Full text of Annual Report of the Federal Reserve Bank of Richmond : Annual Report, 1965

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FEDERAL RESERVE BANK OF RICHMOND
A N N U A L RE P OR T
1 9 65










TO OUR M EM BER BAN KS:
It is a pleasure to present the 1965 Annual Report of the Federal
Reserve Bank of Richmond. Featured is a study of the regulation and
supervision of commercial banking in the United States. Also included in
the Report are comparative financial statements, a brief summary of our
operations, and a: current list of officers and directors of our Richmond,
Baltimore, and Charlotte offices.

On behalf of our directors and staff, ive wish to thank you for the
splendid cooperation and support you have extended to us throughout the
past year.
Sincerely yours,

Ar




Chairman of the Board.

President.

BA N K I N G

The Regulation and

Commercial banking is a highly regu­
lated, closely supervised operation. This
is true in all countries but especially in
the United States.

From conception to

liquidation, from cradle to grave, com­
mercial banks live and operate under
special and complex codes of law, in­
terpreted

and

applied

by

regulatory

agencies. The codes provide for control
of entry since they prescribe how and
under what conditions a bank may be
organized and begin business.

During

the bank’s active life, laws and regula­
tions specify the kinds of business in
which it may engage, limit the kinds
and amounts of many of its assets and
liabilities, and provide guidelines for
many of its operating policies.

If and

when it goes out of business, the law
prescribes how it shall be liquidated and
how the proceeds shall be distributed.
In the United States the subject of
banking regulation and supervision is
diverse, complex, and often detailed and
technical.

4




In many respects its limits

Supervision o f Commercial Hanking in the United States

are vague and poorly defined.

It is

existing structure of laws and regula­

types and forms of activity, some of

marked by considerable overlapping and

tions with little adaptation or integra­

which raise questions

some duplication on the part of state

tion.

and Federal agencies and occasionally

periodic study, review, and revision of

how.

by conflict of authority.

the whole system.

As a result, the su­

the numerous areas of overlap and pos­

this situation is caused by three condi­

pervisory system has not had a smooth

sible conflict already existing among the

tions:

a very large number of

or logical development in keeping with

regulatory agencies.

banks, amounting to nearly 14,000 at

the needs of the economy but rather has

between different regulatory systems and

present;

moved ahead by fits and starts as dic­

agencies and between underlying phi­

tated by acute necessity.

losophies and policies of the agencies

(a)
(b)

In large part

a dual banking system,

state and Federal; and (c)

53 major

There has been no policy of

regulatory agencies, one in each of the

Popular interest in the subject lias

states and three at the Federal level. In

fluctuated widely, usually reaching a

addition, the Department of Justice in­

climax in periods of banking crisis or

tervenes from time to time with antitrust

panic.

actions.

Recently, however, there has

as to whether

banks can participate in them and, if so,
These extensions have increased

Points of friction

have stimulated much of the current dis­
cussion of bank supervision.
The discussion in this report is con­
fined to the impact of governmental con­

been a general revival of interest in the

trol, regulation, and supervision on the

The control and supervision of com ­

topic at a time when the banking system

structure and operations of the com­

mercial banking has had a turbulent and

is strong and prosperous and when no

mercial banking system.

controversial

United

threat of crisis is apparent on the hori­

deal with the effects of central bank

States. In this area attitudes are deeply

zon. This has probably been due to the

monetary policy on commercial bank

rooted and so sensitive that usually basic

ever-widening scope of commercial bank

policies or operations.

history

in

the

It does not

Both state and

revisions and improvements have been

activities and the corresponding spread

Federal activities are considered, but

attempted only under pressure of major

in supervisory rules and regulations.

the principal emphasis is on Federal

emergencies.

Banks are competing more keenly with

activities.

each other and with nonbank financial

permit any comprehensive study of the

institutions.

fifty state regulatory systems.

Changes made at such

times were designed
rent defects

to correct cur­

and were added to the




This takes them into new

Available resources do not

5




onstitutional Aspects
A brief consideration of the legal and
constitutional bases of governmental con­
trol of banking may be helpful in under­
standing the problem. This aspect is
especially significant because of our
country’s dual banking system, under
which banks may be chartered and
regulated by either slate or Federal
authorities.

under which the charter for each bank
was issued as a special act of the legis­
lature. The powers and limitations often
varied from one charter to another and
the obligations imposed by the charters
constituted the principal element of
bank supervision since there were few
a d m in is tr a tiv e agencies to enforce
compliance.

STATE POWERS

FEDERAL POWERS

States have very wide powers in the
banking field.
The courts have con­
sistently held that banks are businesses
“ affected with a public interest” and as
such have some of the characteristics of
public utilities. They are subject to
regulation by the states in the public in­
terest under the police power, which is
one of the broadest of governmental
powers. One authority has stated: “ The
police power of a state extends to pro­
hibiting the banking business except
under such conditions and regulations
as the state may prescribe.” The courts
have held that state legislatures may im­
pose any regulation, control, or limita­
tion which is reasonable in view of the
circumstances and that the legislatures
are the best judges of what is reasonable.
Very few acts of banking legislation
have ever been held invalid for lack of
constitutional power.
States may exercise their regulatory
powers by providing that only corpora­
tions may conduct a banking business,
and then controlling the granting of
charters. In most cases banking cor­
porations are chartered under a special
code which imposes the obligation to
abide by state regulations. For about
the first fifty years of our national life
there was “ special charter” banking

The Federal Government also has the
power to charter and regulate com ­
mercial banks. This power is entirely
separate from and independent of the
state chartering power. It is full and
complete, not subject to limitation by
the states. The banks created under
that power are instrumentalities of the
Federal Government and are protected
from interference and discrimination by
the states.
In theory, the Federal Government is
one of designated or specified powers.
This means that it can exercise only
those powers conferred by the Constitu­
tion or which may reasonably be in­
ferred therefrom.
But Congress does
have the power “ . . . To make all laws
which shall be necessary and proper for
carrying into execution the foregoing
powers. . . .” The Constitution makes no
mention of chartering or regulating
banks, but it does give Congress power
“ . . . To coin money, [and] regulate the
value thereof . . .” and to regulate inter­
state commerce. But on three different
occasions when the Supreme Court con­
sidered the actions of Congress in es­
tablishing the First and Second Banks of
the United States and the National Bank­
ing System it upheld the legislation
under the “ implied powers” to “ . . . make

all laws . . . necessary and proper . .
rather than under the monetary or com ­
merce powers. The implied powers are
broad and indefinite and, in effect, are
determined by court interpretation. In
passing on Federal banking legislation,
the courts have allowed the legislation
wide leeway and have rarely held legis­
lative provisions unconstitutional.
The constitutional positions of the
states and the Federal Government in
this country means that in each of the
fifty states there are two separate and
independent governments with prac­
tically complete power to charter and
regulate banks operating in the same
geographical area. In such a situation
the possibilities of conflict and friction
are numerous. One danger in particular
has loomed large in American thinking.
Generally speaking, and barring inter­
state agreements, a state-chartered bank
is limited to the boundaries of its own
state.
But the Federal Government
could give national banks the power to
operate nationwide systems of branches.
Such a development would probably
alter drastically the balance between

laws and regulations governing con­
tracts, negotiable instruments, legal holi­
days, and the like. In late 1932 and
early 1933, the power of state governors
to proclaim special banking holidays and
to impose restrictions on the withdrawal
of bank deposits played a vital role in
quickening the spread of state holidays
and making the nationwide closing of
banks inevitable. Currently, the appli­
cations of one type of state law to na­
tional banks is uncertain and is the sub­
ject of considerable interest and concern.
A New York law prohibits commercial
banks from issuing short-term negotiable
promissory notes. Are national banks
subject to that law? It would appear
that Congress could give national banks
permission to issue such notes irrespec­
tive of state law. But for the present
Federal law is silent on the matter and

As a result of the dual banking sys­

posit Insurance Corporation (FDIC) or
the Federal Reserve System. Such free­
dom of choice is rare indeed.
Transfers from one banking jurisdic­
tion to another are not uncommon; in
the past few years a considerable num­
ber of banks, including several large
ones, have switched from state to na­
tional charters. At other times the move­
ment has been in the opposite direction.
When such a movement gains mo­
mentum there is a revival of suggestions
that either the state or national banking
system must become more “ competitive”
in order to prevent a collapse of the dual
banking system.
Another important characteristic of
bank regulation is the wide discretion
given to a d m in is tr a tiv e regulatory
agencies. In the granting of charters,
authorizing the e s ta b lis h m e n t of
branches, prescribing rules for bank
operation, conducting examinations, and,
finally, in the closing of banks, super­
visory authorities have wide powers,
usually limited or guided only by broad
and general provisions in the law.
Further, the methods and procedures

state and national banking systems. To

tem, the banking business in this country

through which these powers are ex­

preclude such an occurrence the Federal

has the privilege of choosing its own

ercised are usually prescribed by the

Government subordinated its power to

supervisory authority.

that of the states by providing that na­

organization wishes to conduct a bank­

tional

the position of national banks remains
unclear.
CHARACTERISTICS
OF REGULATION

If

a business

administrators themselves.

Finally, as

one study has noted, with respect to the

be

ing business, it may choose to obtain a

Comptroller,

governed by the branching powers of

state charter and subject itself to ex­

companied

state banks in that state. Similar action

clusive state control.

of judicial finality.

has been taken in giving states power to

carry on the same business under a Fed­

fraud, caprice, or ultra vires, the de­

regulate interstate commerce in insur­

eral charter and Federal control.

cisions of the comptroller are usually re­

banks

in

any

state

shall

Or it may elect to
Fur­

these
by

a

actions

are

remarkable

“ ac­

degree

In the absence of

ance and alcoholic beverages but it is

ther, having chosen one authority it may

garded by the courts as binding and

extremely rare.

reverse that choice and select the other.

conclusive.”

Finally, if it is a state bank it may place

that this was written before the Depart­

to state authority in several respects.

itself

ment of Justice became active in en­

They must carry on business under state

jurisdiction by joining the Federal De­

National banks, of course, are subject




under

concurrent

Federal-state

Perhaps it should be noted

forcing antitrust laws against banks.
7




Bank Regulation and Supervision
As is true of most of our major legal
and economic institutions, our system of
bank regulation does not rest upon any
neat, coherent, and consistent philosophy
or theory. This is true because it has
not been built up continuously and
systematically according to recognized
guidelines. Nevertheless, it is possible
to mention a few general considerations
which have motivated most of the
policies and actions in this field.

NECESSITY FOR REGULATION
In the earliest phases of bank regula­
tion the dominant purpose apparently
was to protect the individual depositor
or, more precisely, noteholder, since
notes constituted the principal liability
of banks in those days. It has long been
recognized that in dealing with financial
institutions such as banks and insurance
companies, most individuals are not able
to protect themselves adequately. There­
fore, it is regarded as proper and per­
haps necessary for governments to pre­
scribe minimum standards for such in­
stitutions in an effort to prevent losses.
In earlier days the country was pre­
dominantly agricultural; self-sufficiency
and barter were more prevalent than
they are today; money was correspond­
ingly less important; and there were
comparatively few banks. Under those
conditions, bank supervision in most
states was very rudimentary and in many
cases took the form primarily of writing
restrictions, limitations, and require­
ments into bank charters, with very
little machinery for insuring compliance.
As the economy developed it became
more dependent on commerce and in­
dustry which, in turn, were heavily de­

pendent on a reliable and smoothfunctioning banking system. Deposits
supplanted notes as the principal bank
liability and became a form of money
though perhaps not the most important
form. When one bank in a community
failed others were affected through both
financial and psychological channels.
Wide-spread bank failures in an area
could paralyze that area. So gradually
it became apparent that bank super­
vision was necessary not only to pro­
tect the individual from loss but also to
protect the business community from re­
curring paralysis.
In the most recent phase— perhaps the
past fifty or sixty years— both the
economic and banking systems have be­
come much more interdependent, and
the money economy has become almost
universal.
Improved communications
and transportation spread the effects of
bank disturbances further and faster.
Demand deposits have become not only
the largest but the dominant form of
money. So now governments must regu­
late banks, not only to protect indi­
viduals and the business community, but
also to safeguard the whole economy
and to insure the stability and integrity
of the monetary standard. Monetary
policy has a part to play in this, too, but
effective banking supervision is a neces­
sary accompaniment.
So over the years there has been a
widening and deepening of the scope of
bank regulation and supervision as re­
curring troubles have demonstrated the
need for it. This has accompanied the
ever-wider role played by money, and
especially bank-created money, in our
economy. Today the money flow con­
stitutes the bloodstream of the economy.

It is the responsibility of the central
bank to see that there is an adequate
supply of the vital fluid. Bank super­
vision has the task of preventing the
flow from becoming obstructed or pol­
luted along the circulatory system.
Along with and overlapping the above
motives for bank regulation has been
another— the fear of monopoly. From
the earliest days the American people
have shown a fear of monopoly gen­
erally and of financial monopoly in par­
ticular. This may be because it is more
difficult to understand financial opera­
tions and people are inclined to be sus­
picious of that which they do not under­
stand. Since banking includes some ele­
ments which look like black magic to the
average person, the fear of banking
monopoly has been strongest of all. This
deep-rooted fear has been a major cause
of the strong preference for unit bank­
ing which prevails in many parts of the
country.
Americans have placed much faith and
confidence in bank regulation, perhaps
for lack of a preferable alternative. It
should be noted, however, that at best
regulation and supervision cannot in
themselves produce a sound, efficient,
or dynamic banking system. They can­
not create good bankers or good banks.
They are essentially negative in char­
acter, although good supervision does
include considerable help and guidance
to responsive bankers. Mainly regula­
tion and supervision set boundaries to
bank activity and tell bankers what they
may not do. Within those limits it is
the responsibility of the bankers to de­
velop and maintain a sound, flexible,
and progressive banking system to serve
the needs of a growing economy.




DIAGRAM OF BANK SUPERVISORY RESPONSIBILITY
S upervisory A ge n c ie s

Institutions S u p e r v i s e d

NATIO NAL BANKS
COMPTROLLER
OF THE
CURRENCY

4,702 Banks
7,752 Branches

991
Examiners
STATE INSURED
NONMEMBER BANKS
7,215 Banks
2,936 Branches
FEDERAL DEPOSIT
INSURANCE
C ORPORATION

STATE MEMBER
BANKS

801
Examiners

1,478 Banks
3,280 Branches

STATE NO NINSURED
NONMEM BER BANKS
FEDERAL RESERVE
SYSTEM

274 Banks
48 Branches

502
Examiners

MUTUAL SA V IN G S BANKS
Insured
327 Banks
531 Branches
Noninsured
179 Banks
124 Branches

STATE B A N K IN G
AUTHORITY
N O N BA N K
FINANCIAL
INSTITUTIONS

1489
Examiners

_______

E x a m in a tio n A u th o rity Exercised

------------E x a m in a tio n A u th o rity U nexercised
N o te :
Source:

D a ta as o f m id -1 9 6 4
A m e ric a n Bankers A s s o c ia tio n ,
B oard o f G o v e rn o rs o f the
N a tio n a l A sso cia tio n o f S upervisors o f S tate Banks.

