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FEDERAL RESERVE BANK OF RICH M ON D MONTHLY REVIEW Antitrust and the New Bank Holding Company Act The Fifth District Agricultural Outlook for 1971 Antitrust and the New Bank Holding Company Act: Part III A s discussed last month, new antitrust rules governing bank holding company acquisitions of banks became effective in 1966. A t that time, there were but 65 regulated companies controlling two or more banks, and their deposits accounted for only 11.6 percent of total bank deposits in the United States. By m id-1970, however, regulated companies ac counted for 16 percent of total deposits, largely be cause 44 new companies were formed in the inter vening period and the number of banks in regulated groups increased from 561 to 884. Although prior approval under the new antitrust rules was required for both holding company formations and for bank acquisitions throughout this period, only two ap provals by the Board were challenged in court by the Department of Justice under the antitrust laws.1 Meanwhile, controversy erupted over the growth of unregulated one-bank holding companies and their expansion into a variety of nonbanking busi nesses. Under the 1956 Bank Holding Company Act, as we have seen, companies controlling two or more banks were required to divest most of their nonbanking activities of they chose to retain con trol over their banks. However, no restrictions were placed upon nonbanking activities of companies con trolling only a single bank. The One-Bank Holding Company Exemption From the legislative reports, it appears that Con gress excluded one-bank holding companies from regulation for three principal reasons. First, since only one bank was involved, the holding company could not be used to evade Federal and State branch banking legislation. Second, most of the banks owned by one-bank holding companies were small. And third, the nonbanking activities of these com panies were for the most part quite limited involv ing, primarily, local real estate and insurance agency operations. The only legislative comment shedding light on the 1956 exemption for one-bank holding companies was the following paragraph of the Senate Report: Your committee did not deem it necessary to in clude within the scope of this bill any company which manages or controls no more than a single bank. It is possible to conjure up visions of monopolistic control of banking in a given area 1 U. S. v. F irst at Orlando Corporation et al., filed December 23, 1969; U. S. v. United Virginia Bankshares, filed January 30, 1970. through ownership of a single bank with many and widespread branches. However, in the opinion of your committee, no present danger of such con trol through the bank holding company device threatens to a degree sufficient to warrant in clusion of such a company within the scope of this bill. Should legislation of that nature prove de sirable in the future, the Congress is free to act upon a showing of need for such a law.2 Nevertheless, the Board consistently urged Con gress to include one-bank holding companies, both before and after adoption of the 1956 legislation. In 1953, Governor Robertson asserted to the Senate Committee on Banking and Currency that If there is merit in the proposal that you should separate banking from nonbanking businesses, it is just as important that you do it in a 1-bank case as in a 2- or more-bank case.3 In 1955, testifying before the House Banking and Currency Committee, Chairman Martin stated: . . . it seems clear that the potential abuses re sulting from combination under single control of both banking and nonbanking interests could easily exist in a case in which only one bank is involved. In fact, if the one controlled bank were a larger bank, the holding company’s interests in extensive nonbanking businesses might well lead to abuses even more serious than if the company controlled two or more very small banks. For these reasons, the Board would continue to urge that, whatever the percentage test may be, the definition should be related to control of a single bank.4 When the 1956 A ct became effective, there were about 117 unregulated one-bank holding companies with total deposits of $11.6 billion,5 compared with 42 regulated companies having aggregate deposits of $15 billion.0 Over the next decade the number of one-bank holding companies increased to about 550, but their combined deposits rose only $3.5 billion, to $15.1 billion. The relatively small deposit in crease reflects the fact that most of the new com panies were small, local enterprises. In contrast, over the same period deposits of regulated holding company banks almost doubled, from $15 billion in 1956 to $27.6 billion at the end of 1965. When 2 “ Control of Bank Holding Com panies,” Committee on Banking and Currency, United States Senate, 84th Cong., 1st Sess. (1 9 5 5 ), p. 7. 3 “ Bank Holding Company Legislation,” Hearings Before the Com mittee on Banking and Currency, United States Senate, 83rd Cong., 1st Sess., on S. 76 and S. 1118 (1 9 5 3 ), p. 14. 4 “ Control and Regulation o f Bank Holding Com panies,” H earings Before the Committee on Banking and Currency, House o f Rep resentatives, 84th Cong., 1st Sess., on H .R . 2674 ( 1 9 5 5 ), p. 15. 5 "T h e Growth o f Unregistered Bank Holding Companies— Problems and Prospects,” S ta ff Report for the Committee on Banking and Currency, House o f Representatives, 91st Cong., 1st Sess. (Febru ary 11, 1969 ), p. 5. 8 Hall, “ Bank Holding Company R egulation,” Southern E conom ic Journal, v. 31, (1 9 6 5 ), p. 34. 3 Congress in 1966 again faced the issue of regulating one-bank holding companies, it again declined to do so because . . there was no substantial evidence of abuses occurring. . . One-Bank Holding Company Growth, 1966-1970 A radical change in the nature of one-bank holding company growth and activities occurred after 1965, as indicated by Table I. pay for time deposits, the lower the costs of such funds. Between 1947 and 1967, changes in the ratio of demand and time deposits and in the maximum rate structure for time deposits combined to increase substantially the cost of bank funds. The shift from demand to time deposits is shown in the following table: T a b le T a b le GROW TH OF O N E -B A N K HO LDING C O M P A N IE S 1955-1970 Year Num ber of O n e -B a n k H o ld in g C o m p a n ie s 1955 1965 1968 1970 * A ctu al a n d * * E stim a te d C o m m e r c ia l Bank D e p o s its (B illio n s) 117 550 783* 1 1 0 0 ** $ 11.6 15.1 108.2* 1 4 0 .0 * * P ro p o s e d O n e - B a n k by Bo ard GROW TH OF D E M A N D A N D TIME DEPOSITS IN CO M M ERCIAL BANKS, 1947-1967 (in b illio n s) Dem and Percent o f T o ta l U.S. D e p o s its 6.0 4.5 24.9 33.8 H o ld in g C o m p a n ie s . o f G o ve rn o rs. But even these figures do not fully indicate the sharp, sudden surge of growth in 1968. Within the first eight months of 1968, over 30 of the nation’s 100 largest commercial banks announced plans to transform themselves into subsidiaries of one-bank holding companies. By the end of that year un regulated companies, including companies in process of formation, accounted for more than double the volume of bank deposits of regulated companies— $108 billion compared to $49 billion. And by the close of 