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FEDERAL RESERVE BANK OF RICHMOND MONTHLY REVIEW Bank A ffiliates and T heir R equlation: P a rt I I Tim e and Savings D eposits in the F ifth D istrict The D istrict E con om y in P ersp ective Spotlight on A griculture T he M o n th ly R e v ie w is produced by the R esearch D epartm ent of the F ederal R eserv e Bank of Richm ond. Subscriptions are available to the public w ithout charge. A d d ress inquiries to Bank and Public R elations, F e d eral R eserv e Bank of R ichm ond, P . 0 . B o x 27622, R ichm ond, Virginia 23261. A rticles may be reproduced if sou rce is given. P lease provide the B ank’s Research D epartm ent with a copy of any publication in which an article is used. 2 M ONTHLY REVIEW, APRIL 1973 BANK AFFILIATES AND THEIR REGULATION* PART II Last month, P a rt I discussed the origin of bank affiliates and the events that led to enactment of the bank affiliate legislation of 1933. In P a rt II , the various types of regulatory legislation adopted in that year applicable to banks and their affiliates are review ed, including the “ holding company affiliate” provisions— the first F ederal statutes designed to regulate bank holding companies. A lth ou gh the bulk of the 1933 legislation accomplished its purpose and continues in force, for various reasons the m ethod of regulating “ holding com pany affiliates” proved to be inadequate. P art I I concludes with a description of the developm ents betw een 1935 and 1955 in volv ing bank holding com panies that caused the “ holding com pany affiliate” provisions to be replaced zvith the Bank H olding Com pany A c t of 1956 and its amendments in 1966 and 1970. AFFILIATE AND BANK HOLDING CO M PAN Y LEGISLATION OF 1933 Banking affiliates. There seems to be no doubt anywhere that a large factor in the overdevelop ment of security loans, and in the dangerous use of the resources of bank depositors for the pur pose of making speculative profits and incurring the danger of hazardous losses, has been furnished by perversions of the national banking and State banking laws, and that, as a result, machinery has been created which tends toward danger in several directions. (a) The greatest of such dangers is seen in the growth of “ bank affiliates” which devote them selves in many cases to perilous underwriting oper ations, stock speculation, and maintaining a market for the banks’ own stock, often largely with the resources of the parent bank. This situation was never contemplated by the National Banking Act, and it would, therefore, appear that the affiliate system calls for the establishment of some legis lative provisions designed to deal with the situation. It has been suggested from many quarters that the affiliate system be simply “ abolished.” This sug gestion has much authority behind it, but, in addi tion to the manifest difficulty of enforcement, owing to the existence of well-known subterfuges to maintain control, there remains the question wheth er it would be of much real service so long as State legislation permits the growth of affiliates in con nection with State banks and trust companies. . . . ❖ ❖ ❖ A combination of events in the early months of 1933 undermined public confidence in banking insti tutions. Bank failures increased at an alarming rate, creating panic in som e states. M ichigan declared a Bank H oliday on February 4, and by M arch 3 at least 28 other states had either closed their banks or im posed some form of restriction on withdrawals of deposits. One of the first official acts of newlyinaugurated President R oosevelt was to declare a national Bank H oliday on M arch 5, which lasted almost 10 days. M ore than 2,000 of the banks that closed during this period never reopened. Then, on M arch 31, tw o leading M ichigan-based bank holding (b) Group banking. Closely allied in many points of similarity with the affiliate system is the plan of group banking in operation in some parts of the United States, working, in a few cases, on a large scale. . . . The evils of indirect control are similar in the two cases, and they may lead to similar abuses, as is seen when it is noted that holding companies also usually control companies organized for security financing. However, such companies have in some parts of the United States become well rooted, and the difficulty of eliminating or abolishing them in any effective way is similar to the difficulty of eliminating or abolishing the affiliates of city banks. It is, therefore, thought best to attempt the control and oversight of these companies. . . .x W ith these w ords, the basis was laid for enactment and Detroit Bankers Co., Inc., filed voluntary peti of a cluster o f statutes designed to regulate relation ships am ong banks and their affiliates, including bank tions for dissolution. holding companies, in three principal ways. companies, the Guardian Detroit U nion G roup, Inc. A t about the same time, a Senate subcommittee investigating the activities of These involved : ( 1 ) separation of com m ercial banking from the National City Bank and its securities affiliate investment banking; ( 2 ) exposed abuses that made headline news throughout financial relationships between banks and their affili the country. Against this background, the Senate Banking and a te s; and ( 3 ) authorization o f Federal bank super Currency Committee filed a report on M ay 15, 1933, recom m ending the bill that became the Banking A ct affiliates. In addition, special provisions were enacted of 1933 just one month later. member banks of the Federal R eserve System. In the report, securi placing o f limitations on visory agencies to examine and obtain reports from applicable to bank holding companies affiliated with ties affiliates were severely criticized, and bank h old ing companies were linked with securities a ffiliates: 1 S. Rep. No. 77, 73rd Cong., 1st Sess. (1933), pp. 9-10. FEDERAL RESERVE BA N K OF RIC H M O N D 3 Separation of Commercial Banking from Invest ment Banking T h e re m e d y a d op ted b y C on g ress to deal with the various abuses resulting from the poration, association, business trust, or other similar organization engaged in the business of issuing, underwriting, selling, or distributing stocks, bonds, m ixin g of com m ercial and investment banking was notes, or other securities shall, at the same time, to complete separation of these functions. T his sepa any extent whatever, engage in the business o f re ration was accomplished by Sections 16, 20, 21, and ceiving deposits subject to check or repayment upon 32 of the Banking A ct o f 1933.2 T w o of these provisions, Sections 20 and 32, presentation of a passbook, certificate of deposit, or brought about the separation of ownership, control, other evidence of debt, or upon request of the de positor.5 Section 16 absolutely prohibits national and management of securities companies and member banks from purchasing for their ow n account any banks o f the Federal R eserve System. shares o f stock of any corporation, except as may be Section 20 declares it unlawful for any member bank to be affili authorized by law, and this restriction is made appli ated with any securities com pany by means of com cable to state member banks by Section 9 o f the Federal R eserve A ct.G M oreover, both national and mon shareholders, directors, trustees, or other per sons exercising similar functions.3 Section 32 renders it unlawful for any officer, director, or em ployee of state member banks are forbidden to purchase for any member bank of the Federal R eserve System to obligations of the United States and other obligations be at the same time an officer, director, or em ployee of any securities com pany, except as may be p er specifically authorized by statute or under regulations prescribed by the C om ptroller of the Currency. their ow n account any investment securities except mitted by the B oard of G overnors o f the Federal R e serve System.4 Com plem enting Sections 20 and 32, Sections 16 and 21 of the 1933 A ct were designed to prevent banks from themselves engaging in the securities Limitations on Financial Relationships Between Banks and Affiliates The 1933 le g isla tio n did not require the separation o f ownership or control o f affiliates other than securities companies from m em business or from purchasing securities for their ow n ber banks, and this continues to be the law today account except as specifically authorized. Section 21, which applies to all types of banks and not just to member banks of the Federal Reserve System, p ro except where affiliation is by means o f bank holding com pany ownership. Instead of requiring such d i vorcem ent, Congress dealt with abuses involving the vides that after June 16, 1934, no person, firm , c o r channeling of bank funds to their affiliates by en acting Section 23A o f the Federal R eserve A ct. T his statute, as supplemented by an amendment adopted in 2 48 Stat. 186, 188, 189, and 194 (1933). 3 48 Stat. 188 (1935), as amended 49 Stat. 707 (1933). The scope of this provision, as well as of the other affiliate provisions, depends upon the definition of “ affiliate.” In reality, for all practical pur poses, there are two coexisting and different definitions of affiliation currently on the statute books. One, which was enacted in 1933 and subsequently amended in 1966, includes situations involving common ownership or control by means of individual owners, bank holding companies, or other types of organizations. The other definition is a consequence of the Bank Holding Company Act of 1956, as amended in 1970. It applies only to affiliation by means of bank holding company ownership. Although both sets of provisions cover situations where there is common ownership or control of a bank and other banks or nonbank companies, they differ signifi cantly in the ways in which they specify what constitutes common ownership or control. These statutory provisions are found, re spectively, at 12 U.S.C. § 221(a) and 12 U.S.C. §1841. The Bank Holding Company Act does not use the term “ affiliate” as such but achieves the same result by its definitions of “ bank holding com pany,” “ company,” “ bank,” and “subsidiary.” Paragraph 5 of Section 23A of the Federal Reserve Act states: “ For the purposes of this section, the term ‘affiliate’ shall include, with respect to any member bank, any bank holding company of which such member bank is a subsidiary within the meaning of the Bank Holding Company Act of 1956, as amended, and any other subsidiary of such company.” 