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Report of the Committee
on

FINANCIAL INSTITUTIONS
to the
PRESIDENT OF THE UNITED STATES




April 1963




Report of the Committee
on

FINANCIAL INSTITUTIONS
lo the

PRESIDENT OF THE UNITED STATES




U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON I 1963

For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington 25, D.C. -Price 25 cents




(II)

T he W

h it e

H

o u se ,

*Washington, April

19, 1963.

Mr. W a l te r W . H eller , Chairman, Council of
Economic Advisers.
Subject: Report of the Committee on Financial Institutions.

M

em orandum

for

I should like to express my appreciation to you, as Chairman, and
to the members of the Committee on Financial Institutions, for the
valuable analysis you have made of the changes in Government policy
toward private financial institutions, which could contribute to eco­
nomic stability, growth, and efficiency. It is heartening that the
eleven agencies represented, all of them intimately involved in the
formulation and execution of Federal policies affecting such institu­
tions, both recognize the need for improvements and agree on the steps
which should be taken.
The conclusions of the Committee are couched in terms of principles
and goals. As the Report states, many of the needed revisions in
law and policy identified by the Committee are not so urgent as to
command the highest priority. However, in my judgment, they will
provide a sound basis for policy and constructive guidance in con­
sidering specific proposals for legislative action.
It is important that wre begin to take the actions necessary to
strengthen and make more effective our private financial system.
For instance, Federal insurance for bank deposits and savings and
loan share accounts has long proved its value. The problem of addi­
tional coverage is now before the Congress. The report concludes,
and I agree, that in increasing the coverage of deposit and share
insurance certain related issues should be satisfactorily resolved. I
am requesting that draft legislation resolving these issues be prepared
as soon as possible.




(m )




T h e C h a ir m a n o f t i i e
C o u n c i l o f E c o n o m ic A d v ise r s,

Washington, D.C., April P, 1963.
D ear M r . P r e s id e n t : I submit herewith the Report of the Com­
mittee on Financial Institutions, established in response to your mem­
orandum of March 28, 1962. The members of the Committee are
listed in the letter of transmittal which follows.
This report is the product of an immense amount of effort by mem­
bers of the Committee and their staffs. The Committee held 39 for­
mal meetings, at which it considered a broad range of issues, many of'
them controversial. . It had the benefit of close to 100 working papers
prepared by the various departments and agencies; numerous studies
and memoranda prepared by trade associations, financial institutions,
and individuals; and the report and studies of the Commission on
Money and Credit.
,f
James Tobin, member of the Council of Economic Advisers, acted
as Chairman pro tem of the Committee until July. Since that time,
Gardner Ackley, Mr. Tobin’s successor on the Council, has served
in this capacity. The Committee is extremely grateful to Robert
Solomon of the staff of the Board of Governors of the Federal Reserve
System, who ably served as its Secretary and as the principal drafts­
man of its report, as well as to Chairman Martin for making Mr.
Solomon’s services available to the Committee.
Your charge to the Committee w’as that it “consider what changes,
if any, in Government policy toward private financial institutions
could contribute to economic stability, growth, and efficiency.” While
the Committee has not attempted to formulate specific legislative rec­
ommendations, its findings point to a number of significant changes in
legislation and in administrative rules and arrangements that would
enable private financial institutions to play a more effective role in
our market economy.
Although numerous improvements are suggested, the report as a
whole offers reassurance that our financial system, for the most part,
functions soundly and efficiently to promote the growth and stability
of our economy and effective employment of our Nation’s savings;
and that Federal supervision and regulation advance these ends. The
Nation is therefore in a position to proceed with improvements after




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VI
due deliberation rather than, as has so often been true in the past,
under the pressure of financial crisis.
All members approached these difficult and controversial issues in
a spirit of cooperation and with a sincere desire to obtain the maxi­
mum possible degree of consensus. As a result, a majority of the
Committee’s specific conclusions were reached by unanimous vote.
On the others, there were one or more dissents. Even where there
were no dissents, however, the conclusions frequently represent a
“common denominator’ of somewhat differing shades of opinion.
The Committee unanimously recommends that this report be re­
leased for publication. In addition to the guidance which the report
may provide for the executive and legislative branches of the Federal
Government, we believe that the report's analysis of issues and its
findings can contribute to a better understanding of these complex
questions in the financial community and in the public generally.
Respectfully,




W a l t e r T\r. H e l l e r ,

Chairman.

LETTER OF TRANSMITTAL
A p r i l 10,1963.
Mr. P r e s id e n t : Attached is the report of your Committee on
Financial Institutions, which you appointed on March 28, 1962, “ to
review legislation and administrative practices relating to the opera­
tions of financial intermediaries,” and “to consider what changes, if
any, in government policy toward private financial institutions could
contribute to economic stability, growth, and efficiency.”
Faithfully yours,

D

ear

Chairman, Board of GovVr/iors of
Reserve S^item

Administrator, Housing and Home
Finance Agency

''The ComptrQi\€r of the Currency

Chairman, FederaT"ij>eposit
Insurance Corporation

Chairman, Council of Economic
Advisers, Chairman of the Committee




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TABLE OF CONTENTS
Chapter I.
II.
III.
IV.
V.
VI.
VII.

Introduction________________________________________________
Scope and structure of reserve requirements------------------------Interest rate regulation_____________________________________
Portfolio regulation_________________________________________
Federal charters for financial institutions__________________
Insurance of deposits and shares_l _________________________
Structural changes and competition among financial institu­
tions --------------------------------------------------------------------------------VIII. Conflicts of interest_____________________1__________________
IX. Supervision and examination of financial institutions-----------Appendix, President’s memorandum, dated March 28, 1902, establishing
the Committee on Financial Institutions---------------------------------------------(IX)

083706— 63----2




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REPORT ON FINANCIAL INSTITUTIONS
Chapter I
INTRODUCTION
The general task of the Committee on Financial Institutions was,
according to the President’s memorandum establishing the Commit­
tee, “to consider what changes, if any, in governmental policy toward
private financial institutions could contribute to economic stability,
growth, and efficiency.”
Private financial institutions serve a vital function in the economic
process. They gather funds of economic units with surpluses and
lend funds to economic units with deficits. In addition, commercial
banks, the largest group of private financial institutions, create the
bulk of the economy’s medium of exchange and administer its pay­
ments mechanism, and are the main channel through which monetary
and credit policy is implemented. These institutions as a group are
closely involved in financing capital expenditures and in creating
liquid assets for businesses and consumers. As a result, the activities
of financial institutions have an important bearing on economic growth
and on fluctuations in economic activity. As lenders of capital, finan-.
cial institutions also influence the allocation of resources and therefore
the efficiency with which the economy operates. Although the finan­
cial system by itself cannot assure that the economy will enjoy steady,
stable, and efficient growth, a well-functioning financial system is a
necessary condition for stability, growth, and efficiency.
Only on a few occasions in our history has the Government under­
taken a broad examination of the financial structure in the absence of a
crisis that made such an examination imperative. During the Civil
War, after the financial panic of 1907, and during the Great Depres­
sion, the need for reexamination and action with respect to the finan­
cial structure was unmistakable.
The occasion for the present study was quite different. It was trig­
gered not by. a crisis, nor by the presence of acute problems. Rather,
it represented a recognition that substantial changes had occurred in
our economy and in the financial structure since the mid-1930’s. In
the decade of the Great Depression, numerous innovations had been
introduced into the relationship between Government and private




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2

financial institutions. Many of these changes were designed either to
prevent a repetition of the financial catastrophe of the early 1930’s or
to encourage recovery from severe depression.
Since World W ar II, the economy has grown and the environment
in which financial institutions operate, and which they help to create
has altered appreciably. The question naturally arose whether these
changes called for new approaches or revisions in Federal regulation
in the financial area.
In the interim, there were a number of congressional investigations
in the area of financial institutions. Subcommittees of the Joint
Economic Committee under Senator Douglas (1950) and Representa­
tive Patman (1952) made intensive studies of monetary, fiscal, and
debt management policies and in 1956-57 the Senate Banking and
Currency Committee under Senator Robertson reviewed Federal laws
. applicable to financial institutions.
More recently, the Commission on Money and Credit, a private
group, undertook an extensive study and in 1961 presented a set of
recommendations calling for, among other things, reform and im­
provement of the financial structure.
The present Committee’s assigned task was to take the recommenda­
tions of the Commission on Money and Credit as a point of departure
and to determine what changes, if any, are desirable in the Federal
,Government’s approach to private financial institutions in order to
contribute to economic growth and stability, remove apparent incon­
sistencies, inequities, and impediments in the financial structure, and
assure that other public purposes are being served effectively.
, The Committee was established at the end of March 1962. .The
' large number.of issues requiring examination in the period since then
precluded any sizable, amount of new research. The Committee’s
analyses have been based largely upon existing information and stud­
ies (including tliose done for the Cofnmissidn on Money and Credit)
and the experience of its members and staff, together with written
submissions from interested groups and individuals outside the Fed­
eral Government.
On this basis, the Committee has weighed the various issues within
its terms of reference and has arrived at conclusions, not always unani­
mous, regarding goals and objectives of Federal policy with respect
' to private .financial institutions. The Committee has generally re­
frained from formulating specific legislative recommendations. Its
conclusions are generally stated in broad terms rather than in the form
of detailed proposals.
Implementation of many of the conclusions in this report would
require transitional arrangements. The Committee has not attempted




3
to spell out the details of such arrangements, which-would depend on
the circumstances at the time of implementation.
!
Our study points to needed improvements in the financial structure.
I f implemented by legislation, these reforms would contribute in var­
ious ways to a better functioning economy. The indicated changes are.
not so compelling as to command the highest priority in the Presi­
dent’s legislative program. But it is of the essence of good govern­
ment to attempt to anticipate problems before they become acute. In
the .financial area particularly, where public confidence is crucial to.
the continued effectiveness of the financial system, and indeed to eco­
nomic stability generally, it would .be unfortunate to confuse lack of
urgency with lack of importance. Problems should be dealt with as
they become evident in order to avoid the need for urgent action to
meet a crisis situation. Furthermore, insofar as unwise policies, in­
consistencies, and inequities creep into the financial system, they are
more difficult to remove the longer they are tolerated, either because
groups come to depend 011 them for their livelihood or because some
policies are not reversible.

Scope of Study
The Committee’s terms of reference, as set out in the President’s
memorandum of March 28, 1962, cover Federal laws and regulations
pertaining mainly to private institutions that accept deposits and
shares. The Federal Government is involved with these institutions
in numerous capacities: as monetary authority seeking to encourage
economic growth and stability, as chartering authority, as insuring
authority, as lending authority, and as general supervisory authority
concerned with financial soundness, preservation of competition, and
provision of adequate services to the public. These governmental
functions naturally impinge upon each other and overlap in various
ways. As a result, judgments regarding Federal policies with respect
to private financial institutions must rest on a balancing among several
criteria, which sometimes point in different directions.
In conducting its study and formulating its judgments, the Com­
mittee has been guided by five basic criteria. IsTot necessarily in order
of importance, these are as follows:
1. Strengthening the effectiveness of Government stabilization pol­
icies in the financial area. Nearly every issue to which the Committee
addressed itself had implications for monetary policy.
2. Increasing the effectiveness of lending institutions in contribut­
ing to efficient resource allocation and promoting economic growth.
Governmental regulations and restrictions need to be examined from
time to time to assure that they enhance rather than limit the ability of




4
private financial institutions to respond to the needs of a growing
and changing economy.
3. Improving equity and efficiency in the regulatory or statutory
treatment of financial institutions. Governmental supervision and
regulation can impose competitive advantages or disadvantages on
one or another group of private financial institutions. Equally pos­
sible is the development of inconsistent or inefficient supervisory
actions and policies. It was an objective of the Committee to exam­
ine existing regulations and, where appropriate, to recommend elim­
ination of apparent inequities or inefficiencies.
4. Preserving the solvency and liquidity of private financial institu­
tions so as to protect the savings of the public. Although it was alert
to the need for flexibility and improvement in the financial system, the
Committee was continuously conscious of the importance of traditional
safeguards over the solvency and liquidity of financial institutions.
5. Strengthening competition among financial institutions. Govern­
ment supervision involves limitations on the scope of competition
among financial institutions, because unrestricted competition in the
financial area can lead to failures which have wide repercussions, well
beyond the welfare of those who own or manage the individual insti­
tutions involved. Nevertheless, competition is relied upon to promote
efficiency and to protect the public. The Committee was concerned
with promoting competition among financial institutions where con­
sistent with other important objectives.




Chapter II
SCOPE AN D STRUCTURE OF RESERVE R EQUIREM ENTS
Reserve requirements were originally regarded as a means of as­
suring that banks maintain sufficient liquidity to meet possible with­
drawals of deposits. In present circumstances, it is generally agreed
that required reserves serve only a marginal liquidity function; for
example, with a 15-percent reserve requirement, a bank would have to
meet 85 percent of a deposit withdrawal by reducing assets other than
its required reserves. The major function of required reserves, it has
come to bo recognized, is to facilitate monetary policy. Required re­
serves perform this function by providing a firm base or fulcrum by
means of which actions of the central bank to expand or contract
commercial bank reserves are transmitted so as to bring about multiple
increases or decreases in bank credit and deposits. .
Although their primary function is to serve as a fulcrum for mone­
tary policy, reserve requirements have other effects which are perti­
nent to policy judgments about the structure and level of requirements.
Reserve requirements affect the earning power of banks (or other
financial institutions subject to reserve requirements), since these re­
quirements determine the proportion of bank assets that must be held
in the form of cash.
A closely related effect of reserve requirements is on the competi­
tive relationships among different types of financial institutions and
on their relative rates of growth. The ability to offer terms attrac­
tive to savers is influenced by the amount and form of reserves, if any,
that financial institutions are required to maintain. This considera­
tion arises most directly in connection with the reserve requirement on
commercial bank time and savings deposits, which are closely competi­
tive with savings accounts available at mutual savings banks, savings
and loan associations, and credit unions; it may also affect the ability
of individual banks to attract and hold demand deposits.
Also related to the influence of reserve requirements on bank earn­
ings is an effect on net interest payments by the Federal Government.
The level of reserve requirements influences the distribution of hold­
ings of Government securities between the Federal Reserve and the
public. If, for example, reserve requirements are relatively high, the
F*rlp,ral Reserve will necessarily purchase in the open market larger




(5)

6

amounts of U.S. Government securities to provide for a desired in­
crease in the volume of deposits and bank credit. Thus the Federal
Reserve, whose earnings revert largely to the U.S. Treasury, will tend
to hold a larger proportion, and the public, including commercial
banks, will hold a smaller proportion of outstanding United States
Government securities.
Major 'problems concerning reserve requirements.— The questions to
which the Committee addressed itself include (1) whether any or all
commercial banks should be required to be members of the Federal
Eeserve System, (2) whether all commercial banks should be subject
to the reserve requirements of the Federal Eeserve, (3) whether the
structure of reserve requirements on demand deposits could be im­
proved, (4) whether reserve requirements on commercial bank time
and savings deposits should be retained, and (5), if so, whether a
similar requirement should be applied to savings accounts at other
financial institutions.