1970, at least 1,100 commercial banks with total deposits of about $140 billion were believed to be affiliated with one-bank holding companies, com pared with 119 regulated groups with 890 banks and deposits of approximately $70 billion. Together, the two classes of holding companies accounted for almost half of all commercial bank deposits in the United States, with unregulated companies account ing for two thirds of the total. This remarkable change in banking structure occurred in less than three years. Reasons for O ne-B ank Holding Company Growth Increasing costs were an im portant factor motivating banks to adopt the one-bank hold ing company form of organization. Commercial banks must necessarily rely on the deposits of the public for their principal source of funds to use in acquiring earning assets. T o the extent that demand deposits are available, operating costs are lower than is the case if interest must be paid to attract time deposits. Similarly, the lower the interest rate banks 4 II I 1947 1967 So u rc e : Tim e T o ta l Percent Dem and o f A ll D e p o s its 108 211 34 24 4 144 455 75 46 F e d e ra l R e se rv e Bu lle tin . Over the 20-year period, while total deposits were more than tripling, the share represented by demand deposits fell from 75 percent to 46 percent. In the same period, the pressure of competition for funds among banks and other financial intermediaries, especially savings and loan associations, forced in terest rates on time deposits ever higher. In 1968 and 1969, as interest rates continued to escalate, commercial banks found themselves at an increasing disadvantage in the competition for funds due to the ceilings imposed by Regulation Q. A bank holding company could avoid restrictions, how ever, by issuing commercial paper, just as any other corporate borrower. The funds so acquired could then be made available to a bank affilate for use in its banking business, and more and more banks began to resort to this method of acquiring funds. A second factor stimulating the creation of onebank holding companies was the growing investment by banks in expensive data processing equipment and personnel. This development in the 1960’s gen erally paralleled the change in deposit composition and the higher cost of funds. M ore important, how ever, the rapid evolution in data processing tech nology and automation, and their interconnection with communications networks, opened up new op portunities for the larger commercial banks in par ticular to serve business and consumer accounts by handling their varied record-keeping and other needs in more effective ways. Typically, these banks possessed substantial excess machine capacity. New uses of equipment held the promise of both lowering unit costs and expanding the range of services available to bank customers. i A prominent banker and early advocate of the one-bank holding company movement summed up the cumulative effect of these changes in 1969: Several events have been working to wrench bank ing about in the last decades. Probably the most fundamental has been the shift in the deposit mix that has made banks more dependent on time de posits and other high-cost funds. But perhaps the most pressing event has been the surge of competition, particularly since 1963. Banking law and regulations have always paid service to the idea that there should be sub stantial competition among financial institutions and within the banking industry. Yet the weight of legislation enacted during the 1930’s and long prevailing was toward restraint—the protection of solvency and the containing of harmful com petitive practices that might again lead to wide spread bank failures. H e * ❖ At the same time, new consumer demands have surfaced. Individuals and businesses, to say nothing of local governments and tax-exempt in stitutions, have sought from banks new and more sophisticated services— such things as account reconciliation, automatic payments or, more inci dentally, travel service and credit insurance. Meanwhile, strides in bank technology— notably computerization— have opened the way to sub stantial efficiencies through the expansion of services, geographically as well as in kind. * * * These events, blurring the lines that once com partmentalized credit markets and creating various new cost pressures, have put banks under heavy onus to diversify, to find new areas where their resources and experience could be profitably put to work. And many have moved into fields which even if not unrelated to banking have not tradi tionally been part of it— such things as factoring insurance, equipment-leasing, mortgage-servicing, data processing, travel services, and credit cards.7 National banks led the movement into new market areas in the 1960’s, with support from the Office of the Comptroller of the Currency. Under the aggressive leadership of James J. Saxon and his successor, William B. Camp, the Comptroller’s office issued a number of interpretations opening the way for national banks to enter these new areas. Nevertheless, banks faced formidable legal ob stacles in attempting entry into new markets. Statechartered banks operating under more restrictive laws and regulations, and many existing nonbank companies already furnishing these services, did not welcome the innovations. A number of bank and nonbank competitors throughout the country re taliated with litigation challenging the power of na tional banks under existing law and their charters to compete in the new ways. The Supreme Court upheld the right of competitors furnishing data pro cessing and travel agency services to challenge na7 C. C. Cameron, “ A Breakthrough in Holding Com pany (1 9 6 9 ), pp. 57-59. Banking,” The One-Bank tional bank entry into their market areas.8 W hile the Court’s decisions did not reach the merits of the question whether national banks may in fact, under their charters and existing Federal law, engage in new activities not traditionally regarded as “ the business of banking,” they cleared the way for such tests. Thus, a long shadow of doubt spread over the legal status of banks entering new market areas, and this at the same time that Federal antitrust en forcement was increasingly thwarting bank growth by acquisitions of other banks. A n editorial in The American Banker gave the following appraisal of these decisions: It was stunning for bankers who had believed themselves to be well sheltered when the Supreme Court affirmed lower court decisions granting competitors standing to sue national banks. That standing had not been granted before, and to make sure it was not, the American Bankers A s sociation for the first time had entered a court case of this type as amicus curiae on behalf of a sued bank, to support the contention that com petitors lacked standing; but even so, the courts found that they have a right to sue, and now it is a whole new legal ball game. # * * It is possible, of course, that the banks will win the trials, and be adjudged as acting within their rights by these extensions of competition; but the point now established is that they do have to undergo this adversary process, and are no longer free to expand unencumbered by such challenges. And no matter what the results in specific cases, the establishment of this new principle is bound to embolden those who find banks tough com petitors to seek legal relief.9 Organization of a holding company is one, and perhaps the only, method owners of banks may use to insulate themselves against litigation attacking their right to enter new areas not specifically au thorized by statute. H olding companies are usually corporations organized under the general business laws of a state and can, therefore, lawfully engage in a wide variety of business activities. If a holding company is in fact competing in a number of market areas other than banking, there is less risk that courts will “ pierce the corporate veil” and impute to the holding company the same legal restrictions ap plicable to a bank owned by such a company.10 A number of powerful economic and legal con siderations thus converged in 1968 to cause large and small banks alike to transform themselves into 8 Association o f Data Processing Service Organizations, Inc. v. Camp, 397 U. S. 150 ( 1 9 6 9 ); A rnold Tours, Inc. v. Cam p, 400 U. S. 45 (1 9 7 0 ). 