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87th Congress, 2d Session

House Report No. 2062

BANK SERVICE CORPORATIONS

REPORT
OF THE

COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
EIGHTY-SEVENTH CONGRESS
SECOND SESSION
TOGETHER WITH

DISSENTING VIEWS
ON

H.R. 8874

JULY 30,1962.—Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
U.S. GOVERNMENT PRINTING OFFICE
85006


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WASHINGTON :

1962

COMMITTEE ON BANKING AND CURRENCY
BKENT SPENCE, Kentucky, Chairman
WRIGHT PATMAN, Texas
CLARENCE E. KILBURN, New York
GORDON L. McDONOUGH, California
ALBERT RAINS, Alabama
WILLIAM B. WIDNALL, New Jersey
ABRAHAM J. MULTER, New York
EUGENE SILER, Kentucky
.WILLIAM A. BARRETT, Pennsylvania
PAUL A. FINO, New Y'ork
LEONOR K. SULLIVAN, Missouri
FLORENCE P. DWYER, New Jersey
HENRY S. REUSS, Wisconsin
EDWARD J. DERWINSKI, Illinois
THOMAS L. ASHLEY', Ohio
SEYMOUR HALPERN, New York
CHARLES A. VANIK, Ohio
JAMES HARVEY, Michigan
WILLIAM S. MOORHEAD, Pennsylvania
TOM V. MOOREHEAD, Ohio
CLEM MILLER, California
JOHN H. ROUSSELOT, California
EDWARD R. FINNEGAN, Illinois
ROBERT G. STEPHENS, JK., Georgia
WILLIAM W. SCRANTON, Pennsylvania
FERN AND J. ST. GERMAIN, Rhode Island
HUGH L. CAREY', New York
HENRY B. GONZALEZ, Texas
HAROLD M, RYAN, Michigan
JOHN E. BARRIERE, Majority Staff Member
OBMAN S. FINK, Minority Staff Member


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ROBEET R. POSTON, Counsel

THOMAS A. GRAHAM, Jr., Counsel

87TH CONGRESS ) HOUSE OF REPRESENTATIVES (
KEPORT
2d Session
J
( N o . 2062

BANK SERVICE CORPORATIONS

JULY 30, 1962.—Committed to the Committee of the Whole House on the State
of the Union and ordered to be printed

Mr. SPENCE, from the Committee on Banking and Currency, submitted the following

REPORT
together with
DISSENTING VIEWS
[To accompany H.R. 8874]

The Committee on Banking and Currency, to whom was referred
the bill (H.R. 8874) to authorize certain banks to invest in corporations whose purpose is to provide clerical services for them, and for
other purposes, having considered the same, report favorably thereon
with an amendment and recommend that the bill, as amended, do pass.
The amendment is as follows:
Strike out all after the enacting clause and insert the matter which
appears in italic in the bill herewith reported to the House.
WHAT THE BILL WOULD DO

H.R. 8874 would enable banks to utilize modern equipment through
stockownership in a jointly owned service corporation. At the present
time nine States have enacted legislation specifically authorizing State
banks to invest in bank service corporations, and in New York and
possibly other States, State banks are authorized to invest in such
service corporations under general provisions of the code. However,
Federal law prevents national banks and certain other federally supervised banks from sharing this privilege because of investment restrictions in the applicable Federal statutes.
The bill removes all limitations and prohibitions of Federal law
exclusively relating to banks, regardless of how owned, which would
otherwise prevent banks from investing up to 10 percent of their
capital and surplus in bank service corporations. The bill requires
that initially, at least two banks must own stock in any such corpora1

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tion, but provides that if one bank ceases to own stock and participate in a bank service corporation, the remaining bank may continue
to hold stock in it.
Provision is made that a bank service corporation must, if requested,
furnish its services to competing banks unless comparable services at
competitive cost are available to the applying banks from another
source, or unless the furnishing of the services sought by the competing
bank would be beyond the practical capacity of the corporation. If
required to furnish such services the corporation would have the
option of either issuing stock and furnishing bank services on the same
basis as to other stockholders, or furnishing the services at cost (including the reasonable cost of capital). Bank service corporations
are prohibited from performing more than one-half of their services
for persons other than banks.
The last section of the bill provides that whenever a federally supervised bank has bank services performed for it, regardless of whether
they are performed by an affiliated service corporation or by some
wholly independent enterprise, the performance of such services must
be subject to examination, and performed in accordance with regulations of the supervisory agencies, to the same extent as if the bank itself
were performing them on its own premises. Quite apart from the
investment problem dealt with in the preceding sections of the bill, it
would obviously be unwise to permit banks to avoid the examination
and supervision of vital banking functions by the simple expedient of
farming out such functions.
THE NEED FOR THE BILL

