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BJjrfliD BTA; 

M \' I I 1 I It I 









S. 72 


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

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


Digitized bvGoO^^IC 


WILLIAM FROXUIBE, Wlsconaln, Olurirmm 




DONALD W. RIEOLE, 3a.. MlcblEtn 

KiHHilB A. MCLbin, Blaff Dtrtctor 

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



Federal Deposit Insurance Corporation 42 

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 

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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 

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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 

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 

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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 

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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 

Present: Senators Proxmire and Sparkman. 


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 


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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. 


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 

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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 

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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 

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 

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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 

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 

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 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 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 


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 

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 

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 

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 

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 

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 


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 

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 

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 

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 


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." 



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 

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 


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 

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 

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- 



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 

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. 


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 :] 


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) ; 

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(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- 



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 

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 


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 

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 

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 


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 

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. 





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 

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 

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 


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 

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 


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 

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 


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 

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 


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. 


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 

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 


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- 


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 

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 

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 


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 


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


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 


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 
"(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 


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 

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 


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 

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. 


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". 


'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 

"(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 

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 

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. O t a 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 

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 


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 

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- 


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. 

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 


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 : 


rtntid a( iBbl dt 

Pircintiii point chmit 


19S1 196« 19M 1973 

19S7-6g 19M-7J 


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. 


IS. 91 


8m footnote at end ol table. 






< 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 


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, 

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 


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 


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. 


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 


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 


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 

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 




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) 

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. 


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 

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, 


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 

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. 


OliCM Ji ■ ptrcmtii* of ill ba 

Dtpawb (In biBiani) 178.0 (297.0 1379.* 

Dttnuti 11 1 pimnUfi ol ill bink di- 


3. ISO 



13, Ml 


17, 131 


19, IM 


13, ;u 


it, 171 







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. 

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 


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 

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 

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 

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 

Digitized bvGoO^^IC 


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- 



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. 

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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 


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 

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

— naHonal hanhn, 
"cloaely related t 

banklnfc",bat the proposed acqatiUloni 

o( Bank HoldlDR Compante*." Eeanemle 


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 

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 

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. 


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- 

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 

■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 


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 

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. 


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 


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 


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 


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 


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 

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 

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. 


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." 


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 

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 


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. 



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. 



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 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 

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. 



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 

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. 


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 


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 

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. 


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- 


"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 

"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 

"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 

"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 

• ****** 

"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 

"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 











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. 


i353 - 


& 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— - •-■ "" 






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 



1 B*[Hi Amtnci Cofp _. Bank ot Amarica. N.T. 

2 Chn* Minhittin Corp Chaie Manlultan Binl 

3 SaoitHy Pacilic Corp _.. ^Kunty PkiKc Nition 





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 

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 


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 

[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- 


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 

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. 


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 

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(b) UnderwTlting life insnraiice that is not sold In connection with b credit 

(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 

(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: 

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"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 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- 

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. ) 


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- 



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 

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 

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) ). 


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. 

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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.) 


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. 

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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". 


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. 


Section 701 of the t)lll would Invite "interested persons " at any future time to 
c hall w ige 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- 


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 

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 

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 

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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 

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. 

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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 

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 

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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 

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. 

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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 

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. 


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 


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 

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 

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 

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 

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 


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 

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 

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 


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 

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 


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 


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 


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 

Digitized bvGoO^^IC 


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 

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 


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- 

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 


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 

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 

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 



TBZDAT, JXnSlS 16, 1078 

TJ.S. Senate, 


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) 


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 

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, 

Digitized bvGoO^^IC 


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. 






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S. 72 

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board* gf KBALTCB^ lacatad 


ha Unlo 

•od Puarto Ue 

. Co^lnad 

p of t 



pacoa. .ctl« 

1 tnttKti In 





Aaaoclacloa ha 

th* laftM 

ip of 

all facati of 

T- T 

m off 

Pnaldanc, Tul 

a. Oklahoaa 


. Hovd 

nt Vie 

PoBtlua, Eh 

ca Pia 

t. Baa 

ar* at AM Hor 

h NlchlgaD A 


nola 6 

la loeatad at 

IS 15th 8tn 

at, B.H. 


, 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 


■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 < 


l»HV.I, ..». to h. 


