The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CONGRESSIONAL CORRESPONDENCE 1987 Collection: Paul A. Volcker Papers Call Number: MC279 Box 25 Preferred Citation: Congressional Correspondence, 1987; Paul A. Volcker Papers, Box 25; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://findingaids.princeton.edu/collections/MC279/c311 and https://fraser.sdouisfed.org/archival/5297 The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls within fair use as defined by the copyright law of the United States. They further agree to request permission of the Princeton University Library (and pay any fees, if applicable) if they plan to publish, broadcast, or otherwise disseminate this material. This includes all forms of electronic distribution. Copyright The copyright law of the United States (Title 17, United States Code) governs the making of photocopies or other reproductions of copyrighted material. Under certain conditions specified in the law, libraries and archives are authorized to furnish a photocopy or other reproduction. One of these specified conditions is that the photocopy or other reproduction is not to be "used for any purpose other than private study, scholarship or research." If a user makes a request for, or later uses, a photocopy or other reproduction for purposes not permitted as fair use under the copyright law of the United States, that user may be liable for copyright infringement. Policy on Digitized Collections Digitized collections are made accessible for research purposes. Princeton University has indicated what it knows about the copyrights and rights of privacy, publicity or trademark in its finding aids. However, due to the nature of archival collections, it is not always possible to identify this information. Princeton University is eager to hear from any rights owners, so that it may provide accurate information. When a rights issue needs to be addressed, upon request Princeton University will remove the material from public view while it reviews the claim. Inquiries about this material can be directed to: Seeley G. Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) mudd@princeton.edu https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, 0. C. 20551 PAUL A. VOLCKER April 13, 1987 CHAIRMAN The Honorable Doug Barnard, Jr. House of Representatives Washington, D.C. 20515 Dear Mr. Barnard: Thank you for your letter of March 5, in connection with our discussion at the hearing held on February 26, regarding whether the regulatory process constrains debt-for-equity swaps to a greater extent than is desirable. As requested, the staff has reviewed the statutory and regulatory framework, as well as the practice of the Board in this area. I am pleased to enclose a staff memorandum on this subject. As that memorandum discloses, U.S. banking organizations have substantial flexibility in making investments in banking and financial organizations overseas. Under Regulation K, U.S. banking organizations can invest in 100 percent of the shares of a foreign company that is engaged in activities considered to be usual in connection with banking or financial activities. The regulations also permit investments in up to 20 percent of the shares of any company, regardless of its activities. This is a significantly broader authority than is permitted domestically, where a bank holding company may invest in no more than 5 percent of the shares of a U.S. company with activities not closely related to banking. It should be noted that most debt-for-equity swaps carried out to date have involved commercial banks as sellers of loans to third parties and not as investors. These third parties, usually multinational corporations, have subsequently converted the purchased debt into equity investments in debtor countries. There is nothing in the Federal Reserve regulations that would impede this activity. In any event, I intend to review this matter with the Board of Governors in coming weeks. I hope this information is useful. if I can be of further assistance. Please let me know Sincerely, Enclosure WAR:PAV:pte (V-26, 87-1142) bcc: Mr. Ryback, Mr. Taylor, Mrs. Mallardi (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis FEDERAL RESERVE STAFF MEMORANDUM SUBMITTED TO CONGRESSMAN BARNARD PURSUANT TO HIS LETTER OF MARCH 5, 1987 REGARDING DEBT-FOR-EQUITY SWAPS BY U.S. BANKING ORGANIZATIONS Statutory and Regulatory Framework There are three statutes that govern foreign activities and investments of U. S. banking organizations. Section 25 of the Federal Reserve Act ("FRA") permits member banks to invest in foreign banks and Edge and Agreement corporationsii A member bank does not, however, have authority to hold directly other kinds of foreign equity securities. Therefore, any debt-for-equity swap transaction must involve ownership of the equity investments by Edge corporations or bank holding companies. Section 25(a) of the FRA provides for the establishment of Edge corporations, which may engage overseas in activities that the Board determines are usual in connection with the business of banking in foreign countries. In addition, subject to regulations of the Board, Edge corporations may invest in any foreign company as long as it does no business in the United States, except that which is considered incidental to its foreign business. 1/ An Agreement Corporation is a company formed to engage in international or foreign banking or other foreign financial transactions that enters into an agreement with the Board to limit its activities to those that the Board specifies. The Board has by regulation limited the activities of an Agreement Corporation to those of an Edge corporation. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis e -2Finally, section 4(c)(13) of the Bank Holding Company Act ("BHC Act") permits bank holding companies to invest in any foreign company that does no business in the United States, except as an incident to its international business, when the Board determines the investment would not be substantially at variance with the purposes of the BHC Act and would be in the public interest. The Board has defined the overseas investment powers of bank holding companies under section 4(c)(13) to be the same as those of Edge corporations. Board Policy on Permissible Activities Overseas At the time of the 1979 revision of Regulation K, which governs the overseas activities of U. S. banking organizations, the Board codified its longstanding policy that foreign investments. under both the Edge Act and BHC Act should be chiefly in organizations engaged in banking or financial activities. The regulation contains a statement of general policy, 12 C.F.R. 211.5(a), and a list of specific activities that have been determined to be permissible for all foreign subsidiaries. 12 C.F.R. 211.5(d). The general statement also requires that foreign activities shall at all times be conducted in accordance with high standards of banking or financial prudence, having due regard for diversification of risks, suitable liquidity, and adequacy of capital. 211.5(a). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 12 C.F.R. -3Specific Activities The regulation states that the Board has determined that the activities specifically listed in the regulation are considered "usual in connection with the transaction of banking or other financial operations abroad."2/ S 211.5(d). 12 C.F.R. This section also provides that an investor./ may apply for a Board determination that other activities are usual in connection with the transaction of the business of banking or other financial operations abroad. Thus, in addition to the listed activities, an activity may be approved if the Board finds that it is banking or financial in nature or that other financial institutions in a foreign country engage in the activity and for competitive reasons U. S. organizations should also be permitted to engage in the activity. Beyond this threshold test of whether an activity is financial in nature or usual in connection with financial activities in a 2/ These activities include engaging in commercial banking or financing; leasing as a functional equivalent of an extension of credit; acting as a fiduciary; providing investment advisory services; operating a general insurance agency or brokerage; managing a mutual fund abroad; providing management consulting services; underwriting, distributing, and dealing in debt and equity securities within certain limits; and operating a travel agency in connection with financial services offered abroad. 3/ An investor is defined as a bank holding company, member bank, or Edge or Agreement corporation. As noted above, because a member bank has limited statutory authority to hold equity securities, this discussion therefore focuses on the other investment vehicles. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -4particular country, the Board reviews a proposal for consistency with the purposes of the BHC Act or the Edge Act to determine whether the proposal presents undue risk or the potential for other adverse effects. Under these standards, the Board has permitted U.S. banking organizations to engage overseas in underwriting life and health insurance, and travel agency and real estate brokerage activities. This is the general framework under which U. S. banking organizations conduct the activities of subsidiaries abroad. Regulation K also has a number of provisions that permit less substantial investments in foreign companies that engage in activities either not listed in the regulations or specifically approved by the Board as permissible. The specific activities and levels of non-listed activities that may be undertaken by a foreign company depend on the kind of ownership interest held by the investor in the company. Levels of Ownership Interests under Regulation K Regulation K provides for three levels of ownership interest in foreign companies: portfolio investment. subsidiary, joint venture and A subsidiary is any company that an investor controls, either through majority stock ownership or by any other means. A joint venture is a company in which an investor holds between 20 and 50 percent of the shares and which the investor does not actually control. A portfolio investment is any investment of up to 20 percent of the shares of a company that the investor does not control. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • -5The BHC Act establishes an irrebuttable presumption that a company that owns 25 percent or more of the voting shares of another company controls that company. similar provision in the Edge Act. There is no Consequently, under Regulation K, the Board has always defined a subsidiary in terms of either majority share ownership or actual control. This standard was adopted deliberately in order to give U. S. banking organizations more flexibility in making foreign investments. For example, the Board in the past few years has followed its prior practice and found that an ownership position of as much as 45 percent of the shares of a company with the ability to elect a minority of the board of directors does not constitute actual control for purposes of Regulation K. On the other hand, the Board has found actual control of a foreign company to exist where less than a majority of shares is held but other factors, such as ability to control the board, are present. Control is a question of fact and therefore depends on the circumstances of each case. As noted, a subsidiary may engage only in listed activities or in activities that the Board has determined are financial or usual in connection with banking or financial transactions abroad. There is one exception to this rule, which was added to the regulation in the 1985 revision: where an investor is acquiring a going concern, up to five percent of the concern's assets and revenues may derive from impermissible https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -6activities. The purpose of this provision is to allow the investing U. S. banking organization a certain amount of flexibility in acquiring a foreign company that may have small amounts of impermissible activities. In these kinds of cases, it is often difficult for the investor to cease the activity or dispose of the nonconforming assets. The five percent "leeway" provision addresses this problem. A joint venture may not be controlled by the investing U. S. banking entity, although it usually takes an active role in the management of the company. Consequently, the regulation requires a joint venture company to engage predominantly in listed activities. The joint venture, however, is given a 10 percent leeway in its activities; it may derive up to 10 percent of its assets and revenues from unlisted activities. Under portfolio investment authority, an investing U. S. banking entity may hold up to 20 percent of the shares of any foreign company regardless of its activities. These portfolio investments may be in a wide range of companies and are not limited to investments in financial companies. The only limitation is that the investing U. S. banking entity may invest no more than an aggregate of 100 percent of its capital and surplus in such companies. 12 C.F.R. 211.5(b)(1)(C). Debt-for-Equity Swaps As noted above, the Board has taken the position that the same rules that apply to foreign investments generally will https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -7also apply to acquisitions made as a result of swapping debt obligations for equity ownership interests. Accordingly, if a financial company that engages only in listed activities becomes available for acquisition, a U. S. banking organization investor could acquire up to 100 percent of the shares of the company. In the only application received by the Board on this subject, a banking organization requested Board approval to swap debt obligations for equity interests in two Chilean companies. One company engages in pension fund management, which is a listed activity. The other company engages in life and health insurance underwriting, which is not a listed activity but had previously been approved for other organizations in other countries. The Board examined the insurance underwriting proposal to determine if it could be considered usual in connection with banking or financial services in Chile. The Board determined that the proposal met the standards in Regulation K and approved the acquisitions. If the debt-to-equity investment is proposed for a company that conducts activities that the Board has not determined to be permissible, the acquisition must conform to either the joint venture or portfolio investment standards. Because a large number of foreign firms that could become available for acquisition under debt conversion programs may be manufacturing or other nonfinancial companies, most https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -8debt-for-equity swaps would probably be made as portfolio investments. The major constraint on these types of investments is the limit established in the regulation that no more than the equivalent of 100 percent of an investing entity's capital and surplus may be made in the aggregate in nonconforming portfolio investments. This is not a significant constraint for a bank holding company, however, because of its large capital base. If the investor is an Edge corporation, its capital and surplus will necessarily be smaller. U. S. banking organizations determine the vehicles through which they make such investments. Amount Limitations Under Regulation K, an investment may be made under the general consent provision of the regulation, without Board action, if the amount to be invested is the lesser of $15 million or 5 percent of the investor's capital and surplus. This amount limitation applies regardless of whether the investment is in a subsidiary, a joint venture, or a portfolio investment. If the investment does not qualify for general consent, the regulation requires only that the investor provide the Board with 45 days' prior notice before the investment is made. During the course of the 45 days, the staff or any Board member can bring the matter to the Board's agenda. If review of the notice is completed before the end of the 45 days, the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • -9remaining time period may be waived to allow the investment to be made. The only foreign investments that must come to the Board for specific consent are applications for a new activity. Other investments are presented for Board consideration where the staff determines there is a policy question as to the size of the investment, the condition of the applicant or some other factor. Other Methods of Holding Shares of Foreign Companies Most debt-for-equity swaps will take place under Regulation K because it deals most comprehensively with foreign investments. There are, however, three other methods for holding equity shares. Under section 4(c)(6) of the BHC Act, a bank holding company may hold up to five percent of the shares of any company, regardless of its activities and regardless of whether the company is foreign or domestic. Accordingly, any debt-for-equity swap that results in a bank holding company owning less than five percent of a company's shares may be made under this authority. This is a self-executing exemption and requires no action by the Board. Such investments must, however, be passive and the investor may not take an entrepreneurial part in the company's activities. Moreover, to the extent that a bank holding company engages to a substantial extent in trading such shares, as opposed to holding them in https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • -10portfolio, there is a question as to whether the trading might in itself constitute an activity requiring Board approval. Section 4(c)(7) of the BHC Act allows a bank holding company to own shares of an investment company that does nothing but invest in securities, as long as the investment company does not own more than five percent of the shares of any one company. Under this authority a bank holding company could establish a wholly owned subsidiary that holds investments made by the bank holding company in less than 5 percent of the shares of other companies. Alternatively, a bank holding company could invest in a mutual fund that invests in equity securities, as long as not more than five percent of the shares of any one company is held by the mutual fund. These investments are also required to be passive, as they are under section 4(c)(6). Neither section 4(c)(6) nor section 4(c)(7) places a dollar limit on investments that may be made. If it were determined that a bank holding company was using these exemptions in a manner or in amounts that had adverse consequences for the safety and soundness of the organization, the Board could take action against the bank holding company to require correction of the adverse situation or could consider the matter in advance if the Board learned of the proposed investment prior to its consummation. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -11There is a final method by which a U. S. banking organization could legally hold shares of a foreign company, although not as a result of a debt-for-equity swap. If a debtor company defaults on a loan, a bank or bank holding company could foreclose on the loan and take the company's assets and shares in satisfaction of the debt previously contracted ("DPC"). The authority to make DPC acquisitions is of limited use for foreign sovereign debt because such debt is unlikely to be declared in default. U. S. banking organizations could, however, acquire shares of foreign private sector companies as DPC acquisitions. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 PAUL A. VOLCKER April 9, 1987 CHAIRMAN The Honorable William L. Armstrong United States Senate Washington, D.C. 20510 Dear Senator Armstrong: Thank you for your letter of December 3 asking for our views on the continued utility of the lending limitations of section 11(m) of the Federal Reserve Act and the apparent conflict between those limits and the more liberal, general lending limitations applicable to national banks under section 5200 of the Revised Statutes as amended by the Garn-St Germain Depository Institutions Deregulation Act of 1982. Members of the Board and the Board's staff are aware of the apparent conflict between these statutes and have met with representatives from the Independent Bankers Association of America and from individual bankers' banks to discuss this issue. I agree the distinction in treatment should be reviewed, but I would strongly suggest that be done in the context of the broader review of banking powers and necessary prudential restraints envisioned by Chairman Proxmire and the Banking Committee this year. Sincerely, SJPaul A. Volcker HJ:LSF:PAV:vcd/pte (V-214, 86-5376) bcc: Messrs. Bradfield, Ireland, Jorgenson, Plotkin, Struble & Schoenfeld Legal Records (2) Mrs. Mallardi (2),/ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 PAUL A. VOLCKER April 8, 1987 CHAIRMAN The Honorable Carroll Hubbard Chairman Subcommittee on General Oversight and Investigations Committee on Banking, Finance and Urban Affairs House of Representatives Washington, D.C. 20515 Dear Carroll: Thank you for your invitation to appear before your Subcommittee at a hearing on the Board's proposal for risk-based capital requirements for banks and bank holding companies. I am looking forward to being with you on Thursday, April 30, at 10:00 a.m. Sincerely, SiEaul _A, Yolcken, CO:vcd (V-6, 87-95) bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Paula Hillery (w/incoming) William Taylor Mrs. Mallardi (2), • • BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 • 1. • PAUL A. VOLCKER April 6, 1987 CHAIRMAN The Honorable Bill Archer House of Representatives Washington, D.C. 20515 Dear Mr. Archer: Thank you for the comments contained in your letter of March 25 regarding the Board's proposal to authorize bank holding companies to engage in real estate investment activities within certain limits. Your general support for Board action in this area, as well as the support and suggestions offered by your constituent, Mr. Tieman H. Dippel, Jr., will be considered by the Board in making its final analysis of this proposal. Sincerely, SA:vcd (V-38, 87-1457) bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Paula Hillery (w/file & date copies & original incoming) Mr. Alvarez Mr. Mattingly G.C. Log 49 Legal Records (2) Mrs. Mallardi (2), • WASHINGTON OFFICE BILL ARCHER 1135 LONGWORTH Nous' OFFICE BUILDING (202) 225-2571 7m DISTRICT, TEXAS MEMBER WAYS AND MEANS COMMITTEE ,tatecs Congre55 of tbe Ztiniteb f- JOINT COMMITTEE ON TAXATION ji)out of Repre5entatibet DISTRICT OFFICE FEDERAL OFFICE BUILDING HOUSTON, TX 77002 (713) 229-2763 --n assbington, De 20515 ds March 25, 1987 0- /957 Chairman Paul A. Volcker Board of Governors of the Federal Reserve System Constitution Ave. and 21st Street Washington, D.C. 20551 Dear Chairman Volcker: Enclosed for your review is a letter from my constituent, Mr. Tieman H. Dippel, Jr., concerning his support for the proposed rulemaking to permit bank holding companies to engage in real estate investment activities within certain limits. I am in favor of a change in Regulation Y, since I believe it would benefit many of the rural banks in Texas. I would appreciate your reviewing the enclosed recommendations and including them in any final analysis you may have on this issue. I would appreciate an acknowledgement of my letter. very much for your attention to this matter. cerel A r cli er Member of Congress BA/cc https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Thank you .111IIMIbmwssmilairwrisal, FEDERAL RESERVE BANK OF DALLAS WILLIAM H WALLACE DALLAS. TEXAS 75222 FIRST VICE PRESIDENT January 15, 1987 Circular 87-4 TO: The Chief Executive Officer of all member banks, bank holding companies and others concerned in the Eleventh Federal Reserve District SUBJECT Request for public comment on Regulation Y -- Bank Holding Companies and Change in Bank Control DETAILS The Board of Governors of the Federal Reserve System has requested public comment on proposed rulemaking to its Regulation Y to permit bank holding companies to engage in real estate investment activities within certain limits. The Board also is requesting public comment regarding whether a subsidiary of a holding company bank should be permitted or prohibited from conducting real estate activities, and on whether bank holding companies should be permitted to conduct real estate investment activities on a nationwide basis. Comments should be addressed to Mr. William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, Washington, D.C. 20551. All correspondence should refer to Docket No. R-0537 and must be received by February 23, 1987. ATTACHMENTS The Board's press release and the material as published in the Federal Register are attached. MORE INFORMATION For further information, please contact Basil Asaro at (214) 698-4345, Gayle Teague at (214) 651-6481, or David W. Dixon of the Legal Department at (214) 651-6228. ,d Sincerely yours, Alte6tat_ For additional copies of any circular please contact the Public Affairs Department at (214)651-6289 Banks and others are https://fraser.stlouisfed.org encouraged to use the following Incoming WATS numbers In contacting this Bank (BOO) 442-7140 (intrastate) and (800) Federal Reserve Bank of St. Louis ••• For immediate release December 31, 1986 The Federal Reserve Board today requested comment on proposed rulemaking to permit bank holding companies to engage in real estate Investment activites within certain limits. The proposed limits are designed to ensure that conduct of the activity does not result in unsafe or unsound practices, unfair competition, conflicts of interest or other adverse effects. Comments should be received by the Board on this matter by February 23, 1987. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The specific conditions on which the Board requests comment include: • a requirement that the activity be conducted through a direct nonbank real estate subsidiary of the bank holding company; • a requirement that bank holding companies that engage in these activities'meet certain capital standards, and that the amount of real estate investment activities conducted directly or indirectly by the bank holding tompany be considered in determining the adequacy of a bank holding company's capital; • a requirement that a bank holding company's total real estate investment activities, including related extensions of credit, not exceed the larger of 25 percent of the bank holding company's Consolidated primary capital or $250,000; • a requirement that the bank holding company's total investment in real estate subsidiaries be limited to 5 percent of the bank holding company's consolidated primary capital; (over) -2- • a limitation on the total leverage in a real estate subsidiary equal to 5 times the capital of the real estate subsidiary; • a limitation of the total investment in a single real estate project or series of related real estate projects to 10 percent of the bank holding company's consolidated primary capital; 41 a requirment that the real estate subsidiary conduct all real estate investment activities through passive, noncontrolling investments in joint ventures or partnerships, with the total investment by the real estate subsidiary representing no more than 49 percent of the equity of the joint venture or partnership; and, • a requirement that during each of the first three years, a bank holding company may invest no more than one-third of its aggregate real estate investment limit in these activities. The Board also requests public comment regarding whether a subsidiary of a holding company bank should be permitted or prohibited from conducting real estate investment activities, and on whether bank holding companies should be permitted to conduct real estate investment activities on a nationwide basis. The Board's notice is attached. -0- Attachment https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis fiti3 - 15811 DATE Ii PA: TlEMAN ti:DIPPEL,JR. • RMAN Of 1111 11,)n REG ( B ENHAM BANCSHARES.INC. I( `,0(111IPAkK ‘,1 PI I I P( 11OX 5R i 41r rolakM.11. XAS 77Ri "In R11,4571 CO: PARA: February 5, 1987 Mr. William W. Wiles Secretary Board of Governors of the Federal Reserve System 20551 Washington, D.C. Re: CoFY Request for public comment; Docket #R-0537, real estate investment activities for bank subsidiaries Dear Mr. Wiles, I read with great interest the recent circular regarding proposed rulemaking to its Regulation Y to permit bank holding companies to engage in real estate investment activities within certain limits. We would like to endorse and strongly recommend the concept. In looking at the specific conditions upon which the board requests comment we feel: 1. For liability reasons, activities should be conducted through a nonbank subsidiary of the holding company. 2. The capital requirements in the following sections regarding leverages and percentages are well thought out and would provide adequate opportunity for a bank to make use of this vehicle while maintaining controls on the concept. The one consideration that we feel would be a major detriment to our use of the subsidiary would be that we conduct all real estate investment activities through passive non-controlling interest in joint ventures or partnerships with total investment by the real estate subsidiary representing no more than 49% of the equity of a joint venture or a partnership. The reason for that is simple'. Some real estate powers are needed by banks to try and compete in a more level playing field and we endorse the concept as it exists, but think it can be improved by allowing 100% ownership in certain situations. Even though this may be limited by a dollar figure, such as $500,000. In the Texas economy, almost every bank and holding company is taking back considerable amounts of real estate. It is in their other real estate owned and in many cases is a property that has cash flow and that is worth more than any present market or foreseeable market. Few of the smaller banks, and most have holding companies now, know exactly what to do with many of these pieces of property. Some could pay their own way and be a long term solution for the bank in the glutted market. But having a 49% interest in an $80,000 rent house becomes quite cumbersome to a small bank. The large banks normally are the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr.. Williath H. Wiles February 5, 1987 Page Two proponents of greatly increased powers such as real estate development. The small banks and their holding companies desperately need a vehicle like you are providing that could allow them the opportunity to deal more effectively with their existing problems and smaller markets. We have been told there are various vehicles available to do this presently, but the stigma has been such that they were more workout compahies and the attitude approach is significantly different. This bill could be a major help to a small holding company, such as ours. The limitation on capital should keep banks from being competitive with other development groups to the point of being speculative, and I sincerely hope that these rules are enacted at the earliest possible opportunity with the only change being a consideration of the non-controlling ownership being amended to allow it to have a much greater utility to small bank holding companies in different markets, such as Texas, to help them work out the real estate problems. Thanking you for your consideration, I remain Sincerely, Tiernan H. Dippel, Jr. Chairman THD/sj cc: Congressman Bill Archer Dear Bill, This is a very important issue to many rural banks. I would appreciate your having your staff review it and a comment being sent to the Fed advocating their enactment of the rule. Hopefully, with the suggestions I made for small banks. This is a vehicle, even though limited, that oculd be of great help to Texas banks, particularly in the present market and what I see coming. The develotmrs will in all likelihood oppose it, so it will take whatever influence can be garnered. I hope the Texas delegation can come together and push in its behalf. It will not be that obvious to many bankers at this time, but this is a major benefit to help solve some of the problems in that it will help the Texas banks buy time to keep good properties and let their value recover and help significantly in the regulatory areas. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Skipper BOARD OF GOVERNORS OF THE • 1 : 000DOG FEDERAL RESERVE SYSTEM 69 • •,•• WASHINGTON, 0. C. 20551 44 ,• •.RAL FtES.• PAUL A. VOLCKER April 6, 1987 CHAIRMAN The Honorable William Proxmire Chairman Committee .on Banking, Housing and Urban Affairs United States Senate Washington, D.C. 20510 Dear Chairman Proxmire: During the course of my testimony on February 19, 1987, you raised a question about whether the Board is required by Section 2A of the Federal Reserve Act to submit a target range for M1 as part of its Semi-Annual Monetary Policy Report to the Congress. It was your view that the decision by the Federal Open Market Committee not to establish a specific target range for Ml, although ranges were provided for M2, M3, and for debt, was not consistent with the requirements of this section. You requested an opinion of the Board's General Counsel on this matter. That opinion has now been prepared and I am enclosing a copy for your review. The General Counsel has concluded that, as a matter of textual interpretation, Section 2A requires a report on the Federal Reserve's "objectives and plans" with respect to the monetary aggregates and if the Federal Reserve has not formulated "objectives and plans" with respect to one particular aggregate, it is not required to report on it. This reading of the text is supported by other provisions of Section 2A, by administrative practice and most importantly by the legislative history. I have paid particular attention to the legislative history because of your direct involvement in it and because I am concerned that the Federal Reserve maintain the close consul tative relationship with the Congress that we have had in the past. I hope that you will agree with us, after going back over the history, that this relationship would not be served by our providing you with a target range for an aggregate that the Committee itself does not feel can provide a reliable quanti tative standard for the conduct of policy at a particular point in time. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable William Proxmire Page Two Our concerns, I suppose, are similar to those raised with you by Chairman Burns in 1975. Those concerns were reflected in the compromise language you developed at the time speaking of both "objectives and plans" and substituting the phrase "monetary and credit aggregates" for the "money supply". I would be glad to discuss this opinion with you further should you have any questions. Sincerely, Enclosure MB:pte bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Bradfield Legal Records (2) Mrs. Mallardi (2)' BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 ADDRESS OFFICIAL CORRESPONDENCE TO TNE SOARD •.RAL ILES.• April 2, 1987 MEMORANDUM Humphrey-Hawkins Act Reporting Requirements Subject: During the course of Chairman Volcker's testimony on February 19, 1987, before the Senate Banking Committee on the Board's semiannual Section 2A of the report to Federal Congress Reserve provided Act, for by Chairman William Proxmire requested the opinion of the General Counsel of the Board on whether the Board is required by Section 2A of the Federal Reserve Act (12 U.S.C. 225a) to submit a range for M1 as a part of this report. target This question arises because, as noted in the Board's February 19, 1987 report under Section 2A, the Federal Open Market Committee ("FOMC") elected not to establish a specific target range for M1 because of uncertainty about its underlying relationship to the behavior of the economy and its increased sensitivity to interest rate changes due to the deregulation of interest rates and other factors. The Board, in its Report, stated that the FOMC had established a range of 5-1/2 to 8-1/2 percent for M2 and M3 and https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -2- 8 to 11 percent for debt as the "Ranges of Growth for the Monetary and Debt Aggregates" for the period from the fourth quarter of 1986 to the fourth quarter of 1987. In addition, the Report noted that while no range had been included by the FOMC for 1987, the FOMC would continue to monitor M1 behavior carefully, assessing the growth of the aggregate in the context of other financial and economic developments. Board Finally, the reported that in the future the FOMC might set more specific objectives for Ml. Section 2A of the Federal Reserve Act, as amended by the Full Employment and Balanced Growth Act of 1978 (92 Stat. 1897) ("Humphrey-Hawkins"), provides in relevant part that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I . . . the Board of Governors of the Federal Reserve System shall transmit to the Congress, not later than February 20 and July 20 of each year, independent written reports setting forth (1) a review and analysis of recent developments affecting economic trends in the Nation; (2) the objectives and plans of the Board of Governors and the Federal Open Market Committee with respect to the ranges of growth or diminution of the monetary and credit ag_gregates for the calendar year is report the which during Nothing in this Act transmitted. . . . shall be interpreted to require that the objectives and plans with respect to the ranges of growth or diminution of the monetary and credit aggregates disclosed in the reports submitted under this section be achieved if the Board of Governors and the Federal Open Market Committee determine that they cannot or should not be achieved . conditions. . changing of because (Emphasis added). -3I. ANALYSIS OF THE TEXT As a should be preliminary addressed is matter, the first question whether Section reporting of numerical ranges for the 2A requires monetary and that the credit aggregates. On its face, the language of the statute is not entirely clear on whether nume rical ranges are required. The statute provides that the Boar d report "objectives and plans . • . with respect to the ranges of growth or diminution of the monetary and credit aggr egates. . . ." Id. It might be argued that the only obligation of the Board is to formulate and disclose "objectives and plan s" without necessarily establishing and publishing quan titative ranges for the monetary aggregates. There is nothing in the language of the quoted sentence that would prevent the Federal Reserve from formulating and its objectives plans in rather than assigning quantitative values. qualitative terms However, the last sentence of the section quoted above refe rs to "objectives and plans with respect to the ranges of growth or diminution of the monetary and submitted credit under aggregates disclosed in the reports this section. . . .", Id. thus expressing a clear expectation for the disclosure of quan titative ranges of growth or diminution of the monetary and credit aggregates. Moreover, the legislative history and admi nistrative practice support the view that Congress obligation on the Federal Reserve: ranges of growth or https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis imposed a dual to establish and publish diminution of the monetary and credit aggregates, and to report its objectives and plans with respect to these ranges. record in borne out by statements This conclusion is of Congressional action on this subject. the For example, the Senate report on the Humphrey-Hawkins Act states that the report its "Federal Reserve would numerical monetary targets for a fixed calendar year rather than a constantly rolling 12 month period." (Sept. 6, (S. Rep. No. 1177, 95th the Similarly, p.98.) 1978), Sess. Cong., 2nd Senate Report on Resolution 133 of 1975 notes that "Discussion and disclosure of planned 'ranges of growth or credit aggregates in the the diminution of upcoming twelve monetary and months' will not eliminate all uncertainty about the future growth of the money supply and other aggregates, but it will provide reasonably reliable information about this crucial element in the economic decision making process." (S. Rep No. 38, 94th Cong., 1st Sess. (Mar. 17, 1975) p. 7.) the Moreover, the hearing record on predecessor legislation to Section 2A, which is discussed in detail below, makes it clear that Congress intended that the Federal Reserve report quantitative target ranges for the aggregates to provide a specific focus for consultations with the Federal Reserve on monetary policy. With respect to the administrative practice, following passage of Humphrey-Hawkins in October of 1978, reports were filed in February and July of 1979 and in February of 1980 with the House and Senate Banking Committees, and hearings were held https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -5- by each Committee on the reports. These reports contained numerical monetary aggregate target ranges. report filed However, while the with the House and Senate Banking Committees in July of 1980 retained the ranges contained in the February 1980 report for the remainder of 1980, the report did not contain precise numerical ranges for 1981 since . . most members [of the FOMC] believe it would be premature at this time to set forth precise ranges for each monetary aggregate for [1981], given the uncertainty of the economic outlook and institutional changes affecting the relationships among the aggregates. (Annual Report of the Board of Governors of the Federal Reserve System, 1980, p. 52.) • The absence of numerical ranges for criticized in both Senate and House Hearings. 1981 was (Hearings Before the Senate Banking Committee on the Federal Reserve's Second Monetary Policy Report for 1980, 96th Cong. 2nd Sess., July 21-22, 1980; Hearings Before the House Banking Committee on the Conduct of July 23, 1980.) Monetary Policy, 96th Cong. 2nd Sess., Shortly after the hearings were completed, and before the Senate Report was prepared, the Federal Reserve did submit numerical monetary aggregate ranges of growth for 1981 (Letter dated July 29, 1980, printed in Federal to Congress. Reserve Bulletin, Vol. 66, August 1980, p. 649.) Each such report filed since then has included such ranges, although as noted above the target for Ml. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis report for February 1987 did not contain a -6- However, this conclusion on the dual obligation to establish and publish quantitative ranges for the monetary and credit aggregates and report on objectives and plans with respect to those aggregates still leaves the question raised by Chairman Proxmire unanswered. It gives no guidance on whether the obligation to report "objectives and plans with respect to the ranges and growth or diminution of the monetary and credit aggregates" requires quantitative ranges for that the all of formulate objectives and Federal Reserve monetary the plans for all of establish aggregates these and ranges, or whether it gives the Federal Reserve broader discretion to be selective about both the ranges and its plans and objectives with respect to those ranges. Three textual elements of Section give 2A some guidance on the question raised meaning of the literal emphasis on the Federal the statute: by Chairman Proxmire on the Reserve's objectives and plans, the absence of any definition of monetary and credit aggregates, and the discretion to change objectives and plans in the light of changing circumstances. A. Does the Language on Section 2A Require an /41 Target Literal Construction First, read literally, if the Federal Reserve does not have "objectives measure of inclusion report. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis and money or of a plans" with respect to a particular credit. Section 2A does not require the range for that measure in the semiannual When interpreting a statute, analysis must begin with -7- the language of the statute itself. Touche Ross & Co. V. Redington, 442 U.S. 560, 568 (1979). The language of Section 2A only calls for the Federal Reserve to report its objectives and plans with respect to the aggregates for which it has formulated objectives and If it has no such objectives or plans. respect to a plans with particular aggregate, the statute does not require the Board to report to Congress on that aggregate. B. Federal Reserve Defines the Aggregates Second, the flexibility establishing the formulation of ranges of growth or intended goals with by Congress respect to in the diminution of the monetary and credit aggregates is also reflected in the fact that Section 2A does not provide definitions of the monetary and credit aggregates. Instead, the definition of the aggregates was left to the Federal Reserve, which defines the aggregates, collects data on them and publishes the data in periodic statistical releases as well as in the Federal Reserve Bulletin. See Rettig v. Pension Ben. Guar. Corp., 744 F.2d 133 (D.C. Cir. 1984). In this connection it is also important to point out that the Federal Reserve definitions of the monetary aggregates have changed from time to time in response to changes in an evolving financial system. enacted At the time Humphrey-Hawkins was in October of 1978 the Federal Reserve had already begun to change Ml. Immediately prior to that date Ml equalled currency plus demand deposits at commercial banks with certain https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -8- adjustments. In October began to set a the Federal Open Market Committee target range for M1+ which included M1 and savings deposits at commercial banks. accounts NOW at all depository institutions, credit union share draft accounts and demand deposits at mutual savings banks. In 1980 all of the monetary aggregates were revised and for a period two versions of Ml, Ml-A transition and for Ml-B, were used introduction the in of order to provide a nationwide NOW accounts under the Monetary Control Act. In this new formulation. Ml-A was basically the old Ml, not M1+, except commercial banks governmental that and entities, comprehensive demand official were measure of deposits held institutions, removed. Ml-B by foreign including was a more transaction accounts which included, along with Ml-A, the interest bearing checkable deposits at all depository institutions -- NOW accounts, held automatic transfer accounts, and credit union share draft accounts. In January of 1982. Ml-A was dropped and Ml-B was redefined as Ml. Because of the changing character of the aggregates in a dynamic economy it is absolutely necessary to have flexibility to adjust the example, if aggregates to changing circumstances. For the definition of M1 was fixed at the time that Humphrey-Hawkins was enacted, today it would not include NOW accounts which have become a substitute for consumer checking accounts and would not provide a supply of transactions money. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis meaningful measure of the -9- Federal Reserve entirely consistent with definition of the aggregates is ve the intention of Congress to lea t to the monetary and credit formulation of goals with respec e, and for the Congress to aggregates to the Federal Reserv sistency with other national review them to determine their con Where a particular measure of economic policy objectives. olete or unreliable, it would be money or credit has become obs ding and intent of the statute entirely consistent with the wor d from the definitions of the for this measure to be remove It makes equally good sense, monetary and credit aggregates. n erpret the provisions of Sectio where this has occurred, to int h e to omit formulating goals wit 2A to allow the Federal Reserv rease or diminution of such an respect to the range of inc culated and regate continued to be cal aggregate even if this agg reported. C. ives and Plans Discretion to Change Object of Section 2A Third, the last sentence demonstrates that Congress did also l not intend that the Federa stated in the objectives and plans Reserve should be bound by tion to Federal Reserve has discre its report and that the only ives and plans, with the depart from these object Banking ure be reported to the limitation that the depart ion with eduled semi-annual consultat Committees at the next sch reasons for with an explanation of the the Committees, together This 's objectives and plans. the changes in the System tion in Federal Reserve's discre the g yin rif cla , ion provis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -10- carrying out monetary policy, suggests that if the System has the discretion to diverge from its objectives and has also the plans, it discretion to inform the Committees that the formulation of objectives and plans for a particular measure of money or credit would not be reasonable in the circumstances. In this situation the provision of objectives and plans for that measure of money or credit in its report to the Congress would be materially misleading, and Congress cannot be held to have intended such a result. THE INTENTION OF CONGRESS II. This reading of the text of Section 2A is supported by the legislative history of this provision. Reference to the legislative history is particularly important in construing a statute that regulates the relationship between Congress and an administrative agency in carrying out authority delegated by the Congress. See, PPG Industries, Inc. v. Harrison, 660 F.2d. 628 (5th Cir. 1981). Broadly stated, the legislative history of Section 2A demonstrates that Congress intended that the Federal Reserve inform the Congress of its "objectives and plans with respect to the ranges of growth or credit aggregates" and left diminution of the monetary and to the Federal Reserve the discretion to formulate these objectives and plans, to select the monetary aggregates that were meaningful in implementing these objective and plans, and to define the monetary and credit aggregates which were to be used in implementing these https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -11- objectives and plans. interpretation This of Section 2A emerges from the hearings on S.Con.Res. 18, the predecessor to Section 2A, where the language on formulation of plans and objectives with respect to the monetary aggregates was worked out. hearings can be best characterized as having These resulted in a compromise between the desire of Chairman Burns to consult with the Congress in a general and unspecific manner without quantifying the FOMC's policy objectives, and Chairman Proxmire's of putting a quantitative focus on Federal goal Reserve monetary policy for the near term future as a basis for consultations between the Federal Reserve and the Congress on this This policy. Proxmire dissatisfied was makes history with consultations Congressional with it the the clear that Chairman of nature general Reserve Federal on monetary policy and wanted more than a general description of past actions and future Chairman Burns and intentions. On the the Board were deeply concerned about the impact of the Resolution on the implementation policy through Congressional reveals that these of monetary limitations on Federal Reserve discretion in carrying out monetary policy. history hand, other conflicting The legislative objectives were reconciled by the adoption of the broad and flexible concept of the Federal Reserve reporting its own goals with respect to the the monetary aggregates as opposed to any specific measure of ket" aggregates to avoid any implication of placing a "straitjac https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -12- on the implementation Reserve. monetary of policy by the Federal (Hearings before the Senate Committee on Banking, Housing and Urban Affairs. 94th Cong. 1st Sess., February 25 and 26, 1975. P. 46.) A. The Derivation of Federal Reserve Reporting Requirements The reporting key language objectives and of the Humphrey-Hawkins Act on plans comes from H. Con. Res. 133 adopted by Congress on March 24, 1975. This Resolution was initially and proposed by Congressman Reuss provided for a direction to the Federal Reserve to conduct monetary policy in the first six months of 1975 so as to reduce interest rates. In the Senate the introduced proposal took the form of S.Con.Res. 18, by Chairman Proxmire on February 12, 1975. This Resolution directed the Federal Reserve to take appropriate action in the first half of 1975 to increase the money supply at a rate substantially higher than in recent experience and appropriate to actively promote economic recovery. It also required the Federal Reserve to consult with Congress at semiannual hearings before the committees on banking "about its money supply growth targets and other monetary policy actions required in the upcoming six months." Chairman February 25, 1975. considerations https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis testified Burns and at underlying this the on Resolution this hearing the Resolution, basic and the on policy Federal -13- Reserve's concerns about it, before the Senate Committee Affairs, 94th were articulated. on Banking. (Hearings Housing and Cong., 1st Sess., February 25 and p. 37, et. !eq.) In his opening statement Urban 26, 1975, Chairman Burns criticized the proposed Resolution because it would result in a more detailed involvement of the Congress in the implementation of monetary policy. He summed up the Board's position in the two concluding paragraphs of his opening statement: In conclusion, Resolution 18 raises in the Board's judgment momentous issues with respect to the role of the Federal Reserve in the economic life of our Nation, whether the Federal Reserve's traditional insulation from political pressures will continue, whether resistance to inflation may not further diminish, and whether the dollar will remain a respected currency around the world. If the Congress should seek through Resolution 18 to become deeply involved in the implementation of monetary policy, it would enter an intricate, highly sensitive, and rapidly changing field -- with consequences that could prove very damaging to our Nation's economy. We therefore hope that this committee will consider very carefully the consequences for our national welfare that could result from adoption of this resolution. Id. at 43-44. In reply, Chairman Proxmire stressed the importance of the Resolution as a means of providing information on which the Congress could make intelligent judgments about the course of monetary policy without the Congress becoming involved in the details of implementation of that policy. He said that Congress as an institution "should have a voice in shaping the broad outline of monetary policy -- not the day to day details, but the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis broad direction monetary policy is taking." Id. at -14- 44. In answer to Chairman Burns' criticism that the directions contained in S.Con.Res. 18 would mean that "Congress would, in fact be making monetary policy, and I do not think that would be wise," Id. at 45, Chairman Proxmire noted that he wanted to go beyond mere consultations to provide a quantitative basis to measure Federal Reserve intentions, but that this quantitative basis would be set as the Federal Reserve's goals for future conduct of emphasized the monetary policy. the Thus, Chairman Proxmire importance of providing additional information on which Congress could base its analysis of Federal Reserve policy, and rejected mere consultations on the ground that he felt "very strongly that if it is going to have any real significance and meaning, we ought to have some focus." Id. at 45. However, he indicated that in providing that focus the Federal Reserve should have broad discretion. To ensure this unfettered discretion, Proxmire proposed that the quantitative focus he wanted should be based on the Federal Reserve's own goals. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis He said, • • • and that focus is what you intend to do. You can explain the past action of the Federal Reserve, and that is history. It is not very significant, it is not likely to demand the attention or the understanding of the Congress. On the other hand, if you tell us what your goals are going to be, then we have the basis on which we can focus discussion and understanding. Id. at 46. i -15- At another point, Chairman Proxmire answered the criticism that Congress would become too much involved in the details of monetary policy by emphasizing. You set the You set the goals, we don't. goals with the discuss them, hear we goals, nd them, understa to try them, you, debate nding understa some reach basis, that on and the on and ee, committ the of part the on part of the Congress as to whether or not to proceed in some other way. Id. at 46. At still another point, Chairman Burns criticized the proposal on the grounds that it would put the Federal Reserve .• • . in a straitjacket and we could country, damage our because we had been put in a straitjacket." Id. at 46. Again, Chairman Proxmire replied by emphasizing that the Congress was asking for the goals to be established by the Federal Reserve which could change if Federal Reserve goals changed: I want to make it clear we are not asking Those goals are for a straitjacket. not anything that are certainly goals. They would be You e. puts you in concret goals, if the from vary to perfectly able do. Id. often they which conditions change, at 46. Finally, as the discussion proceeded, Chairman Proxmire again stressed that the proposal was focused on goals set by the Federal Reserve. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis l He said: We don't say Furthermore, we say goals. way, on the either limit the be to this has it is the that say We . proceeds way the Fed 46. at Id. goal. -16- During the remaining discussions between Chairman Proxmire and Chairman Burns the dialogue turned to the issue of the narrow focus of the Resolution on a growth target with respect to the "money supply." emphasis on reporting Chairman Burns criticized this on the 'money supply' and noted the limited ability of the Board to achieve specific "money supply" targets. It is clear that in the context of the hearing that both Chairman Proxmire and Chairman Burns term "money supply" referred to M1.1/ believed that the In response to these criticisms, Chairman Proxmire said Well, supposing we modify the Resolution to say, "monetary aggregates." Would that help?" Chairman Burns replied I think that would be an improvement. I would like it still better if it read "money and credit aggregates." I am sure you are interested in the credit supply. Id. at 47. It was obviously the intention of Chairman Proxmire in proposing this change in language to make S.Con.Res. 18 more acceptable by allowing the Federal Reserve greater flexibility 1/ In introducing this Resolution in the Senate, Senator Proxmire described the money supply as publicly held currency and demand deposits. 121 Cong. Rec. S.3018 (1975). At that time, this definition of the money supply generally corresponded to the Federal Reserve's definition of Ml. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis i -17- in setting its goals by expanding the scope of the elements that the Federal account into take could Reserve in Moreover, there is no suggestion that establishing its goals. the Federal Reserve would be bound by any mechanistic formula in setting its goals with respect to the monetary aggregates. On the contrary, the varying importance of different aggregates in circumstances different was clearly recognized. example, as the discussion continued concerning For the rate of growth in the "money supply," Chairman Burns emphasized that the M1 definition of the money supply, ". . . made sense 50 years ago, 30 years ago, maybe 20 years ago, but not today, as Id. at 48. I have testified time and time again." and Proxmire Chairman appropriate measures agreed, of money that to there take were into He argued, numerous account in formulating monetary policy. B. S. Con. Res. 18 Modified and Incorporated Into Section -2A As a result of this discussion, S. Con. Res. 18 was with modified in the Senate to require semiannual consultations Board's both the Senate and House banking committees about the of and FOMC's "objectives and plans with respect to the ranges the growth or diminution of monetary and credit aggregates in upcoming 12 months." (1975)) (H. Con. Res. 133, 94th Cong., 1st Sess. The Resolution also provided that "nothing in this ranges of Resolution shall be interpreted to require that such Governors and growth or diminution be achieved if the Board of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -18the Federal Open Market Com mittee determine that they cannot or should not be achieved because of changing con ditions." (Id.) The Senate language was ultimately adopted by bot h the House and Senate in H. Con. Res. 133. This Res olution was then carried on essentially unchanged into the Federa l Reserve Act through the Federal Res erve Reform Act of 197 7 (P.L. 95-188, approved November 16, 1977, 91 Stat. 1387), with the addition of specific reporting requirements with respec t to certain economic factors. Thi s addition to the Federa l Reserve Act was adopted because H.Con. Res. 133 had expired at the end of 1976, and, although Chairm an Burns continued to appear before the Banking Committees as provided by the Resolu tion, the Congress wished to assure that "these appearances sho uld be regularized and made businesslike by statute." (Hearings before the House Banking Committee on H.R. 8094, The Federal Reserve Reform Act of 1977, July 18, 197 7, remarks of Chairman Reu ss at p.2.) C. Conclusions Drawn fro m the Legislative Histor y The legislative history clarifies two important points. First, it emp hasizes that Congress was looking to the Federal Reserve to formul ate "goals" with respec t to the ranges of growth and diminutio n of the monetary and credit aggregates because it did not wis h to circumscribe the Federal Reserve's discretion in formulati ng and implementing mon etary policy. The fundamental purpose was to allow Congress to bet ter inform itself about the Federal Reserve's intentions wit h respect to the future course of moneta ry policy. To do this, Congress did https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -19- not establish arbitrary and objective reporting formula, but sought to continue to rely on the expertise and policy judgment of the Federal Reserve, subject to a requirement that Congress be informed about that policy in a sufficiently precise manner so as to permit consequences. reporting full a framework This ranges on analysis for a of policy the and its is fully consistent with particular aggregate not where the Federal Reserve judges that such ranges would not be useful in the formulation and implementation of policy. Second, the term "monetary and statute in legislative history clarifies that the aggregates" credit was inserted in the place of the term "money supply" because Congress recognized that the importance of the various aggregates varies and the aggregates themselves change in composition as different kinds of monetary instruments fall into disuse or new instruments rise in importance. emphasis This on maintaining Federal Reserve discretion through the use of the Federal Reserve's own goals with respect Congress answer monetary recognized the to legislative aggregate is monetary to and question no longer and aggregates were flexible and changing raised history indicates policy credit by the Federal particular useful as the provides Chairman Proxmire. that if a reliable or that a The monetary guide Reserve determines the for not to formulate a goal with respect to that measure, the Congress did https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -20- not require the Federal Reserve to make a report to Congress with respect to that element of the monetary aggregates. This by supported the the is history legislative the that fact Federal Reserve the respect to all of targets with formulated also has never or monetary See, Rettig, supra. credit aggregates. III. of analysis FEDERAL RESERVE TARGETS DO NOT APPLY TO ALL OF THE AGGREGATES If were 2A Section interpreted to require the formulation of objectives and plans with respect to each of the monetary and credit aggregates, then the Federal Reserve would required since 1975 to formulate goals and report have been them to Congress with aggregates credit data. for respect to each which the of the Federal monetary Reserve and maintains This in fact has not been the case. Although the Federal Reserve may monitor or measure a variety of monetary or historically established credit aggregates, it has not target ranges for all aggregates and included them in its reports to Congress.2/ For example, the monetary aggregate "L," total liquid assets in the hands of the public (M3 plus the nonbank holdings of U.S. savings bonds, short-term Treasury securities, commercial paper and bankers 2/ Money Stock, Liquid Assets, and Debt Measures, Table 1.21, _ Federal Reserve Bulletin, March 1987 lists the current monetary stock and debt measures. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis / % -21- acceptances, net of money market mutual fund holdings of these assets), is regularly reported in the Federal Reserve Bulletin but no target range for this aggregate has been included in reports to Congress under requested Humphrey-Hawkins nor targets for this aggregate. the Reserve does not target debt of has Congress Similarly, the Federal domestic nonfinancial sectors even though the aggregate is monitored by the Federal Reserve relative to a range expected to be consistent with In the past, the Federal Reserve has ranges for money growth. monitored other monetary aggregates without including them in the Humphrey-Hawkins report.1/ IV. CONCLUSION The language of Section . 2A does not require reports on a particular monetary or credit aggregate if the Federal Reserve has not formulated objectives and plans with respect to such an supported aggregate. by the This literal reading of Section last sentence of the section 2A is which contemplates that the Federal Reserve may change its plans and objectives, subject to reporting the changes to Congress. A requirement that the Board report to Congress on objectives and plans on a changing aggregate that might be abandoned within a short time would not 3/ See, e.g., Table 1.21, Money Stock Measures and Components, FedeFaT Reserve Bulletin, January 1979 listing money stock The February 20, measures M-1, M-1+, M-2, M-3, M-4 and M-5. 1979 Humphrey-Hawkins report projected targets for M-1, M-2 and M-3 but not M-4 or M-5. (Federal Reserve Bulletin, March 1979, p. 196.) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -22- serve the intention requirements to policy. that Congress of to provide a focus for use the reporting its review of monetary Moreover, this conclusion is strengthened by the fact Congress has not defined the monetary and credit aggregates but has left this task to the Federal Reserve. is also supported It by the fact that the Federal Reserve has never reported plans and objectives on all of the monetary and credit aggregates and such reports have not been requested by the Congress. Finally, the discretion inherent in the statutory language is borne out by the expressed intention of Congress in enacting Section 2. further the It was the intention monetary policy making process of Congress to by requiring the Federal Reserve to inform the Congress of the its goals with respect to monetary policy over the coming year in a concrete and quantitative way without limiting the discretion of Federal Reserve in the formulation and implementation the of monetary policy. This objective would not served be interpretation of Section 2A which would by an require the Federal Reserve to formulate a goal with respect to a range of increase or diminution of a when, in the would not particular judgment of provide a credit aggregate the Federal Reserve, such a range reliable guide execution of monetary policy. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis monetary or in the formulation and Such a requirement would distort -23- rather than improve the process consultation the between Federal Reserve and the Congress. The Federal Reserve has concluded in its February 1987 report that at this time the uncertainties about the relationship between M1 and economic performance are sufficient so as to preclude setting such ranges. not be consistent with the text or Section the Accordingly, it would stated purpose of 2A to require the Federal Reserve to formulate and report goals with respect to M1 in connection with its monetary policy report for February 1987 because the Federal Reserve has not formulated objectives and plans with respect to this aggregate for the period of the report. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ike;xter/1" pimimmek, •••••.. .,..,, •7 4.7.2 fs... , G0 57 ?••• •o .•. 00" BOARD OF GOVERNORS •Fo .. •D 1 •-n • -A •• •V .., •..e. OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 4Mi i 'i•°.7•: -.RALRO • •...•• April 1, 1987 WAYNE D. AN DELL MEMBER OF THE BOARD The Honorable Fernand J. St Germain Chairman Committee on Banking, Finance and Urban Affairs House of Representatives Washington, D.C. 20515 Dear Chairman St Germain: In its consideration of S. 790 on March 27, the Senate approved by voice vote without Committee consi deration an amendment to the Deposit Availability Title of the bill that authorizes the Federal Reserve to pay fees, including presentment fees, to private sector providers of payment services. There is a possibility that a similar amendment will be offered during the House Banking Committee's mark-up of H.R. 28 on April 2. If such a provision becomes law, it would increase costs for banking services to consumers and may also resul t in delaying the collection of checks contrary to one of the purposes of the delayed availability legislation. The amendment would have the effect of requi Federal Reserve Banks to pay fees to banks for prese ring the nting checks for payment. Prior to passage of the Federal Reser ve Act in 1913, fees for payments of checks, or presentmen t fees, were common. The concept of presentment fees is bad public and business policy. The Federal Reserve Act preve nts banks from imposing presentment fees on Federal Reserve Banks in order to speed the collection of checks through a national check collection system that would collect checks at par--at their full face value. Any presentment fees imposed on the Federal Reserve Banks must, under the Monetary Control Act, be factored into Federal Reserve check collection prices. Banks required to pay increased fees for collecting checks through the Federal Reserve Banks or the private sector will inevitably pass the charges back to their depositing customers. Further, banks may impose presentment fees to discourage the prompt presentment of checks and thereby increase float. That is, in the interest of maximizing their own balan ces, banks may charge such fees unless checks are collected throu gh a more circuitous route. Delays in presenting checks will result in delays in banks obtaining credit for checks deposited for collection. This https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -2- delay will in turn delay the time when banks would be required to pay interest to customers on the funds deposited. This amendment would overturn over seventy years of progress in developing an efficient check collection system. Such an important change in the complex mechanism of our nationwide check collection system should not be adopted without hearings and careful consideration of its impact on the payments system and bank customers. Further, it should be rejected because it would increase costs to bank customers depositing checks for collection. Moreover, it could delay the presentment of checks, thus frustrating the basic purpose of the delayed availability legislation. Enclosed is a staff paper which provides further background on this issue. Sincerely, (signed) Wayne Angell Enclosure LR:ECMcE:OI:DJW:pte/vcd bcc: Mrs. Sharigan Ms. Roseman Mr. McEntee Mr. Ireland Legal Records (2) IDENTICAL LETTER SENT TO ALL MEMBERS OF THE HOUSE BANKING COMMITTEE. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 t April 1, 1987 FEDERAL RESERVE STAFF PAPER ON PRESENTMENT FEES Section 617 of the was added by an Senator Heinz. Competitive Equality Banking amendment This introduced provision would in the Senate resurrect the Act by par clearance controversy, the single most controversial issue with respect to the check collection system in this century. It would require the Federal Reserve Banks to pay fees to banks for presenting checks for payment. Prior to the passage of the Federal Reserve Act, fees for payment of checks, or presentment fees, were common. Under the Federal Reserve Reserve Banks may not collect checks drawn on presentment fees on Federal Reserve Banks. Act, Federal banks imposing These provisions of the Federal Reserve Act were designed to speed the collection of checks through a national check collection system that would collect checks at par -- at their full face value. Because checks have been collectable at par through the Federal Reserve System, banks have generally refrained from imposing these charges, even on other banks, except in special circumstances. The Heinz amendment would allow the Federal Reserve Banks to collect checks subject to presentment fees and is likely to generally. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis result in banks reinstating presentment fees -2- Presentment fees themselves are an anachronism originating in the times when payor banks sought compensation for the costs of shipping currency to presenting payment for checks. reinstated will by increase inevitably increased be the event that presentment fees are banks, the costs for overall passed costs substantial. In are banks in and on these to additional bank difficult the collection of checks costs depositors. to estimate, will While they the may be Any such increased costs to the Federal Reserve Banks must, under the Monetary Control Act, be factored Federal Reserve check collection prices. increased fees for collecting checks into Banks required to pay through the Federal Reserve Banks, or the private sector, are likely to pass the charges back to their depositing customers. Further, banks may impose presentment fees to discourage the prompt presentment of checks by charging fees unless checks are collected through particular correspondent banks or by other inefficient methods resulting presentment. in delays in Delays in presenting checks will result in delays in banks obtaining credit for checks deposited for collection. This delay will in turn delay the time when banks will pay interest on the funds deposited and therefore if a similar amendment is added to the Expedited Funds Availability Act, it will frustrate one of the goals of that Act. A seventy https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis return to presentment years of progress in fees would developing an overturn efficient over check I -3- collection system. Such an important change in the complex mechanism of our nationwide check collection system should not be adopted without hearings and careful consideration of its impact on the payments system and bank customers. It should also be to rejected because it would increase customers depositing checks for collection. costs bank Moreover, a return to presentment fees could delay the presentment of checks, thus frustrating the basic purpose of the Expedited Funds Availability Act. Presentment Fees Are Not A Legitimate Fee For The Collection of Checks Section 617 of the Competitive Equality Banking Act states "Nothing in the first paragraph of Section 13 of the Federal Reserve Act shall be construed to prohibit or exempt the Federal Reserve Board or a Federal Reserve Bank from paying fees on a nondiscriminatory basis to privately operated payment providers." We believe that the intent of this provision may be to permit Federal Reserve Banks to pay for check collection services that they receive from the private sector. If this is the intent, no statutory change is necessary -- however, the provision has far greater implications. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis No law prevents the -4- Federal Reserve Banks from paying for services that they obtain from the private sector. For example, in some cases, Federal Reserve Banks pay associate membership fees to clearing houses in order to help exchanging checks. pay private defray the clerical and other costs of Similarly, Federal Reserve Banks regularly carriers to transport checks Consequently, it is unnecessary to amend to payor banks. the Federal Reserve Act to permit Federal Reserve Banks to pay for check collection services. However, sections 13(1) (12 U.S.C. S 247) and 16(13) (12 U.S.C. S 360) of the Federal Reserve Act, as interpreted by the Supreme Court, do prevent Federal Reserve Banks from paying presentment fees in collecting checks. Section 617 removes this prohibition. The imposition of presentment fees by payor banks is different from a collecting fee. bank charging a check collection (See Attachment A for a diagram of check collection and presentment fees.) Collecting banks frequently charge a fee to their customers for the service of collecting checks deposited with them obligation for collection. to pay a check However, a presented payor bank to it in the course of business by a collecting bank. has an ordinary Presentment fees are a charge by the payor bank for this payment. Today, the act of paying a check by a payor bank does not constitute a service performed for the collecting bank for collecting bank is appropriate. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis which a charge to the -5- The practice of imposing presentment fees is a form of "nonpar" banking. The practice has its origin in the fact that the payment of checks in the early years of this country often required banks to ship currency from one place to another. An "exchange charge" or "presentment fee" served to compensate the paying bank collecting for the bank. cost of transporting Later, as the currency practice of to the maintaining correspondent accounts developed, thereby permitting a payor to avoid transporting currency by using the correspondent account to pay checks in rationalized distant locations, presentment as compensation fees were to the payor bank for having to maintain a balance with its correspondent. The adverse effects of nonpar banking on the payments mechanism checks. include routing in the collection of Since payor banks did not impose a presentment charge on all presenting avoid circuitous such banks, collecting charges by routing banks would checks sent for attempt to collection through banks that, because of special arrangements, were not subject to presentment fees from a particular bank. One of the major objectives in creating the Federal Reserve System was to eliminate this obstacle to the speedy collection of checks throughout the country by establishing a check collection system that does not permit payor institutions to deduct a fee Reserve. for checks collected Nevertheless, over the lobbied for the ability to charge https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis through the Federal years banks have repeatedly the Federal Reserve Banks . 1 -6presentment fees. However, Congress has opposed banks' efforts to levy these unjust charges in the past. As President Woodrow Wilson noted in a letter to Congress in response to one such effort: "I should regard such a provision as most unfortunate and as almost destructive of the function of the Federal reserve banks as a clearing house for member banks, a function which they have performed with so much benefit to the business of the country." (55 Cong. Rec. 3761 (1917)). The Costs That Presentment Fees Were Intended to Recover are Negligible but Presentment Fees are Likely To Be Large As noted above the original purpose of presentment fees was to pay the costs of sending currency back to banks sending checks to the payor bank for collection or the costs of maintaining correspondent balances in order to pay for these checks. In the age of electronic banking, these costs are minimal, and in the case of most checks collected through the Federal Reserve Banks, they are already incurred by the Federal Reserve Banks. Although, in the past, it may have been expensive to transport currency to a distant collecting bank or maintain a balance with a correspondent to pay for checks, today a simple https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -7wire transfer of funds, costing 500 for all checks present ed by any one bank in any one day, is the only cost that would be incurred. For banks holding reserve accounts with the Federal Reserve Banks, either directly, or indirectly on a pass-through basis, even this minimal cost is not Federal Reserve Bank incurred because the debits the payor bank's account for the value of checks presented to the payor bank each day. Although the costs of paying for cash letters are minimal, presentment fees are likely to be high. Historically, banks used presentment fees as a source of income and based the fees on a percentage of the dollar presented to them for collection. value of the checks Under the first paragraph of section 13 of the Federal Reserve Act, banks are authorized to impose reasonable regulated presentment fees, "to by the Board be determined and of Governors of the Federal Reserve System, but in no case to exceed 10 cents per $100, or fraction thereof Federal . but no such charges shall be made against the Reserve banks." (12 U.S.C. S 247). The Federal Reserve Act gives no further guidance as to the proper for determining and above, fees based regulating presentment fees. basis As noted on the costs to pay for checks presented would be negligible, or in the case of most checks presented by the Federal Reserve Banks, nonexistent. to enact legislation to recover such It seems unnecessary minimal costs. On the other hand, fees based on the dollar value of checks presented, as referenced in the Federal Reserve Act, could be large. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis In -8- 1985, the Federal Reserve collected checks on private banks valued at over $9 trillion dollars. A charge of 10 cents per $100 would annually result for in checks charges of collected over through $9 the billion dollars Federal Reserve System alone. Under the Monetary Control Act, the Federal Reserve Banks are required to charge for their including the collection of checks. payments services, These charges are to be based on all direct and indirect costs plus an allocation of imputed costs which takes into account the taxes that would have been paid and a return on capital that would have been provided had sector. Although other provisions of the Federal Reserve Act the services performed been by the private require Federal Reserve Banks to receive checks for collection at par (see 12 U.S.C. S 360), it seems clear that the Federal Reserve Banks would have to include presentment charges in their costs in establishing their charges for collecting checks under the Monetary Control Act. passed back Reserve. to banks Today, many Thus presentment fees would be depositing banks do checks not with charge the their customers an explicit fee for depositing a check. Federal consumer Banks are likely to pass back presentment fees as an explicit charge to consumers. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis , -9- Presentment Fees will Increase the Overall Costs of Collecting Checks and Create Inefficiencies in the Check Collection System In the recent past the practice of charging presentment fees has not been common because these fees could not be imposed on checks collected through the Federal Reserv e Banks. If Federal Reserve banks are permitted to charge presentment fees to Banks, more presentment fees generally. fees will increase check banks are likely to impose The reinstatement of presentment collection costs. Experience with presentment fees demonstrates that presentment fees not only increase the costs to bank depositors by requiring them to pay the presentment fee costs but also by increasing the overal l costs of handling checks substantially. banks collecting checks indicated A 1966 study of 29 that these banks incurred presentment fees of a little over 10 cents per check on non par checks in 1965.1/ back Most of these presentment fees were passed to the customers of the collecting banks. study estimated that banks also incurred costs However, the in handling these non par checks of a little over 9 cents per check -- in 1/ See P. Jessup, The Theory and Practice of Non Par Banking, pp. 94-98 (1967). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -10- addition to the presentment fees themselves. to handle checks have been reduced since While the costs the time of this study, it is clear that growth in the use of presentment fees will increase the overall costs of collecting checks. These costs will ultimately be born by the public who deposit their checks for collection. Further, presentment fees it is will collection process. likely cause that increased inefficiencies in use the of check Experience has shown that banks charging presentment fees will often waive these fees for correspondent banks with whom they have special arrangements. Where banks collect their checks without going through the Federal Reserve they correspondent banks that are likely to send checks to have special arrangements exempting them from presentment fees even if it would be more efficient to present them directly. The use of such correspondents may delay the time of actual presentment of the check. Delays in presentment of checks result in delays in receiving provisional credit for the checks. Under section 8 of the Expedited Funds Availability Act, banks must pay interest on funds deposited by check by the date on which they receive provisional credit for the check. Any delay in the presentment of checks due attempts to avoid presentment fees will delay the time when customers receive interest on their funds and one of the primary purposes of the Act. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis to thus frustrate • -11- Conclusion In sum, permitting presentment fees to be charged Federal Reserve Banks would progress in developing Such an important nationwide check overturn over seventy an efficient check change in collection the years of collection system. complex system to mechanism of our should not be adopted without hearings and careful consideration of its impact on the payments system and bank customers. because it would It should also be rejected increase costs to bank customers depositing checks for collection and delay the presentment of checks, thus frustrating the basic legislation to improve depositing customers. purpose banks' of the delayed services to availability their check There are no offsetting benefits that justify these consequences. Federal Reserve Banks may already pay for legitimate services rendered to them. To the extent that Congress believes that it is inequitable for Reserve Banks not to pay presentment fees which private sector banks do, it should abolish presentment fees generally rather than encourage them by allowing Banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis them to be charged against Federal Reserve https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Impact of Presentment Fees Bank in which Customer Deposits Check $.025 on average $.025 on average + average cost of presentment fee Federal Reserve no charge Under the Senate amendment a fee could be charged to the Federal Reserve Bank on which Check is Drawn Flow of the paper check MIN0 Current Flow of Charges to Collect Checks or. Flow of Charges to Collect Check under Senate Amendment tql A BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 PAUL A. VOLCKER March 27, 1987 CHAIRMAN The Honorable John Melcher Chairman Subcommittee on Agricultural Research, Conservation, Forestry and General Legislation Committee on Agriculture, Nutrition, and Forestry United States Senate Washington, D.C. 20510 Dear Chairman Melcher: Thank you for your letter of February 25 expressing concerns about the Security Pacific Corporation notice under the Bank Holding Company Act to engage in brokerage and clearing activities related to a system for trading options on U.S. government securities. Although the Board has not reached a determination with respect to the notice, the Board has received several written comments relating to the issues you have raised. These issues will be carefully evaluated by the Board in reaching any decision on the notice. No final schedule has been set for the Board's consideration of the notice, but the matter is expected to come before the Board in April. A copy of your letter will be made a part of the record of this notice and will be carefully considered by the Board in its examination of the merits of the proposal. I will keep you informed of the Board's action on this matter. Sincerely, SiFaul A, KB:pte (V-22, 87-906) bcc: Kay Bondehagen Mr. Bradfield Mrs. Mallardi (2)' Legal Records (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis JOHN MELCHER 'NTANA 0. United e tats ,*Enate February 25, 1987 Paul A. Volcker, Chairman Federal Reserve Board of Governors 20th Street and Constitution Avenue NW Washington, D.C. 20551 Dear Chairman Volcker: It is my understanding that Security Pacific Corporation has applied to establish a government securities options exchange. The Senate Subcommittee on Agricultural Research, Conservation, Forestry and General Legislation has an interest in general matters concerning Commodity Futures Trading Commission regulating trading in options. As chairman of this subcommittee, I am concerned that insider trading opportunities would generate competitive harm. Also, because Security Pacific's exchange will not be registered with the Securities and Exchange Commission, I am concerned that such an exchange would: 1) Deprive public investors of the regulatory safeguards mandated by federal law, and 2) Create a competitive advantage for Security Pacific over all regulated exchanges. I would appreciate learning your response to these points. Before any decision is made by the Federal Reserve Board on Security Pacific's proposal, the subcommittee would be interested in pursuing these matters with you in more detail. Best regards. Sincerely, 730 HART BUILDING https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis WASHINGTON, DC 20510 (202) 224-2644 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable John Glenn Chairman Committee on Governmental Affairs United States Senate Washington, D.C. 20510 Dear Chairman Clenn: In accordance with the requirenents of the Government in the Sunshine Act, I am pleased to submit the Board's tenth annual report covering the implementation of its administrative responsibilities under the Act during calendar year 1986. Sincerely, JMcA:T800th:cic Identical letters sent to: The Honorable George Bush -- Dear Mr. President: President of the United States Senate The Honorable James C. Wright, Jr. -- Dear Otr. Speaker: Speaker of the House of Representatives The Honorable Glenn English Dear Chairwan English: Chairman Subcoumittee on Government Information, Justice and Agriculture Comnittee on Government Operations House of Representatives • • The Honorable Lawton Chiles Dear Chairran Chiles: Chairman Subcowittae on Federal Spending, Budget and Accounting Comittee on Governmental Affairs United States Senate The honorable Warren B. Rudman Dear Senator Rudman: Ranking Minority Member Subcoomittee on Federal Spending, Buds:et and Accounting Committee on Governmental Affairs United States Senate 416 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551 PAUL A. VOLCKER March 27, 1987 CHAIRMAN The Honorable Daniel K. Inouye United States Senate Washington, D.C. 20510 Dear Senator Inouye: I am writing to acknowledge receipt of your letter of February 24 concerning the Bank of the Federated States of Micronesia and their request for an amendment to Regulation J. The Board's staff continues to be in contact with Washington counsel for the FSM, and I will be pleased to keep you informed of any action on this matter. Sincerely, CO:pte (V-23, 87-979) bcc: Joe Alexander (for follow-up) Mrs. Mallardi (2) , L, v https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - Action assigned Mr. Bradfield PRINCE KUNIO FEDERAL BUILDING SUITE 7325, 300 ALA MOANA BOULEVARD HONOLULU, HI 96850 18081541-2542 DA NIEL K. INOUYE HAWAII United etates *mate ROOM 722, HART SENATE BUILDING WASHINGTON, DC 20510 (202) 224-3934 February 24, 1987 The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Washington, D.C. 20551 Dear Mr. Chairman: uary 9, 1987, clarifying Thank you for your letter of Febr to the Bank of the the Board's position with respect and their request for an Federated States of Micronesia amendment to Regulation J. Board's staff has been in Your letter indicated that the on exploring the potential contact with Washington counsel I would appreciate, for changes to the laws of the FSM. your keeping me ons, within applicable rules and regulati this matter. in ns atio apprised of the Board's determin Thank you for your cooperation. IEL K. I United Stat DKI:mbs https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis YE Senator . .'