Federal

Reserve S ystem ;

and

9




atory ancl Supervisory Agencies
EARLY HISTORY
Until the Civil War period, the Fed­
eral Government played only a limited
role in bank regulation and supervision,
leaving the field primarily to the state
governments.

There was no national

banking code, and no body of Federal
laws pertaining to banking in general.
But in

two

periods— 1791-1811

and

1816-1836— the First and Second Banks
of the United States played a vital role
in the country’s banking system.

As

fiscal agent for the United States Treas­
ury, each regularly came into possession
of large amounts of state bank notes.
By presenting these notes to the issuing
banks for redemption, the large Federal
institutions could, and occasionally did,
exercise an effective restraint on the
note-issue activity, and hence on the
lending and investing, of state-chartered
banks.

Between 1846 and 1861 the In­

dependent Treasury System, operated by
the Federal Government, exercised much
the same type of influence on state
banks.

banks and the economic effects of bank­
ing operations, which differed consider­
ably from state to state. Moreover, in­
dividual states differed sharply in eco­
nomic and demographic characteristics
and the problem of providing effective
banking

facilities varied

accordingly.

Because of an acute shortage of metallic
money and an unsatisfactory system of
coinage, there was an urgent need for a
sound system of circulating bank notes.
After the demise of the Second Bank of
the United States, the various systems
of

state banks provided

bank

notes

which circulated, but often they were
lacking in soundness.
By 1820, state banking in New Eng­
land, the Middle Atlantic, and the South
Atlantic states was confined to institu­
tions operating under special corporate
charters issued on a limited basis by
state legislatures.

These charters im­

posed a variety of restrictions on such
things as capital, note-issue, types of
loans and investments, activities and
borrowing of directors, interest rates,
and exchange charges on domestic bills.

State gov­

In general, these restrictions were de­

ernments entered the area of bank regu­

signed to protect the public, and es­

lation soon after adoption of the Con­

pecially noteholders, from losses result­

stitution.

Generally,

ing from

regulatory

systems

erratically.

Early

State

R e g u l a t io n

individual state

grew

slowly

and

mismanagement or

abuses.

Several states required periodic reports,

The period was one of ex­

at first usually to legislative committees

perimentation and state banking laws

but later to state auditors or comptrol­

were

lers and, especially after 1830, to state

changed

frequently

to

correct

real or fancied deficiencies revealed by

banking co m m is s io n s .

experience.

after 1820, many also provided for o f­

Individual state regulatory systems

Increasingly

ficial visitation and examination.

were heavily influenced by popular no­

Because of an economic environment

tions respecting the proper functions of

unfavorable to banking and a shortage

tightened and, in many states, banking
departments were established to ad­
minister the new laws. This movement

they established and

system, first adopted by Michigan and
New York in the late 1830’s and copied
by many other states between 1849 and
1860.

operated banks directly; in others they

The free banking laws of this period

celerated by the nationwide banking

were part owners and appointed some of

prescribed broad general rules within

the directors.

In still others, govern­

which the banking business was open to

By the time of the Civil War many

ments pledged their credit to support

all comers. A central feature of the sys­

states had banking departments, with

bonds

tem dealt with the issue of circulating

regular visitations, examinations, and re­

notes, and provided that banks could

porting programs to supplement the col­

were

issue notes only on the basis of specified

lateral

under close legislative surveillance and

collateral deposited with a state official.

Some had even added a requirement of

generally made periodic reports to legis­

In the event of bank failure, the state

a specie reserve against note liabilities.

lative committees. Supervisory and reg­

authority was empowered to pay off the

While many states operated under free

ulatory practices differed in some im­

failed bank’s circulating notes from the

banking laws, entry into the field was

portant respects from those in the East.

proceeds of the sale of its collateral.

far from unlimited.

Unit banking was the rule in the East,

Thus, the principal aim of the free bank­

tions were imposed by the restricted

but most Southern and Western states

ing laws was to provide a competitive

availability of qualified collateral for

allowed statewide branching in order to

system of banking and protection for the

notes and, in some states, by specie re­

accommodate a widely dispersed popula­

holders of bank notes.

quirements.

of capital, some of the new states in the
South and Middle West took action to
encourage the establishment of banks.
In some cases,

issued to provide

banks.
These

state-sponsored

capital
banks

for

toward closer state surveillance was ac­
crisis of 1857.

requirements

for bank

Practical limita­

In addition, the surveil­

tion. Often regulatory authorities in the

The free banking principle spread

South and the West took a more liberal
view of what constituted appropriate

rapidly after 1849, especially in the
South and West. By the early 1850’s,

bank lending and investing, since banks

many states which had earlier prohibited

ENTRANCE OF THE

were popularly regarded in those areas

banking found this prohibition incon­

FEDERAL GOVERNMENT

as “ creators” of badly needed capital

venient and turned to free banking as a

and were expected to lend liberally.

solution.

lance

of

notes.

state regulatory

authorities

served to limit entry into the field.

The Federal Government entered the

Even in New England, where

field of bank regulation in a compre­

particular, state governments often in­

special-charter banking had proved more

hensive way and on a permanent basis

sisted that they invest heavily in state

satisfactory,

with

and local bonds issued to finance in­

adopted and in some of these states

ternal improvements.

special-charter

In

free

banking

and

“ free”

laws

were

b a n k in g

existed side by side.

the enactment of

Bank Act of 1863.

the National

The Office of the

Comptroller of the Currency, created at
that time, was the first major Federal

few states reacted

Yet many of the early free banking

agency established to regulate a form of

to the severe banking panics of the

laws were hastily and loosely drawn and

business activity. That office grew and

period 1837-1843 by prohibiting bank­

early experience under them was marked

expanded over the years under com­

ing entirely;

by many abuses.

petent management.

“ F ree B a n k in g ”

A

others turned toward a

In 1854, extensive

For many years a

system of more banks and increased

failures of the so-called “ free banks”

major part of its activities was super­

competition

occurred in the West and the South and

vision of the issue of national bank

group replaced systems of special-charter

as a result many state laws were re­

notes.

banks by the so-called “ Free Banking”

drawn.

1935.

in

banking.




The

latter

Collateral requirements were

That activity came to an end in

11

WORKLOAD PER EXAMINER IN THE VARIOUS SUPERVISORY AGENCIES
June, 1964
AGENCIES

B A N K ASSETS PER EXAM INER

B A N K OFFICES PER EXAM INER

A v e ra g e o f A ll S tate
Agencies

C o m p tro lle r o f the
C urre n cy

Federal Reserve System

Federal D e p o sit Insu ra nce
C o rp o ra tio n

0

5

10

0

Num ber
N ote:
Some June fig u re s e s tim a te d fro m y e a r-e n d d a ta .
Source:
N a tio n a l A s s o c ia tio n o f S u p erviso rs o f S ta te Banks;
Reserve System .

50

100

150

M illio n s o f D o lla rs
B o a rd o f G o v e rn o rs o f the Federal

After the imposition of a Federal tax
on state bank notes in 1865, the number
of state banks dropped sharply, almost
to the vanishing point, because banking
was not profitable without the power to
issue notes. Gradually, however, banks
found that they could do a profitable
business with deposit banking alone, and
state banks began to come back. By the
1890’s they outnumbered national banks.
Naturally, activity in the field of state
bank regulation was not great in the
1870’s but it revived and expanded near
the end of the century.
Now, after more than a century and
a half of development, bank regulation
and supervision have assumed wide pro­
portions in both state and Federal areas.
Today the major responsibilities of su­
pervisory authorities include: (1) grant­
ing charters; (2) approving the opening
and closing of branches and changes in
capitalization; (3) approving mergers
and holding company a c q u is it io n s ;
(4) interpreting banking laws and issu­
ing and interpreting regulations and in­
structions; (5) examining banks peri­
odically to verify compliance with laws
and regulations and to ascertain their fi­
nancial condition; (6) prescribing and
enforcing corrective action in cases re­
quiring it; (7) giving counsel and ad­
vice when requested; (8) receiving, re­
viewing, and analyzing periodic re­
ports; and (9) presiding over the liqui­
dation of insolvent banks.
The

execution

of

these

duties

is

divided among many agencies, and con­
sequently most banks are responsible to
more

than

one

authority.

National

banks, for example, are subject pri­
marily to the Comptroller but also to
the Federal Reserve

and the FDIC.

State banks come under the primary
jurisdiction of the chartering state but
may also be subject to one or more Fed­
eral authorities.

12




State member banks

are subject to the regulation of both
the Federal Reserve and the FDIC. In­
sured nonmember banks come within the
jurisdiction of the FDIC. Only in the
case of noninsured, nonmember banks is
the line of supervisory responsibility
clear-cut and simple. Encompassing all
types of banks is the authority of the
Department of Justice, which has re­
sponsibility for the maintenance of com­
petition under the antitrust laws.
PRESENT STRUCTURE— STATE
Bank supervisory agencies are sepa­
rate units of state governments in thirty
of the fifty states. Although they fall
within some larger subdivision of gov­
ernment in the other twenty, separate
status is widely regarded as very ap­
propriate because bank supervision is a
highly specialized responsibility. Sepa­
rate status helps attract capable adminis­
trators, which is essential if regulation
is to be effective. Also important is the
adequacy of funds for hiring and main­
taining an adequate and competent staff.

attention and efforts at the expense of
commercial bank supervision.
T h e S u p e r v is o r
Qualifications for the
position of state supervisor are some­
times spelled out in detail, but in nearly
half of the states the appointing au­
thorities exercise their own judgment
with little or no legislative restriction.
Supervisors’ salaries are scaled roughly
according to the amount of banking
resources in the various states and range
from around $9,000 to $20,000 or more.
Their terms of office vary from state to
state but generally fall between two and
six years. A check of the actual record
revealed that in 33 states one or more
changes in the position of supervisor
occurred during a recent five-year
period.

In 1954 only 17 of the State
Bank supervisors felt that their
budgets were adequate to assure ef­
ficient operation of their depart­
ments. By the time of our 1959
Survey, the number with adequate
budgets had grown to 24 . . . . But
in 1964 the number of supervisors
who believed that their department
budgets were adequate had dropped
back to 19.
The National Association of Super­
visors of State Banks is of the opinion
that “ weakness of many banking de­
partments appears linked to low salaries
and small staffs.”

also have the responsibility for supervis­

In 4 5 states examination
fees or assessments are the principal
source of funds. The money collected,
however, is directly available to the su­
pervisory agency in only 13 states. The
other 32 require legislative appropria­
tions which generally follow one of the
following three patterns: (1) examina­
tion fees are earmarked for the banking
department and are routinely appropri­
ated for the purpose; (2) examination
fees are mingled with other state funds
and have little bearing on the amounts
appropriated to support the banking de­
partment; and (3) budgeted needs of
the banking department are covered by
an appropriation and fees are set subse­
quently at levels calculated to reimburse
the general treasury. In the five states

E x a m in a t io n
State bank ex­
aminers are under civil service in 26
states. In nearly all of the other 24
states supervisors have the sole authority
to select and appoint examiners. In a
few cases appointments must be ap­
proved by the governor or by some other
state official. Minimum salaries of state
bank examiners range from about $5,000
to around $12,000, with most in the
$6,000-$7,000 range. Maximum salaries
range between $7,000 and $18,000, with
an average somewhat in excess of $9,000.
The number of examiners per state
varies greatly, even when related to the
work load. Available measures of work
load are only approximations because of
overlapping jurisdictions and cooper­
ative examining procedures. One meas­
ure is the number of bank offices per
examiner; this ranges from as few as
six to as many as 32. Another measure,

ing a variety of other financial institu­

which do not collect examination fees,

the value of bank assets per examiner,

tions such as mutual savings banks, in­

funds are provided entirely by the ap­

has recently ranged from a low of $34

dustrial banks, trust companies, savings

propriation of general revenues.

million to a high of over $280 million.

S cope o f S u p e r v is io n
State banking
departments supervise all state-chartered
banks in their respective states and that
supervision includes p r a c t ic a lly the
whole range of activities listed above.
In most states, however, a majority of
the time and effort of supervisors is de­
voted to granting charters, acting on
applications for branches and mergers,
and conducting examinations. In a ma­

jority of the states, banking departments

F in a n c in g

Ba n k

and loan associations, sales finance com­

Concerning the adequacy of funds

panies, small loan companies, and credit

provided for the support of state bank­

14 banking offices and about $100 mil­

unions.

ing departments, State Banking, a com­

lion of assets in state banking depart­

stantial and have the effect of requiring

pendium

ments, compared to 11 offices and $148

supervisory authorities to divide their

Bankers Association, had this to say:

These activities are often sub­




prepared

by

the American

The average work load per examiner is

million in the Office of the Comptroller
13

of the Currency, ten offices and $47 mil­
lion in the FDIC, and under ten offices
but over $190 million of assets in the
Federal Reserve System.
All state laws call for regular exami­
nations of the institutions supervised.
One examination per year is specified in
about two thirds of the states, and two
per year are required in most of the
others, but the number and timing is
left to the supervisor’s discretion in two
states.
PRESENT STRUCTURE— FEDERAL
VARIATION IN EXAMINING WORKLOAD AMONG STATE
BANKING DEPARTMENTS
NUMBER O F BAN K O F F IC E S
PER EX A M IN ER

BAN K ASSETS PER EX A M IN ER
M ILLIO N S O F DO LLARS

5-9

10-14

15-19

20-24

25 or more

0
Source:

5

10

N um ber of States
The Am erican Bankers Association.

15

5
10
N um ber of States

of t h e Currency
The
Office of the Comptroller of the Cur­
rency is a division of the Treasury De­
partment. The chief administrator is the
Comptroller of the Currency who is ap­
pointed by the President with the advice
and consent of the Senate for a term of
five years. While he conducts the af­
fairs of his Office under the general di­
rection of the Secretary of the Treas­
ury and in accordance with the broad
guidelines laid down by Congress, the
Comptroller in practice has a great deal
of freedom in formulating policies and
determining procedures. Since the au­
thority of the Office is vested in a single
man, and not in a board as is true of
the other Federal supervisory authorities,
the effectiveness and the efficiency of
the agency hinge to a large extent on the

Com ptroller

ability and drive of the incumbent.

In

order to discharge his supervisory re­
sponsibilities, the Comptroller has de­
veloped a regional structure consisting
of 14 districts, each under the direction
of a Regional Comptroller.
Broadly, the Comptroller is the princi­
pal supervisory authority in matters per­
taining to the opening, operations, and
closing of national banks. His principal
activities are in the area of chartering,
acting on branch and merger applica14




tions, issuing interpretations and rulings
under the National Bank Act. and con­
ducting examinations.
He exercises
some control over state member banks
since his Investment Securities Regula­
tion applies to both national and state
member banks. In addition, the Comp­
troller supervises all bank and trust com­
panies operating in the District of Co­
lumbia, even those chartered by states,
and supervises most savings and loan
associations and credit unions in the
District.
F e d e ra l R eserve S y s t e m
R eserve’ s

s u p e r v is o r y

T he Federal
fram ew ork

is

sim ilar to the C om p troller’ s in its re­
g ion a l structure and its d irection fr o m a
central o ffic e .