Federal Reserve Membership and/or Reserves
Under existing law, membership of commercial banks in the Fed.eral Eeserve System is mandatory for national banks and voluntary
for State-chartered banks. National banks comprise one-third of all
commercial banks and hold somewhat more than half of all com­
mercial bank deposits. About 18 percent of State-chartered banks
presently choose to belong to the Federal Eeserve System. They ac­
count for about two-thirds of the deposits of all State banks.
Taking all commercial banks together, more than 7,000 (55 percent
of the total) are not members of the Federal Eeserve System. But
they hold only about 16 percent of deposits at all commercial banks.
History of problem.— Whether or not all commercial banks should

be members of the Federal Eeserve System or subject to its reserve
requirements has been the object of numerous studies and recommen­
dations over the years.
The principle of voluntary membership for State-chartered banks
was first called into question by the Banking Act of 1933, which pro­
vided that, in order to enjoy the benefits of deposit insurance, State
banks would have to become members of the Federal Eeserve System
by July 1, 1936. The Banking Act of 1935 exempted banks with de­
posits of less than $1 million from this provision. The deadline was
postponed from time to time, and in 1939 the provision was repealed.
*In the postwar period, both the Douglas (1950) and Patman (1952)

committees (subcommittees of the Joint Economic Committee making
studies of monetary and credit policies) recommended that all com­
mercial banks be made subject to the reserve requirements of the Fed­




7
eral Reserve and that all banks be given access to loans at the Federal
Reserve banks.
Most recently, the Commission on Money and Credit recommended
that all insured commercial banks be required to become members of
the Federal Reserve System.
Principal issues.— The case for and against compulsory membership
of commercial banks in the Federal Reserve System rests on the ques­
tions of (1) the effectiveness of monetary policy and (2) equitable
treatment of competing banks. In both questions, the compulsory
reserve requirement involved in Federal Reserve membership is the
primary issue.
Effective monetary Tnanagement.— As noted, it is now generally
recognized that the» major purpose of legally required reserves is to
serve as a fulcrum for monetary policy. Member bank reserves func­
tion as a fulcrum for monetary policy for two reasons: (1) for each
member bank, deposits may not exceed a given multiple of its re­
serves, and (2) the*total supply of these reserves is under the control
of the Federal Reserve System. Thus even in the absence of changes
in the required ratio of reserves to deposits, alterations in the supply
of reserves made available to member banks by the Federal Reserve,
for example by open market operations, normally lead to more or less
predictable alterations in the aggregate deposits and assets of mem­
ber banks. In addition, the Federal Reserve can affect bank deposits
and assets by changing the required ratio of reserves to deposits.In present circumstances, nonmember banks are subject to a variety
of State laws regarding legal reserves. These reserves may consist of
deposits in other commercial banks, or, in some States, approved types
of securities, as well as vault cash. Thus, the position of nonmem­
ber banks differs from that of member banks in that neither their
reserve ratio nor the supply of reserves on which they draw is
uniquely determined by the Federal Reserve.
The result is that Federal Reserve directly influences only that
portion of the money supply held in member banks. Yet deposits in
nonmember banks are no less a part of the money supply of the United
States. As a result, there is some possibility of slippage in the effec­
tiveness of monetary policy.
The Committee believes that, in current circumstances, monetary
policy is not significantly weakened by the fact that commercial banks
now holding 16 percent of total deposits are outside the direct influ­
ence of the Federal Reserve. Important short-run disparities in
deposit expansion have not occurred nor are they likely to occur so
long as nonmember banks account for a relatively small fraction of
deposits. Attempts by nonmember banks to expand credit at a faster
683706— 63--- 3




8

pace than they can attract funds from depositors would promptly
result in an unsustainable cash drain, and their ability to attract
deposits depends on their overall competitive position which is not
likely to change significantly over different phases of the business
cycle. Over longer periods, however, there is some evidence that the
rate of growth of deposits has been larger in nonmember than in
member banks. Their lighter burden of required reserves could per­
mit nonmember banks to offer more attractive terms to depositors
and thus to outgrow member banks.
Potentially, a more important consideration bearing on the effec­
tiveness of monetary policy is that the option open to State banks to
withdraw from the Federal Reserve System can at times constitute
a constraint on actions by the Federal Reserve. In the early postWorld War II years, when increases in reserve requirements were
being used to restrain inflationary pressures, the possibility that banks
would withdraw from membership was a factor inhibiting policy
decisions. It is easy to imagine the recurrence of situations in which
it would be appropriate to raise reserve requirements but willingness
to adopt this measure might be affected by the threat of withdrawal of
banks from the System. I f all commercial banks were subject to the
reserve requirements of the Federal Reserve, this type of inhibition
on monetary policy would not arise.
Against these considerations, it has been argued that neither com­
pulsory membership nor compulsory reserves are essential to the con­
duct of monetary policy, on the grounds that most medium-sized and
larger banks would voluntarily retain membership and that Federal
Reserve open market operations and discount policy would have their
effect even in the absence of required reserves. But most members of
the Committee believe that monetary policy would be strengthened
if all commercial banks were required to maintain reserves in the
amounts and form specified for member banks.
Equity and competitive advantage.—Reserve requirements imposed
by the States, and therefore applicable to nonmember banks, tend to
be less onerous than those applicable to member banks of the Federal
Reserve System. In some States, the level of requirements is lower.
More important, the form in which reserves may be held is more fav­
orable to nonmember banks. . In a number of States, reserves may be
held partly in the form of securities, and therefore may earn interest.
Furthermore, correspondent balances, which nonmembers would main­
tain in some amount even in. the absence o f:reserve requirements and
from which they derive benefits, serve to satisfy part or all of State
reserve requirements. In States where reserve requirements are at the




9

same level or even higher than those for member banks, the form of
reserves is favorable to nonmembers.
These differences in reserve treatment tend to confer a competitive
advantage on nonmember banks by permitting them to offer more at­
tractive terms to borrowers and depositors or to earn higher profits
than member banks in similar circumstances. But, under present con­
ditions, the only escape from this inequity for member banks is with­
drawal from the System, and this also means escape from the reserve
base directly under the control of the Federal Reserve. National
banks can escape from this inequity only by giving up their national
charters.
Compulsory membership.—The principal advantages of universal
membership by commercial banks in the Federal Reserve System
would be achieved if all commercial banks were subject to the reserve
requirements of the Federal Reserve and membership for State-chartered banks remained voluntary.
Once the principle of compulsory reserves is accepted, a major re­
maining deterrent to full membership is the requirement that member
banks remit at par for checks drawn upon them. The fact that some
nonmember banks, concentrated in a few areas, still maintain the
practice of making a charge against the payee for remitting on checks
against them is an impediment in the payments mechanism of the
United States. In addition, the problem of sorting out checks on these
institutions and charging back in an equitable way these so-called “ ex­
change” charges to the persons who have accepted checks at face value
for amounts owed to them is costly and time consuming. TherCom­
mittee favors par clearance in principle. But it recognizes that elimi­
nation of the impediment in the payments system would materially
affect the 1,600 banks (with 1,900 offices) that do not now remit at
par.
I f full membership remains compulsory for national banks while
other commercial banks are required to adhere only to the reserve re­
quirements of the Federal Reserve, another class of relationship be­
tween banks and the Federal Reserve will result. A majority of the
Committee sees no reason to change the existing requirement that na­
tional banks be full members of the System. At the same time, to re­
quire that State-chartered banks become full members would provoke
needless controversy; as noted, the major advantages of full member­
ship would be achieved if all commercial banks were brought under
the reserve base of the Federal Reserve.

Conclusion 1.—The Committee, with one member dissenting, con- *
eludes that all commercial banks ought to be subject to the reserve re-




10

guirements specified by the Federal Reserve, and ought to have access
to Federal Reserve discounts and advances. Membership in the Fed­
eral Reserve System, would continue to be voluntary for State-char­
tered banks.
The Structure of Reserve Requirements on Demand Deposits
Member banks of the Federal Eeserve System are required to hold
reserves in the form of either deposits at Federal Eeserve Banks or
vault cash. The present reserve requirement against net demand de­
posits is 12 percent for banks classified as “ country” banks and 16y2
percent for “ reserve city” banks. Under existing law, the Federal
Eeserve Board has discretion to set these reserve requirements between
7 and 14 percent for country banks and between 10 and 22 percent for
reserve city banks.
The geographical classification between “ city” and “country” banks,
with differential reserve requirements, dates back to the National Bank
Act (1863), under which “ reserve city” banks served as reserve de­
positaries for country banks and in turn maintained reserves with
“central reserve city” banks. Differential reserve requirements were
viewed as necessary in that system as a means of protecting the liquid­
ity of the banking system.
The ineffectiveness of required reserves as a means of ensuring bank
liquidity was demonstrated forcefully by the prevalence of financial
panics. Indeed it was these difficulties, resulting from the lack of a
dependable source of liquidity, that led in 1913 to the establishment of
the Federal Eeserve System, which has come to be the ultimate pro­
vider of liquidity in our monetary system. Nevertheless the threeway geographical classification of banks was carried over from the
National Banking System. It was only in 1959 that the three classifi­
cations were reduced to two by a consolidation of the two city-bank
categories.
Other shortcomings of the existing structure of reserve require­
ments have become evident. In the past, large banks, which were lo­
cated mainly in central cities, were concerned principally with serv­
ing the needs of industry and commerce and of out-of-town banks.
In recent years, consumers have become increasingly important as de­
positors and borrowers at large city banks. Moreover sizable concen­
trations of population and business outside the limits of reserve cities,
especially in the suburbs, have led to wider branching and substantial
growth of many banks in these areas. The result has been that the dis­
tinction in size and function between “ country” and “ city” banks has
become blurred. In these circumstances, banks of comparable size
a,nd similar activity are more likely than in the past to have different




11

reserve requirements, depending on where they are located. Further­
more, the question whether or not a city should be classified as a reserve
city, with the consequence that its banks would have a higher reserve
requirement, is a difficult one and inevitably leads to arbitrary distinc­
tions.
Eecognition of these problems has stimulated numerous proposals
in recent years for revision of the system of reserve requirements.
One such proposal is for identical percentage requirements at all
banks. The American Bankers Association is on record in favor of
this proposal. Most recently, the Commission on Money and Credit
recommended uniform reserve requirements.
The case for uniform requirements is usually based on two argu­
ments: (1) that monetary policy would become a more precise instru­
ment if all banks had the same requirements, since potential credit
and monetary expansion would no longer vary with changes in the
distribution of demand deposits among banks in different locations,
and (2) that the present differential is arbitrary and imposes in­
equitable treatment on many banks.
The Committee recognizes the logic of the argument, presented by
the Commission on Money and Credit and others, that completely
uniform requirements would enhance the precision of monetary policy.
At the same time, it is aware that, as a practical matter, the difference
in reserve requirements between city and country member banks
introduces only a minor imprecision into the management of bank
reserves by the Federal Reserve. Greater imprecision results from
the fact that small banks maintain sizable excess reserves and, in
contrast to larger banks, adjust their loans and investments only with
a lag when their reserves change. For this reason, required reserves
would be affected when deposits shift between city and country banks
even if reserve requirements were uniform.
A system of differential reserve requirements is defended on the
grounds (1) that smaller banks find it necessary, in order to obtain
certain services from their city correspondents, to hold a large pro­
portion of their assets in the form of non-interest-bearing balances
at other banks and (2) that smaller banks are necessarily higher cost
banks, in view of their lesser ability to take advantage of economies
of scale (such as avoiding excess reserves, making large individual
loans and investments, and using automatic accounting equipment
and other specialized facilities); a lower level of reserve requirements
may serve to offset these disadvantages of smaller banks, thus helping
to preserve a system of independent unit banks.
As it considered these arguments, the Committee was aware of the
practical difficulty of implementing the two recommendations of the




12

Commission on Money and Credit that all (insured) commercial
banks should be required to become members of the Federal Reserve
system and that reserve requirements should be identical for all
member banks. Nonmember banks are predominantly small banks.
Among the 7,000 banks that are not members of the Federal Reserve
system, more than three-fourths have total deposits of less than $5
million. I f these banks were required to adhere to member bank
reserve requirements and if requirements were made uniform at any­
thing like present levels (somewhere between 12 and 1 6 ^ percent),
a strain would be imposed on many of the small nonmember banks.
To implement the two recommendations therefore, it would probably
be necessary to lower the present average level of reserve requirements
on member banks, perhaps to less than 10 percent.

Although reserve requirements serve mainly as a vehicle for mone­
tary policy, there is, within broad limits, little basis for judging
that in the long run one level is preferable to another in terms of
facilitating monetary policy. Inevitably therefore the other effects
of reserve requirements—on bank earnings, on competitive relation­
ships with other institutions, and on net interest payments by the
Government—become relevant in evaluating the advisability of a
change in the average level of requirements. It is clear that a sub­
stantial reduction in requirements—to 10 percent or less—would, at
least in the short run, result in a sizable increase in net profits of banks
(especially of larger banks in reserve cities now subject to a require­
ment of 16y2 percent) and a corresponding reduction in net receipts
by the U.S. Government, taking into account payments by the Federal
Reserve to the Treasury.
The Committee has examined other means of altering the structure
of reserve requirements, in a way that might represent an improve­
ment over the present arrangement for member banks, and might
also accommodate small nonmember banks if they were required to
maintain reserves as specified by the Federal Reserve Board, while
causing a minimum of transitional disturbance.
The Committee has analyzed in specific terms a possible graduated
system of reserve requirements, and a large majority was convinced
that, under present circumstances, an approach along these lines was
the most practical. Under such a system, every bank would maintain
a low' reserve against the first few million of its net demand deposits,
a higher reserve against its deposits above this minimum amount and
up to a substantial figure, and a still higher reserve against net
demand deposits, if any, above the latter amount. By way of illus­
tration, banks, at least initially, might be required to keep a 7-percent
reserve requirement against the first $5 million of net demand de­




13
posits; a 12-percent requirement (the'present country bank level)
against the next $95 million, and a 16^-percent requirement ’ (the
present city bank level) against net demand deposits iabove $100 mil­
lion. As at present, ranges within which the Federal Eeserve could
vary the required percentages would be specified for each bracket—
ranges which probably should overlap, at least for the two higher
brackets.
A system of this type would represent an improvement over the
present system, whether or hot all commercial banks were subject to
the reserve requirements of the Federal Eeserve. It would bring
some of the advantages of uniform reserve requirements, since banks
of the same size (with respect to demand deposits) would be subject
to identical requirements regardless of location. The sharp differ­
ential between classes in the present two-way classification would be
replaced by a smoothly graduated system.- As a bank grew and passed
into another reserve bracket, the higher requirement would apply
only to its marginal demand deposits. The character of the present
reserve requirement structure could be preserved to the extent deemed
desirable, by continuing to place higher marginal requirements on
larger banks. Similarly, a graduated system would facilitate a transi­
tion to greater uniformity— or, to full uniformity— if and when
desired.
:: '
Conclusion 2.— The ‘Committee, with one member dissenting, con­
cludes that a system of graduated reserve requirements for demand
deposits would eliminate many of the inequities and administrative
difficulties in the present system of reserve requirements and would
facilitate a decision to bring all commercial banks *tmder the reserve
jurisdiction of the Federal Reserve.

Reserves on Time Acccounts
The present reserve requirement against time (and savings) de­
posits at member banks of the Federal Eeserve System is 4 percent
and the range within which it can be varied under existing law is
between 3 and 6 percent.' From the time of establishment of the Fed­
eral Eeserve System, the reserve requirement against time deposits
lias been identical at all banks, although the legal authority exists
for differential ratios at different classes of banks.
Under the National Bank Act (1863), reserve requirements on time
deposits were at the same level as on demand deposits. Provision
for a lower requirement on time than on demand deposits in the
original Federal Eeserve Act (1913) reflected a belief that time de­
posits are less volatile and require less liquidity backing than de­
mand deposits.




14
As noted earlier, commercial bank reserve requirements are now
regarded as providing only a minor degree of liquidity. Their major
. function is to facilitate central banking actions designed to affect
bank credit and deposits.
Recommendation of Commission on Money and Credit.— The Com­
mission recommended repeal of statutory reserve requirements on time
and savings deposits. It stated that the principal justification for
such requirements “is to impress upon financial management the need
for making provision for liquidity” but “management and supervisory
authorities are able to see to it that such liquidity as may be necessary
with respect to such deposits is maintained.5’
The discussion in the Commission’s Report stated further that if
“it is deemed wise to continue statutory reserves against savings and
share accounts,” the requirement “should be designed to minimize any
differential effect on the earning capacity of various institutions com­
peting for savings.” The Commission suggested that this could be
accomplished by permitting “liquidity reserves to be held in cash
or short-term Government securities.”
Reserves on time accounts and monetary policy.— In view of the
primary function of required reserves—to serve as a fulcrum for
monetary policy— the question may properly be asked whether re­
quired reserves on time deposits and shares are a necessary part of
the fulcrum.' Could monetary policy be effectively conducted without
reserve requirements on commercial bank time deposits? Are re­
serves on accounts at other savings depositaries needed as a means
of strengthening monetary policy ?
These are questions to which neither economic theory nor central
banking experience gives clear answers. Those who regard the money
supply, narrowly defined to include only currency and demand de­
posits, as the major variable through which monetary action influences
economic activity are likely to believe that reserve requirements on
time and savings deposits are unnecessary, either at commercial banks
or at other institutions.
Those who prefer a definition of the money supply that includes time
deposits at commercial banks (as.well as those who regard commercial
bank loans and investments as the major variable) view reserve re­
quirements on time deposits as an important adjunct of monetary
policy. In fact this view has led some observers to the proposition
that there should be little if any differential between requirements on
time and on demand deposits.
Another widely accepted view stresses the belief that time deposits
at commercial banks and savings accounts at other financial institu­
tions are close although imperfect substitutes for demand deposits.