. „• of GOve •• 0 R4,•„ .• 42P 0. • C /, ,17.; ; •. .0 • •11 P4444 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551 MillI'll RES • •...• PAUL A. VOLCKER March 27, 1987 CHAIRMAN The Honorable Alan J. Dixon United States Senate 20510 Washington, D.C. Dear Senator Dixon: Thank you for your letter of March 9 concerning proposed legislation to institute a moratorium on Board approval of new securities activities and certain risk and other regulatory concerns you have raised with respect to the notice by Security Pacific Corporation to engage in brokerage and clearing activities involving options on U.S. government securities. The Board has not reached a determination with respect to the Security Pacific notice and would certainly take into account when considering the notice the impact of moratorium legislation. However, my understanding is that the proposed moratorium is intended to apply to underwriting activity that would be impermissible under the Glass-Steagall Act except under an interpretation of the term "engaged principally" in section 20 of that Act. Security Pacific's notice does not rely on or seek permission to conduct activities restricted by section 20. The basis of Security Pacific's notice appears to be that the proposed brokerage and clearing activities have been conducted by banks and bank holding companies for many years. A copy of your letter will be made a part of the record of this notice and will be carefully considered by the Board when it examines the merits of the proposal. I will keep you informed of the Board's action on this matter. Sincerely, L. Vt.:1 ek KB:CO:pte (V-27, 87-1152) bcc: Ms. Bondehagen Mr. Bradfield Legal Records (2) Mrs. Mallardi (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Action assigned Mr. Bradfield ALAN J. DIXON 11.10401S United ,*tatts gicnatt WASHINGTON, DC 20510 March 9, 1987 Paul A. Volcker Chairman Board of Governors Federal Reserve System Constitution Avenue and 21st Street Washington, D.C. 20551 Dear Paul: As you know, the Senate Banking Committee is scheduled to mark up the Competitive Equality Banking Act of 1987 tomorrow. Among the bill's provisions is a section that forbids the Federal Reservg from approving any applications by banks to engage in new securities activities. The reason for this provision is to give the committee time to consider the bank asset powers questions and how best to restructure federal financial services regulatory statutes in a comprehensive way. As you know, I support expansion of bank asset powers, but I believe the Proxmire proposal may provide a way, perhaps the only way, for the Committee to break the legislative logjam that has prevented enactment of any major legislation in the past two Congresses. I urge you, therefore, to carefully consider the Proxmire moratorium proposal and the rationale behind it, and defer any action on the Security Pacific proposal to operate a marketplace for the trading of options on U.S. government securities. I do not believe this kind of activity was contemplated by Congress when they wrote the law, and it seems to me that this is just the kind of new activity that the moratorium is supposed to reach. Security Pacific is attempting to operate a full-blown options exchange without any of the customer protections and federal oversight which characterize regulated exchanges. It thus would have regulatory advantages over the exchanges. Further, many questions surrounding the Security Pacific proposal, such as the appropriateness of the activity, the potential risk to the public and possible impact on the integrity of the bank's capital, make deferral of the final decision on this application until the end of the moratorium period even more necessary. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis .•.• ix Paul A. Volcker March 9, 1987 Page 2 Thank you in advance for your consideration of my request. I look forward to your early reply. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely, Al Dixon 1 .• Of GOVt • ..• Q- 01)4, o• BOARD OF GOVERNORS OF THE *co FEDERAL RESERVE SYSTEM 40, • WASHINGTON, D. C. 20551 PAUL A. VOLCKER •f-RAL RES •• • •..• • March 27, 1987 CHAIRMAN The Honorable Donald W. Riegle, Jr. United States Senate Washington, D.C. 20510 Dear Senator Riegle: Thank you for your letter of March 6 concerning the notice filed by Security Pacific Corporation to engage in brokerage and clearing activities relating to a system for trading options on U.S. government securities. Although the Board has not reached a determination with respect to the notice, the Board has received several written comments relating to the issues you have raised. These issues will be carefully evaluated by the Board in reaching any decision on the notice. No final schedule has been set for the Board's consideration of the notice, but the matter is expected to come before the Board in April. A copy of your letter will be made a part of the record of this notice and will be carefully considered by the Board in its examination of the merits of the proposal. I will keep you informed of the Board's action on this matter. Sincerely, KB:CO:LSF:pte (V-29, 87-1185) bcc: Kay Bondehagen Mr. Bradfield Mrs. Mallardi (2) Legal Records (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis W1 Action assigned Mr. Bradfield DONALD W. RIEGLE, JR. coomArr-rus MICHIGAN BANKING, HOUSING, AND URBAN AFFAIRS ,11zInited I tats eStnate , • COMMERCE, SCIENCE, AND TRANSPORTATION FINANCE BUDGET WASHINGTON, DC 20510 ; , March 6, 1987 The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Washington, D.C. 20551 Dear Chairman Volcker: I understand that the Federal Reserve Board is currently considering Security Pacific Corporation's application under the Bank Holding Company Act to engage in a new form of non-banking activity, the sponsorship and management of a government securities options trading market. This application raises legal and policy concerns about whether bank holding company affiliates should be in the business of operating options trade markets. I am enclosing a copy of a letter that I have written to Chairman Shad. I recogniie that the Board's consideration of the Security Pacific application involves different legal standards and policy considerations than those governing the SEC's action. However, I understand that in considering other applications under the Bank Holding Company Act to engage in non-banking activities, the Board has relied upon the degree to which the activities are otherwise regulated under the federal securities laws. I would urge the Board to be extremely diligent and deliberate in its review of this matter in light of concerns expressed by members of Congress on this issue. DWR/jv Enclosure cc: Honorable John S.R. Shad https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1 DONALD VV. RIEGLE, JR. to:CHIGAN BANK: 1 DUS , UREAN AfiA COMMERCE SCIENZE TRANSFOR7 i: gfitates f3siatc F IN AN C E BUDGET WASHINGTON. DC 20510 March 6, 1987 The Honorable John S.R. Shad Chairman Securities and Exchange Commission 450 5th Street, N.W. Washington, D.C. 20549 Dear Chairman Shad: As you know, the Subcommittee on Securities of the Committee on Banking, Housing, and Urban Affairs is reviewing various issues concerning federal securities laws. One issue which has come to my attention is the "no-action" letter issued by the SEC staff on August 8, 1986, to permit Security Pacific Corporation to establish a new market for trading options on government securities without being required to register as a national securities exchange under Sections 5 and 6 of the Securities Exchange Act of 1934. This position raises legal, competitive and policy concerns. that the Chairman of the House Committee on Energy understand I publicly indicated that his Committee may need has and Commerce e action on this subject before the legislativ to consider becomes operational. proposal Pacific Security In order to have a better understanding of this issue, I would appreciate receiving from the Commission an explanation of the actions taken on Security Pacific's proposal as well as the pertinent documents relating to the proposal. In addition, I understand that the Commission directed its staff during its open meeting on August 8, 1986, to develop proposed regulations respecting automated securities trading systems that would cover such subjects as the routing and execution of orders, admission standards, and financial requirements. Please let me know when the Commission intends to publish these proposed regulations for public comment. Thank you for your cooperation. Sincerely, / // Donald W. Riegle, Jr. DR/iv Honorable Paul Volcker cc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis AD /1,k44 itUtA ........ • of Govtieit, "•.. .•o BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 March 27, 1987 The Honorable Richard H. Lehman House of Representatives Washington, D.C. 20515 Dear Mr. Lehman: Thank you for your letter of March 9 requesting comment on correspondence you received from Mr. Kenneth Anglin concerning the Federal Reserve System. The Federal Reserve System was established by an Act of Congress in 1913 and is not "privately owned". It is made up of twelve regional Federal Reserve Banks which are supervised by the Board of Governors in Washington. The Reserve Banks are corporate instrumentalities of the United States, and were established by Congress for public purposes. The Board is an agency of the Federal Government, and its seven members are appointed by the President with the advice and consent of the Senate. The stock of the Federal Reserve Banks is held entirely by the more than 5,000 commercial banks that are members of the Federal Reserve System. In addition to state-chartered member banks which have voluntarily joined the Federal Reserve System, all national banks which are chartered by the Comptroller of the Currency, an official of the Department of the Treasury, are required by law to be members of the Federal Reserve System. These banks hold the stock of the Federal Reserve Banks. However, ownership of that stock is in the nature of an obligation incident to membership and does not carry with it the attributes of control and financial interest ordinarily attached to stock ownership in corporations that are operated for the purpose of making a profit. As provided in the Federal Reserve Act (Section 5), each commercial bank that is a member of the Federal Reserve System is required to subscribe to the stock of its Federal Reserve Bank in an amount equal to 6 percent of the paid-in capital stock and surplus of the member bank--of the 6 percent subscription required, half (or 3 percent) is paid in, and half is subject to call. The stock may not be sold or pledged as security for loans, and dividends are limited by law to 6 percent per annum. The Federal Reserve Act also provides that any surplus resulting from the liquidation of a Federal Reserve Bank shall be paid to the United States Government, and not the stockholding member banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • The Honorable Richard H. Lehman Page Two The Federal Reserve System is not operated for a profit and in recent years Federal Reserve payments to the Treasury have averaged 90 percent or more of gross receipts. Earnings of the Federal Reserve Banks are derived primarily from interest received on their holdings of securities acquired through open market operations and on their loans to depository institutions. Such earnings go first to the payment of expenses including assessments of the Board of Governors to defray its expenses, the statutory 6 percent dividend on Federal Reserve stock owned by member banks, and any necessary additions to Reserve Bank surplus. Remaining earnings are then paid into the U.S. Treasury. As pointed out in the enclosed press release, in 1986 payments to the U.S. Treasury by the Federal Reserve amounted to about $17.8 billion. The Congress does have ultimate authority over the Federal Reserve and oversees the activities of the Federal Reserve through relevant committees. The Board is required by law to make an annual report to the Congress and the activities of the Federal Reserve are audited by the U.S. General Accounting Office. Members of the Board, especially the Chairman, are called upon frequently to testify before Congressional committees. _ With regard to the issue of the constitutionality of the Federal Reserve Act, although the United States Supreme Court has never rendered a decision involving the constitutionality of the Federal Reserve Act of 1913 as a whole, that Court and other Federal courts have upheld the constitutionality of various provisions of the Federal Reserve Act. In this connection, some of the cases bearing on the constitutional validity of the Federal Reserve Act include First National Bank v. Union Trust Co., 244 U.S. 416, and Burns National Bank v. Duncan, 265 U.S. 17 (the authority of the Board to authorize national banks to exercise trust powers); Hiatt v. U.S., 4 F.2d 374, cert. den., 266 U.S. 704 (upholding the provisions of section 9 of the Federal Reserve Act permitting State banks to become members of the Federal Reserve System); and Raichle v. Federal Reserve Bank of New York, 34 F.2d 910 (the establishment of discount rates). Mr. Anglin's inquiry also seems to suggest that Congress itself lacks the constitutional authority to delegate its money powers to any other party including the Federal Reserve. The Supreme Court of the United States disagrees. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Richard H. Lehman Page Three Article I, Section 8, Clause 5 of the Constitution gives Congress the exclusive power to coin money and regulate its value, and this power has been broadly interpreted by the Supreme Court of the United States to authorize regulation of every phase of the subject of currency. In 1819, the Supreme Court said that Congress had the power to charter banks and to give those banks the power to issue currency, McCulloch v. Maryland, 4 Wheat. 316 (17 U.S. 316). In addition to this specific grant of authority, the Constitution, under Article I, Section 8, Clause 18, grants Congress the power "to make all Laws which shall be necessary and proper for carrying into Execution" the enumerated powers. These provisions give Congress comprehensive authority over the currency and the monetary system of the United States. Only Congress, and not the states, may declare what shall be money and may regulate its value. Congress was using this constitutional power when it passed the Federal Reserve Act of 1913, and specifically authorized the Reserve Banks to issue currency. Regarding Mr. Anglin's concern about the issuance of Federal Reserve notes, it is important to know how the process of issuing notes works. Section 16 of the Federal Reserve Act (12 U.S.C. § 411) provides that Federal Reserve notes may be issued at the discretion of the Board of Governors. In fact, Federal Reserve notes are issued in response to the public's growing needs for currency. As the economy expands, currency is needed by the public in order to carry out transactions. New currency is put in circulation to facilitate the public's need for cash. The amount of notes that may be issued, however, is not unlimited. For example, the amount of notes in circulation is constrained by Section 16 of the Federal Reserve Act, which requires that Federal Reserve notes be backed by collateral security with a value at least equal to the notes issued. The Federal Reserve Act also specifies the types of collateral that are acceptable. In actual practice, the Federal Reserve System distributes Federal Reserve notes in the following manner: a. Federal Reserve notes are printed at the Bureau of Engraving and Printing in Washington, D.C., as directed by the Comptroller of the Currency, an office of the United States Treasury Department. The Federal Reserve pays the costs of printing the notes, which is currently about two and one-half cents per note. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Richard H. Lehman Page Four b. Upon request of the Board of Governors, the Comptroller of the Currency orders the shipment of notes to the Federal Reserve Bank. c. The Reserve Bank holds the notes in its vaults until they are requested by depository institutions. d. Each time a depository institution orders notes, the Reserve Bank charges the amount to the ordering bank's account with the Reserve Bank, and the Reserve Bank increases its net liability for Federal Reserve notes outstanding. When the notes are sent to the requesting institution, Reserve Banks are required to pledge collateral in an amount equal to the sum of notes sent. e. Members of the public receive Federal Reserve notes when they cash checks or make withdrawals from depository institutions. When the public has on hand more notes than currently needed, the excess is deposited with banks and other depository institutions, and the process just described reverses itself. From this description, it is clear that Federal Reserve Banks do not derive any special benefits from their part in the note issue function. Mr. Anglin's characterization of interest rate developments in 1920 doesn't square with our perception of the historical facts. Contrary to his statement, interest rates on a broad range of instruments (and, in the case of the Federal Reserve Bank discount window, on a broad range of eligible paper) rose--not just those for farm credit. But more generally, I think it is fair to say that, at least in today's market environment, banks are not in a position to control interest rates; competitive forces are, in most circumstances, a significant constraint. There would seem to be considerable evidence that bank profitability is not so assured as Mr. Anglin suggests. As regards the question of the contribution of the Federal Reserve System to the stability of the U.S. economy, one would have to admit that policy decisions made in the light of available information have not always proven in the end to be optimal. This is unavoidable in a complex economy that may be affected by shocks arising from many sources, including natural forces like weather, political developments in other countries, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Richard H. Lehman Page Five or unanticipated turns in other governmental policies. At times, Federal Reserve actions may indeed have exacerbated inflationary or deflationary tendencies in the economy. But, especially in the period since the Great Depression, with policymakers perhaps more fully aware of the way in which their tools can and should be used, the Federal Reserve has avoided the sorts of financial panics that marked the earlier economic history of our nation and, in the most recent period, the Federal Reserve has helped to reduce inflation. I apologize for the length of this letter but hope that it is helpful to Mr. Anglin in understanding the true nature of the Federal Reserve System. As additional background, I am enclosing booklets entitled "The Federal Reserve System-Purposes and Functions" and "Historical Beginnings", which may be of interest to your constituent. Please let me know if I can be of further assistance. Sincerely, S'Donald Winn Donald J. Winn Assistant to the Board Enclosures CO:cic (V-28, 87-1182) bcc: Mrs. Mallardi https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Response to be drafted by R&S and CLO W.HARD H. LEHMAN Please Respond to: 18TH DISTRICT CALIFORNIA 0 FRESNO OFFICE SUITE 301 1900 MARIPOSA MALL FRESNO, CALIFORNIA 93721-2517 12091 487-5760 1319 L'ZNGWORTH BUILDING WASHINGTON, D.C. 20515-0518 (202) 225-4540 REGIONAL WHIP COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS Tongress of the 3,1nitt qates aloust of itlepreorntatiuto COMMITTEE ON INTERIOR AND INSULAR AFFAIRS itiasbington, U.Q. 20515 March 9, 1987 Honorable Paul A. Volcker Chairman Federal Reserve System 20th St. & Constitution Avenue, NW Washington, D.C. 20551 1- STOCKTON OFFICE 808 NORTH CENTER STREET STOCKTON, CALIFORNIA 95202-1610 1209) 946-6353 r SONORA OFFICE 48 WEST YANEY AVENUE ALBERT N. FRANCISCO BUILDING SONORA, CALIFORNIA.95370-4612 12091 533-1426 • -• _ r—4 --1 • ••••••••• r:; 7-71 Dear Chairman Volcker: I would like to request the assistance of the Federal Reserve in responding to several concerns raised by a constitutent, Mr. Kenneth Anglin. As the copy of Mr. Anglin's letter indicates, he is opposed to the very existence of the Federal Reserve System on the grounds that it is unconstitutional under Article I, Section 8, Clause 5 of the Constitution. Further, he believes that member banks control the economy via the System; that member banks have historically manipulated the economy in ways that have resulted in a economic cycles from which member banks have profited. Mr. Anglin is also opposed to the activities of the Federal Open Market Committee which he believes is dominated by the Reserve banks, which he notes are privately owned banks of issue. I appreciate any assistance which the staff of the Federal Reserve might be able to provide in helping me address these and the other concerns raised by Mr. Anglin. If you have any questions, please feel free to contact me or Scott Nishioki of my staff, at 225-4540. Si erely, .c:tw.$) LrL RICHARD H. LEHMAN Member of Congress RHL/sn https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis AM, IJd6 Ken H. Anglin P. O. Box 99 Altaville, CA 95221 November 12, 1986 Congressman Richard H. Lehman 1319 Longworth Building Washington, D.C. 20515-0518 Dear Congressman Lehman: Thank you for your letter of October 28, 1986, concerning the Federal Reserve System. From the very beginning of our Nation the International Banking Families tried to take over our monetary system. One Central Bank after another was established only to be kicked out by the next President. Finally, on December 22, 1913, the Bankers railroaded the Federal Reserve Act through Congress, referred to as the "Christmas Massacre", giving them complete control of our monetary system. The Reserve Banks are like the Street Vendor with a magic box. He puts in a blank slip of paper and out comes a $100.00 Reserve Note. Created from nothing and backed by nothing. You can't buy the box, but he will lend you the $100.00. He sets his own interest rates. He can create as many $100.00 Notes as he wants. For every $100.00 he creates, the American people owe him $100.00 PLUS INTEREST. Americans automatically associate the word "Federal" with the U. S. Government. Thus, we assume the Federal Reserve Banks and the Federal Reserve Board and the Federal Reserve Advisory Council and the Federal Open Market Committee are all part of and controlled by the U. S. Government, which could not be farther from the truth. We are also led to believe the Federal Reserve Banks are non-profit organizations established solely for the benefit of the people. The truth is, the 12 Reserve Banks are privately owned Banks of Issue. Records indicate that except for mergers and formation of Trusts, the same Banking Families who purchased their stock in 1914 still own it. For non-profit organizations they have done very well. Their assets in 1914 was a few million. In 1985 estimated assets were in excess of 100 BILLION. Some argue that because the President appoints and the Senate confirms seven out of twelve of the Reserve Board, this ties the system to the Government. The truth is once they are appointed they are completely independent of Presidential or Congressional control. They even brag about their independence in the MEDIA. However, it doesn't really matter because the Reserve Board does not make the decisions that control our economy. Decisions that determine in which direction our economy will go is dictated by the Federal Reserve Advisory Council, which consists of twelve officers from the 12 Banks. Their orders are echoed by the Reserve Board but placed into action by the Federal Open Market Committee which is dominated by five officers from the Reserve Banks. The Banks control our money, credit and interest rates just like OPEC controls the supply of oil. Only the Banks are much more efficient. If they have disagreement among themselves the problem is solved very quickly. A good example is what happened in 1920. Some of the smaller Banks were not cooperating with the Fed's policy. The Farmers were in good shape after WWI and were encouraged by both the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Congressman Lehman letter, page two After the Farmers were deep Banks and the Government to buy more land on credit. in debt, the Fed cut off their credit and raised interest rates from 3% to 7% on FARM LOANS ONLY. The Farmers went broke and so did the local Banks that were holding their paper. The big Banks bought the small Banks and wound up owning the Farms and the Banks. By controlling the cost and availability of credit, plus the amount of money to be created and the speed the money is to be circulated, the Banks control the economy. Money is put in to or taken out of circulation by the Federal Open Market Committee who use that money created from nothing, or simply book entries, to buy and sell securities on the open market. If they buy faster than the goods and services produced it causes INFLATION. They can sell, drawing the money in to the Banks causing DEFLATION. This is what happened in 1929. For a system that we are told was established for the benefit of the people their track record is terrible. Since 1913 we have had consistant INFLATION-DEPRESSIONS-RECESSIONS-INFLATION, all of which could have been avoided by simply adjusting the money valves. Senator Robert Owens who introduced the bill in 1913 which became the Federal Reserve Act testified in the Senate in 1938-1939 saying the Bankers influenced deletions to his original bill that would have limited the Banks ability to cause extreme fluctuations in the economy. But, without these limitations the Banks had purposely manipulated the economy causing the Agricultural Depression of 1920, and the Great Depression of 1929. The Banks make huge profits from all economic fluctuations. Those who acquired the bankrupt Farms and Businesses at depressed prices stood to make huge profits. once the Fed decided to start buying securities again putting money back in circulation. Art 1, Sec 8, Clause 5, of the Constitution charges Congress with the explicit responsibility of controlling the money supply and the value thereof. The Federal Reserve Banks are privately owned Banks of Issue, therefore, the Federal Reserve Act was unconstitutional from its inception. The Congress seems to be very quick to object when others intrude into areas of Congressional responsibility. Yet here is a monetary system that history proves to be disastrous, is completely outside Congressional control, is without question the responsibility of Congress and we have heard no objections from Congress. Congress has the power and the responsibility to abolish the Federal Reserve Act and affect a monetary system with those making vital decisions that control our economy subject to the peoples vote and scrutiny. Our survival depends on Congress dealing with this problem. back you all the way. Sincerel https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Do it and we will BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 PAUL A. VOLCKER March 27, 1987 CHAIRMAN The Honorable Jake Garn Ranking Minority Member Committee on Banking, Housing and Urban Affairs United States Senate 20510 Washington, D.C. Dear Senator Cam: Thank you for your letter of February 5 concerning the applications of Citicorp, J.P. Morgan & Co. Incorporated, and Bankers Trust New York Corporation under the Bank Holding Company Act to engage in limited securities underwriting and dealing activity involving commercial paper, municipal revenue bonds, mortgage-backed securities and consumer receivables. I appreciate your comments on the application of existing law to these proposals. I will keep you informed of the Board's action on these proposals. Sincerely, KB:pte (V-14, 87-462) bcc: Kay Bondehagen Mr. Bradfield Mrs. Mallardi (2) Legal Records (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Action assigned Mr. Bradfield WILLIAM PROXMIRE, WISCONSIN, CHAIRMAN ALAN CRANSTON. CALIFORN,A DONALD W RIEGLE. JR MICHIGAN PAUL S SARBANES, MARYLAND CHRISTOPHER J DODD, CONNECTICUT ALAN J DIXON. ILLINOIS JIM SASSER TENNESSEE TERRY SANFORD, NORTH CAROLINA RICHARD C SHELBY, ALABAMA ROBERT GRAHAM, FLORIDA JAKE GARN. UTAH JOHN HEINZ. PENNSYLVANIA WILLIAM L ARMSTRONG COLORADO ALFONSE M D'AMATO, NEW YORK CHIC HECHT, NEVADA PHIL GRAMM. TEXAS CHRISTOPHER S BOND MISSOURI JOHN H. CHAFEE, RHODE ISLAND KENNETH A McLEAN, STAFF DIRECTOR WALL MINORITY STAFF DIRECTOR M. DANNY United ,tates ,tnate COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS WASHINGTON, DC 20510-6075 7-? February 5, 1987 The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Washington, D.C. 20551 rr. Dear Chairman Volcker: On Tuesday, February 3, 1987, the Federal Reserve Board held hearings concerning the applications of several bank holding companies to establish subsidiaries that would, in addition to engaging in other activities, underwrite and deal in a limited amount of a limited number of securities. These are municipal revenue bonds, commercial paper, mortgage-related securities, and securities backed by consumer receivables. The companies contend that the Board, pursuant to section 4(c)(8) of the Bank Holding Company Act, should grant the applications because Section 20 of the Glass-Steagall Act permits banks to affiliate with companies that are not "engaged principally" in securities activities. I understand that on the day of the hearing the Board received testimony and correspondence from members of Congress to the effect that (1) the Board should simply refuse to act on the applications; and (2) in the alternative, the Board should deny them. Let me comment on both points. First, I strongly disagree that the Board should These simply abdicate its responsibility and refuse to act. applications were filed two years ago and have since been the subject of thorough and vigorous debate on all sides. During that time, Senator Proxmire and I have repeatedly attempted to forge a consensus for new, comprehensive legislation that among other things would have made the "Section 20" controversy unnecessary. As you know, however, these efforts have produced no new legislation. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • • "1% IPS , But just because Congress has failed to add new provisions to the law does not mean that the Board should shirk its duty to interpret existing provisons, and interpret them promptly. This is especially true in circumstances such as these where the outcome is critically important to all the industries involved, but the relevant legal provisions have not been Interpreted clearly and definitively. The Board should act, and act soon. Let me now turn to the second contention, that is, that the Board should deny the applications. I should say at the outset that if this were my decision, I would certainly have my own opinion about the plain language of section 20. But it is not my decision; it is yours and the courts' that will review you. I am not a lawyer, and I was certainly not a member of Congress when any of the relevant statutory provisions were passed. Congress passed the law and put into the public record then its reasons for doing so -- however distant and ambiguous they may seem now. Congressional statements long after the fact are simply irrelevant to the decision that the agencies and courts must make as to what Congress meant when it passed the laws at issue. Since Congress can speak on these issues now only by passing new laws, and since it has failed to do so -- however much I have wished it otherwise -- your duty is, as always, to render a judgment as you always do based on the Again, I statute, case law, and true legislative history. strongly urge you to do so promptly. Sincere , elks\rw'J Jake Garn Ranking Member JG:jdn https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '• PC GOVER% • QS) ••Ct /4'2V •ct :6 ipim.44, • \ BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551 .RAL • •• •RE•• PAUL A. VOLCKER March 24, 1987 CHAIRMAN The Honorable William Proxmire Chairman Committee on Banking, Housing and Urban Affairs United States Senate Washington, D.C. 20510 Dear Chairman Proxmire: I am responding to your request for my views on provisions of the Competitive Equality Banking Act. Many of the provisions of the bill are urgently needed and should be promptly adopted by the Senate. That is certainly true of Title III on the recapitalization of FSLIC. It is essential that the Congress restore the financial integrity of this fund so that it can promptly and effectively deal with the serious problems affecting a limited, but still very significant, portion of the thrift industry. Financial assistance for the FSLIC is urgently required and Title III provides the initial resources of $7.5 billion -- an amount that I believe should be increased to the full $15 billion originally requested. Title I is, in its own way, also essential legislation. I have stressed for some time the importance of a Congressional reaffirming of the important principle of separating banking and commerce. I do not think, as a practical matter, that we can make positive progress towards adaptation of the banking system to deal with the changing financial services market until this fundamental step has been taken. Other provisions of the bill are also important. We strongly support the provisions on emergency acquisition of banks and we have no objection to the credit union administrative provisions. The sections of the bill dealing with deposit availability provide us with useful tools that will enable us to make significant improvements in the payments system so as to help assure that banks can make prompt availability of deposits by check to their customers within a realistic and practical framework. I urge that no further weakening amendments be made to Titles I and III. In Committee amendments to Title I were adopted which loosen the restrictions on nonbank banks and nonthrift thrifts. Further amendments that would weaken the limitations on these institutions -- such as those which would allow affiliate overdrafts in nonbank banks owned by primary https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable William Proxmire Page 2 dealers -- would this Title. very seriously compromise the usefulness of Similarly, Title III has been weakened by reducing the amounts available for FSLIC recapitalization, and by including amendments that restrict the thrift supervisors from carrying out their responsibilities. Here too, further restricting amendments could seriously limit the usefulness of this Title in setting the FSLIC and the thrift industry on a positive course toward rebuilding confidence. The major problems I see in the bill are in Title II. Instead of providing expanded and new authority for bank holding companies to underwrite certain securities as I and others had strongly recommended to the Committee, this Title sets a moratorium, beginning with the date of enactment and extending over a year, on certain bank and bank holding company activities in the area of securities underwriting, as well as insurance and real estate development. This Title is clearly retrogressive; it takes away powers that existing law permit the regulatory authorities to grant to banking organizations. We are opposed to this provision and very much regret that the bill no longer provides authority for bank holding companies to engage underwriting in mutual funds, mortgage-backed securities, revenue bonds, and commercial paper. My preference remains for a positive vote on these powers at this time. I recognize, however, that, as a practical matter, despite the merits of the case, there may not now be a willingness to adopt these limited securities powers at this time, pending further study. Assuming that is true, I welcome the commitment that the Committee has made to examine and vote on fundamental financial restructuring legislation, and the intention of the Chairman to have the Committee make such decisions by October. This intention could be given real meaning if you were to shorten the life of the proposed moratorium and let it expire no later than the end of the current session. To sum up, basic precepts in our banking structure must be preserved and FSLIC must be recapitalized -- and these steps must be taken on an urgent basis if the Congress wishes to preserve the opportunity to maintain stability and build carefully for the future. Undesirable changes, having the effect of weakening Titles I and III, must be avoided. Title III should be strengthened. Title II should be eliminated or amended. The Congress should act promptly on this legislation. Sin rely, MB:ck bcc: Mr. Bradfield Mr. Ettin 14740a/44 Mr. Mattingly Mrs. Mallardi (2) e/ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ••.0 GOlii• BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, 0. C. 20551 PAUL A. VOLCKER CHAIRMAN March 24, 1987 The Honorable William Proxmire Chairman Committee on Banking, Housing and Urban Affairs United States Senate Washington, D.C. 20510 Dear Chairman Proxmire: Last Wednesday, March 18, the Board approved the application of Chase Manhattan Corporation to engage in commercial paper underwriting. Although I understand you were critical of that decision, I wanted you to know the reasons why I would have voted for the decision had I been in Washington on that day. I was in agreement with the decision for three reasons. First, the approval is entirely consistent with the Board's Bankers Trust decision in December 1986, in which I concurred; it broke no new ground. Failure to approve would have had the anomalous result that only one bank could operate under the earlier decision, which clearly was intended to have broader application. In taking the Bankers Trust decision, we came to the conclusion that we had given a fair and appropriate reading to the Glass-Steagall Act's requirements that a corporate affiliate of a bank must not be engaged principally in underwriting. Moreover, we concluded that commercial paper underwriting is closely related to banking and would not result in unsafe and unsound banking practices. Second, the Board has generally taken the view that we are bound to apply existing law to applications that come before us in the regular course of business. As you know, we have regulations that aim at disposition of applications in 60 days, and this case had just gone over the 60-day internal target. We also had to be concerned about the 91-day statutory rule which, if allowed to expire, would have resulted in automatic approval of the application by operation of law. Moreover, in applying these rules we are often under pressure from applicants and competitors of applicants to postpone https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis .1, The Honorable William Proxmire Page 2 action due to an anticipated change in law or because a Congressional committee has a matter under review. I think you will agree with me that we have no choice but to act in accordance with existing law. Third, the Board took account of the provisions of Title II of the bill adopted by the Senate Banking Committee two weeks ago in an appropriate way. Our Order clearly puts Chase on notice that it must conform its activities to the provisions of that bill if it is adopted by the Congress. Moreover, the Board has retained jurisdiction over the case to assure that compliance. Your statement on the Board's decision is basically consistent with my own views. You said that "Congress should be granting new powers to banks, not the Fed." I have emphasized time and again that Congress should enact legislation providing a positive framework for banking and the financial system reaffirming principles that remain valid, closing loopholes where they violate these principles and providing new powers where justified. I have stressed these decisions are too often in practice being made by private parties exploiting loopholes or by regulatory authorities without adequate Congressional guidance. Finally, I have expressed serious reservations about the anomalous results that flow from trying to apply Glass-Steagall to the markedly changed circumstances that we find ourselves in today. In my concurring opinion decision, I asked Congress to act Had I been here last Wednesday, I approve the Chase application but plea to you and your colleagues legislation that is so clearly and https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis to the Board's Bankers Trust promptly on these matters. would have cast my vote to I would have reiterated my to adopt the banking urgently needed. Sincerely, 3 gill BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON,0. E. 20551 PAUL A. VOLCKER CHAIRMAN March 24, 1987 The Honorable Fernand J. St Germain Chairman Committee on Banking, Finance and Urban Affairs House of Representatives Washington, D. C. 20515 Dear Chairman St Germain: In connection with the mark-up scheduled for Wednesday, March 25, in the House Banking Committee, I am providing you with comments on bills proposed as amendments in the nature of substitutes to H.R. 3 that were reported last week by the Subcommittee on International Finance, Trade, and Monetary Policy, chaired by Representative Robert Garcia ("Garcia bill"), and the Subcommittee on International Development Institutions and Finance, chaired by Representative Walter E. Fauntroy ("Fauntroy bill"). I have not had an opportunity to consider carefully all of the issues raised by the two bills, and by recent amendments to them, but I would like to offer some preliminary reactions in three major areas: primary dealer selection, competitive exchange rates, and international debt management. Primary Dealer Selection I share some of the frustrations that seem to motivate the amendment proposed by Congressman Schumer. The bill would deny current or prospective primary dealer status to firms from countries that do not grant U.S. firms "equal access" to their government debt market. Nonetheless, the approach embodied in the proposal has a number of serious drawbacks, and we oppose the provision. It departs entirely from the principle of national treatment embodied in recent banking legislation, substituting a rigid concept of "equal access" that will, in the best of circumstances, be difficult to define. Inadvertently the result could be retaliation against U.S. firms already operating in other countries. Even Japan, at which the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Fernand J. St Germain Page 2 proposal seems to be particularly aimed, has made a number of advances in opening its market to U.S. firms, as the attached letter from E. Gerald Corrigan, President of the Federal Reserve Bank of New York, to Congressman Schumer describes. I believe that progress can be made by continuing the dialogue of the Federal Reserve and others in the government with Japan and other foreign countries concerning access of U.S. firms to their markets without the potentially adverse consequences of the more rigid approach embodied in the proposed bill. Exchange Rates The basic objectives of Subtitle A of the Garcia bill, "Competitive Exchange Rate Act of 1987" -- the achievement of a sustainable pattern of U.S. international transactions and more stability in exchange rates -- are ones with which I remain However, the bill establishes formalized sympathetic. procedures for international negotiations on the exchange rate system and a policy framework for the conduct of international economic policy formulation that is unrealistic and could well have damaging effects. For example, the bill's directive to initiate negotiations in order to achieve a competitive exchange rate for the dollar -- a matter upon which there can be considerable difference among analysts -- runs the risk of building up potentially destabilizing market expectations. In addition, the legislation's stated aim of achieving a competitive exchange rate for the dollar in order to ensure that American industry is competitive in world markets may place too great an emphasis on exchange rates in determining the competitiveness of U.S. industry. It ignores such other important factors as relative productivity, labor costs, market rigidities, and marketing and servicing efforts. Moreover, the requirement to disclose the objectives and plans of the Secretary of the Treasury with regard to the policy on intervention in foreign exchange markets could reduce the usefulness of intervention as a tool for dealing with exchange rate volatility. My recommendation would be that we should not lock ourselves into formalized procedures for international negotiations to achieve specific objectives on exchange rates The fundamental policy objectives of and external balances. the United States can best be implemented in a more flexible framework, such as through the recent meeting in Paris of Finance Ministers and Central Bank Governors. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Fernand J. St Germain Page 3 International Debt Management The bills direct the Secretary of the Treasury to initiate negotiations aimed at establishing a facility for the purchase of developing country debt owed to commercial banks. It is not clear how the facility is to be funded, although the bill directs exploration of the possibility of funding the facility through contributions in the form of liquid assets from the World Bank and gold stock of the IMF. One of the bills would also suggest that a basic principle of the operation of the facility would be establishment of mechanisms for passing along the benefits of any discounts to the sovereign borrowers, taking into account policy commitments by these borrowers. The international debt problem has been managed through an extraordinary cooperative effort by borrowing countries, the international banking community, the multilateral financial institutions and creditor governments. Fundamental to this effort are the measures of the borrowing countries themselves to achieve sustained growth so as to both meet the needs of their people and the requirements for servicing their external debt. This policy envisages continued support by the international financial community of these adjustment efforts. While much has been accomplished towards meeting these objectives, the necessary structural adjustments have been difficult to achieve and there have been setbacks sometimes caused by external factors, especially natural disasters and a precipitous drop in oil prices, as well as in some cases by economic policy misjudgments. Nevertheless, it is my judgment that a great deal has been achieved and, given maintenance of the past levels of cooperation, we are on a track that will assure management of a difficult problem with a reasonable chance of meeting the objective of achieving sustainable debt levels over a period of time. The proposal for managing this problem through partial relief of existing debt, financed at least in part with public resources, would not in my judgment be the right course to take at this time. I believe that the prospect of debt relief would undermine the difficult internal efforts of the borrowing countries to achieve the structural reform that is needed regardless of the policies that are followed on servicing external debt. Equally important, forgiveness of loans could have a serious effect over a considerable period of time on the willingness of the international private financial community to extend credit to the borrowing countries. In the end, internal growth in these countries will depend in large part on the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis e The Honorable Fernand J. St Germain Page 4 willingness of the international financial community to support the adjustment efforts of the borrowers with new credit. Finally, I would express the same concerns as those expressed to you by Secretary Baker about the inappropriateness of using public resources for purchasing private commercial bank debt, which we both see as an inherent aspect of the proposed international debt facility. I would also note that both the Garcia and Fauntroy bills express the sense of Congress that the federal banking agencies should grant the widest possible latitude to banks to negotiate principal and interest reductions with respect to the international debt obligations of borrowing countries. The bank regulators believe that they have sufficient flexibility to deal both with problems as they may arise and to maintain the integrity of the financial statements of institutions they regulate. I would not recommend legislating restrictions on our ability to apply appropriate regulatory and accounting standards. Other Issues The proposed legislation would also require reporting on the consultations of the United States with the IMF under Article IV of the Articles of Agreement. Such disclosure could jeopardize the frank discussions that are an integral part of Article IV consultations. As an alternative, consideration might be given to having a regular summary of the consultations transmitted to the Congress for its information. Many of the reports that would be required by the two bills appear to me to be unnecessarily burdensome, excessively detailed, imply some reassignment of policy responsibilities, and, in the case of the bank profitability study, may be based upon a misunderstanding about the information sources that are available. As an alternative, the Congress should consider whether essential information can be provided as part of current reporting requirements already applicable to the various agencies. I hope that you will find these suggestions helpful in your deliberations. https://fraser.stlouisfed.org • Federal Reserve Bank of St. Louis comments and Sincerely, / l&leA7 IL FEDERAL RESERvE BANK OF NEW YORK NEW 7CF:K. N.Y. t0045 ARLik CJi.0 :12 720•C73 E. GcnALD CZ OILCAN P•csmove, September 10, 1986 The Honorable Charles E. Schumer House of Representatives Washington, D. C. 20515 Dear Congressman Schumer: In your letter of July 24, 1986, you asked my views on the progress that has been made by the Japa nese auth orities in opening their financial markets to foreign firms and on recent developments with respect to the 30-year U.S. Treasury bonds issued last February. As you know, we have been following deve lopments in the Japanese financial markets closely. On the whol e, we have been encouraged that the Japanese authorities have been making steady progress toward opening their markets to foreign firms—due in part to efforts by the United States Gove rnment. For example, the internationalization of the yen has come very far with the development of the Euroyen market (now one of the largest Euromarkets); some deregulation of inte rest rates and easing of restrictions on financial instruments has occurred in the Japanese domestic market; and progress has been made in the access area, with the admittance of nine foreign banks into the trust banking business, the allocation of six seats on the Tokyo Stock Exchange to foreign firms, the gran ting of licenses to deal in Japanese government bonds to foreign bank s and additional full securities licenses to foreign firms, and the recent change in leverage requirements whereby foreign firm s are given national treatment. Enclosed is a memorandum outlinin g recent actions by the Japanese authorities, which I believe you might find of interest. It does not purport to be an exha ustive listing of all developments, but it will give you some idea of the significant steps that have been taken over the past months. This is not to say that more cannot done. We continue to have frequent consulta be and should not be tions with the Bank of Japan and Ministry of Finance regarding the treatment accorded foreign financial institutions in Japan. We have also expressed our views on this matter to major Japanese securiti es firms. Moreover, since late 1983, the Treasury Departme nt has been https://fraser.stlouisfed.org A. Federal Reserve Bank of St. Louis FEDERAL RESERVE SANK Or NEVI YORK-- 2 Congressman Schumer September 10, 1986 engaged in an ongoing, regular dialogue with the concerning further measures to improve the effi Japanese ciency and openness of their domestic markets and addition al steps to internationalize the yen. One of the obje ctives of this exercise, as noted in the May 1984 Report on Yen/Dollar Exchange Rate Issues, is "...that foreign firms be afforded equal competitive opportunity" in the Japanese market. While I strongly believe that more can and will be done to broaden participation in the Japanese financial marketplace, I also firmly believe that the United Stat es should continue to provide entry for firms which have the fina ncial and managerial resources to contribute to the robustness, liquidity and strength of our markets. Given the steps that the Japa nese authorities have taken over the past year or two--while recognizing that more can be done--and given the benefits of open and efficient international money and capital markets, I remain of the view that the broad thrust of the U.S. policy of "national treatment" is appropriate especially when that poli cy is accompanied by vigorous efforts to encourage others to follow suit. As to your question regarding distorti ons in prices in the 30-year Treasury bond earlier this year , we have looked at the circumstances rather carefully and have concluded that there is no "blame" to be attached to any sing le group of investors or securities firms. Rather, the temporary distortions were caused by the unlikely confluence of (1) a larg e number of traders following the same generic trading stra tegy which produced a heavy volume of "short sales" of the 30year bond in question; (2) the simultaneous presence of sizeable open option positions outside the dealer community which nece ssitated heavy deliveries \of the same 30-year bond; and, (3) strong demand for the issue in question, includinunderlying investor g, but by no means limited to, Japanese investors. Let me try to describe briefly what happ ened in general terms. As you know, the Government secu rities market experienced a considerable rally starting in February and lasting through mid-April. During this period there was strong investor demand for the 30-year 9 1/4 percent Treasury bond issued in February 1986 as the most recent and active issue in the long-term market. Investors have generally preferred to own the most recently auctioned issue because it has had greater liquidity. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis FZDERAL. RESERVE SANK OF NEW YORK-- Congressman Schumer September 10, 1986 Japanese purchases of the 9 1/4's were not exceptionall large at the February auction, y but ane cdotal information from market contacts suggests tha buyers of the issue in the t Japanese investors were substantial any "orchestrated campaign"sec9ndary market. We are not aware of Progressive steps by Japane by such buyers to acquire the issue. se authorities to permit Jap anese investors greater latitude in purchasing "foreign" iss ues may have been a contributory fac tor, but we have no specific on this point. evidence Based on past market experienc e, many domestic firms anticipated that holders of the 9 1/4 percent bonds, iss February, would sell them whe ued in n new 30-year bonds were auc in May (the 7 1/4 percent bon tioned d). In anticipation of prospective sell-off of the the 9 1/4's, a large number of domestic firms assumed large short positions in the issue. The rationale was that the older issue wou ld fall in price relati ve issues. In this case, the intent of the short seller to other bet on the general direction s was not to of interest rates but rat capitalize on expected rel her to ative price movements amo ng particular issues. Consequently, off setting long positions wer e established in other longer term issues . This is a traditional the outstanding and newly (or arbitrage trade associated with soon to be) issued securi predicated on the assumptio ties n that investors will sel l issue and buy the new issue. the older Meanwhile, the 2 1/2-month had begun to lose momentum rally and the price of the 9 1/4's was declining about in line wit h the overall market tre nd. Speculation that investors would sell the 9 1/4's to book profits on holdings of the bond aft er the prolonged rally may provided additional incent have ive anticipation that they would to sell the issue short in be able to buy them back at lower prices during the pre- and post-auction period. What happened in the final analysis was that hol the 9 1/4's did not, fora variety of reasons, sell off ders of issue in anywhere near the that expected volume. This created a shortage of supply which res ulted in the price of tha performing comparable long-t t erm investments. This dis bond outtorted the yield-spread relationships in the longer term sector of the market, where the vast majori ty of the offsetting long positions were concentrated. The los ses events were largely due to so that occurred in the wake of these many firms adopting the same https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 FEZERAL RESERVE SANK OF NEW YORK-- Congressman Schumer September 10, 1986 , strategy at the same time -- a problem which was accentuated by the supply of the February 30-year bond being further constricted by deliveries of that same issue to certain holders of open option positions in the same security. From our point of view, and that of the Treasury, it would be shortsighted to criticize investors for purcha sing and holding significant amounts of U.S. Government debt. I am aware of no evidence that there was any concerted effort to "corner" the market or otherwise purposely cause price distortions in these issues. Further, I can see no benefit to limiting the size of participltion by foreign firms or their customers. To the contrary, sLcn an effort would directly affect domestic securities firms as well and would surely be detrimental to the Treasury's efforts to finance the Federal debt at the lowes t possible cost. Similarly, in view of the circumstan ces surrounding this episode, I do not see that it shoul d have a direct bearing on the matter of granting primary deale r status to Japanese firms. . As evident ,from the discussion above, these are difficult and technically complex issues. I hope that I have been fully responsive to your questions. Sincerely, E. Gerald Cor President \ Enclosure https://fraser.stlouisfed.org r Federal Reserve Bank of St. Louis e. . is BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 PAUL A. VOLCKER March 24, 1987 CHAIRMAN The Honorable Chic Hecht United States Senate Washington, D.C. 20510 Dear Senator Hecht: Thank you for your recent letter soliciting my views on provisions of the Competitive Equality Banking Act. Many of the provisions of the bill are urgently needed and should be promptly adopted by the Senate. That is certainly true of Title III on the recapitalization of FSLIC. It is essential that the Congress restore the financial integrity of this fund so that it can promptly and effectively deal with the serious problems affecting a limited, but still very significant, portion of the thrift industry. Financial assistance for the FSLIC is urgently required and Title III provides the initial resources of $7.5 billion -- an amount that I believe should be increased to the full $15 billion originally requested. Title I is, in its own way, also essential legislation. I have stressed for some time the importance of a Congressional reaffirming of the important principle of separating banking and commerce. I do not think, as a practical matter, that we can make positive progress towards adaptation of the banking system to deal with the changing financial services market until this fundamental step has been taken. Other provisions of the bill are also important. We strongly support the provisions on emergency acquisition of banks and we have no objection to the credit union administrative provisions. The sections of the bill dealing with deposit availability provide us with useful tools that will enable us to make significant improvements in the payments system so as to help assure that banks can make prompt availability of deposits by check to their customers within a realistic and practical framework. I urge that no further weakening amendments be made to Titles I and III. In Committee amendments to Title I were adopted which loosen the restrictions on nonbank banks and nonthrift thrifts. Further amendments that would weaken the limitations on these institutions -- such as those which would allow affiliate overdrafts in nonbank banks owned by primary https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4. .. The Honorable Chic Hecht Page 2 dealers -- would very seriously compromise the usefulness of this Title. Similarly, Title III has been weakened by reducing the amounts available for FSLIC recapitalization, and by including amendments that restrict the thrift supervisors from carrying out their responsibilities. Here too, further restricting amendments could seriously limit the usefulness of this Title in setting the FSLIC and the thrift industry on a positive course toward rebuilding confidence. The major problems I see in the bill are in Title II. Instead of providing expanded and new authority for bank holding companies to underwrite certain securities as I and others had strongly recommended to the Committee, this Title sets a moratorium, beginning with the date of enactment and extending over a year, on certain bank and bank holding company activities in the area of securities underwriting, as well as insurance and real estate development. This Title is clearly retrogressive; it takes away powers that existing law permit the regulatory authorities to grant to banking organizations. We are opposed to this provision and very much regret that the bill no longer provides authority for bank holding companies to engage in underwriting mutual funds, mortgage-backed securities, revenue bonds, and commercial paper. My preference remains for a positive vote on these powers at this time. I recognize, however, that, as a practical matter, despite the merits of the case, there may not now be a willingness to adopt these limited securities powers at this time, pending further study. Assuming that is true, I welcome the commitment that the Committee has made to examine and vote on fundamental financial restructuring legislation, and the intention of the Chairman to have the Committee make such decisions by October. This intention could be given real meaning if you were to shorten the life of the proposed moratorium and let it expire no later than the end of the current session. To sum up, basic precepts in our banking structure must be preserved and FSLIC must be recapitalized -- and these steps must be taken on an urgent basis if the Congress wishes to preserve the opportunity to maintain stability and build carefully for the future. Undesirable changes, having the effect of weakening Titles I and III, must be avoided. Title III should be strengthened. Title II should be eliminated or amended. The Congress should act promptly on this legislation. MB:ck (V-32,87-1251) bcc: Mr. Bradfield Mr. Ettin Mr. Mattingly Mrs. Mallardi (2)k7 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sin , rely, le6eVat CHIC HECHT N SVADA UNITED STATES SENATE WASH NGTON, a C.20510 E,73 March 17, 1987 _ The Honorable Paul Volcker Chairman Board of Governors of the Federal Reserve System Washington, D.C. 20551 Dear Chairman Volcker: On Tuesday, March 10 the Senate Banking Committee marked-up and approved for floor consideration a banking bill consisting of six Titles entitled the "Competitive Equality Banking Act of 1987." I am particularly concerned with Title II of the Proxmire bill and I would like you to share with me your views on the Title. Title II of the Proxmire bill imposes a moritorium running from March 5, 1987 until one year after the bill's enactment during which no federal banking agency may allow any bank or bank holding company to engage in any new securities, insurance or real estate activities Furthermore, it is my understanding that, as amended, this Title has the effect of prohibiting the Federal Reserve Board from approving any 4(c)(8) application to engage even in insurance activities permissible under Title VI of the Garn-St Germain Act. The insurance restrictions of Title VI of Garn-St Germain would become applicable to any state banks acquired by a bank holding company during the moritorium period, even where the acquisition occurred merely as part of a one bank holding company formation. Title II appears to allow bank holding companies controlling banks engaging in insurance activities impermissible under 4(c)(8) to acquire additional state banks with the same powers only if they agree to divest "impermissible activities" within two years. It further nullifies for the time of the moritorium the Comptroller of the Currency's 1986 ruling that national banks located in towns of less than 5,000 may conduct insurance activities at any location. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis In your testimony before the Senate Banking Committee on January 21, 1987 you stated that "we have long felt, as a matter of good public policy, that all these activities (revenue bonds, mortgage backed securities and commercial paper securities activities) are appropriate for bank holding companies without artificial limitations on the volume of operation." And you stated that "these powers can be exercised consistent with the safety and soundness of the banking system and the interest of the public at large in effective competition." Regarding insurance and real estate brokerage, insurance underwriting and corporate securities underwriting, you "encourage the Committee to consider other financial areas appropriate for bank holding companies" and "hope the Committee will not act to foreclose further any of existing opportunities of bank holding companies to provid e financial services." In light of your testimony, I would like your views on the proposals contained in Title II of the Proxmire bill. Is this legislation needed by the regulators for any reason? Will it increase the safety and soundness of our banking system? Will it serve the consumer? Is it sound public policy? Thank you for your early attention. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis in rely, Chic echt ( L BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM t7: WASHINGTON, 0. C. 20551 ‘ Isge RALRO •...• • PAUL A- VOLCKER March 24, 1987 CHAIRMAN The Honorable Donald W. Riegle, Jr. Chairman Subcommittee on Securities Committee on Banking, Housing and Urban Affairs United States Senate Washington, D.C. 20510-6075 Dear Chairman Riegle: Your letter of March 19 requests the Board's views on the prohibition on daylight overdrafts by nonbank banks and their affiliates under the Competitive Equality Banking Act of 1987 ("CEBA"), approved by the Senate Banking Committee on March 10. You indicate concern that the Senate Banking Committee bill may have adverse affects on the market for United States government securities, particularly in view of other changes now being implemented with respect to the Board's daylight overdraft reduction program and the Government Securities Act of 1986. We do not believe that the provisions of CEBA limiting overdrafts by grandfathered nonbank banks on behalf of affiliates will have any measurable adverse effect on the ongoing development of the secondary market for United States government securities. In that connection, I would note what I am sure is obvious to you: until very recently, nonbank dealers have operated effectively, (and the government securities market flourished) without nonbank banks. Moreover, currently eight nonbank primary dealers have nonbank banks, these institutions either do not use Federal Reserve book-entry securities transfer services, which are the primary source of overdrafts for government securities dealers, or incur few securities overdrafts that are not offset by funds balances. As these institutions do not currently rely on overdrafts to conduct their business, a prohibition against overdrafts should not have a significant impact on their operations or the government securities markets. Indeed, in the early weeks of March, eleven nonbank banks, only two of which were affiliates of nonbank dealers, incurred book-entry overdrafts. These overdrafts amounted to less than 0.3 percent of all book-entry overdrafts and most of those overdrafts were offset by credit balances in those institution's funds accounts at Reserve Banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Donald W. Riegle, Jr. Page 2 You have also asked about the advisability of amending the CEBA to permit daylight overdrafts by a nonbank bank affiliate of a primary dealer. An amendment to this effect is being proposed by a nonbank primary dealer. We are quite concerned about these proposals to allow nonbank primary dealers to have overdrafts because they would permit securities dealers and all of their affiliates as well to obtain access to the Federal Reserve payments system and to Federal Reserve credit through a nonbank bank. The proponents of amendments to accomplish this objective have argued that the limitations on nonbank bank overdrafts should not apply to nonbank banks owned by primary dealers because primary dealers are monitored by the Federal Reserve Bank of New York and thus a nonbank affiliate of a primary dealer does not pose the risks to the Federal Reserve posed by other nonbank banks. This chain of reasoning is not valid. A nonbank bank owned by a primary dealer can provide payments services to other affiliates as well as the primary dealer, which is not, itself, subject to the same degree of supervision as a bank. These other affiliates are not subject to supervision, regulation or monitoring by the Federal Reserve and could fail without the prior knowledge of the Federal Reserve. Abuse of the nonbank bank by affiliates other than the primary dealer is most likely to occur in times of financial stress on the affiliates -- the time when an independent credit judgment is most crucial. Thus, this amendment will expose the Federal Reserve to the same risks that are presented by other nonbank bank's access to the payments system. We would strongly recommend against any piecemeal erosion of the limitations on nonbank banks at this time. These limitations should be reviewed in the context of the Banking Committee's proposed review of comprehensive financial services legislation in the coming year. To the extent bank holding companies can exercise securities powers, then the exercise of banking powers by securities firms would be reasonable -- in both cases under a framework of law and supervision that does not exist today. Sincerely, (dellOata, MB:ck (V-34, 87-1280) bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Bradfield Mr. Ettin Mr. Mattingly Mrs. Mallardi (2) Mrs. Mallardi Action assigned to Ed Ettin (copy to Bradfield) WIt4IAM PROXMIRE. WISCONSIN, CHAIRMAN ALAN CRitNSTON. CALIFORNIA DONALD W RIEGLE. JR. MICHIGAN PAUL S SARBANES. MARYLAND CHRISTOPHER J. DODO, CONNECTICUT ALAN J DIXON, ILLINOIS JIM SASSER. TENNESSEE TERRY SANFORD NORTH CAROLINA RICHARD C. SHELBY, ALABAMA ROBERT GRAHAM, FLORIDA JAKE DARN UTAH JOHN HEINZ. PENNSYLVANIA WILLIAM L ARMSTRONG. COLORADO ALFONSE M DAMATO. NEW YORK CHIC HECHT. NEVADA PHII. GRAMM TEXAS CHRISTOPHER S BOND M,SSOURI JOHN H. CHAPEL. RHODE ISLAND KENNETH A. McLEAN, STAFF DIRECTOR M DANNY WALL MINORITY STAFF DIRECTOR United tates eStnate COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS WASHINGTON, DC 20510-6075 March 19, 1987 r) The Honorable Paul Volcker Governor Federal Reserve Board 20th & C Streets, NW Washington, DC 20551 Dear Governor Volcker: I am writing with respect to one provision of the Competitive Equality Banking Act of 1987, a bill that the Senate Banking Committee voted March 10, 1987, to report to the full Senate. This bill would in effect prevent the establishment of new "nonbank banks", but provides a "grandfather" for certain existing nonbank banks, subject to certain restrictions including a prohibition on daylight overdrafts on behalf of any affiliate. This letter is prompted by my concern regarding the effect of this provision on primary securities dealers and the primary securities market. An efficient, liquid and deep primary and secondary market for United States government securities is essential to the fiscal integrity of our government. There are a large number of recent legal and market developments that may affect our present system, including the Board's ongoing program to reduce risk in the payments system by reducing daylight overdrafts by all participants, the enactment of the Government Securities Act of 1986 and promulgation of regulations thereunder later this year, and the expected issuance of new Treasury regulations governing the book-entry system. Because the government securities markets will have to adapt to all these ongoing changes, I would like to determine whether the overdraft provisions of the banking bill would have any adverse effects on these markets. It is my understanding that several of the Federal Reserve Banks have permitted nonbank bank affiliates of nonbank primary dealers to establish direct computer-to-computer connections and to begin providing payments services to affiliated and recognized primary dealers in U.S. government securities. Under existing market practices, daylight overdrafts are typically created in the conduct of this business. Under the Senate bill as reported from the Committee, these activities would be effectively prevented. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • V -2- I would appreciate the formal view of the Board on the implications of the daylight overdraft provisions in the Senate bill for the government securities markets. In light of the fact that this legislation may be brought up on the Senate floor shortly, I would be grateful for your prompt attention to this matter. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis nald W. Rieg . hairman Subcommittee on Securities • BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, El. C. 20551 PAUL A. VOLCKER CHAIRMAN March 24, 1987 The Honorable Chic Hecht United States Senate Washington, D.C. 20510 , Dear Senator Hecht: Your letter of March 19 requests the Board's views on the prohibition on daylight overdrafts by nonbank banks and their affiliates under the Competitive Equality Banking Act of 1987 ("CEBA"), approved by the Senate Banking Committee on March 10. You indicate concern that the Senate Banking Committee bill may have adverse affects on the market for United States government securities, particularly in view of other changes now being implemented with respect to the Board's daylight overdraft reduction program and the Government Securities Act of 1986. We do not believe that the provisions of CEBA limiting overdrafts by grandfathered nonbank banks on behalf of affiliates will have any measurable adverse effect on the ongoing development of the secondary market for United States government securities. In that connection, I would note what I am sure is obvious to you: until very recently, nonbank dealers have operated effectively, (and the government securities market flourished) without nonbank banks. Moreover, currently eight nonbank primary dealers have nonbank banks, these institutions either do not use Federal Reserve book-entry securities transfer services, which are the primary source of overdrafts for government securities dealers, or incur few securities overdrafts that are not offset by funds balances. As these institutions do not currently rely on overdrafts to conduct their business, a prohibition against overdrafts should not have a significant impact on their operations or the government securities markets. Indeed, in the early weeks of March, eleven nonbank banks, only two of which were affiliates of nonbank dealers, incurred book-entry overdrafts. These overdrafts amounted to less than 0.3 percent of all book-entry overdrafts and most of those overdrafts were offset by credit balances in those institution's funds accounts at Reserve Banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Chic Hecht Page 2 You have also asked about the advisability of amending the CEBA to permit daylight overdrafts by a nonbank bank affiliate of a primary dealer. An amendment to this effect is being proposed by a nonbank primary dealer. We are quite concerned about these proposals to allow nonbank primary dealers to have overdrafts because they would permit securities dealers and all of their affiliates as well to obtain access to the Federal Reserve payments system and to Federal Reserve credit through a nonbank bank. The proponents of amendments to accomplish this objective have argued that the limitations on nonbank bank overdrafts should not apply to nonbank banks owned by primary dealers because primary dealers are monitored by the Federal Reserve Bank of New York and thus a nonbank affiliate of a primary dealer does not pose the risks to the Federal Reserve posed by other nonbank banks. This chain of reasoning is not valid. A nonbank bank owned by a primary dealer can provide payments services to other affiliates as well as the primary dealer, which is not, itself, subject to the same degree of supervision as a bank. These other affiliates are not subject to supervision, regulation or monitoring by the Federal Reserve and could fail without the prior knowledge of the Federal Reserve. Abuse of the nonbank bank by affiliates other than the primary dealer is most likely to occur in times of financial stress on the affiliates -- the time when an independent credit judgment is most crucial. Thus, this amendment will expose the Federal Reserve to the same risks that are presented by other nonbank bank's access to the payments system. We would strongly recommend against any piecemeal erosion of the limitations on nonbank banks at this time. These limitations should be reviewed in the context of the Banking Committee's proposed review of comprehensive financial services legislation in the coming year. To the extent bank holding companies can exercise securities powers, then the exercise of banking powers by securities firms would be reasonable -- in both cases under a framework of law and supervision that does not exist today. Sincerely, MB:ck (V-35, 87-1320) bcc: All Board Members Messrs. Bradfield,,,Ettin, Mattingly Mrs. Mallardi (2)" https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis STATE OFFICES: CHIC HECHT CARSON CITY OFFICE: NEVADA 308 NORTH CURRY STREET co...Trm BANKING, HOUSING AND URBAN AFFAIRS ENERGY AND NATURAL RESOURCES SELECT COMMITTEE ON INTELLIGENCE (702) 885-9111 United eStats eSmate 300 LAS VEGAS BLVD., SOUTH WASHINGTON. DC 20510 (702) 388-8805 LAS VEGAS OFFICE: REND OFFICE 30o 50e1 STREET -V02) 784-5007 March 19, 1987 r•-; •, F-r; —4 - The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Federal Reserve Board 20th and C Streets, N.W. Washington, D.C. 20551 Dear Governor Volcker: ion of the This letter is to seek your views concernina a provis 1987, to 10, bill that the Senate Banking Committee voted March prevent t, effec report to the full Senate. This bill would, in dfather" "gran would the establishment of new "nonbank banks," but of number certain existing nonbank banks, subject to a overdrafts on restrictions, including a prohibition on daylight behalf of any affiliate. deep concern My interest in this issue is prompted primarily by a rity of integ l for our government securities markets. The fisca primary deep and d, our government depends upon an efficient, liaui . A ities secur and secondary market for United States government m, syste t number of recent developments may affect our presen to reduce including the Federal Reserve Board's ongoing program by all rafts overd risk in the payments system by reducing daylight of Act ities participants, the enactment of the Government Secur year, this later 1986, and promulgation of regulations thereunder governing and the expected issuance of new Treasury regulations markets ities secur nment the book -entry system. Because the gover your ciate appre would I es, must already adapt to all these chang g bankin the of ions provis views concerning whether the overdraft of t opmen devel ng ongoi the bill could have any adverse effects on these markets. l Reserve Banks It is my understanding that several of the Federa primary dealers k nonban of have permitted nonbank bank affiliates, er-tocomput direct in U.S. government securities, to establish ces to servi ts paymen ing computer connections, and to begin provid itory Depos the to nt affiliated recognized primary dealers, pursus https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Paul A. Volcker March 19, 1987 Page 2 tary Control Act of 1980, and Institutions Deregulation and Mone t. Under existing market under the regional Bank's oversigh typically created in the practices, daylight overdrafts are conduct of this business. time, these operations require Although relatively small at this stments. In addition, they may substantial initial capital inve ing the benefits and possible represent laboratories for determin the establishment of clearing problems that may be associated with dealers, and the resulting institutions by nonbank primary ions providing clearance expansion of the number of institut the market for U.S. government services to major participants in , as reported from the securities. Under the Senate bill d be effectively prevented. Committee, thse activities woul s on the implications of the I would appreciate hearing your view the Senate bill, and the daylight overdraft provisions in it daylight overdrafts by an advisability of amending it to perm dealer. affiliate of a nonbank primary / brought up on the Senate floor as Because this legislation may be / of r to speed recapitalization early as Tuesday, March 24, in orde / eciate your prompt attention to the FSLIC, I would very much appr ( this request. / Thank you for your assistance. C Chic Hecht CH :mb https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, 0. C. 20551 PAUL A. VOLCKER March 16, 1987 CHAIRMAN The Honorable William Proxmire Chairman Committee on Banking, Housing, and Urban Affairs United States Senate Washington, D.C. 20510-6075 Dear Chairman Proxmire: Thank you for your letter of February 9 requesting banking structure data on (1) each of the MSAs and non-MSA counties in Texas, (2) the 10 largest largest organizations in Texas, (3) the largest organizations in the nation, and (4) a listing of all bank or bank holding company mergers or acquisitions since 1980 in which both organizations were among the 100 largest in the nation. Extensive computer printouts for the first three items you requested, including technical descriptions of the data, are being sent directly to Robert Dugger along with data on mergers and acquisitions among the 100 largest bank holding companies. My staff has been in contact with Mr. Dugger and invited him to contact us if he should have any questions about the data. I hope these data will be helpful to your Committee. Please let me know if I can be of further assistance. Sincerely, Steaul A. Volcker SR:EE:CO:vcd (V-16, 87-488) bcc: Robert Dugger, Senate Banking Cmte. bcc: Steve Rhoades Ed Ettin Mrs. Mallardi (2) , https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Action assigned Mr. Richline 111 WF.,M PROXMIRE. WISCONSIN, CHAIRMAN ALAN CRAW;TON. CALIFORNIA DONALD W RIEGLE, JR. MICHIGAN PAUL S SARBANES. MARYLAND CHRISTOPHER J DODD, CONNECTICUT ALAN J DIXON, ILLINOIS JIM SASSER. TENNESSEE TERRY SANFORD, NORTH CAROLINA RICHARD C SHELBY, ALABAMA ROBERT GRAHAM, FLORIDA JAKE GARN, UTAH JOHN HEINZ. PENNSYLVANIA WILLIAM L ARMSTRONG COLORADO ALFONSE M D'AMATO, NEW YORK CHIC HECHT, NEVADA PHIL GRAMM. TEXAS CHRISTOPHER S BOND MISSOURI JOHN H. CHAFEE, RHODE ISLAND KENNETH A McLEAN STAFF DIRECTOR M. DANNY WALL MINORITY STAFF DIRECTOR United e tates nate COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS WASHINGTON, DC 20510-6075 February 9, 1987 4((° The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Washington, DC 20551 Dear Chairman Volcker: The Committee would appreciate it if you would forward the following banking market structure and banking concentration data as soon as possible. In fulfilling , this request, please use the latest good quality data available and, where appropriate, consolidate the data for bank holding companies. 1. Using MBA's and non-MBA counties to approximate banking markets, send a computer printout showing the market structure for all individual banking markets in Texas 41÷4,4Ao-444114.Aren Each market structure should specify the name of each bank or bank holding company in the market, its total deposits in that market, and its share of the market's total deposits. Also, show the Herfindahl-Hirschman Index for each market. Please use Table 1, which is attached, as a guide for formatting the printout. 2. For è441 order by size, of (1) total assets; percentage of the each organization Texas a • , provide three separate listings, in rank the 10 largest banking organizations in the state based on: (2) total deposits; and (3) domestic deposits. Also, show the state's banking assets, total deposits or domestic deposits that possesses. 3. Provide three separate listings, in rank order by size, of the nation's 100 largest banking organizations based on: (1) total assets; (2) total deposits; and (3) domestic deposits. Also, show the percentage of the nation's banking assets, total deposits or domestic deposits that each organization possesses. L. Provide a list of all bank or bank holding company acquisitions or mergers since 1980 where both organizations at the time of the acquisition were among the 100 largest banking organizations in the nation. Also, provide the total assets of each organization at the time that the acquisition was approved by the relevant Federal banking agency (typically the Federal Reserve Board). Thank you for your cooperation. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis AMP r $41p TABLE 1 Name of MSA or Non-MSA County Banking Organizations in Market Total Deposits in Market ($ Millions) Market Share ABC Holding Company 160 25.0% DEF Holding Company 140 21.9% GHI Holding Company 120 18.8% JKL Bank 80 12.5% MNO Holding Company 6o 9.4% KB Bank 4o 6.2% STU Bank 20 3.1% VWX Holding Company 20 3.1% 640 100.0% Total Note: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Market HHI 1761 All bank subsidiaries of a given holding company in the market should be aggregated. • BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551 PAUL A. VOLCKER March 23, 1987 CHAIRMAN The Honorable Donald W. Riegle, Jr. United States Senate Washington, D.C. 20510 Dear Senator Riegle: I am pleased to enclose my response to the written questions you submitted in connection with the hearing held before the Senate Banking Committee on January 21, 1987. I have also sent a copy of this to the Committee for inclusion in the record of the hearing. I hope this information is useful. if I can be of further assistance. Sincerely, SIPaul Enclosure bcc: Ed Malan, Senate Banking Committee CO:vcd (#60, 87-1141) bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Rich Spillenkothen (drafted response) Mrs. Mallardi (2) ,/ Please let me know Chairman Volcker subsequently submitted the following in response to written questions from Senator Riegle in connection with the hearing held before the Senate Banking Committee on January 21, 1987: International Coordination of Bank Regulatory Standards On January 8, 1987, the United States and Britain announced a pioneering regulatory agreement that will impose on British and American banks almost identical standards for the levels of capital they must maintain. It is my understanding that the Fed has been talking to Japanese officials about a similar agreement with Japan. Is that correct? And, if so, what other countries are you talking to and what can you tell us about those discussions? In addition to capital standards, what other uniform standards are being discussed? Are you discussing issues of market openness, bank supervision, national treatment, and financial practices? Answer: Prior to announcing the proposed risk-based capital framework, discussions were held with banking supervisors from the G-10 group of countries, including Japan, to inform them of the contents of the proposed agreement between the U.S. bank regulatory agencies and the Bank of England. Responsibility for conducting these meetings was shared by the Federal Reserve and the Bank of England, with the Federal Reserve holding initial discussions with representatives from Japan and Canada, and the Bank of England meeting with representatives from the European members of the G-10 group. One important objective of the U.S./U.K. proposal is to foster greater convergence in the assessment of capital adequacy on an international basis. Thus, it is our hope that banking supervisors in the major industrial countries will examine the proposal with a view toward bringing their policies--to the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -2- extent possible--into alignment with emerging international norms for internationally active banks. Because of significant differences among some countries in banking, accounting, and supervisory and regulatory practices, progress toward achieving greater consistency on an international level may be gradual and involve difficult and complex discussions. Nonetheless, the Federal Reserve, together with the Bank of England, is committed to cooperating with other supervisors, and working through the Committee on Bank Regulatory and Supervisory Practices ("Basle Supervisor's Committee"), to encourage the adoption of appropriate and consistent capital standards for international banking organizations. The proposed U.S./U.K. Agreement owes much to the groundwork laid by the Basle Supervisor's Committee, the European Community's Banking Advisory Committee, and other international organizations which have devoted considerable resources in recent years to the discussion of the coordination and harmonization of supervisory policies and practices among the G-10 countries. The Basle Supervisor's Committee was estab- lished to promote high standards of international banking practice and banking supervision, and is the principal forum through which banking standards and supervisory practices are discussed by the banking supervisors of the major industrialized countries. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis In recent months, the Committee has discussed, in .i -3- addition to capital standards, issues such as off-balance sheet exposures, interest rate risk, securitization and other financial innovations, and the globalization of financial markets. The United States has long followed a policy of open markets and national treatment with respect to banking operations. In carrying out its ongoing responsibilities, the Federal Reserve meets with foreign supervisors and central banks and, in the course of these meetings, seeks to encourage foreign countries to pursue similar policies of openness and fair treatment. Our commitment to national treatment has led us to allow foreign banks to operate in U.S. financial markets on an equal footing with domestic banks and has contributed to making U.S. financial markets among the largest and most efficient in the world. Consistent with this policy, the Federal Reserve has also permitted foreign-owned firms to serve as primary dealers in U.S. government securities. In taking these actions, the Federal Reserve has affirmed its continuing commitment to national treatment and open markets. Nonetheless, we believe that such actions must be viewed as a catalyst for complementary actions by foreign countries. In this regard, we have stressed in our discussions with foreign countries that our commitment to the policy of national treatment depends on a steady flow of complementary and consistent policy actions in key markets abroad. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • -4- With respect to Japanese financial markets, progress has been made on a variety of fronts, and indications are that the Japanese authorities are committed to taking further actions to open their markets. In particular, we understand that the Ministry of Finance will now consider applications from foreign securities firms to conduct business in Japan, and that the Ministry will support a greater allocation of underwriting shares in Japanese Government securities for foreign firms. In this connection, Japan's Ministry of Finance recently announced its decision to allow U.S. commercial banks to operate securities subsidiaries in Japan. U.S. banks will, of course, have to apply for licenses for this purpose. In addition, we understand that the Ministry will consider easing the requirements for participation in medium-term auctions of Japanese Government bonds. We are hopeful that progress along these lines will continue. https://fraser.stlouisfed.org I Federal Reserve Bank of St. Louis BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. E. 20551 PAUL A. VOLCKER March 16, 1987 CHAIRMAN The Honorable Richard C. Shelby United States Senate Washington, D.C. 20510 Dear Senator Shelby: During the hearing before the Senate Banking Committee on February 19, you requested that I furnish additional information on savings rates. I have furnished the enclosed table to the Committee for inclusion in the record of the hearing. Please let me know if I can be of further assistance. Sincerely, Enclosure bcc: Mr. Ed Malan, Senate Banking CO:vcd bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Karen Johnson Ted Truman Alice Long Mrs. Mallardi (2) a/ Insert page 66 (line 16)-2/19/87 Transcript • Chairman Volcker subsequently furnished the following information for inclusion in the record of the hearing: Japanese, German, and U.S. Savings Rates Selected Years, percent of GDP Japan 1965 1970 1985 Gross savings private public 31.5 25.6 5.9 40.2 33.1 7.1 31.4 27.2 4.2 Less depreciation: Net savings private public 18.1 12.7 5.4 26.9 20.2 6.7 17.7 14.2 3.5 Germany 1965 1970 1985 Gross savings private public 27.2 21.9 5.3 28.1 21.8 6.S 22.2 19.4 2.8 Less depreciation: Net savings private public 17.8 12.9 4.9 18.0 12.2 5.8 9.6 7.6 2.0 United States 1965 1970 1985 Gross savings private public 21.0 18.6 2.4 18.1 17.4 0.7 16.5 18.4 -1.9 Less depreciation: Net savings private public 11.2 10.1 1.1 7.5 8.2 -0.7 3.7 7.1 -3.4 Note: Data are taken from OECD National Accounts. The OECD distinguishes between government current expenditure and government investment. It thus reports greater government saving (or smaller deficit) than would be the case if government saving were measured as revenue less total government expenditure. There are additional small differences between the procedures followed in the OECD national accounts and those used in the U.S. National Income and Product Accounts. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D C. 20551 PAUL A. VOLCKER March 16, 1987 CHAIRMAN The Honorable William Proxmire Chairman Committee on Banking, Housing, and Urban Affairs United States Senate Washington, D.C. 20510 Dear Chairman Proxmire: Pursuant to Public Law 96-221, Title VI, the "Truth in Lending Simplification and Reform Act" (Section 618), I am pleased to enclose the Board's report on the Annual Percentage Rate Demonstration Project. Under the legislation, Congress directed the Federal Reserve to undertake a demonstration project for the dissemination of credit interest rates to consumers in several test markets. The Board was directed to evaluate the usefulness to consumers of the distribution of "Shoppers' Guides to Credit", and to evaluate the effects of the information dissemination project on creditors and competition, and to report to the Committee on the project. The Board selected Akron, Ohio, Rochester, New York, and Sacramento, California, as test markets for the project. Shoppers' guides to credit were distributed monthly through mass media, libraries, community groups, Federal Reserve Banks, and local city offices to consumers in the three markets for a period of one year. A series of consumer surveys were undertaken prior to and after the shoppers' guides were distributed in each market in order to gather information about the usefulness of the guides to consumers. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Highlights of the study show: (1) The comparative credit price program appears to have enhanced competition in the mortgage and automobile loan markets, but not the personal loan market; (2) The comparative credit price program does not appear to have affected the proportion of credit users that shop for credit; however, those consumers who do shop for credit appear to use The Honorable William Proxmire Page Two shoppers' guides to facilitate their credit search efforts; and (3) Currently, the state banking departments in New York, Massachusetts, New Hampshire, and Vermont regularly make comparative credit price lists available to the public. A survey of major general circulation newspapers across the country indicates that nearly 70 percent currently publish some type of comparative credit price list. In addition, many financial information firms sell comparative price lists; some to newspapers, financial institutions, and realtors, others directly to individual members of the public. I hope this information will be useful to your Committee. Please let me know if I can be of further assistance. Sincerely, Enclosure GC:CO:vcd bcc: Mr. Canner ,./ ) 2 ( IDENTICAL LETTERS SENT TO THOSE ON ATTACHED LIST ("SUBCOMMITTEE" H) SUBSTITUTED FOR "COMMITTEE" WHERE APPROPRIATE IN LAST PARAGRAP https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mailing list for Annual Percentage Rate Demonstration Project The Honorable William Proxmire Chairman Committee on Banking, Housing, and Urban Affairs United States Senate The Honorable Jake Garn Ranking Minority Member Committee on Banking, Housing, and Urban Affairs United States Senate The Honorable Christopher J. Dodd Chairman Subcommittee on Consumer Affairs Committee on Banking, Housing, and Urban Affairs United States Senate The Honorable Phil Gramm Ranking Minority Member Subcommittee on Consumer Affairs Committee on Banking, Housing, and Urban Affairs United States Senate The Honorable Fernand J. St Germain Chairman Committee on Banking, Finance and Urban Affairs House of Representatives The Honorable Chalmers P. Wylie Ranking Minority Member Committee on Banking, Finance and Urban Affairs House of Representatives The Honorable Frank Annunzio Chairman Subcommittee on Consumer Affairs and Coinage Committee on Banking, Finance and Urban Affairs House of Representatives The Honorable John P. Hiler Ranking Minority Member Subcommittee on Consumer Affairs and Coinage Committee on Banking, Finance and Urban Affairs House of Representatives https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551 March 16, 1987 The Honorable Bart Gordon House of Representatives Washington, D.C. 20515 Dear Mr. Gordon: Thank you for your letter of February 20 enclosing correspondence you received from your constituent, Ms. Evelyn Campbell, concerning the new standard holiday schedule for Federal Reserve Banks that was implemented in 1987. Standard holidays were initiated by the Federal Reserve Board because difficulties arose in the past when some Reserve Banks closed to observe national or state holidays while other Reserve Banks remained open. In such circumstances, depository institutions faced uncertainty about being credited for deposits. In addition to the problems with settling transactions, there was the potential for generating substantial amounts of float where a depository institution would be credited with funds prior to the funds being collected by the Federal Reserve. The original proposal to establish standard holidays, for which public comment was requested, suggested that when a holiday fell on a Saturday the Reserve Banks would observe the holiday on the prior Friday. However, numerous commenters objected to this part of the proposal, stating that most states do not observe a Saturday holiday on the prior Friday and, therefore, most banks would be required to remain open under state law. The closing of Reserve Banks on those Fridays would place unnecessary hardships on the banking industry. After due consideration, the Board approved the standard holiday schedule and decided not to observe Saturday holidays on the preceding Friday. For your information, I am enclosing a copy of the Board's announcement which sets forth the holiday schedule. I hope this information will be helpful. know if I can be of further assistance. Sincerely, S Donald J. Winn Assistant to the Board Enclosure (Press Release dtd. 6/9/86) (REM):CO:DJW:vcd/pte (V-25, 87-1073) bcc: Mrs. Mallardi v/ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Please let me BART GORDON Cong. Liaison Of ce drafting response 1517 LONGWORTH BUILDING WASHINGTON, DC 20515 (202) 225-4231 8TH DISTRICT, TENNESSEE 41ANKING, FINANCE AND 106 SOUTH MAPLE STREET PO BCX 1985 MURFREESBORO, TN 37133 (815) 898-1988 URBAN AFFAIRS SCIENCE AND TECHNOLOGY SELECT COMMITTEE ON AGING ti,40& Congrefscs of flit Ziniteb Otatess ousse of 1kepresStntatibt5 ,if/ — February 20, 1987 The Honorable Paul A. Volcker Chairman Federal Reserve Board Washington, D.C. 20551 Dear Chairman Volcker, Attached is a copy of a letter from one of my constituents expressing objections to the Federal Reserve Board's decision not to give Federal Reserve and bank employees a Fourth of July holiday. Although I am sure that the Board carefully considered the merits before making this decision, I can appreciate my constituent's concerns. If most Americans are given a holiday on either Friday, July 3, or Monday, July 6, because the Fourth of July happens to fall on a Saturday this year, those Americans who must work may be inconvenienced, particularly if they require child care services. I appreciate your careful consideration of rib, constituent's concerns regarding your Fourth of July policy. BART GORDON Member of Congress BJG/jb https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis to121 Dear Sir: have never written a le but I feel compelled to tter to my Senator or Cong to protest ressman, do so now. I am writing Mr. Volcker' this letter s decision to July holida y for bank eliminate the and federal 4th of unAmerican reserve employ that we will ees. It is not be allowe birthday of d to celebrat e the •are partic our country while empl oyees of othe ipating in r companies this National families wi holiday. It ll not be ab also means ma le to spend creates un ny this holiday limited prob to gether and lems for all day care working moth centers will ers because th be closed Ju e ly 3 for Inde pe I apprecia ndence Day. te any infl ue new policy of eliminat nce you might have in re versing this in weekend. Thank you fo g a holiday if it fall s on the r help in th is matter. Sincerly, Evelyn Campbe 304 Loretta ll Dr Goodlettsvil ive le, Tn. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis FEB 1 2 1987 37072 $0 GOv BOARD OF GOVERNORS /V0 • OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 PAUL A. VOLCKER March 13, 1987 CHAIRMAN The Honorable Frank Annunzio Chairman Subcommittee on Consumer Affairs and Coinage Committee on Banking, Finance and Urban Affairs House of Representatives Washington, D.C. 20515 Dear Chairman Annunzio: Thank you for your letter of March 3 inviting the Federal Reserve to participate in your Subcommittee's hearing on credit card disclosure and interest rate cap legislation. I am pleased to let you know that Governor Martha R. Seger will appear on behalf of the Board on Wednesday, March 18, at 9:30 a.m. Sincerely, CO:vcd (V-24, 87-1019) bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Gov. Seger Mr. Garwood JOHN HILER. INDIANA CHALMERS P. WYLIE, OHIO THOMAS J. RIDGE, PENNSYLVANIA FRANZ ANNUNZIO, ILLINOIS, CHAIRMAN 41f" FERNAND J ST GERMAIN, RHODE ISLAND HENRY B. GONZALEZ, TEXAS BRUCE A. MORRISON, CONNECTICUT CHARLES E. SCHUMER, NEW YORK U.S. HOUSE OF REPRESENTATIVES CURTIS A PRINS, STAFF DIRECTOR TELEPHONE (202) 226-3280 ONE HUNDREDTH CONGRESS SUBCOMMITTEE ON CONSUMER AFFAIRS AND COINAGE OF THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS ROOM 212 HOUSE OFFICE BUILDING ANNEX No. 1 WASHINGTON, DC 20515 March 3, 1987 Honorable Paul A. Volcker Chairman Federal Reserve Board 20th Street and Constitution Avenue, N.W. Washington, D.C. 20551 Dear Mr. Chairman: The House Banking, Finance and Urban Affairs Subcommittee on Consumer Affairs and Coinage plans to hold hearings on Wednesday, March 18, 1987, on credit card disclosure (H.R. 244, H.R. 515 and H.R. 1086) and interest rate cap legislation (H.R. 78). I wish to invite you to appear before the Subcommittee on March 18 at 9:30 a.m. The hearings will be held in Room 2128 Rayburn House Office Building. Your presentation should be limited to five minutes. Because of budgetary constraints, each written statement or exhibit submitted for the record of a hearing must be in a form that is capable of being photocopied for printing. All prepared statements or exhibits will appear in the back of the printed hearing within the appendix. The crly exception to this will be charts and graphs referred to within the text. Statements must contain the name and capacity in which the witness will appear. All statements and any accompanying exhibits for the printed hearing must be typed in single space on legal -size paper and may not exceed a total of ten pages. Committee rules require a minimum of 100 copies of the prepared statement be delivered to the Subcommittee office by Monday, March 16. The statements should be delivered to Room 212 Annex #1, 300 New Jersey Avenue, S.E. If you have any questions, please contact Mr. Curtis Prins, Staff Director of the Subcommittee at (202)226-3280. With every best wish, Sincerely, Frank Annunzio Chairman Enclosures https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, 0. C. 20551 PAUL A. VOLCKER February 18, 1987 CHAIRMAN The Honorable Henry B. Gonzalez Chairman Subcommittee on Housing and Community Development Committee on Banking, Finance and Urban Affairs House of Representatives Washington, D.C. 20515-6052 Dear Chairman Gonzalez: Thank you for your letter of January 29, supplementing your previous comments on the announced acquisition of Texas Commerce Bancshares by Chemical New York Corporation. As indicated in my letter to you of February 5, the Board will review the *record of the two institutions with respect to compliance with the Community Reinvestment Act as well as the other factors considered by the Board when it reaches decisions on applications made by bank holding companies. I am pleased to let you know that the application has been received by the Federal Reserve Bank of New York. I will keep you informed of any Board action. Sincerely, yo-)c.1 S Paul A„V KB:CO:vcd (V-10, 87-422) bcc: Ken Baebel Mrs. Mallardi (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis HENRY B GONZALEZ, TEXAS, CHAmmAN FER7"ANL) J ST GERMAIN RHODE ISLAND WALTER E FA:Jr./TROY DISTRICT OF COLUMBIA STAN LuF.041E NEW YOkK VARY ROSE OAKAR OH.0 BRUCE F vENTO, MINNESOTA ROBERT GARcIA, NEW YOkK PARREN J MITCHELL MARYLAND CHARLES E SCHUMER. NEW YORK BARNEY FRANK MASSACHUSETTS RICHARD H LEHMAN CALIFORNIA BRUCE A MORWSON CONNECTICUT JIM COOPER TENNESSEE MARCY KAPTUR. BEN ERDREICH ALABAMA SANDER PA LEVIN MICHIGAN THOMAS R CARDER. DELAWARE ESTEBAN E ToRRES, CALIFORNIA BUDDY ROEFAER LOUISIANA GERALD 0 KLECZKA. WISCONSIN PAUL E KANJORSKi PENNSYLVANIA THOMAS J MANTON NEW YORK FuSTER, PUERTO RICO OHIO U.S. HOUSE OF REPRESENTATIVES SUBCOMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT OF THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS NINETY-NINTH CONGRESS 2129 RAYBURN HOUSE OFFICE BUILDING WASHINGTON, DC 20515-6052 STEWART B McKINNEY. CONNECTICUT CHALMERS P wYLIE OHIO MARGE ROJKEMA NEW JERSEY GEORGE C WORTLEY NEW YORK BILL McCOLLUM FLORIDA DOUG BEREUTER. NEBRASKA DAVID DREIER CALIFORNIA JOHN HILER INDIANA THOMAS J RIDGE PENNSYLVANIA STEVE BARTLETT TEXAS TORY ROTH. WISCONSIN ROD CHANDLER WASHINGTON AL McCANDLESS CALIFORNIA JOHN E GROTBERG ILLINOIS JIM KOLBE ARIZONA J ALEX McM,LLAN NORTH CAROLINA GERALD R McMURRAY, STAFF DIRECTOR (202) 225-7054 JAIME B January 29, 1987 B4/1gi The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Constitution Avenue and 21st Street, N.W. Washington, D. C. 20551 Dear Mr. Chairman: I am writing to supplement my letter dated December 23, 1986, regarding the acquisition of Texas Commerce Bancshares, Inc., by Chemical New York Corporation. Texas Commerce owns two subsidiaries in San Antonio. On information provided by Texas Commerce, I am advised that Texas Commerce Bank -San Antonio, has made about 56% of its home improvement loans to minority borrowers and a similar percentage of personal loans to minority borrowers. The bank's employment includes a substantial number of minority persons, 39% of the total. I am not aware of any formal complaint indicating Texas Commerce has failed to comply either with the Community Reinvestment Act, or the Home Mortgage Disclosure Act. As stated in my earlier letter, I am keenly aware of the enormous problems confronting banks in Texas, and of the expectation that mergers such as that proposed between Texas Commerce and Chemical will ameliorate the difficulty. It is my hope that the Board will ensure that one result of such mergers, including this one, will not be to dilute bank sensitivity to community concerns and needs. Texas Commerce has done well in San Antonio; I hope to see this record sustained and improved. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Hon. Paul A. Volcker Page -2- January 29, 1987 Based on the information at hand, and assurances given to me by Texas Commerce, I withdraw my request that the Board delay approva l of this acquisition. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely you Henry B. Gonzale Member of Congress Chairman .410, ••••.. .• GOvt •. R4% o • -o ••42 .o 'A BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, 0. C. 20551 PAUL A. VOLCKER RAL RE.S" • '• •..• • • CHAIRMAN February 26, 1987 The Honorable John Glenn Chairman Committee on Governmental Affairs United States Senate Washington, D.C. 20510 Dear Chairman Glenn: Pursuant to 31 U.S.C. 1344(d)(4), as recently enacted in H.R. 3614, legislation which restricts the use of government vehicles, the Board is reporting to the Committee with regard to the provision of home-to-work transportation in recent weeks to members of the Board of Governors and its staff. The General Services Administration regulations implementing H.R. 3614 are not yet issued. Nevertheless, recent hazardous weather conditions have caused the Board to use the exemptive provisions of 31 U.S.C. 1344(d)(2) much more than had been anticipated. Since the statute is in force notwithstanding the absence of regulations, we have decided to file this report at this time because of the statutory requirement of prompt filing. Should the GSA regulation, when issued, indicate that additional information not contained in this letter is required, we shall promptly file a supplemental report. All of the transportation reported in this letter was provided to Board Members and staff persons needed for essential activities of the agency. Transportation was provided on January 22, 26, and 27, and on February 23, 1987, based upon a determination that an emergency existed due to the severe winter weather conditions that were experienced on those dates. In each case, special vehicles were dispatched to assist those essential Board Members or employees who could not reach the Board or return home by other means. As you know, Government employees were sent home early on January 22, 1987, and were permitted to stay at home on January 26 and on February 23, and liberal leave policies were in effect on January 23 and 27, 1987. All of the excepted transportation was provided on these dates, as indicated by the following summary. Date Name and Title Additional Information Jan. 22, 1987 Manuel H. Johnson, Vice Chairman Residence to Board and return. Required for the conduct of Board business. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 47. Date Name and Title Additional Information Jan. 22, 1987 Lorenzo Lyons, Data Processing Tech. From Board to residence. These employees were needed to complete a report which is required by statute to be issued by the Board at the end of each week. See 12 U.S.C. 248 (a) (1) Hence, they were not able to leave early with other government workers on this date. Yvonne Abdullah, Data Processing Tech. Arlene Baker, Data Processing Tech. Yvonne Briscoe, Data Processing Tech. Jan. 26, 1987 H. Robert Heller, Member of the Board Residence to Board. Manuel H. Johnson, Vice Chairman Residence to Board and return. William Wiles, Secretary of the Board Residence to Board and return. All were needed for participation in the Board meeting. Jan. 27, 1987 Manuel H. Johnson, Vice Chairman From Board to residence. Required for the conduct of Board business. Feb. 23, 1987 Maria Titus, Telephone Operator Residence to Board and return. To provide communications support for the Board meeting and subsequent requirements. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Lillian Johnson, Telephone Operator Anne Albrecht, Chief Operator Claretha Durham, Mail Supervisor Residence to Board and return. To provide distribution and reproduction of critical material related to the Board meeting. Catherine Mallardi, Admin. Asst. to the Chairman Residence to Board. To prepare testimony for the Chairman's appearance before Senate Budget Committee. Date Name and Title Additional Information Feb. 23, 1987 William Wiles, Secretary of the Board Residence to Board and return. Required to attend the Board meeting. Richard Spillenkothen, Asst. Director of the Division of Supervision and Regulation Residence to Board. Presentation of critical information for the Board meeting. If additional information is required, you may contact Robert E. Frazier, Director of the Division of Support Services at (202) 452-3816. Sinc rely, SS:DJW:bpm bcc: Steve Siciliano Mr. Bradfield Mr. Frazier Mr. Frost Legal Records (2) Mrs. Mallardi (2) IDENTICAL LETTER ALSO SENT TO CHAIRMAN BROOKS. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551 PAUL A. VOLCKER February 25, 1987 CHAIRMAN The Honorable William Proxmire Chairman Committee on Banking, Housing, and Urban Affairs United States Senate Washington, D.C. 20510 Dear Chairman Proxmire: Thank you for your letter of February 6 enclosing written questions in connection with the hearing held on banking legislation on January 21. I am pleased to enclose my responses to the questions for inclusion in the record of the hearing. In addition, 'I have sent letters to Senators D'Amato, Cam, Graham, and Sanford enclosing my responses to their questions. I hope this information is helpful. if I can be of further assistance. Sincerely, Enclosure CO:vcd/pte (V-15, 87-474) bcc: Ed Malan, Senate Banking Committee https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mike Bradfield Ted Truman Mrs. Mallardi (2)i/ Please let me know BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 205SI PAUL A. VOLCKER February 25, 1987 CHAIRMAN The Honorable Jake Garn Ranking Minority Member Committee on Banking, Housing, and Urban Affairs United States Senate Washington, D.C. 20510 Dear Senator Cam: In response to a request from Chairman Proxmire, I am pleased to enclose my responses to the written questions you submitted in connection with the hearing held on January 21 on banking legislation. . I have also sent a copy of these responses to Chairman Proxmire for inclusion in the record of the hearing. I hope this information is useful. if I can be of further assistance. Please let me know Sincerely, Enclosure IDENTICAL LETTERS SENT TO: Senators D'Amato, Graham & Sanford attaching responses to each of their questions. CO:vcd/pte (V-15, 87-474) bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mrs. Mallardi (2) Chairman Volcker subsequently submitted the following in response to written questions from Chairman Proxmire in connection with the hearing held before the Senate Banking Committee on January 21, 1987: Q. 1: You stated that not closing the nonbank loophole and thus allowing a mixture CDT commerce and banking will result in an increasing concentration of financial and commercial power in our country. Why in your view is that a problem and are there any political implications on such an increased concentration? ANSWER: to a Failure to close the nonbank breakdown commerce. the traditional separation of banking and As more commercial firms acquire nonbank banks pressures will enterprises. existing in bank loophole will lead grow for banks That may occur law, or it as come may to also acquire banks find about by the commercial ways to exploit actions of state legislatures, or it may develop from Congressional action response to commercial appeals for firms competitive equity. derive advantages from in Also, as some banking services provided by their affiliated banks, their competitors will feel impelled to acquire their own banks. phenomenon carries within it the Thus, the seeds for a nonbank bank significant burgeoning of merger and acquisition activity. The nonbank vision banks is apparently that market seen by forces some will proponents eventually of sort themselves out into a relatively few major financial commercial conglomerates operating nationwide and dominant institutions in banking. internationally as the When or if that "vision" would fully develop, it seems to be evident the end result could be an inevitably increased concentration of financial and economic power. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S -2- The classic problems and dangers of a concentration of economic power are applicable Concentration is likely to Equally or more influence their the provision banking enterprises. this instance banks to serve credit to the or their otherwise, fortunes of will commercial while large well. inevitably interests exposing scale in the commercial In particular, there should also be concern that access to credit for smaller companies and could as ultimately reduce competitiveness. important, commercial firms of system in be reduced beginning companies by the linking of banking to large established commercial enterprises. Q. 2: If there is any competitive advantage from owning a bank, once one firm in an industry acquires a bank, all the other firms will be forced to acquire or set up there own little "pocket banks." I am concerned the result will be a proliferation of banks, many operated by companies inexperienced in banking, needlessly and perhaps dangerously increasing the burden on U.S. regulatory and supervisory resources. Are my concerns justified? ANSWER: Yes. The increased supervisory arise not so much from the problem increase in as I see it would the number of banks subject to supervision but rather from the problems associated with the affiliation of banks with commercial firms. From experience in administering the Bank Holding Company Act, we do not believe that it is possible to insulate at all fully bank from https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis the financial problems of its affiliates. the -3- Although some very strong companies have acquired nonbank banks, there is no reason to think, if this phenomenon develops further, that only strong companies will acquire banks. I would expect to see an impact on the condition of banks and a rise in bank failures as riskier companies and weaker companies acquire banks. Questions will arise as to the nature of the responsibilities of the supervisory agencies to assess the financial condition of the commercial company and to anticipate problems that might have repercussions on the affiliated bank. It should be clear resources or that the banking agencies do not have expertise to examine companies that would be affiliated the the variety of commercial with banks, nor could that be desirable if it could be avoided. There supervisors. will be another heavy burden imposed on If banks and commercial companies are affiliated, there will be substantial questions about conflicts of interest and strong natural interest of their incentives for banks commercial owners or to operate in the affiliates, including discrimination against competitors or potential competitors of their affiliated commercial company. We can write rules against tying, but in practice, the problems for the regulatory agencies in this area would be very difficult and argue strongly for a continued separation of banking and commerce. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -4- In 1984 there was broad agreement about the need to Q. 3: close the so-called South Dakota loophole, but there was considerable disagreement over how it should be closed. Senator Garn and I favored a provision that would have permitted states to allow their state-chartered institutions to engage in insurance activities provided they engaged in them Senator Dodd's provision, solely within the chartering state. which prevailed in the Senate, provided that even if a state authorized its state-chartered banks to engage in insurance activities, they could not do so if they were a subsidiary of a bank holding company. In light of the Federal Reserve's denial in 1985 of Citicorp's application to acquire a South Dakota bank to engage in nationwide insurance activities, do you still think Congress needs to enact legislation to close that loophole? If so, which approach to closing the loophole do you favor -- the one originally proposed by Senator Garn and me or the one advocated by Senator Dodd and previously adopted by the Senate? I believe that it is still desirable and necessary for ANSWER: Congress to clarify existing so-called South Dakota certain circumstances law loophole. be and While.existing enough broad the definitively close to cover law may in an egregious case, the Congress should leave no mistake about its policy in this area. The Federal Reserve supports the approach taken by you and Senator Garn -- namely, to limit nonbanking activities to the state amendment. that the At authorized same time them we to that of the that it believe Dodd would be desirable to place some outside limits on what a state would permitted as to authorize for state banks. unrestricted real estate be Some activities, such development or securities investments, plainly involve higher risks and could result in losses to the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis federal insurance funds. Accordingly, in our -5- judgment the federal government should be able to determine that certain activities are "outside the pale" of what should be a permissible activity for a federally insured institution. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Chairman Volcker subsequently submitted the following in response to written questions from Senator Graham in connection with the hearing held before the Senate Banking Committee on January 21, 1987: What impact does the declining dollar Q. 1: banking system? ANSWER: factor have on the U.S. Exchange rate changes are probably not a direct major at indirect present for implications. typically have currencies, banks, U.S. While significant management of but banks U.S. open they do exchange currency swaps obviously carry risk in some themselves do not positions foreign have in foreign portfolios volatile and markets that must be protected by adequate capital and controls. Bank customers are, of course, exposed exchange debtors variations In so far as the economic well-being of the in exchange rates. banks's to and rates, so creditors too will affected is by changes the banks be affected. in For any given change in exchange rates, some individual customers will benefit and decline in some will the dollar lose. will As tend general a to enhance proposition, a the competitive position of U.S. firms and may help, therefore, to enhance the credit quality of U.S. banks' loan domestic portfolios. On denominated the in other dollars hand, the real will diminish value with of wealth a decline in the dollar, and this may adversely affect banks' customers as well as banks themselves. The decline in the dollar had the incidental effect of making the dollar value of foreign banks' https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -2- balance sheet positions larger relative to the balance sheet positions of U.S. banks. Beyond the fundamental positive competitive impact on banks' customers, a decline in the dollar will tend to reduce some of the costs (e.g.,, labor costs) incurred by U.S. banks relative to those incurred by banks in other countries, just as it improves the competitiveness of nonbank organizations. Q. 2: On page 10 of your written testimony you discuss foreign experience with "universal" banking systems as justifying What role has greater integration of banking and commerce. their currency exchange rate and fiscal system played in their developing this system? ANSWER: other In my written testimony I said that the experience of industrialized does countries ndt justify greater integration of banking and commerce and that, if anything, the trend is toward placing limits on such further I linkages. noted also that ". . . in fact, whatever the formalities of the law, there are few commercial firms instances owning in industrialized important banking countries of institutions" (pages 11-12). Although I am not an expert on the role played by exchange rate systems or fiscal systems in the evolution of the financial structure of foreign countries, I would be surprised if the experts would say that exchange rate systems played a substantial role, since for most of the period during which the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -3- structure of banking systems developed, all essentially similar exchange rate systems. countries had It may be somewhat more likely that variations in fiscal systems could have played a significant role, given the complex interactions between tax policy and a priori the structure of economic enterprise, but on basis, would I be hard put to demonstrate an that differences in fiscal systems have had a significant effect on the structure of banking systems. Q. 3: On page 17 of your statement you discuss the international forces at work in the banking and financial marketplace. Would you elaborate on these "international forces"? ANSWER: Innovation and deregulation in both domestic financial markets in nature and scope of financial markets, taking advantage recent years international and have transactions. of developments altered World in the financial communications technology and computers, are now much more closely integrated with worldwide trading 24-hour a day basis. in some financial instruments on a The volume of international transactions is enormous, amounting to well in excess of 4-1/2 trillion per day, on average. much wider involving Major borrowers and lenders have access to a range of large, markets. prime Credit flows, especially those borrowers, increasingly are being "securitized," that is, they take the form of direct claims of lenders on ultimate intermediaries. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis New borrowers, financial rather than using instruments, banks often not as -4- showing up on banks' balance sheets, are evolving and growing These forces reflect technological change and in importance. competitive forces generally and are international in scope. On page 23 of your written testimony you discuss the Q. 4: supervisory and regulatory discipline that needs to accompany Do you see this supervisory and self help by the industry. regulatory discipline needing to be increased? I believe that Chairman Gray and ANSWER: an excellent job under very industry with a significant and one whose prudential institutions supervision testimony, the Congress. I constraining Bank will the and insolvent of participants are not used to a high degree of regulation. As Board add circumstances -- an difficult number the FHLBB have done that deserves the FSLIC/FHLBB's the noted support Congress ability I should in of my the avoid to limit abuses, to require realistic collateral and loan valuations, or to require mergers of illiquid or insolvent institutions -- in short to act as a serious and prudent supervisor. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Chairman Volcker subsequently submitted the following in response to written questions from Senator Sanford in connection with the hearing held before the Senate Banking Committee on January 21, 1987: During your testimony, you stated that it was not Q. 1: late to close the nonbank bank loophole because there are 13 nonbank banks owned by commercial firms that present If the nonbank bank loophole were closed, would problem. favor closing it for all nonbank banks or only for those nonbank banks owned by commercial firms? too only a you 13 If we were to allow all but those 13 nonbank banks to remain open, how do we distinguish them from all other nonbank Could you suggest specific legislative language that banks? carves out a method for grandfathering all but those 13 nonbank banks? If the nonbank bank loophole were to be closed in this manner, would additional restrictions need to be placed on the remaining nonbank banks and if so, what restrictions? In ANSWER: my testimony, I emphasized the 13 nonbank banks that are owned by commercial firms because I see this aspect of the nonbank major down bank as the most serious pat of the problem. purpose of closing the nonbank bank loophole is a framework -- financial system. maintenance commerce. of If the a marker -- Fundamental for to traditional the Congress fails A to set the evolution of the that evolution is the separation of banking and to close the nonbank bank loophole, the number of these institutions that will be owned by commercial firms will undoubtedly expand and the opportunity will have been lost to maintain the separation principle that I believe is so important to an effectively functional financial system. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -2- On the other hand, eventually, I see the possibility of expanding the authority for financial institutions to own banks to include, for example, firms engaging in securities and insurance underwriting. maintaining the Thus, I see no conflict between basic separation between banking and commerce and allowing the grandfathering, with appropriate restrictions, of the approximately 65 nonbank banks that are owned by financial services firms, at least while Congress resolves the larger issue of the appropriate powers of banking organizations. With respect to your specific question, I object to closing making for not the loophole prospectively for all nonbank banks, with grandfathering, if Congress considers appropriate, would existing is that the nonbank grandfathering practical matter, and banks.. The approach this point I is feasible not inconsistent with to be was as a the maintenance of the basic principle of separating banking and commerce, because the number of nonbank banks affiliated with commercial firms is relatively small. that nonbank Implicit in your question is the suggestion banks owned by financial firms be grandfathered but that commercial firms be required banks. This seems to me one possible approach. In answer to the second Congress desires divest their https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis to divest their nonbank to require nonbank part of your question, if the the 13 nonfinancial companies to banks, the following language could be -3- inserted in section 4 of the Bank Holding Company Act after the general language grandfathers that nonbank banks acquired before the grandfather date: Notwithstanding any other provision of this Act, a company that is engaged in activities that are not of a financial nature may not retain for more than two years after the effective date of [the name of the amendatory statute] control of an institution that becomes a bank as a result of enactment of the [the name of the amendatory statute]. The term "of a financial" nature would encompass broad spectrum of insurance the securities activities, but and would not cover manufacturing or retailing activities. to restrictions on the remaining nonbank banks, I As indicated expand in testimony my that they shopld not be able to their operations or to operate them in tandem with their nonbanking affiliates. grandfathered products and nonbank services permissible for bank Under banks of the could nonbank holding tandem not affiliates companies or products and services to be offered or affiliates. As one method offer rule, or the market the that are not permit the bank's marketed through such of assuring compliance with these limitations, the grandfathered nonbank bank should not be able to have overdrafts at the Federal Reserve Banks on behalf of their affiliates. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -4- Q. 2: At the conclusion of your oral testimony, you stated that one of the major risks in breaking down the barrier between commerce and banking is the risk to the payment system. Your concern appears to be that the Federal Reserve does not now and does not wish to regulate commercial firms. However, many states now allow foreign firms, many of which are owned by foreign commercial enterprises, to purchase banks. In that situation the Federal Reserve has no knowledge of or ability to regulate the foreign parent. Do you believe this situation raises similar risks to the payment system? If not, why not, and if so, what, if anything, should Congress do about it? ANSWER: foreign Access banks by U.S. offices (branches and to our agencies) of payments system is a matter we monitor closely because we do not have close supervisory contact with their parent banks. limited now. That is Their why their access to Fedwire is uncollateralized daylight on overdrafts Fedwire cannot exceed a quantity related to their U.S. capital equivalency (essentially a portion of their U.S. assets) and such exposure is monitored closely. U.S.