9 The Am erican Banker, M arch 3, 1970. 10 A real risk nevertheless exists. This was clearly established early in March, 1971, when the Supreme Court refused to review a lower court ruling which held that operation o f an armored car deposit pick-up service violated the branch banking law o f the State of Georgia, even though the service was operated by a subsidiary of a bank holding com pany. The A m erican Banker, M arch 2, 1971. Y et to be determined is the possible effect o f the 1970 amendments on rulings based on the law in e ffect prior to December 31, 1970. 5 subsidiaries of one-bank holding companies. The mood was aggressively expansionistic, as reflected in these words from Fortune: In 1967, Harry Volk had only ten years in bank ing, yet that had been enough to know that the future of the banking business lay with the “ fi nance industry.” Accordingly, he turned his Union Bank of Los Angeles into a de novo commercial corporation called Union Bancorp., which became the owners of the bank. After a year or so of hesitating— and duly noticing Union Bancorp.’s impressive earnings— other banks soon followed, first stepping, then pushing, finally stampeding into line. The ac celerating rush was more than an example of “ an idea whose time had come.” Bankers sensed that Congress might impose new restrictions but might also provide some sort of “ grandfather protection” for those who got there first.11 Congressional Debate and Differences, 1969-1970 Large banks were not the only leaders in the rush to form one-bank holding companies. Conglomerate enterprises such as Signal Oil & Gas, Gulf & W est ern Industries, and Sperry and Hutchinson also began acquiring commercial banks of substantial size to complement their operations. The dread of abuses, including raids on bank resources for the benefit of nonbank affiliates, favoritism by the hold ing company bank in lending to customers of its nonbank sister organizations, and even the growth of giant banking-industry combinations in the pat tern of the saibatsu which dominate the Japanese economy, generated irresistible pressures to amend the Bank Holding Company A ct to insure that these potential evils would not occur. N o less than five different bills to control onebank holding companies were introduced in the House and Senate in 1969. All agreed upon cov erage of one-bank holding companies, but they dif fered widely in their approach to other major issues. These were primarily the identity of the agency to administer the new legislation, the date of a “ grand father clause” or other exemptive provisions, and the all-important question of the permissible nonbanking activities for bank holding companies.12 These dif ferences generated two full years of debate, the equal of the memorable 1966 battle to bring bank mergers and bank acquisitions by regulated holding companies under antitrust control. A typical head line early in this debate announced “ Administration. Congress Near Blowup Over Controlling One-Bank Holding Firms.” 13 1 Sanford Rose, “ The Case for the One-Bank Holding Com pany,” 1 F ortune, M ay 15, 1969, p. 310. 12 H . R. 6778, sponsored by Rep. W rig h t Patm an; H . R . 9385, in troduced by Rep. W idnall on behalf o f the Adm inistration; S. 1052, sponsored by Sen. Proxmire; S. 1211, sponsored by Sen. Sparkm an; S. 1644, the Senate counterpart o f H . R. 9385 o f the Adm inistration introduced by Sen. Sparkm an; and S. 2382, sponsored by Sen. Brooke. 13 The Wail Street Journal, February 13, 1969. 6 First blood was drawn by advocates of a highly restrictive bill. Late in November 1969, the House passed a measure with a “ laundry list” of business activities specifically designated as “ not in the public interest to be carried on by bank holding companies of subsidiaries thereof.” It included insurance, data processing, accounting, travel agency, securities and leasing services. The proposed bill limited other business activities of bank holding companies to those “ financial or fiduciary in nature . . . so closely related to the business of banking as to be a proper incident thereto.” The House-passed bill (H .R . 6778) would thus have specifically foreclosed bank holding companies from insurance activities even though the original 1956 A ct had authorized them under certain con ditions, and might well have blocked any future ex pansion of approved financial or fiduciary activities. T w o tests had been developed by the Board in 15 years of acting upon proposed applications to perform “ financial, fiduciary or insurance” ac tivities authorized under the original 1956 A c t : (1 ) whether such activities were “ so functionally integrated with or required for banking operations as to make them in effect part of the parcel of such operations” ;14 and (2 ) whether their performance by commercial banks was in accordance with common regional practice among banks in the areas con cerned.15 In practice, these tests had proved so rigorous that only a handful of applications were filed during the entire 15 years that the 1956 pro visions were in effect, and most of the approvals w e r e for insurance agencies which would have been banned under the House legislation. The restrictive nature of the House bill was underscored by its designation of May 9, 1956, the date the original Act became effective, as the “ grandfather” date establishing retroactive coverage of the law. W ith passage of H .R. 6778, proponents of more liberal legislation concentrated their efforts in the Senate. The Senate approved a bill without the “ laundry list” of prohibited activities, and its bill also contained a provision designed to give the Board greater discretion in approving bank holding com pany applications to engage in nonbanking ac tivities. Specifically, it stated that such activities should be . . . functionally related to banking in such a way that their performance by an affiliate of a bank holding company can reasonably be expected to produce benefits to the public, such as greater 1 "A p p lica tion o f Transam erica Corporation Relating to Occidental 4 Life Insurance Company o f C alifornia,” Federal R eserve Bulletin, September, 1957, pp. 1017-1018, 1029-1930. 