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March 8, 1976
To:

Chairman, Council of Economic
Advisers

From:

Chairman, Board of Governors
of the Federal Reserve System

A F
Subject:- The Financial Reform.Act of 1976
As you know, this legislation is pending before the House
Banking Committee, and the hearings on the legislation are scheduled
to conclude on March 18. It is anticipated that the Committee will
move promptly to mark up the bill, and the markup could commence as
early as March 23. Chairman Reuss has publicly stated his intention
to move this bill not only through the Committee but also through the
House before the mid-April Easter recess. It is not at all certain
that this ambitious scheduling can be met, but it is our present
judgment that the bill will be voted on by House Banking before this
recess. Hill sources indicate that if the House passes a Financial
Reform Act, this legislation will be brought to conference with the
Financial Institutions Act which passed the Senate during the first
session of the 94th Congress.
I find the legislation as it is presently drafted an
'exceedingly troublesome piece of legislation. It is my judgment
that if this legislation passes in its present form, it could well
frustrate the conduct of monetary policy and do serious injury to
our nation's economy.
I am primarily concerned about Title I of the bill, which
proposes the establishment of a Federal Banking Commission. Under
the bill, this Federal Banking Commission would assume the bank
regulation and other banking supervisory functions presently lodged
with the Board of Governors of the Federal Reserve System or with
the Comptroller of the Currency.
It is the Board's considered judgment that the Federal
Reserve, as the nation's central bank, must be closely involved in
the process of bank regulation and supervision. There is a vital
interaction between monetary policy and bank supervision that the
drafters of the legislative proposal obviously didn't consider.
The interaction is so strong that actions by this new Federal Banking
Commission, either deliberately or inadvertently, could frustrate
monetary policy and destroy the effectiveness of the Federal Reserve.




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r For examplej rigid bank examination standards by the new
Commission will help determine bank lending policies. A monetary
policy by the Federal Reserve designed to promote active lending
policies on the part of our n a t i o n 1s banks could thus be frustrated
by actions currently taken or previously taken by the Federal Banking
Commission. Conversely, a~ policy of monetary restraint could be
frustrated by past or prospective Commission action to ease bank
lending standards.
Again, the new C o m m i s s i o n ^ policies regarding the
adequacy of bank capital could disrupt the conduct of monetary
policy. If the Commission sets rigid bank capital standards,
such action could weaken monetary policy aiming to finance a
satisfactory economic expansion. Conversely, loose standards
could frustrate a monetary policy looking towards economic
restraint.
Thirdly, the transfer of our regulatory and supervisory
function to the new Commission will make far more difficult the
operation of our discount window. Through the bank regulatory and
supervisory function, the Federal Reserve has built up a considerable
body of knowledge concerning the individual banks which come to the
discount window for temporary assistance. In time, this knowledge
will be lost.
Finally, our experience as a regulator has convinced us
that the behavior of monetary aggregates is directly affected by
regulatory decisions--such as the recent decision of the Board
which authorized passbook accounts for business firms.
In conclusion, I urge that you and the Administration
oppose this Title of the bill and that this opposition be conveyed
to the Committee in testimony and in other ways prior to the markup
of the legislation.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102