repayable
in 6 months or less, the applicant could sell the consunar a
policy with a monthly benefit of from 1 1/2 Co 3 tlmea the
monthly payment depending on the circumstanees.''' This too
Is excess coverage unrelated Co the sxtenalon of credit and an
abuse of the public rather chat a public banefit.

Digitized bvGoO^^IC

D. Appllcane Will Sail Only 3-Da; Batroactlva Cradlt
Accident and Health Inauranca vhan aora raaaonabla
Covarage !• Avallabla.

^pllcanc propoaea to aell cradlt accldmt and haalth
insurance (A&H) with a thrae day racroacciv* waiting parlod.
Such coverage la raraly allowed In ochar atataa and tha peaetle*
baa been deacrlbed as "archaic".^' Evan 7-day rateo la aat allowad
in many atataa. However, theaa are the only two typaa of covaeage
available in connection with ataall loana In Geocgla.^'

A diaabllity a* long aa aeven daya la imllkaly Co graaCly.
affect tha conaunera ability to sake hla nonthly paypant dua to
likelihood of^ick pay and other reeourcea to cover that avail . '■
loaa of work tiDe, and it ia hard to vlauallte a cironatance in
which a diaabllity of laaa than aeven dayi would work a hardabLp
on Che borrowera ability to pay.

"The noac popular policy. . .anong email loan landara (ia)
IA day retro which normally accoqillahaa ice purpoaa wall by
replacing all loan paynenta In a caea over 14 daya and con-
eldering a ahortar dieablliCy Crivlal."'^ In fact, many acatea
do not allow a waiting period of laaa than 16 day* on ealaa of MB.

Throughout tha atata of Ceorgla aalea of A&H In connaction
with industrial loana under the high rate* then applicable reaulted
In a loaa ratio in 1974 of 28. 11^^ and in 1975 of 29.91^'.
Clearly Appllcanca alight reduction in rates will not bring
it cloae to an acceptable loaa ratio or change tha usaleis natura
of the policy and if applicant continuaa to propoaa such sales
Che application ahould be denied.

Digitized bvGoO^^IC

E Th« Proposed Sale of Joint Life Cr«dtc Insuranca it
not a PUBLIC BENEFIT.

Joint credit ILfe iiuuranee la rarely need by a conaiMaT. .
It ia eold primarily co Increase the coqiensatloD to the creditor.
When a married couple borrows money, often only one of Chem Is
working. It ia that person's income lAlcb ia needed to make the
payments and Lt Is that person who might need credit insurance.
There Is no need to provide Insurance for a non-working spouse.

Moreover, Protestant believes that a proper interparatation ■
of Georgia law and regulations is Chae tha sale of JoinC Life
Inaurance would constitute • violation of tha Carogla Industrial

F. I^vel Tern Life Inaurance Should Hot be Provided
In Conjunction Hlth Any Installment Loan

^pllcant has indicated that It haa no plana to sell level
tern Insurance and, aa noted above, the Board baa clearly liodted
the right to sell this Insuzance. Hsvertheless , a general
prohibition of Isvsl term life inaurance has somaclmes implicitly
exceptsd tha sale of such insurance aa a matter of "convenience"
and in conminicles of 5000 population or less. Aa the earlier
discussion noted, level term coverage Is Inapproplace for any
decreasing consumer indebtedness. Any acceptance of this aspect
of Che application should explicitly state that l^val term credit
inaurance will not be written in connection with any installment
consumer loan.

D„ii„.db,Go(5glc

G. Thara I* • Posslbtllcy That Appllcmt !■ Co^alllng
CoDsumera To Purchase Crcdlc Inauroacs

Applicaae has not provldad any Information concamlng
the Banner In uhlch Ic aarkeca credit Inaurance and th« par-
centaga of loans in which credit i* aold. Tha 1976 annual Raport
fllad by FCCG, however, indicate* that cradit life Inauranca waa
aold on 3006 of 3039 loana (98. 9X) and credit A&H on 2997 loana
(98.61). Froteatant submita that any panecratlon rat* of over 901
crealea a preaumption that the aale of the inauranc* In eotipulBory
rather Chan a public benefit. In addition, the eoBpulaor; aale
of credit inauranee while excluding It froB the Financ* Charge
violates Truth In Lending as wall. E.G. FTC v. Jorgengon, 5 CCS
Consumer Cradit Guide 198.594 (D.D.C. 1975). the application
•hould not be approved until tha penetration ratea of Ritter
are made known and the voluntariness of Credit Salaa is Established.
III. The Board Should Carefully Scrutinize The Applicant's

Ability to fulfill Its Stated Intentlona

When applicant applied for approval of Its acqutstcton of
Ritter, it indicated that Its future expanalon would be via
de novo office* and the Board relied on this In approving the
application. 197S F.R. Bulletin &2. Now it la seeking to expan Into
Georgia by acquiring an on-going concern presently owned by
another bank holding company.

Board approval was baaed in part on applicanc'a co^iitBant
to lover Interest rates 4X to all borrowara without being more
restrictive In its credit standards end to reduce the rate* charged
by Rlttar's landing office* for credit insurance. 197S F.R. Bull. 42.

Digitized bvGoO^^IC

Thareafter, unsucherizad ralnsuranca acclvlclea were eoianenced
in Harch Carolina and Fsnnaylvania apparently vichout reduced
racea. 1977 F. R. Bulletin 590.

How Froteacant has coae acraaa « contract tiiued by
Ritter after ica acquisition by applicant In which no reduction
tn either the finance charge or the Insurance preffliun was taade.
The loan, attached as exhibit U, was for $678.69 amount financed
over 24 months. Ritter charged the exact maxlnnm psmlesable
finance charge under Connsctlcut law, $185. 31. ^^ Similarly
Ritter charged the full amount permitted In Connecticut for
credit life insurance. ^^ Proteatant has been unable to leern
from appllcaoG about Applicant's practice* and procedures in this
regard so that only one side of the story is know. However, the
Board is urged to make a careful Inquiry into commitment* mad*
by Applicant.

Respectfully Submitted, this 17 day of December, 1977

Of Counsel

WlU-Um p. OCBURH

national Consumer Law Center __,

11 Beacon Street PAUL E. KAITFmUm 7^

Boston, Maasacbusetts Georgia Legal Servlcea

Tel. 617-5Z3-S010 Programs, INC.

P.O.BOX 176

Coluidiua, Georgia 31902
Telephone 404 571 74S6

Digitized bvGoO^^IC

Se« alio, Bxblblc "%" ,

If tiy risk at all la lovolvad, Ic la alnlmal
pollc; provides that Insurance lapses If the
default for 60 imy.