The demand for bank services is increasing at an extremely rapid
rate. Many banks have found it difficult to acquire adequate personnel to handle this mounting workload. Testimony indicated that
the volume of checks in circulation has increased tremendously during
the past two decades. The estimated check volume in 1939 was 3.5
billion. The volume is increasing at the rate of about one-half billion
items per year. By 1970 the number of checks is expected to be at an
annual rate of 22 billion. In addition to check handling there is a
need for automation of other bank services. Some banks are now
processing their savings accounts, computing payrolls, calculating
other credits and charges, and preparing and mailing statements
through the use of automatic equipment. For the majority of banks
the high cost of equipment makes this impossible.
Larger banks are generally able to afford this automatic equipment,
but smaller institutions find the cost prohibitive. According to a
study made by the Federal Reserve System, nearly all large banks
in the group they surveyed are presently using some form of automated
equipment or plan to do so within the next 3 years. However, the
ratio of automating banks to the total number of banks falls rapidly
as one moves down the scale in bank size. Thus, it is becoming more
and more difficult for smaller banks to compete with larger banks in
offering complete and efficient banking services to their customers.
Testimony was received which indicated unless a satisfactory means
is devised wThereby smaller banks may acquire benefits of automated
equipment, many of them may be absorbed by larger banks.
Under this bill two or more banks would be able to pool their resources through the corporate device in order to gain the benefits

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of this expensive equipment for themselves and for the people in their
communities.
VIEWS OF THE FEDERAL BANK SUPERVISORY AGENCIES

All of the bank supervisory agencies have submitted reports on the
bill. The reports are as follows:
APRIL 26, 1962.
Hon. BRENT SPENCE,
Chairman, Committee on Ranking and Currency,
House of ^Representatives, Washington, D.C.
DEAR MR. CHAIRMAN: This is in reply to your request for the
comments of this Department on H.R. 8874, to authorize certain
banks to invest in corporations whose purpose is to provide clerical
services for them, and for other purposes.
The bill would authorize national banks, district banks, and State
member banks to invest in a corporation organized to perform clerical
services for two or more banks.
The Treasury Department is in accord with the objectives of the
proposed legislation but feels that its scope should be extended in two
respects. Clerical services are not the only services which might be
performed better or at lesss cost by a service corporation. Furthermore, no reason appears why a corporation organized to provide
services for a single bank should be excluded from the benefits of the
proposed legislation.
The Treasury, therefore, recommends (1) that the committee give
consideration to other services which a service corporation might
properly be authorized to perform and (2) that such corporation be
authorized to perform services for one or more.
The Department has been advised by the Bureau of the Budget
that there is no objection from the standpoint of the administration's
program to the submission of this report to your committee.
Sincerely yours,
ROBERT H. KNIGHT, General Counsel.
JULY 25, 1962.
Hon. BRENT SPENCE,
Chairman, Committee on Banking and Currency,
House oj Representatives, Washington, D.C.
DEAR MR. CHAIRMAN: Reference is made to your request for the
views of this Department with respect to committee amendments to
H.R. 8874, a bill to authorize certain banks to invest in corporations
whose purpose is to provide clerical services for them, and for other
purposes, as amended.
This bill would authorize national batiks, district banks, member
banks, or nonmember insured banks to invest an amount not in excess
of 10 percent of capital and surplus in the stock of a corporation organized to perform services for two or more banks. The bill, as amended,
subjects the service corporations to regulation by existing Federal
banking agencies and also prescribes certain other limitations on the
activities of the service corporations.