12 U.S.C. § 3 7 1 (c ). Bank holding companies and their subsidiaries are also, by the terms of the Bank Holding Com pany Act, made subject to the same types of restrictions as regards examinations and furnishing of reports as are applicable to affili ates generally under the 1933 legislation. 4 Section 32 provides: No officer, director, or employee of any corporation or unincorporated association, no partner or employee of any partnership, and no individual, primarily engaged in the issue, flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndicate participation, of stocks, bonds, or other similar securities shall serve (at) the same time as an officer, director, or employee of any member bank except in limited classes of cases in which the Board of Governors of the Federal Reserve System may allow such service by general regulations when in the judgment of the said Board it would not unduly influence the investment poli cies of such member bank or the advice it gives its customers regarding investments. 4 1966 to Section 1S ( j ) of the Federal Deposit Insur ance A ct, limits loans to and investments in affiliates by banks insured by the Federal Deposit Insurance Corporation to 10 percent o f the capital and surplus o f the lending bank to any one affiliate and to a m axim um of 20 percent of the bank’s capital and surplus to all affiliates in the aggregate. Section 2 3 A also requires that each loan or extension o f credit to an affiliate by an insured bank be secured by collat eral in the form of stocks, bonds, debentures, or other such obligations having a market value at the time o f making the loan or extension o f credit o f at 5 Section 2 1(a) provides, in relevant part, that it shall be unlawful: (1) For any person, firm, corporation, association, business trust, or other similar organization, engaged in the business of issuing, underwriting, selling, or distributing, at wholesale or retail, or through syndicate participation, stocks, bonds, debentures, notes, or other securities, to engage at the same time to any extent whatever in the business of receiving deposits subject to check or to repayment upon presentation of a passbook, certificate of deposit, or other evidence of debt, or upon request of the depositor . . . 6 48 Stat. 165 (1933). In Investment Company Institute V. Camp, 401 U.S. 617 (1971), the Supreme Court held that even though a national bank may lawfully commingle trust assets, act as managing agent for customers, and purchase stock for the account of its customers, it is prohibited by Sections 16 and 21 of the 1933 legis lation from combining these functions to operate an investment fund that affords bank customers the opportunity to invest in stock funds created and maintained by the bank. M ONTHLY REVIEW, APRIL 1973 least 20 percent m ore than the amount o f the loan or extension, or at least 10 percent m ore if secured by the obligation of any state or any o f its political subdivisions or agencies.7 Examinations and Reports B oard, to disclose fully the relations between the affiliate and each affiliated mem ber bank. These reports must be published by the member bank under the same circumstances as govern publication o f its condition reports.10 C o n g re ss c lo s e ly fo l low ed the recomm endation of the Board of G overnors by adopting legislation authorizing the Board and the Com ptroller of the C urrency to examine all affili ates of state member banks and national banks, re spectively, as necessary to disclose fully the relations Bank Holding Company Regulation In a d d ition to the three classes o f affiliate laws described above, which were made applicable to all affiliates, special provisions were enacted in the Banking A ct o f 1933 applicable to “ holding com pany affiliates.” T his was the first Federal statute designed specifically to regu between such banks and their affiliates and the effect late bank holding companies. of the affiliate relationship upon the affairs of the In addition, national and state member T he term “ holding com pany affiliate” was defined to include any corporation, business trust, association, banks were required to obtain from each o f their or other similar organization ow n ing or controlling affiliates, other than member banks, and furnish to eith e r: banks.8 the B oard of G overnors not less than three reports each year.9 Each report must be in such form as the Board may prescribe and must contain all in for mation that is necessary, in the judgm ent o f the 7 The first two paragraphs of Section 23A provide as follows: 1. Loans to affiliates and investments in, or loans on, their obligations No member bank shall (1) make any loan or any extension of credit to, or purchase securities under repurchase agree ment from, any of its affiliates, or (2) invest any of its funds in the capital stock, bonds, debentures, or other such obligations of any such affiliates, or (3) accept the capital stock, bonds, debentures, or other such obligations of any such affiliate as collateral security for advances made to any person, partnership, association, or corporation, if, in the case of any such affiliate, the aggregate amount of such loans, extensions of credit, repurchase agreements, investments, and advances against such collateral security will exceed 10 per centum of the capital stock and surplus of such member bank, or if, in the case of all such affiliates, the aggregate amount of such loans, extensions of credits, repurchase agreements, investments, and advances against such collateral security will exceed 20 per centum of the capital stock and surplus of such member bank. 2. Security for loans to affiliates Within the foregoing limitations, each loan or extension of credit of any kind or character to an affiliate shall be secured by collateral in the form of stocks, bonds, debentures, or other such obligations having a market value at the time of making the loan or extension of credit of at least 20 per centum more than the amount of the loan or extension of credit, or of at least 10 per centum more than the amount of the loan or extension of credit if it is secured by obligations of any State, or of any political subdivision or agency thereof: Provided, That the provisions of this paragraph shall not apply to loans or extensions of credit secured by obligations of the United States Government, the Federal intermediate credit banks, the Federal land banks, or the Federal Home Loan Banks, or by such notes, drafts, bills of exchange, or bankers’ acceptances as are eligible for rediscount or for purchase by Federal reserve banks. A loan or extension of credit to a director, officer, clerk, or other employee or any representative of any such affiliate shall be deemed a loan to the affiliate to the extent that the proceeds of such loan are used for the benefit of, or transferred to, the affiliate. Section 1 8 (j) of the Federal Deposit Insurance Act, as amended in 1966, provides as follows: (j) The provisions of Section 23A of the Federal Reserve Act, as amended, relating to loans and other dealings between member banks and their affiliates, shall be applicable to every nonmember insured bank in the same manner and to the same extent as if such nonmember insured bank were a member bank; and for this purpose any company which would be an affiliate of a nonmember insured bank, within the meaning of Section 2 of the Banking Act of 1933, as amended, and for the purposes of Section 23A of the Federal Reserve Act, if such bank were a member bank, shall be deemed to be an affiliate of such nonmember insured bank. 80 Stat. 242 (1966). 8 48 Stat. 166, 192 (1933). In 1966, Congress amended Section 10(b) of the Federal Deposit Insurance Act to authorize the FDIC to examine all affiliates of nonmember insured banks. 80 Stat. 1053 (1966). 8 48 Stat. 165 (1933). (1) a majority of the shares of capital stock of a member bank or more than 50 percent of the number of shares voted for the election of directors of any one bank at the preceding election, or con trolling in any manner the election of a majority of the directors of any one bank; or (2) for the benefit of whose shareholders or mem bers all or substantially all the capital stock is held by trustees.11 A n y com pany falling within the definition o f a “ holding com pany affiliate” was prohibited from voting any stock ow ned or controlled by it in any member bank without first obtaining a voting permit from the B oard of G overnors. In order to obtain a voting permit, a holding com pany affiliate was re quired to agree to the follow in g co n d itio n s: (1) To be examined by Federal Reserve examiners, and to permit each subsidiary bank to be examined, just as if it were a member bank; (2) To permit full disclosure of the relations be tween the holding company affiliate and its banks, and the effects of such relations upon the banks; (3) To publish individual or consolidated state ments of condition of all banks owned by it, if required; (4) To avoid all connections, direct or indirect, with any organization engaged in underwriting and selling securities, except government issues and a few other special types; 1 Id. Paragraph 9 of Section 21 of the Federal Reserve Act now 0 provides: Whenever member banks are required to obtain reports from affiliates, or whenever affiliates of member banks are required to submit to examination, the Board of Governors of the Federal Reserve System or the Comptroller of the Currency, as the case may be, may waive such requirements with respect to any such report or examination of any affiliate if in the judgment of said Board or Comptroller, respectively, such report or examination is not necessary to disclose fully the relations between such affiliate and such bank and the effect thereof upon the affairs of such bank. This statute was added as a new paragraph to Section 21 of the Federal Reserve Act by the Banking Act of 1935. 49 Stat. 751 (1935). Because all member banks are required to furnish reports to the Board of Governors, it has the authority to waive submission of reports. The authority of the Board and the Comptroller is divided in waiving examinations of affiliates of state member banks and national banks, respectively. 