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 


• 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 ■ ana g aaant , 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 


t Ehla iaaua vlll ba talaad 


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 


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 


[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 ' 


.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 


.c««le .«.. .C ch 


vhan Cha flo«.eUl 



on uho al 




llMa of 


coBpacai Hlch ICa a 



. VhlU 

Chl> A)*CK 

•tlon rMBsa 

iaa. and 


ly appraelataa [ha 


tal mpport for 

houitns mi 



that ecu 

Ik holdtm 



aa vail 

■ lavl 

!■ and Loaa .aaoda 


...d aarvlo. 


.. « 


ly faal 

hat panlaalbla bank holdl 

m CO! 



iboolil b* « 





ncUl .C»» dtrac 

tly r 


CO bu.hln, 

W* alto £•■ 




• by bank holding c 


a. a. 

..11 a. 

..rvtc. «t 


•na ahnuld not 

ba pen 

Itcad in Cha flald 


■ raa 

n.ld ch«. 

cUrlMd by 

.l«.t t 


l«ga n«. 

of bur*n ■ 

nd ■>! 


He ipf 




ty to 

^raa. our «nc«™. 



Mr lUKHir 

<i( S. 








c-h 1. v<»]i »d D» m tab 






Digitized bvGoO^^IC 

JvstJstsd , 




Digitized bvGoO^^IC 

^^r 1 







-^^'s-r- "■ '^5 y?^ 





mo age o d eci e ate so espe ao his 



y ^ 



o*a bodcvdo oiwohd 
S p '■Wu (u but oVoy ho 


™ i 


o 0^0 meet 9 b he o, wo 





a oortsmo h e h Jng golf e 
b olwcy ho me fb you 




■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,. 


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 







r ',: Ik 



■■\t\tT d-.;-'fiHr 

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 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^. 


76 Pr<nr»r»— Itwil 







Public Utilities 

Sm Km Unu, EWrie CompaniM, 
RoilrMict, T>!*p}i«nfl CompaniM, 
alio Ge: Companiat 


Ranges & Stovat— Deolara 

Communitotien Eq«iomont-a 
A Systams 


AJBii .^M'lau . 

-WHERE rO CALt* ..■.-.^, 



Lmir. CIMlwil A SFO 9 *16 



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 

Fse's E3sl Estate " 

\« S. Clinton f31-2474 

■.«lt and Lo«t«r Po»t*, Brohvr* 


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^ 4. 

Is an Orflcial B«nk Publication such as « ^ 

:,'.i.M.iani lodiea.lnil nanaa of offlcara 
Iso licanaad bro^ora and/or s 


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 


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 



3 >>^ 



H-5|!*IFjl'^ III 


^ §i i| ii Mil t tm I i-i i 

mm, I I i! Jill I im i iii ii 


Jii I 
llee 5 



II 1^ 


^il Hi i I 
!! Ill i I 





) SS: 

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 

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 



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. 


B y ^A*t-^ 


Franklin C. Earley. 

by Franklin C, Earley 


NotoTK^ubUc in and tor the Slate 6f Iowa. 

Digitized bvGoO^^IC 

;.:;jt. C,-:;ilicr 

MS directly or lit J1 rdctly_ controltA by bj:.:. 


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 •■•■ ■ n-ctly 

icBTh*; ( 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( 





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 


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 



3 of lfl73, !0 "S/T/ 

. IS snr 

- "FOR SALE ' - 
604 ieth Street '■ 

" ^D&G Associates 

fcai— " 


8? acres in Columbia Township, 73 acres 
tlLlaSIe. Ko biOIdlnei, PojMSSlon MarcS 


coKaavi-j BUSS n reu. ss:.\'^'. nmnEss » lou* 

««TOr iBdlrtcll* cant 

-- #; 




■ Kgldtng C»i>uT> II v 

{(:-.«>. cepT af pabllcitlon vlth id) 

tj^fr^'^ / Recor d ■ Hsr^lS 


-::,;^--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, 



rjO.\S«A:.»3fW.-0','STS .. 


i *ii)e«»Ho««..- 

.... !«.» 

C'-- rml«™*R«BW-'.:v..:... 


» . H«J&u»LVi»d<*l..r 

* UiR>ew<k««««« 


, OlIwAiHU 


•; TtiTAt 


■: ' L!AB!l.!T!cS 

■■;. .': 

.C^MSUKk . .. 

i ■ *^» . . 

. - IM.CM.OD 

J . Viio'ikMl'nflu .. 

' . : 

-j , DVMto ^ 

■" - y.S.O..Y-H>,T«.k. .:: 


-; . 7«:wrJFBDtMfM.lhMKl 

. . . 