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The Department prefers the original bill, which was designed to
remove the impediment in existing law to investment in the stock of
such service corporations. The Department believes that H.R. 8874,
as amended, by incorporating a number of additional restrictions on
such investment, unnecessarily limits the possibilities for banks to
obtain the benefits which were intended to be afforded under the original bill. These restrictions have been discussed in detail by members
of my staff and the staff of your committee. The Department will
be glad to supply a memorandum setting forth its objections to the
proposal, should your committee so desire.
In view of the need for the expedition of this report, it has not been
possible to obtain the customary Bureau of the Budget clearance prior
to its submission.
Sincerely yours,
ROBERT H. KNIGHT General Counsel.
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM,
Washington, March 1, 1962.

Hon. BRENT SPENCE,
Chairman, Banking and Currency Committee,
House of Representatives, Washington, D.C.
DEAR MR. CHAIRMAN: This is in reply to your letter of August 28,
1961, asking for a report from the Board on the bill H.R. 8874, to
authorize certain banks to invest in corporations whose purpose is
to provide clerical services for them, and for other purposes. If
enacted, the bill would be cited as the "Bank Service Corporation
Act."
While it favors the objective of the bill, the Board wishes to emphasize the relatively new and rapidly developing field to which the
bill addresses itself. Suggestions as to changes in some of the features
of the bill are set forth in the latter part of this letter.
The basis for the bill is the improvements in recent years in data
processing through the use of electronic and related equipment
designed for that purpose. This equipment is being utilized by more
and more banks. For example, some banks have purchased the
equipment because, notwithstanding the high initial cost, its use
makes possible operating economies and improvements in services
not otherwise attainable. Other banks have service contracts with
data processing centers operated by private commercial concerns.
H.R. 8874 undertakes to make the benefits of such equipment available to banks through an additional device that might be attractive
especially to many smaller or medium sized banks.
"Banks service corporation" is defined by the bill as "a corporation
whose primary purpose is to perform for two or more banks, each of
which has an in vestment in such corporation, services such as check
and deposit sorting and posting, computation and posting of interest
and other credits and charges, preparation and mailing of statements,
notices, and similar items, or any other similar clerical or bookkeeping
function."
H.R. 8874 would permit any national bank, any bank organized
under the lawT of the District of Columbia, and any State bank that
is a member of the Federal Reserve Svstem and is authorized to do

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so under State law, to make investments in a bank service corporation, either by the purchase of its stock or by loans or advances
thereto. In the absence of such an authorization, investments of this
kind by member banks would be prohibited or restricted under various
provisions of the Federal banking laws. But, if a State member bank
had no authority under the applicable State law to invest in a bank
service corporation, State enabling legislation would be necessary,
notwithstanding enactment by Congress of legislation like the present
bill. It is understood that enabling legislation has been enacted thus
far by six States; i.e., Connecticut, Iowa, Maine, Michigan, Ohio, and
Pennsylvania.
The bill limits the total amount of investments outstanding at any
one time in a bank service corporation by any such bank to 10 percent
of its capital and surplus, unless approved by the Comptroller of the
Currency in the case of a National or a District bank, or by the Board
of Governors of the Federal Reserve System in the case of a State
member bank. Investments in excess of that limitation may be
approved by the Federal supervisory agency concerned if, in its judgment, (1) the investment is reasonable and prudent in relation to the
financial strength of the bank; (2) the corporation may be reasonably
expected to effect for the bank reduced clerical costs or improvements
in customer services sufficient to justify the investment; and (3) the
appropriate Federal supervisory agency receives satisfactory assurances that, whenever the 10-percent limitation is exceeded, (a) the
corporation will make such reports to the agency as it may require,
and (6) the corporation's charter, capitalization, scope of operations,
or schedule of charges for services will not be changed materially
without the agency's approval.
Bank service corporation.—The definition of "bank service corporation" in section 2 (a) of the bill is quoted above. As the definition
recognizes, the efficiency of a bank service corporation and the resulting benefits to the investing banks might be increased in some circumstances if the corporation were not limited to serving the banks
exclusively. The Board believes, however, that the definition should
be changed to make it clearer that over one-half of the corporation's
business would have to be that of serving the investing banks, and to
limit any business of the corporation with others to serving them in
the same way permissible as to banks. These suggestions might be
accomplished by substituting for the language "whose primary
purpose is to perform" in line 7 on page 1 of the bill, the language "(1)
whose principal purpose is to perform"; and by adding at the very
end of the definition new language reading "and (2) whose other
purposes, if any, are limited to the performance of comparable services
for others."
The definition of "bank service corporation," includes an enumeration of the services to be performed for the banks, followed by the
language "or any other similar clerical or bookkeeping function."
(See p. 2 of the bill, lines 2 and 3.) In order to assure the maximum
benefit from the operations of a bank service corporation, it is suggested that the language just quoted be broadened to read "or any
other similar clerical, bookkeeping, accounting, or statistical function
related to the business of the banks."
State nonmember insured banks.—Despite the provision of the bill,
section 6(a)(l) of the Bank Holding Company Act (U.S.C., title 12,