48 Stat. 162 (1933). In 1966, this definition, in substance, became paragraph (4) of the definition of “ affiliate,” 80 Stat. 242. FEDERAL RESERVE BA N K OF R IC H M O N D 5 (5) To build up a reserve in the form of cash or readily marketable assets other than bank stock that, after five years from the enactment of the Banking Act of 1933, would equal at least 12 per cent of the aggregate par value of the bank stocks owned by the holding company affiliate. (This was to be increased 2 percent a year until free assets equaled 25 percent of the par value of bank stocks. All net earnings in excess of 6 percent of book value were to be retained until such free assets equaled 25 percent of par) ; and (6) To limit its payment of dividends to actual net earnings.12 B efore granting the permit, the Board was re quired to satisfy itself that the financial condition of the holding com pany, the general character o f its management, and the probable effect o f the granting of the voting permit on the banks were all favorable. A nother provision made every officer, director, agent, Decem ber 31, 1934. A m on g these were 170 holding com pany affiliates, o f which the B oard ’s 1934 A n nual R ep ort stated: “ (t)h e r e were 60 holding co m pany affiliates that were prim arily bank holding com panies.” 14 B y draw ing a distinction between “ holding com pany affiliates” and “ bank holding com panies” in this way, a precedent was established for a policy limiting the regulation of bank holding companies to those that were “ prim arily” engaged in managing or controlling banks, and excluding from regulation companies controlling only one or tw o banks, or engaging prim arily in nonbanking activities and only incidentally in holding the stock of banks. Legal authority for this policy was conferred by Section and employee of a holding com pany affiliate subject 301 o f the Banking A ct of 1935, which added the to the same penalties for false entries— in any book, follow ing language to the 1933 definition o f “ holding report, or statement of the affiliate— that apply to com pany affiliate” : officers, directors, agents, and employees of member banks of the Federal R eserve System .13 T he 1933 “ holding com pany affiliate” provisions were based on control of a single bank, and in this . . . the term “ holding company affiliate” shall not include (except for the purposes of Section 23A of the Federal Reserve Act, as amended) any corpora tion all of the stock of which is owned by the United States, or any organization which is deter H ow ever, the mined by the Board o f Governors of the Federal Reserve System not to be engaged, directly or in legislation was defective for several reasons. First, it applied only to member banks of the Federal directly, as a business in holding the stock of, or managing or controlling, banks, banking associ ations, savings banks or trust companies. respect their coverage was broad. R eserve System and thus did not include thousands of state-chartered banks that were not members. Both the H ou se and Senate R eports on the bill A part from this, if control over a bank could be that became Section 301 cited examples o f companies exercised without voting its stock, the holding co m pany did not have to subject itself to regulation. In intended to qualify for exem ption from the voting permit requirement. T he H ouse R eport referred to one instance, for example, a bank holding com pany ow ned a controlling interest in 24 banks yet obtained voting permits to vote the stock of only tw o o f them. a number o f actual cases illustrating “ the types of T w o years later the coverage of the 1933 “ holding com pany affiliate” legislation was further curtailed by Section 301 of the Banking A ct o f 1935. This tained in the present law, because they are not be event was significant for the later development of bank holding com pany regulation, because it marked the beginning of a period o f special treatment for one-bank holding companies that lasted until the end o f 1970. so-called holding com pany affiliates which the am end ment would exclude from the broad definition co n lieved to be within the intent o f the provisions of law regarding holding com pany affiliates.” 15 A m on g these “ actual cases” were a department store chain, a labor union, a charitable foundation, a large lumber com pany, and a corporation organized to hold real property for a church. Each of these companies owned the stock of only one or tw o member banks.16 The 1935 Holding ments Company Affiliate Am end A total o f 2,314 a ffilia tes w e re rep orted by 1,142 national and 295 state member banks in response to the call fo r reports by the Federal R e serve Board and the Com ptroller of the C urrency on 1 48 Stat. 186 (1933). 2 In lieu of the requirements specified in paragraph (5) above, the Banking Act of 1935 subjected holding company affiliates after June 16, 1938, to the requirement that each such affiliate establish and maintain out of the net earnings over 6 percent per annum on the book value of its own shares a reserve of readily marketable assets of not less than 12 percent of the aggregate par value of bank stock held by it not subject to statutory liability. The voting permit provisions of the 1933 Banking Act were repealed in their entirety in 1966 by Public Law 89-485, 80 Stat. 242 (1966). 13 48 Stat. 186 (1933). This provision was also repealed in 1966. 6 1 Annual Report of the Board of Governors of the Federal Reserve 4 System (1934), p. 59. This report stated that of the total number of affiliates, 281 were nonmember state banks, 227 were safe-deposit or bank-building companies, 124 were foreign organizations, and 1,682 were described as “ . . . mainly in the fields of finance and investment and real estate.” The report further stated: Among the affiliates comprehended by the statutory defi nition are factories, stores, churches, colleges, newspapers, steamship companies, cemeteries, hotels, and labor unions. A large number of these are in the affiliate relationship acci dentally, and not as the result of any purpose of establishing such relationships. In many cases the affiliation is due to the fact that the bank has had to realize on collateral pledged to secure loans, or holds certain property as trustee of an estate, or has been helped out of difficulties of its own by the owners of other businesses. About one-sixth of the affiliates grow out of the liquidation of bad assets by member banks. 1 H. Rep. No. 742, 74th Cong., 1st Sess. (1935), p. 15. 5 1 Ibid., pp. 15-16. 8 M ONTHLY REVIEW, APRIL 1973 R eferring to bank holding companies of this de the U nited States.20 scription, the Senate R eport noted that “ (t )h e intent was thus com prom ised by the fact that bank holding companies as a group controlled only a relatively small and generally static proportion of total banks and bank deposits in the country. Nevertheless, there of the amendment is to relieve such organizations from the limitations and requirements to which hold ing companies engaged as a business in controlling banks are su bject.” 17 In retrospect, Section 301 was an aberration in the development of bank Federal holding policy tow ard companies and the their T he urgency o f the message was one com pany whose continued rapid grow th and expansion, across state lines and into a variety of nonbanking areas, gave cause for serious concern. regulation of affiliates. Later, it was m ore clearly recognized in 1943 on its experience regulating bank holding that if com m on ownership or control of a bank and companies under the voting permit mechanism, the The Exceptional Case R e p o r tin g to C on g re ss other businesses by a bank holding com pany could B oard o f G overnors noted that, on the whole, their lead to abuses threatening the soundness or solvency of the bank, the risk would be present regardless of management had been cooperative and that it had enjoyed satisfactory relations with most o f them. whether the holding com pany owned one or tw o or a H ow ever, the Board a d v ise d : number o f banks. Indeed, if the one bank were a large bank, the holding com pany’s interests in exten sive nonbanking businesses might well lead to abuses m ore serious than if the com pany controlled several small banks. Nevertheless, the decision was made in 1935 to limit Federal regulation o f bank holding companies to those that were “ engaged as a business in manag ing or controlling banks.” Between 1935 and 1966, It is the exceptional case which now concerns the Board, for it is in the exceptional case that the in adequacies of the (1933 holding company affiliate legislation) are real impediments and in which the Board’s ability to regulate is challenged. In the exceptional case, the Board has found that the corporate device of the holding company has not been used solely as a mechanism for the efficient operation of controlled banks but as a device to accomplish by indirection objectives which could not be accomplished directly.21 T w o different aspects of operations by “ the excep tional case” were criticized. First, the B oard char when Section 301 was repealed, the Board exercised acterized the pow er of a bank holding com pany to its authority to make “ 301 determinations” on at acquire least 356 occasions. approval as in conflict with the objective o f Federal In actual practice the vast ma banks without any requirement of prior jority of holding com pany affiliates exempted from branch banking legislation. the voting permit requirements were one-bank hold establishment o f branches by national banks to the ing com panies.18 same geographic areas permitted to state-chartered banks by state law. A s the Board pointed out, . . BANK HOLDING CO M PAN Y DEVELOPMENTS 1935-1955 O n A pril 28, 1938, President Roosevelt sent a Special Message to Congress calling for “ . . . a thorough study of the concentration of econom ic pow er in Am erican industry and the effect o f that concentration upon the decline of com petition.” 19 In the message, bank holding companies were singled out for special attention. Immediate legislation was These laws limit the the same management which is restricted in its op er ation under a bank charter can, through the holding com pany device, acquire unit banks, operate them in the same manner branches will be operated, and thus defeat the will o f Congress regarding the establish ment o f branches.” 