15 See, e. g., “ First Bank Stock Corporation,” Federal R eserve Bul letin, August, 1959, pp. 917-954. convenience, increased competition or gains in ef ficiency, that outweigh possible adverse effects, such as undue concentration of resources, de creased competition, conflicts of interest or un sound banking practices.16 The Senate bill would also have allowed one-bank holding companies to continue to engage in non banking activities in which they were engaged on March 24, 1969, regardless of whether they met the foregoing test. One major new feature appeared in the Senate version of H .R. 6778. This was a provision that in some respects imposed more stringent antitrust restrictions upon commercial banks in their basic operations than those applicable to business and in dustry generally under the Sherman and Clayton Acts. The new provision, subsequently enacted into law, subjects all commercial banks, regardless of whether they are in a holding company group, to the following absolute stricture: A bank shall not in any manner extend credit, lease or sell property of any kind, or furnish any service, or fix or vary the consideration for any of the foregoing, on the condition, agreement or understanding (1) that the customer shall obtain some other credit, property or service from such bank, a bank holding company of such bank, or from any sub sidiary of such bank holding company; (2) that the customer provide some other credit, property, or service to such bank, the bank hold ing company of such bank, or to any subsidiary of such bank holding company; or (3) that the customer shall not obtain some other credit, property, or service from a competitor of such bank, bank holding company of such bank, or any subsidiary of such bank holding company.17 T w o classes of exceptions were written into this absolute prohibition against tie-ins. One provides that banks may continue to require loan customers to maintain compensation balances as compensation for loans, and ask correspondent banks to maintain balances as compensation for services. The second authorizes the Board by regulation or order to per mit such exceptions as it considers will not be con trary to the purposes of the prohibition.18 But even these exceptions do not apply in the event of antitrust charges under Section 3 of the Clayton Act and under the Sherman Act. A s pointed out by the Department of Justice in a letter to the Chairman of the House Committee on Banking and Currency, “ It is important to remember that any tie-ins in the area of traditional banking practice will remain fully subject to normal sanctions under the antitrust laws.” 19 >« H . R. 6778, as amended and adopted by the Senate, S. Rep. No. 91-1084, 91st Cong., 2d Sess. (1 9 7 0 ), Section 4 ( c ) ( 8 ) . 1 84 Stat. 1766-1767 (1 9 7 0 ). 7 i»84 Stat. 1767 (1 9 7 0 ). 1 W ashington Financial R eports, N o. 47, November 23, 1970, p. 9 T .6 ; Compare F ortn er Enterprises, Inc. v. United States Steel Corp., 394 U. S. 495 (1 9 6 9 ). The 1970 Amendments A com prom ise between the House and Senate bills was reached in the course of a marathon three week conference in De cember, 1970, described by one newspaper as “ one of the most contentious sessions ever held on bank ing legislation.” 20 Negotiating teams representing the two legislative bodies were headed by Senator Sparkman, Chairman of the Senate Banking and Currency Committee, and Representative Patman, Chairman of the corresponding House Committee. There was dissension within each team, and sharp disagreement later as to the meaning of the com promise measure agreed to. Debate centered around the new provisions au thorizing bank holding companies to engage in non banking activities. There is little doubt about the meaning of most of the other 1970 amendments. The amended statute covers one-bank holding com panies on the same basis as multi-bank companies and now includes partnerships as well as corpora tions, trusts, associations and similar organizations. Sole administrative jurisdiction is vested in the Board, which is authorized to determine that such an organization exercises controlling influence over a bank or bank holding company even if it does not own or control 25 percent or more of the shares, or the election of a majority of the board of directors, of a bank. All companies subject to the 1970 amendments are required to register with the Board on forms to be prescribed prior to June 30, 1971. A “ grand father clause” date of June 30, 1968, is established, which permits companies to continue activities en gaged in continuously since then, regardless of whether they are authorized under the new amend ments.21 However, this is subject to the following qualification: The Board may at any time, after opportunity for hearing, terminate the authority con ferred on any company by the “ grandfather clause” if it determines that such action is necessary to pre vent undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. In addition, the Board must, within two years, review the nonbanking activities of all companies controlling banks with assets of over 20 The Am erican Banker, December 24, 1970. 2 Three other classes of exemptions are provided: Section 4 ( c ) (11) 1 exempts from the statute any company more than 85 per centum o f the voting stock o f which was collectively owned on June 30, 1968, and continuously there after, directly or indirectly, by or for members o f the same fam ily, or their spouses, who are lineal descendants o f com mon ancestors. Section 4 ( c ) (1 2 ) exempts companies which agree to divest them selves of their banks on or before December 31, 1980; and Section 4 ( d ) grants to the Board discretionary authority to exem pt onebank holding companies existing prior to July 1, 1968, from the divestiture requirements o f Section 4 provided certain conditions exist, and subject to such conditions as the Board deems necessary to protect the public interest. 7 $60 million to determine whether such activities should be terminated. A s to permissible nonbanking activities, the com promise standard finally agreed upon provides that new activities may be approved only if they are determined by the Board to be . . so closely related to banking or managing or controlling banks as to as to be a proper incident thereto. . . In making determinations, the Board must consider whether the activities . . . can reasonably be expected to produce benefits to the public, such as greater convenience, in creased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices.22 The Board is also authorized to differentiate be tween proposed acquisitions of going concerns by holding companies proposing to enter new areas, and their entry de novo. Recent Actions by the Board Soon after the new law became effective, the Board on January 25, 1971, published for comment a proposal to authorize bank holding companies to engage in ten different nonbanking activities, subject to approval by the Board in individual cases.23 Unlike acquisitions of banks, no geographic limitations are imposed as to nonbanking activities either by the law or by the Board’s proposed authorization. Since the proposed activities— including, particularly, mortgage loan and finance offices— involve some functions similar to those performed by banks, strong opposition to permission to expand across state lines has already been registered, most notably by the Independent Bankers Association.24 The nature and extent of comments received have caused the Board to schedule hearings in April and May on the proposed ac tivities, with particular attention to be given to 22 Bank Holding Company A ct, Section 4 ( c ) (8 ) as amended by the Bank Holding Company A c t Amendm ents o f 1970. 