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BANK SERVICE CORPORATIONS

sec. 1845) would continue to preclude a State nonmember insured
bank that is a subsidiary of a bank holding company from investing
in a bank service corporation that is also a subsidiary of the holding
company and is not engaged solely in serving the holding company or
its subsidiary banks. It is believed that this could be remedied by an
amendment to section 3 of the bill which would include State nonmember insured banks among the banks which may invest in bank
service corporations, and by an appropriate change in section 2(d) of
the bill. The Board would have no objection to amendments to the
bill in these respects.
Investments exceeding the 10 percent limitation.—In connection with
approval by the Federal supervisory agency concerned of total investments by a bank in a bank service corporation in excess of 10 percent
of the bank's capital and surplus, section 4(2) requires the agency,
among other things, to be satisfied that "the corporation may reasonably be expected to provide a reduction in clerical costs, or an
improvement in the services offered by the bank to its customers, or
some combination thereof, which is sufficient to justify the investment." At the same time, section 4(1) would require the agency to
be satisfied that "the investment is reasonable and prudent in relation
to the financial strength of the bank." The Board suggests that
section 4(2) be deleted. The detailed nature thereof would not only
be conducive to administrative difficulties, but the provision itself is
not necessary in view of the broad scope of section 4(1).
Section 4(3)(B) requires, in effect, that whenever the 10-percent
investment limitation is exceeded, "no amendment shall be made to
the charter, and no substantial change may be made in the [bank
service] corporation's capitalization, scope of operations, or schedule
of charges for services without the approval of" the Federal supervisory agency concerned. It is suggested that the language just
quoted be changed to read "no substantial change may be made in
the capitalization or operations of the corporation without the
approval of such agency." This simplified provision would seem
entirely adequate to protect the investing banks.
Reports and examinations.—Under section 4(3) (A) of the bill, the
Federal supervisor}7 agency concerned is entitled to reports from
the bank service corporation whenever the bank's total investment
therein exceeds the 10-percent limitation. The Board believes that
the purpose of a provision for reports from a bank service corporation
would be better effectuated if the provision were broadened to include
also examinations of such corporations and certain regulatory safeguards, and if the provision, as so broadened, were made applicable
irrespective of the 10-percent limitation. This might be accomplished by deleting section 4(3) (A) of the bill and adding at the end
of section 3 a new sentence such as the following:
"No investment shall be made pursuant to this section unless
the bank first obtains from the bank service corporation an agreement that it will permit examiners appointed by the Federal supervisory agency concerned to make such examination of the corporation
as the agency may deem necessary, will make such reports to the
agency as it may require, and will comply with such regulations as
the agency may prescribe as necessary or appropriate to assure


