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Office Correspondence

Mr, Eccles


Mr* Carpenter

In accordance with the understanding at the meeting yesterday, there is attached a copy of the revised statement containing comments upon the proposed substitute bank holding company bill
which were agreed upon for transmission to Senator Robertson• A
letter to Senator Robertson transmitting the memorandum is now being
written and a copy will be delivered to your office as soon as it is



There are set forth below views and comments of the Board
of Governors of the Federal Reserve System regarding the April 22, 1950
Confidential Committee Print of a proposed substitute for S. 2318, the
bank holding company bill?
No Change in Existing Law
Proposal, - The proposed substitute bill 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. It would superimpose its provisions upon the provisions
of existing law,
Comment* - This treatment of the matter results in a shorter
bill which, on its face, may appear to be relatively simple; but when
the existing law and the substitute bill are considered together, interpretation of the resulting provisions is confusing, and the effort
to achieve brevity and simplicity defeats its own end. There appears
to have been some misapprehension as to the nature and effect of the
proposed substitute bill. It should be clearly understood that the
substitute bill is not an amendment to existing law. If it were enacted,
it would result in two independent statutes relating generally to the
same subject matter but not correlated in any manner. On the one


hand, there would be the existing law relating solely to "holding company affiliates" of member banks. On the other hand, there would be
the new law relating to "bank holding companies". Some holding
companies would be "holding company affiliates" under the existing law
and subject to all its requirements and at the same time would be
"bank holding companies" under the new law. and subject to all its
requirements. Other companies, however, would be "bank holding companies" but not "holding company affiliates" and, therefore, would be
subject only to the new law. This would be true, for example, of a
company like Morris Plan Corporation which controls only nonmember
banks. Similarly, there are companies which control banks but are not
"holding company affiliates" under the existing law because of exemptions
granted by the Board but which would be "bank holding companies" under
the new law and could not be exempted from the requirements of the new
law. There is no justification for these distinctions and lack of
uniformity in requirements or the confusion which would necessarily
result from attempting to deal with this subject in this manner.
Definition of "Bank Holding Company"
Proposal. - The substitute bill 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 only member banks. Thus, a
company would be a holding company if it owns or controls 50 per cent

-3of 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 bank holding company on April 15 or thereafter, would always be a
holding 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 revised bill.
Comment. - One of the principal objections to the existing
law is that the definition of "holding company affiliate" is not broad
enough to reach some 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, because it is common knowledge that one
company may exercise a controlling influence over another company without owning or controlling 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 bank holding company based on "control in any
manner11 of the election of directors of a bank hts 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 law would be construed strictly

against the Government* as all criminal statutes are. Moreover, even
though a company might be a bank holding company because of "control
in any manner" of a bank, it would nnt 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 believes, therefore, that the definition of "bank
holding company" proposed in the substitute bill is impractical and
will be unsatisfactory in accomplishing the desired results. The
Board is of the view that, whatever percentage of ownership may be
used, it is essential that any adequate definition of bank holding
company also provide for some discretionary axithority in the administering agency* Without such authority there will necessarily be some
cases which should be covered by the law but which would not be brought
within its provisions* For example, there is one important bank group
where the stock of the banks is held by trustees under a testamentary
trust, and it appears that the largest bank in the group may exercise a
controlling influence over the management and policies of the other banks
There is, however, no effective means of providing in the statute a
definition which would cover this institution unless it be done through
the exercise of a discretionary authority after investigation and a
hearing if necessary. If the bill included an adequate provision for
authority to determine whether a particular company is a "bank holding
company", the Board would not be inclined to regard the 50 per cent test
as being entirely unworkable.

The definition in the substitute bill does not adequately
cover cases in which a company exercises a controlling influence over
a bank holding company and thus indirectly exercises such an influence
over a group of banks• Thus* as is true in at least one case* a
company might own slightly less than 50 per cent of the voting stock
of a bank holding company controlling substantial banking interests,
but would not itself be a bank holding company* Such a company would
be free to purchase bank stock and to continue to hold nonbanking
investments without regard to the restrictions contained in the
substitute bill.
The definition of "bank holding company" in the substitute
bill does not contain any provision for exemptions. It differs in
this respect from existing law which, in defining "holding company
affiliate", provides that that term shall not include, except for
limited purposes, any company which the Board determines is not
engaged as a business in managing or controlling banks• Through the
years the Board has made such determinations with respect to over
150 organizations which controlled one or more banks but which the
Board did not regard as being engaged as a business in managing or
controlling banks, These organizations have included, among others,
large industrial or commercial businesses, labor unions, churches,
colleges, etc*, which had incidental banking interests. In a large percentage of the cases, the control of only one bank was involved^


The fact that an organization might have been so exempted under the
definition of "holding company affiliate11 under existing lew would
have no bearing whatsoever on its status as a "bank holding company" under the proposed substitute bill*

If it controlled a bank,

the organization would be a "bank holding company" and required
to divest itself of either its nonbanking interests or its bank
stock• Aside from being an unnecessary irritant and nuisance as
an administrative matter, the results might be quite unfortunate
from the standpoint of the public interest in some instances
where organizations own and operate banks as a matter of convenience
for their members, employees or customers•
Diffusion of Administrative Responsibility
Proposal. - The substitute 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 to be acquired is a 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.
Comment« - This diffusion of authority, the Board believes, is impractical, will lead to conflicting policies, and will
hamper the effective administration of the law. As was stated
during the hearings on S. 2318, the Board believes that from the
standpoint of efficient administration and the fixing of responsibility,
such authority should be vested in a single agency. However, if