15
Shifts between demand deposits and savings accounts are said to be
responsive to changes in interest rates and are reflected in the rate of
turnover (or velocity) of demand deposits. In periods of monetary
restraint, for example, rising interest rates are said to attract funds
from demand deposits to time, savings, and share accounts. Because
of the difference in reserve requirements (and their absence at some
institutions) this permits an expansion of credit at the institutions
whose deposits or shares increase,’without a corresponding contraction
in demand deposits and credit at commercial banks, unless the Federal
Reserve takes action to' absorb reserves. Some have concluded, on this
basis, that monetary policy is blunted by the existence of a difference
in reserve requirements as between money proper and money-substitutes such as deposits and shares in savings institutions, and would
be further weakened if there were zero reserve requirements against
time deposits at commercial banks. They call for a measure of control
by the central bank over the reserves of all institutions whose liabilities
are close substitutes for money.
These differences in approach and their implications for policy have
been widely discussed and analyzed in recent years, not only in the eco­
nomic literature and the financial press in the United States but also
in many other countries; a notable example is the Radcliffe Report
(1959) in the United Kingdom, which in general adopted the third
approach noted above.
The Committee does not pretend to have resolved the issues raised
in this wide-ranging and many-faceted discussion. It observes, how­
ever, that the empirical evidence for the United States does not offer
strong support for the proposition that, in practice, the operations of
nonbank financial intermediaries have offset or seriously weakened
countercyclical monetary policy. On the contrary, experience to date
has shown that the nonbank institutions tend to grow faster when mon­
etary policy is encouraging expansion of commercial bank assets and
liabilities and to grow less rapidly in periods of monetary restraint.
Time deposits at commercial banks have tended to behave in a similar
manner, although interpretation of this experience is clouded by the
two postwar increases (in 1957 and 1962) in maximum permissible
rates payable on commercial bank time and savings deposits.
The evidence also shows that since the end of World War II, the
nonbank savings institutions have grown faster than commercial
banks. This in turn may help to account for the upward trend in
monetary velocity experienced over this period. Yet, many other in­
fluences were at work, including the substitution of short-term se­
curities for demand deposits, as market interest rates rose from the
low levels of the early postwar period.
683706— 63--- 4




16
A t the present time therefore, the Committee believes that it is dif­
ficult, on grounds of essentiality to effective monetary policy, to sup­
port either maintaining the existing requirement on time deposits or
extending direct central bank controls to nonbank financial institu­
tions. In fact, the Committee noted that extension of reserve require­
ments to nonbank institutions— with the reserves taking the form of
deposits with the Federal Eeserve— might at times complicate rather
than simplify the task of monetary management. For example, un­
der present circumstances, a decision by the public to transfer funds
out of securities and into nonbank savings institutions has no effect
on member bank required reserves (and little, if any, effect on the
economy). If, however, all savings institutions were required to
maintain reserves at the Federal Eeserve, a switch from securities to
savings accounts, or vice versa, would increase or decrease required
reserves. I f these.restraining or stimulating effects were to be avoided,
offsetting Federal Eeserve operations would be necessary.
Nevertheless, the Committee recognizes that reserve requirements
on nonbank institutions, even if not kept at the Federal Eeserve,
could at times serve as a supplement to the existing instruments of
monetary policy. Furthermore, there are reasons other than the
need for quantitative credit and monetary controls that justify apply­
ing cash reserve requirements to nonbank depositary institutions.
Liquidity, equity, and supervisory considerations.— The Committee
is aware that some sayings institutions need to make additional provi­
sion for liquidity. The liabilities of savings and loan associations, mu­
tual savings banks, and credit unions are widely regarded by the
general public as being withdrawable on demand. Whatever the legal
considerations applicable to such savings accounts, institutions must
in practice be prepared to meet demands for withdrawals promptly.
Yet the assets of these institutions are concentrated in instruments,
primarily mortgages, which are inherently illiquid.
It is true that monthly repayments provide a steady cash inflow
which contributes significantly to day-to-day liquidity needs. It is
also true that the ultimate liquidity of the economy can be provided
only by an effective central bank. Yet, within this framework, indi­
vidual institutions, and all other economic units, should manage their
portfolios so that, in ordinary circumstances, they can meet their own
liquidity needs.
It has traditionally been a function of supervisory agencies to en­
sure that financial institutions maintain an adequate degree of liquid­
ity and remain solvent. The Committee takes the view that it is
necessary and desirable to strengthen the authority of the existing
supervisory agencies, in particular the Federal Home Loan Bank




Board in its relationship to member savings and loan associations.
This relationship involves surveillance and influence over the prac­
tices of savings institutions, including the extent to which institutions
make provision for liquidity in order to be in a position to meet with­
drawals. The Committee believes that if the associations were re­
quired to maintain a cash reserve at the Federal home loan banks the
relationship between the supervisory agency and the supervised in­
stitutions would be strengthened in the public interest. The influence
of the supervisors would be enhanced by the existence of the cash re­
quirement and the power to change it. The institutions in turn would
become more acutely conscious of the role of the Federal Home Loan
Bank System as a governmental institution operating in the public
interest.
Two additional considerations support the proposal for cash reserve
requirements at all savings depositary institutions. First, it would
eliminate the existing inequity wherein commercial banks must main­
tain cash reserves against time deposits but competing savings institu­
tions have no such requirement. The alternative way to remove
this inequity— namely, eliminating the requirement at commercial
banks— would have the disadvantage of increasing the incentive of
banks to induce depositors to hold in the form of time deposits what
are in fact demand deposits. Second, such a cash requirement, even
if it were not kept at the Federal Eeserve as an instrument of monetary
policy, could be used at times as a supplement to monetary policy.
Increases in the reserve requirement would serve to limit the lending
power of savings institutions and reductions would increase their lend­
ing power.
The Committee has noted the relationship of a proposal for a cash
reserve requirement on savings institutions both to the policy of the
Federal Home Loan Bank System with regard to advances to member
institutions and to the earnings of the home loan banks. It is expected
that the System’s advances policy would not become any more liberal
because of the cash reserve requirement.
The substantial amount of funds that would accrue to Federal home
loan banks when the proposed cash reserve requirement became effec­
tive should in ordinary circumstances be reinvested in U.S. Govern­
ment securities. Only at times of substantial and widespread with­
drawals of funds from member institutions should the Federal Home
Loan Bank System be expected to use for advances the funds accruing
to it as a result of the cash reserve requirement. In addition, as in the
case of Federal Eeserve banks, dividends to member associations
should be limited to 6 percent, and net earnings of Federal home loan




18
banks, after additions to reserves and payment of dividends, should be
paid over to the Treasury.
A similar cash reserve requirement is desirable in the case of mutual
savings banks. Which Federal agency would hold the required re­
serve balances will presumably depend on what action if any is taken
on the question of Federal charters for mutual savings banks.
The Committee also considered whether such a requirement is neces­
sary and desirable for credit unions. No such recommendation is made
at this time. The reasons for this conclusion are discussed more fully
in chapter V I in connection with the subject of Federal insurance of
credit union shares.
Conclusion 3.— The Committee, with one member dissenting, favors
the continuation of reserve requirements on time and savings deposits
at commercial banks and the introduction of a similar reserve re­
quirement for shares at savings and loan associations and deposits
at mutual savings banks. In addition, Federal agencies that supervise
financial institutions should be endowed with sufficient authority to
assure that the institutions maintain adequate liquidity over and
above cash reserve requirements.




Chapter III
IN T ER E ST RATE REGULATION
The Federal Government regulates rates of interest paid on de­
posits at commercial banks. In particular, payment of interest on
demand deposits is prohibited and rates paid on time and savings
deposits are subject to ceilings determined by the Federal Reserve
Board and the Federal Deposit Insurance Corporation.
These controls were introduced into Federal legislation by the
Banking Acts of 1933 and 1935. Prior to that time there had been
no direct Federal control over interest paid on deposits.
The major reason for enactment of the prohibition of interest on
demand deposits in 1933 was apparently to prevent a recurrence of
certain developments that were thought to have contributed to the
financial debacle of 1929-33. The stock market boom of the late
1920’s had involved financing through the call loan market at high
rates of interest. This market was fed in part by New York and
other large city banks, which invested deposit balances of interior
banks that were drawn to the large city banks by the payment of
attractive interest rates. The major purpose of the prohibition was
to limit the drawing of funds from interior banks to money centers
for speculative purposes.
The authority to regulate maximum rates paid on time and savings
deposits had a somewhat different purpose. It was designed to limit
interest rate competition among banks, on the grounds that such
competition had tended to drive up interest rates on time and savings
deposits and thereby induced banks to acquire high-yielding but
unsound assets. There was a widespread feeling that such motivations
had contributed to many bank failures, even before the depression.
In the years 1921-29, more than 5,000 commercial banks were forced
to close their doors because of financial difficulties. Concern over the
soundness of bank assets may also have been a factor in the decision
to prohibit interest on demand deposits.
Major questions.— The Committee weighed the question whether
the prohibition of interest on demand deposits remains justified under
present-day conditions. With respect to regulation of maximum rates
on time and savings deposits, the Committee considered the alterna­
tives, of (1) maintaining the status quo, (2) converting the control




(19)

20
to a standby basis, (3) and eliminating the control; related to these
alternatives is the question of extending regulation, if any, to other
financial institutions that accept time and savings accounts.
Recommendations of Commission on Money and Credit.— The Com­
mission recommended that the prohibition of interest on demand de­
posits be continued. In the case of time and savings deposits, it
recommended that the present authority be converted to a standby
basis and be extended, under the appropriate Federal agencies, to
mutual savings banks and savings and loan associations.
The Commission noted that commercial banks must compete for
time and savings deposits with other financial institutions whose rates
are presently unregulated, and its recommendation for suspension of
the regulation of maximum rates on time and savings deposits was
apparently based in good part on a wish to eliminate this competitive
disadvantage under which commercial banks are forced to operate.

Interest on Demand Deposits
Some of the important considerations that apparently motivated
enactment of the prohibition in 1933 have little force today. The
call loan market is of minor importance. Stock market credit is
regulated by Federal Eeserve margin requirements. Consequently,
there is little likelihood of a repetition of the experience of the 1920’s
when stock market speculation attracted funds, including interbank
deposits, from the interior of the country to New York.
Payment of interest on demand deposits could, however, give rise
to related problems. I f the prohibition were eliminated, it has been
argued, banks in financial centers would compete more actively for
demand deposits of businesses and institutions and would succeed in
attracting deposits away from banks in smaller communities. This
in turn might have undesirable effects on the availability of bank
credit in smaller communities. Competitive bidding for demand de­
posits might also induce banks to reach out for unsound assets in
order to increase earnings. These considerations are regarded by some
members of the Committee as the present-day counterpart of the
dangers that promoted acceptance of the prohibition in 1933.
Another consideration favoring the prohibition of interest on de­
mand deposits is that it helps to preserve the fundamental distinction
between the payments medium and liquid savings— a distinction that
underlies the existing arrangements for monetary control.
Those who favor elimination of the prohibition argue that the hold­
ing of demand deposits is made unnecessarily costly to the depositor.
The cost is measured by the interest foregone when demand deposits
are held instead of interest-earning liquid assets. In order to minimize




21
this cost, the public has an incentive to undertake frequent financial
transactions designed to avoid loss of interest on what would otherwise
be idle demand deposits^-transactions that serve no economic purpose.
The extent to which such transactions would be reduced in volume, if
interest on demand deposits were permitted, was questioned by others,
who also suggested that the costs involved are of minor significance.
A second consideration in favor of restoring interest payment 011
demand deposits is that it would tend to reduce cyclical fluctuations
in monetary velocity and would therefore ease the task of the monetary
authorities. It is argued that £ts interest rates vary over the business
cycle, while the interest rate on demand deposits remains fixed at
zero, there is a corresponding cycle in the incentive presented to the
public to substitute interest-earning assets for demand deposits; this
incentive is said to grow stronger in periods of high interest rates and
weaker in periods of low interest rates and is reflected in a cyclical
variation in the velocity of money. I f interest payment were per­
mitted, the rate paid on demand deposits would presumably move
cyclically with other interest rates and the incentive to hold demand
deposits would vary less over the business cycle, thereby dampening
the extent to which movements in velocity tend to offset counter­
cyclical monetary policy.
The practical significance of this point was questioned by a majority
of the Committee on the grounds that even if interest on demand de­
posits were permitted, the rate is likely to remain low and inflexible.
The rate on demand deposits would probably not be highly responsive
to short-run market forces. As a result, the incentive to economize de­
mand deposits would continue to vary directly with the cyclical move­
ment in interest yields on short-term securities.
It is recognized both by those who favor and those who oppose a
change in the present law that various practices exist by which interest
is paid implicitly on demand deposits. In order to attract and keep
demand deposits while adhering to the prohibition on explicit interest
payment, banks may compensate some customers with more liberal loan
terms and the provision of various free services; furthermore, service
charges may b& graduated or waived entirely.
Many Committee members believe that the banks and the public have
by now adjusted to the substitution of implicit for explicit payment
of interest on demand deposits; a reversion fo explicit interest payment
would therefore have very little beneficial effect and might be harmful
for the reasons previously cited. Some feel, however, that if implicit
interest were replaced by explicit interest, together with a requirement
that interest rate schedules be published, treatment of depositors would
be more uniform and equitable.




22

In balancing these considerations, some members of the Committee
favor repeal of the prohibition of interest payments on demand de­
posits and its replacement with standby authority to prohibit interest
or establish a maximum rate if the possible dangers cited by the ma­
jority turned out to be realized. In addition to the considerations out­
lined earlier, this view is based on the thought that demand deposits
and other types of deposits and shares are sufficiently similar and sub­
stitutable to merit similar regulatory treatment. A majority of the
Committee believes that this differential treatment is justified, on the
grounds that demand deposits constitute the fundamental medium of
exchange in our economy and as such should be subject to unique re­
strictions, which are not necessary in the case of financial assets serving
only as a store of value but not as a medium of exchange.

Conclusion b.— The Committee, with three members dissenting, con­
cludes that the prohibition of interest payments on demand deposits
should be continued.

Interest on Time and Savings Accounts
The Federal Eeserve Board and the Federal Deposit Insurance
Corporation are presently required by law to establish maximum rates
on time and savings deposits.1 Between 1936 and 1957, the regulations
specified a maximum rate of 2y2 percent. This was raised to 3 per­
cent as of January 1,1957, and to 4 percent as of January 1,1962. A t
the present time, the maximum rates are as follows:
Percent
Savings deposits held for:
1 year or more_________ _____________________________________
4
Less than 1 year________________________________________________
Time deposits payable in :
1 year or more_____________________________
________________
6 months to 1 y e a r__________________
_________________ ----- 3%
90 days to 6 months_____________________________________________ ~ ~ 2%
Less than 90 days_____________________________________________

The case for ending Federal regulation of interest rates on time
and savings deposits rests mainly on the presumption that, in the
absence of strong evidence to the contrary in particular cases, the
public interest will best be served if the forces of supply and demand
are permitted to reflect themselves in prices, including interest rates.
In particular, the presumption is that both equity as between buyers
and sellers (or lenders and borrowers) and the allocation of resources
will be more satisfactory when prices and interest rates are free to
reflect market forces.
1 An Act of Congress approved on Oct. 15, 1962, provided that, for a period of 3 years,
deposits of foreign governments and certain foreign official institutions were exempt from
interest ceilings.