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both to the bank and the corporation adequate systems of insurance
protection and internal audit and control."
Relation? with other data processing organizations.—As pointed out
above, some banks have already availed themselves of services of the
kinds contemplated by H.R. 8874 for bank service corporations,
through contractual arrangements with data processing centers operated by private commercial concerns. It would seem reasonable to
expect the number of such banks to increase. The Board believes that
its suggestion above with respect to examinations, reports, and regulations in the case of bank service corporations should be made applicable as well to other data processing organizations serving banks.
If the foregoing suggested addition to section 3 of the bill should be
adopted, the latter suggestion might be accomplished by adding to the
bill a new section 5 along the following lines:
"SEC. 5. Xo bank of a kind referred to in section 3 of this Act
shall enter into any contract or other arrangement for the purpose of
obtaining services described in section 2 (a) of this Act from any person
other than a bank service corporation, unless the bank first obtains
from such person an areement of the kind required by the last
sentence of section 3 of this Act. As used in this section 'person'
includes an individual, corporation, partnership, association, and any
other organization whether or not incorporated."
In addition to the above suggestions, the Board's staff will be glad
to discuss with your staff a few minor suggestions relating solely to
technical or drafting matters.
It is hoped that the foregoing may be helpful in connection with
such consideration as your committee may give to H.R. 8874.
Sincerely yours,
WM. McC. MARTIN, Jr.
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM,
Washington, July 25, 1962.
Hon. BRENT SPENCE,
Chairman, Committee on Banking and Currency,
House of Representatives, Washington, D.C.
DEAR MR. CHAIRMAN: This is in response to your request for the
Board's views on the substitute amendment to H.R. 8874, adopted
yesterday by Subcommittee No. 1 of the House Banking and Currency
Committee.
As indicated to you in the Board's report submitted under date of
March 1, the Board favors the objective of this bill. The substitute
amendment adopted by the subcommittee in substance would carry
out the suggestions made by the Board in its earlier report, and the
Board is especially pleased to note that the new bill includes in section
5 provisions that are needed to insure adequate regulation and examination of bank services performed off the bank's premises. The
Board, accordingly, recommends enactment of the bill as amended.
Sincerely yours,
WM. McC. MARTIN, Jr.

H. Kept. 2062, 87-2
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FEDERAL DEPOSIT INSURANCE CORPORATION,
OFFICE OF THE CHAIRMAN,
Washington, April 25, 1962.
Hon. BRENT SPENCE,
Chairman, Committee on Banking and Currency,
House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN: The Corporation has been requested to
express its views on H.R. 8874, a bill introduced in the House of Representatives on August 23, 1961, by Mr. Spence. The proposed bill
would permit national banks and State member banks, when authorized by State law, to invest not exceeding 10 percent of the bank's
capital and surplus, or such additional sum as might be approved by
the appropriate Federal supervisory agency, in stock in a bank
service corporation, established to provide clerical and bookkeeping
services to the banks participating in the establishment of the corporation and in the services to be rendered by the corporation.
The capacity of the banking system, to adequately service the needs
of commerce and industry, depends on its ability to expeditiously
process daily a mountainous volume of paper instruments evidencing
approximately 95 percent of all business transactions. The bank
clearing system is under heavy strain due to the tremendous expansion in the national economy and also by reason of the very great
enlargement in bank services which has taken place during the past
15 years.
The electronic computer, with related equipment, is ideally suited
to the accounting needs of banks, but unfortunately is so costly that
only the large banks can afford the machines. Were the small banks,
and 10,000 of the 13,400 banks of the country are classed as small
banks, unable to utilize the electronic computer because of cost, they
would be placed at a serious disadvantage and ultimately have to
become a part of a larger banking system in order to survive.
Fortunately, the great speed and capabilities of computers make it
possible for one installation to perform the accounting function for
several smaller banks located within a county or regional area possessed of good communications. By sharing the expense, two or more
banks may enjoy the benefits of a computer system on a par with
large banks. For these reasons we should recommend that national
banks, and insured State banks when authorized by State law, be
enabled to invest in bank service corporations up to 10 percent of the
bank's capital and surplus, without prior approval of Federal bank
supervisory agencies, and to such additional amount, and under such
conditions, as the Federal bank supervisory agencies may permit.
The Corporation endorses in principle the proposal outlined in the
subject bill. However, it offers for consideration the following
amendments thereto that appear to improve the proposal:
(a) For purposes of more accurately denning the functions of
the bank service corporation, it is recommended that the word
"accounting" be added to line 2 of page 2 (sec. 2(a)) between
the words "clerical" and "or."
(b) The definition of Federal supervisory agency at line 11
through line 15 on page 2 (sec. 2(d)) should be expended to
include the Federal Deposit Insurance Corporation for insured
State nonmember banks.