-7this is not to be done, the Board believes that, rather than to have
the authority diffused as proposed in the substitute bill, it would
be preferable for the three Federal bank supervisory agencies to act
as a unit and that unanimous approval of all three agencies be required for expansion ty a holding company group. If provision were
made for unanimous approval, it should be required for the establishment of branches and the purchase of assets of other banks by subsidiary banks in a bank holding company group, as well as for the pur<chase of bank stock by a bank holding company; and similarly all other
administrative action provided for in the bill should be by unanimous
Expansion through Purchase of Assets
Proposal* - The substitute bill 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.
Comment. - 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. 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 not to be

- 8 replaced by a branch* 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 believes, 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* The purchase of assets of banks by banks
controlled by a bank holding company should be permitted, in the
Board's view, only with administrative approval granted after consideration of the same standards or guides as are prescribed in connection
with the purchase of bank stock by holding companies*
Creation of New Bank Holding Companies
The substitute bill does not provide adequate
control over the creation of new bank holding companies* As long
as a company did not acquire a majority of the stock of any bank,
it would be possible for it to acquire a very substantial portion
of the stock of any number of banks and to exercise a controlling
influence over a large bank group without being a bank holding
company subject to the restrictions of the substitute bill. Also, it
would be possible for a newly organized corporation to acquire all

- 9 of the stock of all of the banks controlled by two or more bank
holding companies without approval by any supervisory agency; and
by this means it would be possible to consolidate two or more holding
company systems, thus permitting increased concentration of banking
and consequent tendency to monopoly*
Regulation, Investigation, and Enforcement
Proposal* - There is no provision in the substitute bill
for regulation or supervision by any Federal agency, and likewise no
provision for the making of investigations. There is no Sanction
or provision for enforcement except criminal penalties. Willful
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 individual*
Comment. - If the administration of the law is to be effective, it is imperative that there be appropriate authority for the
making and enforcement of regulations by the administering agency* An
authority to make investigations is necessary 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* Furthermore, without such authority, together with a power
to require correction in appropriate cases, the affairs or conduct of
bank holding companies which might be inimical to the public interest,

- 10 or possibly contrary to specific legal standards, could not be dealt
with adequately. It seems obvious that a power of investigation, with
appropriate subpoena pov/er, should be vested in the appropriate apency
of the Federal Government* In providing criminal sanctions alone,
without provision for investigations and administrative hearings
or other civil proceedings to decide questions with respectto which
there may be honest differences of opinion, the proposed substitute
bill would be punitive legislation of the most drastic kind. In urging
appropriate provision for investigations and administrative hearings,
the Board is merely suggesting procedures comparable to those long
followed by the Federal Trade Commission, Securities and Exchange
Commission, Interstate Commerce Commission, and other regulatory
agencies* In connection with sanctions, it is believed that, in
addition to criminal penalties, consideration should be given to less
drastic penalties such as were proposed in S, 2318.
Examinations of Bank Holding Companies
Although existing law authorizes examinations of bank holding companies where member banks are involved and applications are
made for voting permits, the substitute bill contains no provisions
with respect to examinations* Accordingly, a holding company, such
as Morris Plan Corporation, which 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•


Judicial Review
There is no judicial review provided in the substitute
bill, 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 review 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*
Divestment of Nonbanking Shares and Obligations
Proposal» - Under the substitute bill, 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 or trust companies*
Comment« - The substitute bill contains no exception to
this provision which would permit the ownership of 5 per cent or less
of the securities of any one company*

Such 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

-12basic objective of the bill#

In this connection, it should be noted

that under provisions of existing law which would still be applicable
to any holding company which held a voting permit * a holding company
is required to build up certain reserves of readily marketable assetSJ
these assets now may consist of readily marketable stocks, as well as
bonds, and there appears to be no good reason why this should not continue to be permitted©

The substitute bill 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 substitute bill 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 exceptions to the restrictions on holding of nonbanking investments* In
addition, there are other business enterprises which are closely related
to banking and whose association with banks has been traditionally
recognized as being unobjectionable, so that their control by bank
holding companies would seem to be likewise unobjectionable.
Proposal* - In passing upon requests for bank holding companies to purchase shares in banks under the proposed bill, 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, needs of the community,
and whether or not the corporate powers are consistent with the law


relating to Federal insurance of deposits. It would also be required
to take into account the policy of Congress frin favor of local ownership and control of banks and competition in the field of banking".
It is apparently intended that the various factors enumerated
above would have to be taken into consideration also by a Federal
supervisory agency in considering applications for branches.
Comment* - The Board has no objection to this requirement
and feels that it is a desirable and constructive one. It is
very important , however, that it be made entirely clear that these
standards are to be taken into consideration in passing upon applications by banks in a holding company group for establishment of
branches and purchases of assets of other banks*
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 permit3
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 substitute bill #
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.

-nMiscellaneous Subjects Not Covered
In addition to the confluents made above, it should be noted that
the substitute bill does not contain any provisions to restrict loans made
to a bank holding company by 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 and voting permits
are not obtained; 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.