Exhibit "J", Schedule "r'

Application, p. S6 The Incraaaa could ba even greater since
the presant average Includes nonregulated mortgage* and the
new average does not

Letter to fiovemor Jefjrey M, Bucher. Board o£ Covemora of
the Federal B^aetve Syaten. November 29, 1974, from Charles
H. Tobln, Secretary , Federal Trade CoEinisslon reprinted
in Hearings on Conauaer Information Before the SubeomBltl

e Houae (

OEiKlctee c

BBlOn St

7. College of Business Admlni at ration of Ohio Unlverelty.
Consumer Credit Life and Disability Inauranc* (bubbard,
1973) 75,77

8. One Study showed that saall loan coippanias recleved a th

their net Income from credit Inaurance . In Re Determlnl
the msxlmum Rates of Charge and Amount of Loan

PebAtted SmalfLoan'CompgDlea , Virginia

Conmiaalon Case II9W1 , Exhibits MVl IB-i

9. Exhibit "J", Schedule C
10.

11 Exhibit "V

12. Eidilblt "J", Schedule P

13 Ibid

UExhlblt "Q", REG. 120-1-11- . 03(1)

15 Exhibit "S", p. 89

16. Exhibit "Q", Reg. 12O-1-11-.03

17. Exhibit "S"

Digitized bvGoO^^IC

FOOTNOTES, CONI

IS. Exhibit: "0", SctMdul* F

19. Exhibit "F", Schadul* F

20. Exhibit "Q"

21. $17/$100/anii

511/ $100/ Mw

22. Llf« Inaurance rata

Digitized bvGoO^^IC

BEFORE THE

SENATE BILL No. 72

STATEMENT OF
NATIONAL ASSOCIATION OF CASUALTY AND SURETY AGENTS

Submitted by:

Mr, Bruce T. Wallace
Executive Vice President
National Association of Casualty

and Surety Agents
5225 Wisconsin Avenue, N.W.
Washington, D.C. 20015
(202) 362-0101

OF COUNSEL:

Stephen F, Owen, Jr.

Henry Aahton Hart

LOOMIS, OWEN, FELLMAN & COLEMAN

Suite 800, 2020 K Street, N.w.
Washington, D.C. 20006
(202) 296-56B0

June 21, 1978

Digitized bvGoO^^IC

HATIOMAL ASSOCIATION OF CASUM.TY ANP SURKTY AGEWTS

tion of Casualty and Surety Agent a
(HACSA) is an organization con^rising ovar three hundred of
the larger property and casualty inaurance agencies and
brokerages in the United States accounting for better than
22 percent of the total property/casualty insurance industry'!
premiums. HACSA appreciates the opportunity to provide
these written comments on S.72, the "Competition In Banking
Act 0£ i977",

S.72 narrows somewhat the area of permissible insurance
activities of bank holding companies. By requiring insur-
ance activities which are conducted by bank holding companies
to produce substantial benefits to the public which clearly
and significantly outweigh poasiblo adverse effects, S.72
strengthens the current standards set forth at Section
4(c) (8) of the Bank Holding Company Act of 19Sfi and 12
C.F.R. Section 22S.4{a)(91. However, 5.72, like the current
law, is still a general standard.

The past seven years have shown that the Federal
Reserve Board is unwilling under a general standard to
effectively limit the insurance activities oC bank holding
companiea. NACSA, therefore, urges your Ccnnmittee to go
further in S.72 to specifically prohibit all forms of

Digitized bvGoO^^IC

isurance except for a few specific foms of inauranc* such
■ credit life, credit health, and credit accident iniuranc*
• sold in towns of 5,000 inhabitants or less. 1/

RESERVE BOABD WS FAILED TO

LIMIT IS50RASCE

BMJK HQLDIMC COMPAHIES UHDER A 'GEKERM. BTAHDMtP'
In 1970, Section t(c){a) of the Bank Holding Compojiy
Act was amended to Its current form which prohibits bank
holding companies from engaging in insurance activities
unless the Federal Reserve Board finds such activities to be
so closely related to banking as to be a proper incident
thereto, and further finds that public benefits outwalghlng
possible adverse effects can reasonably be sxpectvd to
result, ror the past seven years the Federal Reserve Board
has interpreted this 'general standard' in the most expan-
sive sense, and while expending a great aaiount of tlma and
resources, has allowed bank holding coapanlea to engag* In
almost all forms of property and caaualty insurance.

In 1971, citing Section t(c}(B] of the Bank Holding
Company Act as authority, the Federal Reserve Board prom-
ulgated 12 C.F.B. Section 225.4(b)(9). This regulation
allows bank holding companies to engage in, anong others.

This approach has been taken by two bills currently
pending in the Congress. On Hay IG, 1978, S.3087
was introduced in the Senate by Senators Durkin and
Hathaway and referred to this Coranittes. On March 10,
1978, H.R. 11456 was introduced in the House and referred
to the House Committee on Banking, Finance, and Urban
Affairs. This latter bill was re-introduced in the
House on Hay 10, 1978 aa H.R.12fil4. On June £, 1978,

Digitized bvGoO^^IC

1 extension

the tollowlnq broad categories of
l.t Any insurance directly i

of credit by a bank or to the provialcin of other
financial services by a bank; and
2.) Any Insurance sold as a natter of convenience
to the purchaser ao lon<| as this portion of the
inaurance activity of the bank holding company is
insignificant.
Under this extremely broad standard, the Federal
Reserve Board ha* allowed numerous fonas of Insurance
activities. These activities include the following forsis of
vhere such insurance has been isaued to protect
.n which the bank has a security interest or to
la bank holding company's ability to obtain repayment

property

Fire, theft, b

Conprehenalve
Colllsii
Herine insure nc
Liability i
Property floater ]
Koneowner'i Insuri
Bailer and machine
Surety bonds

Supervision, Regulation, and Insurance, by near
unanimous endorsement, added the language of
H.R. 12614 as an asMndnent to Title XIII of H.B.96I;
l"Xhe Safe Banking Act of 1977").

Digitized bvGoO^^IC

10.) Performance bonds, and

11.) Credit lite, credit accident, and credit health
insurance issued to cover the debtor. 2/
Furthermore, the Board has also allowed bank holding co«~
panies to en9a9e in numerous focns of insurance, such as
automobile insurance, when sold as a matter Of convenience
to the purchaser. 3/

The recent decision of the Fifth Circuit in Alabawa
ABHQciatioo of Insurance Agents, Inc. v. Board of Governors
of the Federal Reserve System 4/, further demonstrate* the
Federal Reserve Board's ineffective handling of this Issue.
The Court was able to reach a final decision Only after It
had issued two re-hearing opinions, each of which significantly
nodlfled the Court's prior position. The great difficulty
which the Fifth Circuit had in deciding the Alabama Association
case was due largely to the failure of the Federal Reserve
Board to set forth, as is required by the Administrative
Procedure Act, a full statement of the basis and purpose of
its regulations. Had the Board, at the time it prooulgated
12 C.F.R. Section 2JS.4(a)(91, set forth the basia for its
conclusion that the broad range of insurance activities

2/ Alabama Financial Group, Inc., J9 Fed. reg. 25548

(1974)! First National Holding Corporation. 39 Fed.

Reg. 31411 (1974) .
V Id,
7/ 531 F.2d 224 (Sth Cir. 1976); re-hearing denied, S5B

F.2d 729 (5th Cir, 1977) i cert, denied 4G U.S. L.N.

3539, No, 77-668, February 27, 1978,

Digitized bvGoO^^IC

allowed by tha regulation vara cloaaly related to bankl
and likely to benefit the public, the Fifth Circuit woi
have been able to nore effectively review the action* i
Board. However, the Board failed to do this, and canei

quently.

■ rift

foe the convanii
COJnpanieB to ent

vision of other

the Fifth Circu:
conpaniea to en<
all those specif:

1 Circuit was aignif icantly hampered
decision in the Alabana Asaociation a
, while disallowing forms of insuranci
;a of the purchaaer, did allow bank hi
le in any insurance activity directly
.enslon of credit by a bank or to the [
inanclal services by a bank. In so d<
left open the door for bank holding

B of i

inc:

.cally listed t

On April 10, 197S, the Federal Reserve Board promul
gated a propoaed anendnant to 12 C.F.R. Section 215. 4Ii
in order to conform that regulation to the final decis:
the Alabama ftBBOciation case.