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(c) The authorization appearing in section 3 on page 2 should
be extended to include "any insured State nonmember bank."
(d) There should be added a new section—"Section 5"—which
would provide for the examination, visitation and supervision by
State and Federal bank supervisory authorities to the same extent
as the banks, or any of them, which are serviced by the bank
service corporation, are subject.
(e) There should be added another new section, which should
provide that no insured bank could contract for services, such
as those provided by a bank service corporation, unless the
servicing party agrees to and, in fact, does permit the State and
Federal bank supervisory authorities to exercise the right of
visitation in the same manner and to the same extent as contemplated in the preceding paragraph.
With these amendments, the Corporation would favor the bill's
enactment. We would be glad to have our Legal Division assist
your staff in drafting the provisions of these amendments, if they
meet with your approval.
We have been advised by the Bureau of the Budget that it has no
objection to the submission of this report from the standpoint of the
administration's program.
Sincerely yours,
ERLE COCKE, Sr., Chairman.
FEDERAL DEPOSIT INSURANCE CORPORATION,
OFFICE OF THE CHAIRMAN,
Washington, July 24, 1962.
Hon. BRENT SPENCE,
Chairman, Committee on Banking and Currency,
House of Representatives, Washington, D. C.

DEAR MR. SPENCE: In accordance with your request, we have
examined the committee print of H.R. 8874, dated July 24, 1962, as
amended by Subcommittee No. 1, a bill to authorize certain banks to
invest in corporations whose purpose is to provide clerical services
for them, and for other purposes, and recommend its enactment.
Sincerely yours,
ERLE COCKE, Sr., Chairman.


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DISSENTING VIEWS OF HON. WRIGHT PATM AN AND HON.
HENRY B. GONZALEZ
We dissent to H.R. 8874 on seven grounds:
(1) The bill raises serious problems under the antitrust laws
and may open the door to restraints of trade, price fixing, and
bank mergers. This very important question was not raised in
the hearings. We are presenting an opinion of Judge Lee
Loevinger, Assistant U.S. Attorney General, Antitrust Division,
Department of Justice, herewith, that is convincing that further
study be given this proposal.
(2) Inadequate hearings were held to guide us in this very new
pioneering venture. More time should be given for developments
and experience.
(3) Billions of dollars are involved in this bill that is presented
in very short hearings
where limited information was presented
and where fewT questions were asked. This is a bonus to the
banks since it allows 10 percent of their capital funds to perform
double duty. Banks' capital can also be diluted by investments
in small business investment companies. Capital funds are
sacred and should be carefully guarded.
(4) No foundation has been laid for the necessity for banks
to invest in service corporations as the only means of securing the
advantages of electronic clerical services.
(5) The bill as written is tailormade to benefit particularly
branch and holding company banking.
(6) Banks should not be permitted to dilute their capital
structure in this fashion, when the banks already complain about
inability to make loans because of insufficient capital.
(7) It is doubted that small or independent banks will permit
even friendly competitors to have access to their confidential
transactions and business, so we can reasonably expect that only
branch and holding company banks will utilize the provision, with
the result that they will have an advantage over their small and
independent competitors. The bill thus would have consequences
which its sponsors claim they are preventing.
BILL RAISES SERIOUS QUESTIONS UNDER THE ANTITRUST LAWS

The committee might well have elicited testimony from the Chief
of the Antitrust Division of the Department of Justice to explore the
possibility of problems this bill might create under the antitrust laws.
Mr. Patrnan undertook to ask Judge Loevinger about this and received the following reply—which speaks quite eloquently of the
problems this bill might raise:
10


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JULY 27, 1962.
Hon. WRIGHT PATMAN,
House of Representatives, Washington, D.C.
DEAR CONGRESSMAN PATMAN: This is in reply to your request for
my views on the possible antitrust consequences of H.R. 8874, a bill to
authorize certain banks to invest in corporations whose purpose is to
provide clerical services for them, and for other purposes.
While I do not disagree with the basic objectives of this bill, you may
wish to consider possible abuses which might raise questions under the
antitrust laws.
The exchange of confidential business information among competitors carries with it the possibility that such information will be used
for anticompetitive purposes. Thus the exchange of information concerning interest rates and charges to particular customers could result
in an elimination of competition for the account and an artificial
stabilization of interest rates at noncompetitive levels. Past experience has illustrated that such anticompetitive results have in fact
occurred in the operation of many bank clearing house associations.
To avoid this possibility, it would be desirable to provide that no information furnished to the service corporation may be made available to
participating banks other than the bank directly involved.
Moreover, such jointly owned corporations could become vehicles
through which large banks could enhance their dominant position in
the market. Competition in the offering of services is one of the most
important types of competition which the antitrust laws seek to preserve. Frequently, service competition is the principal means by
wThich small businesses, including banks, are able to attract and maintain business. Any diminution in the incentives to small banks to
engage in competition of this type would be of serious concern to the
Department of Justice.
In view of the fact that the formation of such corporations is not
exempted from the antitrust laws, any antitrust violations occurring
in the operation of the service corporations would, of course, be subject to prosecution by the Department of Justice. If, for example,
the acquisition of stock in any of these corporations should substantially lessen competition or tend to create a monopoly, section 7 of the
Clayton Act would be fully applicable.
Time has not permitted a detailed analysis of the bill or coordination of these views either within the Department or with the Bureau
of the Budget. However, I hope that these observations may be of
some help in your consideration of this matter.
Sincerely,
LEE LOEVINGER,
Assistant Attorney General,
Antitrust Division.
Judge Loevinger raises the question about the possible "exchange
of confidential business information among competitors" and the
possibility that this procedure might "be used for anticompetitive
purposes."
This is obviously a serious matter, as witness the statement made
by Mr. Wolcott:
The bank service corporation will have in its possession
records and data of two or more banks, confidential in nature

