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April I S , 1950.
To:

Board of Governors

From:

Mr. Vest

Subject; Comments on the Eevised
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DRAFT
V I M S OF FEDERAL RESERVE BOARD ON PROPOSED
REVISION OF BANK HOLDING COMPANY BILL —
DRAFT OF APRIL 14, 1950

There are set forth below the views and comments of the
Board of Governors of the Federal Reserve System regarding the
April 14 draft of the proposed revision of the Bank Holding Company
Bill, copies of •which were distributed at a meeting on April 14 in
Senator Robertson's office to representatives of the Comptroller of
the Currency, the FDIC, and the Board of Governors.
BRIEF SUMMARY OF THE PRINCIPAL PROVISIONS
OF THE BILL
Existing Law. - The revised draft does not repeal, modify, or
change in any way the provisions of existing law relating to holding
company affiliates, but leaves these provisions intact in the law. The
proposed revision -would superimpose its provisions upon the provisions
of existing law.
"Bank Holding Company"« - Ihe draft would define a bank holding company in much the same way as the term "holding company affiliate"
is defined in existing law, except that it would apply to the ownership or control of insured banks instead of merely member banks. Ihus,
a company would be a holding company if it owns or controls 50 per cent
of the shares of a bank, or 50 per cent of the shares voted at the last
election of directors, or controls in any manner the election of a majority of the directors. A company which, under this definition, is a
holding company on April 15 or thereafter would always be a holding




- 2 company; and so long as it owns or controls more than 5 per cent of
the shares of any insured bank,< would be subject to the restrictions of
the bill.
Expansion of Holding Company. - A bank holding company would
be prohibited from acquiring the shares of any bank except with the approval of (a) the Board if the bank to be acquired is a State member bank.,
(b) the Comptroller of the Currency if the bank to be acquired is a national
bank, or (c) the FDIC in the case of any other bank,
Noribank Investments. - A bank holding company would be prohibited, after five years from the date of the law, from holding stock
in any nonbanking corporations, except those engaged in a safe deposit
or a fiduciary business, and from holding any obligations except investment securities which national banks are permitted to purchase under the
National Bank Act; but these provisions do not apply to bank holding companies which are themselves banks. No bank holding company could acquire
any shares of a State bank if this would be contrary to State law.
Standards. - In passing upon requests for bank holding companies to purchase shares in banks, the appropriate Federal supervisory
agency would be required to take into consideration the financial condition of the bank, adequacy of capital, earnings prospects, character of
management, nae <fo dfthe community, and whether or not the corporate
powers are consistent with the lav/ relating to insurance of deposits.
It would also be required to take into account the policy of Congress
"in favor of local ownership and control of banks and competition in
the field of banking, and in opposition to excessive concentration of




c
power in the field of banking through undue expansion of multipleoffice banking systems".

The various factors enumerated above would

apparently have to be taken into consideration also by a Federal supervisory agency in considering applications for branches.
Enforcement. - There is no sanction or provision for enforcement of the bill except criminal penalties, T/illful violation of any
provision of the bill would be subject to a maximum punishment of $1,000
a day in the case of a corporation or any other organization, and a
maximum of $10,000 fine or one year imprisonment, or both, in the case
of an individual0
Federal Reserve Districts, - The bill also contains certain
restrictions upon the acquisition by a bank holding company system of
more than 25 per cent of the deposits or banking offices in a Federal
Reserve District and upon the acquisition of shares in banks in other
Federal Reserve Districts.

It is understood, however, that these pro-

visions are being omitted from the bill,
C0I1CTTS ON VARIOUS PROVISIONS OF THE BILL
Definition of Bank Holding Company. - One of the principal
objections to the existing law is that the definition of "holding
company affiliate" is not broad enough to reach many companies which
control the management and policies of banks. Ownership or control of
50 per cent of the stock of a bank is entirely unrealistic as a basic
test for determining whether a holding company relationship exists,




c
because it is common knowledge that one company may exercise a controlling influence over another company without owning or coivtroiling
a majority of its stock.

The continuation of this 50 per cent test of

a bank holding company relationship would facilitate evasion of the law.
The test of a tank holding company based on "control in tiny
manner" of the election of directors of a bank has very little practical
meaning.