In luiraBary, over the paat seven years the Federal
Reserve Board has applied the general standard of Sect:
4(c) (a) of the Bank Holding Company Act of 1956 ao aa i
accomplish three things, all of them contrary to the pi
intereat and the intent of Congress:

D„ii„.db,Go(5glc

1.) It has axpended ■ great anount of tlMa and

adminiatrativc raaourceap
2.) It haa aetad In auch an arbitrary and confuaing

■annar as to pravant sffactlva judicial ravi«w of

ita actional and
3.) It haa allowod bonk holding ccopaniaa to angaga in

an extranely broad cange of inauranca aotivitiaa.

and has tharaby left open tba potential for bank

holding coi^>anleB to Inpoae undue acononie coercion

upon the businesa of inaurance.

II. REASONS FOR THE FAILURE OF THE FEDBRAI. RBSMVB
60ARD TO EFFECTIVELY LIMIT IMSURAMCE ACTIVITIES

or 3a:!k holding CQMgAMss i"^:der h "gz::esial S7a.N'3aa3"

A.} The Federal Reserve Board Haa Bean Suaceptible To
The Pressure Brought To Bear Upon It By The Bank
Holding Companiea

Since Che promulgation in 1971 of 12 C.F.R. Section

22S,4(aH9), the Federal Resezvo Board haa bean barcagad

with nunaroua applications by bank holding cDDpaniaa for

paraiasion to engage In an extrenely broad range of Inaur-

anca activities. In addition to those nuiMroua foma of

Insurance mentioned earlier for which bank holding coapanlea

successfully filed, bank holding companies also attenpted.

albeit unsuccessfully, to engage in the fallowing foma of

D„ii„.db,Go(5glc

Buslnasa intarruption inaucance
Fidelity Inaucanca

5.) NoEtgaga guarantea Inauranca. S/
Furthamorsi encouraqad by the Alabama Aaeociation
case, the bank holding eonpanlaa have continued to pressure
for pemlaalon to engage in still other foraa of insurance.
On Ksy 1, 1978, Che American Bankers AsaociaCion filed its
cOBBenta upon the Federal Reserve Board's proposed aDandment
to 13 C.F.R. Section 225.4(aM9). The bulk of thsae conunts
were fined at amending the regulation further to allow bank
holding conpanlea to iasue extenaions or renewala upon
credit related insurance even though the loan which la
related to the insurance has been paid in full. Of coursa,
in such an Inatance, the issuance of the renewal insurance
cannot be said to be 'closelv related' to banking since the
renewals are to be laaued at a tine when the loan which was
the basis for the original laauance of insurance has been
paid. This position of the Anerican Bankers Association
implies that the bank holding companies feal that the
Federal Reserve Board, whoa* membera have a strong banking

S/ Alabama Financial Group, Inc., 39 Fed. Reg. 35548 t

—^ ^r r rA M n -^'V I " rh.__.. .. ^ . J . ir-1 j;^- ,. ..J 1

D„il„.db,G0(5glc

background, will be suscaptibls to an argunent that alnoat
any fom of insurance is 'closely related* to banking.

Another example of ttiia attitude on the part of the
bank holding companies is reflected In the recent appli-
cation of HCNB Carporation. which application asked th*
Federal Reserve Board to approve the retention by HCHB
Corporation of its subsidiaries which were an9Bged in the
actual undervriting (i.e.. they bore the ultioata risk) of
property and casualty insurance related to extensions of
credit by affiliates of HCNB Corporation. By Order of Hay
12, 1978, the Federal Reserve Board denied the applicationr
however, the fact that one Governor on the Board voted
against rejecting the application indicates that the Board
was not entirely unsusceptible to the idea of bank holding
companies underwriting property and casualty insurance.

In reliance upon a broad general standard and upon the
syaq^athetic views of Federal Reserve Board ■owbers towards
the banking industry, bank holding conpanies have applied
for peraission to engage in nearly every fom of insurance
•nd have in most instances, been successful In obtaining
this pertoission. Only a law which specifically prohibits
all but a few specific fortos of insurance will put a atop
CO this phenomenon.

D„ii„.db,Go(5glc

panlee To Exert Eeooop]

Reserve Board

It ion to the
economic

The pro-banking attitude of the Pedera.
has caused it to give insufficient conaideri
potential of bank holding conpanieB
coercion in the placeoent of insurance vlth their subsi-
diaries. This shortcoming of the Fedaral Reaerve Board vaa
amply demonstrated in the proceedings laadtng up to the
Alabama Association case-
in that case, the Fifth Circuit was reviewing the
orders of the Federal Reserve Board in two case dockets
involving applications by bank holding companies to engage
In the insurance agency business. The Board in turn had
Issued its orders in response to the Racoimiended Decisions
of an Administrative Law Judge. The AdininistTative Law
Judge, who issued the Itecoimnended Decision In both dockets,
was not assigned to the Federal Reserve Board, but rather
was borrowed from another agency for the purpose of conducting
Bdministrative proceedings with respsct to the two dockets.

In both dockets, the Administrative Law Judge made a
finding that the economic concentration of the applicant
bank holding companies seriously threatened insurance
agents, and that a substantial possibility of voluntary
tying of insurance sales to loans axlsted. 6/

e/ January 14, 1974 Recommended Decision of the AdninisCrativi
Law Judge, F.R.B. Docket lA-B (First National Holding Compi
and February 7, 1974 Recoomended Decision of the Administri
Law Judge, F.R.B. Docket IA-10 (Southern Bankcorporatltfn) .

Digitized bvGoO^^IC

In the Sou thorn Bankcorporation proce*ding. tba Adalnl-
Judge. finding tha Applicant to hava as high
as 4S.7 percent of deposits in so«e markets, concluded that
the Applicant *... would have a doainant position in tenaa
of captive clientele which could b« influanc«d to divert
froD local existing independent insurance agencies. While
coercive tying of insurance sales to lending Is illegal
under Section lOS of tha Act, 'voluntary' tying through
subtle influencing particularly in timei of tight Honey is a
distinct possibility despite pEoteatatiana of TAFG witnessaa
to the contrary" 7/

In the First National Holding Company proceeding, the
Administrative Law Judge, finding two of the applicants to
control 52.8 percent of the Atlanta market, concluded that
"... their combined econocnlc power would represent a lomldable
threat to the independent agenclaa by reaaon of tha banks*
advantage in terms of a very large built-in clientele of
borrowers and that consequently . . . the Independent cooilaslon
agents would have difficulty surviving* B/.