23
An analogy with governmental regulation of prices charged by
public utilities is sometimes suggested. In view of the fact that
public utilities are inherently in a monopolistic position, price regu­
lation is designed to prevent monopolistic pricing while other regu­
lations are designed to assure adequate service to the public. A l­
though Government regulation limits competition in the field of
banking— in part by restrictions on the establishment of new banks—
existing interest rate regulation is not at all comparable to price regu­
lation in the public utilities field. I f deposit interest rate regulation
were analogous to price regulation over public utilities— that is, if it
were designed to protect the public from monopolistic pricing— the
regulation would impose a floor, not a ceiling, on interest rates.
When originally enacted, the objective of this regulation was to
help assure sound banking. The Committee takes the view that im­
provements in bank supervision and examination in recent decades
make continuous regulation of interest rates unnecessary as a means
of preventing acquisition of unsound assets. In addition, the perva­
sive use of amortized and of Government-backed mortgages today, in
contrast with the 1920’s, lessens the danger of serious losses by banks
in the investment of time deposits.
Another consideration is that the present regulation applies only
to commercial banks and not to other institutions with which they
compete for funds. This difference in regulatory treatment results
in a competitive disadvantage for commercial banks.
Consideration was also given to the possibility that under certain
conditions competitive bidding up of rates paid on time and savings
accounts might produce undesirable repercussions, particularly in the
mortgage market.
On balance, the Committee believes that the case for continuous
regulation has less force today than in 1933. Nevertheless, recogniz­
ing the possibility of a recurrence of the need for maximum rates,
the Committee does not propose that interest rate regulation be com­
pletely abandoned. Rather, it should be placed on a standby basis
and extended to other depositary-type institutions. The very existence
of such standby authority would help to prevent excessive increases
in rates paid.* ’
The Committee envisages that such standby authority would be in­
voked by the responsible supervisory agencies only when they deem it
necessary either to prevent institutional practices in the payment of
interest and extension of credit that were inconsistent with the safety
and liquidity of a significant number of institutions or to supplement
other governmental policies to promote the objectives of the Employ­
ment Act of 1946.
683706— 63--- 5




24
In either case, the Committee believes that the supervisory agencies
should be given wide discretion in invoking the standby authority.
This discretion should include the authority to impose different rates
on different kinds of deposits, classified by type of holder, maturity,
location, or other characteristics, and to apply a maximum rate only to
some types of deposits. The Committee believes, for example, that the
reconciliation of domestic aims with balance of payments considera­
tions might at times justify different ceilings on domestic and foreign
deposits, or perhaps limitations on rates of one of these groups but
not the other. Eate ceilings on some or all domestic accounts might
under unusual circumstances be useful in exerting a marginal influence
on the flow of funds and terms available for certain types of credit,
such as mortgages, although the Committee does not feel that interest
rate regulations should ordinarily be used as a means of affecting the
allocation of credit.
In these circumstances coordination among the supervisory agencies
would be especially important. This matter is discussed in Chapter
IX .
The Committee is aware of an administrative difficulty that would
arise if ceiling rates on time deposits were eliminated while the pro­
hibition on demand deposits were retained. One of the problems%
faced by the Federal Eeserve and the FD IC even under the present
legislation is to prevent demand deposits from earning interest in the
guise of short-maturity time deposits. This problem has been met
in the past by establishing a relatively low maximum rate on short­
term time deposits. I f continuous regulation were eliminated, polic­
ing the prohibition of interest payment on demand deposits would
become more difficult. The broad authority suggested above would
make it easier to deal with this problem.

Conclusion 5.— The Committee believes that the purpose served by
continuous regidation of interest rates on time and savings deposits
would be served equally well by standby authority to impose maximum
rates, and that this regidation should apply as well to nonbank finan­
cial institutions that accept deposits or shares. The standby authority
might be invoiced either to help assure the continued safety of the
institutions or to promote the stability of the economy. In exercising
this authority, the supervisory agencies should be permitted to estab­
lish, at their discretion, different maximum rates for different accounts
according to type, holder, maturity, or other characteristics.2
2 One member of the Committee dissents from the last sentence of this conclusion.




Chapter IV
PORTFOLIO REGULATION
Financial institutions are subject to restrictions, both qualitative
and quantitative, on the assets they may acquire. The Federal Gov­
ernment imposes restrictions on the lending and investing activities
of federally chartered institutions (national banks, Federal savings
and loan associations, and Federal credit unions) while portfolio
restrictions on State-chartered institutions are, for the most part, a
matter of State laws. There are, however, some exceptions to this
generalization— that is, cases in which Federal statutes limit the lend­
ing and investing activity of State-chartered institutions; these ex­
ceptions apply mainly to State-chartered member banks of the Federal
Reserve System. There are virtually no specific portfolio limitations
imposed on State-chartered institutions by the Federal Government
in its capacity as insuring authority, but Federal insurance agencies
have responsibility for examination of the quality of assets and the
adequacy of capital at State-chartered institutions.
Portfolio restrictions are to a large extent the historical product
of periodic waves of failures of banks and other institutions with
consequent losses to depositors (or other claimants) and disruption
to the economic life of the communities involved. Much of the restric­
tive legislation has been added in a piecemeal manner, in response to •
specific problems. Similarly, exceptions and exemptions, both general
and specific, to these restrictions, have been enacted at various times,
in response either to pressures from regulated institutions for less
burdensome restrictions or to a desire by government to encourage or
discourage particular lending activities.
The trend in recent decades has been toward less stringent restric­
tions. For example, since 1927 national banks have been permitted
to acquire mortgages of progressively longer maturity than the 1-year
maximum of that time. Similarly the authority for Federal savings
and loan associations to acquire assets other than mortgages on single­
family dwelling units has been repeatedly broadened.
A t the same time, the attitudes and practices of financial institutions
have changed. The traditional view of commercial banks as short­
term lenders to business has been modified as banks have placed a"
significant proportion of their assets in longer term instruments (such




(25)

26
as term loans and mortgages) and have attempted to meet both the
short- and long-term financing needs of consumers (in the form of
consumer instalment credit and residential mortgage credit).
Purposes of portfolio regulation.— Restraints on the lending and
investing activity of financial institutions have two broad purposes:
to safeguard their solvency and liquidity and to maintain a degree
of specialization in their functions.
Portfolio restrictions, along with other governmental policies, such
as limitations on the establishment of new financial institutions, are
designed to insure the solvency and liquidity of financial institutions
responsible for maintaining the money supply and for handling the
liquid savings of individuals and businesses. The Nation as a whole
has an overriding interest in assuring universal acceptability of the
means of payment and in preventing the disruption to individual
communities and to the economy generally of failures of financial
institutions. While these purposes are now served in part by deposit
and share insurance, the Federal Government has a direct interest in
preventing insolvency in its incipient stages.
Portfolio regulation is also related to the specialized nature of finan­
cial institutions. Specialization is most marked in the case of credit
unions and savings and loan associations. It is less evident in mutual
savings banks and still less in commercial banks. To some extent, the
enforcement of specialization by means of portfolio restrictions can be
traced to a desire to confine institutions to types of lending activity
most appropriate either to their management structure or to the nature
of their liabilities. Portfolio regulation is also designed to promote
national policies, notably encouragement of home ownership, through
specialized institutions.
Major issues.— The Committee considered the following questions
concerning portfolio regulation: (1) To what extent, if any, should
regulation continue to impose a degree of specialization among finan­
cial institutions? (2) In what ways consistent with other objectives
might regulatory policy better promote competition between institu­
tions, mobility of funds (geographically or among sectors of the
economy), or risk taking? (3) Does the multiplicity of regulations
and supervisory authorities introduce serious inequities or incon­
sistencies in the availability of loans and investments ?
Recommendations of Commission on Money and Credit.— The Com­
mission recommended “that the regulatory authorities be authorized
to permit greater flexibility to savings banks and savings and loan
associations to acquire a wider range of suitable long-term debt in­
struments. Commercial banks should be allowed the same flexibility
in investing their time and savings deposits. Financial institutions




27
should be permitted to change tlieir investment practices but they
would not be obliged to do so.” It recommended further that invest­
ment in equities continue to be restricted, but called for equal treat­
ment, at the least burdensome level of mutual savings banks, savings
and loan associations, and commercial banks in the investment of time
and savings deposits. The Commission also recommended a liberali­
zation of restrictions on the geographical area over which institutions
may lend.
The background discussion of these and related recommendations
in the Report of the Commission states that they were designed to en­
courage the safety of the financial system, on the one hand, and to pro­
vide greater flexibility for portfolio investment, increased mobility of
funds, and increased alternatives for savers and borrowers as a means
to stimulate economic growth, on the other. These recommendations
would, according to the Report, “enable the financial institutions to
become less specialized in investment, if they so desired. The recom­
mendations are not intended to alter the specialized powers of the
institutions to offer the forms of financial assets and the services which
they now provide.”

Considerations Regarding Specialization
The Committee recognizes the disadvantages of excessive special­
ization among financial institutions. By inhibiting adequate diversi­
fication of loans among industries and sectors of the economy,
specialization could make financial institutions more vulnerable to
insolvency arising from adversity in the particular industries or sec­
tors in which their lending is perforce concentrated. A related
danger is that a restricted choice of lending power may induce insti­
tutions to reach out for unduly risky loans of the permitted type in
an effort to invest funds fully when credit demands in the specialized
area are declining.
I f specialization is overdone, the resulting restrictions on the mo­
bility of funds may have harmful effects on resource allocation. Un­
less loan funds of institutions can shift with reasonable facility from
one use or one locality to another in response to changing needs,
important market distortions are likely to persist, with adverse conse­
quences for growth and efficiency. I f savings institutions are overly
specialized, such shifts'are likely to be slow and cumbersome, since
they must await shifts of funds by depositors or savers from one insti­
tution to another. Excessive specialization may also restrict compe­
tition among lenders, to the detriment of borrowers, especially those
outside of urban centers who may have access to relatively few insti­
tutions of each type.




28
On the other hand, a degree of specialization can contribute to both
solvency and efficiency in a setting characterized by many small insti­
tutions. Management is induced to concentrate in relatively limited
sectors of the credit market, and the ability to appraise basic values
and risk may be enhanced. Concentration on certain sectors, when
the supply of managerial talent and size of institutions is limited, can
also help promote more efficient techniques and economies of scale.
Moreover, specialization in the lending activities of at least some
types of institutions provides to Government a vehicle for stimulating
or, if need be, restraining lending activity in particular sectors in
accordance with broad social objectives. This can be done through cen­
tral reserve institutions or special treatment in other respects. Even
more broadly, specialization provides some assurance that certain
types of borrowers with needs deemed important from the stand­
point of the public interest and the efficient performance of the econ­
omy can be assured access to a set of institutions particularly attuned
to, and sympathetic with, their special problems and requirements.
In addition, specialization serves to prevent large and sudden shifts
of funds from one sector of the economy to another in response to
short-run deviations in rates of return— shifts which could, when real
resources cannot be shifted with equal speed, seriously affect particular
industries and complicate the task of achieving economic stability.
In balancing these considerations, the Committee is inclined toward
the view that there is merit in continuing to charter institutions some­
what specialized in their lending activities. But this approach would
not preclude some broadening in the lending powers of specialized
institutions. In general, the greater assurance which national policies
and institutions now provide against severe economic and financial
collapse should permit some redirection of portfolio regulation, con­
sistent with the objectives of solvency and liquidity, toward greater
mobility of funds, freer competition, and further flexibility for inno­
vation.

Portfolio Policy for Commercial Banks
By tradition, commercial banks tend to give priority to the shortand intermediate-term borrowing needs of business. Through their
handling of demand deposits, commercial banks are already closely
attuned to the needs and circumstances of their local business commu­
nities. This orientation helps to assure a flow of credit to smaller and
more localized businesses which lack ready access to the broader money
and capital markets. The Committee believes that this basic orienta­
tion has much to commend it.




29
Commercial banks have, however, developed diversified lending ac­
tivities beyond business loans, and it is appropriate that they continue
to do so. Commercial banks are the most widely dispersed geographi­
cally of all lending institutions; they attract funds of individuals as
well as businesses; they are necessarily in close contact with all ele­
ments in a community; and they are sometimes the only institution
conveniently available to local borrowers. Moreover, diversification
in the lending activities of commercial banks helps to assure that
specialization among other types of institutions will not endanger
either the mobility of credit between sectors or effective competition.
Because of the primary orientation of banks toward business lend­
ing, and because of the volatility of some of their liabilities, retention
of some aggregate limitation on the size of their home mortgage port­
folios appears consistent with a desirable degree* of diversification.
The existing limitation for national banks was recently raised by Con­
gress from 60 to 70 percent of their volume of time and savings de­
posits.
Limitations on the volume of funds advanced to one borower are
felt to remain an appropriate means of enforcing diversification.
However, the current limit of 10 percent of capital and surplus applied
to national banks might usefully be reviewed to determine whether,
consistent with adequate diversification, some liberalization is de­
sirable to permit banks more effectively to serve the needs of their
larger customers, and whether the existing network of exceptions to
the loan limit is beneficial.
The Committee believes that some detailed portfolio restrictions
might better be determined by supervisory authorities on the basis of
general statutory guidelines. This would facilitate timely adjustments
to basic changes in lending conditions and economic circumstances.
Discretionary authority of this nature exists in the case of regulations
on the investment powers of commercial banks, with generally satis­
factory results.

Portfolio Policy for Savings and Loan Associations
I f Congress feels that the desirability of encouraging housing con­
tinues to justify special attention to the availability of residential
mortgage credit, savings and loan associations might appropriately
continue to concentrate their major efforts in that field. This will
help to assure the continuation of widely dispersed facilities for
mortgage loans to individuals through savings associations that have
developed expertise and special interest in providing mortgage credit
and handling individual savings.
While favoring the concept of some specialization of lending activ­
ity between groups of institutions, the Committee has been mindful, as




30
noted, of the problems that might arise when such specialization is
carried to the point that competition between institutions is stifled,
and institutions are unable to shift any significant proportion of
their funds to other sectors of the economy in response to changes in
underlying economic conditions. Thus, authority for savings and
loan associations to acquire mortgages on other than single-family
residences, rather than being treated as exceptions to a general rule
as at present, might be made more positive; and existing geographical
limitations on lending might reasonably be liberalized. A majority
of the Committee believes that consideration should also be given to
providing statutory authority for savings and loan associations to
engage in shorter term lending directly related to improving the
“livability” of real estate through the purchase of major household
durable goods; on the other hand, several members feel that further
expansion into the field of consumer credit would be too much of a
departure from the specialized function of mortgage lending.
Federal savings and loan associations must now confine their earn­
ing assets, apart from loans based on real estate or savings passbooks,
to U.S. Government securities. It would be consistent with the
regulatory principles here recommended to permit them to invest in
high-quality State and local government bonds.
In recommending only a relatively modest deviation from the
present portfolio regulations of savings and loan associations, the
Committee has been influenced by its endorsement of a system of
federally chartered mutual savings banks. The existence of such a
system would provide an alternative for savings and loan associations
that desired to engage in more diversified lending and investing, under
appropriate supervision and safeguards.

Portfolio Policy for Mutual Savings Banks
Mutual savings banks, while generally confined to handling the
savings funds of individuals and nonprofit institutions, typically
have broader lending and investing authority, under State laws, than
savings and loan associations. The Committee sees no serious prob­
lems in this area; it feels that this broader authority, such as is now
permitted under State laws, is helpful in increasing the mobility of
funds and should be retained if Federal charters are provided.

Portfolio Policy for Credit Unions
Credit unions might reasonably be expected to continue to con­
centrate on short- and intermediate-term consumer loans to their
members. In the case of these institutions, considerations of safety
and solvency loom particularly important, since credit unions are




31
typically managed on a part-time basis by nonprofessionals whose
judgment is likely to be most reliable in assessing the credit worthiness
of their peers for relatively small consumer loans. Limitation to this
kind of lending is also consistent with the special purpose of credit
unions— which is, through cooperative action, to help close a possible
gap in the availability of small loans to individuals.