In the first place, it is extremely difficult to prove such

control, and no supervisory agency of the Government would be vested
with any authority to make any determination in this regard. The question could be settled only by resort to the criminal courts through the
Department of Justice. Of course, the Is.w would be construed strictly
against the Government, as all criminal statutes are. Koreover, even
though a compeny might be a bank holding company because of "control
in any manner" of a bank, it would not be subject to the restrictions
of the law unless it also owns or controls more than 5 per cent of the
stock of some bank.
The Board feels, therefore, that the definition of a bank
holding company proposed in the revised draft of bill is impractical
end will be unsatisfactory in accomplishing the desired results. If,
however, notwithstanding, Congress should feel it desirable to use
this general type of definition in any holding company legislation
adopted, the Board feels that it is rnost important that a percentage
substantially less than the 50 per cent now prescribed in the defi- nition be specified.




Absence of Provision for Exemptions,, - The definition of
"bank holding company" does not contain any provision for exemptions
similar to the provision in the existing definition of "holding company
affiliate". As a result, the bill would apply to a large number of
cases in which a company controls only one small bank and to other insignificant cases where there is no real reason for regulation. Aside
from this being a nuisance as an administrative matter, the results
might be quite unfortunate in some instances where large commercial or
manufacturing concerns own and operate small banks as a matter of convenience for their employees and customers.
Diffusion of Administrative Responsibility. - The revised
bill provides that a bank: holding company, in order to acquire the
shares of any bank must obtain the approval of the Board if the bank
is e State member bank, the Comptroller of the Currency if the bank
is a national bank, and the FDIC if the banK is a nonmember bank.
This diffusion of authority, the Board believes, is impractical, will
lead to conflicting policies, and will hamper the effective administration of the law.

If Congress is unwilling to place the responsibility

for passing upon the expansion of bank holding company groups in a single
agency of the Government, the Board feels that rather than have the diffusion of authority proposed in the revised draft, it would be much
preferable that the three agencies act as a unit and thst unanimous approval of all three be required for any expansion that might be proposed
by a holding company group.




-6Expansion through Purchase of Assets« - Expansion and tendency
toward monopoly can be attained not only by the purchase of shares by
a bank holding company but also by the acquisition of assets of other
banking institutions by banks in a holding company group. The revised
draft of bill, however, omits completely any provision requiring a banking subsidiary of a bank holding company, or a bank holding company
which is itself a bank, to obtain the approval of any supervisory
agency before purchasing the assets of any other banking institution.
It is true that, if after such a purchase of assets the holding company
desires to convert the institution so acquired into a branch of one of
the banks in the group, it would ordinarily have to obtain permission.
No such permission is required, however, where the bank whose assets
are taken over is to be liquidated. The acquisition of assets of a bank,
coupled with its liquidation, can be a very effective means of eliminating
competition in a given community. The Board feels, therefore, that legislation for regulation of bank holding companies can be effective only
if it includes restrictions on the purchase of assets of banks. It is
noteworthy in this connection that the House of Representatives has
passed, and a subcommittee of the Senate Judiciary Committee has approved,
a bill to make certain provisions of the Clayton Act restricting stock
purchases by corporations applicable also to purchases of assets of other
corporations where the effect is a lessening of competition or tendency
to monopoly.

c



-7 Creation of New Bank Holding Companies. - The bill does not
provide adequate control over the creation of new bank holding companies,
and it would be possible, for example, for a newly organized corporation
to acquire all of the banks controlled by two or more existing bank
holding companies without approval by any supervisory agency. Through
this device it would be possible to consolidate two or more holding
company systems, thus permitting an increased concentration of banking
and consequent tendency to monopoly.
Divestment of Nonbanking Shares and Obligations. - The revised draft would prohibit a bank holding company, after five years,
from holding shares of nonbanking organizations and from holding obligations other than investment securities which national banks may hold.
There is no exception which would permit the ownership of 5> per cent or
less of the securities of any one company, ^uch an exception, the Board
believes, is a justifiable one because it permits a bank holding company to continue to have diversified investments where the amount of
each such investment is so small that it does not contravene the basic
objective of the bill.

Moreover, the revised draft apparently does not

permit a bank holding company to own assets which it has acquired from
a subsidiary bank in a case where the bank has been asked by the appropriate supervisory authorities to rid itself of certain undesirable
assets. Also, under the revised draft it is not clear that a bank
holding company could own a corporation organized for the purpose of
providing bank premises.

These would all seem to be desirable excep-

tions to the restrictions on holding of nonbanking investments.