As a result of these findings in both dockets, the
Administrative Law Judge recommended that the aiajor bank
holding companies involved be denied the right to engage in

7/ February 7, 1974 Recommended Decision of the Admini strati v«

Lau Judge, f.R.b. nocKet lA-lQ (Southern Bankcorporation) .
8/ January 14, 1974 Recommended Decision of the Administri
: lA-e (First National Holding

Digitized bvGoO^^IC

all toma of Insuranca, axcapt Edit pcopttetary and SBployae
Inauranea and for oradit lifa, oradit haalth, credit accident
and Dortqaqa radanption Inaurance. 9/

The Federal Reserve Board, having reviewed these
'alaiBlng' findinga of the Kdainistiative Law Judge, never-
thelaaa in large part rejected tha Recoanended Decision of
tha Adainiatratlve Law Judge and allowed the Applicant bank
holding oonpaniaa to engage in many types of inaurance which
the Adninistrative Uw Judge had found to be contrary to the
public inteceat. In rejecting the Recoanended Declaiona of
the Adainiatrativa Law Judge, the Boacd merely stated that
it had found no actual evidence of the bank holding coapanies
using their economic power to coerce. This insistence by

} Board that thei
<er Ignorea the c!

feated in the Confei

> a ahowing of actual abuse of economic

: intent that the Board conaider not

power, but also tha potential

f Congreas was clearly nanl-

srence Report to acconpany the 1970 amend-

nMHts to Section 4Ic)l8) of the Bank Holding Coapany Act of

1956:

'But the dangers of 'voluntary' tie-ins and
reciprocity are basically atructural and must be dealt
with by the Board in determining the competitive
effects of bank holding company expanaion into fields

closely related to banking when considering applications
under Section 4 |c} (8} . These will be difficult ques-
tiona, for assurancea of good faith and tho intention

9/ Supra at n.S

Digitized bvGoO^^IC

not to engage in tie-ins and reciprocity by the Appli-
cant bank holding companies will largely be irrelevant
to the just as serious dangers of 'voluntary' tie-ins
and reciprocity. The Board must, in any case, consider
these problems in carrying out its responsibilities
under the Act." (emphasis supplied) 10/.

This insistence of the Board that there be a showing of
actual abuse of economic power by the banks is also incon-
sistent with the long-held viaw in this country that
monopoly power in Itself is an evil, regardless of whether
that power is in fact exercised by its holder 11/.

Given a general standard with which to work, the Federal
Reserve Board will continue to ignore this serious problem
of potential abuse of economic power by bank holding companies.
Only a specific standard which prohibits bank holding companies
from engaging in all but a few specific forms of insurance
will protect the public against this threat of abuse of
economic power by bank holding companies.

In allowing bank holding companies to engage in an
extremely broad range of insurance activities, the federal
Reserve Board has given an overly broad interpretation of
the term 'closely related to banking'. The Board has

10/ H.R. Report No. 91-1747, p. IB, December 16, 1970.

IT/ "So it is that monopoly power, whether lawfully or
unlawfully acquired, may Itself constitute an evil
and stand condemned under Section 2 [Sherman Act)
even though it remains unexercised.' (bracXets added],
U.S. V. Griffith, 334 O.S. 100 {194B) .

Digitized bvGoO^^IC

applied the "closely related* test In a manner which allows
bank holding companies to engage in numerous forms of
property and casualty Insurance. This interpretation of the
Board reflects a lack of understanding on its part of the
specialized nature of the job performed by a property and
casualty insurance agent.

A member of the staff of the Federal Reserve Bank of
Atlanta, writing in 1971, identified two factors as relevant
to the determination of whether an activity is closely
related to banking: [1) whether the activity may be functionally
integrated to banking and [2] whether it may be operationally
integrated to banking 12/. When one understands the specialized
nature of the job of the property and casualty insurance
agent, it becomes readily apparent that the sale of property
and casualty insurance can not be functionally or operationally
integrated into the loan transaction.

Unlike credit life, health, and accident insurance
which is generally written under a blanket policy issued to
the lender without underwriting of individual applicants,
the sale of property and casualty insurance necessitates the
tailoring of the policy to the specific needs of the client.
The agent must be fully familiar with the client's business
or personal situation, and the risks which are presented to

12/ Sally, Charles D., "What Is Closely Related To Banking?",
59 Monthly Review, Federal Reserve Bank of Atlanta, 98
(June 1971) .

Digitized bvGoO^^IC

hiB client as a result of that situation-
Few loan officers will have the necessary understanding
of the numerous forms of property and casualty insurance
policies which are available for their client, and few loan
officers will be able to spend time to fully familiarize
themsslves with their client's personal or businsss insurance
nssds. This nacessitates the creation of a totally unrelated
insurance department of the bank and the hiring of insurance
specialists to staff that department. In short, the sale of
property and casualty insurance may not be functionally or
operationally integrated into a loan transaction.

yet another factor, which has been relied upon by bank
holding companies as a justification for their claim that an
insurance activity is closely related to banking, is the
need of the bank holding company to engage in the insurance
activity.

While banks clearly have a need to assure that the
assets in which they have a security interest are insured,
they do not have a need to sell such insurance. A bank
needs numerous goods and services in order to function.
However, this does not mean that the bank needs to sell
those goods and services. For example, while a bank may
need to use computer systems in its accounting branch, it
does not necessarily follow that the bank needs to go Into
the business of selling cc^pputers.

Digitized bvGoO^^IC

As has be«n sxplained above, pcopsrty and casualty
Insurance agents ar« much better qualified than a bank loan
officer to select insurance which will adequately protect
assets in which a bank has a security interest; and these
property and casualty insurance agents can perform this job
in a better manner, which will bs most helpful to the
debtor as well as the lending bank. Consequently, bank
holding companies have no need to engage in the business of
the sale of property and casualty insurance.

It is clear that the Federal Reserve Board intends to
allow bank holding companies to engage in numerous forma of
property and casualty insurance under a 'general standard",
even though such activities are not in fact clos«ly related
to banking. Only a specific standard which prohibits bank
holding companies from engaging in all but a few specific
forms of insurance will remedy this situation.

III. COHCLUSIta)

While S.72 correctly recognizes the need to further
limit the insurance activities of bank holding con^anies,
the approach taken by S.72 is unlikely to achieve that goal.
Although S,72 would strengthen somewhat the current standard
governing permissible insurance activities of bank holding
companies, the standard of S.T2 is still a general standard.

D„ii„.db,Go(5glc

ThB past BttvAn years have clearly shown that the Federal
Reserve Board, left with a general standard, will not
effectively limit the insurance activities of bank holding
companies .

The Federal Reserve Board, having a strong Baanking
background, has been highly susceptible to the continued
pressure of bank holding companies to expand the acopa of
insurance activities in which they nay engage, rurtheraoce,
the Board has shown an indifference to the very real poten-
tial of bank holding companies to exert undue economic
coercion with respect to the insurance business. Lastly,
failing to appreciate the specialized nature of the sale of
property and casualty insurance, the Board has allowed bank
holding companies to engage in numerous forms of property
and casualty insurance even though the sale of such insuz—
ance is not in fact closely related to banking and is beyond
the expertise of most loan officers or bank personnel.

The net result of the Federal Reserve Board's actions
in this area under a general standard is a negative one-
While expending a great amount of time and administrative
resources in the area, the Board has failed to effectively
limit the insurance activities of bank holding companies and
the economic evils which result from the conduct of an
expanding range of insurance activities by bank holding
companies. A specific standard is required in order to
effectively limit the insurance activities of bank holding
companies. Consequently, HACSA urges this Committee to
adopt a specific standard which prohibits bank holding

D„ii„.db,Go(5glc

companies from engaging In all buC a few specifically stated
fonu of insurance such as credit life, credit health, and
credit accident insurance and insurance sold in towns of
S.OOO inhabitants or less.

Respectfully submitted.

Bruce T. Wallace
Executive Vice President
National Association of Casualty
and Surety Agents

OF COUNSEL:

Stephen F. Owen, Jr.

Henry Ashton Hart

LOOMIS, OHEH, FELLMAH i COLEMAN

Suite BOO, 2020 K Street, H.W.