The Extension of Federal Portfolio Regulations
Banking and thrift institutions are subject to portfolio regulations
imposed by a multiplicity of authorities, State and Federal. In­
evitably, this multiple system of supervision has led in some instances
to unequal treatment of institutions in similar circumstances. In the
Committee’s view, these inconsistencies are not today a serious and
immediate threat to the overall health of the financial system, nor do
they appear to involve inequities so severe as to create a need at this
time for a major overhaul of the regulatory structure.
The Committee does not believe that it is essential, in protecting
the legitimate public interest, to extend Federal authority in the area
of portfolio regulation to all banking and thrift institutions (or to all
insured institutions). It recognizes that some differences in treat­
ment will remain, although in specific instances these differences might
legitimately stimulate review by both Federal and State authorities
of the validity of their requirements.
There is one area, however, where the ability of Federal authorities
to protect their interests should be strengthened. Supervisory and
insuring authorities should have. adequate powers to assure that all
member institutions maintain at all times ample capital in accordance
with guidelines established by those agencies. Sanctions short of the
complete withdrawal of insurance or expulsion from membership
should be available to these Federal authorities.
Conclusion 6.— The Committee recognizes that there are anomalies
in the existing system of portfolio regulation, ivhich are the produet
of a dual chartering system and of historical evolution. Nevertheless,
the Committee sees no need for a drastic overhaul of existing portfolio
regulations, nor for extending Federal regulations to State-chartered
institutions. ..
Conclusion 7.— Some modification of the existing system is desirable.
One aspect is broadening portfolio alternatives while not abandoning
the concept of some specialization of financial institutions. In addi­
tion, many of the detailed regidations now spelled out in the statutes
might well be left to the discretion of supervisory authorities, within
statutory guidelines.




32
Conclusion 8.— Federal supervisory and insuring authorities should
have adequate powers to assure that all institutions subject to their
respective jurisdictions maintain at all times ample capital in ac­
cordance with guidelines established by those agencies. These powers
should be such that the authorities may enforce adequate provision
of capital without the need to resort to expulsion from membership
or termination of insurance.1
iT h e Comptroller of the Currency feels that he now has sufficient power to regulate
the capital of national banks.




Chapter V
FEDERAL CHARTERS FOR FINANCIAL INSTITUTIONS
Under existing law, both the Federal and State governments pro­
vide charters to commercial banks, savings and loan associations, and
credit unions. For these three groups of financial institutions, there
is a dual system of chartering and supervision.
In recent years, it has been proposed that Federal charters be avail­
able also to mutual savings banks. The Commission on Money and
Credit supported this proposal and also recommended that Federal
charters be available to life insurance companies.

Federal Charters for Mutual Savings Banks
In broad economic function, mutual savings banks resemble savings
and loan associations. There are differences between the two types
of institutions in their history, traditions, form of organization, legal
nature of liabilities, and investment powers and practices. However,
both perform the basic economic function of providing a relatively
liquid eaming-asset to individual savers and investing in long-term
relatively illiquid obligations, mainly residential mortgages. As
financial intermediaries, these institutions are more than mere middle­
men between savers and borrowers. They hold assets which savers
would for the most part be unwilling to hold directly, and their
liabilities have a degree of liquidity which individual borrowers would
be unable to provide directly.
I n . attracting funds, mutual savings banks and savings and loan
associations compete not only with each other but with commercial
banks as savings institutions. But mutual savings banks are con­
centrated in the northeastern part of the country, whereas savings
and loan associations and commercial banks are found in the 50 States.
Charters for mutual savings banks are available in only 18 States.
Reflecting their historical origins, three-fourths of the savings banks
are in three States— New York, Massachusetts, and Connecticut.
The proposal for Federal charters envisages that Federal mutual
savings banks might come into existence in three ways: (1) by con­
version of existing State-chartered savings banks to the form of
Federal mutual savings banks, (2) by conversion of existing savings




(33)

34
and loan associations (Federal or State-chartered), and (3) by the
establishment of new institutions.
Analysis of the proposal.— Federal charters for mutual savings
banks are supported in part on the ground that such charters are now
available for competing institutions, and equity calls for similar
treatment for savings banks.
It is further argued that if savings banks could spread to other
parts of the country, the result would be (1) an increase in saving,
(2) a better geographical distribution of saving in relation to invest­
ment needs, particularly for home-finance, and (3) more flexible and
more competitive financial institutions.1
Proponents of Federal chartering have argued that personal sav­
ing tends to be higher in communities where mutual savings banks
exist than in comparable communities without them. - They further
argue that Federal charters would contribute to an improved geo­
graphical distribution of saving by stimulating greater saving in
those areas of the country— especially the West and South— where
economic growth has been most rapid but where investment has been
financed by savings attracted from capital surplus areas in the north­
east.
Whether the evidence on the volume of savings deposits in com­
munities with savings banks can be taken to imply that national or
regional saving would increase in relation to national income if sav­
ings-banks were more widespread is questionable. The spread of
such institutions might merely result in a rechanneling of the flow of
savings.
The Committee is generally disposed favorably toward measures
that would enhance the mobility of savings in response to investment
needs, where consistent with other important objectives. Whether
the establishment of new Federal mutual savings banks or the con­
version of existing institutions to that form would make a major con­
tribution to such mobility is unclear, but it would presumably tend
in that direction. To the extent that the availability of Federal char­
ters led to increased competition for. savings, the public would benefit
from more favorable returns on' amounts saved. Moreover, although
an excessive multiplication of savings institutions could threaten the
solvency of existing and new institutions, this danger seems remote
in view of the chartering standards that now exist for other types
of institutions and the standards that would presumably be applied
in chartering new Federal mutual savings banks.
Mutual savings banks have wider investment powers than savings
and loan associations and are in a better position to respond to changes
i National Association of Mutual Savings Banks, Mutual Savings Banka (a mono­
graph prepared for the Commission on Money and Credit), 1962, pp. 261-266.




35
in the composition of investment needs. It is argued that the oppor­
tunity to establish additional mutual savings banks, either by the
chartering of new, or the conversion of existing, institutions, would
provide a desirable safeguard against excessive specialization in mort­
gage financing: by savings institutions. With appropriate statutory
standards, a desirable strengthening in the liquidity position of many
.thrift,institutions might also result. Furthermore, savings institu­
tions would be better able to adapt, and less vulnerable, to a rela­
tive decline in the demand for residential mortgage funds, for with
broader investment powers they could supply funds for other pro­
ductive uses.
Bills under consideration would best the chartering and super­
visory authority for Federal mutual savings banks in the Federal
Home Loan Bank Board. This matter is discussed in chapter I X .
The Committee’s endorsement of Federal charters for mutual sav­
ings banks does not imply endorsement of any particular bill in the
Congress.2
Conclusion 9.— The Committee concludes that voluntary Federal
charters should be available for mutual savings banks, subject to ade­
quate supervisory standards and safeguards.

Federal Charters for Life Insurance Companies
Life insurance companies are presently chartered in each of the 50
States. Companies that operate across State lines are subject to the
regulations of the States in which they sell insurance as well as their
home States. In practice, New York has been a key regulatory State
by virtue of the fact that companies accounting for three-fourths of all
life insurance are licensed to sell insurance in New York.
The Commission on Money and Credit recommended that “over­
riding Federal charters be available to life insurance companies,”
in order “to avoid increasing complications of multiple State jurisdic­
tions * * *”
The Committee has had neither the time nor the resources to under­
take an intensive study of the life, insurance industry and its regula­
tion. In part because the Federal Government has no supervisory
responsibilities over insurance companies, existing knowledge and ex­
perience in the Government provide less foundation for judgment
on this question than on most of the other issues within the Commit­
*The Committee, while aware o f the implications of differing Federal tax treatment of
financial institutions (including mutual savings banks) for their growth and relative
competitive positions, did not consider this range of problems as directly within its terms
of reference. The Administration position on taxation of mutual savings banks and
savings and loan associations was fully developed in hearings on the Revenue Act of
1982 last year.




36
tee’s terms of reference. The Committee has had indications, how­
ever, of particular cases of unduly lax supervision.3
The Committee has noted that a degree of national regulation is,
in effect, provided by New York State, but there are inherent diffi­
culties in regulation by individual States of companies that operate
in many States. Furthermore, the setting of national standards may
more properly be a function of the Federal Government. The Com­
mittee also noted that in the McCarran Act (1945), Congress provided
that the antitrust laws would apply to the business of insurance “to
the extent that such business is not regulated by State law.5’ This
provision raises questions as to the extent of applicability of the anti­
trust laws.
The Committee realizes that overriding but voluntary Federal char­
tering would be of only limited effectiveness in creating uniform regu­
latory standards across the Nation. In States where regulatory stand­
ards and entry requirements are relatively lax, Federal charters in­
volving stricter standards would attract few companies. Only to the
extent that life companies regard regulation by the States as too oner­
ous or too divergent from State to State would Federal charters be
attractive to individual companies and therefore effective in enhancing
nationally uniform regulation.
The Committee also wishes to point out that, in view of the inter­
state character of the life insurance industry, problems of overly
lax or disparate State regulation, if they arise, can be handled by
specific Federal legislation, even in the absence of Federal charters.
Conclusion 10.— The Committee sees no objection in 'principle to vol­
untary Federal chartering of life insurance companies. A t the same
time, in view of the apparently lax supervision in some States, the in­
herent difficulties in State regulation of companies that operate across
State lines, and the limited applicability of the antitrust laws, the
Congress might wish to conduct a study of life insurance practices and
regulation so as to determine whether Federal legislation is desirable.
3 The adequacy o f supervision, State by State, is also discussed in The Insurance
Industry: Aviation, Ocean Marine, and State Regulation, Report of the Committee on
the Judiciary, U.S. Senate, made by Its Subcommittee on Antitrust and Monopoly, 86th
Cong., 2d sess., 1960.




Chapter VI
INSURANCE OF DEPOSITS AND SHARES
The Federal Government provides insurance for deposits in com­
mercial and mutual savings banks (through the Federal Deposit In­
surance Corporation) and for shares in savings and loan associations
(through the Federal Savings and Loan Insurance Corporation). All
national banks, State-chartered member banks of the Federal Reserve
System, and Federal savings and loan associations are required to be
insured; State-chartered member associations of the Federal Home
Loan Bank System are not required by law to cany insurance, but
as a matter of policy the Federal Home Loan Bank Board does not
currently admit associations to membership without insurance. For
nonmember commercial banks, for mutual savings banks generally,
and for State-chartered savings and loan associations, insurance is
voluntary.
In fact, all but 2y2 percent (or 329) of the commercial banks in the
United States are insured by the FDIC. Uninsured banks account
for less than 1. percent of all commercial bank deposits. Among the
515 mutual savings banks, 330 are insured by the F D IC (and 176 of
those remaining are insured by the deposit insurance fund of the
State of Massachusetts). Mutual savings banks not insured by either
the FDIC or the Massachusetts fund account for little more than 0.1
percent of all mutual savings bank deposits. Among savings and
loan associations, about two-tliirds are insured with the FSLIC and
they account for 95 percent of the assets of all associations.
Insurance coverage is presently $10,000 per account for deposits
and shares. When introduced in the early 1930’s, coverage was $2,500.
This was raised to $5,000 in 1934 and to the present level in 1950.
Recommendations of Commission on Money and Credit.— The Com­
mission recommended “that Federal deposit insurance for all savings
banks and savings and loan associations be available from the Federal
Savings andrLoan Insurance Corporation, and that chartering au­
thorities urge such participation.”
The Commission’s Report noted that savers frequently believe that
their deposits and shares in all institutions are insured and that there
are differences in the insurance available at various institutions. It
suggested that insurance should be brought in line with savers’ beliefs




(37)

38
and practice. The Commission also suggested that the maximum
insurance coverage per account should be reconsidered in the next
few years.
Principal questions concerning insurance.— The Committee con­
sidered three principal questions in this area: (1) Should deposit and
share insurance be compulsory, either for all or for a greater propor­
tion of commercial and mutual savings banks and savings and loan
associations? (2) Should the present $10,000 level be raised? (3)
Should share insurance be available to credit unions ?
Purposes of insurance.— In its deliberations on these questions, the
Committee considered that the major purpose of deposit and share
insurance is to preserve public confidence concerning the ability
of financial institutions to meet their liabilities. This need was
amply demonstrated historically by a series of financial panics in
which suspension of payment by one or a few institutions was followed
by “runs” on many sound institutions, which were in turn forced to
close their doors. A related purpose of insurance is to prevent the
economic disruption to communities that would result from the fail­
ure of banks or other financial institutions, with consequent losses to
depositors and shareholders. Still another purpose is to protect the
savings of families of moderate means, who often lack the technical
ability to make judgments regarding the relative soundness of differ­
ent institutions.
These purposes could conceivably be achieved in other ways. The
central bank could presumably prevent panics, and runs on financial
institutions by committing itself to lend freely at such times. Effective
examination and supervision, buttressing adequate portfolio regula­
tion, might be relied upon to prevent most individual institutions from
failing.
Yet the financial history of this country, with its structure of unit
banks and other financial institutions, underscores the need for insur­
ance protection in addition to the other governmental powers men­
tioned above. In any case, Federal insurance is by now an integral
part of the financial landscape. Ajiy suggestion that it be curtailed
would act to undermine confidence and would serve no useful purpose.

Compulsory Insurance
The beneficiaries of deposit and share insurance— that is, consumers,
businesses and institutions having accounts in insured institutions—
do not contract directly for insurance. In this respect, such insurance
differs from most other types of insurance protection. A depositor
or shareholder protects his funds only by selecting an insured insti­
tution. But many citizens— especially those of small means who may




39
be most in need of protection— lack the financial sophistication to be
aware that some institutions are not insured. In fact, because such a
large proportion of depositary institutions are insured, the public
tends to assume that all are insured, with the result that funds may
inadvertently be placed with uninsured institutions; this possibility
has been enhanced in some instances by misleading advertising. For
these reasons, a case can be made for compulsory insurance at all
institutions.
There was sympathy for this viewpoint in the Committee. On the
other hand, it was also felt that compulsion should be avoided if
possible. In particular, when small local institutions choose to remain
uninsured, their nearby depositors and shareholders are likely to be
aware of their uninsured status. On this basis, the Committee believes
that insurance need not be compulsory as long as uninsured institutions
(commercial banks, savings and loan associations, and mutual savings
banks), confined their operations to local areas.
Conclusion 11.— The Committee concludes, with one member dis­
senting, that uninsured commercial banks, mutual savings banks,
building and loan, and savings and loan associations should be pro­
hibited from accepting deposits or shares across State lines.*
The Committee affirms that institutions which benefit from Federal
charters or membership in a Federal System ought to carry insurance.
Conclusion 12.— State-chartered savings and loan associations that
are members of the Federal Home Loan Bank System but are not
insured by the Federal Savings and Loan Insurance Corporation or
an accepted State fund should either qualify for and; obtain insurance
from the Federal Savings and Loan Insurance Corporation or give
up their membership. All new members should, be required to obtain
insurance.
The Committee is aware of the existence of State-sponsored insur­
ance funds, with a history, of sound operation. Institutions insured
with State funds that have been in existence for a number of years
should be exempt from the foregoing proposals. It is not desirable,
however, to encourage the creation of additional State insurance sys­
tems: In view of the nature of the risks— which are not actuarially
determinate— and in view of the fact.that reduction of the risks
depends in large part on actions by the Federal Government to
prevent economic and financial crises, the provision of deposit and
share insurance is properly a function of the Federal Government.
JThe Committee is aware that a number of institutions are presently Ineligible for
Federal insurance by virtue of their form of organization. It is assumed that legislation
to implement this conclusion would make provision for such problems.




