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X-6268 FE!IERAL RESERVE BJU'IK OF SAN FRANCISCO March 1, 1929 Walter Wyatt, Esq., General Counsel, Federal Reserve Board, Washington, D. C. Dear V.r. Wyatt: On February 13 and 14 last a general conference of the directors of this bank covering both the head office and all the branches was held at San Francisco. The meeting was a very interesting one and I believe great benefit was derived by all who attended. One of the subjects placed upon the ~rogram at the suggestion of some of the directors of our Portland Branch was the question of stockholders t liability as applied to· banks owned by holding companies. As you know, .in many states where branch banking is prohibited by statute attempts have been and are being made to accomplish approximately the same object through the formation of holding corporations which, in turn, purchase all the capital stock of a nmnber of banks. This is familiarly known as 11 dhain banking," the difference between this method and branch banking being that each unit in the chain operates as a separate corporate entity, with more or less control on matters of policy and procedure coming from those who constitute the hblding company. In the opinion of many, Chain banking possesses all the weaknesses and'very fewt if any, of the virtues of branch ba~ing. Some of the directors present evidenced considerable concern over the effect of this somewhat recent development in their states. The question was propounded to me as to what, if any, legislation had been enacted seeking to impose upon the shareholders of the parent organization liability for the debts of the separate units constituting the chain. I waswalso asked what, if any, legislation had been enacted seeking to restrict the formation of corporations organized for the sole purpose of holding stock in banks and whether or not any regulation or control could be exercised through s~te laws or through amendments to the Federal Reserve Act. I was not able to give any very positive r~sponse to these inquiries. A suggestion was made that through you we seek information from Counsel to the other Federal reserve banks as to what '!egislation, if any, of this character had been enacted tn their respective districts. I believe that in New Jersey there is a law prohibiting a corporation from holding more than ten per cent~ of the •''' X-6268 -2- cayital stock of any bank. I am also informed that in the State of Washington a bill is now :;>ending seeking to prohibit the formation of corporations organized for the sole purpose of holding stocks in banking institutions and another bill seeking to impose upon the stockholders in the holding corporation the same liability as that imposed "U-pon individual holders of bank stocks. The question is chiefly important in those states which prohibit branch banking. For instance, in the State of Oregon branch banking is prohibited but stockholders in banlcs organized since 1912 are liable for the benefit of depositors to the extent of 10~ of the par value of stock held. In other states double liability is imposed upon the holders of bank stocks and branch banking is now allowed. Let us suppose that in such a state a corporation organized under the laws of a foreign state in which no double liability exists seeks to own a number of state banks through the purchase of the entire capital stock. In the event of the insolvency of one or more of the banks so held what recourse have the creditors and depositors? Is "it not true that by such device the double liability sought to be imposed may be· entirely defeated? Another problem is presented. in this situation: A corporation is organized for the sole purpose of acquiring the entire capital stock of a number of banks. The stockholders of the holding company are not bankers and under the existing law in most jurisdictions are not subject to the restrictions imposed upon banks. Each bank acquired by the holding corporation is officered by men having no proprietary interest in the i.nstitution which they operate, being merely ~nployees of the holding company. If the holding corporation i~ well managed and exercises close and direct control over the units composing the system or chain, all may be well, but if · the holding corporation is organized solely as a money-making· proposition and if no well directed efforts are used to con-:trol or supervise the manner in which the unit banks constituting the chain are conducted, it may be seen that a very serious situation may be created. The elements of local pride and local identity are lacking, t.he banks scattered throughout the state becoming merely money-making agencies of an absentee corporation. These problems and others which naturally occur to one in connection with the situation thus created are those which were disturbing our directors and upon which they desired information as to restrictive or regulatory legislation. Mr. James, who was present at the conference, stated that he thought you would be willing to seek information from X-6268 -3- Counsel to the other Fed~ral reserve banks as to what, if any, legislation had beezt eW1cted or proposed seeking to reach these problems. I am addressing letters of inquiry to the superinten~ dents of banks in the sJ1.tes comprising the Twelfth Reserve District, asking for ~he necessary information, and I wonder if you will ask Counscl,l to the other Federal reserve banks to do likewise. The information thus acquired could be compiled either through your office or by me and would, I believe, make a very interesting study. Thanking you in advance for your assistance in this matter, and with kindest personal regards, I am Yours very truly, (S) Albert C. Agnew, Counsel.
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