-chartered foreign-owned banks, with capital in the U.S., are treated like any other bank, and it is true that their foreign enterprise. banks parent (To the are owned necessary in a by a may be best of affiliated of sovereign different policies from our own and treatment. In my view, these commercial a knowledge few international my commercial firm.) world with situation This nations which may is have under a policy of national arrangements for treating domestic subsidiaries of foreign banks the same as U.S. banks represent https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis a reasonable basis for facilitating international -5- trade and similar capital terms and markets. U.S. banks operate conditions. abroad under U.S. authorities, of course, have to be diligent in evaluating the risks in practice, but I think no action is required at this time by the Congress, although I would like to see more equal treatment of U.S. banks overseas. One of the central themes of much of the testimony Q.3 presented at the hearings dwelled on the tremendous change that we have seen in the financial services industry. One set of such changes is what has occurred in the thrift industry with may thrifts becoming more like banks in issuing certain commercial and consumer loans and carrying checking accounts for individuals. Given the blurring of the line between banks and thrifts, what would you feel the advantages are disadvantages would be of merging our bank and thrift industries? . How would you envision such a merger taking place, and would it involve a merger of the FSLIC and FDIC funds? If so, would the FSLIC still need recapitalization before the funds were merged? ANSWER: There is no doubt that thrifts and more alike in recent years. banks have become However, I see no need to "force" a merger of the two industries. There is still a desirable place for specialized institutions, and those that continue to, say, specialize in residential mortgage finance might well continue to enjoy special privileges. However, I do believe that when thrifts give up that specialization -- fail to meet a thrift portfolio test -- this should be taken into account in terms of access subsidized https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis credit, and, for example, with to long-term respect to -6- application of rules on branching. Regardless ownership and of portfolio instate and structure, all depository institutions require the same degree of supervision and regulation, and the same attention quality, capital base, and liquidity. lessons of the last decade. would be (although one way of because of insured prudential to asset That is one of the clear Merger obtaining interstate of the consistency insurance of funds treatment past history, the actual funds would segregated for a period) and I would be welcome Congress exploring that possibility, with others, at a later date. Q. 3 (3rd paragraph): Given the changes that have occurred in the thrift industry in the last five years, do you believe that the rationale stated by the Federal Reserve Board in 1974 for concluding that the purchase of a thrift, by a bank is not "a proper incident to banking" is still valid? If so, what and if not, what rationale would you give for continuing to prevent banks from acquiring healthy thrifts? ANSWER: No, I do not believe, in fact, the former rationale is still valid. by bank The Board has approved a number of acquisitions holding companies of failing thrifts on the basis that the public benefits of restoring and such institutions to health preventing what otherwise might be serious adverse effects on the thrift industry outweigh any adverse effects from the affiliation. been authorized by the Most of Board the under resulting thrift acquisitions have the provisions of the Garn-St Germain Act, which establishes certain procedures for a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -7- bank Given the to acquire a failing thrift. holding company Congressional intent embodied has Board in that statute, the to approve acquisitions of thrift institutions felt constrained only under those provisions. As point you significant changes years, the in the including however, out, elimination differential, the expansion institutions, and the both opportunities for still remain to of the proliferation banks and the of the last few interest of powers thrift interstate of thrifts. rate banking Nevertheless, there important public policy implications in allowing to acquire holding companies continue in thrift industry very been have there limit healthy out-of-state thrifts. bank holding Many states companies' acquisitions of banks located in those states, and, if they do allow such acquisitions, only by bank holding companies located within certain defined regions. Moreover, allowing the acquisition of healthy thrifts has been opposed in the past by the FHLBB, which holding company also has regulatory jurisdiction over healthy thrift acquisitions, because of bank the adverse implications for the ability of the FSLIC to deal with failing thrifts. In light of these considerations, it would be useful for Congress to provide the Board area. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis with guidance in this -8- Much of the delay in clearing checks results from the Q. 4. lengthy process of returning checks that the bank decides not What steps do you think could be taken and what to honor. legal changes would be required to short-cut the return of checks through the entire chain of banks involved in the presentation of the check? There are ANSWER: return a number of checks could returns permitting to of different means by which accelerated be ranging from the simply be made directly to the institution of first deposit in all jurisdictions to facsimile transmission of back the feasible most the provide direct return if process. the Federal regulatory terms making of major a process at reasonable cost would in return in approach improvement for We believe to the institution of first deposit. the check of checks authority. is This provided approach with the would to the be feasible These improved arrangements would Reserve of automation with be necessary permit earlier availability of deposits at relatively low cost. Generally, payor banks would required be returns to the institution of first deposit time frames. Board to This would establish institutions for these necessitate arrangements for all checks regardless of use of within specified require regulatory authority for all transportation the depository whether collected through the Federal Reserve System. would to effect they were This requirement methods that would expedite the return of checks rather than use of regular mail which is now used for over 11 percent of returns, slowing the trip back to the institution of first deposit by several days. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -9- requirement for A period checks directly to the payment for to recoup deposit and Uniform time would necessarily require depository institutions to be to return able specified a within returns Commercial Code of most of first institution the check. jurisdictions Although the provides for direct return, three jurisdictions, New Jersey, Wisconsin and the District of Columbia Board The would need not do provide for direct returns. regulatory authority to implement direct returns for all depository institutions. One means of improving the efficiency of handling return items would be to enclose them in carrier envelopes and have them collected through the forward check collection In order process -- in effect an automated direct return. encourage payor depository institutions envelopes for this purpose, the Board authority to create incentives for to would all use carrier have to have payor institutions to use this procedure for checks to the depository where it would speed the return process. In addition, other in speeding the return proposals might also be beneficial process. Accordingly, we believe that it is necessary for the Board to be given sufficient regulatory authority in order to speed the check return process for all checks, whether or not processed Banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis through the Federal Reserve -10- Q. 5: You stated that you do not believe that granting banks the power to market or issue commercial paper, mortgage-backed securities, municipal revenue bonds or mutual funds presents What specific steps do you believe should be any great risks. taken to ensure that the consumer who is encouraged by his banker to, for example, invest in mutual funds, does not mistakenly receive the impression that such an investment is somehow backed by the bank or even FDIC insured? ANSWER: companies disclose affiliate The Board has long had a policy requiring bank holding issuing thrift notes and other debt obligations to bank and they that prominently are are not insured an of obligations not by the Federal Deposit Moreover, such obligations may not be Insurance Corporation. sold on the premises of an affiliate bank. In companies the event that Congress authorizes to holding bank underwrite mutual fund shares or mortgage-backed securities, the Board consideration, a would requiring proposal in consider, and the under fact has holding company to provide each of its customers a disclosure statement describing the difference between banking affiliates. the underwriting affiliate and its Such a statement could also indicate that the obligation is not insured by the Federal Deposit Insurance Corporation or an obligation of an affiliate bank. also has under consideration limiting the The Board distribution prospectuses and sales literature for such securities offices of an affiliated bank. through The Congress might want to consider a requirement of a distinctive name. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis of I # Chairman Volcker subsequently submitted the following in response to written questions from Senator Garn in connection with the hearing held before the Senate Banking Committee on January 21, 1987: Q. 1: In your testimony, you state that the need for additional liquidity for FSLIC is urgent, that the Treasury Plan in the only practical alternative, and that there is no time for delay. What is your view of the U.S. League proposal? ANSWER: I am not fully informed about the financial aspects of the U.S. League proposal, but my sense financial capacity would be less is than Moreover, the public's attitude toward that the it's assured Treasury Plan. the thrift industry is likely to deteriorate it if appears always to be on the brink of one emergency after another. given the Thrift regulators should be necessary resources to address the problems of the thrift industry. The Treasury Plan appears to be the practical alternative before Congress. Q. 2: Some trade publications have reported that you believe a merger of the insurance funds may eventually be necessary -would you please comment on that. If a merger were necessary, do you think it would involve a merger of the regulatory structure? Would thrifts still be required to pay a special assessment or would banks and thrifts be required to contribute equally? ANSWER: will As Board alternative https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis problem faced a considerable take resolve. Bank The I by the FSLIC is both serious and amount of time and resources to have stressed, the Treasury-Federal Home Loan recapitalization that is now proposal before is the the Congress. practical I would urge, -2- however, that adoption of this alternative should not foreclose our looking at other ways to supplement this approach. the that merger of I have suggested two insurance funds over a considerable period of time might be one approach Merger of the two funds that ought to be carefully analyzed. would, I believe, have a psychological positive immediate impact in helping to maintain depositors confidence. It would also have the very beneficial effect of placing both banks and thrift institutions under the same broad regulatory framework applying the same accounting, capital and supervisory standards This would seem to me to be a to both types of institutions. very desirable objective and problems that developed Although the Federal in Home would past the Loan help to assure that the Bank wbuld Board has strides forward, more remains to be done and two funds could Obviously, be a major application the not reoccur. made major the merger of the catalyst for these developments. of accounting, regulatory and capital standards now applicable to banks would have to take place over a period of time. Similarly, full integration of risk assumption would also have to take place over a period of time. One approach might be for the FSLIC to remain for some period as a separate accounting entity within the FDIC and with thrift institutions paying higher premiums into this facility: of time would there premium charges. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis be full risk sharing only after a period and equality of -3- In response to your question, I mention this idea only as input into your thought process as an additional perspective to take the necessary immediate action is into account after taken to strengthen the FSLIC as proposed in the Treasury-FHLBB proposal now before the Senate. Q. 3: In your testimony, you indicate that common ownership of businesses means common direction and further state that the fortunes of one business unit rest on the performance of the This may be true for a traditional bank holding others. company where virtually all the assets are bank assets -- but isn't it much less true for more diversified firms who routinely sell off businesses in whole or in part that do not perform as expected -- such as American Express? ANSWER: In my view, any form of holding company implies common direction by holding company management. This is particularly true in the case of companies that own blanks, where confidence is essential their to success. who entrust customers secure use of credit lines. Banks must have the confidence of with them payment mechanism, and the assets, seek desire dependable Consequently, bank customers are understandably sensitive to the strength of their bank and the reliability of Our experience is that depositors and other their management. funding liquid sources can and do react to negative news regarding affiliated units that the customers clearly perceive to be part of the bank entity (most often with the same name). experience is that managements tend https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis in response, bank and holding Again our company to behave as if the affiliated companies are -4- one entity in order to protect the name and position of all the affiliates. I do not see why this situation would the case of a small bank. change in large diversified firm that owns a relatively Problems in the affiliate would still have a potential impact on its bank and, consequently, on the federal safety net proposals would as for well. Moreover, eliminating prevent the bank the I see nothing banking/commerce acquired in current barriers that by a diversified firm from being a very large bank, absolutely or relative to the business of the firm. Care would have to be exercised to assure that the resources of the bank would not be used to support troubled affiliates. from For affiliated where the many reasons, including the risks to banks firms, I do not think we should take chances combination of banking and commercial firms is involved. Both bank businesses can and holding companies and more diversified do sell affiliates, and I expect, as you suggest, that is more common for the diversified firm. do not think that changes the analysis. But I You are aware, for instance, the American Express infused large amounts of capital in its insurance affiliate company, and could afford in time of need. to do so. It is a strong Baldwin United apparently drew on different parts of its corporate structure to support the whole, until it all went bankrupt, involving its insurance company as well as other parts. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -5- In reading your testimony, I was surprised to see Q. 4: references and arguments leading toward a financial services Not only do you endorse commercial paper, holding company. municipal revenue bonds, and mortgage-backed securities, you also support investment companies being able to affiliate with Isn't this the first time you have a full service bank. testified that you recognize the unfairness of a legislative proposal that would grant bank holding companies mutual fund authority while requiring investment companies to divest their nonbank banks? ANSWER: Under my bank proposal, holding companies be would permitted to own a firm that underwrites and distributes mutual funds. The effect of this authorization would also be to allow a firm that distributes and is This bank. not merely underwrites mutual funds to own a theoretical a concept -- a as practical matter there are a considerable number of mutual fund underwriters that would be in a position to take advantage of this opportunity. This position is entirely consistent with the position I that have with cooperated for taken the Treasury that was introduced as bank some time. The Federal Reserve Department in drafting the bill S. 1609 in 1983 which advocated that holding companies be permitted to engage in a considerable number of financial activities, including effect of the bill would have been mutual funds. to permit bank The holding companies to own these types of financial services firms and vice versa. While the four securities powers you mention have long been supported https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis by the Board, my testimony clearly suggested -6- Congress ought to explore further "financial" powers as well at a later between banking would these None of day. Moreover, commerce. and basic separation violate is it its within institution operate maximum separation between the that companies affiliate company the bank and this owning to prudential framework a other bank a between important because of the identity of interest and especially assure financial companies, and that the enterprise as a whole be operated in a safe and sound manner. Q. 5: Later you strongly recommend that the committee consider expanding bank holding company activity to insurance and even You point to the overseas market -corporate underwriting. the ever increasing trend toward and particularly London -securitization. If after study the Congress were to decide to the product authorities of bank holding further extend companies, is it fair to extend the logic of the financial service holding company concept to those new authorities? ANSWER: I do not know what is service holding company." your previous question, the expansion bank of holding "the logic of a financial But, as I pointed out in answer to proposals company that we powers and inherent in it a two-way street -- if a bank have made services holding for has company can e.g. buy an insurance company, an insurance company should be able to buy a bank -- provided, in either case that all the activities of the combined holding company. the powers https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis for We bank firm are appropriate strongly recommend holding companies for a bank that Congress expand to allow them to -7- compete more effectively and at the same time this will have the effect of permitting other types of providers of financial services to own banks, all within the framework that we believe is maintaining to essential the stability and safety and soundness of the financial system and to avoiding conflicts of interest and concentration of resources. With regard to the so called nonbank bank -- do you Q. 6 believe that the Congress should deal with the nonbank bank and the so-called nonthrift thrift at the same time? ANSWER: the Yes. nonbank nonthrift It makes little sense, in my opinion, to close bank loophole If thrifts. without addressing the problem the Congress closes the nonbank bank loophole without acting on the nonthrift, thrift question, this would encourage companies seeking to affiliate with depository institutions to gain access to the payments system or for other reasons to acquire a exemption companies. maintains own "free provided thrift institution for unitary savings through and the current loan holding I believe this loophole can be closed in a way that the option for diversified companies to continue to standing thrifts" heavily engaged in financing housing, while requiring those that wish to engage in a broader range of financial services activities to conform to the same prudential and other rules that are competitors in the same businesses. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis applicable to their -8- Q. 7: Over the past fifteen years there appears to have been a distinct change in the profitability of the basic wholesale banking business as noted in the report recently completed by the Federal Reserve Bank of New York. I would be interested in your comments on the future viability of banks referred to in that report. ANSWER: More intense competition nonbank from banks, foreign from suppliers of credit, and from the securities markets have all placed the profit margin of banks, particularly large However, I do not read wholesale banks, under more pressure. the New York Bank shift in with report as reflecting profitability. In particular, loan losses associated special situations (developing sectoral difficulties or country a dramatic permanent real debts, agriculture, estate, and energy) have played a more significant role in constraining earnings. As a general matter, these problems are credit risks associated with the traditional banking adjusted over time. business that will Independent of be these absorbed banking and credit problems, wholesale banks could benefit from additional powers, such as powers types of securities. underwriting certain that regulatory we have response envirS nment. supported to a would change I do not, under in represent the a The new prudent competitive this approach, fear for the viability of banks, large and small. There is another area where progress must be made to assure fS reign https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis a more competitively banks -- capital fair adequacy environment for standard. More U.S. and uniform -9- international capital standards, such as developed in the recent Bank of England-Federal Banking Agencies agreements, are an important step in a more equitable institutional competitive environment. the Following the direction of Congress contained in International Lending Supervision Act, I think we are beginning to make real progress in this area. Q. 8: I believe that about 15 years ago, 7 out of the top 10 largest banks in the world were U.S. banks and today only one of the top 10 banks in the world is a U.S. bank. I'd like your views on why the growth of U.S. banks relative to the growth of other banks has slowed down so dramatically. ANSWER: One very important factor over the past two years has been the strong rise in the yen and other currencies, relative to the dollar, which has made banks' balance sheets grow banks. the dollar much faster value of foreign than that of U.S. This, of course, reflects fundamental problems arising from our trade and budget deficits, and the surpluses of other countries, and does not imply any lack of competitiveness of United States banking institutions. But there are other factors that should be taken into account. Lists of the top banks in the world are dominated by banks in countries with highly concentrated banking systems -Japan and France which are not necessarily a model for us. Historically, U.S. banking organizations have certainly been among the more aggressive internationally, but, more recently, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -10- their U.S. banks have been paring back balance sheets in order to enhance their rate of return on assets and to improve their capital • positions. Meanwhile, more foreign • banks have been increasingly •aggressive in international money markets. While precise comparisons of capital standards across countries are • difficult, it seems that not all foreign banks are subject to • standards as stringent as those capital effort with an •in The Federal Reserve has been actively engaged other supervisory authorities to U.S. banks. by •faced international coordinate process was made in the that •in capital stanS.rds; a major step recent joint risk-based capital proposal by the Federal Banking Agencies and the Bank •of England. In cS ncerned strong general, I with banks the will believe strength be able that •and to we should be quality of our compete primarily banks, and effectively and aggressively in international markets. Q. 9: As you know, several U.S. money center banks have been in the business of underwriting corporate securities in Europe for a number of years. And as far as I know, they have done so without any particular problems or threats to the safety and If this is true, what is soundness of the parent institution. wrong with letting them underwrite corporate securities in the U.S. market? ANSWER: I It is true that bank affiliates abroad are permitted underwrite corporate debt issues in those markets in which local banks may do so, although there are severe limitations on their authority to underwrite equity issues. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Their success in -11- that should underwriting corporate bonds is certainly a factor be taken into consideration in evaluating legislation to permit such activity in the United States. However, the size of U.S. capital markets, the number and nature of potential issuers and bank underwriters, and the competitive environment, all need be evaluated. I believe of consideration that such to an expansion of underwriting authority should be part of a broader examination of bank planned to follow holding company powers and services that is consideration Congressional the of legislation that is now before the Senate Banking Committee. The United Kingdom and Canada have recently taken Q. 10: substantial steps toward protecting the viability of their securities and capital markets by under.taking a significant Japan is currently restructuring of their financial system. the U.S. be Shouldn't steps. similar discussing taking in the long that so ng restructuri major same the undertaking run its capital and securities markets don't get left behind? ANSWER: Obviously the the success of British and Canadian initiatives remains to be seen, but they certainly, in part, represent an effort to "catch large up" to the efficiency and than the competitiveness of the United States rather reverse. But that does not mean some of the steps taken abroad may not be suggestive of desirable thrust of our changes recommendations move here. in a In general, similar the direction. However, I must emphasize that both here and abroad, a variety of considerations are https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis at state. Thus, bank holding company -12- powers must take account of the safety and soundness of banks, conflicts of interest, the viability and safety of the payments mechanism, and safety net. the proper limits on the reach of the federal These issues should not be overlooked to enhance or protect the competitive position of a particular Clearly, there set of financial institutions. service areas in an effort in which powers banking consistent with these concerns. can are financial increased be The Federal Reserve has since 1982 supported, with the Treasury, limited underwriting, real estate, and insurance powers and continues to urge Congress to enact such legislation. I would again like to emphasize that those powers and services that go before the Senate should beyond those that are not be the subject for review, analysis and legislative action as soon as possible after the enactment of pending bills. I would like to return for a moment to the European Q. 11: underwriting affiliates already owned by many of our largest Isn't it possible that if we don't make money-center banks. our regulatory system more flexible, many of these money-center banks will have no choice but to move an increasingly larger percentage of their activities abroad, thus costing the U.S. jobs, capital and tax revenues? ANSWER: Clearly, incentives direction, which is one good could be provided in that reason this whole area should be reexamined. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I % -13- Earlier, reference was made to the major restructuring Q. 12: of financial markets undertaken by the United Kingdom and Canada which they view as necessary to protect jobs and increase competition. Over the years there has been an influx of foreign banks to New York, the major domestic financial Isn't it likely market, which has improved New York's economy. that significant deregulation in the U.S. will mean more jobs in the U.S. financial services sector as foreign institutions increase their presence here and less loss of jobs for U.S. banks? ANSWER: I have personally heard important justification presented as United not Kingdom and Canada. the "jobs" rationale for the changes in the In any event, I do not believe a kind of international competition in laxity in a search for jobs can provide a sound rationale for regulation of banks and financial markets. merit. The changes should be made on their own As I have already stressed and as the premise of your question recognizes, U.S. markets are highly competitive. A large amount of financial intermediation will be done here and the companies number that of people. provide that service will employ large Your acknowledgement that large numbers of foreign banks have been attracted here is ample recognition of this fact. From an employment perspective, it does not matter who provides the service -- someone will hire people to provide the service. If there are artificial incentives to move jobs based on differences in regulations, they should and dealt with examined in ways consistent with safety and soundness, the need for competition and the like. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis be -14-- The banking industry, including the small banks, is Q. 13: facing increased pressure from competitors which have greater flexibility to respond to a dynamic market with products like the securitization of car loans and the securitization of consumer credit receivables. Do you see any way in which we can keep our banking system healthy and competitive without substantially altering the current regulatory structure to permit full competition among the financial services providers? ANSWER: Banks portfolios. for need general to managed public recently. powers to securitize their loan Banks have sold loans to each other (syndication) generations, placements no new The nonbank on institutions their through question own through private for decades, and to the unaffiliated underwriters more of underwrite such issues for whether they themselves public distribution should is, indeed, a matter I think should be reviewed. Banks compete and are competed with in virtually every credit market. The issue is the degree to which new powers are consistent both with safety and soundness of banks' support by the federal safety net. banks and the We do not believe this objective can be achieved by dismantling the barriers that have separated through begin banking and commerce or permitting the exploitation by reaffirming banking in this by undermining them We should of loopholes. that basic element in the structure of country. With this task done we should undertake the serious exploration of the necessary additional steps improve to consistent https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis with competitiveness necessary rules and service to assure to consumers the fairness and -15- stability of the system as a whole. substantially overstate the issue if system cannon remain "healthy and But I think you suggest the good suggests the fate of market place is some from That may or idea, but I simply know of no evidence that the entire banking exercising every "financial" power. back banking competitive" without bank holding companies exercising all financial powers. not be a you system rests on In fact, what I see in the financial conglomerates freely stepping participating in some sectors of the market (e.g., American Express from insurance, Merill Lynch from real estate brokerage and Beneficial from nonbank banking). As you are well aware, many issues concerning Q. 14: "conflicts of interest" have been raised over the years going all the way back to the Glass-Steagall Act. Is there any evidence that the domestic underwriting and dealing activities currently engaged in by banks has led to any concerns about safety and soundness of those banks or the banking system? ANSWER: the As you know, member banks have Banking securities, Act of certain 1933 to municipal been underwrite and state permitted U.S. under government obligations, and certain other obligations specifically authorized by Congress. I know of no evidence to indicate that these activities led have to important adverse effects on the safety and soundness of the banks or bank holding companies involved. accounts, in part, for the Board's support for granting bank holding companies authority https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis This experience to underwrite municipal revenue -16- bonds and mortgage-backed securities for securities. These are, of course, which possibilities of conflict of interest are much more limited than, say, for corporate securities. no doubt are aware, bankers were pilloried (and As you sometimes indicted) for conflicts of interest in the early 1930s. Q.14 (second question 14): The capital raising mechanism in this country is becoming increasingly centered in New York. Wouldn't it make sense to improve the capital-raising abilities in other areas of the country by permitting the banking system, under proper regulation, to compete in this market? ANSWER: survive Regional securities firms without a New York and prosper in regional disparities in diminished over several the United access States and, in to markets decades underwriters are headquartered. wherever presence general, have substantially major dealers and In any event, I warmly support the ability of regional or local banks with the capacity to do so to engage in the same securities activities I recommended for any bank holding companies. Does the high degree of concentration which currently Q. 15: exists within the investment banking industry and excessive profits earned by those firms, cause any concern that there needs to be greater competition in those markets? Wouldn't banks and other financial services providers be natural entrants in that market? If U.S. banks are prohibited from entering, isn't it more likely that instead of losing market shares to U.S. banks, securities firms will instead lose shares foreign securities to firms and foreign financial intermediaries? ANSWER: attracted https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis There is no doubt that a to what they perceive few large U.S. banks are as significant profits in -17- and underwriting, securities investment their protect to have bankers bank from market aggressively sought competition. Much of the recent profits of investment banking firms business, a acquisition from business the been apparently have are of recent relatively banks which result and merger by a and phenomenon prohibited not Another large portion of their regulation. the or law profits come from trading in United States government securities, an activity in which corporate Mortgage-backed that debt a diminishing share of the underwriting, accounts for of investment firms. particularly and underwriting, corporate My understanding is participants. banks are major profits bonds, commercial paper, and revenue bonds are growing and profitable market segments. In the New earlier, there referred potential for corporate banks. Reserve is an Bank study interesting you which to analysis of the profit in bank entry into corporate underwriting (at pp. 336-339). could York One item pointed underwriting, even significantly affect The commercial if the banking out is maintained profits of the profits from under bank entry, relatively few industry is simply many times larger than the investment banking business. Finally, as I have pointed out, I see no evidence that U.S. capital markets are uncompetitive and serious risk that there is any that U.S. firms will lose market share to foreign competitors because these markets permit the linking of banking https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • -18- and firms. On the contrary, Commission and the academic securities Monopolies Ministry complain Economics stifled and securities stunted that German the because more markets, but are established companies than in to the capital interested providing the advisors banks large Germany equity markets dominate in to are the lending to innovative start-up firms. In your testimony, you indicate that it is not too 16. Q. You late for the Congress to close the nonbank bank loophole. specify that you have narrowed your view to 13 companies. What are the names of the parents of those nonbank banks? ANSWER: The parents of the 13 nonbank banks referred to in my testimony are listed below: Parent Company Bank 1. Gulf & Western Corp., New York, New York Associates National Bank, Concord, California 2. Household International Corp., Prospect Heights, Illinois Valley National Bank, Salinas, California 3. McMahan Valley Stores, Carlsbad Western Family Bank, N.A., Carlsbad, California 4. J.C. Penny Company, Inc., New York, New York J.C. Penney National Bank, Harrington, Delaware 5. Textron, Inc. Providence, Rhode Island Avco National Bank, Irving, California 6. Sears, Roebuck & Co. Chicago, Illinois Greenwood Trust Co., Greenwood, Delaware https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -19- 7. Sears, Roebuck and Co. Chicago, Illinois Hurley State Bank, Hurley, South Dakota 8. ITT Corporation, New York, New York Lyndon Guaranty Bank of Ohio, Columbus, Ohio 9. ITT Corporation, New York, New York Lyndon Guaranty Bank of New York, Greece, New York 10. Florida Power & Light Company, Philadelphia, Pennsylvania Bay Loan and Investment Corporation, East Greenwich, Rhode Island 11. Montgomery Ward & Co., Chicago, Illinois Clayton Bank & Trust Co., Clayton, Delaware 12. Archer-DanielMidlands Company, Decatur, Illinois Eagle Bank of Macon County, Forsyth, 13. General Electric Corp., Westport, Connecticut The Monogram Bank Blue Ash, Ohio https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Chairman Volcker subsequently submitted the following in response to written questions from Senator D'Amato in connection with the hearing held before the Senate Banking Committee on January 21, 1987: states In his testimony, Undersecretary Gould Q. 1: comprehensive bill would include: that a "Strengthening the safety and soundness of our financial system so that the public will continue to have confidence in the stability of our financial institutions." How would granting banks additional powers that expose them to greater risks accomplish the goal of maintaining "confidence in the stability of our financial institutions"? recent powers which underwriting The ANSWER: legislative bonds, revenue municipal proposals securities, commercial mortgage-backed we support as part of mutual fund paper, and shares -- do not involve unusual risk or involve conflicts of concentration or interest of They are entirely resources. underwriting U.S. consistent with the current authorization for government securities, specifically with bank provided and bonds agency securities. for underwriting of satisfactory. obligation general Our other experience these securities has been entirely Allowing bank holding companies to provide these services will improve service to the customer and lower costs of financing. We believe that service provided is consistent with confidence in strengthen financially them source of earnings. mind But in making have banking organizations and may providing had of the a more diversified the same considerations in judgments about other the question https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis We by in this manner benefits and products and services. cost of expanding the -2- authority of banking organizations to provide these additional services in some instances need further evaluation and the to Senate begin this evaluation as soon as I urge have you completed the task of enacting pending legislation. The Baker Plan to promote growth in debtor countries Q. 2: requires the extension of credit from U.S. commercial banks if it is to succeed. If banks are permitted to engage in security underwriting activities which create new profit centers for them, then won't they be most reluctant to lend the funds to Therefore, doesn't Secretary Baker's advocacy debtor nations? of an expansion of securities powers to banks undermine the Baker Plan? ANSWER: I see no reason to expect that permitting banks to engage more broadly in underwriting of securities would induce them to make significant changes in their international lending activities. If there is an influence, gereater diversification may reduce reluctance to lend. Considering the highly concentrated nature of the Q. 3: Japanese banking industry and the symbiotic relationship between the Japanese government, Japanese corporations and Japanese banks, isn't the real surprise that it has taken the Japanese so long to become 4 of the 5 largest banks in the world rather than the fact that they have achieved this status? Has the size of these foreign institutions resulted in the in compete which institutions American placing international markets at a competitive disadvantage? ANSWER: the The growth and size of Japanese banks mainly reflects relatively concentrated industry, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis the large amounts nature of of the savings Japanese generated banking by the -3- Japanese economy, and the recent rise in the value of the yen (which raises the dollar value of yen assets on Japanese banks' I.lance sheets), as as well the international markets. Japanese banks in behavior competitive of the size of While Japanese banks earns them top ranking in lists of the world's largest banks -- and, indeed, that may have motivated some of in size behavior -- their their itself does not give them a Themoney-center competitive advantage. banks and the large banks in other countries surely are big enough to compete effectively, and IS so. Other disadvantage factors of U.S. may indeed banks. For work to the instance, competitive the capital standards to which U.S. banks are subject may be more stringent than those facing some foreign banks: been the Federal Reserve has working actively to coordinate capital standards across cI untries in part for this reason, and signcant progress recently has been made in that direction. Q. 4: Isn't the real problem with competitiveness the failure of banking institutions to offer credit at interest rates competitive with the rates borrowers must pay to the holders of their commercial paper? ANSWER: banks to Yes, that is part of the problem -- the inability of be able to offer commercial paper market. notes that are lower Naturally, the than bank, which the used to make loans to the commercial paper borrower wants to be able to https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -4- continue to service its former client who now does his commercial loan borrowing in another form -- commercial paper. Done in the right way -- and I believe there is no reason it cannot be done in the right way -- I see no special risk bank from underwriting commercial paper. to a Technically the risk is smaller. There are many reasons why banks are unable to offer The as low rates are available in the commercial paper market. short answer is that the commercial paper market cuts out much of the role of the middle man. in commercial absorbed paper paper by the has bank. More technically, the investor assumed the credit issuer Obviously, the usually risk of commercial must be of the highest credit rating (or a bank has had to guarantee the credit for a fee that encompasses the credit risk only) and not the cost of funding (i.e., of obtaining the funds finance to a totally riskless credit). Thus, an increasing number of low-risk borrowers have chosen to by-pass banks or pay them a small fee for credit risk. Chairman Volcker you have often warned this committee Q. 5: about the explosion of corporate debt in this country, wouldn't this problem be exacerbated by allowing commercial banks the ability to underwrite corporate debt? ANSWER: I do not believe so: it would primarily shift to some extent the focus of the underwriting business, so long as banks maintained https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis prudent standards. In that respect, I have no -5- reason to believe that bank be would standards less, in general, than those of investment banks. If a bank holding company is allowed to engage in Q. 6: securities underwriting and this is an appropriate banking activity, and you believe that commercial and banking should remain separate, do you also feel that no commercial concern should be able to acquire a firm that engages in underwriting If commercial entities are allowed to acquire activity? securities firms, which you have characterized as an appropriate banking activity, then why shouldn't commercial firms be allowed to engage in other banking activities? How do you draw the line? You ANSWER: asked me whether in view of my support for the separation of banking and commerce whether I would also support the combination of commercial and underwriting firms. I want to emphasize that the fundamental premise of my support for the separation of banking and commerce is the special role that banks play in the economy as the custodians of liquid payments savings, and as operators of a secure and reliable mechanism and as impartial decision makers in the granting of credit, as well as because of their special role in the implementation of monetary policy. role It is because of this that Congress has provided a measure of federal support through federal deposit insurance and Federal Reserve credit facilities that other industries do not enjoy. It is because of these characteristics that a measure of federal regulation is necessary and appropriate. Experience has shown over time that in order to avoid conflicts of interest, concentration of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -6-- resources and other adverse consequences that could impair the important role for banking institutions in the economy that I have described, it is both prudent and desirable to maintain a broad separation between the users of credit and the commercial banking system. This explains my reasons for strongly recommending the continued separation of banking and commerce. whether there should be a similar separation between securities underwriting and commercial firms. of You also asked prudence and good practice, In my judgment, as a matter this would seem to me a desirable practice, but I have not raised it as a question of law or regulation. The securities industry, while important, does not have the same crucial role in so many areas of the economy as banking and it is not the beneficiary of the same level of federal support. need for requiring Therefore, I do not see separation the same between commercial firms and securities underwriters, although I could see good reason why a securities underwriter maintain its unaffiliated would objectivity with firms want, as a matter of prudence, to and independence that are the by remaining potential users of its services. Finally, you asked if commercial firms are allowed to buy securities underwriters why shouldn't commercial firms be allowed to engage in other banking activities. answer to this question https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis flows directly from I believe the my introductory -7- remarks in answering this question: supported by the independent from federal safety banking is special, it is net, and needs the consumers of credit and to remain other banking services. You point out that it is difficult to draw lines. I would agree that line drawing in this area is very difficult. We should err on the side of avoiding the extension of the scope of federal regulation, but to my mind there is a clear and compelling case, justified by long experience, for maintaining a measure of federal regulation of the ownership of banking organizations. I believe it is reasonable that the line be drawn between banking and commercial firms. On page 12 of Undersecretary Gotild's testimony, he Q. 7: states that the Treasury would support expanded products and services for banks through separately capitalized facilities. What specific safeguards would you suggest to insure that the same self-dealing and conflicts of interest that were revealed For in the hearings culminating in the Glass-Steagall Act? permitted to subsidiary be example, should a bank's securities extended by the parent bank? underwrite or securitize the credit ANSWER: As you consideration, companies municipal to know, applications underwrite and revenue commercial paper. Board has under Board the bonds, by a currently number deal in, to mortgage-backed of a has bank limited under holding extent, securities, and In connection with those applications, the consideration whether to impose a number of conditions designed to address the problem of self dealing and conflicts of interest that were of concern to Congress in 1933 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -8- and that lead to the enactment of the Glass-Steagall Act. Among the conditions the Board is considering are the following: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1. A bank affiliate should not provide a standby letter of credit or other credit facility for securities underwritten by a securities affiliate or extend credit to a customer to purchase such securities or to an issuer of such securities for the purpose of the payment of principal or interest on the securities. 