22 T he Board also called attention to the creation by “ the exceptional case” of a conglom erate organization com bining bank ownership with extensive control over nonbanking businesses: called for to halt their grow th and eventually to limit them, even though the number of such companies had declined from 97 in 1931 to 52 in 1936. B y the latter year they could not have accounted for more than 8 to 10 percent of total com m ercial banking deposits in Accepted rules of law confine the business of banks to banking and prohibit them from engaging in extraneous businesses such as owning and oper ating industrial and manufacturing concerns. It is axiomatic that the lender and borrower or potential borrower should not be dominated or controlled by the same management. In the exceptional case, the corporate device has been used to gather under 17 S. Rep. No. 1007, 74th Cong., 1st Sess. (1935), p. 14. 20 “ Origin and Development of Bank Holding Companies,” Federal Reserve Bulletin (1938), p. 99. 1 On a few occasions the Board exempted organizations that con 8 trolled more than one bank. In one case, the holding company controlled three banks and in another case four banks. In both cases, however, the holding company was a nonbanking organization, in one the Mormon Church and in the other a college. 21 Annual Report of the Board of Governors of the Federal Reserve System (1943), p. 36. (Emphasis added.) 19 Senate Document No. 173, 75th Cong., 3rd Sess. (1938), pp. 8-9. 22 Ibid., p. 37. FEDERAL RESERVE BA N K OF R IC H M O N D 7 one management many different and varied enter prises wholly unallied and wholly unrelated to the conduct of a banking business.23 Based upon its experience with “ the exceptional case,” and because of the threat posed by the lack of effective regulation, the B oard concluded its report with this recom m endation: pendent Bankers A ssociation, a national organization, and the President o f the Independent Bankers A s s o ciation of the T w elfth Federal R eserve District, the area that included California and other western states where Transam erica banks were located. Both as serted that free enterprise and com petition in banking were threatened by the grow th of bank holding co m The Board believes, therefore, that it is necessary in the public interest and in keeping with sound banking principles that the activities of bank hold ing companies be restricted solely to the banking business and that their activities be regulated, as are the activities of the banks themselves.24 panies, especially Transam erica.26 A lthough the bill was reported out favorably by the Senate Banking and C urrency Committee, no further legislative action was taken in that session of Congress, and it was not until 1949 that another bill to regulate bank holding Identifying the Exceptional Case A bill d e signed to regulate bank holding companies was p ro posed by the B oard in 1945, and Congressional hear ings were held in 1947. Chairman E ccles o f the companies was introduced. A s of 1948, therefore, there was but one affiliate statute intended to provide some measure o f control over bank holding companies, and that was the in Board of G overnors appeared as a witness and in the effective “ holding com pany course of his testimony identified “ the exceptional 1933 based upon the voting permit mechanism. W ith case” that was the cause o f such concern : prospects dim for further bank holding com pany While the management of the great majority of the important bank holding company systems have sought the Board’s views, if not its approval, on proposed bank acquisitions, there is one case where a holding company management has openly defied the Board in its attempt to halt an unbridled bank expansion program. I refer to the Transamerica Corp. with its vast group of controlled banks in Arizona, California, Nevada, Oregon, and Wash ington. . . . It may be interesting to the members of the com mittee to have the latest figures on the size of the Transamerica banking empire. As of December 31, 1946, information available to the Board indicates that there are 41 banks in the Transamerica group, operating a total of 619 banking offices having aggregate deposits in excess of 6 ^ billion dollars. This represents more than 40 percent of all the banking offices and 38 percent of all of the com mercial deposits in the five-state area. Since 1934, the Transamerica group has acquired a total of 126 banks, which have been operated either as separate units or have been absorbed by the banks in the group. . . . In addition, (Transamerica) owns and operates many other types of businesses with aggregate re sources of more than $275,000,000. . . . There is real estate, iron and brass foundaries, another real estate outfit, buying, processing, and selling fish and seafood, a very big fishing outfit; the manu facture of diesel engines and other products; hold ing real estate and acting under trusts. . . . Then there is Occidental Corp., Occidental Life Insur ance. That is a large life, health and accident company. And so forth. affiliate” provision o f legislation in the near future, another method of bringing the grow th o f Transam erica under control was attempted. The Transamerica Litigation O n Ju ne 24, 1948, after receiving a report from the Department of Justice that there was not sufficient evidence o f abuse of pow er by Transam erica to support an antitrust proceeding under the Sherman A ct, the B oard of G overnors issued a com plaint charging Transam erica with violation of Section 7 o f the Clayton A ct.27 T h e complaint alleged that Transam erica and its prede cessors had “ continuously and systematically” ac quired the stocks o f independent com m ercial banks located in the five states o f California, O regon , N e vada, W ashington, and A rizon a, and that the effect o f such acquisitions might be to substantially lessen com petition, restrain com m erce, or tend to create a m onopoly. T his was the first such proceeding chal lenging stock acquisitions of com m ercial banks by bank holding companies by either the B oard o f G o v ernors or the A ntitrust D ivision o f the Department o f Justice during the entire 34 years since enactment o f the Clayton A c t in 1914. H earings were held and evidence was taken before a member o f the Board, w h o filed his findings and recom m ended decision on June 13, 1951, concluding I want just to indicate that there is nothing really excluded from acquisition if it appears to be profit able opportunity for investment.25 that Transam erica had violated Section 7, as alleged. A part from Chairman Eccles, only tw o other w it of 3 to 2 (w ith G overnors R obertson and M ills not Thereafter, on A pril 1, 1952, the B oard itself by vote nesses testified in support o f the proposed legislation. participating) concluded that a total of 47 bank stock T hey were, respectively, the Secretary of the In de acquisitions by Transam erica were illegal. It ordered 23 Ibid., p. 36. (Emphasis added.) 2 Ibid., pp. 31-2, 44. 0 2 Ibid., p. 37. 4 2 Transamerica Corp. v. Board of Governors of the Federal Reserve 7 System, 206 F.2d 163 (3rd Cir. 1953), cert, denied, 346 U.S. 901 (1953). 25 Hearings on S. 829, 80th Cong., 1st Sess. (1947), pp. 22, 24. 8 MONTHLY REVIEW, APRIL 1973 divestiture in all instances, except for the stock of regarded com m ercial banking as “ interstate com Bank of A m erica National Trust and Savings A s so m erce” subject to Federal regulation. Consequently, the court upheld the B oa rd ’s jurisdiction to proceed under the Clayton A ct with these w o r d s : ciation. Transam erica appealed to the United States Court o f Appeals for the T hird Circuit, which vacated and set aside the B oa rd ’s order on July 16, 1953, on the ground of failure of p roof.28 H ow ever, the decision was of profound significance because of its rulings on the legal issues. Transamerica argued that Congress had not intended for the Sherman A ct and Section 7 of the Clayton A ct to apply to com m ercial banks. It pointed out that both statutes were based upon the pow er of Congress to regulate interstate com m erce, that the Suprem e Court had consistently held during the nineteenth century that com m ercial banking was not “ interstate com m erce,” and that such decisions were in force when the Sherman and Clayton A cts were passed in 1890 and 1914, respectively.29 It asserted that Congress could not have intended anti trust statutes, which are based on the Com m erce Clause of the Constitution, to apply to activities that did not constitute “ interstate com m erce” at the time the statutes were enacted. It also noted that the constitutional basis for banking legislation had his torically been the pow er of Congress to “ coin money . . . and regulate the value thereof,” and not the Com m erce Clause. T he Court of Appeals conceded the logic o f these arguments but took note that, com m encing in 1942 with the decision in N .L .R .B . v. Bank o f A m erica N ational T rust & Savings A ssn .,30 the courts had reversed their nineteenth century position and now It may readily be admitted that Congress has in the past customarily dealt with the banking busi ness by special legislation directed solely to that end. This it did under its fiscal and currency powers. Indeed more than 100 years ago the Supreme Court had held that banking was not commerce. It is, therfore, doubtless true that the members of Congress in enacting Section 7 of the Clayton Act in 1914 did not specifically contem plate that “ corporations engaged in commerce” would include banks. We find nothing in the legislative history, however, to indicate that Con gress did not intend by Section 7 to exercise its power under the commerce clause of the Constitu tion to the fullest extent. The avowed purpose of the Clayton Act was to supplement the Sherman Act by arresting in their incipiency those acts and practices which might ripen into a violation of the latter act. Since the general language of the Sherman Act was designed by Congress “ to go to the utmost extent of its Constitutional power in restraining trust and monopoly agreements” the supplementary general language of the Clayton Act was undoubtedly intended to have the same all inclusive scope.31 W ith this language, the court provided the legal basis for full application of the antitrust laws to the banking industry. than that. But the cou rt’s opinion did more If any doubt remained as to the pow er of Congress under the Constitution to regulate all bank holding companies, regardless of their ownership of stock in member banks o f the Federal R eserve Sys tem, it was swept away with the Transam erica d eci sion. A n d the ruling against the B oard on the facts of the case provided renewed impetus fo r the drive to enact legislation placing discretion in the B oard to control the grow th of bank affiliation by means of bank holding com pany ownership. 