U ltim ate authority, h ow ­

ever, resides n ot in a single individu al
but in the seven m em bers o f the B oard
o f G overn ors w ho are appoin ted b y the
P resident w ith the ad vice and consent o f
the Senate fo r term s o f 14 years. Unlike
the

other

su p ervisory

agencies,

the

B o a rd ’ s p rim a ry respon sib ility lies out­
side the regu latory fie ld ; it is the fo rm u ­
lation and adm in istration o f m onetary
p o licy .

In

the

su pervisory

area,

the

B oa rd ’s p rin cip al activities are acting on
applications

fo r

acqu isitions

by

bank

h old in g com p a n ies, passing on certain
bran ch and m erger p roposa ls, interpret­
in g the Federal R eserve A c t and related

ing Act of 1933, has an obvious stake
in effective supervision stemming from
its contingent liability for all insured de­
posits. The FDIC is managed by a bi­
partisan Board of Directors composed
of three members. The Comptroller of
the Currency serves as an ex officio
member and the other two are appointed
by the President with the advice and
consent of the Senate for terms of six
years. One of these serves as chairman.
The FDIC has a regional structure con­
sisting of 12 regions, each under the di­
rection of a Supervising Examiner.
While the FDIC is concerned for the
soundness of all insured banks, its su­
pervisory attention is focused on non­
member state banks, since other insured
banks are supervised by either the Fed­
eral Reserve or the Comptroller. The ac­
tivities of the FDIC are heavily concen­
trated in the examining field. In con­
nection with this, it not infrequently
works closely with banks in distress to
avert failure, either by providing direct
financial assistance or by arranging to
have the threatened banks absorbed by
other banks. It may underwrite the
rescue operations to insure the assisting
banks against loss. The FDIC acts as
receiver for national banks which fail
and for insured state banks if requested
by the appropriate state authority.

statutes, su pervisin g the exam in in g a c­

ARRANGEMENTS

tivities o f the F ederal Reserve Banks,
and collectin g

and

data, partly fo r regu latory purposes but
perhaps pred om in a n tly to serve as the
basis fo r m on etary p o licy . In m ost cases,
contacts with m em ber banks and the ap­
plica tion o f general su pervisory policies

agree on the kinds of data needed, the

FOR COORDINATING

an alyzing banking

complish a common objective. These ar­
rangements are many and varied and
cover matters as detailed as day-to-day
working relationships.
Some of the
more important areas of cooperation in­
volve bank examinations, uniformity of
reports, and consistency of supervisory
rulings and regulations.
In the area of bank examination, ar­
rangements have evolved which are
workable, though not ideal. State bank­
ing authorities cooperate with the FDIC
in examining insured nonmember banks
and with the Federal Reserve in examin­
ing state member banks. The arrange­
ments vary somewhat from state to state,
but frequently the state and Federal au­
thorities conduct joint examinations.
At the Federal level, duplication of ef­
fort is minimized by exchanging copies
of examination reports.
In 1938 a very important agreement
was reached by the Federal supervisory
agencies with respect to procedures in
examinations. The agencies agreed to
follow uniform policies in the classifica­
tion of loans and the appraisal of invest­
ment securities. They also agreed that
until a bank had written off losses and
established adequate reserves, it would
be required to use any profits from the
sale of securities for those purposes.
In collecting economic information
from commercial banks, the Federal au­
thorities have generally been able to
form in which they should be reported,

REGULATORY ACTIVITIES

and the timing of reports.

In the past

Because of overlapping jurisdictions,

few years, however, there has been con­

arrangements for coordinating the ac­

siderable difficulty on this score. Since

tivities of the various supervisory au­

the information obtained in this way is

thorities

to

vital to the conduct of proper super­

achieve efficiency and reduce confusion.

vision and to the formulation of mone­

Some of these arrangements have been

tary policy, it is highly important that

provided for by law, but the majority

agreement be reached so as not to bur­

F e d e r a l D e p o s it I n su r an ce C o r p o r a ­

have grown up over time in response to

den the banking industry with duplicate

The F D IC , created by the Bank­

the obvious need to cooperate to ac­

and unnecessary reporting.

are ca rried ou t b y the Reserve Banks
under

general

p olicies

established

by

the B oard.

t io n




are

necessary

in

order

IS




o f Regulation
BANKING STRUCTURE
One of the most important forms of
regulation is control over the structure
of the banking system. Supervisory au­
thorities influence the banking structure
through control over the chartering of
new banks, bank mergers, the opening
and closing of branches, and over the
formation and growth of bank holding
companies. In some of these areas Fed­
eral law is paramount, in others state
law governs, and in yet others the au­
thority is divided.
C h a r t e r in g o f N e w B a n k s
T he
chartering of new banks is one area in
which authority is divided. For many
years there was little effective control
over the creation of new banks and
charters were issued almost automa­
tically to any group of men which met
certain limited requirements.
In the
quarter century before 1920 this policy
resulted in a phenomenal increase in the
number of banks, raising the total to
about 30,000. In the next 14 years more
than half of these banks disappeared,
most of them by failure.
A departure from this policy was
made by Comptroller of the Currency
Murray (1908-1913) who decided to ex­
ercise greater restraint in chartering
banks, taking into consideration public
needs and convenience. Also, authorities
in some states had been directed by law
to consider the public interest in charter­
ing banks. Federal legislation in the
1930’s specifically directed the Comp­
troller to consider such things as the
bank’s future earnings prospects, the
character of its management, and the
convenience and needs of the com­
munity. Today, the laws of most states
require the chartering authority to con­
sider similar factors.

The right of a bank
to do business at more than one place
B r a n c h B a n k in g

is restricted by both Federal and state
laws. For many years the National Bank
Act was interpreted so as virtually to
prohibit the operation of branches by
national banks. These restrictions were
gradually eased, and today Federal legis­
lation gives national banks the same
branching powers as are enjoyed by
state banks in the states in which they
are located. With respect to statewide
branching, the law specifies that na­
tional banks can establish branches “ if
such establishment and operation are at
the time authorized to State banks by the
statute law of the State in question by
language specifically granting such au­
thority affirmatively and not merely by
implication or recognition, and subject
to the restrictions as to location imposed
by the law of the State on State banks.”
State laws on branch banking vary
greatly. Some twenty states and the Dis­
trict

of

Columbia

permit

statewide

branch banking, although one of these
(Virginia) limits de novo branching but
permits statewide branching by merger.
Fourteen states permit branch banking
within limited areas, and another ten
prohibit branch

banking

but permit

“ offices,” “ agencies,” or “ stations.” Five
states prohibit branch banking, and one
state has no legislation on it.
Although state law determines the
basic right of banks to branch, national
banks and state member banks must, in
establishing branches, obtain the ap­
proval of the Comptroller or the Board
of Governors. Branches of insured non­
member banks must be approved by
the FDIC.
Banking authorities affect the bank­
ing structure also by controlling bank
mergers and consolidations. The period
since W orld War II has been marked by

laws of either the states or the Federal

Reserve and to comply with certain
other requirements of the law.
This legislation gave the Federal Re­
serve System some authority over bank
holding companies, but not enough to
control their formation and operation.
The law did not apply to all holding
companies and was aimed more at pro­
tecting the safety of the holding com ­
panies than at their control. In an at­
tempt to correct these deficiencies, Con­
gress enacted the Bank Holding Com­
pany Act of 1956.
This Act defines a holding company
as one which owns or controls 25 per
cent or more of the voting stock of each
of two or more banks, or that controls
the election of a majority of the direc­
tors of two or more banks. The Board
of Governors administers the Act, and
all bank holding companies (as defined
by the Act) are required to register with
the Board. Prior approval is required
before a company becomes a bank hold­
ing company, and for most acquisitions
of bank stock thereafter. Approval is
also required for the acquisition of all.

Government. Thus, except for Section 7

or substantially all, the assets of a bank

of the Clayton Act, there were few legal

or merger with another bank holding

restrictions on bank holding companies

company.

numerous mergers, most of which re­
sulted in the acquired banks being
operated as branches. The rate at which
banks were being absorbed became so
great in the early 1950’s as to cause
concern over the effects on competition.
Control over bank mergers has long
been divided between state and Federal
authorities, and this division of re­
sponsibility has caused some confusion.
During the 1950’s, Federal supervisory
authorities complained that they lacked
power to control the absorption of banks
by merger and Congress responded by
enacting the Bank Merger Act of 1960.
That Act is discussed below.
The decade
of the 1920’s was marked by a rapid
growth in holding companies and by nu­
merous abuses of the holding company
B a n k H o l d in g C o m p a n ie s

device.

Banks affiliated with holding

companies are subject to the same laws
and regulations as other banks, but the
holding company itself is not a bank and
is not subject to the general banking

to such companies, or accept their obli­
gations as collateral for loans.
CAPITAL REQUIREMENTS
An important objective of bank regu­
lation is the protection of the bank and
its customers against failure, and this
purpose is perhaps responsible for more
laws and regulations than any other.
But a bank may fail because of in­
solvency or b e ca u s e of a lack of
liquidity, and regulations designed to
protect banks against these two types of
failure are necessarily quite different.
P r o t e c t io n
solvency

A g a in s t

means

that

I nsolvency
the

value

In­
of

a

bank’s assets falls below its liabilities.

On this basis, a bank becomes insolvent
only after the owners’ equity has been
eliminated
against

through

insolvency,

losses.

Protection

therefore,

achieved in two w a y s:

(1 )

m ay

be

through re­

quirement of a m inim um ratio between
capital accounts
(2 )

and

total assets,

and

through regulations aimed at m ini­

m izing losses in asset values.

The Banking Acts of 1933 and 1935

acquire any voting shares of, or all the

require holding companies which con­

assets of, any bank located outside its

Capital Adequacy Both Federal and
state laws have long specified minimum
capital requirements for new banks and
for the establishment of branches, but
these requirements have little signi­
ficance today. They usually are related
to the population of the city in which

trol member banks to obtain voting per­

home state unless such acquisition is

the bank is located (not the best basis

mits from the Board of Governors in

specifically authorized by the laws of the

for determining capital adequacy), and

order to vote the stock of member bank

state in which the bank is located, nor,

they are seldom revised to take account

subsidiaries.

Before granting a permit,

with certain exceptions, may it hold

of changing conditions. Moreover, even

at that time.

A bank holding company may not

the Board must consider the financial

voting shares of any nonbank company.

if a bank’s capital equals or exceeds the

condition of the applicant, the general

The Federal Act does not prevent any

legal minimum initially, it may become

character of its management, and the

state from exercising powers or juris­

grossly inadequate if the bank has a

probable effects of granting the permit

diction over banks, bank holding com­

large growth since the amount, structure,

upon each of its subsidiary member

panies, and subsidiaries.

A bank con­

and nature of its assets and liabilities

banks. The holding company must agree

trolled by a holding company may not

provide the chief guides to its capital

to open its books and those of its sub­

invest in the securities of the holding

needs.

sidiaries to examination by the Federal

company or its subsidiaries, make loans

capital has become largely a matter of




Thus, the adequacy of a bank’s

17

administrative judgment, determined by
the supervisory authority.
REGULATION OF ASSETS
In the acquisition of assets,
all commercial banks are subject to
numerous legal restrictions, most of
which are designed to protect the safety
of the bank. Space does not permit a
full discussion, so the following is in­
tended to indicate only the general na­
ture of such restrictions.
Federal and state laws severely re­
strict the power of banks to own real
property, usually by specifying the pur­
poses for which it may be held. Banks
may, of course, own real estate which is
necessary to the conduct of business.
Beyond that, investment in such property
is generally prohibited. Even the invest­
ment in bank premises is restricted. A
national bank or state member bank may
not invest in the bank’s premises an
amount in excess of the bank’s capital
stock, except with the approval of the ap­
propriate authority. Many state laws im­
pose similar limitations on state non­
member banks. Banks also may acquire
real property which is mortgaged to
them as security for debts or which they
acquire in order to protect themselves
from loss on debts. Usually property so
acquired must be sold within a specified
time period.
As a general rule, national banks and
state member banks are prohibited from
investing in corporate stock. Exceptions
to this rule include ownership of the
stock of Federal Reserve Banks and of
subsidiaries which own the bank prem­
ises, provide safe deposit facilities, or
perform other specified functions. In
addition, a recent decision of the Comp­
troller permits the purchase of stock in
Safety

other corporations under certain con­
ditions. National banks (and state mem­
ber banks unless prohibited by state
law)

may invest limited amounts in

stock of small business investment com ­
panies. Restrictions on stock ownership
18




by state nonmember banks vary greatly,
but a number of states permit banks to
hold corporate stocks.
Commercial banks are subject to
many other restrictions on loans and in­
vestments.
The aggregate amount of
real estate loans a national bank may
make is limited in relation to capital
funds and its time and savings de­
posits. Individual real estate loans are
limited as to maturity and in relation to
appraised value. As a general rule, these
limitations do not apply to loans insured
and/or guaranteed by the Federal Hous­
ing Administration or the Veterans A d­
ministration. Some state laws restrict
real estate loans in much the same way,
but in many states they are limited, if
at all, only by supervisory action.
National and state member banks may
not make loans to “ executive officers”
in an amount exceeding $2,500, and a
majority of the board of directors must
approve all loans to executive officers.
The laws of most states limit, and a few
prohibit, loans by banks to their o f­
ficers, directors, or employees, but the
limits are far from uniform. Generally,
a bank may not make a loan to a bank
examiner who might be assigned to ex­
amine that bank, nor may it make a loan
with its own stock as collateral.
Perhaps even more important than re­
strictions on particular types of loans
are those that limit the amount a bank
may lend to a single borrower. The gen­
eral rule is that national banks may not
lend to any one borrower an amount in
excess of “ 10 per centum of the . . .
capital stock . . . paid in and unimpaired
and 10 per centum of . . . unimpaired
surplus funds.”
The Comptroller re­
cently ruled, however, that in the case of
national banks subordinated notes and
debentures may be added to the capital
stock and surplus to determine the loan
limit.
The primary purpose of the loan limit
is to reduce risk, so there are no limita­
tions on loans secured by certain types

of collateral, while loans secured by
other types are limited to various pro­
portions of capital stock and surplus.
Excepted loans include those secured by
United States Government obligations,
obligations in the form of drafts or bills
of exchange drawn against actually
existing values, and a number of others.
State laws limiting loans to one borrower
are similar to those pertaining to na­
tional banks. Some states have the same
basic limit of 10 per cent of capital and
surplus, but others have higher limits.
State laws also provide numerous ex­
ceptions to the basic limit.
L im it a t io n s o n I n v e s t m e n t s
Invest­
ments of commercial banks also are
closely regulated. As noted above, the
power of national banks to invest in
common stock and real estate is severely
limited, and a rule similar to the “ 10 per
cent rule” relating to loans to a single
borrower applies to investments as well.
Prior to the 1930’s, commercial banks
freely engaged in underwriting securi­
ties, both public and private. The Bank­
ing Act of 1933 severely restricted such
activities, and today member banks are
prohibited from underwriting the se­
curities of private corporations.
Of­
ficers, directors, partners, and employees
of firms dealing in securities may not
serve as directors, officers, or employees
of member banks. But member banks
may underwrite securities of the Federal
Government, Federal agency obligations,
and general obligations of state and local
governments.
National banks and state member
banks may invest in debt obligations
classified as investment securities under
regulations set forth by the Comptroller,
who has defined investment securities so

as to exclude securities that are “ pre­
dominantly speculative.”