. 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 


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 


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 



S99 Odiridje Oiive. Dn Mointi, Iowa 503M 
Telephone 51S 244-2 IW 



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 p ropa rt y 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 


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-.^ 


608 Gaiffld Sln»l - 

Senator Pr 


• and Othar 

SehBt* Banking Com 


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*~\ 


an pays a greater 










daT of 

■ Dd 


aworn to bafora^ Barold H. McKlnnay oa 





, 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 



Digitized bvGoO^^IC 


s.. EE'" i 


72if J~« »?«_ '-=»-' 


Notary puuio In and fovTuu County, loi 

Digitized bvGoO^^IC 


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 . 


mns '.OTH TK9^,W 
6. ttVS KHODi NJ 

TUB. ItXl jorfs 

I^&Aj fl. 




Tna, Imra BOCTG 


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 





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. 


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 


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 




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. 


Digitized bvGoO^^IC 

Cat^-Vr^aJk, Omc. 


M CMbwl v». M s-nte - 1 oar. ,4 Sta^t^ CkM 


»» 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\ 


,,( O C..^./^ 


ci.nalder any ui'her ol 

rf.-r,, (hiu 

p«ri¥ .<r (h.' iir= 

1 | 

I nuy preaoni Co 

■his tUiy anil duie af< 


l»Lln,. f..«,ir;,ci u 


ir l^rm enterad Into 


n,; i.cIUe 
t dul>.'d Mjiv 11, t 


,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" ''" 


Pnr.granh : 
and all ocher real ei 
farm Qwo«d by psrtiei 


r ihc nr.t pnrt 


' 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 


■knowledge chat they 
try Acclon and daed 
ics of ths flrat pari. 

iirr .ior 


Digitized bvGoO^^IC 


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 . 


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. 


Digitized bvGoO^^IC 

l?lJ ^1~> nauL wu't&Mt.' 'ibMuuMiM 


[■ft^ g, 

iNGi CHUM) Ti:iiA.'a '».Mu'i>1 JSSmmi ' 


■« >y* a*r^'* 




UMVOUC LMTjIC C«ltnUCT-A(it«nd bY 

TiarTMTl-rftr-tTOO.lM p-r »«• if .irntwi jN 

Digitized bvGoO^^IC 


^ 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 an gatf> n f 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^ — • 


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 wbp wcacatad tha aaaa aa bl> 

t ^ i U i TolanUrr •ot and daad. fiJaMjU* ?/S<«i„«> 





Xu^t^^l ■ 




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 


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. 

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 


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 


= 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< 


Digitized bvGoO^^IC 





"Halping I* What 

Wa'ra Atauf ' 

* We are now providing: 


VWant to SflM InsuranM 
pnNNriy oonreci?? 

can Mpl 

tar th* abMiitM owiMT, wt fMt 
!• 1 vwy wiM Mdwvor 



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... 

JoMiBurmi -Brokar 
Karmit Hazan-Brakar 

URoyPack - Salaa 
Hatha OwaiM • SaJaa 

SIS 44M844 





* Call Tany Slaanbaiig 

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 







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I ; I ; i 

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ii ii II ; ; E R s ; £ £ si ; ; 

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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. 


Digitized bvGoO^^IC 




7^1^ cx^ -^ »aw «•--- ^ <? 'S^'" 


V"^ '^Be«.^ .-"^a^ ,-s><U ^<at<£ a^ 


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 



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 

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 


Grundy Center, Iowa 

Where Industry and Apiculture 
Are Partners in Progrets. 



A Place to Grow 

For Further Information 

Fvmefi Sartap Bftok 

Gmady Centw, Iowa 


Cntet iHanacB A Rul Estate Atenej 

OraMly Cntar, Iowa 






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. 


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 

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^ 

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 


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 


oro, IKI, Presidi 

nt; Preston Martin (President of PMI Mortgage Insurance 


, San Francisco) , 

Vice President; Leon r. KendaJi fPresldanC of Mortgage 

9 Insurance Corpo 

Tiger I 

nvestors Mortgage 

Insurance Company, Boston), Treasurer/ and John C. 


son, Waahlngton, 

K, Executive vice President. 


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: 


"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 

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 


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 


: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. 


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 


■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 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. 


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 
> taeir aph loally 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 


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. 



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. 


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. 


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 


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 


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 


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 


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 


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 


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- 

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 


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. 