28 Ibid., p. 163. W illiam F . Upshaw 2 Ibid., p. 165. 9 80 N.L.R.B. v. Bank of America National Trust < Savings Assn., fe 130 F.2d 624, 626 (9th Cir. 1942), cert, denied, 318 U.S. 791, 792 (1943). 8 Supra, note 27, pp. 165-66. 1 P a rt III, to appear n ext month, discusses the regulation of bank and nonbank affiliation under the Bank H olding Com pany A c t of 1956, as amended. T he regulatory structure applicable to bank hold ing com panies and their affiliates is com pared with the provisions applicable to bank affiliation by other means. FEDERAL RESERVE BA N K OF RIC H M O N D 9 trict between 1971 and 1972. TIME AND SAVINGS DEPOSITS Table I shows the amount outstanding and the percentage change from the previous year in time and savings deposits in the Fifth District, classified by type of deposit as well as IN THE FIFTH DISTRICT size and location of the bank holding the deposits. Total time and savings deposits in the Fifth District were $11.6 billion in O ctober 1972, an increase of to its term, which may range from periods of less T he Federal R eserve System and the Federal D e posit Insurance Corporation conduct in O ctober an than one year to longer than tw o years. annual survey of time and savings deposits held by deposits, while technically subject to a thirty-day insured com m ercial banks. Interim quarterly surveys more than 20 percent from the previous year. withdrawal notice, are in practice withdrawn on de are conducted on a sample of banks. Total deposits com prise tw o main categories o f d ep osits: time and savings deposits. tween a time and a savings deposit lies with the Growth in Tim e and Savings Deposits stipulated time constraint on time d ep osits: the de posit in a time account must not be withdrawn prior the highest rate in the 12-month period ending in deposits grew at the slower rate of 14.6 percent. T w o September. This m ovem ent— a decline in rates from autumn of 1971 to the beginning of 1972 follow ed trends appear to underlie the large increase in time by an increase— was also exhibited by rates on prime deposits. First, large denomination deposits, basic comm ercial paper of fou r-to-six months and on ally certificates of deposit of $100,000 or m ore, grew longer-term T reasury issues o f three-to-five years. by 61 percent. o f Fifth District banks, on O ctober 31, 1971 and O ctober 31, 1972. T he chief distinction be 1972, which was the lowest rate since July 1963. T hey then rose to 4.651 percent in September 1972, posits, which grew at a rate of 28.8 percent.1 Savings o f h o ld e r: savings deposits are held only by individ uals or nonprofit organizations. T his article co m pares data collected from the tw o most recent surveys gather inform ation on total deposits and on interest behavior of rates of return on various com peting in struments in the market. Rates on new issues of three-month U . S. T reasury bills fell from 4.668 per cent in September 1971 to 3.180 percent in February grow th largely resulted from expanding time de mand. A nother difference is represented by the type Both surveys rates paid in various categories of deposit. Savings This grow th was in longer-term deposits, i.e., deposits of tw o years or more. These trends may be explained by reference to the Y ields on corporate bonds and on com m on stocks displayed m ore steady declines during this period. Second, in deposits of smaller de nomination, i.e., those less than $100,000, the largest T he dow nw ard movement of market rates o f return on investments between 1971 and early 1972 was an T im e and 1 This figure refers to the change in total time deposits, which is not shown in Table I. savings deposits rose dramatically in the Fifth D is incentive for funds to be attracted to savings and time Tablc C H A N G E S IN TIM E A N D S A V IN G S DEPO SITS AT FIFTH DISRICT B A N K S: FIFTH DISTRICT Type of Deposit Held by Individuals, Partnerships and .Corporations (IPC) Am ount Outstanding ($ Millions) as of October 31, 1972 % Change From Year Ago M ARYLAND % of Deposits held by Banks with Total Deposits of % C hange in Deposits from Year A g o for Banks W ith Total Deposits Less than $100 mill Total Time and S a v in g s Deposits S a v in g s Deposits $100 mill, or more Less than $100 mill. Am ount O utstanding ($ Millions) October 31, 1972 O CTO BER 31, 1971 TO O CT O BER 31, 1972 V IR G IN IA D. c. % Cange FrorYear /,0 Am ount Outstanding ($ Millions) October 31, 1972 % Change From Year Ago Am ount Outstanding ($ Millions) October 31, 1972 WEST V IR G IN IA % Change From Year A go Amount Outstanding ($ Millions) October 31, 1972 % Change From Year Ago NORTH C A R O L IN A Am ount Outstanding ($ Millions) October 31, 1972 SOUTH C A R O L IN A % Change From Year A go Am ount Outstanding ($ Millions) October 31, 1972 % Changt From Yeai Ago $100 mill, or more 1 1,597 20.7 32.5 67.5 17.2 22.4 1,598 126 1,065 7.4 4,382 19.6 1,352 19.0 2,658 37.2 543 14.3 6,108 14.6 34.2 65.8 16.2 13.7 1,268 1^0 587 8.0 2,192 15.5 713 14.4 1,097 18.3 250 10.4 1 Time Deposits Less than $100,000 3,706 19.2 38.5 61.5 16.6 21.0 207 Ifo 148 — 10.2 1,774 23.0 512 20.1 833 19.9 232 20.8 Less than 1 year 1,718 12.7 33.9 66.1 7.7 15.5 79 2 4 118 — 9.4 695 11.1 241 13.5 432 16.5 153 27.7 749 10.8 53.2 46.8 11.3 10.2 54 1 13 — 18.1 349 10.7 147 11.0 132 22.7 54 5.4 1,239 36.5 35.9 64.1 37.1 36.1 74 3 17 — 9.2 730 45.8 124 52.1 270 24.2 25 18.5 1,528 61.0 13.5 86.5 34.9 66.1 82 0 296 16.3 341 36.0 108 47.2 655 153.6 47 27.9 979 74.5 7.8 92.2 67.3 75.3 58 4 164 17.6 240 29.6 64 56.1 452 232.4 1 37.2 549 41.5 23.8 76.2 21.2 49.2 24 3£2 132 14.7 101 54.1 43 35.8 203 66.1 46 27.7 81.6 16.9 16.9 42 3-2 33 20.1 75 4.2 19 44.9 72 30.1 15 1 to 2 years 2 years or more $100,000 or more N e go tiab le Certificates of Deposit N on negotiab le Certificates of Deposit an d O pen Accounts Special Funds1 255 17.0 18.4 N um ber of Banks Reporting 366 360 329 37 325 35 46 6 12 12 150 146 108 108 24 23 26 26 M e m oran du m : Consum er-Type O pen Account Deposits 860 27.2 28.6 71.4 — .5 43.4 58 8 38 6.7 326 49.4 103 4.2 196 35.9 139 18.0 -2 4 .1 1 Christmas Clubs and similar non-interest bearing accounts 10 MONTHLY REVIEW, APRIL 1973 FEDERAL RESERVE BA N K OF RIC H M O N D 11 accounts at com m ercial banks. Furtherm ore, the fluctuations in market rates of interest induced greater uncertainty, which probably increased the willingness of investors to incur longer commitments less than $100,000, classified by type o f deposit as at fixed rates of return. mitted. The Distribution of Deposits by Size of Bank In both 1971 and 1972, approxim ately 10 percent of Fifth District member banks held $100 million or more in total deposits.2 In 1971, these larger banks held 66.6 percent of total Fifth District d ep osits; in 1972, this figure increased slightly to 67.5 percent. well as by location and size of bank.3 Section B shows the percentage o f these deposits, similarly clas sified, receiving the maxim um rate o f interest p er Section A indicates that 80.1 percent o f all banks in the Fifth District paid the m axim um rate of 4.50 percent on savings deposits. Section B indi cates that only 73.2 percent of all savings deposits in the Fifth District received the 4.50 percent return.4 The District of Columbia banks appeared to be som e what less aggressive in com peting for time deposits T he savings and time com ponents of total deposits than were banks in other parts of the District. display similar patterns o f concentration. In terms of grow th, the larger banks experienced a greater 41.7 percent of D. C. banks were paying maxim um O nly increase in total time and savings deposits, 22.4 p er ample, while 88.0 percent of V irginia banks were pay rates on time deposits of less than one year, fo r e x cent, than did the smaller banks, with 17.2 percent. ing the maxim um on these deposits. N orth Carolina, A s Table I shows, much of this increase is explained which exhibited the greatest increase in time and by the substantial rise in large bank holdings o f large savings deposits, also had the greatest percentage o f time deposits, which grew by 66.1 percent com pared with a rate of 34.9 percent in smaller banks. In co n trast, the rate of increase of savings deposits was more rapid in smaller banks, at 16.2 percent, than in larger banks, at 13.7 percent. banks paying the m axim um rate of interest: 91.7 p er cent. M aryland and the District of Columbia, which had the tw o lowest increases in total time and savings deposits in the Fifth District, also had the lowest percentage of banks paying m axim um rates o f in terest. A greater percentage o f banks with deposits T h e g re a te st in of $100 million or more pay maxim um rates on time crease in total time and savings deposits for the deposits of less than $100,000 than do smaller banks. period considered was in N orth Carolina, with a gain In V irginia, W est V irginia, and N orth Carolina, the Growth in Deposits by States of 37.2 percent. N orth Carolina exhibited a par ticularly salient increase of 153.6 percent in time deposits of $100,000 or m o r e ; and its savings deposits grew at a rate of 18.3 percent, the most rapid rise in the Fifth District. T he District of Columbia showed the smallest increase in total savings and time de posits, having a rise of only 7.4 percent. Smaller denomination time deposits declined by 10.2 percent in the District of Columbia while increasing by 23.0 percent in V irginia, the largest such increase in the Fifth District. T his disparity suggests that the D is figure is 100 percent. smaller banks, however, A greater percentage of pay m axim um rates on savings deposits. It appears, therefore, that com petition for deposits, as shown by percentages o f banks paying maxim um interest rates, is keener for savings deposits am ong the smaller banks, and for time deposits of less than $100,000, am ong the larger banks. Furtherm ore, a smaller percentage of savings deposits received the m axim um rate in 1972 than in 1971, while a larger percentage of time deposits of less than $100,000 received the maxim um rates in 1972 than in 1971. trict of Columbia banks faced substantial com petition “ Maximum Rates under Regulation Q: from neighboring areas in V irginia. Percent Rates Paid on Savings and Time Deposits of Less than $100,000 A con sid era tion o f the rates offered by banks in the Fifth District helps to further define their com petitive position. Table II is co n cerned with the patterns of rates paid on time and savings deposits in the Fifth District. Section A shows the percentage of banks paying the maxim um rates allowable under Regulation Q on deposits of 2 Hereafter, time and savings deposits will refer to deposits of individuals, partnerships, and corporations (IPC) only. 12 Savings 4.50 Multiple Maturity Time Deposits 30-89 days 4.50 90 days to 1 year 5.00 1 year to 2 years 5.50 5.75 2 years and over Single Maturity Time Deposits* Less than $100,000 5.00 30 days to 1 year 5.50 1 year to 2 years 2 years and over 5.75 $100,000 and over 30-89 days no set maximum at p 6.75 90-179 days 180 days to 1 year 7.00 7.50 1 year or more *These rates were used as maximums. 