23 These w ere: (1 ) operating as a m ortgage, finance or factoring com pany; (2 ) operating as an industrial bank; (3 ) servicing loans; (4 ) acting as fiduciary: (5 ) acting as investment or financial ad viser; (6 ) leasing personal property subject to specified restric tions; (7 ) acting as insurance agent or broker, principally in con nection with extensions o f credit by the holding company or its subsidiaries; (8 ) acting as insurer for the holding com pany and its subsidiaries or with respect to insurance sold by the holding company or any o f its subsidiaries as agent or broker; (9 ) pro viding bookkeeping or data processing services for (a ) the holding company and its subsidiaries, (b ) other financial institutions, or (c ) others, provided that the value o f services performed by the company for such persons is not a principal portion o f the total value of all such services perform ed; and (10) m aking equity in vestments in community rehabilitation and development corporations engaged in providing housing and employment opportunities for low and moderate income persons. 24 P ratt’s L etter, March 5, 1971. permissible insurance agency and brokerage serv ices, and to the furnishing of data processing and bookkeeping services. Only after the testimony at these hearings will the Board’s initial regulations be made outlining the scope of permissible activities. Concluding Comments A s discussed in Part I, the desire to supplement Federal and State branch banking legislation to prevent creation of regional or nationwide banking organizations by means of hold ing companies was a prime factor leading to enact ment of bank holding company regulation in 1956. At that time, bank holding companies were re stricted to banking and managing or controlling banks, were effectually prevented from further ex pansion across state lines, and were barred from substantially all types of nonbanking activities. In 1956, when the Bank Holding Company Act became effective, enforcement of the antitrust laws against commercial banking had been attempted in only one case, and that attempt had failed. By 1970, all types of bank mergers and consolidations, and all bank holding company acquisitions of banks, were subject to prior antitrust review both adminis tratively by the Federal banking agencies and by the Department of Justice and the Federal courts. During the 1960’s major changes occurred in the economic environment of the commercial banking in dustry. The cumulative effect of these changes caused many leading banks, accounting in the ag gregate for a substantial percent of total commercial bank deposits in the United States, to expand or plan to expand into many new service and geo graphic areas by means of the one-bank holding com pany. Congress reacted with legislation bringing one-bank holding companies under regulation and conferring upon the Board of Governors’ broad dis cretion to authorize such expansion within the frame work of guidelines embodying the substance of the traditional antitrust “ rule of reason,” tailored to the particular conditions of the commercial banking in dustry. Strict new provisions limiting the use of tying devices were made applicable to all commercial banks. For the future, enhancement of competition and the preservation of the traditional separation of banking and commerce will very likely be the princi pal guideposts for regulating expansion of com mercial banking in the United States.25 William F. Upshaw ^ See, e.g., W illiam W . Sherrill, “ Some Reflections on the New Bank Holding Company Legislation,” Speech, W ashington, D. C., March 16, 1971. Economic Review of 1970 THE FIFTH DISTRICT Efforts to overcome inflation continued to be a prime economic concern in 1970 as in 1969, and prevailing conditions gave evidence of the deep entrenchment of inflation in the nation’s economy. A s anti-inflationary policies were pursued, unem ployment began a steady climb, and the problem became one of preventing the slowdown from slip ping into a deep recession. The Fifth District shared with the nation the problems of rising wages, prices, and unemployment, as well as a contraction in the construction industry. Economic data on states and regions are seldom available immediately following the end of the year. Even now, some of the final statistical series neces sary for a complete evaluation of economic conditions within the District are not available. Thus, in addi tion to the published statistical sources, this article depends heavily upon responses to the Fifth Dis trict Opinion Survey of Business Conditions con the index may reflect convergence of opinion about the direction of change without indicating a change in the economic series itself. Manufacturing W eakness in sales accom panied by large wage settlements produced a serious profit squeeze in manufacturing industries throughout the nation last year. District survey respondents also reported weakness in shipments, volume of new orders, and backlogs of orders in both durable and nondurable goods manufacturing. This sluggishness characterized some of the District’s most important industries, including textiles, chemicals, nonferrous metals, and furniture. Inventory levels, which re mained fairly stable on the high side, were a con tinuing concern for manufacturers throughout the year, as most respondents felt that inventories were too high relative to desired levels. ducted by the Federal Reserve Bank of Richmond. Questionnaires are mailed at four-week intervals, Retail Sales so that replies are received and compiled during the particularly appliances and furniture, suffering more week preceding each meeting of the Federal Open Market Committee. The survey sample currently contains between 80 and 90 respondents representing manufacturing, banking, and trade and services than nondurable goods. throughout the Fifth District. The level of consumer purchases during the Christ mas season was greater than expected, lending sup port to the belief that the downward trend in retail The sample is strati fied so as to represent all important industries and all regions of the District. In order to obtain more accurate data and thus a better picture of general economic conditions, the survey questionnaire was revised in May 1970. Accordingly, the charts and R etail sales fell o ff during 1970 in the nation at large, with durable goods purchases, The situation was ag gravated in the final quarter of the year by the Gen eral Motors strike. The ensuing decline in auto sales was the largest quarterly drop in 20 years. sales was reversing. The first two months of 1971 have tended to confirm that conclusion. The situation in the Fifth District, as indicated comments that follow pertain to the period from by the survey, was much the same. Retail sales, ex May 1970 through February 1971. cluding autos, were consistently down until fall, The graphs show diffusion indexes computed from responses to the questionnaires. interpreted as follows: These indexes are a + 1 indicates that all re when an upturn became evident, partly in accord with seasonal expectations. Auto sales were poor early in the year, and, as the work stoppage stretched spondents feel that conditions in that particular from category are “ up,” a — 1 shows that all replies are significantly reduced, sales dropped sharply. September into November and output was Dis “ down,” and 0 indicates that “ up” and “ down” re trict surveys show that this trend is continuing sponses are evenly distributed. Thus, movements in into 1971. 