Washington, D.C. 20006

(202) 296-5680

Date: June 21, 1978

Digitized bvGoO^^IC

TESTIMONY OF JOHN M. DELANY

BEPOHE THE COMMITTEE ON BANKING. HOUSING AND ORBAH APPAIHS

RE S.72 - "A Bill to Amend the Bank Holding Company Act
and the Bank Merger Act to restrict the
activities In which registered bank holding
companies may engage and to control the
acquisition of banks by bank holding companies
and other banks."

Mr. Chairman and Members oT the Banking, Housing and
Urban Affairs Committee. My name Is John M. Delany. I am
Group Senior Vice President and General Counsel of Purolator
Services, Inc. I thank you for this opportunity to present
views In support of provisions of S.72 with which the armored
car and courier Industries are concerned.

The experience of the armored car and courier
Industries under the Bank Holding Company Act Amendments of
1970 emphasizes the need for this legislation Insofar as It
relates to standards for bank holding company entry Into
bank-related activities and to administrative procedures
and Judicial review. Our Industries, of course, have had
no Involvement In mergers of banking Institutions and I
am not qualified to address myself to those provisions of
S.72. .

Digitized bvGoO^^IC

You hare sBked that testimony be directed to
seven highly pertinent questions relating to the

appropriate scope of activities which should be pemiltted to
bank holding companies under , Section 1(cK8) Of the Bank
Holding Company Act and to procedural provlslone designed to
assure due process in the adnlnlstratlon of the Act. I
ahall be pleased to express my views on those questions.

At the outset I would point out that I an particularly
impressed with the statement of Findings and Purposes of
3.72 that bank holding companies have extended their services
Into product markets beyond those directly related to banking,
thereby eroding the line between banking and commerce In
the Nation. Courier services are specifically named as an
example of such an inappropriate extension of Bank Holding
Company activities.

In order that the Committee may fully appreciate the
impact of the Bank Holding Company Act upon our business, I
believe that It will be useful If 1 give you a brief description
of the nature of the courier and arokored car industries.
I.
DESCRIPTION OF THE COUHIEB INDUSTRY

Courier companies furnish essential transportation

D„ii„.db,Go(5glc

commodities eonslat of cash letters for banks; data
processing for banks and business concarnsi radiopharmaceuticals
for laboratories and those destined to hospitals; exposed and
processed film Tor major processing laboratories; computer
repair parts and other repair parts requiring expedited
delivery; and a myriad of other small package Items, all
required to move on precise and rapid transportation
schedules. In order to meet the needs of the public utilizing
thia service, deliveries must usually be completed ulthln
13 hours or less, on a door-to-door basis, from point of origin
to point of destination. This service Includes the movement
or courier material between the £ast Coast and the West Coast
Hlthln a l£-hour period. This la accomplished by coordinating
ground and air services perforinea and undertaken by courier
companies.

Cash letters Involve the daily movement of checks
In the process of collection. Thia service Is essential
CO any small bank In shipping Its deposits to a larger bank;
for collection service on behalf of the small bank; and for
credit to that bank's deposit account when collection has
occurred. Rapid end reliable courier service enables banks

D„ii„.db,Go(5glc

to •am IntersBt througti the Investment of such funds for
lonsBr periods. This Is a matter of substantial economic
Importance, particularly in tight money marketB, Hhen aa
much BE or more than (230 a day In Interest, per one
million dollars, can be earned.

Courier service Is usually provided during the
evening hours, Hlth pickup after the cloae of the business
day and. In most Instances, delivery before the opening of
business the neit morning. In the courier service provided to
banks, cash letters and data processing material must
frequently ba delivered to or from a large bank Hithln a
period as short as three or four hours.

□round courier operations betveen the states may be
regulated by the Interstate Commerce Commission, ahlle
service within any given state may be governed by that state's
regulatory agency. For service provided in conjunction with
air operations, courier companies are regulated by the Civil
Aeronautics Board.

The basic unit of any courier service operation
is the route, that is, the cluster of banks and other
customers served by the sane vehicle. The economic existence
of a courier service company is directly and essentially
related to the profitability of the structure of Its route or

Digitized bvGoO^^IC

served on any given route, the cost snd avsllablllty of
Bervlcs to all sre enhanced.

It should be noted that the courier service
Industry is relatively young. Its existence dates from
about the early 19^0' s when a number or Individual companies
came Into being to provide the expedited transportation
•ervlce required Tor certain important documents and
commodities.

II.
DE3CRIPTI0H OP THE ABWORED CAR BUSIMESS
Armored oar companies conduct a speelallied
transportation business Involving the safeguarding and
transfer of valuables of every nature. They provide a for-
hlre transportation and safekeeping service. The comsodltlea.
transported by armored car companies consist of cash and
currency, coin, silver, bullion, stocks and bonds snd
various other articles of unusual value which require a high
degree of care In handling and transportation, such as
precious metals and dangerous drugs. The armored car
Industry provides service, generally, to the following typea
of cuBtoraera: banks, chain and retell stores, brokerage
offices, currency exchanges, Industrial plants (particularly
in the delivery of their payrolls) and amusement parks and

D„ii„.db,Go(5glc

•porting arsnas. Operatlona are conducted In ftraored cars,
Hhlcli are constructed of bullet -resist ant steel plate and
bullet-proof glass and which are equipped with built-in
sares and grills. Armored car cocupanleH aiust maintain
terminals where specially constructed vaults of various
types have been Installed In order to provide service Tor
overnight storage and the protection of valuables.

Anaored car companies operate In all of the major
metropolitan areas of the Nation, as Hell as from, to, and/or
between these areas. In considerable measure, operations
of an Interstate nature are regulated by the Interstate
Commerce CommlsBion while intrastate service nay be regulated
by state agencies. In order that armored car companies may
render the most convenient and economical service, they
dispatch their trucks on a scheduled basis or route. By
service of as many customers as possible on a route and
apportionment of the total cost among then, the cost to each
customer can be maintained at a level sufficiently low for use
by most small businesses. The economic importance of having
as many customers as possible on the route Is such that
usually only In the Nation's larger cities is there sufficient
demand to support more than a limited number of armored
car companies.

D„ii„.db,Go(5glc

By ncoeseltr, becauas of the graat value of tha
commodltleB being bandied, armored car CQnpanles muat be
reliable and imist be well managed. Entrance Into tbe
armored car rield requires a major Investment In highly
specialized armored vehicles at a cost In the range of from
110,000 to about $30,000 per unit, depending upon slie and
the equipment built Into the unit. In addition, operating
teralnals, Hhlch are, by and large, suitable only for a
single purpose, are quite expensive due to the high cost of
vault Installation for overnight storage and the construction
of highly specialized security areas which must be equipped
Hith the latest and most sophisticated electronic alarm

III,
You have asked for an eiprosalon of vleMs on the
allied questions of (1) the neceaalty to restrict bank holding
companies to activities "directly' related to banking and thoae
activities Htthln Che courier and armored car industries
which I would consider "directly" related to banking; and
(2) the kinds of activity In these Industries now permitted
by the Federal Reserve to bank holding companies under the
existing "closely" related test.

Digitized bvGoO^^IC

On the basis of action taken to date by the
FederaJ Reserve Board In determining that bank affiliates
nay engage In certain courier service on the basis of
Section 4(c)(8] as it now reads, I believe that the
statutory change to be accomplished by restrlotlon of
bank holding companies to activities "closely and directly"
related to banking Is a required one. In that same aonnection,
I also consider that the proposed amendnent In S.7Z which
would change "a proper Incident thereto" to
"a proper and necessary incident thereto" (p. 10, line 16}
is highly useful.