Obligations of

the United States, general obligations of
states and political subdivisions, and the
obligations of

a number

of

Federal

agencies are specifically exempted from

the restrictions
ment securities.

pertaining

to

invest­

a n d L iq u id it y
Because most
bank liabilities are payable on demand
or on short notice, maintenance of
liquidity has always been a matter of
the greatest importance for commercial
banks. Both Federal and state govern­
ments have attempted, through legisla­
tion and supervision, to insure liquidity
by requiring that specified types of
assets be held in some minimum ratio
to deposits.
Early state laws usually specified that
reserves be held in the form of specie
or deposits in other banks, and their
purpose was to insure the convertibility
of bank liabilities. Originally, national
banks were required to hold reserves in
the form of vault cash and/or deposits
in other banks. Under the Federal Re­
serve System, national and state member
banks are required to hold legal reserves
in the form of vault cash or deposits in
a Federal Reserve Bank.
All states except one have statutory
requirements for reserves, but these vary
widely from state to state. Few states
have different requirements based on lo­
cation, but most have higher require­
ments against demand than against time
and savings deposits. Legal reserves
usually may be held in vault cash or in
demand balances due from banks, but
almost a third of the states permit some
part of required reserves to be held in
the form of United States Government
obligations. In about half of the states
reserve requirements are fixed by statute,
but in the others bank supervisory
agencies may change them within limits.
Legal reserve requirements originally
were adopted to protect the safety of

R eser ves

banks, but in recent years they have be­
come primarily an instrument for carry­
ing out monetary policy, particularly for
Federal Reserve member banks.

Re­

quired reserves are not a major source
of liquidity in time of need, and most




banks look upon their secondary re­
serves as the real measure of their
liquidity. Nevertheless, there are no
legal requirements governing secondary
reserves. The size and composition of
such reserves are determined by bank
m a n a g em e n t, although the bank’s
liquidity is a matter of concern to Fed­
eral and state supervisory authorities.
REGULATION OF LIABILITIES
Regulation of commercial bank lia­
bilities includes the prohibition of cer­
tain types of liabilities, limiting the size
of others, and regulating interest rates
and other terms relating to deposits and
borrowing.
P r o h ib it io n

of

C ir c u l a t in g

N o tes

Prior to the establishment of the N a ­
tional Banking System, banks in the
United States typically made loans by
issuing their own bank notes. Soon after
the National Banking System was es­
tablished, however, a tax was imposed
on state bank notes which made their
issuance impractical, and they disap­
peared from circulation. From that time
until 1914, the only bank notes in cir­
culation were those of national banks.
Although the introduction of Federal Re­
serve currency removed the need for na­
tional bank notes, it was not until 1935
that their issue was stopped. This action
marked the end of commercial bank
notes in the United States.
L im it s on I n d e b te d n e s s
N a tio n a l
banks may not incur debts to an amount
greater than their capital stock plus 50
per cent of unimpaired surplus. There
are several exceptions to this limitation,
including deposits, unpaid dividends,
borrowings from Federal Reserve Banks,
and certain others. In addition, the
Comptroller recently ruled that in the
case of n a tio n a l banks borrowings
through the sale of short-term notes as
well as through the “ purchase” of Fed­
eral funds from other banks are not
subject to the limitation on indebtedness.

P a y m e n t o f I n t e r e s t on D ep o sits In
the 1930’s, Congress authorized the
Board of Governors and the FDIC to
limit the interest paid on deposits by
member banks and by insured nonmem­
ber banks, respectively. Interest on de­
mand deposits is prohibited by statute
and maximum rates may be prescribed
for time and savings deposits. A few
states also prescribe maximum rates for
deposits.
R e c e iv e r s h ip a n d L iq u id a t io n Super­
vision plays as important a role at the
end of a bank’s life as it does at the be­
ginning. Whether a bank ceases opera­
tions voluntarily or involuntarily, the
law sets forth in considerable detail the
procedure to be followed. The Comp­
troller supervises the voluntary liquida­
tion of national banks. He may appoint
a receiver either because the bank is in­
solvent or because it has violated certain
laws, but receiverships for any cause
other than insolvency are extremely
rare. The FDIC must be appointed as
receiver for national banks, but it per­
forms some of its functions in this ca­
pacity under the direction of the Comp­
troller. The laws of 41 states require that
either the supervisor of banking or the
FDIC be appointed receiver of insolvent
state banks; nine of these states specify
that only the FDIC may be appointed.
The rarely used arrangement known
as bank conservator is an interim meas­
ure short of receivership. If a bank’s
solvency is uncertain and if it is
threatened with failure, a conservator
may be appointed to take charge of the
bank, conserve its assets, and try to work
out a solution to its difficulties. The
conservator may attempt a reorganiza­
tion of the bank’s finances, and if
solvency is restored, the bank is returned
to the management of its directors. The
Emergency Banking Act of 1933 au­
thorized the Comptroller to appoint con­
servators for national banks and the laws
of a majority of the states contain similar
provisions applying to state banks.

19




o f Banking Laws and Regulations
ADMINISTRATIVE PROCEDURES
Supervisory agencies rely heavily on
two major procedures— reports sub­
mitted by the banks and examinations
carried out by staff examiners. If either
of these procedures reveals irregularities
or questionable practices or conditions,
they may be followed by investigations,
conferences, and, if necessary, the in­
vocation of sanctions.
R epor ts

data for the whole country, the many
supervisory agencies specify the same

Banks submit many reports

to supervisory agencies.

The dates for the other two call re­
ports vary from year to year, with one
coming in the first half of the year and
the other in the second.
To prevent
window dressing on these calls, banks
usually are required to give a statement
of their condition “ as o f” a date a few
days before the call is announced. In
order to obtain comparable and additive

These serve

call dates and use approximately the
same report form.

both as a means of surveillance and as

In addition to the regular condition

the source of data which are vitally im­

reports, supervisory agencies may re­

portant for the formulation and ad­

quire special reports. If an individual

ministration of monetary policy and for

bank warrants special attention or if it

the analysis of financial and economic

is

developments.

Supervisory authorities

scribed changes in its practices or to re­

have considerable discretion in prescrib­

adjust its assets, the supervising agency

ing the form, content, and frequency of

may require it to make periodic reports

reports.

to show the progress it is making in im­

Call or Condition Reports

The most

frequently used report is the “ Call Re­

under

instructions

to

make

pre­

proving its condition or in carrying out
the instructions.
Reports

011 Income and Dividends

port”

of condition as of a specified

date.

In this the bank submits a fairly

The condition reports give a still picture

complete breakdown of its assets and

of principal assets and liabilities as of

liabilities.

Most supervisory agencies

a given date.

Banks also submit, an­

now require four such reports per year.

nually or semiannually, moving pictures

The dates for two of them are fairly

in the form of reports on income and

well fixed, and fall at or near the end

dividends.

of June and December.

The principal

down to show the principal sources of

purpose of the fixed date is to provide

revenue, the main items of expense, and

These reports are broken

comparable data from year to year. The

the dividends paid.

disadvantage is that bankers know in ad­

ports alone give little indication of the

The condition re­

vance when it is coming and may resort

profitability of the bank’s operations.

to “ window dressing,” or an artificial in­

But the condition reports and the earn­

crease in certain items to make the

ings reports combined make a very use­

bank’s condition appear more favorable

ful tool for analyzing the state of the

than it really is.

bank’s financial health.

Reserve Reports
the

Federal

weekly

Member banks of

Reserve

(reserve

city

System

submit

banks)

or

bi­

notice, at least once, and sometimes
twice, per year.

to determine intrinsic values which may
be realized at maturity and not values
based on any abnormal current quota­
tions or on a forced liquidation.

major importance in the formulation and

M a jo r E x a m in a tio n P r o c e d u r e s
Several major procedures are performed
in each examination. It should be em­
phasized, however, that an examination
is not an audit of all the bank’s trans­
actions. A complete audit of each bank
examined would require much larger
staffs than are now available. Further,

administration of monetary policy and

the audit is a management prerogative

portions or all of the asset’s value. Until

in providing a reliable indication of the

and there is serious question whether the

such losses have been written off or

level of tightness or ease of reserves in

supervisory official should usurp that

adequate reserves established, the bank

the banking system of the whole country.

prerogative.

is restricted in the use of certain of its

weekly (country banks) reports on their
deposits, the reserves required to be held
against them, and the reserves actually
held. These reports are the principal re­
liance for checking compliance with re­
serve requirements.

They are also of

Little information is available on re­
serve

reports

required

by

state

au­

An evaluation of principal assets and
a verification of liabilities is a major

thorities but it appears that those reports

part of an examination.

The first im­

are much less frequent than those of the

poses

Federal Reserve.

examiner.

He must appraise loans on

the basis

of

a heavy responsibility
from

the

the

bank’s assets which are below acceptable
standards. Depending on how far below
such standards the asset falls, the bank
may be required to write off varying

profits.
Another and very difficult part of a
bank examination is an appraisal of the
bank’s management.

There is no yard­

stick for such an appraisal and the ex­

bank’s

aminer must rely upon his ability to

for each bank under their jurisdictions.

files, information supplied by the bank

judge human nature and the information

In this file are posted the principal items

management and any other available

he has about the banker’s age, training,

from recent condition and income re­

source, and the borrower’s performance

experience, ability, and character. In so

Supervisory authorities maintain a file

data

on

On the basis of his appraisal, the ex­
aminer may “ classify” certain of the

ports, and summary items from the latest

on the current and previous loans.

The

far as possible, this appraisal should, of

examination reports noted below.

Sub­

examiner must apply this information

course, be impersonal and impartial and

totals are run for key assets and lia­

with a broad knowledge of general busi­

should be based upon a careful distinc­

bilities and significant ratios are com­

ness principles and conditions as well

tion between the responsibilities of the

puted. These files thus are case histories

as an understanding of special condi­

directors and officers of the bank to set

and provide s u p e r v is o r y

authorities

tions and practices prevailing locally.

policies and the responsibility of the ex­

some perspective on the banks’ condi­

In one sense he is permitted to “ second

aminer to offer counsel and advice. The

tion if and when trouble develops.

guess” the banker since he appraises the

appraisal of the management should be

loan on the basis of current conditions

helpful to the examiner in indicating

and not those prevailing when the loan

what kind of advice to offer and to ail

was made. The examiner must also ap­

supervising agencies in deciding when

E x a m in a t io n s

In the case histories just

mentioned, the anchor or bench-mark
items are the reports of examination,

praise the bank’s investments, but here

and how to intervene if trouble should

which are the principal reliance of su­

he may receive substantial assistance

develop.

pervision in maintaining surveillance of

from security ratings and market quota­

banks and checking their compliance

tions. Local or other unrated securities,

of the bank’s capital.

with laws and regulations. Usually each

however,

difficult

revising legal standards and the rapid

bank

problems.

In all appraisals the aim is

growth in the size of banks, minimum

is

examined,

without




advance

may

present

very

Examiners also appraise the adequacy
Due to the lag in

21

capital requirements have lost most of
their significance. In recent years, su­
pervisors have rarely permitted banks to
start operations with the minimum legal
requirement.
Before World War II,
a rule of thumb frequently used to
determine adequacy of capital was that
capital funds should be about 10 per
cent of deposits. The sharp expansion

To a considerable extent, also, they will

The Comptroller is empowered, under

determine the extent and amount of the

specified conditions

examiner’s work, since in the absence of

days notice, to publish the report on a

a sound system of internal safeguards he

national bank. The threat of publication

must dig deeper and harder to find the

is meant to be a disciplinary action to

facts.

An open question is whether su­

induce compliance by the bank’s officers

pervisory agencies should have authority

and directors with instructions contained

to require banks to establish and main­

in the report. It is rarely, if ever, used.

of bank assets and deposits during the

tain systems of internal safeguards which

war, with most of the increase in assets

meet minimum standards.

represented by risk-free Governments,

Finally, the examination procedure in­

quickly made that standard obsolete.

cludes a comprehensive report by the

and after ninety

SANCTIONS
All laws and regulations must have

For a time there was a tendency to elimi­

examiner in charge.

Much of the ef­

sanctions if they are to be effective, and

nate Governments and measure capital

fectiveness of the report and of the

banking laws and regulations are no ex­

against “ risk assets.”

This ratio de­

whole examination will depend on the

ception. Of course, banks, unless speci­

clined from about 25 per cent in 1945

logical arrangement of the report, the

fically exempted, are subject to all gen­

to around 12 per cent at the end of 1964,

clarity with which it is presented, and

eral civil and criminal statutes. In addi­

but there is no general agreement on

the cogency o f its conclusions.

The re­

tion, banking codes prescribe civil and

what is a satisfactory or adequate ratio.

port should be built around, and should

criminal penalties for a number of of­

More recently, a practice has developed

highlight, the principal conclusions in­

fenses peculiar to banking such as false

of allocating certain amounts of capital

dicated by the examination.

representation in reports, making loans

against various types of assets plus addi­

before he can write such a report, the

to examiners, accepting deposits when

tional amounts for liquidity, trust opera­

examiner must prepare a detailed an­

the bank is known to be insolvent, and,

Naturally,

tions, and other similar factors. No gen­

alysis of the favorable and unfavorable

generally, violating banking laws and

erally accepted standards have evolved

features revealed by the examination

regulations.

and supervisors must depend heavily on

with respect to the bank’s asset distribu­

stricted to sanctions which may be im­

their judgment reinforced by such ratios

tion, quality of assets, capital adequacy,
management, earnings, compliance with

posed by supervisory agencies.

statutory provisions, and other pertinent

visors do not have the authority to levy

primarily to uncover embezzlements or

factors.

fines to enforce their instructions and

other irregularities, but the examiner

pose.

would be remiss if he did not give at­

agency the examiner’s appraisal of the

The Comptroller may fine a national

tention to the bank’s system of internal

bank’s condition, together with his rec­

bank $100 per day (no variation al­

safeguards.

ommendations for any needed remedial

lowed)

action.

Second, it informs the bank di­

The Board of Governors may levy a

of all transactions, all practicable in­

rectors of the bank’s condition as seen

fine of up to $1,000 per day on a bank

ternal checks and safeguards, and some

by the examiner, and calls attention to

for failure to sever its connections with

system of auditing, dependent on the

any matters which might require action

a securities company.

size and organization of the bank. These

by the directors.