9 Employment and Unemployment Patterns of employment and unemployment within the District generally paralleled those of the nation throughout 1970. The District’s total civilian employment grew from 8,216,100 in December 1969 to 8,245,400 in December 1970, an increase of .4 percent. Over the same period unemployment in the District increased by 30 percent from 240,600 to 313,100, but this 3.7 percent rate of unemployment for December 1970 the employment situation as becoming progressively weaker during most of 1970, as the number of re W ages and Prices T he survey accurately re flected wage and price movements in the Fifth Dis trict, indicating that despite scattered reports of price declines and price shading, the price trend was up until late in the year. In the last two months of 1970, and thus far in 1971, surveys have indicated that among manufacturers, price decreases out weighed increases, particularly in the textile and nonferrous metals industries. Price advances were generally the rule among businesses in the trade and services category. Upward pressure on wages was consistently reported by survey respondents during 1970, and this pressure is continuing in the current year. Both 1970 and 1971 are record years spondents reporting declines in employment out in terms of numbers of employees affected by col was considerably below the 6.0 percent seasonally adjusted national rate. Survey respondents in the District interpreted numbered those reporting increases throughout the year. A t the same time, however, numerous re spondents indicated that while the supply of avail able labor was usually adequate, it was often dif ficult to find labor of the desired quality, particularly lective bargaining agreements in the nation at large, and the effect of the settlements is clearly felt in the District. Numerous work stoppages occurred in the District last year, and survey respondents continue to express concern about the likelihood of further work stoppages in the District this year. skilled labor. The District’s employment situation has yet to show clear signs of strength in 1971, ac Construction cording to the survey. a year of marked recession in residential construc MANUFACTURERS' ORDERS A N D SHIPMENTS INVENTORIES For the U. S. at large, 1970 was RETAIL SALES EMPLOYMENT A N D HOURS W ORKED PER WEEK tion, continuing the trend that prevailed throughout the previous year and reflecting the effects of rising costs of materials and labor as well as the scarcity of funds. Survey respondents reported a similar weakness in residential construction in the District, and for the District as a whole, residential construction de clined from the 1969 level. North and South Caro lina were exceptions to this general trend; both crease in both the square feet and valuation of non residential construction. The lifting of the freeze on Federal construction projects was perhaps a sig nificant factor in this growth. Loan Demand Increases in both m ortgage and business loans at District banks were reported until July, when a downward trend developed and lasted throughout the remainder of the year. A t year end, states recorded increases in square feet, number of dwellings units, and value of total residential build business and mortgage loan demands in the District ing in 1970. In December, bankers throughout the in the nation at large, and coincided with a sub District began to anticipate increased activity in stantial growth of the liquidity positions of banks. residential construction in the months ahead, and early 1971 surveys show an apparent recovery under Consequently, several cuts in the prime rate oc curred, market interest rates declined significantly, way in this field. During most of re around in the demand for business loans has oc ported that nonresidential construction activity was curred, according to respondents, during the first gradually increasing. two months of 1971, but so far, it does not represent were particularly weak. This condition also existed and banks actively sought borrowers. A slight turn 1970, most respondents Actual statistics show, how a significant increase. ever, that the District experienced a slight decline in the number of projects, square feet, and value of Mortgage loan demand, on total nonresidential building, except in the District the other hand, has made a much more dramatic recovery since the beginning of the year. of Columbia area where there wr a substantial in as Demand for consumer loans, while marked by LOCAL LABOR SUPPLIES RELATIVE TO CURRENT NEEDS W AGES - + .6 + .4 + .2 U n s k ille d : \ x ^ 0 _______________ ~~ 1 — -.2 -.4 — ^ S lr illn r l -.6 i i i i i i PRICES RECEIVED i i i -I ..... 1 1 ......... -1......... 1 -i. J CO NSTRUCTION v#siw3;i fluctuation, increased moderately on balance during 1970, according to District bankers. Since 1971 began, consumer loan demand has strengthened further in the District. Capital Spending D u rin g the first three quarters of the year, District manufacturing respondents con sistently reported excess plant and equipment ca pacity, while businessmen in trade and services gen erally considered their facilities inadequate. Neither group of respondents indicated any strong tendency toward reduction of expansion plans in the early part of the year when the prevailing sentiment among businessmen was that inflationary conditions would continue. In the final quarter, manufacturers began to report cutbacks in capital spending plans, and at year end, this tendency was still in evidence. District manufacturers is not readily affected by changing economic policies. Prospects for the Immediate Future From M ay through the summer months of 1970, the general at titude expressed by respondents concerning eco nomic conditions in the Fifth District was one of uncertainty, produced not only by economic develop ments but by the discontent and social unrest felt throughout the nation. Remarks to the effect that the economic situation was likely to worsen before any improvement occurred were not uncommon. By September a definitely optimistic tone was ap parent as respondents anticipated an increase in economic activity. By the end of the year, a sig nificant majority still expected an economic upturn, although cautioning that such a change would be slow in coming and expressing some discouragement W hile recently announced accelerated deprecia over the obvious sluggishness of the economy. M ore tion allowances are expected to exert some influence over, manufacturers were less optimistic than re spondents in trade and services, citing the persisting on capital spending throughout the nation in 1971, reports from District manufacturers fail to indicate problems of excess