1 The discrepancy in percentages is explained by the less-than-equal distribution of deposits among banks: 10 percent of the banks, for example, may hold more or less than 10 percent of total deposits. MONTHLY REVIEW, APRIL 1973 Table II D ISTR IBU T IO N OF M A X IM U M RATES OF TIM E A N D S A V IN G S D EPO SITS OF LESS T H A N $100,000 O N O CT O BER 31, 1971 A N D O CT O BER 31, 1972 FIFTH DISTRICT A. Percentage of Banks Paying M axim um Rates Type of Deposit Time Savin gs Less Than 1 Year A rea and Size of Banks1 B. Percentage of Deposits Receiving M axim um Rates Savings 1-2 Years 2 Years or More 71.4 67.5 67.2 65.3 83.8 87.8 65.6 Time Less Than 1 Year 1-2 Years 2 Year: or Mon 85.0 92.1 96.2 97.1 77.1 85.9 80.0 91.5 73.2 97.5 97.7 95.7 92.5 97.5 FTH DISTRICT 78.1 78.4 Total 1971 80.0 Total 1972 Less than $100 mill. $100 mill, or more 80.1 81.8 64.9 76.9 91.9 73.5 72.9 78.4 MARYLAND Total 1971 Total 1972 Less than $100 mill. $1 00 mill.. or more 82.6 52.2 54.3 47.8 96.6 81.4 50.2 90.5 82.6 80.5 100.0 43.5 39.0 80.0 47.8 46.3 60.0 47.8 43.9 96.7 88.9 86.3 87.1 52.8 72.4 80.0 100.0 85.4 30.1 83.7 95.2 76.6 83.3 83.3 85.7 80.0 50.0 50.0 81.9 33.3 * * 81.8 91.5 57.1 * 60.0 25.0 * * * 14.6 * ★ * 50.0 * * 84.8 80.7 88.0 87.6 88.0 80.0 86.9 100.0 100.0 79.6 55.7 89.3 32.2 70.2 86.0 83.5 100.0 D. C. Total 1971 Total 1972 Less than $100 mill. $100 mill, or more 41.7 * 78.1 82.2 58.1 52.1 V IR G IN IA Total 1971 Total 1972 89.0 82.1 78.1 99.0 99.8 99.5 93.5 95.1 91.2 98.7 99.4 98.5 100.0 100.0 100.0 98.0 99.1 98.9 46.3 73.9 72.5 95.7 97.6 97.4 100.0 100.0 100.0 80.6 100.0 83.9 86.9 46.2 100.0 69.4 77.8 77.1 100.0 72.2 80.6 80.0 100.0 100.0 59.3 60.2 59.0 100.0 Total 1971 Total 1972 Less than $100 mill. 91.3 91.7 94.1 95.7 91.7 88.2 91.3 91.7 88.2 91.3 99.1 91.7 88.2 79.7 97.8 76.7 99.9 98.9 80.7 98.2 78.9 $100 mill, or more 85.7 100.0 100.0 100.0 78.1 100.0 100.0 99.6 100.0 99.9 96.3 55.5 99.0 78.5 89.0 99.5 54.1 * 93.4 * Less than $100 mill. $1 00 mill, or more W EST V IR G IN IA Total 1971 Total 1972 Less than $1 00 mill. $1 00 mill, or more 59.3 72.2 71.4 N O R T H C A R O L IN A SO U TH C A R O L IN A Total 1971 80.8 84.6 65.4 42.3 Total 1972 69.2 80.8 77.3 53.8 50.0 63.7 21.4 54.5 * 50.0 * 97.8 * Less than $100 mill. $100 mill, or more 81.8 * 100.0 100.0 1 By am ount of total deposits * W ithheld to avoid disclosure FEDERAL RESERVE BA N K OF RIC H M O N D 13 Rates on Time Deposits of $100,000 or More These deposits exhibited the greatest percentage in crease in the Fifth District. The m axim um rates paid by Fifth D istrict banks on large time deposits Table III M A X IM U M RATES P A ID BY FIFTH DISTRICT B A N K S O N O CTOBER 31, 1972 O N TIME D EPO SIT S OF $100,000 O R M O R E BY A R E A A N D B A N K S IZ E 1 are shown in Table I I I ; interest rate patterns for Negotiable Certificates (percent) Other Certificates and Open Accounts (percent) these deposits differ somewhat from those discussed above for smaller deposits. The most typical rate paid on both negotiable and other certificates of deposit and open accounts was in the range o f 6.25 percent and less. A lthough not shown in Table III. FIFTH DISTRICT data from the survey reveal that 12.5 percent o f Less than $100 million 7.26 - 7.50 7.26 - 7.50 smaller banks paid m ore than the typical rate on $100 million or more 6.25 and less 6.51 - 6.75 Less than $100 million 6.76 - 7.00 6.25 and less $100 million or more 6.25 and less 6.25 and less Less than $100 million 6.25 and less 6.25 and less $100 million or more 6.25 and less 6.25 and less Less than $100 million 7.26 - 7.50 7.26 - 7.50 $100 million or more 6.25 and less 6.51 - 6.75 Less than $100 million 7.26 - 7.50 7.26 - 7.50 $100 million or more 6.25 and less 6.25 and less Less than $100 million 6.25 and less 6.25 and less $100 million or more 6.25 and less 6.25 and less 7.26 - 7.50 6.25 and less negotiable certificates of deposit, while none o f the larger banks paid more than this typical rate. F or other certificates and open accounts of m ore than $100,000, 7.1 percent o f the smaller banks paid more than the typical rate, while only 3.1 percent o f the larger banks paid m ore than 6.25 percent. Thus, there is evidence of keen com petition for time deposits of $100,000 or m ore by smaller b an k s; but the limited num ber o f banks in this category prevents broad generalization in this regard. Conclusion M ARYLAND DISTRICT OF C O L U M B IA V IR G IN IA T im e and sa v in g s d e p o sits in the Fifth District grew substantially during the period from O ctober 1971 to O ctober 1972. A s rates of interest in the market exhibited instability and de clines, the com petitive position o f com m ercial banks for funds im proved. A s a result, there were m ajor increases in deposits, particularly in time deposits. T im e and savings deposits rose most rapidly in locations where m axim um rates of return prevailed. A greater percentage of smaller banks offered higher interest rates on savings deposits and larger certifi cates o f d e p o sit; how ever, larger banks m ore fre quently offered higher returns on time deposits of less than $100,000. 14 Susan P . K ru g W EST V IR G IN IA NO RTH C A R O L IN A SOUTH C A R O L IN A Less than $100 million $100 million or more none 6.25 and less M ost Typical Rate Paid in Fifth District 1 By amount of total deposits M ONTHLY REVIEW, APRIL 1973 6.25 and less 6.25 and less THE DISTRICT ECONOMY IN PERSPECTIVE: 1972 In the United States and the Fifth Federal Reserve District, 1972 was a bullish year. consum er price increases were held to 3.0 percent. Both the rate of N ot only have the controls retarded the rise in prices unemployment and the rate o f inflation declined. but they have also contributed to a reduction in the Output, employm ent, and incom e all m oved in the right direction, as a climate o f expanding econom ic inflationary expectations that plagued the econom y during 1971. activity and stimulative fiscal and monetary actions nurtured rapid econom ic grow th. In most instances, econom ic developments in the Fifth District during 1972 paralleled those of the A strong demand for good s and services, aided by accelerated monetary grow th, characterized the na nation at large. Statistics for 1972, com bined with sample survey1 results, clearly indicate that 1972 was tional econom y during the past year. Gross national product gained nearly 10 percent, increasing by m ore than $100 billion for the first time in history. A fter at the individual sectors of the Fifth District econom y a banner year for all District states. A closer look adjustment for price increases, “ real” G N P expanded provides a better perspective o f District developments over the past year. 6.5 percent, the most substantial advance in m ore than six years. T he increased demand for good s and The Employm ent Picture services by individuals and all levels o f governm ent ployment statistics showed moderate to substantial was accom panied by a rise in the volum e o f business purchases. T he 21 percent jum p in gross private im provem ent in the nation and the District during 1972. Em ploym ent figures through Decem ber were domestic investment from fourth quarter up 3 percent over a year ago, with gains of 4 percent in manufacturing and 2 percent in nonmanufacturing industries. A close look at the m ajor categories of 1971 to fourth quarter 1972 far outstripped the 1970-1971 growth. T he strong upward momentum of spending during the year was associated with a large rise in the level of credit outstanding. F or 1972, com m er cial bank credit rose at a 14 percent annual rate. The marked increase in total spending also prom pted a sharp rise in production. Y ear-to-year, the industrial production index was up 10.4 percent in Decem ber. Stepped-up production was made possible by three key factors— labor force expansion, im proved labor utilization, and increased productivity. Civilian em ployment rose at a 3.6 percent annual rate for most of the y e a r ; both average hours w orked and output per m an-hour were up over a year a g o ; and a much slower rise in production costs in the first three quar ters reflected the increased productivity of labor, as well as slower grow th in compensation. T his greater N o n a g ricu ltu ra l e m nonm anufacturing employm ent illustrates the relative strength o f each. A part from manufacturing, governm ent is the leading source of job s in the District. In Decem ber, Federal, state, and local governm ents supplied 1,508,900 job s or 22 percent o f the District’s total nonagricultural employment. T he relatively large size of the governm ent sector reflects the location of the nation’s capital within the District. T he 3 p er cent expansion of governm ent employm ent during 1972 roughly paralleled the 1971 increase. In divid ual state advances w e r e : 7 percent for South C aro lina, 5 percent for V irginia, 4 percent for M aryland, and 1 percent for N orth Carolina and W est Virginia. T he District o f Columbia showed no grow th in g o v productivity m irrored an increasingly efficient re ernment employm ent in 1972, perhaps reflecting an source allocation as the econom y approached a more attempt by the Federal Governm ent to reduce em optimal operating level. ployment rolls. Further illustrating the dynamic nature o f the 1972 Both the trade and services categories also posted econom y, total personal income, after price change sizable increases in em ploym ent during 1972. adjustments, grew 