In special situations

few other instances where fines may

things

the

the report may be the basis for a special

bank’s management, but if they are

meeting of the directors at which a

be used, but they are not a common
sanction.

clearly inadequate the examiner should

representative of the supervising agency

call them to the attention of the manage­

will discuss major findings and explain

comparatively new sanction, added in

ment and the supervisory authorities.

the reasons for recommended changes.

the Banking Act of 1933 but very rarely

as they consider pertinent.
Bank examinations are not conducted

This includes good basic

records, prompt and efficient handling

are

the

22




responsibility

of

The report serves a dual pur­
First, it gives the supervising

Fines

rulings.

The discussion here is re­

As a general rule, bank super­

There are a few exceptions.

for failure to render reports.

There may be a

Removal of Officers or Directors

A

used, is the power to remove from office
an officer or director of a commercial
bank. The Comptroller or a Federal
Reserve agent may cite to the Board of
Governors any director or officer of a
national or state member bank believed
to be guilty of continued violation of any
banking law or of continuing unsafe and
unsound practices. If the Board, after
granting the accused “ a reasonable op­
portunity to be heard,” finds the charge
to be true, it may order the officer or
director removed from office.
Such
action is, of course, subject to judicial
review.
Expulsion and Termination of Insur­
ance

The Board

of

Governors

may

expel a member bank from the System
for any one of several offenses.

These

include false certification of checks by
an officer of a state member bank, con­
tinued affiliation with a securities com ­
pany, failure of an affiliated company
to allow an examination, failure to keep
the number of directors within specified
limits, and, generally, violations of bank­
ing laws and regulations.

The Board

has the authority, after a hearing, to
order explusion, but, again, its action
is subject to judicial review.
If any bank insured by the FDIC con­
tinues

unsafe

and

unsound

banking

other banks, and 34 other banks sus­
pended before a date was set for ter­
mination. Three cases were pending at
the end of 1964. This left 12 cases in
which termination dates were set; of
these, nine suspended before the termi­
nation date and three continued in op­
eration after insurance was terminated,
but one of them closed four months
later.
Forfeiture of Charter

The forfeiture

of a bank’s charter is a drastic penalty,
very rarely used.

The Comptroller is

authorized to forfeit the charter of a
national bank if it refuses to allow an
examination or to give information in
connection therewith, or if it violates
banking laws.

Of historical interest is

the

requiring

provision

all

national

banks to join the Federal Reserve Sys­
tem within one year after the enactment
of the Federal Reserve Act.

A very few

banks did fail to join and surrendered
their charters at that time.
feiture
When

of

The for­

charter

is

not

automatic.

an offense

is

committed,

the

Comptroller must bring action in an
appropriate

court

which

makes

the

decision.
CONCLUSION

practices or permits officers to violate

A frequently voiced criticism of sanc­

banking laws and regulations, the FDIC

tions in the banking field is that they are

may bring action to terminate the bank’s

too harsh and drastic for use except on

insurance.

The FDIC must notify the

rare occasions.

bank

other

pressed it, the offense may be com­

and

affected

regulatory

agencies, and hold a hearing.

If the

As someone has ex­

parable to the violation of a traffic law

bank is found guilty, its insurance may

but the penalty is that for murder. There

be terminated.

During the years 1936

seems to be a need for more flexible and

through 1964, the FDIC started 189

more appropriate penalties. Two sugges­

actions to terminate insurance.

tions along this line are that supervisory

In 72

cases corrections were made and pro­

officials be given the power to issue

ceedings closed. In 68 cases the affected

“ cease and desist” orders, and that more

banks were absorbed or succeeded by

use be made of monetary fines.




23

o f Antitrust Laws to Banking
Time was when it was felt that anti­
trust laws did not apply to banks. There
were two reasons for this. First, bank­
ing, unlike industry and commerce gen­
erally, is a regulated business, and this
was supposed to exempt it from most
provisions of the antitrust laws. Sec­
ond, the Federal antitrust laws were
adopted under the “ Commerce Clause”
of the Constitution, which gives Con­
gress power to regulate commerce among
the states. It was long assumed that
banking was not interstate commerce
and therefore not subject to Federal
legislation on this point.
The idea that banking is not inter­
state commerce within the meaning of
the Sherman and Clayton Acts came
from two old cases. These cases held:
(1) that a state could regulate the in­
surance business, since writing an in­
surance contract was not interstate com ­
merce; and (2) that a state tax on
money or exchange brokers was con­
stitutional because the banking business
was not interstate commerce.
Later,
however, Federal power under the Com­
merce Clause came to be applied to fi­
nancial institutions in specific situations.
The National Labor Relations Act was

it said that: “ No argument is made
in the case that banking is not [inter­
state] commerce, and therefore that
Section 7 [of the Clayton Act] is in­
applicable; plainly, such an argument
would have no merit.” Thus, the old
argument that banking is not interstate
commerce is of only historical interest,
important solely because it accounts for
the late entry of the Justice Department
into this field.
The first argument— that since it is
a regulated industry, banking should be
exempt from the antitrust laws— remains
with us today. The landmark decision
in the Philadelphia case settles the ques­
tion only temporarily; the ruling of that
case is the subject of intensive study by
Congress.
Special interest centers on
the peculiar problems relating to bank
mergers and holding company acquisi­
tions, including the formidable un­
scrambling process that would have to
be ordered in some cases.

held applicable to banks in 1942, and in

straint of trade or commerce among the




Section 1 of the Sherman Act, adopted
in 1890, declares illegal “ every contract,
combination . . . or conspiracy, in re­

1944 the Supreme Court reversed itself

several states. . .

and held that the insurance business is

crime to “ monopolize, or attempt to

in interstate commerce and therefore

monopolize, or combine or conspire . . .

subject to the antitrust laws.

24

THE ANTITRUST LAWS

Section 2 makes it a

In 1946,

to monopolize any part o f the trade or

the Department of Justice filed its first

commerce among the several states.. . . ”

suit against banks under the Sherman

“ Restraint of trade” is an elastic con­

Act. In 1953, a Federal appellate court

cept. Not all restraints are illegal; only

said banking is “ commerce” within the

unreasonable ones.

meaning of the antitrust laws. In 1963,

the courts apply the so-called “ rule of

In antitrust cases,

in the Philadelphia case, the Supreme

reason” : the reasonableness of a con­

Court laid the question to rest when

centration of economic power is de-

termined by its effect in restraining
competition.
It was soon felt that the Sherman Act
provided inadequate protection against
concentration in industry; effective ac­
tion could be taken under the Act only
after a monopoly had been achieved.
Consequently, in 1914 Congress adopted
the Clayton Antitrust Act, designed to
forestall monopoly in its inception. The
key provision of the Act is Section 7,
which originally provided that no cor­
poration engaged in interstate commerce
“ shall acquire, directly or indirectly, the
whole or any part of the stock or other
share capital of another corporation en­
gaged also in [interstate] commerce,
where the effect of such acquisition may
be to substantially lessen competition
between” such corporations “ or to re­
strain such commerce in any section or
community or tend to create a monopoly
of any line of commerce.”
(Italics
supplied.)
The Federal Reserve Board was given
power to enforce Section 7 and certain
other sections of the Act “ where ap­
plicable to banks, banking associations,
and trust companies.”
Generally, except for certain “ per se”

in its inception.
The Clayton Act
language is broad and sweeping: the
conduct spelled out in the Act is illegal
if its effect may be substantially to
lessen competition or to tend to create a
monopoly.
SUITS AGAINST
THE BANKING INDUSTRY
Once it appeared that the old “ bank­
ing is not interstate commerce” concept
no longer sheltered banks from anti­
trust assault, a variety of proceedings
was instituted. They fall into two broad
categories: suits against trade practices
and suits against mergers and holding
company acquisitions.
rade
P r a c t ic e C ases
In 1946, the
Government brought suit under the Sher­
man Act against a New York trade as­
sociation and 38 lending institutions, in­
cluding one commercial bank and 17
savings banks, charging they had used
their association to eliminate competi­

T

tion among themselves through various
practices,

including

fixing

minimum

amortization rates and terms; establish­
ing standard appraisal procedures and

violations, like division-of-territory or

valuations, and withholding mortgage fi­

price-fixing agreements, illegal without

nancing from builders, thus preventing

regard to their actual effect on competi­

new construction in areas where the de­

tion, a Sherman Act violation requires

fendants already had substantial mort­

actual realization of monopoly.

gage interests.

This

A consent decree re­

was dismissed because most of these
practices had ended.
The year 1963 brought something
new: the first criminal prosecutions of
banks under the antitrust laws. Price
fixing was charged in each case. In a
Minnesota case, seven banks and a bank
holding company were indicted under
Section 1 of the Sherman Act for agree­
ing to fix service charges for checking
accounts and other bank services. All
defendants pleaded no contest, and were
fined. In another Minnesota case, 11
banks were charged in a Sherman Act
indictment with agreeing to fix rates of
interest, terms, and conditions of loans,
and to refrain from absorbing certain
losses and providing free supplies to
correspondent banks. Ten defendants
pleaded no contest and were fined.
A civil action in New Jersey charged
three banks with fixing and maintaining
a uniform schedule of charges for
checking accounts and other services. A
consent decree halted these practices.
In Utah, competing banks filed a Sher­
man Act suit charging that a one-check
payroll plan offered by the defendant
was an attempt to monopolize the local
checking account business.
The trial
court in 1965 found no violation, saying
“ . . . progress and the utilization of new
instrumentalities and procedures are not
prohibited . . .” by the antitrust laws.
M

erger

and

A

c q u is it io n

Cases

means the power to set prices or exclude

quired the trade association to be dis­

competition, or at least some overt at­

solved and put an end to the challenged

Until the Bank Holding Company Act

tempt to achieve such an end with rea­

practices.

A similar Sherman Act suit,

o f 1956, no Federal statute specifically

sonable probability of accomplishment.

charging a Chicago bankers’ association,

governed the acquisition of shares of

A lesser degree of proof is required

12 commercial banks, and other corpora­

bank stock by a corporation, although

under Section 7 of the Clayton Act,

tions

there were, and are, some similar state

which is designed to prevent monopoly

sions, service fees, and interest rates,




with

fixing

minimum

commis­

Holding Company Acquisition Cases

bank holding company acts.
25

Before the Holding Company Act was
adopted, however, there was one im­
portant proceeding to compel divestiture
of a holding company’s holdings of bank
stocks. This was the Transamerica case,
a proceeding instituted by the Board of
Governors charging violation of the
original Section 7 of the Clayton Act,
and the only proceeding the Board has
ever instituted to enforce the Clay­
ton Act.
The Board, after a hearing, found
Transamerica and its affiliates con­
trolled 645 banking offices, 40.9 per
cent of the total, in the states of Cali­
fornia, Washington, Oregon, Nevada,
and Arizona. The Board found that this
constituted a violation of Section 7 of
the Clayton Act and ordered Transa­
merica to divest itself of all its bank
stocks except those in the Bank of
America. However, an appellate court
set aside the Board's order and the Su­
preme Court refused to review the case.
Another attack on a holding company
acquisition, this time made after enact­
ment of the Bank Holding Company Act
of 1956, was the Firstamerica case, filed
in 1959. This case was settled by a con­
sent decree under which Firstamerica.
now

called

Western

was required
interest

in

to

65

Bancorporation,

divest
b a n k in g

itself of

its

offices

in

California.




its corporate identity. Thus, it could be
reasonably argued that a bank could run
afoul of Section 7 of the Clayton Act
only by purchasing enough shares of the
stock of another bank to produce an
anti-competitive effect.
This assumption was laid to rest in
1963 in the Philadelphia case, in which
the Supreme Court said mergers fit per­
fectly neither the stock acquisition nor
the assets acquisition technique, “ but lie
somewhere between the two ends of the
spectrum.”
only

Thus, the court said, the

transactions

excluded

from

the

coverage of Section 7 were assets ac­
quisitions

by

ject to FTC
a c c o m p lis h e d

corporations
jurisdiction
by

not

sub­

“ ivheii

not

merger/’

(Italics

supplied.)
Between the 1950 amendment of Sec­
tion 7 of the Clayton Act, and the Phila­
delphia case in 1963 came two acts
specifically dealing with the concentra­

The original prohibi­

tion of economic power in banks— the
Bank Holding Company Act of 1956 and

tion in Section 7 against acquisition of

the Bank Merger Act of 1960. The for­

stock was expanded in 1950 to provide:

mer required approval of the Board of

“ . . . and no corporation subject to the

Governors: (1) before a company could

jurisdiction of the Federal Trade Com­

become a “ bank holding company,” i.e.,

mission shall acquire the whole or any

a company owning or controlling 25 per

part of the assets of another corporation

cent of the shares of two or more banks,

. . .” where the effect of the acquisition

or controlling election of the majority

“ may be substantially to lessen com ­
petition, or to tend to create a mo­

of the directors of two or more banks:
and also (2) for any such holding com­

nopoly.”

(Italics supplied.) Banks, of

pany to acquire ownership or control of

course, are not subject to the jurisdic­

more than 5 per cent of a bank’s voting

Merger Cases

26

tion of the Federal Trade Commission,
and therefore it was generally assumed
that the 1950 (assets acquisition) amend­
ment of the Clayton Act did not directly
affect them. It was assumed also that
a stock acquisition (covered by the orig­
inal Section 7) meant not a merger but
the purchase by one corporation of
shares of another, with neither losing

shares. Before approving “ any acquisi­
tion or merger or consolidation” the
Board was required to consider: the fi­
nancial history, prospects, and manage­
ment of the companies and banks in­
volved; the convenience, needs, and wel­
fare of the communities and the area
concerned, and “ whether or not the ef­
fect of such acquisition or merger or
consolidation would be to expand the
size or extent of the bank holding com­
pany system involved beyond limits
consistent with adequate and sound
banking, the public interest, and the
preservation of competition in the field
of banking.” (Italics supplied.)
The 1950 and 1956 legislation was as­
sumed by most observers to indicate
that bank expansion, as such, was ex­
empt from the antitrust laws, and also
that straight stock acquisitions by banks
were intended to be treated somewhat
differently from acquisitions by non­
banking corporations. This view was
buttressed by adoption of the Bank
Merger Act in 1960, which provided
that the appropriate regulatory agency
— the Comptroller, Board of Governors,
or FDIC— must give its consent before
an insured bank could merge or con­
solidate with, acquire the assets of, or
assume liability to pay deposits in, any
other insured bank. In deciding whether
to give its consent, the appropriate Fed­
eral banking agency was required to

tors involved from the Attorney General
and from the other two Federal regula­
tory agencies.
In the Philadelphia case, however, the
Supreme Court majority rejected the
argument that the 1960 legislation con­
ferred an implied immunity from the
Clayton Act on bank mergers, saying:
“ When Congress enacted the Bank Mer­

only under Sections 1 and 2 of the Sher­

case back to order the merged bank
broken up.
The largest bank merger yet at­
tacked by the Department of Justice oc­
curred in 1961, when the Hanover Bank
of New York City merged with Manu­
facturers Trust Company to form Manufacturers-Hanover Trust Company. De­
cision in the suit was withheld pending
the Supreme Court’s decision in the
Philadelphia case. Finally, the United
States District Court for the Southern
District of New York handed down an
exhaustive opinion in the spring of 1965.
The feature which marked this case
particularly was that it involved a mer­
ger which directly affected two banking
markets— a “ wholesale” or national
market and a “ retail” or local market.
The task of defining these two markets in
this particular case presented the court
with a very difficult problem. After ex­
haustive analysis and the consideration
of great masses of statistics, the court
could find no violation of the Sherman
or Clayton Acts based “ solely on the
factor of the market share foreclosed by
defendant in either market as a result
of the merger.”
This sounded like a
prelude to a ruling that no antitrust law
violation had been shown. But the court
went on to say: “ Whether a given mer­
ger increases the market share of the re­
sulting firm to forbidden proportions or
threatens a ‘significant’ rise in concen­

consider substantially the same factors

man Act. The merger of First National

tration depends on the setting.”

as the Board of Governors must con­

Bank and Trust Company and Security

The “ setting” which finally decided

sider in passing on Holding Company

Trust Company of Lexington, Kentucky,

the case was the demonstrated trend

Act applications. The transaction should

had been approved by the Comptroller.

toward concentration in the New York

not be approved “ unless, after consider­

The bank argued that the Bank Merger

area. The court noted that in 1950 there

ing all of such factors” the agency

Act, under which the Comptroller acted,

had been 70 independent commercial

“ finds the transaction to be in the public

rendered such transactions immune from

banks in New York City, but in the fol­

ger Act, the applicability of Section 7
to bank mergers was still to be au­
thoritatively determined; it was a sub­
ject of speculation. . . .