inventories and plant and equip any tendency to step up capital expenditure plans. ment capacity, rising costs, employment weakness, The survey results imply that capital spending by and the effects of strikes. D E M A N D FOR LOANS Ann M . Spivey CURRENT E X P A N SIO N PLANS RELATE P DESIRED EXP,A N SIO N + .6 + .4 + .2 0 -.2 Consum e r -.4 -.6 CURRENT PLANT A N D EQUIPMENT CAPACITY RELATIVE TO DESIRED CAPACITY PROSPECTS FOR THE IM M EDIATE FUTURE Uncertainties Cloud the ... AGRICULTURAL OUTLOOK FOR 1971 Top level economists of the U. S. Department of Agriculture presented their views of this year s prospects for the nation s agriculture at the National Agricultural Outlook Conference late in February. A capsule review of their forecasts follows. The nation’s farmers can probably look forward to some strengthening in farm prices and incomes as the year 1971 progresses. Realized gross farm income may well achieve a new record. But farm production expenses will likely rise more than enough to offset the increase in gross income. Realized net farm income will thus probably fall slightly below that in 1970, even though the income situation will likely brighten later in the year. This appraisal of the agricultural outlook assumes that 1971 will be a year of stepped-up activity for the general economy. Both fiscal and monetary policies are expected to favor economic growth. Consumers’ disposable personal incomes, boosted by increased Federal income tax exemptions and higher wage rates, are likely to rise further. Such income gains, although probably not as large as in 1970, are expected to support a strong domestic demand for farm products. In addition, foreign demand con tinues exceptionally strong, with the value of total farm exports in the current fiscal year expected to hit an all-time high. There are more uncertainties than usual in this year’s outlook, however, especially for crop farmers. They are faced with making adjustments to the new farm program, to the possibility of another outbreak of Southern corn leaf blight, and to a limited supply of blight-resistant seed corn. The outlook for live stock farmers is also cloudy, with prospects hinging on feed costs and on producers’ breeding decisions during the first half of the year. Expenses and Income Farm production expenses are expected to advance to another record high. The gain, however, seems likely to be less than in 1970. The biggest increase is expected to be for purchased feed. Overhead costs are headed higher. Sizable increases are also anticipated for wage rates, farm machinery, insurance, and fertilizer. Moderat ing factors in the farm cost picture are the expected softening in interest rates and lower prices for feeder livestock. This year’s outlook for cash receipts from farm marketings points to a slight gain over last year. The increase, if realized, would probably reflect a greater volume of marketings, with little change from 1970 in average prices received by farmers. Crop receipts may register a sharp increase, while live stock receipts will probably hold near last year’s level. Some decline in Government payments to farmers is indicated and will offset part of the ex pected gain in cash receipts. Even so, gross farm income is expected to top last year’s record, al though heavier outlays for farm production expenses will more than offset the income gain. Hence, total realized net farm income is expected to fall short of the 1970 figure. But with a declining number of farms, net income realized per farm may show only a slight drop from last year’s near-record level. A sizable gain in farmers’ income from nonfarm sources appears likely and will help compensate for the ex pected dip in net income from farming. Commodity Prospects H igh ligh ts in the out look for major Fifth District commodities as seen by the Department of Agriculture fo llo w : Poultry and E ggs: Poultry farmers are still faced with low prices and high feed costs. Lower broiler, turkey, and egg prices are likely to prevail through m id-1971. Broiler and egg prices may strengthen later and average slightly higher in the second half, but lower turkey prices may continue. Large pork supplies will tend to keep poultry prices under pres sure through midyear. Substantially higher feed prices are in prospect for most of the year. Broiler output is expected to average about the same as in 1970, but production of eggs and turkeys may be somewhat larger. Dairy Products: Prospects are good for another rise in milk production this year. Record-high milk 13 prices, an easier labor situation, and a good supply of herd replacements point to a slight expansion in output despite rising dairy ration costs. Milk cow numbers will likely continue to decline at a slow rate. Farm prices for milk are expected to show a modest increase, and gross income from dairying will probably rise further. M eat Animals: Large pork supplies and low hog prices are expected through the first half of 1971. But prices, although down sharply from a year ago, have picked up in recent weeks. A cutback in farrowings will probably occur during the spring months, reducing pressure on prices in the second half. Fed cattle marketings may hold near year-earlier levels through mid-1971 and then show a moderate increase in the second half. With consumer demand for meat expected to remain strong, fed cattle prices are likely to continue firm. Tobacco: The outlook for tobacco is mixed. D o mestic demand for cigarettes and other tobacco products remains at a high level, but the decline in tobacco use continues. Competition in world markets is growing, and United States tobacco exports in 1971 will do well to hold at the reduced 1970 level. Carry-over stocks will probably change little, despite smaller beginning supplies. Smaller marketing quotas are in effect this year, so growers can be ex pected to harvest considerably less tobacco than in 1970. On the other hand, price supports are up 4.2% and the smaller crop may well result in higher prices. Soybeans and, Peanuts: The supply-dem and situations for soybeans and peanuts offer a study in contrasts— too many peanuts and not enough soy beans. Peanut supplies are at record levels, about 16% above a year earlier. Output this season was one-third above edible requirements and farm use. Soybean supplies, however, are tight and 6 % below a year ago. Usage of soybeans is exceeding produc tion by a wide margin for the second consecutive year and will result in another sharp drop in carry over stocks. Price support for 1971-crop peanuts has been set at $267 per ton, up 4.7% from last yea r; for soybeans the support level continues at $2.25 per bushel. Cotton: Prospects for larger disappearance and a slightly smaller supply highlight the cotton outlook. The increase in disappearance reflects better export prospects resulting from dwindling supplies and ex panding use of cotton abroad. Combined domestic since 1952. Cotton prices have generally been stronger this season, with the shorter staples doing best. The 1971 loan rate for Middling 1-inch cotton at average location is 19.50 cents per pound, down about 2 cents from 1970. Farm Credit Outlook Farm ers are expected to use more credit this year than in each of the past several years. Keys to this outlook are the easing of the