5.6 percent through the third the third most im portant source o f nonagricultural A smaller percentage of the gain was lost employment, wholesale and retail trade accounted for quarter. As in higher prices than in previous years, as prices have advanced at a slow er rate since the imposition of wage and price controls in A ugust 1971. F or 1972, 1 The Fifth District Opinion Survey of Business Conditions is con ducted monthly by the Research Department of the Federal Reserve Bank of Richmond. Respondents represent manufacturing, banking, and trade and services industries throughout the District. FEDERAL RESERVE BA N K OF RIC H M O N D 15 19 percent of the D istrict’ s nonagricultural job s in O ctober, up 3 percent for the year. T he m ost im pressive gains were in M aryland and South Carolina, each showing 5 percent increases. Jobs in the service ages continued to restrict the output of textile and furniture producers. T he low unem ployment rate in the District does not portend any immediate im prove ment in the labor shortage problem . industries were also up 3 percent for the second year A t 3.7 percent, the rate of unem ployment in the D istrict ended the year below the national rate o f 5.2 in a row , closely follow in g the national trend. M ary land and N orth Carolina experienced the largest relative gains in service employment. Y ear-to-year, the trade and services categories com bined to p ro vide 34 percent of nonagricultural em ploym ent in the District. Surveys of business conditions for N ovem ber and percent. N ot only was the aggregate rate fo r the D istrict below the U . S . fig u r e ; but each state posted a Decem ber 1972 rate o f unem ployment below the national average, with the exception o f W e st V ir ginia. Overall, joblessness showed a marked decline in the District during 1972, with much o f the im D ecem ber reflected a continued increase in nonagri provem ent the result of a slight easing o f W est V ir cultural employment, with the exception o f the manu ginia’s unemployment crisis. State unem ployment rates in Decem ber w e re : W est V irginia, 7.1 percen t; facturing sector where some leveling off is indicated. A significant number of nonagricultural respondents continued to report severe shortages o f both skilled and unskilled labor relative to desired needs, particu larly in the manufacturing sector. T he number of workers employed provides one key to the grow th of manufacturing industries in the District. A fter adjustm ent for seasonal variation, em ploym ent in manufacturing industries in 1972 re flects a reversal of the general decline reported a year earlier. T he year was characterized by strong up ward adjustments in inventory levels, volum e of shipments, and new orders and order backlogs. A c com panying this trend was a severe shortage o f labor, notably in the textile and furniture industries. In D ecem ber, overall District manufacturing em ploym ent rolls were 4 percent higher than a year earlier. T he bulk of the increase was in durable goods industries, which showed a 6 percent jum p in employment. Each state shared in the manufacturing employm ent grow th, with the exception of the D is trict of Columbia. O nly V irginia and the Carolinas experienced gains in both durables and nondurables. Perhaps an equally im portant measure o f grow th is manufacturing man-hours, which follow ed a steady upward trend during 1972. The District index in D ecem ber was up 5 percent from a year earlier, with a 7 percent gain in durables and a 3 percent increase in nondurables. These figures reflect a substantial recovery over the m an-hour declines that character ized 1971. A s was true of manufacturing em ploy ment, the largest man-hour gains were in the durables sector. T otal manufacturing man-hours through D e cember increased 7 percent in V irginia, 6 percent in South Carolina, 5 percent in North Carolina, 3 per cent in M aryland, and 1 percent in W est V irginia. T he index showed a small decline of 2 percent in the District of Columbia. Survey respondents in N o M aryland, 4.2 p ercen t; South Carolina, 3.4 p e rce n t; V irginia and the District o f Columbia, 2.7 percent ; and N orth Carolina, 2.4 percent. Construction Highlights F o r the U . S. at large, 1970 was a year in which the construction industry boom ed. T he surge in construction activity generally reflected an ample availability of m ortgage credit at stable interest rates, a strong demand fo r residential housing, and a general expansion in business activity. In spite of labor and material shortages that plagued the industry during the year, the index of construction contracts, both residential and nonresidential, showed a marked increase throughout 1972. Overall, construction contracts in the District were up 14 percent through Decem ber, prim arily as the result of a 38 percent jum p in residential contract awards. Gains in the residential sector w ere sizable in each state, with the exception of the District o f Columbia, which suffered a sharp decline. T he rela tive increases w e r e : 99 percent in W est V irginia, 53 percent in South Carolina, 49 percent in V irginia, 42 percent in N orth Carolina, and 23 percent in M aryland. Districtwide, nonresidential contract awards declined slightly from January to D ecem ber 1972. A 5 percent decrease in W e st V irginia, an 8 percent decline in the D istrict of Columbia, and a 6 percent drop in M aryland were offset by substantial gains in V irginia and the Carolinas. V irginia showed the largest grow th in nonresidential construction ac tivity, registering a 49 percent increase. Other gains were N orth Carolina, 13 percent, and South C aro lina, 12 percent. Generally, nonresidential construc tion benefited from new industries locating in the District and from sizable plant expansions by several manufacturing firms. The Farming Data C ash re ce ip ts fro m farm vem ber and Decem ber reported sizable increases in marketings during the January-N ovem ber period hours worked per week, but troublesom e labor short were 8 percent above those of the same period last 16 M ONTHLY REVIEW, APRIL 1973 year, with gains of 9 percent from livestock and 7 percent from crop receipts. C ool weather and e x cessive rainfall in early summer caused substantial damage to agricultural crops, and many farmers suffered severe damage from the floods accom pany ing H urricane A gn es in June. A lthough crop co n ditions had im proved by late summer, the production level was still below a year ago. T he 1972 flue- Banking Developments T h e 1972 sta tistics fo r member banks in the Fifth District clearly reflect a significant easing o f credit, a broad expansion of business activity, and strong loan demand. T hrough Decem ber of 1972, the bank debits index rose 20 percent for the District as a whole. L arge increases were experienced in each state, ranging from a low of cured tobacco marketing season was highlighted by 12 percent in M aryland and W e st V irginia to 28 percent in V irginia. T h e stepped-up level o f e co record high prices, which averaged 10 percent above nom ic activity com bined with strong loan demand to a year earlier. T he volum e of marketings was 5 per result in a dramatic increase in loans and discounts cent lower, however, resulting in only a 5 percent in by District member banks. crease in the value of sales. In general, 1972 crop production reflected both smaller acreages for harvest and low er yields per acre. Prices received by farmers cember 1972, loans and discounts were up 24 percent from all com m odities increased in each District state through Decem ber. Generally, the largest gains were in loans. A lthough the increase in investments by member banks in the D istrict was not as im pressive in prices received from livestock. Y ear-to-year in creases in the receipts from farm marketings w e r e : as the grow th o f loans, it was still substantial. In vestment in other securities (m ainly m unicipals) jum ped 12 percent from Decem ber 1971 to Decem ber 20 percent in South Carolina, 16 percent in W est V irginia, 14 percent in V irginia, 13 percent in M a ry land, and 8 percent in N orth Carolina. T he general increase in farm marketing receipts over a year earlier. A t $17.6 billion in D e Unusually heavy consum er and real estate lending accounted for much o f the increase 1972 to a level o f $5.2 billion. H oldings o f U . S. Governm ent obligations increased at a m ore m oder ate 7 percent to $2.5 billion. Total assets o f member in prices paid by farmers, i.e., wage and production costs. In a Decem ber 1972 survey o f farm conditions banks in the District were $30.5 billion at the close of 1972, up 18 percent over 1971. B y states, total assets on the last W ednesday in Decem ber posted in the District, 95 percent of the respondents indi cated that prices paid by farm ers continued to rise cen t; N orth Carolina, 20 percen t; W est V irginia, 18 was accompanied by a continued upward movement throughout 1972, although in some cases the increase was slight. Survey respondents felt that gains in the follow in g year-end in creases: V irginia, 22 per p ercen t; M aryland, 14 p e rce n t; District o f Columbia, realized net farm incom e were likely, but the increase 13 percent; and South Carolina, 11 percent. District member banks also experienced sizable would not be as large as the expected hike in realized deposit expansion during 1972. gross income. A strong demand deposits at the close of the year were $25.8 billion, 18 throughout 1972. for farm credit continued District farm ers increased their use of both long- and short-term debt, causing both types of credit to expand at a much faster rate than a year earlier. A pproxim ately the same number of farmers borrow ed from com m ercial banks in 1972 as in the previous year, but the average size of a farm loan increased. In general, most survey respondents indicated that the financial condition o f District farm percent above 1971. T otal deposit gains by state w ere : 24 percent in N orth Carolina, 21 percent in V irginia, 17 percent in W est V irginia, 16 percent in M aryland, 12 percent in South Carolina, and 11 per cent in the District of Columbia. Both demand and time deposits showed sharp increases in all states. Overall, the 21 percent time deposit expansion was only slightly more impressive than the 16 percent demand deposit grow th. ers im proved during 1972. Total member bank B . Gayle B urgess