Auto Loan Fees Plunge in 2 Midne fmms """t a 
As Snudl Savings Bank Sparks Rate War 

Wi. ■ T dfc» Imp ■■iipi H ii 

dM mm K M ( bBfMt -n* <Mt. " 



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xneKiol WiLU Stret Journal 
pi"**" HondKr, Juuarr 23 

I piTti CDmuaa Sivlnii. 

II. And ODdUB tlTUIl luy 


i^onsumer Finonce Fimts Beginning to Offer ■ ■ 
IVIore High Role Certifiinles to lodividuols 



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. 

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 

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 

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. 



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 

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 

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 

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 :] 


Hgmbtr «l 

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 


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 

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 


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 

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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. 


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 

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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. 

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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 

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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. 


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! 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.* 

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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 

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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 

"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 

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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. 

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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. 

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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. 

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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 

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. 


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 


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 

Mr. Silver. Yes. 

The Chaihican. All right. Go right ahead. 



Digitized bvGoO^^IC 

16 Jun« 1978 

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 


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 


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 


.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. 


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, 


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 


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 efforti 

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 


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 

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 




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 


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 

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). 


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 unbuit t y 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 Com ptr oller 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 aflo r tt 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 C um p tr oIlM tooa paimitttd "f^l^TM l 
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 b at wa an 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 o f 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). 


. . [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 


«■ 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. 


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 InTaa mwu t 
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 Coiup cr 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. 

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 


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. '" Howwe r , 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. 



I nuidag vote piMad oo to dw RBIT, Oienbf cainplaii«nilns the 
bank's nrn r^ aataM acdrlelai and kaaplag tlia tank's eo au i uiar a 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 
notebold T i and aharebeldera aceualng U of mlmn s n agl n gihectuafa 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 

I tau rM, 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 happens t an c e of the economy that ■ number of these loans have become 
problems", Reapoose of tba American Bankan Association, wpra, at p. 37. 


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* 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 


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 C ouiptiu ilar 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. 


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 


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. 


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 




iKlnlia I967-I976 ( IncludiDg Id 



































73 7 



• 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 



Active investiiig 

in fhe fixed-income market 

makes sense and money. 



TiHCJiveiOHrED Mm or kctvim wo mmkinos 


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^ 





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. 





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 


Ibur fixed-incame fund 
has got to deliver 
superior results. 

Ifeai: After yeac After yeac 


[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. 


ndlhul Compuiy of Chicago • 'a\ South LaSailaStnst.Chlcaini. lUlDoMa 


PEB3I0M3 i IHVESTKEt lT3 , fcPRIL 3S, 1977 


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 o ut petfooning the m*^' 


utvlervalued and then sell them 
when d^ reach lull value, 
the lesula will be con- 


1972-76 is; 


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 


' * aI/ J^ slstendysood. 
.itlQn -W AiaraOi. 


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 




Your company employee benefit plan can^ profit 

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 






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 ( 



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 

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 

! 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- 

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 

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 


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. 

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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 


Md having a Legend on the stateiBenl: ItaeLf "CHASE'S AUTOWTIC 

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. 

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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 

Digitized bvGoO^^IC 

, ue support Section 301(a) and 

David Siltrar 


: Honorabla Edward U. Brooka 
Ranking Htnority Hsmber 

Co^lCCaa on Kaaklng, Housing and Urban Affairs 
Unitad States Senate, Suite 5300 
Washington, D. C. 20510 

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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- 

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. 

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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. 

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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." 


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 

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/ — 


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. " 

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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 

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 

Mr. Silver. I fully agree, Mr. Chairman. 

The Chairman. When you talk about competition, that obviously 
isn't fair competition. 

Digitized bvGoO^^IC 


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 

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 

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 


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 

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 


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 

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.] 

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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), 
Present : Senators Proxmire and Schmitt 


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 


Digitized bvGoO^^IC 


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. 


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 


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 


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 


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. 


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 

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. 

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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 

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). 

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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. 


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. 


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. 

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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 

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 

<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 

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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 

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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- 


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 age ncy 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- 



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 

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 

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 

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 

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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). 

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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 

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 : 

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[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- 

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 

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. 


Mr. WiLBON. Mr. Chairman and members of the committee, my 
name is Thomas E. Wilson. I am with Wilkinson, Cragun & Barker, 

Digitized bvGoO^^IC 


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. 


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 


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., 

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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. 



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- 



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). 