tight money situation and prospects for lower interest rates and higher production costs. Funds for farm loans should be more readily available both to lenders and to farm borrowers. Life insurance companies, almost out of the farmmortgage lending business in 1970, may be con siderably more active this year. But with lenders increasingly quality conscious, the repayment ca pacity of the farming operation and the management ability of the farmer are likely to figure more im portantly in evaluations of loan requests. Both long- and short-term farm loans will probably carry lower interest rates. The decline in interest rates in the money markets late last year and early this year has already resulted in some lowering of farm-mortgage interest rates by life insurance com panies and the Federal land banks. Production credit associations are also expected to cut their rates be cause of the sharp drop in the cost of their loan funds obtained from the central money markets through the Federal intermediate credit banks. W ith the recent increases in bank liquidity, commercial banks can also be expected to make more funds available for farm lending. Many small banks, how ever, rely primarily on local sources o f funds and as a consequence their loan rates are less sensitive to changing money market conditions than are those of P C A ’s or of large, city banks that regularly tap the central money market. In the recent tight money period, for example, country banks did not raise short-term interest rates as promptly or as sharply as city banks. On the other hand, cuts in their rates may not be as great or as promptly forthcoming as those for city banks. Farmers will likely remain conservative in making additions to their long-term debt in 1971. Indica tions are, however, that the use of farm real estate credit will accelerate. Many farmers need to catch up on capital improvements, and if interest rates continue to soften, they may consolidate some of their unwieldy short-term debts into long-term real estate debt. Rising costs of production inputs and a mill use and exports may exceed 1970 production new farm program that encourages larger plantings by over 1 million bales, cutting the cotton carry-over will this summer to around \]/2 million bales, smallest maintain a strong demand for short-term credit. 14 increase day-to-day operating expenses and Some Implications of New Farm Legislation The Agricultural A ct of 1970 contains provisions applicable to the 1971-73 crops of cotton, feed grains, and wheat that are quite different from the pro grams of past years. Participation is voluntary, and those who choose to participate and receive program benefits have much more freedom to plant and manage their cropland. The flexibility provided by the 1970 legislation makes farmers’ response to it highly uncertain. The new farm program is designed to (1 ) help farmers shift to a market-oriented agriculture and away from reliance on Government programs; (2 ) give farmers more options on what and how much to plant; (3 ) protect and improve farmers’ incomes; and (4 ) keep farm production in line with antici pated demand. W hile the 1970 Act continues to protect farm in come through payments and loans, it has shifted loan levels of the supported crops to specified minimum levels and away from parity. It thereby eliminates the loan escalating features which have threatened to price United States farm products out of world markets in the past. A major departure from former farm programs is the elimination of the old system of crop-by-crop allotments whereby a farmer’s planting of the af fected crops was limited to his acreage allotments or base less diversion. Now allotments and bases no longer dictate the number of acres a farmer is per mitted to plant. Instead, they are used only to figure the set-aside acreages and price support pay ments. Another significant feature of the new legislation is the elimination of the cross compliance requirement. A farmer who operates several farms may now participate in the various programs on one or more farms without doing so on others. A farmer who has cotton and/or wheat allotments or a feed grain base may become eligible for program benefits by signing up for a specific program or pro grams during the enrollment period, setting aside the required number of acres, and maintaining his farm’s conserving base. Under the set-aside provisions in effect for 1971, a cotton farmer is required to set aside to approved conservation uses an amount of cropland equal to 20% of his farm’s base acreage tains his conserving base, he is free to plant as much cotton, feed grains, or wheat as he has remaining cropland. Or, he is also free to plant his remaining acres in crops of his choice, except the quota crops -—tobacco, peanuts, rice, sugarcane, and extra long staple cotton. This set-aside provision not only gives the farmer freedom to shift acres to crops he can best produce, but it also enables him to employ his land, machinery, and other capital resources more efficiently. A farmer is required to plant a specified per centage of his farm’s acreage allotment or base acreage each year to preserve his allotment or base acreage history. He may plant either the crop for which he has an allotment or base, or an authorized substitute. For 1971, the required planting per centage for cotton is 90% of the farm’s base acreage allotment; for feed grains, 45% of the feed grain base; and for wheat, 90% of the domestic allot ment. A producer who plants less than the required percentage will have his base or allotment reduced the following year by the amount of the underplant ing, up to 20% . If no crop or authorized sub stitute crop is planted for three consecutive years, the entire allotment or farm base for the affected crop will be removed from the farm. Loss of allot ments or base can be avoided, however, if the farmer makes the required set aside and does not collect the price support payment or if he was prevented from planting the required acreage because of some natural disaster. A farmer may plant wheat or feed grains in lieu of cotton for history preservation, but he will not receive cotton price support payments. Cotton cannot be substituted for wheat allotments or feed grain bases, however. The broader substitution privileges provided by the 1970 Act have special significance this year in view of the very real threat of Southern corn leaf blight and the shortage of blight-resistant seed. Corn producers, for example, may plant wheat and grain sorghum on their feed grain base without loss of history or payments. Farmers in all or parts of nine Southern states, including the entire states of North and South Carolina, have also been declared eligible to apply for permission to substitute soy allotment; for the feed grain producer, the set aside beans or other crops on corn acreage in 1971 if they amounts to 20% of the farm’s feed grain base; and can show that they are unable to obtain enough for the wheat farmer, it equals 75% of his domestic blight-resistant seed to plant at least 45% of their allotment. Once a farmer sets aside the required amount of corn acreage base. Similar authority for farmers in several other states is under study. cropland to approved conservation uses and main Sada L. Clarke 15