The design

fashioned in the Bank Merger Act was
predicated upon uncertainty as to the
scope of Section 7, and we do no vio­
lence to that design by dispelling the un­
certainty.”

The opinion was based en­

tirely on Section 7 of the Clayton Act,
and the Court expressly declined to dis­
cuss whether or not the merger, as
charged by the Government, violated
Section 1 of the Sherman Act as well.
However, a Sherman Act violation
was found in the Supreme Court’s next
major banking decision— the Lexington
case, decided in 1964.

When this suit

was filed, the Philadelphia case had not
yet been decided, and apparently be­
cause the Justice Department doubted
the applicability of Section 7 of the Clay­
ton Act to banks, it elected to proceed

The Act

attack under the antitrust laws. The Dis­

lowing ten years 27 were absorbed by

further required, “ . . . in the interest of

trict Court rejected this contention but

mergers, and only three new banks had

uniform standards, . . .” that the ap­

went on to hold that violation of the

entered the market.

propriate agency, before acting, should

Sherman Act had not been shown. The

ting,” the court said, “ admits no con­

request reports on the competitive fac­

Supreme Court reversed, and sent the

clusion other than that this merger . . .

i n t e r e s t (Italics supplied.)




This “ factual set­

27

tends to create a monopoly by signifi­
cantly increasing concentration and ac­
celerating a trend toward oligopoly. The
case more than satisfied the rule that
when concentration is already great,
even slight increases must be prevented.”
Thus, the court found, the merger “ sub­
stantially lessens competition and re­
strains trade by the permanent elimina­
tion of significant competition formerly
existing between major competitors,”
and that in itself constitutes a violation
of Section 1 of the Sherman Act and of
Section 7 of the Clayton Act. No final
divestiture order had been entered as of
this writing.
Five other merger cases may be men­
tioned briefly. In the Calumet case,
begun in 1963, the Department of Jus­
tice brought action to forestall an Indi­
ana merger which had been approved by
the Comptroller. Because of threatened
costs and delays the two banks dropped
their plans and, at their request, the
Comptroller rescinded his approval.
The Crocker-Anglo case, also begun in
1963, is a suit to dissolve a California
merger and is pending at this writing.
It involves one bank with 124 offices,
largely in the northern part of the state,
and another with 78 offices, mostly in
the southern part; there was relatively
little competition between them. The
Government was unsuccessful in an at­
tempt to obtain a preliminary injunc­
The Continental-Illinois case, begun in
If the court

case also is still pending.
State Antitrust Laws

Many states

have antimonopoly statutes which may
apply to banking.

In what appears to

be the only decision involving enforce­
ment of a state antitrust law against
banks, a Michigan court in the People’s
Saving Batik case, decided in 1960, dis­
approved a plan to dissolve a competing
bank. The court relied on the Michigan
antimonopoly statute, which provided in
part:

“ All combinations of persons . . .

entered into for the purpose and with
the intent of establishing. . . or of at­
tempting to establish . . . a monopoly of
any trade . . . or business, are . . . illegal
ing had a branch in Port Huron, where
the People’s Saving Bank was the only
other bank. The Lansing bank, through

present an especially difficult problem

its employees’ profit-sharing trust, ac­

since the merged bank has been operated

quired a majority of the stock in the

as a unit bank due to the Illinois no­

savings bank and announced its inten­

The Third National case, filed in 1964.




tervene as a defendant in the suit. This

should order a dissolution here it would

branching law.

28

Comptroller received permission to in­

and void.” A commercial bank in Lans­

tion to stop the merger.
1961, is also still pending.

the findings of the Comptroller in ap­
proving the merger. The court denied
the Comptroller permission to intervene
in the suit.
One of the most recent actions is the
Mercantile Trust case, started in 1965,
which attempts to dissolve the merger
of two St. Louis banks. It has two un­
usual aspects. It has been called a “ cash
merger” because the stockholders of the
bank being absorbed received cash in­
stead of stock in the surviving bank.
Conceivably, this may affect the appli­
cability of Section 7 of the Clayton Act.
The other unusual feature is that the

tion to vote these shares to dissolve it.
Action was brought to stop the transac­

sought to block a merger in Tennessee.

tion.

The court denied application for a pre­

fendants’ argument that the state anti-

The court, in rejecting the de­

liminary injunction, relying heavily on

monopoly law did not apply to banking

and that Federal antitrust and bank­
ing laws had pre-empted the entire
field, held that
. . banking is not gen­
erally exempted from the antimonopoly
laws, . . .
It also rejected the defense
argument that “ banking is not a
business in which monopoly is ever
possible. . .

trust suit. The Proxmire amendment
also contained a controversial provision
exempting from the antitrust laws any
approved merger or acquisition con­
summated before adoption of the amend­
ment if the resulting bank had not been
dissolved or divided pursuant to a final
judgment. This, of course, would have
exempted from divestiture the banks in­

PROPOSED LEGISLATION

volved in the pending cases discussed

In
April 1965, Senator Robertson, Chair­
man of the Senate Committee on Bank­
ing and Currency, introduced a bill to
amend the Bank Merger Act. It pro­
vided that the authority of the Federal
regulatory agencies to approve mergers
and acquisitions involving banks “ shall
be exclusive and plenary,” and that any
merger or acquisition approved under
the Bank Merger Act would be exempt
from the operation of the antitrust laws.
The bill also exempted any insured bank
with respect to any approved merger or
acquisition consummated before May
13, 1960.
Opposition developed to the complete
T he

R o b e r t s o n - P r o x m ir e

B il l

above.

While the proposal for retro­

active exemption of the banks involved
in pending suits encountered strong op­
position on the Senate floor, the bill
passed the Senate with this provision
intact.
In the final week of the 1965 session
of Congress, the House Banking Com­
mittee reported a much-revised and con­
troversial version of the Robertson-Proxmire bill. As amended, the bill provides
that the responsible Federal banking
agency, and also any court reviewing the
legality of a merger, should “ take into
account the effect on the public interest
and the community” of the banking fac­

of bank mergers and the

tors specified in the Bank Merger Act.

Senate Committee ultimately reported a

If this version of the bill is approved

bill containing an amendment offered by

during the 1966 session of Congress,

Senator Proxmire.

The amended bill

the rule of the Philadelphia, Lexington,

would leave bank mergers and acquisi­

and Manufacturers-Hanover cases— that

tions subject to the antitrust laws, but

a merger is illegal if it has substantial

exemption

would create a thirty-day waiting period

anticompetitive effect, even though it is

after approval by the appropriate bank­

beneficial to the public— will be changed.

ing agency. This would serve the double

However, the question whether the bill

purpose of delaying consummation and

was actually reported out by the House

imposing on the Department of Justice a

Committee was in dispute as Congress

short statute of limitations.

adjourned.

Unless suit

were filed within thirty days after the

Thus, while changes in the application

Attorney General was notified of a mer­

of antitrust laws to banks may be ac­

ger

would

complished during the 1966 session of

thereafter be immune from antitrust at­

Congress, the form such changes will

approval,

the

transaction

If suit were filed within thirty

take and the effect they will have on the

days, the merger could not take effect

six cases now pending in the courts re­

until final determination of the anti­

main to be seen.

tack.




29

velopments and Problems Affecting Regulation
The Justice Department s suits to ap­
ply the antitrust laws to banks as dis­
cussed in the previous section have per­
haps been the most striking development
in bank regulation in recent years. But
there have been other developments in
bank regulation which, though of less
immediate interest to the general public,
may have consequences just as far-reaching as the court decisions which have
made headlines.
METHODS OF ACQUIRING FUNDS
The acquisition of reserves by com ­
mercial banks has always been regulated
to some extent. Reserves are derived
traditionally from three sources: capital.
Federal Reserve credit, and deposits.
Capital requirements have always been
specified by the banking authorities to
some extent and the use of capital funds
has been regulated. Additions to bank
reserves from Federal Reserve credit are
closely regulated, but the creation of re­
serves through primary deposits has at­
tracted less attention until recently. In­
dividual savings deposits are usually so­
licited on a local basis, and larger cor­
porate and correspondent bank deposits
typically are negotiated, at least to some
extent. Until recently, only very limited
use was made of the impersonal instru­
ments of the money market to acquire
deposits.

Be­

cause the market for CD’s is very im­
personal, the issuing bank may easily

of

D e p o s it

During the

longer needs the funds.

past five years, banks have raised large

Since 1933, the Board of Governors

sums through the sale of three types of

has regulated the interest rates mem­

instruments:

negotiable certificates of

ber banks may pay on time and sav­

deposit (CD’s ), subordinated debentures,

ings deposits by changes in Regula­

and

short-term

tion Q. These interest rate ceilings have

The active solicitation of cor­

become especially significant since banks

notes.




down corporate demand deposits at some
bank other than the issuing bank.

reduce the amount outstanding if it no

C e r t if ic a t e s

30

porate time deposits represented a sub­
stantial departure from previous policy
for most banks. Banks have usually wel­
comed savings deposits, which are the
deposits of individuals, having no spe­
cific maturity but which, in practice,
may be withdrawn on demand. Such de­
posits usually represent true savings and
are in the aggregate relatively stable. A
time deposit, which may be evidenced
either by an open account or by a cer­
tificate of deposit, may not be with­
drawn in less than thirty days after the
deposit.
In contrast with savings deposits, most
time deposits are highly volatile. They
consist mainly of corporate funds which
are temporarily idle, but which must be
available on specific dates for working
balances or payments purposes. Until
the advent of the CD, the great volatility
of corporate time deposits discouraged
banks from seeking them. Banks ap­
parently felt that the CD minimized the
shortcomings of corporate time deposits.
Once a CD market was developed, the
volatility of any single corporation’s de­
posit became less important. Also, the
wider market presented the possibility of
increasing time deposits by drawing

negotiable

unsecured

have issued CD’s on a large scale.
With some $16 billion of CD’s outstand­
ing in late 1965, the Board must con­
sider not only the prevention of un­
healthy competition between banks for
deposits, but also the ability of banks
to compete with other financial inter­
mediaries for deposits. A rate ceiling
low enough to impair the ability of
banks to attract and retain deposits
may have far-reaching effects.
S u b o r d in a t e d D eb e n t u r e s Since 1962,
banks have issued approximately $1 bil­
lion in capital notes and debentures. In
a sharp break with previously accepted
banking practices, banks of all sizes have
entered the market with a variety of
long-term debt instruments. Tradition­
ally, the issuance of debt instruments
to provide capital was considered inap­
propriate and unsound. It was generally
believed that a major function of bank
capital was to afford protection for de­

NEGOTIABLE TIME CERTIFICATES OF
DEPOSIT OUTSTANDING
$ Billions

positors, and that protection could best
be provided with equity capital.
In almost half the states, the sale of
capital notes or debentures by state
banks was illegal or limited to special
circumstances, and until recently na­
tional banks had no authority to raise
capital in this manner.

These restric­

tions, together with the unfavorable con­
notations involved in such issues, were
sufficient virtually to prohibit the use
of senior securities.
The situation changed quickly when,
in December 1962, the Comptroller is­
sued a ruling permitting the issuance of
either convertible or nonconvertible cap­
ital debentures by national banks.

A n­

other ruling, permitting the proceeds of




I9 6 0
Source:

1961

1962

1963

1964

1965

Board of G o vern ors of the Federal Reserve System .

31

CAPITAL NOTES AND DEBENTURES OUTSTANDING
$ M illions
1,400

1,300

all subordinated capital notes or deben­
tures to be included as part of bank
capital for the purpose of computing the
legal limit on loans to a single borrower
further enhanced the use of such se­
curities. Almost immediately after the
Comptroller’s first ruling, a number of
banks issued debentures, and many
others soon followed their lead. Today
many of the largest banks have sizable
issues of capital notes or debentures out­
standing, and the number is increasing.
Supervisory authorities are not in
agreement on the use of debt capital.
The Comptroller has encouraged its
use; the Board of Governors has not

1,200

favored it.

Some states freely permit

capital security issues, while others for­
1,100

bid them completely.

The Comptroller

considers subordinated notes and deben­
tures as part of a bank’s capital.

1,000

For

purposes of determining capital ade­
quacy, the Board of Governors con­
900

siders such issues to be a part of capital
but it has ruled that “ . . . capital notes
or debentures do not constitute ‘capital’,

800

‘capital stock’, or ‘surplus’ for the pur­
poses of the provisions of the Federal

700

Reserve Act.”
Some states which prohibited the use

600

of debt capital by banks before 1962
have

500

recently

liberalized

their

laws.

Under the dual banking system, a state
bank may escape most state regulations
by applying for a Federal charter and

400

becoming a national bank, and many
banks have done so. The Comptroller’s

300

ruling on debentures is one of several
rulings which have induced state legis­

200

latures to alter state banking laws in
order

to preserve the state banking

system.
N e g o t ia b l e

o
1963
1964
Source:
Bank Stock Q uorterly; Am erican Banker.

32




1965

N otes

U n secur ed

Another

recently

S h o r t -T erm

d e v e lo p e d

method of raising additional funds, but

thus far a minor one, is the negotiable
unsecured short-term note. This rep­
resents a further departure from the tra­
ditional reliance on equity capital and
deposits by commercial banks.
Until
recently, commercial banks had gen­
erally used the money market only for

Federal funds by national banks. Be­
tween 1956 and 1958, in several rulings
on purchases and sales in connection
with repurchase agreements, he relaxed
the restrictions

somewhat while still

holding to the concept that they involved
the lending and borrowing of funds. In

buying and selling investments, but the

1963, however, he reversed his position

short-term note, like the CD, represents

by ruling that they are purchases and

an attempt to tap that market as a source

sales of funds rather than borrowing

of loanable funds.