IbIdu, FRB Dockel lA-10, at 10-2D (emphaili added). 

Digitized bvGoO^^IC 


to result in benefits to the public that outweighed any possible adverse 

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 


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 

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 


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.' 


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 

•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 

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. 


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 :] 


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 

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). 



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 







^tTDf lunhorbtnkholdlniMniiunrnnni 






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 

EtUoitgaEC Banken AbsocIrUoq of Aniprlm, Mortgage Banking: lOTS, Washingtan 

n, ■,v..i.,Coi>^r 


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 


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 

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 U8 t- 
' 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 



■ 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- 


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. 


•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 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. 

HIMtiil iiii i K 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 MtrHMtiil iiii i K 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 llHi M tM rt 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 


ila nw IM EiEiti Cndtt^mnt: UdooIr FInt Bukt, 


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 


, . , ^ 41,719 i.aub.t^ 

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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 

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■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. 

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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. 
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Mipinr pirtnt 

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ChrM: FInl Unioa'darV. 

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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 
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• 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 
dA It mlliUa on th« •mnlililM. 
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mmIiWoi, Unn tporiM «• Cout Moitiiio Co. 

Il«n<iitt not nnllibto: mm diti Ii u of Doc. 31, 1971. 

,..__._. ....._. .. loeimo • mnk hoMlni lt71.Thiha 


MOfDicil, 1972. 






$7, 413. 74t 



Fim rHHiiyiioni* cwp 7,iu,an 

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Ok. 31. 1971 

Fln«einliSr>lMi>,litc - - -. 

», 945,783 








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• 21,342.. 


iTht <hiiiM compinv MiM flfiim in allhtr Irvm thi "AmMiun Bmlitr'i" llitol "100 L»tMI Runet Cnmpiiilai 
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• 64,060 



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JS. ConmclocojM 

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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 

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- 

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MK Dn. SI. UIl MI* tn,W,0«e.Thi ttCNB MM >fi>n HMHiM In tiM bMM It ilM ■> If Dk. 31, 1371. 


'■niin laiilni Ciit. I 

nd II dT Mc Jl, 1971 loc MrML 
nd u o( Dm. 11, ItnKHUI^nt. 


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 

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 



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 

The Chairman. I 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 



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 

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 

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 



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 

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. 


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 

Digitized bvGoO^^IC 


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 

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 

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 



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 

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 » up po rt# 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 

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 


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, 

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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 

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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 

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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 

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 


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 ata n ding 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 


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 


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. 


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. 




Z2 1B7I 






102 Soulh 2na 51. — P. 0. Boi 

728 - AbwDaan. S. D. 
05} 225-8890 


Abardaap, South Dakota 
Kaj 18, 1978 

NSP* DapartHut 
1717 PcnnaylTan: 

Suit, laoo 

Uaahinctoo, DC 

of SoTerani 

It Affair. 


■ Si„: 



er to Ctaainu 

.n Fa«.r. 

,'a bulletin on bank 

a doing accontlng 



offiee baa dona saTeral 
■s accountlne or bookltai 


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 



the bank- 8 
UBtanl or ai 

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. 


la a 

ddltion. I : 

rind that U. 

. of our c 

llente understand t 

he cod. arotn th.1 



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 


dn purdiasB racordi and ga 


Rental and condomkUun 

For furtlwr Infonnatlon call Ronald CoJoman colloct at F&M 

'i •*,>■ 





Tm * M^y WMniH Bint 



- .', 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 


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 

Jo»phF Murphy. EMCutwVlc»Preikl«il 
274-TBOO 0< wne !□ him al Oid Slone Ban 
•tOWeumlnilciSlrwl Provldrncii. R KQilUS 




|l^Sl^Ess LOAMS 

iplNAMCIAL^unSGLmO ., 


fl^lfjCAteS Of OffOSIT 






ilAfciilCH r.:iRT 






1 2^0 , 


Vaiki National Bank of Arizona 

Digitized bvGoO^^IC 

Vfe qWo you montlity : 

Imsllclty Canaiil LMgat Min. 

Important options: 

You gain: 

ntilbMIT Our Gwwril 




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 





eoNnraOTMi I>3A Services 



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 


1.001 and ovar 

MlnlMa Par Cjrcla: 

Ona Dollar ($1.00) aacli. 
IMoty-flve dollar* (SU.OO) 

Ian caota ($.10) aach. 