40

Limit on Insurance Coverage
I f the purposes of insurance, outlined previously, are to be achieved
and are considered overriding, a case can be made for complete cover­
age or a considerably higher upper limit than the present $10,000,
especially for demand deposits. I f the community needs protection
against the economic disruption and hardship that would result from
bank failures, this need is not fully met when the public can only
count on protection of the first $10,000 in bank accounts. In order
to be certain of full protection, depositors must split deposits among
several banks and, for businesses especially, this is inconvenient and
inefficient.
In the case of time deposits and shares, the justification for com­
plete or much higher coverage is less compelling. These accounts are
not transaction balances and, by definition, are not actively used. To
split them among several institutions is less inconvenient and ineffi­
cient. Furthermore, it must be recognized that Federal insurance
provides a distinct competitive benefit to savings institutions. It en­
hances their ability to attract funds which savers might otherwise
invest directly and enables weaker institutions to compete on more
equal terms with more carefully managed institutions. There is
some question as to how far the Federal Government ought to go in
abetting the promotional activities of savings institutions.
As a practical matter, however, the Federal Government through
the F D IC could not provide higher insurance coverage for demand
deposits than for time and savings deposits in the same institution.
And, it could not provide higher coverage for time and savings deposits
at commercial banks than for deposits and shares at other insured
savings institutions.
A case can be made against complete insurance coverage on the
ground that it would eliminate the incentive to holders of large ac­
counts to investigate institutions before placing funds with them.
This process is regarded by some as a desirable supplement to the ac­
tivities of governmental supervisory authorities in preventing undue
risk-taking by institutions. Others believe that governmental author­
ities can be relied on for this purpose and that the discipline exerted
on management of financial institutions by large account-holders may
lead to excessive avoidance of risk. One member of the Committee be­
lieves that an increase in insurance coverage would weaken the incen­
tive to prudent management, particularly by those banks whose de­
posits would become fully insured.
In evaluating these various considerations, the Committee, with one
member dissenting, agreed that increases in existing coverage are
justified from time to time, to take account of rising income and wealth,




41
among other factors, but that complete coverage of all deposits or
shares should not be provided. Studies by the FD IC and the FH LBB
have concluded that an increase to as much as $25,000 at the present
time would be justified and helpful.
These studies, in particular, suggest that such an increase in cover­
age, judging from past experience, would have only a minor effect on
the size of the FD IC and FSLIC insurance funds. For example, if
coverage at $25,000 had been in effect during the past decade, net pay­
ments by the FD IC to cover depositors’ claims on failed or failing
banks over this period would have been about $270,000 or 11 percent
higher, thereby reducing the size of the $2.4 billion fund by a minute
fraction. Projections for the next decade prepared by the F D IC and
FSLIC, taking into account the growth in deposits and shares but also
assuming, for the sake of analysis, a considerably greater number of
failures than in the past 10 years, indicate that an increase in coverage
to $25,000 would reduce the projected size of each of the insurance
funds a decade hence by much less than 1 percent.
The Committee is aware that it is impossible to forecast with reli­
ability the amount of future drains on the insurance funds. One mem­
ber believes that sufficient evidence has not been submitted to justify
the proposition that insurance coverage could be substantially in­
creased without raising the present assessment rates. Other members
believe that the prospects for minimizing economic instability, to­
gether with the safeguards provided by bank supervision and exam­
ination, justify reliance on past experience in support of the judgment
that insurance coverage can safely be increased while the current
assessment rates are maintained.
Apart from this question, however, the Committee felt that pro­
posals for increased insurance coverage could not appropriately be
separated from consideration and evaluation of supervisory controls,
adequacy of provisions for liquidity, and competitive practices in
seeking funds, particularly as they may adversely affect lending
standards among the various affected financial institutions, since in­
creases in insurance coverage will, in the opinion of some, tend to
reduce the care with which depositors or shareholders themselves
evaluate the safety and stability of the various institutions, and
thereby affect the ability of particular institutions to attract addi­
tional funds. The Committee has suggested several areas in which
action is needed to strengthen further the supervisory framework and
to assure more effectively the solvency and safety of individual in­
stitutions, including an extension of reserve requirements to savings
and loan associations and mutual savings banks and a strengthening
of the authority of supervisory authorities over liquidity positions*




42
standby authority over rates paid on savings and time accounts, and
broadening of safeguards against conflicts of interest to additional
institutions. Consequently, the Committee, with one member dis­
senting, believes that an increase in insurance coverage would be ap­
propriate when these other considerations— insofar as they are rele­
vant to the kind of institution concerned— are satisfactorily resolved.
Conclusion 13.— The Committee, with one member dissenting, be­
lieves that an increase in existing insurance coverage is justified in
terms of the adequacy and capacity of the insurance funds for meeting
foreseeable contingencies. In considering such increases, however,
the adequacy of liquidity, competitive practices in attracting funds as
they are related to lending standards, and regulatory and supervisory
controls and standards among the various affected financial institu­
tions should be fully considered and continually evalulated?
The various actions the FD IC may take to assist a failed or failing
bank— such as making loans or purchasing assets to facilitate a merger
or an assumption of assets and liabilities by another bank—are some­
what limited by the language of existing law. The Committee believes
that the language should be modified so as to clarify the conditions
under which the F D IC may take such actions to reopen or strengthen
banks. One member of the Committee dissents on the grounds that
this change would add to discretionary authority, which might not be
uniformly applied.
Conclusion H .— The Committee, with one member dissenting,
favors a clarification of the conditions specified in the Federal Deposit
Insurance Act under which the Corporation may assist a failed or
failing bank.

Insurance for Credit Unions
Credit unions are the only depositary-type institutions that do not
have insurance available through an instrumentality of the Federal
Government. The Committee believes that before a decision is made to
provide insurance, a thorough study should be undertaken to determine
whether it would be consistent with the character, purposes, and
functions of credit unions.
Although fast-growing and to some extent competing with other
savings institutions, credit unions have unique characteristics. They
do not serve the general public but are limited to accepting funds and
making loans to members, who ordinarily have a common bond of
-O ne member, while agreeing to the general tenor of the statements in conclusion 13,
does not consider it necessary to delay increasing the insurance limit to $25,000.
Implementation of the other recommendations in this report would be timely enough even
if such implementation followed the change in the insurance limit by as much as a year.
Another member, who fully supports conclusion 13, points out that as far as his agency
is concerned the aforementioned recommendations are already applied.




43
occupation, association, or community. Furthermore, credit unions
are frequently subsidized one way or another by employers and sel­
dom, have full-time management. Their loss experience has been very
small.
The Committee is concerned that insured status might tend to
change the character of credit unions so that some of them would
become aggressive institutions that would use the insurance feature
for promotional purposes. In order to assure preservation of the
unique and useful status of credit unions, the Committee believes that
neither cash reserve requirements nor Federal insurance should be
adopted without more study.




Chapter YII
STRUCTURAL CHANGES A N D COMPETITION AMONG
F IN A N C IA L IN STITU TIO NS
In discharging its responsibility to assure that financial institutions
remain both solvent and responsive to ,the needs of the community,
the Federal Government inevitably is concerned with the structure
of the markets within which financial institutions operate and compete.
Federal agencies charter new institutions. They provide deposit or
share insurance directly to federally chartered institutions and make
such insurance available on a voluntary basis to institutions chartered
by the States, thereby affecting their ability to compete. Generally,
they approve or disapprove new branches, mergers, and holding
company relationships among financial institutions, both Federal and
State chartered. (For State-chartered institutions, approval of State
supervisory authorities is required before action by the appropriate
Federal agency is taken.)
These responsibilities give rise to administrative problems and to
substantive policy problems. The administrative problems in this
area represent one aspect, albeit a crucial one, of a more general prob­
lem regarding coordination of policy among Federal supervisory
agencies with overlapping jurisdictions in the field of banking. This
question is dealt with in Chapter I X of this report.
The substantive problems concern the standards to be applied in
approving or disapproving structural changes, such as the chartering
of new institutions, branches for existing institutions, mergers among
existing institutions (which may either convert an independent insti­
tution into a branch of another institution or consolidate two or more
offices into one), and holding company acquisitions.

Nature of Problem
In the period since World War II, the structure of financial insti­
tutions and their competitive relationships— especially in the field
of commercial banking-—have been subject to special stresses. Migra­
tion of people and businesses to the suburbs has led to a need for more
varied lending and depositary services of banks and other financial
institutions in areas where little such need was evident earlier. A t
the same time, more and more consumers have become bank depositors,




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45
and banks have had a greater incentive to compete for personal
deposits. Growth in the size of business units has generated pressures
for larger size banking units to serve business needs. The potential
economies from use of automatic accounting and computing devices
are providing a new inducement toward combination. In addition,
general prosperity has apparently made it difficult for smaller financial
institutions to hold and attract managerial talent.
The result has been a strong movement toward expansion, on the
one hand, and toward consolidation, on the other. New institutions
and, where permitted by State laws, new branches have been opened
in many areas. A t the same time, formerly independent institutions
have been converted into branches by means of mergers. In the past
decade 5,000 de novo branches of commercial banks have been opened,
while more than 1,300 independent banks have been converted into
branches through mergers. Holding company acquisitions and other
forms of affiliation have also been widespread.
In recognition of the problems created by these developments, Con­
gress has enacted two major laws in recent years. The Bank Holding
Company Act of 1956 required prior approval by the Board of Gov­
ernors of the Federal Eeserve System of acquisitions of banks by
holding companies. The Bank Merger Act of 1960 (an amendment
to the Federal Deposit Insurance Act) specified the factors that Fed­
eral agencies were to consider in weighing a merger and emphasized
the importance of considering the effect on competition, by providing
that the agency having the responsibility to approve a merger should
receive an advisory opinion on the competitive effect of the proposed
merger from each of the other two banking agencies and the Depart­
ment of Justice.
In deciding cases under these statutes and in approving or denying
applications for new charters and branches, Federal agencies are
necessarily exerting -a major influence on the structure of financial
institutions and the pattern of competitive relationships among them.
Furthermore, decisions to grant charters and to approve branches,
mergers, and holding company acquisitions are by their nature irre­
versible. It is important, therefore, that the criteria applied by Fed­
eral agencies be conducive to the type of financial structure that will
over the years best serve the needs of a growing, efficient economy and
that such criteria be consistently applied among the agencies involved
and over time.
These criteria must take account of a great variety of local and
regional circumstances, from small communities with a single bank
to metropolitan centers with numerous giant financial institutions of
all types. Policy approaches with regard to charters, branches,




46
mergers, or holding companies that promote competition while
encouraging soundness in one type of community or region might lead
to excessive concentration elsewhere.

Nature of Financial Markets
Financial institutions, especially banks, operate and compete in
circumstances that differ in several respects from those in which other
businesses operate and compete.
In contrast to the situation that largely prevails in commerce and
industry, the chartering of new financial institutions is subject to
special limitations. The economic disruption and hardship that re­
sults from the failure of financial institutions has led governments to
limit the establishment of new institutions in accordance with the
“convenience and needs” of the community and with an eye to pre­
venting the failure of the new or existing institutions.
Competition is also limited by other governmental restrictions.
Regulation of interest rates paid by commercial banks reduces the
extent to which banks may engage in price competition for demand,
time, and savings deposits. For this and other reasons, competition
often tends to be manifested in the nonprice elements of deposit rela­
tionships and loan contracts. Some portfolio restrictions also limit
the area of competition.
Another feature is that the market in which financial institutions,
especially banks, operate is difficult to define. In some of their loan
and deposit operations banks serve a local market which may be
sheltered from competition. In other transactions, they deal in na­
tional markets which are highly competitive. The absence of a single
well-defined market complicates the task of judging the impact on
competition of mergers and other structural changes.
Within finance, there is a significant degree of interindustry com­
petition, which is relevant to decisions on structural changes. For
example, banks compete not only with each other but with other types
of savings and of lending institutions in attracting deposits and
making loans and investments.
Although financial markets have special characteristics, including
limitations on competition, it is important not to confuse banks and
other financial institutions with public utilities. In the case of many
public utilities, it is recognized that competition would be wasteful,
and the discipline of competition is replaced by detailed governmental
regulation of prices, types of service, etc. In finance, on the other
hand, regulation is much less comprehensive. Considerable leeway
exists for the play of competition and, in fact, competition is relied
upon as a spur to adequate service and as a means of assuring that




47
interest rates and other credit terms serve a useful allocative function
on an equitable basis.

Recommendations of Commission on Money and Credit
The Commission recommended that—
1. The provisions of the National Banking Act should be re­
vised so as to enable national banks to establish branches within
“trading areas” irrespective of State laws, and State laws should
be revised to provide corresponding privileges to State-chartered
banks.
2. In exercising this power to grant branches, the chartering
authority should adopt the following practices:
a. It should avoid undue concentration of the local market.
b. It should give new entrants a chance to compete even
if their business must be partially, bid away from existing
competitors, and should place considerable reliance on the
applicant’s integrity, managerial competence, and his judg­
ment in regard to the earning prospects of the new branch.
c. It should treat the applications for new branches on a
par with new unit bank applications.
d. It should treat applications for new branches of non­
local banks on a par with applications for new branches of
local banks.
In its background discussion, the Commission expressed “its con­
cern about the need for clarification of present legislation and diffusion
of authority for administrative action in relation to financial mergers.
A t the same time, in its opinion, policy in regard to mergers should be
discriminatng. Mergers that result in operating economies and which
are forced by competition to pass on the benefits of operating econo­
mies clearly should be encouraged by public policy. The Commission’s
judgment is that more precise criteria than are now in use can and
should be evolved for drawing the line between mergers that are and
mergers that are not in the public interest.”

Other Recommendation
The Advisory Committee on Banking to the Comptroller of the
Currency recommended legislation that would permit national banks
to establish branches within a limited area irrespective of the law of
the State in which the national bank is located.

Needs for Study
As it considered the problems in this area, the Committee was aware
of the difficulty of formulating reliable criteria on which policy de­
cisions may be based. In contrast to many of the items within the




48
Committee’s terms of reference, which have been the object of analysis
and recommendation over the years, the issues pertaining to industrial
organization, performance, and market structure among financial in­
stitutions have received little systematic study. Yet Federal agencies
must act on a steady stream of applications for structural changes.
The Committee urges that strong encouragement be given to research
efforts, within the Federal Government and elsewhere, aimed at evalu­
ating the performance of financial institutions with different types
of structure and at studying the interaction between performance and
structure.
Conclusion 15.— The Committee urges that intensive studies be
undertaken, within the Government and elsewhere, with a view to
providing an essential body of information and analysis on ichich to
base sound policy 'guidelines for decisions on applications for charters,
branches, mergers, and holding company acquisitions.

Structural Changes and Competition Among Commercial Banks
Statutory standards.— The Federal statutes authorizing charters
for national banks, branches for national and insured State banks,
admission to deposit insurance, and admission to membership in the
Federal Eeserve System specify a number of factors that the super­
visory agencies must take into account before acting. In general the
so-called “banking” factors, which the agencies are required to consider
before acting on an application, include the financial history and con­
dition of bank (or banks), capital adequacy, future earning prospects,
character of management, corporate powers, and the convenience and
needs of the community. The more recent legislation on bank holding
companies and mergers includes similar factors but also explicitly
adds “the effect on competition” as a factor.
It is clear, from legislative history and regulatory practice, that
each of these factors is not necessarily given equal weight. In par­
ticular, the effect on competition, although it is only one of seven fac­
tors specified in the Bank Merger Act, is accorded substantial weight.
Frequently, the problem facing the supervisory agency with primary
responsibility is to balance the combined banking factors against the
competitive factor.
Some members of the Committee believe that even greater weight
should be given to the competitive factor than has been the practice
in the past, and they would achieve legislative support for this ob­
jective by reducing the number of factors to three: banking soundness,
convenience and needs of the community, and effect on competition.
Other members of the Committee believe that such a change would
serve no purpose and that the present statutes give adequate emphasis
to the competitive factor.