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and vital io the banks1 operations. For that reason the supervisory agency must be put in a position of immediate control
of any conduct by the bank service corporation constituting
a violation 1of any provision of the bill or of any regulation
thereunder. [Emphasis added.]
Thus, both the supervisory agencies and the Antitrust Division
would, under this bill, be required to undertake additional burdens;
namely, to observe very carefully the conduct of any bank service
corporation, to determine whether they would involve any violations
of law.
Judge Loevinger speaks of the danger of jointly owned corporations
becoming:
* * * vehicles through which large banks could enhance
their dominant position in the market.
He also stresses that:
Competition in the offering of services is one of the most important types of competition which the antitrust laws seek
to preserve.
Further, he notes that:
Frequently, service competition is the principal means by
which small businesses, including banks, are able to attract
and maintain business. Any diminution in the incentive
to small banks to engage in competition of this type would be
of serious concern to the Department of Justice.
Finally, Judge Loevinger points to the danger of monopolistic
mergers. There is a tremendous merger movement underway among
banks. The growing monopoly of money and credit—the lifeblood
of our economy—poses an ominous threat particularly to opportunities
for small business. The Congress should not take steps to accelerate
this trend.
HEARINGS INADEQUATE FOR SUCH A PIONEERING VENTURE

H.R. 8874 would permit any two or more National banks and State
member banks, when authorized by State law, to invest not exceeding
10 percent of each bank's capital and surplus in stock of a bank service
corporation, established to provide clerical and bookkeeping services.
The hearings were exceedingl}' brief. Testimony was heard from
the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and a Director of the Federal
Deposit Insurance Corporation (Mr. Wolcott). Statements were also
filed by counsel of the Connecticut Bankers Association and by the
executive vice president of the Massachusetts Bankers Association.
Very few questions were raised by committee members. Comptroller
of the Currency Saxon termed the bill:
* * * purely a technical, procedural one in essence, and
intended primarily
to meet the requirements of smaller
institutions.2
1 Hearings on H.R. 8874, p. 47.
2 Hearings, p. 40.


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He commented further that:
The proposal is not an earthshaking thing * * *.3
Comments of the banking officials notwithstanding, this is a serious
pioneering venture for banks into nonbanking fields. More thorough
testimony should be elicited and more tune should be given for
development and experience in this area before taking the major step
the bill provides.
BAXKS SHOULD NOT BE PERMITTED TO DILUTE CAPITAL STRUCTURE

It need hardly be documented, in view of the complaints we have
heard in increasing volume in recent years, that banks—particularly
small banks—feel that their capital ratios are inadequate. It is
contended that inadequate capital ratios are an impediment to making
much needed loans.
The 1961 Annual Report of the Federal Deposit Insurance Corporation, a copy of which I have just received, reveals a further decline
in the capital ratio of insured banks. This is shown by the following
tabulation:
Ratio of total capital accounts to total assets other than cash and U.S. Government
obligations (percent), of all insured banks in the United States, Dec. 31, 1958,
through Dec. 30, 1961.
Call dates:

Dec. 31, 1958
June 10, 1959
Dec. 31, 1959
June 15, 1960
Dec. 31, 1960
Apr. 12, 1961
June 30, 1961
Sept. 27, 1961
Dec. 30, 1961

Percentage

_

_

_

_

-

--

14. 1
13.9
13.5
13.6
13. 7
13. 9
13. 9
13. 9
13. 6

Source: Annual Report of the Federal Deposit Insurance Corporation, 1961, p. 107.