Aceapcad for 


Digitized bvGoO^^IC 

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ptliitxl ■pcnttlji in Uu EifiUy meHoa k arte to 

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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- d iiuin Btal hiliin cw I* 

pBDltttq t)w prtntiBi of bductd, iixanU npoco. praduod. 


















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- 


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 


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 


"SX JiiS 

'IS "»1 

r.a .!i !MS 


Digitized bvGoO^^IC 


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 


•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 « 

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■ 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 


«. KKRUSSl.'^S. 

" rSfisaa"' 

jJS.H "i^S TuaJwiWdfiiinfl ji 


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. 









































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, fa dHm ci wp hi sttcMtd 

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. 


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. 


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 


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 


i I 





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 



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Hiis computer print out is used by the 

employer to record the ioitiiil payroll statistics 

for any new employees. 




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Pjrning Statement ihows all current and year to date infonnation for emplo^pca 


Your paychecks are supplied to you signed and in departmental sequence ready for 

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 


« na oaooi or -» JOHN D EICUI 

Continental Bank 

UioMf^ I noi.60 

••ikOi.ior i:i;ei-oiiqt: i^'* 

Digitized bvGoO^^IC 


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 


" ^1 Jl T 

£=:i:s:;s t z 



2t2SSE2 S ; 

=ss::s E c" 

=-~E = 1 

— =- ■ s 




1J=2£2= t C 

2 f-Z-t ' J 


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tCiC=t2SC t 



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;:x£*i'r> i s 



•==•==;==« = f 



5*saeKS 5 B 

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Essssi::? : ss £ seesseks : 

?£CE5S:£S = 

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'•=H=:- i ■ 

=1 » =:JS:S5 S S 

, I £ ! ' I 

I 8 S 8 S S -2 ■ 


Digitized bvGoO^^IC 


s: S3SI 1 6s,. 

Digitized bvGoO^^IC 


All current and year-to-date deduction information. 
Sub-totals by department 
Grand totals 1^ company 

Digitized bvGoO^^IC 

C8 "S g 8S 

& 'i- 


8E £; SS : 

St s tsses G 




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CITr. STiTF 99909 

Woge and Tax Stottmant xlASd 
Copy B k M iM <M •MwWi nwi iJFSH" 


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'1 i£=i. 

a. 12 

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I Tax Stotvment t4jOA 

Wag* and Tax Sfot«(nent \ 



2.99! 138. ( 




• Oenenl Ledger 

■ Labor Diilributioa 

• PayroU 

• Inventor)) Cootro) 

• Mtilin) Label Procening 

eoiunNENmL DA3A Services 


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 


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 

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 c ornputer 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 




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 l ugg eiB cr tl for 'creaMrtf' and places for eitra money. 
fulitaryonUttttcashnnanaeement ffi^hinamporatedobn [Pei- 
tr«ndsanj imprtwenrcnis, hepiyou^cbeenovertcokingtuch 

The First pMipk to talk to ^^Tbe FInt 



get a ittle extra help 
fnmi tlie specialists 



M t»l>|t icciHiiitbtlilen an allilUclir H 1 1 Moefi 
1177 lacena tai pnpantn itnittiMa ndv 

. atwiimmtmi m ittti im ivmnMt m mimtit 

iSsii ^ r Freedom 




Hugh Cu»lnx>.. C 

Digitized bvGoO^^IC 



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? 



The Mercantile 
Banks offer 
3 new 


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. 


cci Executive Ccamittee 

Digitized bvGoO^^IC 




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, 

tha euatoiira of th* Ihlvcreit^ 
IB • TsUd serrlce to faa affordad 


J. V. FanaU 


P.S. Hr. Toms L 



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; 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'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^.^. *-^-^-^ 




;!"''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'^^ 


Digitized bvGoO^^IC 

oiricu: OF ooMPT«OLJ-i:i« 


February 1. L978 

House Office Building 
Tallahassee. Florida 3230A 

Kegioiul Counsel. Sixth Hatlooal Batik Region, In AclanC 

sing our 
dUcely upon 




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 


Digitized bvGoO^^IC 



•■ «n?» 

1717 IiKiniylnnli athuu, N.H,, Sulu 1200 
Vuhlngton, D. C. 20006 


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 


^ ^^^^^^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 


The Chairman. Mr. Zayas. 


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- 


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. 


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 

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 



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. 


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 ' 


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, 


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. 




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 

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- 



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 

■ 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 

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. 




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 

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 


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 

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. 




Mr. Zat AB. No ; the