49
Consistency of standards.— The market environment in which banks
compete is affected by each of the four types of structural change over
which the Federal Government has supervisory authority. Yet the
statutes do not lay down completely consistent standards as a basis
for decisions by supervisory authorities. In particular, although the
effect on competition is specified as a relevant factor in merger and
holding company cases, the statutory authority to grant charters
and branches does not require that the effect on competition be
considered.
In practice, the supervisory authorities tend to apply the same
standards to charter and branch applications as to merger and holding
company requests. The ,Committee believes that this practice is ap­
propriate. It was observed, for example, that the establishment
of new branches may not always enhance competition. Where the
alternative to a new branch of an existing institution is a new inde­
pendent institution, competition might be greater if the branch appli­
cation is denied and the charter application is approved.
The Committee differed on whether or not the practice of super­
visory agencies in applying the competitive factor to charter and
branch applications, should receive explicit statutory endorsement.
Some members believe that this is unnecessary, in view of existing
practices. A majority favors legislative authorization for the prac­
tice of basing decisions on charter and branch applications on “the
effect of competition” along with the criteria already specified by law.
The result would be that each of the supervisory agencies would be
directed to apply similar, if not identical, standards to each type
of significant structural change— charters, branches, mergers, holding
company acquisitions and any other form of affiliation which might
be regulated.
Conclusion 16.— Although existing statutory standards are inter­
preted as authorizing consideration of the effect on competition in
the granting of charters and the approval of new branches, the Com­
mittee concludes that the statutory standards applicable to granting
of charters and approval of new branches should explicitly include
uthe effect on competition, ”
In addition to the need for consistency in evaluating different types
of structural changes, application of standards among the several
supervisory agencies should be consistent. Whether or not the Fed­
eral agencies have been consistent in their decisions is a matter of
some disagreement.
The general problem of uniformity in bank supervision at the Fed­
eral level is discussed in chapter I X of this report. The need for
specific measures to encourage greater uniformity in decisions on bank




50
structure depends on what action is taken with regard to coordinating
bank supervisory functions generally.
A degree of coordination is achieved in merger cases by the provi­
sion of the law that each of the other bank supervisory agencies and
the Justice Department submit to the agency responsible for decision
an advisory opinion on the effect of the proposed merger on competi­
tion. Some members of the Committee see merit in a proposal that
this procedure be extended, on a permissive basis, to other types of
structural change, including charters, branches, holding company
acquisitions, membership in the Federal Eeserve System, and admis­
sion to deposit insurance. Thus each supervisory agency and the
Department of Justice would be given notice of applications received
and would have an opportunity to submit an advisory opinion on the
effect of such proposed actions on competition. It would be understood
the agencies would not be required or expected to submit advisory
opinions in the case of each application, but only when they had a
substantial reason for doing so. Other members oppose this proposal
on the grounds that such interchange would be needlessly burdensome.
As an alternative to this coordination procedure, and pending more
general decisions with regard to bank supervision, some members of
the Committee favor establishment of a single board (consisting of
representatives of each of the three bank supervisory agencies) to act
on all applications for charter, branch, merger, or holding company
acquisition. Other members believe that the arrangements for infor­
mal coordination which have generally prevailed in recent years are
satisfactory and adequate.
Conclusion 17.— The Committee believes that in the case of each
application for charter, branch, membership in the Federal Reserve
System, and admission to deposit insurance, the banking agencies not
directly concerned and the Justice Department should have the oppor­
tunity to submit an advisory opinion on the effect of the proposed
action on competition}
Branching problems.— In considering the recommendations concern­
ing branches of national banks that have been put forward by the
Commission on Money and Credit and by the Advisory Committee on
Banking to the Comptroller of the Currency, the Committee was well
aware of the controversial and emotion-laden aspects of this issue.
In the case of banks, the Congress has taken the position that State
laws should remain paramount in determining the branching privi­
leges of both State- and Federal-chartered banks. In the case of
1 Three members dissent on the grounds that this conclusion would place new and
burdensome responsibilities on the affected agencies and create unnecessary confusion con­
cerning the locus of responsibility and the standards to be applied in an area in which
adverse competitive implications are seldom a critical factor.




Si-

Federal savings and loan associations, however, the Federal statutes
impose no limitations on the authority of the Federal Home Loan
Bank Board to grant branching privileges.
Under existing law, branch banking is completely prohibited in
eight States. An additional eight States prohibit branches with
limited exceptions, such as drive-in facilities close to the main office
or paying and receiving stations in communities without established
banking facilities. A t the other extreme, branching is authorized
without local limitation in 10 States. In the remaining States, branch
banking is permitted under varying limitations. Where limited
branching is permitted, the statutes in most States are more liberal
regarding branches near the main office than for more distant
branches.
The Committee believes that extreme limitations on authority ito
permit branching by commercial banks in some States may operate
to the detriment of the interest of businesses and consumers in those
States. In other States, relatively unrestricted authority to permit
branching may have led to excessive concentration of banking facili­
ties. Leaving aside considerations involving the relationship between
the Federal and State Governments, it is difficult to defend the ex­
treme disparity among the States in the prevalence of branch banking.
It is likely that the public interest would be better served by a more
consistent policy among the States regarding branches.
An argument in favor of permitting banks to establish branches
more freely is that it brings some of the benefits of economies of scale
to users of banking services in areas which cannot support large unit
banks or perhaps any unit bank. In addition, the establishment of
new branches can sometimes increase competition and thereby im­
prove and lower the cost of banking services.
A major disadvantage attributed to broad statutory authority for
branching is that, unless carefully administered, it can lead to undue,
concentration of banking facilities. It is also argued that independent
unit banks are more responsive to the needs of the local community.
Finally, it may be argued that in some areas a freer chartering
policy by supervisory authorities would introduce more competi­
tion without the additional concentration that comes with brandling.
One way to work toward a more uniform approach to branching is
through the branching authority for national banks. Opinions differ
on whether the economic advantages from such an approach would be
great enough to warrant disturbing the existing balance between Fed­
eral and State supervision. It is certain that considerable contro­
versy would ensue if it were proposed that the Federal Government
permit national banks to establish branches in areas where this is not
presently permitted to State-chartered banks.




52
Conclusion 18.— The Committee believes that extreme limitations
on branching of financial institutions in some States may impede the
provision of banking services and effective competition. On the other
hand, it is important to avoid excessive concentration of banking (and
other financial) facilities through branching. It seems quite likely
that branching, properly regulated, can encourage more favorable
competitive conditions and the provision of more effective banking
services, particularly in local areas, without affecting the soundness
of banks (and other financial institutions). The Committee con­
cludes therefore that the Federal and State Governments, within their
respective authorities, should revieio present restrictions on branching
icith a vieio to developing a more rational pattern, subject to safe­
guards to avoid excessive concentration and preserve competition.
Other forms of affiliation.— A t present, only branching and bank
holding company relationships are subject to Federal supervision.
There are, however, other forms of affiliation among banks and other
financial institutions which may require supervision. The Commit­
tee has in mind widespread instances of ownership of two or more
banks by individuals, sometimes referred to as chain banking. The
Committee believes that additional studies are needed to determine
whether such other forms of affiliation require Federal supervision.2

Structural Changes and Competition Among Savings and Loan
Associations
The Committee believes that federally supervised savings and loan
associations and mutual savings banks should be subject to Federal
standards regarding charters, branches, mergers, and holding com­
pany supervision similar to those applicable to commercial banks, as
discussed previously. This would include authority to the Federal
Savings and Loan Insurance Corporation to pass on application for
branches of State-chartered associations in a manner parallel to the
authority of the Federal Deposit Insurance Corporation over State
banks.
Federal law, as noted, does not limit the authority to permit Federal
associations to branch. As a matter of policy, however, the Federal
Home Loan Bank Board follows the principle of permitting branches
for Federal savings and loan associations in any locations where State
laws permit (or do not prohibit) other financial institutions to have
some form of affiliate office. Pending outcome of the decision on
branch banking, the Committee does not suggest a change in either
the legislation or the policy regarding branches of Federal savings
and loan associations.
2 One study of this type has recently been published: Chain Banking, Report by Wright
Patman, chairman, to the Select Committee on Small Business, House of Representatives,
87th Cong. (Jan. 3, 1963).




53
Conclusion 19.— In principle, the Committee believes that federally
supervised savmgs and loan associations should be subject to Federal
standards regarding charters, branches, mergers, and holding company
supervision similar to those applicable to banks. However, pending
outcome of the study on branching recommended above, the Committee does not suggest a change in either the legislation or the policy ’
regarding branches of Federal savings and loan associations.
Conclusion 20.— The Committee believes that the Federal Savings
and Loan Insurance Corporation shoidd be given authority to pass on
branching applications of State-chartered insured associations in a
manner parallel to the authority of the Federal Deposit Insurance
Corporation over insured State banks.

Interlocking Relationship Among Financial Institutions
Section 8 of the Clayton Act has two parts. The first part, which
applies only to banks, prohibits (with exceptions) interlocking rela­
tionships between member banks of the Federal Reserve System and
other banks in the same or a nearby community. But interlocking
relationships among nonmember banks, savings and loan associations,
and other financial institutions are not covered by the law. Mutual'
savings banks are explicitly exempted, as are relationships involving
a member bank if the banks are not located in the same or a “contig­
uous55 or “ adjacent55 city, town, or village. The Committee sees no
reason why these limitations on interlocking relationships should
apply only to member banks.
Although the second part of section 8 deals with corporations in
general, it contains a reference to banks and is therefore pertinent
to the work of the Committee. That part of the section prohibits
interlocking directorates between two or more competing corporations
engaged in commerce (if one has a capitalization above $1 million).
There is an exemption, however, for “banks, banking associations,
[and] trust companies.55 This exemption was presumably inserted
in order to omit from coverage of the second part of section 8 those
relationships’ among banks already covered by the first part. It
might be interpreted, however, as exempting an interlocking direc­
torate between a bank and a competing financial institution even
though the latter type of interlocking relationship is not covered by
the first part of section 8. The Committee believes that the Clayton
Act needs clarification in this respect.
Conclusion 21.— The Committee believes that the provisions of section 8 of the Clayton Act which govern interlocking relationships
involving financial institutions should be clarified and probably
strengthened.




Chapter V III

CONFLICTS OF INTEREST
The Commission on Money and Credit recommended that, in view
of the rapid postwar growth of financial institutions, existing legis­
lation, regulations, and examination procedures be reviewed “to en­
sure against any unwarranted personal benefits accruing to individuals
responsible for handling institutional funds, which might be asso­
ciated with or derived from the use or investment of the funds.”
This is a matter on which the Committee was not in a position to
make an intensive examination. The Commission’s recommendation
refers not to violations of existing law but to inadequacies in law and
regulation, including the extent of their applicability, which might
permit unwarranted personal benefits by reason of association with
financial institutions. For example, officers, directors, or employees
of financial institutions may have other business interests (such as
insurance or real estate) to which direct benefits accrue as a result
of their association with the financial institutions.
Legislative restraints are more stringent for some types of financial
institutions than for others. The Federal statutes contain a number
of limitations on transactions between member banks and their offi­
cers and directors and also between member banks and affiliated orga­
nizations. Also, certain criminal •statutes relating to conflicts of
interest are applicable to directors, officers, and employees of insured
banks. But the Federal statutes pertaining to savings and loan asso­
ciations do not include all the safeguards contained in the Federal
banking laws.
<*
Conclusion 22.— The Committee believes that the safeguarding pro­
visions now applicable to either member or insured banks should be
broadened so as to apply to all commercial banks, savings and loan
associations, mutual savings banks, and credit unions subject to Fed­
eral supervision. They should also be made m o re effective— for ex­
ample, by strengthening the definition of affiliated organizations and
by extending the class of transactions that are limited or prohibited.
A t the same time, these provisions might be made more equitable (for
example, by increasing the present ceiling of $2,500 on the amount an
executive officer of a bank may borrow from his bank and by permitc
ting public bank examiners to obtain mortgage loans from an insured
bank on real estate that they occupy as residence).
More generally, consideration should be given to authorizing super­
visory agencies to issue regulations, as they deem it necessary, to pre­
vent unwarranted benefits to individuals from their association with
financial institutions.




(54)

Chapter IX
SUPERVISION AND EXAMINATION OF FINANCIAL
INSTITUTIONS
This chapter is concerned with the organization within the Federal
Government of supervisory activities over private financial institu­
tions. These activities are presently performed by three Federal agen­
cies in the case of commercial banks and by one agency each in the case
of mutual savings banks, savings and loan associations, and credit
, unions. It should be noted ,at the outset that in its deliberations the
Committee assumed continuation of the so-called dual system of bank­
ing, and finance, with its division of supervisory and chartering re, sponsibilities between the Federal and State governments.
The Federal supervisory agencies and their major present functions
are as follows:
The Office of the Comptroller of the,Currency, in the Treasury
Department,, charters, supervises, and examines the 4,500 national
banks and approves new branches and mergers in which the resulting
institution will be a national bank:.
The Federal Deposit Insurance Corporation provides insurance to
national,and State-chartered banks that are,members of the Federal
Eeserve System, and admits to insurance State .nonmember commer. cial and mutual savings banks that apply and qualify .for .insurance.
The Corporation regularly. examines the 7,000 insured nonmember
commercial banks and the 331, insured mutual savings banks. New
, branches of insured nonmember banks and mergers, where the result­
ing bank is an insured nonmember, require the approval of the Corpo­
ration.
The Board of Governors of the Federal Eeserve System, in addi­
tion to its central banking functions, admits State-chartered, banks tto
membership in the Federal Eeserve System and examines State mem­
ber banks. Branches and mergers, where the resulting institution will
be a State member bank, and the acquisition of any bank by a holding
company require the approval of the Board. (Membership in the
System includes the 4,500 national banks and 1,570 State banks.)
The Federal Home'Loan Bank Board charters, supervises and ex­
amines Federal savings and,loan associations; provides insurance,
, through the Federal Savings and Loan Insurance Corporation, and




(55)

56
examines State-chartered insured and member associations; also it
provides advances to member associations through the Federal home
loan banks. Branches and mergers involving Federal associations re­
quire the approval of the Board. (Membership in the System consists
of 1,900 Federal associations, 2,900 State-chartered associations of
which 2,300 are insured by the FSLIC, and 20 mutual savings banks.)
The Bureau of Federal Credit Unions, in the Department of Health,
Education, and Welfare, charters, supervises, and examines the 10,000
Federal credit unions.
Recommendations of Commission on Money and Credit.— The Com­
mission recommended “increased coordination of examining and su­
pervisory authorities. A t the Federal level there should be only one
examining authority for commercial banks. The Comptroller of
the Currency and his functions and the F D IC should be transferred
to the Federal Reserve Sj^stem.” The Commission also recommended
“that there be a unified authority at the Federal level for the exami­
nation of all federally insured savings and loan associations and mu­
tual savings banks. The activities and standards of these two Federal
authorities should be coordinated with each other and with the respec­
tive State examining and. supervisory authorities.”
Four members of the Commission appended footnotes endorsing
consolidation but questioning whether the responsibility should l>e
shifted to the Federal Reserve. Another member favored consolidat­
ing bank supervision in the FDIC.
Other proposals.— In recent speeches, Gov. *T. L. Robertson of the
Federal Reserve Board has proposed that a new Federal banking
commission be established to take over all the bank supervisory func­
tions of the three agencies. The Federal Reserve would confine itself
to monetary policy and the functions of the other two bank supervisory
agencies would be transferred to the new commission. This new
agency would have two major divisions, one to deal with insurance and
the other to deal with examination, changes in bank structure, and
related matters.
Chairman Cocke of the FD IC has suggested in a recent speech that
the Federal Reserve should be relieved of responsibility for bank
supervision and that the FD IC , as insurer, should examine all insured
banks, alternating examinations with the Comptroller of the Currency
in the case of national banks and with State authorities in the case
of State banks. The FD IC would investigate, concurrently with the
Comptroller or the State chartering authority, proposals for changes
in bank structure.
The Advisory Committee on Banking to the Comptroller of the
Currency recommended recently that the Federal Reserve be divested




57
of all nonmonetary functions and that all supervisory, examination,
and regulatory authority relating to national banks be transferred to
the Comptroller of the Currency. All Federal supervisory, examina­
tion, and regulatory authority over State-chartered banks would be
transferred to the FD IC, but authority to approve branches of State
banks would be relinquished to the State supervisory authorities.
The FD IC would be reorganized under a single administrator and
transferred to the Treasury Department.
Committee's approach to supervision problems.— The Committee
first examined the working of the present tripartite organization of
Federal bank supervision. Finding that differences in approach and
deficiencies in coordination are possible under the existing arrange­
ment, the Committee went on to examine the advantages and disad­
vantages of a more unified approach to Federal bank supervision.

The Present System of Federal Bank Supervision
The existing organization of bank supervision at the Federal level
is the result of historical evolution. The National Bank Act (1863)
established the Office of the Comptroller of the Currency as supervisor
of national banks. From 1863 to 1913, there was a clear and complete
division of authority,, without overlap, between Federal supervision
of national banks and State supervision of all other banks.
With the creation of the Federal Reserve System in 1913, national
banks became subject to supervision by the Federal Reserve as well as
by the Comptroller, and State banks that chose to join the System
became subject to some measure of Federal supervision. Finally,
with the introduction of deposit insurance in 1933, nonmember State
banks came under Federal supervision (by the FD IC ) if they chose
to be insured, while both National and State member banks, for which
insurance is mandatory, acquired a relationship with a third Federal
. supervisory agency. A t the same time, State-chartered banks,
whether members or nonmembers of the Federal Reserve System, and
whether insured or not, continued to be supervised by State authori­
ties. It has turned out, therefore, that the only group of commercial
banks not subject to some measure of multiple supervision are the
300 uninsured banks, out of a total of about 13,400 commercial banks.
The system of overlapping supervision of commercial banks has
been made workable by a division of jurisdiction and by procedures
for coordination. Primary responsibility for Federal supervision
and examination has been apportioned by law as follows: national
banks by the Comptroller of the Currency; State member banks by
the Federal Reserve; and insured nonmember banks by the Federal
Deposit Insurance Corporation. Yet each agency continues to have




58
functions affecting banks primarily under the jurisdiction of one or
both of the other agencies.
The three agencies perform some similar functions. Each examines
and each approves branches and mergers. Over the years, various
techniques, formal and informal, have been developed to facilitate
coordination. Each agency has access (in some cases by statute) to
the relevant examination reports of the others, and such reports have
been standardized to a large extent. Under the Bank Merger Act of
1960, each agency plus the Justice Department is required to render
to the agency with primary responsibility an advisory opinion on the
effect of each proposed merger on competition among banks. Over
many years, although not currently, all three agencies had exchanged
full information and views on charter and branch applications and
had jointly operated a school for bank examiners.