As shown above, the ratio of capital accounts to total assets other
than cash and U.S. Government obligations has declined in recent
years. As of December 30, 1961, it stood at 13.6 percent as compared
with 14.1 percent at the end of 1958. During this same interval, total
loans and discounts (net) of all insured banks rose from $117 billion
at the end of 1958 to over $150 billion at the end of 1961.
That investment in service corporations will dilute the capital structure of banks is reflected in the efforts of the Comptroller of the
Currency to raise the effective limit to 25 percent.
Already, the capital funds of the banks are doing double duty, since
they can be diluted by investments in small business investment
companies.
' Ibid.


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BANK SERVICE CORPORATIONS

QUESTION NOT EXPLORED AS TO WHETHER BANKS COULD SECURE ELECTRONIC CLERICAL SERVICES WITHOUT INVESTING IN SERVICE CORPORATIONS

Were this a matter simply of enabling banks to secure the costsaving benefits of electronic devices, it would not cause any great concern. However, it is in the means of securing such services that serious problems arise. Is it essential that banks secure an ownership
interest in a service corporation in order to have the benefit of electronic services? No testimony was heard on this point. The matter
was not raised by any of the members of the committee.
The limited testimony was to the effect that only by being permitted
to join together with other banks and investing in service corporations
would the smaller banks be able to secure the cost-saving efficiency of
electronic bookkeeping.
Mr. Wolcott testified:
The electronic computer, with related equipment, is ideally
suited to the accounting needs of banks, but unfortunately
is so costly that only the large banks can afford the machines.
If the small banks, and 10,000 of the 13,400 banks of the
country are small banks (under $10 million), were unable to
utilize the electronic computer because of cost, they would
be placed at a serious disadvantage.
Fortunately, the great speed and capabilities of computers
make it possible for one installation to perform the accounting function for several smaller banks located within a county
or regional area possessed of good communications. By
sharing the expense, two or more banks may enjoy the bene-4
fits of a computer system on a par with large banks * * *.
Mr. Saxon stated:
Many of them singly lack the capital required to undertake
these extensive programs in view of the cost of the equipment. 5
Mr. Martin stated:
Under the bill, two or more banks would be able to pool
their resources through the corporate device in order to gain
the benefits—for themselves
and for their customers—of
this expensive equipment. 6
Electronic devices have been so publicized in recent years that one
would think that nothing can be done without them. They are
thought to be so efficient and so magnificent that merely to suggest
their use is to induce enthusiasm. Maybe this is the reason why no
questions were raised as to whether the only way banks could utilize
such electronic equipment would be to own them. But this overlooks
a very important fact; namely, that the major electronic companies
provide these services through their own service bureaus. It is not
necessary to own the equipment. Indeed, it is rare that the more
expensive computers are purchased. It would be most uneconomical
4

Hearings, p. 46.
'6 Id., p. 40.
Id., p. 34.


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to own some of the more expensive machines unless the load factor
were extremely heavy.
In short, until it is demonstrated that electronic clerical services
can be secured only through the owning of service corporations, banks
should not be permitted to join together for this purpose. Moreover,
we should have some information as to the number of people in small
communities that might be thrown out of work by the introduction
of these electronic services.
BILL BEXEFITS BANK HOLDING COMPANIES AND BRANCH BANKS

It is clear that the great beneficiaries of this bill are the bank
holding companies and the branch banks. They are the ones who
have the financial resources to undertake investment in service
corporations. But more significant, the independent banks guard
carefully information on their confidential accounts. Once other
banks gain access to such information, the wa\* is paved for overt
merger, bank holding company takeover, or covert branching.
It is significant that no testimony was heard on H.R. 8874 from
representatives of the small banks. The Independent Bankers
Association did not testify on behalf of the bill. We have not received
a single letter from banks in our districts recommending that the bill
be passed.
In view of the serious questions raised by H.R. 8874, it is our
sincere belief that it should be rejected.
Respectfully submitted.
WRIGHT PATMAN.
HENRY B. GONZALEZ.


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