Since funds secured

and lending and specifically exempted

through the sale of notes are not at

them from all limitations as to amounts.

present considered to be deposits, they

The Board of Governors, in Septem­

are not subject to Regulation Q nor to

ber 1963, made it clear that under the

the reserve requirement against time de­

laws administered by the Board, a trans­

posits, nor is it necessary to pay FDIC

action in Federal funds constituted a

insurance premiums on them.

loan on the part of the selling bank and

Prospects for the further growth of

a borrowing on the part of the purchas­

note issues are still in doubt. Some state

ing bank.

banks still are faced with legal barriers.

ruling that a sale of Federal funds by a

But probably the major reason for lack

bank to another bank in the same hold­

of expansion is that the CD is working

ing company

satisfactorily. It appears likely that un­

sidered a criminal violation of the Bank

secured notes will be issued on a signi­

Holding Company Act.

ficantly larger scale only if CD’s prove
to be inadequate.

It also reaffirmed the 1959

system would

be con­

Since 1963, there has been a sub­
stantial increase in Federal funds trad­
ing, but it is impossible to say how
much of the increase is due to the Comp­

FEDERAL FUNDS

troller’s ruling. Because that ruling ap­
The term “ Federal funds” means re­

plies only to national banks, some state

serve balances of member banks at a

banks feel that they have been put in

Federal Reserve Bank.

an unfair competitive position.

If a member

bank has an excess of such funds above

one

requirements, that excess produces no

minor,

income since no interest is paid on its

authorities.

deposits at the Federal Reserve.

of

the

more

conflicts

glaring,

between

This is
even

if

supervisory

If an­

other member bank is deficient in re­
serves, it may buy (borrow) funds from

UNDERWRITING REVENUE BONDS

the bank with an excess, as an alterna­

The banking legislation of 1933 re­

tive to discounting or raising funds by

stricted the right o f commercial banks

other means. There is an active market

to underwrite bond issues. In particular,

for these funds and trading has in­

it permitted banks to underwrite bonds

creased greatly in recent years.

issued by state and local governments

The Comptroller has issued a number

only if they were “ general obligations”

of rulings on the purchase and sale of

of such units. By direct implication this




33

\KW BANK CHARTERS ISSUED
Number

1957
19 5 9
* 1 9 6 5 d a t a a s o f J u n e 30.
S o u rc e :

1961

B o a r d o f G o v e r n o r s o f t h e F e d e r a l Re se rv e S y s te m .

19 6 3

1965*

excluded "revenue or limited obligation
bonds. Thus the distinction between the
two types of securities is of considerable
importance both to commercial banks
and to issuers of this type of security.
For a long time there was no dis­
agreement over the definition of general
obligation bonds, but in October 1962.
the Comptroller ruled that the revenue
bonds of certain Georgia state au­
thorities were general obligations. Since
then he has ruled that revenue bond
issues of various public authorities in
Virginia. Illinois. Pennsylvania, and else­
where are general obligations. In late
1965 he accomplished the same purpose
by holding that revenue bonds of the
Port of New \ ork Authority were “ gen­
eral obligations of a state or political
subdivision thereof.
The Board of Gov ernors continues to
use the older definition, and has speci­
fically forbidden state member banks to
engage in the underwriting of rental
revenue bonds, despite the fact that the
rental collections were totally dependent
upon the tax income of local govern­
ments. Ihus, at present, there is a con­
flict; national banks are permitted to
engage in certain underwriting opera­
tions which are forbidden to state mem­
ber banks. There have been legislative
proposals to clarifv the issue either bv
specifically defining general obligation
bonds or by permitting all member banks
to underwrite revenue bonds, but as
of now, the matter remains unsettled.

BANK OWNERSHIP OF LEASED
EQUIPMENT
In March 1963, the Comptroller ruled
that the leasing of personal property,
acquired for that specific purpose, was
34




“ a lawful exercise of the powers of a na­
tional bank and necessary to the business
of banking.” The ruling came as a
shock to other regulatory agencies, and
as a great surprise to the banking and
legal communities. It was a direct re­
versal of a ruling of the previous Comp­
troller who had concluded that a leasing
arrangement would qualify only if it re­
quired the lessee to pay the total amount
of the “ rents” even if he were deprived
of the use of the property.

This would

give the bank an unconditional promise
to pay, and would make the so-called
“ lease”
note.

in

actual fact

The

a promissory

Comptroller’s

ruling

ap­

parently has not yet been tested in the
courts.

RENEWED COMPETITION
BETWEEN STATE AND NATIONAL

the early

the open market, and the issuance of
short-term negotiable promissory notes;

SYSTEMS
From

half of 1965. For many years prior to
1961, the states issued about two thirds
of all bank charters, but in 1964 their
share dropped to only a little more than
one third.
While state charters did not increase
as rapidly as Federal charters, there was
a substantial increase in the number is­
sued after 1961. Further, the competi­
tion between state and national regula­
tory agencies has not been limited to the
issuance of charters. In an atmosphere
reminiscent of the competitive laxity be­
fore 1930, the Comptroller has issued
numerous rulings liberalizing banking
practices, and placing national banks in
a stronger competitive position vis-a-vis
state banks.
The Comptroller has permitted for the
first time: (1) the sale of preferred
stock, capital notes, and debentures on

1930’s, when

the

(2)

ownership

(3)

ownership of mortgage-servicing

of leased equipment;

underwent

corporations; (4) the sale of data pro­

massive changes, until 1961, the num­

cessing services; (5) travel services for

American

banking system

ber of banks in the United States de­

customers;

(6)

clined slowly but steadily. A few banks

operations

through

closed their doors involuntarily, but a

rather than stock purchase of foreign

great many

e lim in a te d

banks; (7) purchase of “ key man” life

Meanwhile, the num­

insurance for the benefit of the bank;

more were

through mergers.

extensions of foreign
direct acquisition

ber of new banks chartered each year

and (8)

remained fairly stable.

savings accounts (prohibited by the Fed­

In 1946, 136

new banks were chartered; in 1960, 134.

the acceptance of corporate

eral Reserve).

In the years between, new bank charters

The Comptroller has also liberalized

ranged from a low of 55 in 1953 to a

the rules governing: (1) underwriting

high of 120 in 1956. Then, in 1961, the

of municipal securities; (2) certain trust

picture suddenly changed.

A series of

operations; (3) investment of a national

rulings from the Office of the Comp­

bank in its own premises; (4) loans to a

troller apparently stimulated great in­

single borrower; (5) sale of insurance

From

by banks; and (6) the issuance of stock

26 in 1961, the number more than

dividends, and stock options and pur­

doubled in both 1962 and 1963.

chase

terest in national bank charters.

A

plans.

The

Comptroller

also

record of 202 was set in 1964 before the

liberalized numerous practices regarding

rate dropped sharply to 57 in the first

real estate lending, and removed several




35




COMMERCIAL BANKS AND BRANCHES
Thousands

1900
Source:

1920

1940

1960

B o a r d o f G o v e r n o r s o f t h e F e d e r a l R e se rv e S y s t e m .

types of loans involving real estate from
the category of “ real estate loans” with
their various limitations.
Probably in response to the more
liberal attitude of the Comptroller, at
least 37 states have appreciably liberal­
ized their bank regulations. Meanwhile,
state banks have switched to national
charters in unprecedented numbers.
From the beginning of 1962, when the
Comptroller’s more liberal policies first
appeared, through September 1965, 88
state banks switched to national charters.
In the 12 preceding years, only 77 had
switched. Included among those switch­
ing in recent months is the Chase-Manhattan Bank, one of the largest in the
nation.
The American Bankers Association,
the National Association of Supervisors
of State Banks, and other trade groups
have voiced concern about the future of
dual banking, and have launched efforts
to prevent its erosion. Attempts are
being made to speed up the revision of
state banking codes, improve the train­
ing of state bank examiners, and to
awaken state banks and banking au­
thorities to the need for preserving a
dual banking system. Thus, the conflict
between state and national supervisors
is contributing to the constant and
rapid changes taking place in bank
regulations.




Bank regulation in the United States

Numerous efforts have been made,

It is carried out

and are being made, with some limited

by many agencies whose jurisdictions

success, to restore the previous balance

overlap at many points.

between state and national banking sys­

is vast and complex.

The potential

for jurisdictional friction and conflict is
large.

In recent years, as the banking

industry has moved vigorously to adapt

tems by making state charters more at­
tractive. Many proposals have been ad­
vanced to consolidate or unify regulatory
activities at the Federal level.

At this

its services to the changing environment,

writing no appreciable progress has been

numerous disagreements and conflicts

made in that direction.

between regulatory authorities have de­

useful by-product of the current ferment

veloped and have caused deep concern

has been to focus attention and study on

in banking circles. The problems raised
by those conflicts threaten the base of
the

unique

banking

system

of

this

Perhaps one

the nature, structure, and procedure of
bank regulation. It may be hoped that,
regardless of other consequences, this
will produce some simplification and

country and affect both the structure

clarification in our complex system of

and operations of the system.

bank regulation and supervision.

37







EARNINGS AND CAPITAL
ACCOUNTS
Net earnings before payments to the
United States Treasury rose to a record
$89,186,576.09 in 1965 from the 1964
level of $77,534,187.61. Six per cent stat­
utory dividends totaling $1,629,632.11
were paid to Fifth District member
banks, and $85,603,893.98 was paid to
the Treasury as interest on Federal Re­
serve notes.
Capital stock increased $1,953,050.00
to $28,092,450.00 as member banks
added to their stockholdings by three
per cent of the rise in their own capital
and surplus. The surplus account was in­
creased $1,953,050.00 to $28,092,450.00,
the level of paid-in capital.

country checks at Charlotte were pro­
cessed on electronic equipment.
Check volume increased 11 per cent
over the previous year, but it was pos­
sible to improve service by extending
closing hours at all three offices for
computerized country checks, Govern­
ment card checks, and postal money
orders.

CHANGE IN DISCOUNT RATE
On December 10 the Richmond Re­
serve Bank, with the approval of the
Board of Governors, raised its discount
rate from 4 per cent to 4*4 per cent.
The action was part of a package policy
move initiated December 6 when the

CHECK COLLECTION
During the current year all three of­
fices updated check handling programs
and equipment.
Richmond now has
three Burroughs B-275 systems with ad­
ditional core memory and two six-tape
listers for each system. Baltimore is
planning to replace two IBM 1421 sys­
tems and two third generation IBM
360’s early in 1966. Charlotte has two
IBM 1421 systems and has placed an
order for two of the new IBM 1979 sys­
tems as replacements.

Board of Governors raised the maximum
interest rate payable on member bank
time deposits to 5^2 per cent and ap­
proved discount rate increases for the
New York and Chicago Reserve Banks.
By December 13, similar increases had
been approved at all twelve Reserve
Banks.
The

actions

three reasons:

were

undertaken

for

(1) to bolster the Gov­

ernment’s efforts to prevent inflationary
excesses from damaging an economy al­
ready carrying the added burden of mili­

At Richmond 81 per cent of city

tary operations in Viet Nam, (2) to sup­

checks and 91 per cent of country checks

port the Government’s programs to over­

were processed on computers. Baltimore

come persistent deficits in the U. S.

handled 91 per cent of city checks and

balance of payments, and (3) to demon­

92 per cent of country checks on high­

strate anew United States determination

speed equipment, and 52 per cent of the

to maintain the international strength of

city checks and 86 per cent of the

the dollar.

The change was the first
39

since November 1964 when the rate was
increased from 3 % per cent to 4 per cent.

THE COIN SITUATION
The persistent coin shortage began to
show signs of improvement by mid-year.
As a part of the Treasury’s crash pro­
gram, the San Francisco Mint was re­
opened for preparing metal strip for
pennies and nickels and for striking the
new clad quarters.

The Treasury con­

tinued the purchase of metal strip from
private industry for nearly all denomina­
tions.

This enabled the Mints to add

additional striking presses and step up
the volume of production.
In late August the Bureau of the Mint
began production of the new type quar­

The Old Line National Bank,
Rockville, Maryland,
April 9, 1965
Metropolitan National Bank,
Richmond, Virginia,
July 15, 1965
Williamsburg National Bank,
Williamsburg, Virginia,
December 8, 1965
In addition, two former nomnember
banks converted to System membership
during the year. Southwest Virginia
Bank, Pocahontas, Virginia, adopted a
national charter under the name of
Southwest Virginia National Bank on
March 10.
Blackville State Bank,
Blackville, South Carolina, converted to
a national charter under the name of
County National Bank on November 22.

ters, which consist of a covering of 25
per cent nickel and 75 per cent copper

CHANGES IN DIRECTORS
Fifth District member banks elected

ing the new quarters to commercial

one Class A and one Class B director to

banks throughout the country.

three-year terms on the Board of Di­

During the last two months of 1965

rectors at the Head Office.

CHANGES IN OFFICIAL STAFF
The year 1965 brought about several
changes in the Bank’s official staff.
James Parthemos and Joseph F. Viverette, formerly Assistant Vice Presidents,
were elected Vice Presidents in July and
September, respectively. Mr. Parthemos
is the senior administrative officer in
the Research Department, and Mr. Viverette is senior officer in charge of Data

on a pure copper core. On November 1,
Federal Reserve Banks began distribut­

Manager, Metal Products Division, Koppers Company, Inc., Baltimore, Mary­
land. John L. Fraley, Executive Vice
President, Carolina Freight Carriers Cor­
poration, Cherryville, North Carolina,
was appointed by the Board of Gover­
nors to a three-year term at the Charlotte
Branch.
Mr. Fraley succeeds J. C.
Cowan, Jr., Vice Chairman of the Board,
Burlington Industries, Inc., Greensboro,
North Carolina.

William A.

Processing,

Fiscal

Agency, Planning,

and Securities.
Stanhope A. Ligon, Cashier of the
Charlotte Branch, retired in September

At

Davis, President, Peoples Bank of Mul­

and Stuart P. Fishburne, formerly an

year end it appeared that the coin

lens, Mullens, West Virginia, was elected

Assistant Vice President at the Rich­

shortage was substantially broken, with

a Class A director. Mr. Davis succeeds

mond Office, was named Vice President

only half dollars in short supply.

The

David K. Cushwa, Jr., President, Wash­

and Cashier of the Charlotte Branch.

Treasury’s current production schedules,

ington County National Savings Bank,

In December, Clifford B. Beavers, junior

coins were circulating more freely.

coupled

with

circulation

of

existing

Williamsport,

Maryland.

Elected

as

officer in charge of the Transit Depart­

coins, suggest that the crisis has passed

Class B director was Charles D. Lyon,

ment,

its peak.

President. The Potomac Edison Com­

Cashier to Assistant Vice President.

NEW MEMBER BANKS
Four new national banks were orga­

was

promoted

from

Assistant

pany, Hagerstown, Maryland, who suc­

Appointed to the official staff at the

ceeds Raymond E. Salvati, Consultant,

Richmond Office were Jimmie R. Mon-

Island Creek Coal Company, Hunting­

hollon and William C. Glover. Mr. Mon-

ton, West Virginia.

hollon was named Assistant Vice Presi­

nized in the Fifth District during 1965,

The Board of Governors appointed

dent in Research and Mr. Glover was

and were welcomed into the Federal Re­

Arnold J. Kleff, Jr., Manager, American

named Assistant Vice President in Plan­

serve System.