Advantages of Present System
The existing organization of bank supervisory functions at the
Federal level is defended on the grounds that (1) it prevents abuses
that might result from concentration of authority in a single Federal
agency; (2) it reflects differences in function, which call for separa­
tion of authority; and (3) coordination among the three agencies can
prevent inconsistent policies and duplication.
1. It is frequently argued that division of responsibility for bank
supervision among three agencies has the advantage of diffusing power
and therefore lessening the possibility of arbitrary action by govern­
ment officials. A related argument is that the existence of more than
one supervisory agency provides financial institutions an opportunity
for relief from arbitrary or unduly stringent regulation.
A counter-argument is that this is not an appropriate way to pro­
vide for relief from arbitrary or unduly stringent regulation, where
and when it exists. It is the rule rather than the exception for super­
visory and regulatory functions to be concentrated in one agency.
For example, there is a single Federal supervisory authority over
insured savings and loan associations, railroads, communications com­
panies, etc. Furthermore, if the principle implied by the above argu­
ment were generally followed, it would require multiplication of
supervisory agencies with similar functions in other areas.
2. A major consideration advanced in favor of multiple supervision
is that since the functions of the agencies are distinct, they can be
more effectively conducted on a separate basis. In a dual banking
system, the nature of Federal supervision over State banks is quite
different from that over national banks and calls for separate treat­
ment. For example, it is argued that unless there is complete separa­




59
tion between the chartering and insurance authority, a danger exists
that the Federal insuring authority will favor federally chartered
over State-chartered institutions.
In opposition to this viewpoint, it is argued that under the present.
arrangement no agency has authority commensurate with its respon­
sibilities. For example, the F D IC has no discretion whether or not
to provide insurance to National and State member banks; its author­
ity extends only to insure nonmember banks. It is also observed that
both the Federal Eeserve and the Federal Home Loan Bank Systems
supervise Federal and State-chartered institutions, and there is no
reason to believe that they show favoritism.
3.
The third major defense of the present arrangement is that
machinery for coordination eliminates duplication and the danger
of differences in policy approach. As noted earlier, various pro­
cedures, both statutory and informal, have been developed over the
years to encourage coordination and these procedures have ordinarily
accomplished their major purposes.
A counter-argument is that, since much of this coordination is
voluntary, it cannot always be counted on to be successful. Moreover,
it may involve an undue expenditure of time and effort by executives
and staff of the three agencies.

Disadvantages of Present System
Some of the problems in the existing arrangement are noted in the
previous section. The other major disadvantages attributed to the
present tripartite system are that (1) it makes possible differences
in supervisory policy and practice between one group of banks and
another; (2) it makes possible a degree of rivalry among supervisory
agencies; and (3) it is illogical and inefficient.
1.
The Committee’s discussion brought out the possibility of differ­
ences in policy approach. The major policy questions currently facing
the three agencies are in the field of bank mergers. The Bank Merger
Act of 1960 specifies seven factors to be considered by the responsible
agencies when they judge applications; six of these are so-called bank­
ing factors and the seventh is the effect on competition. The Merger
Act requires advisory, opinions from the other two banking agencies
and the Department of Justice only on the effect of the proposed
merger on competition, while the agency with primary responsibility
must weigh not only this but all the factors specified by Congress.
But the act does not and cannot provide specific guidance, and differ­
ences in approach are possible. Although the Committee is aware
that a pattern of decisions under the 1960 legislation may be in process
of evolution, it is conceivable that mergers would be more freely per-




60
mitted among banks under one jurisdiction than under another, with
unfortunate and irreversible results.
2.
A second disadvantage of the existing organization is that there
is a possibility of rivalry among the agencies, involving competition
to attract banks that are under the jurisdiction of one of the other
agencies. Such rivalry could, in turn, lead to a competitive lowering
of regulatory standards.
8.
Finally, it may be argued that even if a division of authority
were desirable, the present demarcation cannot be defended on any
logical basis. In particular, division in Federal examining authority
over insured State-chartered banks between the Federal Reserve and
the FD IC seems hard to defend.

Committee Analysis
The Committee recognizes that the present arrangement makes
possible lack of uniformity in Federal bank supervision. It is clear
that the degree of uniformity has varied from time to time depending
on the views and temperaments of the responsible officials.
A t the very least, procedures for coordination should be strength­
ened. One way to accomplish this would be to replace the informal
methods of coordination with statutory requirements. In the area
of charters, branches, mergers, and holding companies, the Com­
mittee is making specific recommendations (in Chapter V II) for
greater opportunity for interchange of advisory opinions among the
three agencies. Although the procedures recommended in Chapter V II
are designed to encourage more consistent policies with regard to
bank structure changes, those procedures would increase the duplica­
tion of effort that now exists. Furthermore, although the rendering
of advisory opinions may encourage, it does not assure, uniformity
of policies.
As another step, the Committee considered the pros and cons of re­
ducing to two the number of bank supervisory agencies, by removing
the Federal Reserve from the field of bank supervision. As noted,
Governor Robertson of the Federal Reserve included the latter sug­
gestion in his proposal for a single agency, and both Chairman Cocke
of the FD IC and the Advisory Committee to the Comptroller of the
Currency have put forward proposals for a two-agency system of Fed­
eral bank supervision. Chairman Cocke proposed that the FD IC take
responsibility for Federal supervision of all insured State banks and
that it share with the Comptroller examination and some supervisory
functions over national banks. The Advisory Committee to the Comp­
troller recommended a complete separation of these functions, with the
FD IC having sole responsibility for Federal supervision of insured




61

State banks and the Comptroller having sole responsibility over na­
tional banks, but with both under the general supervision of the Secre­
tary of the Treasury.
These proposals would clearly eliminate some of the disadvantages
of the existing arrangement. Both would end the division of respon­
sibility for Federal supervision of insured State-chartered banks, and
the Advisory Committee proposal would also accord full responsibility
for the supervision of national banks to a single agency. General
supervision of both agencies by the Secretary of the Treasury, as rec­
ommended by the Advisory Committee to the Comptroller, would re­
duce the scope for divergence in policy approach. Neither proposal
for two agencies would, however, automatically eliminate the possi­
bility of differences in treatment for particular groups of banks.
The two-agency proposal would have the additional advantage of
permitting the members of the Federal Reserve Board to concentrate'
their time and energies on their principal responsibility— the formu­
lation and implementation of monetary policy. There may be dis­
advantages, however, in removing the Federal Reserve from the field
of bank supervision. Although its main task is monetary policy, the
central bank is also vitally concerned with the soundness, flexibility,
and competitive structure of the commercial banking system. These
characteristics of the banking system can significantly affect the trans­
mission of monetary policy actions to the economy at large. Fur­
thermore, the intimate knowledge of banking conditions that comes
from examination and supervision is very helpful, if not essential, to
the effective conduct of monetary policy.
The Committee also gave consideration to unifying Federal bank
supervision in a single agency. Such a proposal would cope with most
of the disadvantages in the present system. It would facilitate execu­
tion of consistent and uniform policy with respect to banking structure
changes. It would end the possibility of rivalry among Federalagencies and eliminate the time and effort now devoted to the machinery
for coordination. Such an agency would represent the focal point of
Federal responsibility for bank supervision in the eyes of the Presi­
dent; the Congress, and the general public, as well as the banks subject
to supervision.
Locus of responsibility.— Even those who favor such consolidation
find it is easier to state the advantages of a single supervisory authority
than to determine the most desirable locus for that authority.
The FD IC has a broad base among commercial banks. It now in­
sures over 97 percent of all commercial banks and has cooperative
arrangements with the State bank supervisory authorities. It would
therefore be a logical repository for all Federal supervisory functions.




62
However, an agency with an insurance function might be so concerned
with protecting the insurance fund that overly strict supervision of
banks would hamper innovation and growth. In addition, the FDIC ,
is publicly identified with State nonmember banks and its selection as
the single supervisory agency might be taken— regardless of merits—
as a threat to the national banking system.
Another possibility would be to accept the recommendation of the
Commission on Money and Credit that all . Federal supervisory re­
sponsibilities over commercial banks be transferred to the Federal
Eeserve. The Federal Eeserve is not historically identified with either
national or State banks and has broader responsibilities than bank su­
pervision. Moreover, as noted earlier, the central bank has a strong
interest in the structure of the banking system.
The major disadvantage is that even the present supervisory tasks
of the Board interfere with its main responsibility. How much that
interference would increase compared with the present arrangement is
not clear. But, as noted earlier, a case can be made for relieving the
Board of bank supervision and lessening that interference. An al­
ternative would be to center the supervisory task at the Federal Ee­
serve but to change its organization, by statute, to provide for the
delegation of responsibility for bank supervision to individual Board
members or to senior staff. (Indeed, this might be desirable even if
the Board retains only its present responsibilities.)
Finally, there is the possibility of. creating a new agency to incor­
porate the supervisory functions now vested in the Comptroller, the
Federal Eeserve, and the F D IC (which could be transferred as a cor­
porate entity to the new agency). TKe major consideration against
creation of a new agency devoted only to bank supervision is the dan­
ger that it might come to be identified with, or even dominated by, the
industry it supervises. Some have contended that unification of
Federal bank supervisory functions might be interpreted as a threat
to the dual banking system. But experience with a single Federal su­
pervisory agency in the case of savings and loan associations does not
support this contention.
,,
,v
;
On the favorable side, such an agency would have the advantage of
starting with a clean slate, without traditional identification with a
particular segment of the commercial, banking system. A new agency
could be made a part of the Treasury Department, where it would
have the advantage of access to the Cabinet through the Secretary, or
it could be given independent status, which might enhance its ability
to attract officials of the highest calibre.
Conclusion 83.— The Committee concludes that practices of bank
supervisory and examining agencies in the Federal Government have




63
not always been fully satisfactory in achieving needed cooperation and
c
o
o
r
d
i n
a
t
i o
n
>'>
t'Existing agencies should strive'to achieve greater cooperation and
coordination under common standards, regulation and procedures,
than has been achieved in the past. Reviews should be made, how­
ever, at the discretion of the President, to determine whether this'ap­
proach is proving successful in anticipating and resolving major
common problems. I f the reviews indicate that important public
purposes in this area still are not being achieved, consideration should
then be given to more basic approaches, such as consolidation of bank
supervision in the hands of two agencies, or a single agency or com­
mission

Federal Supervision of Other Financial Institutions
In the case of savings and loan associations, Federal supervision
is organized in a single agency. Examination, regulation, and insur­
ance are all concentrated in the Federal Home Loan Bank Board,
which manages the Federal Savings and Loan Insurance Corporation.
The Committee does not recommend that this arrangement be altered
in any fundamental way.
It has been proposed that, should Federal charters be made avail­
able to mutual savings banks, the Federal Home Loan Bank Board
be designated as the supervisory authority. This would also involve
insurance. The result would be that the Federal Home Loan Bank
Board would be supervising two types of institution; furthermore,
the question would then arise whether State-chartered but federally
insured mutual savings banks should remain under the jurisdiction of
the Federal Deposit Insurance Corporation. The Committee has no
solution to these organizational problems but regards them as relevant
if and when consideration is given to the proposal for Federal charters.
The Committee has no comment regarding supervision of Federal
credit unions.
On the question of coordination between agencies supervising com­
mercial banks, on the one hand, and other financial institutions, on
the other, as recommended by the Commission on Money and Credit,
there is no reason why such coordination cannot be worked out on an
informal basis, as needed. Such coordination would become especially
relevant if the Committee’s recommendations on cash reserve require­
ments at mutual savings banks and savings and loan associations
and on standby regulation of interest and dividend rates are
implemented.
1 Four members believe that not only the practices but the organization of bank super­
vision is not fully satisfactory.




64
Conclusion 21^.— The Committee concludes, in the interest of im­
proved coordination and implementation of Federal laws, regulations
and policies affecting all federally supervised financial institutions
(including savings and loan associations and credit unions), that the
Federal charterijig, supervisory and insuring agencies should meet at
regular times,
less than quarterly, to discuss and resolve matters of
current or mutual interest.




A P P E N D IX
The W

h it e

H

ouse,

W ashington, March 28, 1962.
Memorandum t o :
The Chairman o f the Council o f E conom ic Advisers.
The Secretary o f the Treasury.
The Attorney General.
The Secretary o f Agriculture.
The D irector o f the Bureau o f the B u d g et
The Chairman o f the B oard o f Governors o f the Federal Eeserve System.
The Chairman o f the Home Loan Bank Board.
The Adm inistrator o f the Housing and Home Finance Agency.
The Com ptroller o f the Currency.
The Chairman o f the Federal D eposit Insurance Corporation.
Su bject: The Establishment o f a Committee on Financial Institutions.
Pursuant to my Economic R eport to the Congress, I am requesting the persons
to whom this memorandum is addressed to form a Committee on Financial In­
stitutions to review legislation and administrative practice relating to the opera­
tions o f financial intermediaries. I am asking the Chairman o f the Council
o f Econom ic Advisers to serve as Chairman o f this Committee. The Committee
should seek the views and advice o f appropriate Government agencies and may
also consult with interested private parties and independent experts.
The recommendations o f the Commission on Money and Credit on this subject
provide a point o f departure fo r the Committee, but its deliberations need not
be lim ited to the issues raised by the Commission. The Nation’s monetary,
credit, and financial system makes im portant contributions to the functioning
o f our free enterprise economy and to the effectiveness o f Government policies
under the Employment A ct o f 1046. The general task o f the Committee is to
consider w hat changes, if any, in Government policy tow ard private financial
institutions could contribute to econom ic stability, growth, and efficiency. Recom ­
mendations fo r changes should provide fo r equitable treatment o f the various
types o f financial institutions and fo r transitional arrangements that may be
necessary to minimize any temporary disruptive effects.
Among the topics fo r consideration by the Committee should be the fo llo w in g :
(a ) The scope o f controls over commercial banks and other financial in­
termediaries exercised by the Federal Reserve System and other gov­
ernmental and quasi-governmental agen cies: fo r example, membership
in the Federal Reserve System and in the Federal Home Loan Bank
System, reserve requirements, regulation o f interest rates on deposits
and other liabilities and on Government-guaranteed mortgages.
(&) The possibility and desirability o f broadening the permissible portfolio
choices o f various kinds o f financial institutions.
( c ) The scope o f Federal deposit and share insurance program s: criteria
fo r voluntary and compulsory participation.




(65)

66
( d ) Federal chartering o f financial institutions: life insurance companies,
mutual savings banks.
( e ) Federal legislation w ith respect to branching o f banks and other finan­
cial intermediaries.
( / ) Coordination and possible consolidation o f Federal responsibilities fo r
supervision, examination, and chartering o f financial intermediaries
and fo r regulation o f merging and branching.
(g ) Adequacy o f legislation and regulations to insure against unwarranted
benefits to individuals handling funds fo r financial institutions.
In order to be o f use in draw ing up the Adm inistration’s legislative program
fo r the 1963 session o f the Congress, the Committee’s report and recommenda­
tions should be submitted to me by November 30,‘ 1962.
I
am enclosing fo r your inform ation copies o f the memoranda establishing
separate committees on Corporate Pension Funds and Other Private Retirement
and W elfare Program s and Federal Credit Programs.




(S)

II.S

Jo h n F . K

ennedy.

C O VfR N M FN I PR IN TIN 6 O F F IC K iliC S