2. The underwriting affiliate should disclose the difference between it and its banking affiliates as well as any lending relationships between the issuer and the affiliate, and should refrain from in advertising or entering engaging into agreements suggesting that an affiliated bank is responsible for its underwriting obligations, and distributing prospectuses and sales from literature through an affiliated bank or offices of the bank. 3. Employees of an affiliated bank should not with. respect to the express an opinion of purchasing securities advisability by an affiliate unless an underwritten affiliate's appropriate disclosure of the interest in the securities is made and a bank affiliate should not purchase in a fiduciary accounts over which it has capacity for investment discretion securities underwritten by period of the during the affiliate an underwriting or selling syndicate, unless the purchase is specifically authorized by the parties in interest or otherwise by law. 4. An underwriting affiliate should not underwrite securities to repay a loan by a bank affiliate to the issuer, and should not underwrite securities issued by its bank holding company affiliates. 5. The holding company and its affiliates should not purchase for their own account securities other affiliate, and by an underwritten transactions between the bank and an underwriting persons in which the with affiliate, or underwriting affiliate is a participant or has a financial interest, should be on an arm's length and on terms no less stringent than those applicable to unrelated third parties. -9- 6. The bank affiliate should not provide information to the underwriting affiliate except as required by law. 7. The underwriting affiliate should not have a name that is similar to that of an affiliate bank. If revenue consider mutual bonds and company holding bank securities, commercial paper, mortgage-backed underwriting of municipal authorized Congress the funds, the would Board whether any of the above conditions or others would be would Board The necessary. have the authority and the obligation to adopt any conditions necessary to assure that the new activities are conducted connection, this Glass-Steagall it banks general obligation and a number would making process to point out for some time been have of other be taken useful In manner. that under underwriting bonds, United States.government securities especially effects, is in a safe and sound types of obligations conflicts into account that would of interest. as one element go into the without adverse This experience in the decision formulation of the specific rules applicable to the new underwriting authorities. The particular should be affiliated address in question about whether a securities subsidiary permitted bank to underwrite extended by an is precisely one of the issues Congress should considering corporate part of the present proposals. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis credit underwriting, which is not -10- Many critics of the Glass-Steagall Act suggest that Q. 8: banks have been squeezed out of their traditional sources of revenue and therefore need to expand into the areas of security underwriting. This argument seems hollow in light of the Wall Street Journal article demonstrating the profitability of these institutions through their traditional lines of business. Incidentally, the most profitable banks are those that are most Would vociferously arguing for the expansion of bank powers. this in argument? inconsistency you comment on the internal ANSWER: As noted in my answer to your question 4, bank profits been have rather than from customers issuing securities pressure under borrowing from banks. In the aggregate, bank profits -- including those of large banks -- have been rising over the last year or so, but margins remain under pressure. But, in my view, revisions of Glass-Steagall should not in the end the turn primarily on implications for bank profits -- and of thousands of banks, important to only a banking risks. corporate underwriting very few -- but on would public benefits be vs. In my view, some additional underwriting powers are consistent with public benefits, with little or no increase in bank risk and would also be consistent with maintaining bank profitability. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -11- On page 15 of Undersecretary Gould's testimony, he Q. 9: mentions that "outdated and unfair restrictions on the u.S. banking industry are hindering its ability to complete in This statement conflicts with your statement global markets." 1997 hearing that U.S. banks are on the 21, at the January Can you explain the competition. foreign "cutting edge" of to what specific and positions two in these difference referring. you are "outdated and unfair restrictions" ANSWER: and U.S. banks are able to offer many of the same services market many of to banks can provide. innovative the same products abroad that foreign Indeed, U.S. banks have been among the most in developing new instruments and foreign as well as domestic markets. banks can offer any services or products in many At the same time, U.S. products in the United States that foreign banks can offer (except for some relatively minor instances of grandfathering). U.S. banks may, however, be somewhat hindered short run in capital adequacy abroad. for competing may comparisons exceedingly difficult to make. have been the than the standards for by our more stringent be International business in some of those of capital standards are Nevertheless, major efforts underway to address this problem, not by sacrificing adequacy of U.S. banks' strengthened, but rather banks internationally. capital, which should be by raising the capital standards for A significant step in this process of international coordination of capital standards is represented by the recent joint proposal by the Federal Banking Agencies and the Bank of England for a risk-based capital measure. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -12- I cannot respond for Undersecretary Gould as to what restrictions he has in mind, although he may be fact to such referring matters as branching or interstate restrictions that reduce the domestic base of U.S. international banks. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis in WILUAM PROXMIRE, WISCONSIN, CHAIRMAN ALAN CRANSTPN. CALIFORNIA JAKE GARN. UTAH DONALD W RIEGLE. JR . MICHIGAN JOHN HEINZ, PENNSYLVANIA PAUL S SARBANES MARYLAND WILLIAM L ARMSTRONG. COLORADO CHRISTOPHER J DODD, CONNECTICUT ALFONSE M D'AMATO, NEW YORK ALAN J DIXON. ILLINOIS CHIC HECHT NEVADA JIM SASSER. TENNESSEE PHIL GRAMM TEXAS TERRY SANFORD. NORTH CAROLINA CHRISTOPHER S BOND. MISSOURI RICHARD C SHELBY, ALABAMA JOHN H. CHAFEE. RHODE ISLAND ROBERT GRAHAM, FLORIDA KENNETH A MCLEAN. STAFF DIRECTOR M DANNY WALL MINORITY STAFF DIRECTOR United tats nate COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS WASHINGTON, DC 20510-6075 February 6, 1987 The Honorable Paul Volcker Chairman, Board of Governors Federal Reserve Board Washington, D.C. 20551 Dear Chairman Volcker: Thank you for testifying before the Committee on January 21, 1987. In order to complete the hearing record, the Committee would appreciate your answers to the enclosed questions by the close of business on (ebr_uary _17_, 1987.... Please set forth each question (single-spaced i1upper and lower case type) before giving your answers to that question. Again, I thank you for appearing before the Committee. If you have any questions, please contact Mr. Richard S. Carnell at 224-7391. rely, Tm a Pro Chairman Enclosure https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis re QUESTIONS OF THE HONORABLE PAUL A. VOLC KER FROM SENATOR PROXMIRE JANUARY 21, 1987 Q.1. You stated that not closing the nonbank loophole and thus allowing a mixture of commerce and banking will result in an increasing concentration of financial and commercial power in our country. Why in your view is that a problem and are there any political implications on such an increase d concentration? Q.2. If there is any competitive advantage from owning a bank, once one firm in an industry acqu ires a bank, all the other firms will be forced to acquire or set up their own little "pocket banks". I am concerned the result will be a proliferation of banks, many operated by companies inexperience d in banking, needlessly and perhaps dangerously increasing the burden on U.S. regulatory and supervisory resources. Are my concerns justified? Q.3. In 1984 there was broad agreemen t about the need to close the so-called South Dakota loop hole, but there was considerable disagreement over how it should be closed. Senator Garn and I favored a provision that would have permitted states to allow their state-chartered institut ions to engage in insurance activities provided they enga ged in them solely within the chartering state. Senator Dodd's provision, which preva iled in the Senate, provided that even if a state authorized its state-chartered banks to engage in insu rance activities, they could not do so if they were a subsidia ry of a bank holding company. In light of the Federal Reserve's deni al in 1985 of Citicorp's application to acquire a South Dakota bank to engage in nationwide insurance activities, do you still think Congress needs to enact legislation to close that loophole? If so, which approach to closing the loophole do you favor -- the one originally proposed by Senator Garn and me or the one advocated by Senator Dodd and previously adopted by the Senate? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis QUESTIONS FOR CHAIRMAN VOLCKER FROM SENATOR GRAHAM JANUARY 21, 1987 Q.1. What impact does the declining dolla r have on the U.S. banking system. Q.2. On page 10 of your written testimony you discuss forei gn experience with "universal" banking systems as justi fying greater integration of banking and commerce. What role has their currency exchange rate and fiscal system played in their developing this system? Q.3. On page 17 of your statement you discu ss the international forces at work in the banking and financial marketplace. Would you elaborate on these "international forces"? Q.4. On page 23 of your written testimony you discuss the supervisory and regulatory discipline that needs to accompany self help by the industry. Do you see this supervisory and regulatory discipline needing to be incre ased? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Questions of Senator Sanford to Chairman Volcker Q.1. During your testimony, you stated that it was not too late to close the non-bank bank loophole because there are only 13 non-bank banks owned by commercial firms that present a problem. If the non-bank bank loophole were closed, would you favor closing it for all non-bank banks or only for those 13 non-bank banks owned by commercial firms? If we were to allow all but those 13 non-bank banks to remain open, how do we distinguish them from all other non-bank banks? Could you suggest specific legislative language that carves out a method for grandfathering all but those 13 non-bank banks? If the non-bank bank loophole were to be closed in this manner, would additional restrictions need to be placed on the remaining non-bank banks and if so, what restrictions? Q.2. At the conclusion of your oral testimony, you stated that one of the major risks in breaking down the barrier between commerce and banking is the risk to the payment system. Your concern appears to be that the Federal Reserve does not now and does not wish to regulate commercial firms. However, many states now allow foreign firms, many of which are owned by foreign commercial enterprises, to purchase banks. In that situation the Federal Reserve has no knowledge of or ability to regulate the foreign parent. Do you believe this situation raises similar risks to the payment system? If not, why not, and if so, what, if anything, should Congress do about it? Q.3. One of the central themes of much of the testimony presented at the hearings dwelled on the tremendous change that we have seen in the financial services industry. One set of such changes is what has occurred in the thrift industry--with many thrifts becoming more like banks in issuing certain commerical and consumer loans and carrying checking accounts for individuals. Given the blurring of the line between banks and thrifts, what would you feel the advantages and disadvantages would be of merging our bank and thrift industries? How would you envision such a merger taking place, and would it involve a merger of the FSLIC and FDIC funds? If so, would the the FSLIC still need recapitalization before the funds were merged? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Given the changes that have occurred in the thrift industry in the last five years, do you believe that the rationale stated by the Federal Reserve Board in 1974 for concluding that the purchase of a thrift by a bank is not "a proper incident to banking" is still valid? If so, why and if not, what rationale would you give for continuing to prevent banks from acquiring healthy thrifts? Q.4. Much of the delay in clearing checks results from the lengthy process of returning checks that the bank decides not to honor. What steps do you think could be taken and what legal changes would be required to short-cut the return of checks through the entire chain of banks involved in the presentation of the check? Q.5. You stated that you do not believe that granting banks the power to market or issue commercial paper, mortgage-backed securities, municipal revenue bonds or mutual funds presents any great risks. What specific steps do you believe should be taken to ensure that the consumer who is encouraged by his banker to, for example, invest in mutual funds, does not mistakenly receive the impression that such an investment is somehow backed by the bank or even FDIC insured? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis QUESTIONS FROM SENATOR GARN TO PAUL A. VOLCKER, CHAIRMAN FEDERAL RESERVE SYSTEM I. IN YOUR TESTIMONY, YOU STATE THAT THE NEED FOR ADDITIONAL LIQUIDIT Y FOR FSLIC IS URGENT, THAT THE TREASURY PLAN IS THE ONLY PRACTICAL ALTERNATIVE, AND THAT THERE IS NO TIME FOR DELAY. WHAT IS YOUR VIEW OF THE U.S. LEAGUE PROPOSAL? 2. SOME TRADE PUBLICATIONS HAVE REPORTED THAT YOU BELIEVE A MERGER OF THE INSURANCE FUNDS MAY EVENTUALLY BE NECESSARY -- WOULD YOU PLEASE COMMENT ON THAT? IF A MERGER WERE NECESSARY, DO YOU THINK IT WOULD INVOLVE A MERGER OF THE REGULATORY STRUCTURE? WOULD THRIFTS STILL BE REQUIRED TO PAY A SPECIAL ASSESSMENT OR WOULD BANKS AND THRIFTS BE REQUIRED TO CONTRIBUTE EQUALLY? 3. IN YOUR TESTIMONY, YOU INDICATE THAT COMMON OWNERSHIP OF BUSINESSES MEANS COMMON DIRECTION AND FURTHER YOU STATE THAT THE FORTUNES OF ONE BUSINESS UNIT REST ON THE PERFORMANCE OF THE OTHERS. THIS MAY BE TRUE FOR A TRADITIONAL BANK HOLDING COMPANY WHERE VIRTUALLY ALL THE ASSETS ARE BANK ASSETS -- BUT ISN'T IT MUCH LESS TRUE FOR MORE DIVERSIFIED FIRMS WHO ROUTINELY SELL OFF BUSINESSES IN WHOLE OR IN PART THAT DO NOT PERFORM AS EXPECTED -- SUCH AS AMERICAN EXPRESS? 4. IN READING YOUR TESTIMONY, I WAS SURPRISED TO SEE REFERENCES AND ARGUMENTS LEADING TOWARD A FINANCIAL SERVICES HOLDING COMANY. NOT ONLY DO YOU ENDORSE COMMERCIAL PAPER, MUNICIPAL REVENUE BONDS, AND MORTGAGE-BACKED SECURITIES, YOU ALSO SUPPORT INVESTMENT COMPANIES BEING ABLE TO AFFILIATE WITH A FULL SERVICE BANK. ISN'T THIS THE FIRST TIME YOU HAVE TESTIFIED THAT YOU RECOGNIZE THE UNFAIRNESS OF A https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis LEGISLATIVE PROPOSAL THAT WOULD GRANT BANK HOLDING COMPANIES MUTUAL FUND AUTHORITY WHILE REQUIRING INVESTMENT COMPANIES TO DIVEST THEIR NON-BANK BANKS? 5. LATER YOU STRONGLY RECOMMEND THAT THE COMMITTEE CONSIDER EXPANDING BANK HOLDING COMPANY ACTIVITY TO INSURANCE AND EVEN CORPORATE UNDERWRITING. YOU POINT TO THE OVERSEAS MARKET -- PARTICULARLY LONDON -- AND THE EVER INCREASING TREND TOWARD SECURITIZATION. IF AFTER STUDY THE CONGRESS WERE TO DECIDE TO FURTHER EXTEND THE PRODUCT AUTHORITIES OF BANK HOLDING COMPANIES, IS IT FAIR TO EXTEND THE LOGIC OF THE FINANCIAL SERVICE HOLDING COMPANY CONCEPT TO THOSE NEW AUTHORITIES? 6. WITH REGARD TO THE SO-CALLED NON-BANK BANK -- DO YOU BELIEVE THAT THE CONGRESS SHOULD DEAL WITH THE NON-BANK BANK AND THE SO-CALLED NONTHRIFT THRIFT AT THE SAME TIME? 7. OVER THE PAST FIFTEEN YEARS THERE APPEARS TO HAVE BEEN A DISTINCT CHANGE IN THE PROFITABILITY OF THE BASIC WHOLESALE BANKING BUSINESS AS NOTED IN THE REPORT RECENTLY COMPLETED BY THE FEDERAL RESERVE BANK OF NEW YORK. I WOULD BE INTERESTED IN YOUR COMMENTS ON THE FUTURE VIABILITY OF THE BANKS REFERRED TO IN THAT REPORT. 8. I BELIEVE THAT ABOUT 15 YEARS AGO, 7 OUT OF THE TOP 10 LARGEST BANKS IN THE WORLD WERE U.S. BANKS AND TODAY ONLY ONE OF THE TOP 10 BANKS IN THE WORLD IS A U.S. BANK. I'D LIKE YOUR VIEWS ON WHY THE GROWTH OF U.S. BANKS RELATIVE TO THE GROWTH OF OTHER BANKS HAS SLOWED DOWN SO DRAMATICALLY. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 9. AS YOU KNOW, SEVERAL U.S. MONEY CENTER BANKS HAVE BEEN IN THE BUSINESS OF UNDERWRITING CORPORATE SECURITIES IN EUROPE FOR A NUMBER OF YEARS, AND AS FAR AS I KNOW, THEY HAVE DONE SO WITHOUT ANY PARTICULAR PROBLEMS OR THREATS TO THE SAFETY AND SOUNDNESS OF THE PARENT INSTITUTION. IF THIS IS TRUE, WHAT IS WRONG WITH LETTING THEM UNDERWRITE CORPORATE SECURITIES IN THE U.S. MARKET? 10. THE UNITED KINGDOM AND CANADA HAVE RECENTLY TAKEN SUBSTANTIAL STEPS TOWARD PROTECTING THE VIABILITY OF THEIR SECURITIES AND CAPITAL MARKETS BY UNDERTAKING A SIGNIFICANT RESTRUCTURING OF THEIR FINANCIAL SYSTEM. JAPAN IS CURRENTLY DISCUSSING TAKING SIMILAR STEPS. SHOULDN'T THE U.S. BE UNDERTAKING THE SAME MAJOR RESTRUCTURING SO THAT IN THE LONG RUN ITS CAPITAL AND SECURITIES MARKETS DON'T GET LEFT BEHIND? 11. I WOULD LIKE TO RETURN FOR A MOMENT TO THE EUROPEAN UNDERWRITING AFFILIATES ALREADY OWNED BY MANY OF OUR LARGEST MONEY-CENTER BANKS. ISN'T IT POSSIBLE THAT IF WE DON'T MAKE OUR REGULATORY SYSTEM MORE FLEXIBLE, MANY OF THESE MONEY-CENTER BANKS WILL HAVE NO CHOICE BUT TO MOVE AN INCREASINGLY LARGER PERCENTAGE OF THEIR ACTIVITIES ABROAD, THUS COSTING THE U.S. JOBS, CAPITAL AND TAX REVENUES? 12. EARLIER, REFERENCE WAS MADE TO THE MAJOR RESTRUCTURING OF FINANCIAL MARKETS UNDERTAKEN BY THE UNITED KINGDOM AND CANADA WHICH THEY VIEW AS NECESSARY TO PROTECT JOBS AND INCREASE COMPETITION. OVER THE YEARS THERE HAS BEEN AN INFLUX OF FOREIGN BANKS TO NEW YORK, THE MAJOR DOMESTIC FINANCIAL MARKET, WHICH HAS IMPROVED NEW YORK'S ECONOMY. ISN'T IT LIKELY THAT SIGNIFICANT DEREGULATION IN THE U.S. WILL MEAN MORE JOBS IN THE U.S. FINANCIAL SERVICES SECTOR AS FOREIGN https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis INSTITUTIONS INCREASE THEIR PRESENCE HERE AND LESS LOSS OF JOBS FOR U.S. BANKS? 13. THE BANKING INDUSTRY, INCLUDING THE SMALL BANKS, IS FACING INCREASED PRESSURE FROM COMPETITORS WHICH HAVE GREATER FLEXIBILITY TO RESPOND TO A DYNAMIC MARKET WITH PRODUCTS LIKE THE SECURITIZATION OF CAR LOANS AND THE SECURITIZATION OF CONSUMER CREDIT RECEIVABLES. DO YOU SEE ANY WAY IN WHICH WE CAN KEEP OUR BANKING SYSTEM HEALTHY AND COMPETITIVE WITHOUT SUBSTANTIALLY ALTERING THE CURRENT REGULATORY STRUCTURE TO PERMIT FULL COMPETITION AMONG THE FINANCIAL SERVICES PROVIDERS? 14. AS YOU ARE WELL AWARE, MANY ISSUES CONCERNING "CONFLICTS OF INTEREST" HAVE BEEN RAISED OVER THE YEARS GOING ALL THE WAY BACK TO THE GLASSSTEAGALL ACT. IS THERE ANY EVIDENCE THAT THE DOMESTIC UNDERWRITING AND DEALING ACTIVITIES CURRENTLY ENGAGED IN BY BANKS HAS LED TO ANY CONCERNS ABOUT SAFETY AND SOUNDNESS OF THOSE BANES OR THE BANKING SYSTEM? 14. THE CAPITAL RAISING MECHANISM IN THIS COUNTRY IS BECOMING INCREASINGLY CENTERED IN NEW YORK. WOULDN'T IT MAKE SENSE TO IMPROVE THE CAPITAL- RAISING ABILITIES IN OTHER AREAS OF THE COUNTRY BY PERMITTING THE BANKING SYSTEM, UNDER PROPER REGULATION, TO COMPETE IN THIS MARKET? 15. DOES THE HIGH DEGREE OF CONCENTRATION WHICH CURRENTLY EXISTS WITHIN THE INVESTMENT BANKING INDUSTRY AND EXCESSIVE PROFITS EARNED BY THOSE FIRMS, CAUSE ANY CONCERN THAT THERE NEEDS TO BE GREATER COMPETITION IN THOSE MARKETS? WOULDN'T BANKS AND OTHER FINANCIAL SERVICES PROVIDERS BE NATURAL ENTRANTS IN THAT MARKET? IF U.S. BANKS ARE PROHIBITED FROM ENTERING, ISN'T IT MORE LIKELY THAT INSTEAD OF LOSING MARKET SHARES TO https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U.S. BANKS, SECURITIES FIRMS WILL INSTEAD LOSE SHARES TO FOREIGN SECURITIES FIRMS AND FOREIGN FINANCIAL INTERMEDIARIES? 16. IN YOUR TESTIMONY, YOU INDICATE THAT IT IS NOT TOO LATE FOR THE CONGRESS TO CLOSE THE NON-BANK BANK LOOPHOLE. HAVE NARROWED YOUR VIEW TO 13 COMPANIES. PARENTS OF THOSE NON-BANK BANKS? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis YOU SPECIFY THAT YOU WHAT ARE THE NAMES OF THE QUESTIONS FROM SENATOR D'AMATO FOR VOLCKER I. IN HIS TESTIMONY, UNDERSECRETARY GOULD STATES THAT A COMPREHENSIVE BILL WOULD INCLUDE: "STRENGTHENING THE SAFETY AND SOUNDNESS OF OUR FINANCIAL SYSTEM SO THAT THE PUBLIC WILL CONTINUE TO HAVE CONFIDENCE IN THE STABILITY OF OUR FINANCIAL INSTITUTIONS." HOW WOULD GRANTING BANKS ADDITIONAL POWERS THAT EXPOSE THEM TO GREATER RISKS ACCOMPLISH THE GOAL OF MAINTAINING "CONFIDENCE IN THE STABILITY OF OUR FINANCIAL INSTITUTIONS? A 2. THE BAKER PLAN TO PROMOTE GROWTH IN DEBTOR COUNTRIES REQUIRES THE EXTENSION OF CREDIT FROM U.S. COMMERCIAL BANKS IF IT IS TO SUCCEED. IF BANKS ARE PERMITTED TO ENGAGE IN SECURITY UNDERWRITING ACTIVITIES WHICH CREATE NEW PROFIT CENTERS FOR THEM, THEN WON'T THEY BE MOST RELUCTANT TO LEND THE FUNDS TO DEBTOR NATIONS? THEREFORE, DOESN'T SECRETARY BAKER'S ADVOCACY OF AN EXPANSION OF SECURITIES POWERS TO BANKS UNDERMINE THE BAKER PLAN? 3. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CONSIDERING THE HIGHLY CONCENTRATED NATURE OF THE JAPANESE BANKING INDUSTRY AND THE SYMBIOTIC RELATIONSHIP BETWEEN THE JAPANESE GOVERNMENT, JAPANESE CORPORATIONS AND JAPANESE BANKS, ISN'T THE REAL SURPRISE THAT IT HAS TAKEN THE JAPANESE SO LONG TO BECOME 4 OF THE 5 LARGEST BANES IN THE WORLD RATHER THAN THE FACT THAT THEY HAVE ACHIEVED THIS STATUS? HAS THE SIZE OF THESE FOREIGN INSTITUTIONS RESULTED IN PLACING AMERICAN INSTITUTIONS WHICH COMPETE IN THE INTERNATIONAL MARKETS AT A COMPETITIVE DISADVANTAGE? 4. ISN'T THE REAL PROBLEM WITH COMPETITIVENESS THE FAILURE OF BANKING INSTITUTIONS TO OFFER CREDIT AT INTEREST RATES COMPETITIVE WITH THE RATES BORROWERS MUST PAY TO THE HOLDERS OF THEIR COMMERCIAL PAPER? 5. CHAIRMAN VOLCKER YOU HAVE OFTEN WARNED THIS COMMITTEE ABOUT THE EXPLOSION OF CORPORATE DEBT IN THIS COUNTRY, WOULDN'T THIS PROBLEM BE EXACERBATED BY ALLOWING COMMERCIAL BANES THE ABILITY TO UNDERWRITE CORPORATE DEBT? 6. IF A BANK HOLDING COMPANY IS ALLOWED TO ENGAGE IN SECURITIES UNDERWRITING AND THIS IS AN APPROPRIATE BANKING ACTIVITY, AND YOU BELIEVE THAT COMMERCIAL AND BANKING SHOULD REMAIN SEPARATE, DO YOU ALSO FEEL THAT NO COMMERCIAL CONCERN SHOULD BE ABLE TO ACQUIRE A FIRM THAT ENGAGES IN UNDERWRITING ACTIVITY? iF COMMERCIAL ENTITIES ARE ALLOWED TO ACQUIRE SECURITIES FIRMS, WHICH YOU HAVE CHARACTERIZED AS AN APPROPRIATE BANKING ACTIVITY, THEN WHY SHOULDN'T COMMERCIAL FIRMS BE ALLOWED TO ENGAGE IN OTHER BANKING ACTIVITIES? HOW DO YOU DRAW THE LINE? 7. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ON PAGE 12 OF UNDERSECRETARY GOULD'S TESTIMONY, HE STATES THAT THE TREASUD'Y WOULD SUPPORT EXPANDED PRODUCTS AND SERVICES FOR BANES THROUGH SEPARATELY CAPITALIZED FACILITIES. WHAT SPECIFIC SAFEGUARDS WOULD YOU SUGGEST TO INSURE THAT THE SAME SELF-DEALING AND CONFLICTS OF INTEREST 2 THAT WERE REVEALED IN THE HEARINGS CULMINATING IN THE GLASSSTEAGALL ACT? FOR EXAMPLE, SHOULD A BANK'S SECURITIES SUBSIDIARY BE PERMITTED TO UNDERWRITE OR SECURITIZE THE CREDIT EXTENDED BY THE PARENT BANK? 8. MANY CRITICS OF THE GLASS-STEAGLL ACT SUGGEST THAT BANKS HAVE BEEN SQUEEZED OUT OF THEIR TRADITIONAL SOURCES OF REVENUE AND THEREFORE NEED TO EXPAND INTO THE AREAS OF SECURITY UNDERWRITING. THIS ARGUMENT SEEMS HOLLOW IN LIGHT OF THE WALL STREET JOURNAL ARTICLE DEMONSTRATING THE PROFITABILITY OF THESE INSTITUTIONS THROUGH THEIR TRADITIONAL LINES OF BUSINESS. INCIDENTALLY, THE MOST PROFITABLE BANKS ARE THOSE THAT ARE MOST VOCIFEROUSLY ARGUING FOR THE EXPANSION OF BANK POWERS. WOULD YOU COMMENT ON THE INTERNAL INCONSISTENCY IN THIS ARGUMENT? 9. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ON PAGE 15 OF UNDERSECRETARY GOULD'S TESTIMONY, HE MENTIONS THAT "OUTDATED AND UNFAIR RESTRICTIONS ON THE U.S. BANKING INDUSTRY ARE HINDERING ITS ABILITY TO COMPETE IN GLOBAL MARKETS." THIS STATEMENT CONFLICTS WITH YOUR STATEMENT AT THE JANUARY 21, 1987 HEARING THAT U.S. BANKS ARE ON IHE "CUTTING EDGE" OF FOREIGN COMPETITION. CAN YOU EXPLAIN THE DIFFERENCE IN THESE TWO POSITIONS AND TO WHAT SPECIFIC "OUTDATED AND UNFAIR RESTRICTIONS" ARE YOU REFERRING. 3 .• GO;.. •• Of ... -.. BOARD OF GOVERNORS OF THE -o •-n FEDERAL RESERVE SYSTEM • -A WASHINGTON, D. E. 20551 February 19, 1987 RAL RE-S - • PAUL A. VOLCKER CHAIRMAN The Honorable George Bush President of the United States Senate Washington, D.C. 20510 Dear Mr. President: The Board of Governors of the Federal Reserve System is pleased to submit its Monetary Policy Report to the Congress pursuant to the Full Employment and Balanced Growth Act of 1978. Sincerely, Enclosure IDENTICAL LETTERS SENT TO THE ATTACHED LIST. pte bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mrs. Mallardi (2) • Senate Robert C. Byrd Majority Leader (S-221 Capitol Bldg.) Robert Dole Minority Leader (S-230 Capitol Bldg.) Alan Cranston Majority Whip (S-148 Capitol Bldg. Alan K. Simpson Minority Whip (S-229 Capitol Bldg. John C. Stennis President Pro Tempore (S-206 Capitol Bldg.) William Proxmire, Chairman Committee on Banking, Housing and Urban Affairs (SD-534) ); Jake Garn, Ranking Minority Member Committee on Banking, Housing and Urban Affairs (SD-534) Lloyd Bentsen, Chairman Committee on Finance (SD-205) Bob Packwood, Ranking Minority Member Committee on Finance (SD-205) Lawton Chiles, Chairman Committee on the Budget (SD-621) Pete V. Domenici, Ranking Minority Member Committee on the Budget (SD-621) Paul S. Sarbanes, Chairman Joint Economic Committee (SD-G01) William V. Roth, Jr., Senate Ranking Minority Member Joint Economic Committee (SD-G01) John C. Stennis, Chairman Committee on Appropriations (SD-118) Mark 0. Hatfield, Ranking Minority Member Committee on Appropriations (SD-118) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis HOUSE James C. Wright, Jr. Speaker (H-204 Capitol Bldg.) Thomas S. Foley Majority Leader (H-114 Capitol Bldg.) Robert H. Michel Minority Leader (H-230 Capitol Bldg.) Tony Coelho Majority Whip (H-114 Capitol Bldg.) Trent Lott Minority Whip (1622 LHOB) yFernand J. St Germain, Chairman Committee on Banking, Finance and Urban Affairs y (2129 RHOB) Chalmers P. Wylie, Ranking Minority Member Committee on Banking, Finance and Urban Affairs (B-371A RHOB) William H. Gray, III, Chairman Committee on the Budget (214 House Annex I) Delbert L. Latta, Ranking Minority Member Committee on the Budget (214 House Annex I) Lee H. Hamilton, Vice Chairman Joint Economic Committee (SD-G01) Chalmers P. Wylie, House Ranking Minority Joint Economic Committee (SD-G01) Stephen L. Neal, Chairman Subcmte. on Domestic Monetary Policy Cmte. on Banking, Finance and Urban Affairs (H2-109) Bill McCollum, Ranking Minority Member Subcmte. on Domestic Monetary Policy Cmte. on Banking, Finance and Urban Affairs (517 House Annex I) Dan Rostenkowski, Chairman Committee on Ways and Means John J. Duncan, Ranking Minority Member Committee on Ways and Means Doug Barnard, Jr., Chairman Subcmte. on Commerce, Consumer and Monetary Affairs Cmte. on Government Operations (B-377 RHOB) Larry E. Craig, Ranking Minority Member Subcmte. on Commerce, Consumer and Monetary Affairs Cmte. on Government Operations (2158 RHOB) Jamie L. Whitten, Chairman, Committee on Appropriations (H-218 Capitol) Silvio 0. Conte, Ranking Minority Member, Cmte. on Appropriations (H-218 Capitol) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 .444. PAUL A. VOLCKER RAL FtE.S" • • •..• • February 18, 1987 CHAIRMAN The Honorable David L. Boren United States Senate Washington, D.C. 20510 Dear David: Thank you for your letter of January 30 informing me of the task force you are organizing to look into the problems in the financial industry due to the depressed energy and farm economies. These are matters about which we share a common concern, and I would appreciate hearing from you as the work of the task force proceeds. Please let me know when we can be of assistance in your deliberations. Sincerely, CO:DJW:vcd (V-13, 87-425) bcc: Bill Taylor (w/copy of incoming) Mrs. Mallardi (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis DitylT,NIIREN MAW SAHoMA COMMITTEE ON FINANCE Russtu. ButuRito COMMITTEE ON AGRICULTURE. NUTRITION AND FORESTRY WAsioNcrosa. DC 20610 121 Nown4Romwsoft OELAHoN4 Cm. OK 73102 440 Soun4 HOUSTON United tates eSenatc COMMITTEE ON SMALL BUSINESS SELECT COMMITTEE ON INTELLIGENCE WASHINGTON. DC 20510 TULSA. OK 74127 MU PIICMAL BUILD11•1 January 30, 1937 SENitocuL OK 74111 The Honorable Paul A. Volcker, Chairman Board of Governors Federal Reserve System 20th & Constitution Ave., N.W. Washington, D. C. 20551 Dear Paul: As you are well aware, the Southwest region of the country_.is experiencing immense problems in the financial industry due to: the depressed energy and farm economies. While the ultimate solution lies in diversification and recovery of our economy, we face grave risks if banking stabilization is not achieved. The rapid de-escalation of asset values now is, not only a result of the the true marketplace, but also of the increased liquidation activities and the compounded fear within the industry. The restriction of commercial lending, as well as its negative or non growth, will further comolicate the region's eventual recovery. In light of this situation, I an currently organizing an informal task force of Senators, from the region which seems most affected by this problem, to join together in studying and recommending possible remedies. I want this to be a productive forum for ideas on ways to stabilize and allow our region's financial infrastructure to be intact for its economic recovery. In accomplishing that goal, we will soon be asking for you and your staff's assistance in exploring various issues. Enclosed is a list of members invited to participate, as well as sample letter, for your information. I will appreciate your constructive input and help. Sincerely, Da Boren United States Senator DLB/gk Enclosure https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis DAVID BOREN W44414 OILI1J40401,a COaworli( Clas 1 irs•a111 Nu •got D.K. coihdfoir/f( Oft *C.ø.(.0 1U41 .WT0117,001, Mho() SUM'S TOY DC 201110 e? Nosmso. C.•• Oa 73107 440 10v, . .0u11,04. Tuts,. Da 'United e tates oStnate WASHINGTON. DC 20510 CCAU/W171( Oft SMA&I NJ:0%115S SI aC1 COmedicrif 04.4.11..CA\C1 74177 *44. Duo... December 31, 1936 The qonorable J. qennett Johnston United States Senate Washington, D. C. 20510 9ear TIonnett: -)iie to the increasingly critical state of the energy and farm economies in our region of the country, the 100th Congress must hold new hope for solutions to problems which our government has helped create. 3 you are aware in your home state, the reflection of our economy casts a gloomy picture on the banking industry. Mot only are bank failures occurring at a rate surpassing the 7,reat Depression records, but the downward spiral of asset values has sent a deadly chil! through the industry, freezing the availability of credit . While the regulatory agencies have been responsive to our region's needs through the capital forebearance programs, the problems remain and further, will only worsen as long as the depression lasts. flaying met with some of our top regulators, T feel assured of their responsiveness to our concerns. In order to organize and coordinate the efforts that will be required to address the short term and long term need to stabilize the banking industry in our region, I am organizing an informal task force to study the problems of the industry and recommend potent ial interim solutions. invite your association with this task force and hope your can be very active in sharing your thoughts and ideas. I ho:)e to have an initial meeting of the task force later next month. Please let me know if you wish to participate. If you prefer, your staff member can contact Greg Nubiak of my office at 4-4721 . https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis / I/ David L. Boren United States Senator https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Senators Invited to Participate in the Banking Task Force Lloyd Bentsen Phil Gramn J. Bennett John:;ton John Ereaux Arnstron TiTaothy irth Wallop Alan K. Sinpson ax Baucus John iielcher Fran:: iurkow::i Tej Stevens Quentin Eurdick ::ent Conrad Jeff Binar:.an Pete DoLenici J. JcLic:; Exon ZorinL,ky Don :J.clt! APP" •" •• GOv ••. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 PAUL A. VOLCKER February 18, 1987 CHAIRMAN The Honorable E. Thomas Coleman House of Representatives Washington, D.C. 20515 Dear Mr. Coleman: Thank you for your letter of January 8, expressing your concern that bank holding companies that purchase banks in rural communities should continue to help meet the credit needs of persons residing in those communities. As you mention, the Community Reinvestment Act of 1977 (CRA) specifically requires the federal financial regulatory agencies to assess the record of performance of the institutions we supervise in helping to meet local credit needs consistent with the safe and sound operation of the institutions. CRA enforcement authority is divided among the banking agencies, with the Federal Reserve examining state-chartered member banks for compliance with th.e Act. We are also required to take the record of a bank holding company's subsidiary banks into account when considering certain applications filed under the Bank Holding Company Act. We generally rely on the assessment performed by the FDIC, the Comptroller of the Currency, and the Federal Reserve Banks in connection with the review of applications filed by bank holding companies. Because these applications are subject to public comment, the Board also has the benefit, on occasion, of views from the local community. Since the CRA became effective in 1978, the Board has received approximately 80 protests against bank holding company applications because of concern that an institution was not meeting its community responsibilities. In each of these cases, the Board has examined the records of the banks involved in detail and, when appropriate, has urged that additional commitments or outreach efforts be made in the affected community. The Board undertakes a similar review when applicants have subsidiary banks that show a less than satisfactory performance according to the reports of the regulatory agencies. While these represent a small percentage of the applications reviewed by the Federal Reserve, I believe this approach is responsive to our obligations under the statute. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 .. .. The Honorable E. Thomas Coleman Page Two I believe I can speak for the other members of the Board, as well as myself, in saying that we share your concern that the financial institutions the Board supervises should help meet the credit needs of our rural communities in a continuing and affirmative manner consistent with safety and soundness. If members of the public believe that banks are not trying to help meet unmet credit needs, the Community Affairs Officer at each of the Federal Reserve Banks stands ready to facilitate a dialogue between those persons and the institution to see if problems can be resolved. I assure you that the Board takes its responsibilities under CRA seriously and that we will continue to encourage our banks to help meet the credit needs of their communities consistent with safe and sound banking practices. Sincerely, KB:LSF:vcd (V-7, 87-109) bcc: Ken Baebel Mrs. Mallardi (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis , E. THOMAS COLEMAN WASHINGTON OFFICE 6TH DISTRICT. MISSOURI 2344 RAYBURN HOUSE OFFICE BUILDING WASHINGTON DC 20515 (202) 225-7041 COMMITTEES ge" AGRICULTURE Stjit-OMMITTEES CONSERVATION, CREDIT. AND RURAL DEVELOPMENT, RANKING DOMESTIC MARKETING, CONSUMER RELATIONS, AND NUTRITION EDUCATION AND LABOR Congress of the Unita! 6 tats Jim of Represtntatitits Washington, PC 2015 DISTRICT OFFICES 5950 NORTH OAK TRAFFICWAY KANSAS CITY, MO 64118 (816) 454-7117 POST OFFICE AND FEDERAL BUILDING 8TH AND EDMOND ST JOSEPH MO 64501 (816) 364-3900 SUBCOMMITTEES POSTSECONDARY EDUCATION RANKING SELECT EDUCATION HUMAN RESOURCES EMPLOYMENT OPPORTUNITIES January 8, 1987 C.> The Honorable Paul A. Volker Chairman Federal Reserve System 20th St. and Constitution Ave., NW Washington, D.C. 20551 Dear Mr. Volker: I represent Missouri's Sixth Congressional District which has been severely impaired by the nation's depression in agriculture. The availability of credit at competitive rates is criti cal to our farmers. As a member of the House Agricultural Commi ttee, I have been active in efforts to stabilize the farm credi t system and insure the continuing availability of such credi t. In addition, I have worked diligently to insure that gover nment and private leaders are cooperating to achieve Congress' intent that the credit needs of qualified farmers and our rural commu nities are met. While the phenomenon is not unique to my Congressional district, I am deeply concerned by the number of rural banks being closed and subsequently purchased by holding companies who serve primarily as depository, not lending, insti tutions. Clearly, if this trend continues, rural communitie s will have their access to credit further diminished. As you are well aware, Congress has often expressed its desire that federal financial supervisory agenc ies encourage financial institutions "to help meet the credit needs of the local communities in which they are chartered consi stent with the safe and sound operation of such institutions,"[12 USCS Sec. 2901 et. req.] 12 USCS Section 1816 cites " the conve nience and needs of the community to be served " as one factor to be considered in certifying a financial institution. 12 CFR Part 228.4 specifically mentions farm loans as a category of credi t needs to be met by financial institutions under review. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I 1 .0 In writing I am asking that your agency review carefully related transactions to insure that acquiring financial institutions are meeting Congressionally mandated requirements that they be responsive to the credit needs of rural communities. Since l , E. i Coleman h omas ll MEMBER OF CONGRESS ETC:dbl https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 116 •et ..