- 8Standards in Connection with Expansion. - In addition to the
other standards set forth in the bill, the supervisory agencies in passing upon requests for expansion of a bank holding company must take into
consideration the policy of Congress "in favor of local ownership and
control of banks and competition in the field of banking, and in opposition to excessive concentration of power in the field of banking through
undue expansion of multiple-office banking systems," While the Board
has no opposition to this requirement and feels that in large measure
it is a very desirable and constructive one, it would have no objection
to omitting the language "excessive concentration of power in the field
of banking".

c

Branches, - As we interpret the revised draft, the standards
set forth are required to be taken into consideration by any Federal
bank supervisory agency in passing upon applications for branches. We
believe this is a very important and desirable requirement and should
be clearly stated in any legislation on this subject.
Authority to i^ake Investigations, - The bill contains no
authority for an administrative agency to make investigations in order
to determine what institutions may or may not be bank holding companies
within the meaning of the definition prescribed and, therefore, subject
to the restrictions imposed by the legislation. Without such authority
to make investigations, institutions which should be regulated may be
able to avoid the law entirely.

It seems obvious that a power of in-

vestigation,with appropriate subpoena power, should be vested in the
appropriate agency of the Federal Government.




- 9Judicial Review. - There is no judiciel review provided, so
that when a supervisory agency acts upon a request of a bank holding
company for acquisition of shares and denies it, the decision is final.
The Administrative Procedure Act does not help, because the latter does
not prescribe judicial reviev in case of discretionary action. Consequently, a holding company would have no choice but either to accept the
position of the supervisory agency or to be prosecuted criminally, with
the virtual certainty of being convicted.
Tax Provisions. - It is understood that appropriate provisions are to be incorporated in the revised draft to insure that
companies and their shareholders will not be subjected to unfair taxation as a result of action taken in order to conform to the new legislation.

The Board feels that such provisions are most desirable in any

holding company legislation.
Indirect Control. - It is not clear whether the provisions
relating to the acquisition of additional bank stocK by holding companies
applies to the acquisition of control "directly or indirectly", as well
as to the direct purchase of bank shares. If not, the bill woulo: be
open to ready evasion. There ia a similar question in connection with
the provisions relating to the acquisition and retention of shares in
nonbanking organizations.
Lack of Correlation with Present Law. - One of the most
confusing effects of the proposed revised draft results from the
fact that the new law would be superimposed upon the old law without




any change in the latter. This would mean that some holding companies
would be technically holding company affiliates under the old law and
subject to all its restrictions and at the same time bank holding companies under the new law and subject to all its restrictions. Other
companies, however, for example, those owning or controlling nonmember
banks only, would not be subject to the old lav but only to the new law.
There is no justification for such a distinction.
Examinations of Bank Holding Companies. - Although existing
law authorizes examinations of bank holding companies where member
banks are involved, the revised draft contains no provisions with
respect to examinations. Accordingly, a holding company which owns
or controls only nonmember banks would not be subject to examination
by any Federal agency. Obviously, there should be an appropriate provision for examination of all bank holding companies.
Voting permit Procedure. - The principal requirement of the
existing law is that a holding company must obtain a voting permit
from the Board if it wishes to vote the stock which it owns in a member bank. As has been previously pointed out, this provision is impracticable because it leaves with the company the option as to whether
to obtain a voting permit, and the law is not applicable to a company
unless it chooses to get such a voting permit. It is sometimes possible for a company to operate satisfactorily and to control its
banks without a voting permit. This unsatisfactory procedure is left
unchanged by the revised bill. Moreover, this situation makes for




c

-11-

possible conflicts since conceivably the Comptroller might permit a
holding company to acquire the stock of a national bank under the
provisions of the revised draft and the Board, under existing law,
might refuse to grant the holding company a permit to vote the stock
in the national bank so acquired.

It seems most important that the

voting permit procedure be eliminated and that all of the requirements of the law, whether new or old, be made uniformly applicable to
all bank holding companies.
Miscellaneous Subjects Not Covered. - In addition to the
comments made above, it should be noted that the bill does not contain any provisions to restrict loans made to a bank holding company
tjy a subsidiary nonmember insured bank; any provisions requiring a
bank holding company to maintain a reserve of readily marketable assets
where member banks are not involved; any provisions providing
regulatory control by a supervisory agency over the charging of excessive management or service fees by holding companies against their
subsidiary banks; or any provisions for registration of holding companies or the making of reports by them.

4-18-50