Smelting & Refining Company, Balti­

ning and Data Processing.

more, Maryland, to fill a vacancy on the

Wilson was appointed Assistant Cashier

These banks, and the

dates of their openings, are:

oc­

at the Baltimore Branch, succeeding

Norfolk, Virginia,

casioned by the resignation of Harry B.

A. C. Wienert, who retired at the end

January 5, 1965

Cummings, Vice President and General

of November.

First National Bank of Norfolk,

40




Board of the Baltimore Branch

Gerald L.

Summary o f Operations
1965

1964

CHECK CLEARING & COLLECTION
Dollar amount
Commercial bank checks* ..............
Government ch eck s**......................
Other items ........................................
Number of items
Commercial bank checks* ..............
Government ch eck s**......................
Other items ........................................

108,683,006,000
9,468,158,000
701.191.000

98,095,365,000
9,421,817,000
987.180.000

339.698.000
59,423,000
4,312,000

302.129.000
58,193,000
3,870,000

2,293,759,320
69,121,605
834,771,400
59,948,400

2,158,384,872
46,345,858
820,864,500
111,139,000

236,017
180,667

434,137
378,801

Dollar amount
Total loans made during year ....................
Daily average loans outstanding ................

9,113,929,315
24,969,669

5,512,538,400
15,061,580

Number of banks borrowing during the year

95

102

8,286,880,667
174,593

6,694,596,621
176,243

100,109,860
371,763

98.601,038
383,406

348,910,372
8,418,449

349,361,605
7,923,289

418,478,236
8,726,857

384,416,970
7,954,864

2,501,017,121
859,108

2,355,519,585
837,886

159,039,470,295
283,619

161,866,483,638
264,614

CURRENCY & COIN
Currency disbursed— Dollar am ount................................
Coin disbursed— Dollar amount ......................................
Dollar amount of currency withdrawn for destruction
Dollar amount of currency burned .................................
Daily average of currency burned
Dollar amount .................................................................
Number ..............................................................................
DISCOUNT & CREDIT

FISCAL AGENCY ACTIVITIES
Marketable securities delivered or redeemed
Dollar amount ................................................
Number ............................................................
Coupons redeemed
Dollar amount ................................................
Number ............................................................
Savings bond issues (including reissue)
Dollar amount ................................................
Number ............................................................
Savings bond redemptions
Dollar amount ................................................
Number ............................................................
Withheld tax depositary receipts processed
Dollar amount ................................................
Number ............................................................ .
Transfers of Funds
Dollar amount ................................................
Number .............................................................
^Excluding checks on this Bank
**Includes postal m oney orders




41

Condition
D e c e m b e r 31,1965

D e c e m b e r 31,1964

Gold certifica te accoun t __ __________________
Redem ption fu nd fo r Federal Reserve notes

$1,012,486,436.66
142.512.550.00

$ 895,509,335.08
133,364,850.00

TOTAL GOLD CERTIFICATE RESERVES .__

1,154,998,986.66

1,028,874,185.08

102.010.149.00
8,773,823.52
2,650,000.00

56,420,180.00
8,661,450.13
13,855,000.00

643,686,000.00

438,268,000.00

1.756.015.000.00
463,254,000.00

1.826.322.000.00
382,449,000.00

TOTAL U. S. GOVERNMENT SECURITIES

2.862.955.000.00

2.647.039.000.00

TOTAL LOANS AND SECURITIES __________

2.865.605.000.00

2.660.894.000.00

699,625,048.59
4,736,309.27
53,520,673.80

666,004,788.33
4,884,719.71
33,238,793.10

$4,889,269,990.84

$4,458,978,116.35

$3,388,300,616.00

$3,010,111,595.00

M em ber bank— reserve accounts ________ _____ ________________
U. S. T reasu rer— general account ____________________________
F oreign __________________ __ ___________________________________
O ther ____________________________________________________________

824,915,070.66
68,830,632.64
7,500,000.00
12,749,807.26

780,280,497.01
56,781,775.78
11 , 000, 000.00
10,075,861.15

TOTAL DEPOSITS _________________________________________________

D eferred availability cash items _________________________________
Other liabilities ___________________________________________________

913,995,510.56
518,052,215.27
12,736,749.01

858,138,133.94
504,148,407.28
34,301,180.13

T O T A L L IA B IL IT IE S _______________________

4,833,085,090.84

4,406,699,316.35

28.092.450.00
28.092.450.00

26.139.400.00
26.139.400.00

$4,889,269,990.84

$4,458,978,116.35

$

$

ASSETS:

F ederal Reserve notes o f other Federal Reserve Banks
Other cash ______________________________________________
D iscount and advances ____________________________ ____
U. S. G overnm ent securities:
Bills ___________ _________________________________ _____ _
C ertifica tes ____________________________________________
N otes _________________________________________________
Bonds __________________________________________________

Cash item s in process o f collection
Bank prem ises .......................................
Other assets ________________________
T O T A L A S S E T S ...

L IA B IL IT IE S :
F ederal Reserve notes _______ ____________________________________
D e p o sits:

C A P IT A L A C C O U N T S :
Capital paid in _______ ____________________________________________
Surplus ____________________________________________________________
T O T A L L IA B IL IT IE S A N D C A P IT A L A C C O U N T S

C ontingent liability on acceptances purchased fo r foreig n correspondents

42




7,180,000.00

6,140,000.00

STATEMENTS
Earnings and Expenses
E A R N IN G S :

1965

D iscounts and advances _____________________ .
In terest on U. S. G overnm ent securities ____ ___ .
F oreign currencies _________________________________
Other earnings ________________________________

$

TOTAL CURRENT EARNINGS __________________ ___ _________

1,048,591.04
103,120,760.22
699,210.82
20,538.04

1964

$

542,502.38
90,899,833.80
317,400.76
21,022.49

104,889,100.12

91,780,759.43

12,844,811.25
428,900.00
2,521,522.65

12,399,415.31
429,500.00
1,469,254.02

15,795,233.90

14,298,169.33

89,093,866.22

77,482,590.10

97,860.47

42,609.98
11,306.13

97,860.47

53,916.11

L oss on sales o f U. S. G overnm ent securities (n et) ______________
A ll other ______________________________________________________ __ _______________

840.27
4,310.33

2,318.60

TOTAL DEDUCTIONS _____________________________________________________________

5,150.60

2,318.60

N E T A D D IT IO N S __________________________________________________

92,709.87

51,597.51

EXPEN SES:
O peratin g expenses (in cluding depreciation on bank prem ises) a fter deduct­
in g reim bursem ents received fo r certain F isca l A g en cy and other expenses
Assessm ents fo r expenses o f B oard o f G overnors _________ ____
Cost o f F ederal Reserve curren cy ______________________________________
N E T E X P E N S E S _________________________________
C U R R E N T N E T E A R N IN G S ___________ _________

....

.

.

ADDITIONS TO CURRENT NET EARNINGS:

P r o fit on sales o f U. S. Governm ent securities (n et) ___________________
A ll other ____ __ ______________________________________________ ____.
TOTAL ADDITIONS __________________________________________________
DEDUCTIONS FROM CURRENT NET EARNINGS:

N E T E A R N IN G S B E F O R E P A Y M E N T S TO U. S. T R E A S U R Y ,.

$ 89,186,576.09

$

77,534,187.61

$

1,629,632.11
85,603,893.98
1,953,050.00

$

1,528,499.41
99,005,588.20
-22,999,900.00

$ 89,186,576.09

$

77,534,187.61

Balance at close o f previous year _________________________________________________
P aym ents to U. S. T reasu ry (interest on Federal Reserve notes) ______________
A ddition account o f p rofits fo r year ....____________________________

$ 26,139,400.00

$

49.139.300.00
22.999.900.00

B A L A N C E A T CLO SE O F C U R R E N T Y E A R ___________________

$ 28,092,450.00

$

26,139,400.00

$ 26,139,400.00
1,978,200.00

$

24,569,650.00
1,619,650.00

D ividends paid ______________ __ ________________ ___ ____________________________
Paym ents to U. S. T reasury (interest on Federal Reserve notes) ___________
T ra n sferred to surplus _________________________________________
T O T A L ________________________________________________________________

SURPLUS

C A P IT A L

ACCOUNT

STO CK

1,953,050.00

ACCOUNT

(R epresen tin g am ount paid in, w hich is 50% o f am ount subscribed)
Balance at close o f previous year ________________________________________________
Issued du ring the year _________________________________________________________ __
__________

28,117,600.00
25,150.00

B A L A N C E A T CLO SE O F C U R R E N T Y E A R ___________________

$ 28,092,450.00

Cancelled du ring the year _....




__________ _____ _____________ _____

26,189,300.00
49,900.00

$

26,139,400.00

43

EDERAL RESERVE

Edwin Hyde

Chairman of the Board and Federal Reserve Agent

William H. Grier

Deputy Chairman of the Board

George Blanton, Jr.

President, First National Bank
Shelby, North Carolina
(Term expires December 31, 1967)

David K. Cushwa, Jr.

President, The Washington County National Savings Bank
Williamsport, Maryland
(Term expired December 31, 1965)
Succeeded by: William A. Davis
President, Peoples Bank of Mullens
Mullens, West Virginia
(Term expires December 31, 1968)

Robert T. Marsh, Jr.

Chairman of the Board, First & Merchants National Bank
Richmond, Virginia
(Term expires December 31, 1966)

Robert Richardson Coker

President, Coker s Pedigreed Seed Company
Hartsville, South Carolina
(Term expires December 31, 1967)

Robert E. L. Johnson

Former Chairman of the Board (R etired), Woodward & Lothrop, Inc.
Wasliington, D. C.
(Term expires December 31, 1966)

Raymond E. Salvati

Consultant, Island Creek Coal Company
Huntington, West Virginia
(Term expired December 31, 1965)
Succeeded by: Charles D. Lyon
President, The Potomac Edison Company
Hagerstown, Maryland
(Term expires December 31, 1968)

Wilson H. Elkins

President, University of Maryland
College Park, Maryland
(Term expires December 31, 1968)

William H. Grier

President, Rock Hill Printing & Finishing Company
Rock Hill, South Carolina
(Term expires December 31, 1966)

Edwin Hyde

President, Miller & Rhoads, Inc.
Richmond, Virginia
(Term expires December 31, 1967)

C lass A

C lass B

C lass C

M e m b e r F e d e r a l A dv iso r y C o u n c il

John F. Watlington, Jr.

44




President, Wachovia Bank and Trust Company
Winston-Salem, North Carolina
( Term expires December 31, 1966)

BANK OF RICHMOND

Officers
Edward A. Wayne, President
Aubrey N. Heflin, First Vice President

Robert P. Black, Vice President

John L. Nosker, Vice President

J. Gordon Dickerson, Jr., Vice President

Joseph M. Nowlan, Vice President and Cashier

W elford S. Farmer, Vice President and General Counsel

James Parthemos, Vice President

Donald F. Hagner, Vice President

B. U. Ratchford, Vice President and Senior Adviser

Edmund F. Mac Donald, Vice President

Raymond E. Sanders, Vice President

Upton S. Martin, Vice President

Joseph F. Viverette, Vice President

Clifford B. Beavers, Assistant Vice President

John C. Horigan, Chief Examiner

John G. Deitrick, Assistant Vice President
Jimmie R. Monhollon, Assistant Vice President
H. Ernest Ford, Assistant Vice President
Arthur V. Myers, Jr., Assistant Vice President

William C. Glover, Assistant Vice President
William B. Harrison, III, Assistant Vice President

Victor E. Pregeant, III, Assistant Vice President and Secretary

J. Lander Allin, Jr., Assistant Cashier

Chester D. Porter, Jr., Examining Officer

Edward L. Bennett, Examining Officer
R. Henry Smart, Examining Officer
John E. Friend, Assistant Cashier
Robert L. Miller, Assistant Cashier




Jack H. Wyatt, Assistant Cashier

G. Harold Snead, General Auditor
Roger P. Schad, Assistant General Auditor
45

Directors

(D ecem ber

31, 1965)

Joseph B. Browne

President, Union Trust Company of Maryland
Baltimore, Maryland
(Term expires December 31, 1968)

E. Wayne Corrin

President, Consolidated Gas Supply Corporation
Clarksburg, West Virginia
(Term expires December 31, 1968)

Leonard C. Crewe, Jr.

Chairman of the Board, Maryland Specialty Wire, Inc.
Cockeysville, Maryland
(Term expires December 31, 1967)

Harry B. Cummings

Vice President and General Manager, Metal Products Division, Koppers Co., Inc.
Baltimore, Maryland
(Resigned December 31, 1965)
Succeeded by: Arnold J. K lejf, Jr.
Manager, American Smelting and Refining Company
Baltimore, Maryland
(Term expires December 31, 1966)

Adrian L. McCardell

President, First National Bank of Maryland
Baltimore, Maryland
(Term expires December 31, 1967)

Martin Piribek

Executive Vice President, The First National Bank of Morgantown
Morgantown, West Virginia
(Term expires December 31, 1967)

John P. Sippel

President, The Citizens National Bank
Laurel, Maryland
(Term expires December 31, 1966)

Officers
Donald F. Hagner, Vice President
A. A. Stewart, Jr., Cashier
B. F. Armstrong, Assistant Cashier

E. Riggs Jones, Jr., Assistant Cashier

Gerald L. Wilson, Assistant Cashier
46




(D e c e m b e r

31, 1965)

Directors

Wallace W. Brawley

Senior Executive Vice President, The First National Bank of South Carolina
Spartanburg, South Carolina
( Term expires December 31, 1967)

j . C. Cowan, Jr.

Vice Chairman of the Board, Burlington Industries, Inc.
Greensboro, North Carolina
(Term expired December 31, 1965)
Succeeded by: John L. Fraley
Executive Vice President, Carolina Freight Carriers Corporation
Cherryville, North Carolina
(Term expires December 31, 1968)

Carl G. McCraw

President, First Union National Bank of North Carolina
Charlotte, North Carolina
(Term expires December 31, 1967)

W. W. McEachern

Chairman and Chief Executive Officer, The South Carolina National Bank
Greenville, South Carolina
(Term expires December 31, 1966)

William B. McGuire

President, Duke Power Company
Charlotte, North Carolina
(Term expires December 31, 1967)

James A. Morris

Dean, School of Business Administration, University of South Carolina
Columbia, South Carolina
(Term expires December 31, 1966)

G. Harold Myrick

Executive Vice President and Trust Officer, First National Bank
Lincolnton, North Carolina
(Term expires December 31, 1968)

Officers
Edmund F. Mac Donald, Vice President
Stuart P. Fishburne, Vice President and Cashier
Winfred W. Keller, Assistant Cashier




Fred C. Krueger, Jr., Assistant Cashier

E. Clinton Mondy, Assistant Cashier

47