On Novenber 15, 1973, the Federal Reserve Board
determined that bank holding companies should be permitted
to engage In certain types of courier service. This ruling wf.B
baaed upon the language of the present Section '1(c)(8), with
the Board deterninlng that these courier servlcss Here
(a) closely related to banking and (b) that this relationship
was such as to make these courier services a proper Incident
to banking.

• Under Section «(<:)(8), as enacted in the 1970 AmendmentB,
the orIterJ.a for approval of a non-banking activity are that
it be found by the Board "to be so closely related to banking...
as to be A pfopei' incident thereto" and that "£l]n determining
whether a particular activity Is a proper incident to
banking.. .the Board ahai: consider whether its performance
by an amilate of a holding company can reasonably be expected
to produce benefits to the public such as greater convenience.
Increased competition, or gains m efriclency that outweigh
possible adverse effocts, such as undue concentration of
, decreased or unfair competition, conflicts of
or unsound banking practices."

D„ii„.db,Go(5glc

The Federal Reeerve Bosrd, In ItB Interpretation

of Section 1(c)(8], hsB undoubtedly related Its rullnES to
the vieHB expressed by Its then ChalrniBn Burns during leglslatlv<
consideration of the 1970 AmendiiientB . His poaitlort iraa
that the banking syaten has become very Innovative and that
the language of Section UCeXS) should not be rraned or
Interpreted in a Banner to haaper thl's Innovation. In aupport
of the Board's ruling that certain courier services oay be
engaged In by subeldiarlea of bank holding campanlss, the
Federal Reserve Board argued that the legislative purpose of
the 1970 Amendments was to grant the Board "greater flexibility
In datemlnlng what non-banking actlvltles^^^are to be
permitted bank holding companies." (Board's Brief In United
States Court of Appeals In National Courier Association et al.
V. Board of Qovernors of the Federal Reserve Systei. 5l6 F.2(l
1229 (D.C. Clr. 1975), p- 61. )■

With this background of the "greater flexibility"
philosophy of the Federal Reserve Board, the language utilized

■ In Its ruling on appeal from the decision of the Federal
Reserve Board in National Courier Association, the United States
Court of Appeals modified the Board's decision insofar as the
Board had permitted bank holding company subsidiaries In some
circumstances to engage in the courier transportation of non-
flnanolally related materials. Nonetheless, In permitting
bank holding company affiliates to engage in certain courier
activities, the Court of Appeals seems clearly to have boon
Influenced by the legislative history resulting in the
Congressional determination to use the words "closely related
to banking". 516 P. 23 at 1236-37.

Digitized bvGoO^^IC

In S-TS, at Section 301 In unending Section 4(e)(8},
BCcompltsHeB an essential objective. Rather tl
activities "closely related to banklns" , 3.72 provides that
the activities shall be "closely and directly related to
banking" (underscoring supplied), ahich Is obviously a more
restrictive test.

In approving certain courier activities for bank
holding company subsidiaries, the Board followed Its "greater
flexibility" approach and In doing so clearly moved Into an
area which Is not "closely and directly related" to the
banking business. The Small Business Administration, In
commenting to the Federal Reserve Board upon the proposed
courier regulation, stated that "now, for the first tine, we
see Hhat may be a dEuigerous development for snail business
creeping up In, , .a proposed rule on armored car and courier
services. That Is, we see a switch In concept from expanding
a service already being provided by the bank to proposing to
engage In a service that has traditionally been received by
the bank. In other words, the argument that IB being made ts
that because we, the bank holding company, need a certain
housekeeping service. It Is closely related to banking and
a proper Incident thereof." (underscoring supplied).

The facts are that armored car and courier
services are completely unrelated to the business of banking.

D„ii„.db,Go(5glc

Armored oar and courier services are bseieally the buainesa

or transportation of property by notor vshlcle [and aooetlaes

by plane) wboae scope la in considerable neaaure subject to

utility regulator; statutes. Laying out araored car and

courier routes and schedules In an affletent and economical

manner demands specialized skills. Hanagenent of a complex

armored car or courier system, frequently calling for close

coordination of ground and air aervlce, requires a higb

degree of transportation and allied expertise, having nothing

at all to do with banking skills or experience.

On the other hand, the business of banking

"...consists In the issue of notes payable on demand
Intended to circulate as money where the banks are
banks of ISBuei in receiving deposits payable on
demand; In discounting commercial paper; making
loans of money on collateral security; buying and
selling bills of exchange; negotiating loans,
and dealing in negotiable securities Issued by
the government, state and national, and municipal
and other corporatlona." Mercantile Bank v. Men
York. 131 U.S. 138, 156 {iSBTT;

In the circumstances, I would respectfully suggest
that legislative reports on S.72 put to rest once and for all
the Federal Reserve Board concept that a "flexible approach"
should be adopted to Section 1(c){8).

The answer, therefore, to the question of whether
there is a necessity to restrict bank holding companies to
activities "directly" related to banking Is "yes". As to
the question of what activities within the araored car and

Digitized bvGoO^^IC

courier industry should be conaldered "dlreotly'
ralftted to bonking, the logical snsoer la plainly "none"
since, as noted earlier, these are tranaportation businesses
calling Tor specialised skills coapleteljr unrelated to
banking. It should, hovever, be noted that Section UCcKlKC}
of the Bank Holding Company Act, aa amended, IZ U.S.C. 3ec.
181I3(C){1KC), provides an eiemptlon to a bank holding
company for the 'furnishing [of] services to or perfomlng
services for such bank holding company or Its banking
aubsldlarles."

you have asked the klnda of activity In the courier
end armored car induatry now permitted by the Federal Reserve
Board to bank holding companies under the exiatlng 'closely"
related test. Activities so permitted in the courier
Industry are the following (in addition to "the internal
operations of the holding company and Its Hubeldlarlea",
which the Court of Appeals found to be expressly permitted by
Section 11(c)(1)(C), BuEra):

and written instruments (excluding
currency or bearer-type negotiable
Instrumentg) as are exchanged among banks
and banking Institutions; 2. audit and
accounting media of a banking or financial
nature and other business records and
documents used In processing such media.

D„ii„.db,Go(5glc

The Board to date has authorlEcd no bank boldlns
conpany activity in the ai^ored car Industry. The fact Is,
howevei*, that armored car aervicea also remain tn Jeopardy
under the present language of Section ^CcJtB). In the
armored car and courier service hearings, the Board found
that "the record Is virtually devoid of evidence In support
or the proposed amendment [as to armored car service]'.
Despite this determination, the Board specifically left the
way open for a bank holding company to malce application to
engage In armored car services. (Order of Federal Reserve
Board, November 15, 1973, amending Regulation V, Part 225,
p. 14).

IV.

lour next question relates to the necessity to
consider unfair competition, undue concentration of resources
and conflicts of Interest in permitting particular activltiea
under Section ii(c)(B}. Hy response is that It Is essential
that anticompetitive activities be given great weight in
passing upon the right of bank holding companies to engage
In non-banking activities. I believe that the revised
language of Section H(o)(8){B) In 5.72, substituting "Is
likely to produce substantial benefits to the public which
clearly and significantly outMelgh possible adverse effects"
(p. 10, lines 17-19) for "can reasonably be expected to produce
benefits to the public" Is a major Improvement In approach.