•• • •.. • Of G°Ve •• ••%0 R4, •c1••Q, \ -1; o • • BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM --J11[111a. .RAL RES • •• • • • WASHINGTON, O. C. 20551 February 17, 1987 The Honorable Jake Garn Ranking Minority Member Committee on Banking, Housing, and Urban Affairs United States Senate Washington, D. C. 20510 Dear Senator Cam: I am writing in further response to your request for comment on correspondence you received from Mr. William G. Bruce of Dallas, Texas. Mr. Bruce states that in 1983 he borrowed from Central Fidelity Bank in Richmond, Virginia. , Mr. Bruce sold his house, After paying a total of which was the collateral for the loan, to pay off the balance. On closing, Mr. Bruce found that his payments had not reduced the principal on the loan and that he owed a balance of . Mr. Bruce states that the loan agreement indicates that, in the event of prepayment, he would receive a rebate of the portion of any unearned interest, calculated according to the Rule of 78's. The Rule of 78's, however, was not explained to him when he obtained the loan. Mr. Bruce believes that the information in his loan agreement about the Rule of 78's implies that he is entitled to a rebate of interest when the loan is paid prior to maturity. The Rule of 78's is a method used by some lenders to determine how much interest has been earned at any point in the loan's term. State, not federal, law determines whether any particular method of making this calculation is permissible. (The Rule of 78's is permitted under Virginia law, although Central Fidelity no longer uses this method to accrue interest on loans greater than 60 months.) It is possible that the use of the Rule of 78's may result in the customer owing more than originally borrowed because of the mathematics involved. This formula takes into consideration the fact that the borrower pays more interest in the beginning of the loan's term, when the customer has use of more of the money, and less interest as the debt is reduced. The federal Truth in Lending Act, and its implementing Regulation Z, require creditors to disclose to consumers whether or not they may be entitled to a rebate of interest if a loan is paid off early. Creditors are also required to identify the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Jake Garn Page Two method of computing any unearned portion of the finance charge in the event the loan is prepaid in full, and to disclose the amount or method of computation of any charge that may be deducted from the rebate. Creditors, however, are not required under the regulation to furnish a narrative or mathematical formula of computation on their disclosures to explain the Rule of 78's. I am enclosing a pamphlet which describes the Rule of 78's in more detail. We asked the Federal Reserve Bank of Richmond to look into the matter of Mr. Bruce's loan. In response to the Reserve Bank's request for information about this matter, Central Fidelity reviewed the Bruces' loan documentation and found that the interest on the loan was calculated correctly according to the Rule of 78's and the method of calculation was disclosed as required by Regulation Z. The bank, however, discovered that it had made an error in calculating the payoff figure in favor of the Bruces. Mr. and Mrs. Bruce borrowed a principal amount of at an annual percentage rate of 14.99 percent. A 2 percent service charge, which was earned at inception and on which interest was calculated, was included in the finance was accrued under charge. In addition, interest of in the 19th off the loan the Rule of 78's. The Bruces paid , the payoff paid accrual month. While the Bruces difference The . figure should have been take the 19th to failure bank's the of apparently was the result Mr. Bruce is not, of earned. had accrual of interest which it also may He amount. additional course, to be charged for the deducttax is loan the on paid wish to know that the interest ible on the 1986 return. I hope this information is helpful. if I can be of further assistance. Please let me know Sincerely, Donald J. Winn Donald J. Winn Assistant to the Board Enclosure SP:CO:LSF:vcd (IN-l98, 86-4287) bcc: Susan Potkai Mrs. Mallardiy/ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 October 14, 1986 The Honorable Jake Garn Chairman Committee on Banking, Housing, and Urban Affairs United States Senate Washington, D.C. 20510 Dear Chairman Garn: I am writing to acknowledge receipt of your letter of September 25 concerning correspondence you received from Mr. William G. Bruce regarding the application of the Rule of 78 to his loan by Central Fidelity Bank in Richmond. We have asked the Federal Reserve Bank of Richmond to look into this matter, and I expect to have a response to you in the near future. Sincerely, L',or,aid J. Winn Donald J. Winn Assistant to the Board CO:vcd (V-198, 86-4287) bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Susan Potkai (for follow-up) Mrs. Mallardi BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM • L.). .RAL RE3tc-•• • •..• • • WASHINGTON, O. C. 20551 PAUL A. VOLCKER February 9, 1986 CHAIRMAN The Honorable Daniel K. Inouye United States Senate Washington, D.C. 20510 Dear SenatorInouye: Thank you for your letter of September 16 regarding the request of the Bank of the Federated States of Micronesia for a routing number so that checks drawn on it may be cleared through the Federal Reserve System. Mr. Leo A. Falcam, the bank's president, states in his letter to you of August 7 that he believes that this could be accomplished by an amendment to the Board's Regulation J that would "deem" the Federal States of Micronesia ("FSM") to be a part of a Federal Reserve District. As Mr. Falcam notes, a recent amendment to Regulation J provides that the Northern Mariana Islands (which, like the FSM, were formerly part of the Trust Territory of the Pacific Islands) are deemed to be in the Twelfth Federal Reserve District. Routing numbers are assigned to banks and other eligible depository institutions by Rand McNally & Company as agent for the American Bankers Association. The policy under which routing numbers are assigned was established jointly by the ABA and the Federal Reserve. Banks consider routing numbers important because Federal Reserve Banks will not process checks as "cash items" (i.e., provide availability of the funds represented by the check according to an automatic availability schedule) unless the check has the routing number encoded on it in magnetic, machine-readable ink. A key feature of the routing number is the identification of the Federal Reserve District in which the paying bank is located. There are 12 Federal Reserve Districts encompassing the 50 states, the District of Columbia, and certain territories and commonwealths of the United States. Of the territories and commonwealths, the Virgin Islands and Puerto Rico are considered to be in the Second District (the District served by the Federal Reserve Bank of New York), and Guam, American Samoa, and the Northern Mariana Islands are considered to be in the Twelfth District (Federal Reserve Bank of San Francisco). Recently, the Board amended its Regulation J, which governs check collection by Federal Reserve Banks, to incorporate the Northern Marianas into the Twelfth District. The Board https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Daniel K. Inouye Page Two acted on the request of a bank located in Saipan for a routing number. In adopting this amendment, the Board relied on earlier precedents that had included Guam and American Samoa in the Twelfth District. The Board understood that the Northern Marianas, like Guam and American Samoa, is a commonwealth of the United States. Prior to the Board's consideration of inclusion of the Northern Marianas in the Twelfth District, the Board's staff, anticipating similar requests from banks located in other areas of the former Trust Territory, considered whether to propose to the Board the possibility of amending Regulation J to incorporate all of the former Trust Territory into the Twelfth District. After examining the Compacts of Free Association with the FSM and the Marshall Islands and consulting with staff at the Department of the Interior, the staff concluded that it would not be appropriate to treat the Marshall Islands and the FSM the same as the Northern Marianas, Guam, and American Samoa are treated. Consequently, the staff did not propose this amendment, and it was not considered by the Board. The staff's decision was based on its understanding of the status of the FSM and the Marshall Islands as independent states in "free association" with the United States. Although the Compact of Free Association provides that the people of the FSM will continue to receive the benefit of certain U.S. Government programs (including deposit insurance), the staff was concerned about Section 171 of the Compact, which provides that the laws of the United States no longer apply to the FSM as they do to the Northern Marianas, Guam, and American Samoa. This provision suggests that Board regulations, including the check collection regulation, would not apply to the FSM as they do to the Northern Marianas, Guam, and American Samoa. For example, Section 210.9(a) of Regulation J provides that a paying bank "becomes accountable for the amount of a cash item" unless it pays for the item in a specified manner by the close of business on the day of presentment; that is, if such payment is not made within the times and by the means specified in the regulation, the paying bank becomes primarily liable for the amount of the item and no longer has the right to return the check under Section 210.12(a). This provision enables Reserve Banks to make the proceeds of checks deposited with them for collection available to the sending institutions according to time schedules based on average collection times. Institutions rely on such schedules in planning how to meet short-term funding needs. Not being subject to the regulation's limits, however, FSM banks could fail to make provisional payments and still return checks or could return their checks after the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Daniel K. Inouye Page Three deadlines for return in the regulations had passed as long as their actions were consistent with FSM law. Of course, a Reserve Bank may charge back the amount of credit given on account of an item if the item is returned, but if the chargeback is made after the normal time for return of domestic items, it may be difficult for the sending institution to recover the funds from its customers. In addition to these problems, Reserve Banks may not be able to enforce the warranties and indemnities made by paying banks under Section 210.12(b). Finally, FSM banks would not be required to make the notice of nonpayment for large-dollar items domestic paying banks must make. Given this uncertainty, the staff did not believe it appropriate to propose to the Board that banks in freely associated states be treated like banks located in other areas (such as Guam and the Northern Marianas) where U.S. law is still enforceable. Nevertheless, the Board's staff has been in contact with Washington counsel for the FSM to explore the potential for changes to the laws of the FSM and whether such changes would enable checks drawn on institutions located here to have their checks collected in the United States. I hope this information is useful. if I can be of further assistance. Sincerely, 5, _ Pc,4 JRA:vcd (V-192, 86-4164) bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Joe Alexander Oliver Ireland Legal Records (2) Elliott McEntee Steve App Mrs. Mallardi (2)J Please let me know DANIEL K INOUYE HAWAII PRINCE KUNIO FEDERAL BUILDING Action assigned Mr. Allison suITE 7325, 300 ALA IVIOANA BOULEVARD HONOLULU, HI 96850 (808) 546-7550 United eStates ROOM 722, HART SENATE BUILDING WASHINGTON, DC 20510 (202) 224-3934 1.-2"-c- 7-;. September 16, 1986 C• - 7- r-,-1 (Li,. (-Ft tp(-1 The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Washington, D.C. 20551 Dear Mr. Chairman: I am writing to inquire about the status of the Bank of the Federated States of Micronesia, which is experiencing difficulty in gaining access to the Federal Reserve System. Mr. Leo Falcam, President of the Bank, has written me the enclosed letter detailing his request that the Bank be "deemed" part of the Twelfth Federal Reserve District under Regulation J. Within existing regulations, may I ask that you respond to the concerns raised by Mr. Falcam and that you apprise me of the possibility of achieving an administrative solution to this problem? Thank you for your assistance in this important matter. K. United Sta DKI:dcl Enclosure https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis UYE Senator t tC:/i s tr-1C71 ▪ r , r1 CL, r•rf. r "'"""3 ,e) (JO r,i ' (77) f• 7▪:7 (2 -- I , "• 40, BANK OF TIIE FEDERATED STATES OF MICRONESIA P. 0. BOX 98 POIINPEI STATE FEDERATED STATES OF MICRONESIA 96941 r )(4.4.1,‘) 0 1- 1'I 1 D August 7, 1986 The Honorable Daniel K. Inouye 722 Hart Senate Office Bldg. Washington, D.C. 20510 Dear Senator Inouye: I am writing to you in a private capacity in relation to a matter of great importance to the Federated States of Micronesia. As a long standing good friend of Micronesia, I thought you might be the appropriate person to begin our inquiries with. The Bank of the Federated States of Micronesia is a bank which was formed about a year and half ago to essentially function as a national bank of the FSM. The Bank is wholly privately owned, approximately 25% by United States citizens. Top management of the Bank are executives hired from the Bank of Hawaii system and Bank of America system. The Bank of the FSM is the only domestically created bank in Micronesia (including Saipan) to have gone through the rigors of seeking United States Federal Deposit Insurance Corporation deposit insurance successfully. We are quite proud of that fact. Needless to say FDIC had no knowledge of the Federated States of Micronesia and little interest in extending its services out here, and so acquiring FDIC deposit insurance was a very diffic ult task. We have now crossed that hurdle, the Bank is open and functioning and we soon hope to have branches operating in all States. I serve as President of the Bank and am one of the founders and principal stockholders. There are ten other FSM citize n principal stockholders, two from Yap, four from Truk, three others from Pohnpe i and one from Kosrae. In addition to the founders and princi pal stockholders, the Bank has a total of about 1,300 FSM citizen shareholders coming from all parts of Micronesia. The FSM Bank's principal correspondent is First Hawaiian Bank. We hope and expect that this Bank will become to the Federated States of Micronesia what the Bank of Hawaii and First Hawaiian Bank have become to the State of Hawaii, the backbone of commerce in the island s. We have encountered a major problem and would like to enlist your support and help in solving it. While we are an FDIC insured bank because of certain language inserted in the enabli ng legislation of the Compact of Free Association, we are not eligible for a routing number in order to route checks throug h the Federal Reserve https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Daniel K. Inouye Senator 722 Hart Senate Office Bldg. August 7, 1986 Page 2 System. While this may app ear to be a rather minor matter , in fact, it is of great importanc e. Because of our ineligibilit y for a Federal Reserve routing num ber, we are unable to proces s our own checks through the Federal Reserve system. This effectively means that we cannot issue checki ng accounts to customers which is a tremendous drawback and discou rages acquiring new customers. It places us insa very difficult pos ition competitively with other U.S . Banks in the area and will be a factor inhibiting our growth for as long as this circumstance exists . We have been in touch with Fed the eral Reserve Bank of San Franci sco in order to try and resolv e the problem over the last several mon ths. These contacts have been unsatisfa ctory. The problem relates to what is referred to as Regulation J of the Federal Reserve. This regulation authorizes rou ting numbers and is organized in a geographic fashion assigning geo graphic areas to Federal Reserve distri cts. In a footnote to Regulatio n J, the Virgin Islands and Puerto Rico are "deemed" to be in the Second Federal Reserve District and Guam and American Samoa in the Twelfth. The Northern Mariana Isl ands was recently included within Regulation J, apparently in the same manner. It appears that the new fre ely associated states could be "de emed" to be part of the Twelfth Federa l Reserve District as well, but that requires action of the Fed era l Reserve Board. Like our initial approaches to FDIC, we are finding Federal Reserve uninteres ted in our problem and not helpfu l. Again, like the FDIC issue, it appears to us to be within American interests to have the freely associated states eli gible for routing numbers and eligible for participation in the Federa l Reserve. This would create a link between United States banking sys tem and the freely associated sta tes which would tie the two areas together commercially in such a way as would appear to be beneficia l to the United States. Of course , this link would be extremely useful to the freely associated sta tes. The purpose of this let ter is to request your assistance in getting the attention of the Fed eral Reserve Board in relation to alt eration of Regulation J. Any assistance you can give us in this regard will be deeply appreciated. We are also app roaching the Government of the Fed erated https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Daniel K. Ino uye Senator 722 Hart Senate Office Bld g. August 7, 1986 Page 3 States of Micronesia and wil l be enlisting the support of the Government in approaches to others in the United States Gov ernment to have this matter resolv ed. Again, we would appreciat e any help you can give us. Sincerely, Leo A. Falcam President LAF:lr https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4114, • .• •o •% -co .. -o ...,, ---A f• GOvi•. R4% c.,. Tr% 1: .,it. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551 PAUL A. VOLCKER February 9, 1986 CHAIRMAN The Honorable Daniel K. Akaka House of Representatives Washington, D.C. 20515 Dear Mr. Akaka: Thank you for your letter of September 26 regarding the request of Mr. Leo Falcam, President of the Bank of the Federated States of Micronesia ("FSM"), for a routing number so that checks drawn on the bank may be cleared through the Federal Reserve System. Routing numbers are assigned to banks and other eligible depository institutions by Rand McNally & Company as agent for the American Bankers Association. The policy under which routing numbers are assigned was established jointly by the ABA and the Federal Reserve. Banks consider routing numbers important because Federal Reserve Banks will not process checks as "cash items" (i.e., provide availability of the funds represented by the check according to an automatic availability schedule) unless the check has the routing number encoded on it in magnetic, machine-readable ink. A key feature of the routing number is the identification of the Federal Reserve District in which the paying bank is located. There are 12 Federal Reserve Districts encompassing the 50 states, the District of Columbia, and certain territories and commonwealths of the United States. Of the territories and commonwealths, the Virgin Islands and Puerto Rico are considered to be in the Second District (the District served by the Federal Reserve Bank of New York), and Guam, American Samoa, and the Northern Mariana Islands are considered to be in the Twelfth District (Federal Reserve Bank of San Francisco). Recently, the Board amended its Regulation J, which governs check collection by Federal Reserve Banks, to incorporate the Northern Marianas into the Twelfth District. The Board acted on the request of a bank located in Saipan for a routing number. In adopting this amendment, the Board relied on earlier precedents that had included Guam and American Samoa in the Twelfth District. The Board understood that the Northern Marianas, like Guam and American Samoa, is a commonwealth of the United States. Prior to the Board's consideration of inclusion of the Northern Marianas in the Twelfth District, the Board's https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4■11, The Honorable Daniel K. Akaka Page Two staff, anticipating similar requests from banks located in other areas of the former Trust Territory, considered whether to propose to the Board the possibility of amending Regulation J to incorporate all of the former Trust Territory into the Twelfth District. After examining the Compacts of Free Association with the FSM and the Marshall Islands and consulting with staff at the Department of the Interior, the staff concluded that it would not be appropriate to treat the Marshall Islands and the FSM the same as the Northern Marianas, Guam, and American Samoa are treated. Consequently, the staff did not propose this amendment, and it was not considered by the Board. The staff's decision was based on its understanding of the status of the FSM and the Marshall Islands as independent states in "free association" with the United States. Although the Compact of Free Association provides that the people of the FSM will continue to receive the benefit of certain U.S. Government programs (including deposit insurance), the staff was concerned about Section 171 of the Compact, which provides that the laws of the United States no longer apply to the FSM as they do to the Northern Marianas, Guam, and American Samoa. This provision suggests that Board regulations, including the check collection regulation, would not apply to the FSM as they do to the Northern Marianas, Guam, and American Samoa. For example, Section 210.9(a) of Regulation J provides that a paying bank "becomes accountable for the amount of a cash item" unless it pays for the item in a specified manner by the close of business on the day of presentment; that is, if such payment is not made within the times and by the means specified in the regulation, the paying bank becomes primarily liable for the amount of the item and no longer has the right to return the check under Section 210.12(a). This provision enables Reserve Banks to make the proceeds of checks deposited with them for collection available to the sending institutions according to time schedules based on average collection times. Institutions rely on such schedules in planning how to meet short-term funding needs. Not being subject to the regulation's limits, however, FSM banks could fail to make provisional payments and still return checks or could return their checks after the deadlines for return in the regulations had passed as long as their actions were consistent with FSM law. Of course, a Reserve Bank may charge back the amount of credit given on account of an item if the item is returned, but if the chargeback is made after the normal time for return of domestic items, it may be difficult for the sending institution to recover the funds from its customers. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Daniel K. Akaka Page Three In addition to these problems, Reserve Banks may not be able to enforce the warranties and indemnities made by paying banks under Section 210.12(b). Finally, FSM banks would not be required to make the notice of nonpayment for large-dollar items domestic paying banks must make. Given this uncertainty, the staff did not believe it appropriate to propose to the Board that banks in freely associated states be treated like banks located in other areas (such as Guam and the Northern Marianas) where U.S. law is still enforceable. Nevertheless, the Board's staff has been in contact with Washington counsel for the FSM to explore the potential for changes to the laws of the FSM and whether such changes would enable checks drawn on institutions located here to have their checks collected in the United States. I hope this information is useful. if I can be of further assistance. Sincerely, A. \ToIci<Pri JRA:vcd/pte (335, 86-4246) bcc: Joe Alexander Oliver Ireland Legal Records (2) Elliott McEntee Steve App Mrs. Mallardi (2)\-- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Please let me know BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, 0. C. 20551 k . •.RAL RES • PAUL A. VOLCKER February 9, 1986 CHAIRMAN The Honorable Spark Matsunaga United States Senate Washington, D.C. 20510 Dear Senator Matsunaga: Thank you for your letter of Ocotber 1 regarding the request of the Bank of the Federated States of Micronesia ("FSM") for a routing number so that checks drawn on it may be cleared through the Federal Reserve System. Routing numbers are assigned to banks and other eligible depository institutions by Rand McNally & Company as agent for the American Bankers Association. The policy under which routing numbers are assigned was established jointly by the ABA and the Federal Reserve. Banks consider routing numbers important because Federal Reserve Banks will not process checks as "cash items" (i.e., provide availability of the funds represented by the check according to an automatic availability schedule) unless the check has the routing number encoded on it in magnetic, machine-readable ink. A key feature of the routing number is the identification of the Federal Reserve District in which the paying bank is located. There are 12 Federal Reserve Districts encompassing the 50 states, the District of Columbia, and certain territories and commonwealths of the United States. Of the territories and commonwealths, the Virgin Islands and Puerto Rico are considered to be in the Second District (the District served by the Federal Reserve Bank of New York), and Guam, American Samoa, and the Northern Mariana Islands are considered to be in the Twelfth District (Federal Reserve Bank of San Francisco). Recently, the Board amended its Regulation J, which governs check collection by Federal Reserve Banks, to incorporate the Northern Marianas into the Twelfth District. The Board acted on the request of a bank located in Saipan for a routing number. In adopting this amendment, the Board relied on earlier precedents that had included Guam and American Samoa in the Twelfth District. The Board understood that the Northern Marianas, like Guam and American Samoa, is a commonwealth of the United States. Prior to the Board's consideration of inclusion of the Northern Marianas in the Twelfth District, the Board's staff, anticipating similar requests from banks located in other https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Spark Matsunaga Page Two areas of the former Trust Territory, considered whether to propose to the Board the possibility of amending Regulation J to incorporate all of the former Trust Territory into the Twelfth District. After examining the Compacts of Free Association with the FSM and the Marshall Islands and consulting with staff at the Department of the Interior, the staff concluded that it would not be appropriate to treat the Marshall Islands and the FSM the same as the Northern Marianas, Guam, and American Samoa are treated. Consequently, the staff did not propose this amendment, and it was not considered by the Board. The staff's decision was based on its understanding of the status of the FSM and the Marshall Islands as independent states in "free association" with the United States. Although the Compact of Free Association provides that the people of the FSM will continue to receive the benefit of certain U.S. Government programs (including deposit insurance), the staff was concerned about Section 171 of the Compact, which provides that the laws of the United States no longer apply to the FSM as they do to the Northern Marianas, Guam, and American Samoa. This provision suggests that Board regulations, including the check collection regulation, would not apply to the FSM as they do to the Northern Marianas, Guam, and American Samoa. For example, Section 210.9(a) of Regulation J provides that a paying bank "becomes accountable for the amount of a cash item" unless it pays for the item in a specified manner by the close of business on the day of presentment; that is, if such payment is not made within the times and by the means specified in the regulation, the paying bank becomes primarily liable for the amount of the item and no longer has the right to return the check under Section 210.12(a). This provision enables Reserve Banks to make the proceeds of checks deposited with them for collection available to the sending institutions according to time schedules based on average collection times. Institutions rely on such schedules in planning how to meet short-term funding needs. Not being subject to the regulation's limits, however, FSM banks could fail to make provisional payments and still return checks or could return their checks after the deadlines for return in the regulations had passed as long as their actions were consistent with FSM law. Of course, a Reserve Bank may charge back the amount of credit given on account of an item if the item is returned, but if the chargeback is made after the normal time for return of domestic items, it may be difficult for the sending institution to recover the funds from its customers. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Spark Matsunaga Page Three In addition to these problems, Reserve Banks may not be able to enforce the warranties and indemnities made by paying banks under Section 210.12(b). Finally, FSM banks would not be required to make the notice of nonpayment for large-dollar items domestic paying banks must make. Given this uncertainty, the staff did not believe it appropriate to propose to the Board that banks in freely associated states be treated like banks located in other areas (such as Guam and the Northern Marianas) where U.S. law is still enforceable. Nevertheless, the Board's staff has been in contact with Washington counsel for the FSM to explore the potential for changes to the laws of the FSM and whether such changes would enable checks drawn on institutions located here to have their checks collected in the United States. I hope this information is useful. if I can be of further assistance. Sincerely, JRA:vcd/pte (341, 86-4323) bcc: Joe Alexander Oliver Ireland Legal Records (2) Elliott McEntee Steve App Mrs. Mallardi (2),_ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Please let me know R4,•. .0V• x „ --)-•*i••;4,•\ 0,.. * co ' \, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 PAUL A. VOLCKER RAL RE.S" • • • •..• •• February 5, 1987 CHAIRMAN The Honorable Henry B. Gonzalez Chairman Subcommittee on Housing and Community Development Committee on Banking, Finance and Urban Affairs House of Representatives Washington, D.C. 20515-6052 Dear Chairman Gonzalez: Thank you for your letter of December 23, regarding the public announcement by Chemical New York Corporation of its agreement to acquire Texas Commerce Bancshares, Inc. ("TCB"). As you note, the Board must give prior approval under the Bank Holding Company Act before the acquisition can be consummated. In considering an application for a bank holding company to acquire a bank, the Board reviews and assesses the parties' past and anticipated performance for certain factors, including the convenience and needs of the local communities and the performance of depository institutions under the Community Reinvestment Act (CRA). Such evaluations benefit from public comments. During 1986, the CRA performance of both Chemical Bank and Texas Commerce Bank Shares, Inc., were reviewed by Federal Reserve staff. TCB's record was reviewed in connection with another application, and Chemical's record was reviewed by the Federal Reserve Bank of New York in connection with a regularly scheduled examination. Those records will be taken into account again in the context of any application that is filed with us by the institutions. I will see to it that you are notified when the application is received and will advise you of any Board action. Please let me know if I can be of further assistance. Sincerely, KB:CO:jhe/pte (V-2, 87-36) Mr. Eric K. Tarlow Supervising Examiner FRB, New York bcc: Mr. William L. Rutledge Vice President FRB, New York Messrs, Baebel & Taylor; Mrs. Mallardi (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis HENRY B GONZALEZ. TEXAS. CHAIRMAN FERNAND J ST GERMAIN, RHODE ISLAND WALTER E F .INTROY. DISTRICT OF COLUMBIA STAN LUND" NEW YORK MARY ROSE DAKAR. OHIO BRtCE F VENTO, MINNESOTA ROBERT GARCIA. NEW YORK PARREN J MITCHELL, MARYLAND CHARLES E. SCHUMER. NEW YORK BARNEY FRANK, MASSACHUSETTS RICHARD H LEHMAN. CALIFORNIA BRUCE A MORRISON, CONNECTICUT JIM COOPER. TENNESSEE MARCY KAPTUR. OHIO BEN ERDREICH. ALABAMA SANDER H LEVIN, MICHIGAN THOMAS R CARPER, DELAWARE ESTEBAN E TORRES CALIFORNIA BUDDY ROEMER, LOUISIANA GERALD D KLECZKA. WISCONSIN PAUL E KANJORSKI, PENNSYLVANIA THOMAS J MANTON, NEW YORK JAIME B FUSTER. PUERTO RICO _ zior Cc U.S. HOUSE OF REPRESENTATIVES SUBCOMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT OF THE COMMITTEE ON BANKING, FINANCE AND UREAN AFFAIRS NINETY-NINTH CONGRESS 2129 RAYBURN HOUSE OFFICE BUILDING STEWA'RT B McKINNEY. CONNECTIC CHALMERS P WYLIE OHIO MARGE ROUKEMA. NEW JERSEY GEORGE C WORTLEY, NEW YORK BILL McCOLLUM, FLORIDA DOUG BEREUTER. NEBRASKA DAVID DREIER, CALIFORNIA JOHN MILER. INDIANA THOMAS J RIDGE. PENNSYLVANIA STEVE BARTLETT. TEXAS TOBY ROTH. WISCONSIN ROD CHANDLER. WASHINGTON AL McCANDLESS CALIFORNIA JOHN E GROTBERG ILLINOIS JIM KOLBE ARIZONA J. ALEX McMILLAN, NORTH CAROLINA GERALD R McMLARAY, STAFF DIRECTOR (202) 225-70E4 WASHINGTON, DC 20515-6052 December 23, 1986 s') - Honorable Paul Volcker Chairman Board of Governors Federal Reserve System Washington, D. C. 20551 Dear Mr. Chairman: The announcement last week that the Chemical New York Corporation (The Chemical Bank), the fourth largest bank in the United States, has proposed the acqu isition of the Texas Commerce Bank Shares, Inc., has sent a troublin g message to not only the financial institutions in the State of Texas, but also to the hundreds of thousands of bank customer s whose interest, I fear, may surely be forgotten in the interest of bailing out the banking industry of Texas. I am troubled not only by the movement of the big New York financial giants into Texas, but more importantly, by the imperial attitude that these financia l institutions have towards their small business and minority cust omers. I am writing to urge that the board withhold its approval of this acquisition until it can be asce rtained that the Chemical Bank and the Texas Commerce Bank meet the requirements of the Community Reinvestment Act and the Home Mortgage Disclosure Act, and that both the existing institutions and the acquiring institution will meet the credit needs of the community in which they serve and propose to serve if the acquisition is appr oved. There is no doubt that financial institutions, as well as other business enterprises, are hurting because of the economic situation existing in the State of Texas today, but I do not want to see the bank customers and potentia l customers run rough-shod over , just in the interest of protecting the so-called financial stability of financial institutions. In shor t, Mr. Chairman, what I seek is that the interest of the bank cust omers and prospective credit users, particularly those minority groups who have in the past been redlined by these institutions, are not in any way adversely affected by this proposed acquisition. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sin rely, 14471 enry B. Gonzalez, Ch irm BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20 551 PAUL A. VOLCKER January 16, 1987 CHAIRMAN The Honorable Paul S. Sarbanes Chairman Joint Economic Committee Washington, D.C. 20510 Dear Chairman Sarbanes: Thank you for your letter of January 6 inviting me to testify before the Committee at your annual hearings on the Economic Report of the President. I look forward to being with you on Monday, February 2, at 10:00 a.m. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely, A. Vcte DJW:vcd (V-4, 87-49) bcc: Mr. Kichline Mrs. Mallardi (2)v BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, 0. C. 20551 PAUL A. VOLCKER January 16, 1987 CHAIRMAN The Honorable William Proxmire Chairman Committee on Banking, Housing, and Urban Affairs United States Senate Washington, D.C. 20510-6075 Dear Chairman Proxmire: Thank you for your letter of January 7 inviting me to appear before your Committee on banking legislation. I look forward to seeing you on Wednesday, January 21, at 10:00 a.m. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely, CO:vcd (V-5, 87-73) bcc: Mr. Bradfield Mrs. Mallardi (2) ALAN CRANSTON CALIFORNIA DONALD W RIEGLE. JR.. MICHIGAN PA Ap'S SARBANES, MARYLAND CHFTSTOPHER .1 DODD CONNECTICUT ALAN J DIXON. ILLINOIS JIM SASSF--.':'ENNESt:EE TERRY SAJ4FORD. r./ORNI CAROL/NA RIC,4ARD C SHELBY. ALABAMA ROBERT GRAHAM, FLORIDA JAKE GARN, UTAH 7...7 JOHN HEINZ. PENNSYLV 62 WILLIAM L ARMSTRONG COLORADO ALFONSE M 0 AMATO. NEW YORK CHIC HECKT. NEVADA PHIL GRAMM. TEXAS CHRISTOPHER S BOND. MISSOURI JOHN H. CKAFEE. RHODE ISLAND KENNETH A. McLEAN, STAFF DIRECTOR M. DANNY WALL. MINORITY STAFF DIRECTOR United tats ,tnate COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS WASHINGTON, DC 20510-6075 January 7, 1987 The Honorable Paul Volcker Chairman Federal Reserve System Twentieth St. & Constitution Ave. NW Washington, DC 20551 V-7- 7i Dear Mr. Chairman: This letter is to formally invite you to testify on January _21_, 1984...at 10:00 a.m. before the U.S. Senate Committee on Banking, Housing and Urban Affairs on various banking issues described below, which were considered by the Committee in prior Congresses. / ( Matters on which the Committee would benefit from your views are: (1) the Administration's plan for recapitalizing the Federal Savings and Loan Insurance Corporation (FSLIC); (2) the proposal advanced in 1986 by bank regulators for new powers to deal with failing and failed banks; (3) whether and why there is a need to close the nonbank bank loophole and the South Dakota loophole; (4) whether and why Congress should grant bank holding companies new powers to deal in such matters as commercial paper, municipal revenue bonds, mortgage-backed securities, and mutual funds; (5) the need for legislation to deal with check-holding practices of financial institutions. As Chairman, I do not plan to introduce a specific banking bill incorporating proposals on the above issues prior to hearings the Committee will hold on January 21 and 22. Since, however, many of the above matters have been before the Committee and the Senate for years, I do plan to quickly formulate a bill on the basis of the January hearings and move it to a mark up before the full Committee shortly after such hearings are completed. Your views, then, will be of the utmost importance as the Committee deals with these important public policy matters. Attached is a copy of the Committee's Guidelines for Witnesses. Please note in particular that our Committee rules require that all witnesses submit at least 100 copies of their written statements to Room SD-534 of the Dirksen Senate Office Building at least 24 hours prior to their appearance. Witnesses are also requested to limit their oral testimony to 10 minutes. The Committee would appreciate your complying with these requirements. If you have any questions regarding your testimony please call Patrick Mulloy (224-1571) or Bob Dugger (224-7391) of my Committee staff. Thank you for your cooperation. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis elyi2 „t_tts re, Chaitmafi- 1 WILLIAM PROXMiR". WISCONSIN. CHAIRMAN ALAN CR4NSTON CAIIFORNIA CpdALD w RIEGLE MICHIGAN PAUL S SARBANES MARYLAND CHRISTOPHER J DODD CONNECTICUT ALAN J DIXON ILLINOIS JIM SASSER TENNESSEE TERRY SANFORD NORTH CAROLINA RICHARD C SHELBY ALABAMA ROBERT GRAHAM. FLORIDA JAKE GAIN. UTAH HEINZ. PENNSYLVANIA WILLIAM L ARMSTRONG COLORADO ALFONS' M D AmATO, NEW YORK CHIC Nicwr, NEVADA PHIL GRAmM TEXAS CHRISTOPHER S BOND, MISSOURI JOHN M. CHAFE'. RHODE ISLAND JOHN KENNETH A. McLEAN. STAFF DIRECTOR M. DANNY WALL MINORITY STAFF DIRECTOR United eStats Etiatc COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS WASHINGTON, DC 20510-6075 GUIDELINES FOR WITNESSES These guidelines apply to all hearings of the Senate Committee on Banking, Housing, and Urban Affairs and its subcommittees. 1. All hearings will begin at 10:00 a.m. in Room SD-538 Dirksen Senate Office Building unless otherwise indicated. 2. Committee rules require that all witnesses submit at least 100 copies of their written statements 24 hours prior to their appearance (Sundays and holidays not included in determining this 24-hour period). If witness desires copies to be distributed to press and public, more copies are needed. In order to minimize duplicating costs for the witness and printing costs for the Committee, it is requested that these statements be single-spaced. Statements should be delivered to Room SD-534 Dirksen Senate Office Building, Washington, D.C. 20510. Strict adherence to the 24-hour rule is essential in order that Committee Members may review the statements before the hearing, thus enabling the Participants to more thoroughly discuss the issues involved. Statements will not be released to anyone except Senators and staff prior to the day of your testimony. 3. Witnesses not complying with the 24-hour rule will not be allowed to testify unless specifically permitted by the Chairman. 4. Oral presentations must be limited to a brief summary not to exceed 10 minutes. Your complete statement will be printed in the hearing record. 5. Please complete the attached card and bring it to Room SD-534 Dirksen Senate Office Building prior to the hearing. You will be given copies of the statements of those testifying with you at that time. Your cooperation is appreciated. https://fraser.stlouisfed.org • Federal Reserve Bank of St. Louis William Proxmire Chairman •'of GOVib.• 94, • .*•0 0• *0 --n ' -4 .• e, N.L 4 BOARD OF GOVERNORS OF THE ' : l 0c., FEDERAL RESERVE SYSTEM •• 17 RAL RE.S. • •... • • - WASHINGTON, D. C. 2055 PAUL A. VOLCKER January 15, 1987 CHAIRMAN The Honorable John D. Dingell Chairman Committee on Energy and Commerce House of Representatives Washington, D.C. 20515 Dear Chairman Dingell: On September 15, 1986, you wrote to me about your interest in the proposal by Security Pacific Corporation to establish an over-the-counter trading system to facilitate trading by primary dealers and other institutions of options on U.S. government securities. I thought you would like to know that on December 23 Security Pacific filed with the Board a notice to engage in the activity under section 4(c)(8) of the Bank Holding Company Act. Michael Bradfield of my staff has been in touch with Consuela Washington of your staff about this application. Copies of the filing and the Board's Federal Register notice are enclosed. Sincerely, §'Paul A. YoIcker Enclosures KB:vcd (V-185, 86-4026) bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Messrs. Bradfield, Mattingly, Plotkin Ms. Bondehagen Mrs. Mallardi (2)v Legal Records (2) Gov; BOARD OF GOVERNORS OF THE -o (is FEDERAL RESERVE SYSTEM •A WASHINGTON, O. C. 20 551 January 9, 1987 PAUL A. VOLCKER CHAIRMAN The Honorable William Proxmire Chairman Committee on Banking, Housing and Urban Affairs United States Senate Washington, D.C. 20510 Dear Chairman Proxmire: The Federal Reserve Board has been considering applications by several bank holding companies that have proposed a new interpretation of Section 20 of the Glass-Steagall Act that would permit affiliates to engage in securities activities otherwise prohibited to banking organizations. At the state level, there are related and similar developments occurring. The Board has approved one of these applications as consistent with Section 20 in which a company applied to engage in the placement of commercial paper in a commercial lending affiliate. In addition, the Board has announced that it will hold a hearing in February on three other pending applications by bank holding companies to underwrite commercial paper, municipal revenue bonds, mortgage-backed securities, and consumer related receivables in affiliates largely conducting U.S. Government securities operations. Those applications involve important legal and factual issues beyond those raised in the approved application, and the Board intends to complete its consideration of those issues by the end of April. We will, of course, reach as sound a judgment as feasible within the context of the language of the law and Congressional intent. However, these applications, together with other recent developments, make it evident that interpreting a statutory framework adopted more than 50 years ago in a financial marketplace that has been enormously changed by technology and competitive forces poses virtually insuperable difficulties both in divining the intent of Congress and sensibly and consistently applying the literal language of the statute. For instance, the present applications depend on a reading of Section 20 of Glass-Steagall as allowing the affiliates of banks to engage in otherwise prohibited underwriting activity so long as they are not "engaged principally" in this activity. Applying the law in this way has the odd result of giving incentives to bank holding companies to shift traditional https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • The Honorable William Proxmire Page Two banking activities out of the bank and into a non-banking affiliate in order to have sufficient diverse activity in the affiliate so as not to be "engaged principally" in underwriting. Further, only the largest banks would be in a position to establish affiliates in which the underwriting activity would be large enough to be economically viable yet a small enough part of the affiliate that it would not be "engaged principally" in the underwriting activity. These and other policy issues clearly require fresh consideration by the Congress. Underwriting of commercial paper, municipal revenue bonds, mortgage-backed securities, and mutual funds have long been supported by the Board as safe and sound activities for bank holding companies when conducted within an appropriate statutory framework. I know I speak for all members of the Board in urging that Congress turn its attention promptly to dealing with the issue of additional securities activities for bank holding companies and adopting a legislative framework that will provide a straightforward solution relevant to today's marketplace and a fresh expression of Congressional intent. Because of your interest and responsibilities over these matters, I am enclosing a summary of the Board's recent decision and an analysis of the issues involved. I would also call your attention to my concurring opinion at the end of the material which focuses on the need for Congress to review and update existing law. Sincerely, Enclosure (Press Release dtd. 12/24/86) DJW:PAV:pte IDENTICAL LETTERS SENT TO ALL MEMBERS OF THE HOUSE AND SENATE BANKING COMMITTEES. bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mrs. Mallardi (2)
@FedFRASER