D„ii„.db,Go(5glc

In terms of unfair compotltlon and conflicts of
Intarest, ttis absence of these attuidards tn the statute Hould
leave open such poHslbllltles as that the bank holding company
would make no direct charge for courier or armored car
service but Instead oould recover the coats by adjustments
in the compenaatlnB balance of the correspondent bank using
the service; that In aome cases no charge at all would be
made for the service and In others a non-compensatory
charge would be mads; that the bank holding companj would
pick and choose those who would receive the not-for-'proflt

afnilated courier firm whl
prooeaslng flpma In the sam
Its purpose to provide superior
and the need to provide service
plain that a holding company
aubaldlarles, which also operati
the area could use this ser

would fumiah the greatest
I that solicitation for

correspondent banking

the courier or armored

subsidiary company's employees but by marketing orflcera or

the bank and other affiliates of the bank holding company.

Additionally, with respect to conflicts of interest any bank-

> served rival banks and data

service for its own facilities
for its competitors. It seems
th bank and data processing
e only courier service In
he severe detriment of

Its competitors.

Sine

t holding company derive

the great

D„ii„.db,Go(5glc

prsponderance of Its profits from its banking and data
proceaalng servlcea. It Mould have a compelling econc»lc
Incentive to provide Its courier service in such a way as
to favor its affiliates and ttielr custoiters over tbe
requirements of direct competitors. Aa the Departunt of
Justice pointed out in the Board's courier proceeding, '[wlhen
a holding company controls its oxn courier service it has
the potential to structure that service In ways which most
advantageously meet the needs cf its banking subsidiaries
and Its correspondent banking custoBsra' .

The Inherent advantage which a bank holding conpany
has over its independent courier and armored car competltora
Hould appear Inevitably to produce undue concentration of
economic resources. Thus, as the then head of the
Antitrust JDlvlalon of tbe Department of Justice stated In
testifying on the 1970 Amendments!

"Bank expansion In other areas perolta the

carryover of economic power Into such endeavors.
There is, of course, the obvious danger of overt
reciprocity or tying arrangements, as well as
general favoritism of bank afflliateH, particularly
In tines of tight money. Also, and perhaps more
Important in terms of the need for ppeaent
legislation, there are dangers which are of a
■tore structural nature — adverse competitive
effects that would tend to develop naturally

;ual overt use of the economic power
tr from the banking sphere" (Hearing
Senate Committee on Banking and
»st Cong., ^d Sess., pt . 1, at 239)-

DigilizedbvGoO^^IC

Before leaving Section H(o>{8)<a) of 3-72, I
would make certain ougeoatlons reapectlng ItB languaae:

1. That at p. 10, lines 17-18, the words

"Is likely to produce substantial benefits to the public"
be revised to read "will probably produce substantial benoflto.
to the public". I believe that, in terms of a competitive
test such as this one, the word "probably" has a more well-
defined meaning than "likely". For the same reason, I
would suggest that at p. 11, line 11, the words "is likely
to" be changed to "will probably."

2. That at p. 10, lines 20-21 and lines ;ll-25,
the words "(i) the term 'substantial benefits to the public'
includes increased competition..." and "(11) the term 'adverse
effects' includes undue concentration..." be revised to read.,
"(1) the term 'substantial benefits to the public' refers

to Increased competition..." and "(11) the term 'adverse
effects' refers to undue concentration..." (underscoring
supplied) .

The fourth question relates to the necessity to
prohibit a national bank from engaging in activities which
have been ruled to be not "directly" related to banltlng.
The reasons which ihould bar a non-bank subsidiary of a bank

Digitized bvGoO^^IC

holding company froa engagins In activities not "dlreetly"
related to banking ahQuld all the more so prevent the bank
Itself from engaging In those activities. Under
12 U.S.C. Sec. 21) (Seventh), a national bank has
power "Ctlo exercise by Its board of directors or duly
authorized officers or agents, subject to laif, all sueb
Incidental powers as shall be necessary to carry on the
business of banking." The statutory Units already placed
upon national banks are far more stringent than those laposed
by Section a{e)(8) upon non-banking aubBldlaries of a bank
holding company.

VI.

Your firth and Blith queotlona relate to (1) the
neoeSBlty to require rulemaking proceedings under Section ftCcJCS)
to be conducted on the record after opportunity for hearing
and full cross-examination and (3) the necessity for the
procedural provisions in the Act to protect the public interest.

Section 601(a) Of S.T2 Includes a ne» Section 9
to the Bank Holding Company Act which provides, at subsection
(b), that "[8]11 Board determinations (whether by order or
regulation) under section 4(c}<8) shall be made on the record
after opportunity for hearing, and the provisions of
sections 5^6 and 537 of title 3 of the United States Code
shall apply with respect thereto."

D„ii„.db,Go(5glc

In the llEht at the position taken by the Federal

Reserve Board in prior proceedings under Seotton 4(0X8), It

appears Important that this language be enacted Into law.

Thus, In the Hearings Regarding Courier and Aroored Car

Services, the Board atateiS:

"In the Board's Judgment, the regulatory
actions under consideration In the subject proceedings
do not constitute an order subject to the Judicial
review provisions or section 9 of the Bank Holding
Company Act. Further, the Holding Company Act
dOHB not require a formal hearing on the record with
respect to auch regulatory aotlons; and no oon-
slderatlona or arguments have been presented to the
Board that, in the Board's Judgment,
formal hearing on the Issues Involv*
hearings, aa a matter of Board dlscc
Accordingly, the motlona for formal
denied." (Order of the Board of Goi
January 12, 1972, p-3).

the Federal Reserve Board thus

basic procedural safeguard as

1 that may be required for a full

id true disclosure of the facts Is a matter of grace, which

ly or nay not be granted by the Board to a participant

1 a Section 11(c)(8) proceeding. This situation should be

In the language I have Just quoted. It will also
s noted that the Federal Reserve Board ruled that hearings
) of the Act to determine If

Under

existing ISH,

;ook the posltlo

n that such a

:he right to cro

ss-examlnatlor

D„ii„.db,Go(5glc

banking are not subject to appeal to the United Statai
Court of Appeals under Section 9 of the Bank Holding
Company Act (12 tl.S.C. Sec. IBIS). As a result, I bellevs
It Is essential that Section 601(b} be enacted Into law.
This amendment provides that "regulations" as well as "orders"
■ay be appealed to the appropriate Court of Appeals . I
Mould also suggest that any legislative report analyzing the
provisions of S.72 make It plain that any person aggrieved
by B decision of the Federal Reserve Board on a proposal
relating to determination Hhether a non-banking activity
Is closely related to banking shall be permitted to go to
the United States Court of Appeals as a matter of right.

Section 601(a) of S.72, in adding the new Section
9<d), provides that, in any proceeding under Section ll(c)(B)
to which the requirements of the Administrative procedure
Act relating to hearings on the record are applied, an
interested party may call for any Information or documents,
not privileged, for purposes of discovery Or for use as
evidence. Experience under the present law emphasizes
the need for this amendment.

The Federal Reserve Board, In Section 'l(o)(8)
proceedings, has expressly denied access by participants

D„ii„.db,Go(5glc

to materlsl which has appeared clearly to be relevant to a
proper determination of such natters by the Board. In the
hearinss related to granting Bank Holding Companies the right
to engage in amored car and courier activities, the
National Courier Association, the National Armored Car
Association and the Independent Bankers ABsociation
requested access to Intra-agency memoranda considered by
the Board In deciding to announce its proposed rulemaking
regarding courier and araored car services. The Board
denied this request, asserting, as its basis, that Section
552 or Title 5 of the United States Code specifically
exempts from public inspection inter-agency or Intra-agency
mv mo rand urns cr lettera Hhich Hould not be available by
law to a party other than an agency tn litigation with the
agency. (Order of the Board of Oovernors, January 1?, 19TS,
p. 3) In the circumstances there presented. It clearly would
have been In the public Interest to permit all participants
to review these memoi-anda and to submit for the consideration
of the Federal Reserve Board material, data and the product
of experience which would clarify, rebut, supplement or
rjpport the underlying data and concluaions of those
i]:iernal Board memoranda.

D„ii„.db,Go(5glc

sctly applicable to this provlalon of S.72

le by the United States Court of Appeals
Tor the District of Columbia In Mational Courier Aaaoeiation
V. Board of GovernorB of the Federal Reaerve Syatea. 516 P.
2d 1229 at 12111. In commentlne upon the efforts of
the Federal Reserve Board to prevent the disclosure of
certain Internal nemorsjida, the Court said:

"Private

parti

BE an

d reviewing c

ourts alii

have a si

tPonK

.lly

knOKlng

the basis and

of a

deolBlon

. The

proc

ess by wh

lich

the

decision

has b

en myste-

s maln-

talnlng i

the agem

internal

docu

rmally be

far easl.

tr for

the

agency to

1 establish iti

than for the private litigants to establish
their interest In exposing them to Judi-
cial scrutiny. The proper approach,
therefore, vould appear to be to oonaider
any document that might have influ-

dence' within the statutory definition,
but subject to any privilege that the
agency properly claims as protecting its
interest in non-disclosure."

I would suggest that the following language bi

itltuted at page 16, lines 7-lJ;

"any interested pa:"- -.::.■ call upon and shall

be entitled to recflv.- fTsm" (1) the Board,

Digitized bvGoO^^IC

or <2) In the case or the consideration or
an application, the applicant, for any
InforrDBtion or documents, not privileged.
Tor purpoBes of discovery or for use as
evidence." (underlined iioiTla would be

Por all of the reasons which favor enactment of
the snendEBents contained In S.T2, 1 believe that there
should be aede available to the public the right to petition
for Issuance, amendment or revocation of an order or
regulation promulgated under the authority of Section 1(c)<8}.
It seems particularly important that, if a regulation or
order under Section 1(c)(8) Is not serving the function for
which it was Issued or is producing anticompetitive effects,
then the regulation or order should be revoked or
appropriately modified. 'Die fundamental purpose of Section
4(c)(8) is to insure that the public interest is preserved.
Uhen it becomes apparent that the regulation or order
is not serving the public Interest, then assuredly there
stiould be a statutory provision which makes possible the
prompt repeal or revision of the offending regulation or order.
VII.

Your final question treats with the adequate capltall
tlon of bank holding companies and their subsidiaries and the

D„ii„.db,Go(5glc

fact that no loans should be mode to afrilt«t«* vhlch
discriminate against competitors. On this subject, I •
particularly concerned that bank holding coapanles,
possessing as they do najor financial and econoi

■ver their power Tron one industry Into other
I our case. Into the armored car and courier
.ndustrles). If a bank holding eonpan; or Its banking
lubsldlary makes a loan vtalch discriminates asatnst conpetitors

subsidiaries, then an alien factor has been
.ntroduced into the cooopetltlve process. The hallmark of
! Shernian Act, the Clayton Act and the Robinson-Pat Ban
, 1b that competition shall be fair and that anticompetitive
iorlmlnatlon shall not be practiced. The threat that a
bank holding company or its banking subsidiary will subaldlze
another of its subsidiaries by making discriminatory loans
runs directly counter to the public int«rest at the heart
of Section 'l(o)(8]. In that connection, I would reco^end
the fol lowing:

That Section 4 of the Bank Holdlne Company Act of
1956 as amended by Section 501(a) of S.72 be revised at page 14,
lines 9-11, as follows:

"■•■(Z) bank and other subsidiaries of bank
holding companies refrain from discriminating

Digitized bvGoO^^IC

in ravor or their parent holding eonqiany or
their affiliated subsldlarlea In tbe Making of

loans or In the eatabltehlng of terms and
conditions of credit or In the perfornmce of
aervlgcs In the eourae of engaging In tt non-
banking activity." (iinderacorlng !■ of wordi
proposed to be added).

I would also respectfully suggest certain other
matters related to 3.72 for the consideration of your Conmilttee.

On the subject of "tie-ina", I note that 3.7!
makes no anendaent to Section 106(b) of the 1970 Amendments
(12 U.S.C. Sec. 1972). which bars a bank from engaging in
tle-ln activities. In limiting Itself to antl-coapetltive
conduct by banks, the statute falls to deal with such
activities on the part Of other subsidiaries of a bank holding
company. While this void haa been filled in part by the
Federal Reserve Board in its Regulation ¥ (12 CPH 225, Sec, 225."
<c)J, it would be my recommendation that this deficiency in
Section 106(tp) be corrected by S.T2.»

•Section 225-1(0

provides in pertinent part that "[e]icept

following conditio

ns -hall apply with respect to every

;.ated or activity engaged in on the authority

i.- me Act: (1) the provision of any

credit, property (

:■ j^rvlceo Involved shall not be subject to

an unlawful Cle-lr

an-aiF^wit under section 106 of the Bank

Holding Company A;

I Ar:iendraent8 of 1970..."

D„ii„.db,Go(5glc

Turning to another provision of S.72, I obsorv*
that It provides at Section 301(b)(1) that a bank holding
conpany may continue to engage In activities In ohlch It
Has laxfully engaged on and since November 1, 1975, "except
that such a bank holding eampu^y shall not permit the
scope or size (tn terms of voliune or business] of those
activities to expand to any significant degree." I beltev*
that an amendment of this nature Is essential In light
of the Federal Reserve Board's position with respect to a
"grandfather" provision In the 1970 ABeodments (Section '1(a)(2),
12 U.3.C. Sec. 1B03). There. In responding to a petition
lodged against the expansion of the courier activities of
a bank holding co^iany's subsidiary on an Intrastate basis
and Into domestic and international air freight forwarding,
the Board stated that "Congress has. . .Indicated. ..that
expansion of grandfathered activities through Internal
growth would have a favorable oonpetitlve effect and,
accordingly, did not place restrictions upon such method
of expansion." (Letter of Board to counsel for Purolator
Courier Corp.. dated November 15, 197"). The effect of
this position of the Federal Reserve Board Is that a courier
subsidiary holding grandfather righti and engaging in the
most limited service could expand from state to state and
.ly on a geographic basis and could expand the

itlon or supervision by the Board.

D„ii„.db,Go(5glc

I conBlder that Section SOldKl) would make
It clear to the federal Reaerve Board that llBltvd
"grandfather" rights may not be used as a springboard
for unlimited expansion. I would recommend that the
"scope or size" language of the Section be recast to
state that the limitation there imposed encompasses both
geographic expansion and increase In the nature of
commodities carried by the "grandfathered" subsidiary.

1 aa grateful for the opportunity to appear
before this Committee in its consideration of this
significant and Important legislation.

Digitized bvGoO^^IC

-saixa jjoos^^ 6025

.■nodi,Go(5glc

D„ii„.db,Go(5glc

D„ii„.db,Go(5glc

StHkMd UnlvanM UbmriM

iiiiiiiiiliiiiii

3 6105 045 178 659

DKIEDUE 1

STANFORD UNIVERSTTY UBRARIES
STANIORD, CAUFORNIA 9430J-6004

D„ii„.db,Go(5glc