FEDERAL RESERVE BA N K OF RIC H M O N D 17 Outlook for ’73 . . . SPOTLIGHT ON AGRICULTURE This y ea rs prospects fo r the nation s agriculture were recently analyzed by top level economists of the V . S. Department o f Agriculture at the National Agricultural Outlook Conference. The outlook, as they see it, shapes up this way. Realized gross income of the nation’s farm ers in 1973 may well top last year’s record perform ance. But farm production expenses will probably rise faster than gross income and leave slightly less net income than the all-time high realized in 1972. Even so, net incom e per farm could almost equal 1972’s im proved level. F arm ers’ demand for credit will re main high. M ost lenders feel, however, that ample funds will be available to meet the increased demand. Strong dom estic and foreign demand— key factors F ood consum ption per capita is expected to in crease, hitting a new high as it rebounds from last year’s reduced level. W ith food supplies early in the year somewhat low er than in 1972, all of the an ticipated increase will probably occur in the second half. Consumers are expected to eat m ore meat, poultry, fish, dairy products, fruit, and processed vegetables, and use m ore vegetable oil than they did in 1972. But they seem likely to reduce their co n continued sumption of eggs, fresh vegetables and potatoes, animal fats, coffee, and cocoa. strength to farm prices, income, and exports in the year ahead. M oreover, the expansion in general sumption, consumers will probably spend from 7 to in the ou tlook — are expected to lend econom ic activity will likely gain momentum, adding further strength to agriculture’s prospects for 1973. W ith both higher food prices and increased co n 8 percent m ore for food in 1973 than they did last year. But the increase in food expenditures w ould A n d yet, uncertainties in several areas cloud the out still be smaller than the indicated 9.5 percent a d look. vance in disposable personal income. A m on g them a r e : the unsettled international monetary situation ; the question o f whether or not farmers will plant larger acreages of soybeans, wheat, and feed grains this year in response to grow in g w orldw ide d em an d ; and the related unknowns co n cerning when and if the Peruvian fish catch will again permit normal production and exports of fish meal. perhaps to 15.5 percent. Supply-Demand Conditions S u p p lies o f h ig h - protein feeds are tight, and market demand for feedstuffs and food grains is grow in g, both at hom e and abroad. Food Prices and Expenditures A m e r ic a n c o n sumers trying to cope with skyrocketing food prices It thus appears that the share of consum ers’ after-tax incom e spent for food will again decline fractionally, dropping To help meet this stepped-up demand, m odifications have been made in 1973 farm p ro will not find the outlook for 1973 very encouraging. grams for wheat, feed grains, and cotton to en courage farm ers to produce m ore grains and so y W ith somewhat larger food supplies than in 1972, beans. they may eat m ore but they will pay higher prices. likely, and m ore hogs will probably com e to market Retail food prices are likely to average about 6 M oderately larger cattle marketings are also after midyear. Prices o f food Consumer demand for food and other farm p ro d purchased both at grocery stores and in restaurants ucts, fueled by rising incomes, is expected to re are expected to rise at a faster pace than they did main strong. last year. Gains in prices of grocery store food may ment, and above-norm al tax refunds from overw ith well outstrip those for restaurant foods, rising per holding in 1972 may boost disposable personal in haps as much as 6.5 percent. com e about 9.5 percent above a year ago, despite the percent higher this year than last. M uch of this year’s H igher wage rates, increased em ploy advance in food prices will result from higher prices substantial rise in social security taxes. for beef, veal, and pork. consum ers’ willingness to buy in 1973 will match But price increases are also W hether indicated for poultry, eggs, and fish. O n the brighter their ability to do so remains to be seen. side, some respite from the sharply higher beef, veal, prices in key areas such as food , plus the impact of and pork prices appears likely after midyear. last year’s spectacular increase in installment credit 18 MONTHLY REVIEW, APRIL 1973 R ising and the resulting sharp upturn in outstanding in labor. stallment debt, could curb consumer spending to most m inor, expense items to be higher than a year some extent. B lossom ing export demand for the nation’s farm products prom ises to expand to unprecedented levels in the current fiscal year. E xports, as a result, may well total $11.1 billion— up about $3.0 billion from ago, however. the previous all-time high set last year.1 M ore than Farmers can expect costs o f all m ajor, and Commodity Digest H e re is a b rie f ru n d o w n on the Department of A gricu ltu re’s expectations for m ajor Fifth District com m odities. T obacco G row ing dom estic and overseas demand half the gain will result from larger v olu m e; the re for mainder, from higher prices. sharply low er surplus stocks are bright spots in the outlook for tobacco farmers. W ith this upturn in W eather-reduced har vests in many foreign countries in 1972, R ussia’s tobacco prod u cts— especially cigarettes— and huge purchases of grains and soybeans, emergence of demand and reduced supplies, basic marketing quotas the P eop le’s R epublic of China as a significant e x for flue-cured and burley have been increased. G row port market, continued grow th o f the livestock and ers can thus be expected to harvest considerably more poultry industries in Japan and W estern Europe, tobacco this year. and the expanded w orld demand for other protein tion in loan stocks is indicated. meals because of the sharply reduced supplies of for eligible 1973-crop tobaccos will be 5.3 percent Peruvian fish meal have been the m ajor develop ments leading to this year’ s unusually strong foreign higher than in 1972. Still, another significant reduc T he support levels demand. Realization o f this big jum p in farm e x ports hinges to a great extent, however, on whether United States leaf exports will continue to face intense com petition in w orld markets. A s a result, overseas shipments will decline, falling to a more or not the nation’s transportation system perform s normal level after the sharp expansion in 1972 that at a high level, without a m ajor disruption, for the follow ed the dock tie-ups a year earlier. entire year. of U nited States to b a cco ; expanded production, im H igh prices proved quality, and low er prices o f foreign-grow n Farm Income and Expenses F arm in co m e p r o spects for 1973 may be summed up this way. The to b a cco ; and the tobacco policies o f the enlarged European Com m unity are adversely affecting our volum e o f farm marketings will probably be larger tobacco exports. than a year ago. Farm prices are likely to average higher but may decline slightly after midyear and tight supplies, skyrocketing prices, and attempts to Soybeans and P eanuts Unusually strong demand, average near year-earlier levels in the second half. T he com bination of larger marketings and higher get farmers to plant m ore soybeans this spring char average prices will likely result in about an 8 per cent gain in cash receipts. Thus, despite sharply re entire 1972 crop of soybeans is indicated, and carry duced Government payments to farmers, realized mestic and foreign demand will remain strong, keep gross income could reach a new high roughly 5 p er cent above the previous record set last year. Farm ing supplies tight and prices high through the re mainder of this crop year at least. W ith peanut production continuing to outstrip co n production expenses, however, may well rise even m ore than gross income. A s a result, total realized net farm incom e may drop slightly below 1972’s peak level but w ould be the second highest on record. Farm expenses jum ped 7 percent in 1972 and will likely rise at least as much, if not m ore, this year. Should farm output expand in response to the e x ceptionally heavy demand at home and abroad as is anticipated, farm ers w ill doubtless use m ore and higher priced inputs. E xpenses for items of farm origin— feed, livestock, and seed— can be expected to advance m ore sharply than those for items of non farm origin. Leading the parade o f larger-than- average cost increases will probably be those for pur chased feed, purchased seed, and wages o f hired 1 This forecast was made prior to the February 12 devaluation of the dollar and does not consider possible effects of the devaluation. acterize the current soybean situation. U sage o f the over stocks will be at minimum levels. sumption, supplies are at record levels. Both d o Output this season was about one-third above requirements for food and farm use, and peanut prices again averaged near the support level. U n der existing legislation, 1973 acreage allotments have been set at the m ini mum level. C otton Because o f the big 1972 crop, cotton supplies are up over 2 million bales above last sea son’s 14.8 million. W ith strengthening foreign de mand, cotton export prospects are much brighter and may total about 4.5 million bales— the most since 1966-67. Dom estic mill use, on the other hand, may drop around 5 percent below a year ago, probably falling to the lowest level since the late forties. The decline would reflect prim arily the increasing com p e tition from man-made fibers that has resulted from FEDERAL RESERVE BA N K OF R IC H M O N D 19 last year’s reduced supplies of cotton. Cotton mill consum ption will continue to benefit from the g r o w ing popularity of denim and corduroy, however. W ith tighter milk supplies, milk prices may aver age 4 to 5 percent above last year’s level. T he higher E x prices will m ore than likely offset the smaller m ar pected disappearance will be up slightly but much less than 1972 output, so the cotton carry-over this ketings, and dairym en’ s gross cash receipts will in for cotton have been cut 13 percent, and the c ro p crease moderately. But their production costs rose faster than their gross incomes early in 1973, and net returns for the year may be low er than in 1971 land set-aside requirement for eligibility in the cotton and 1972. summer will be larger. T he 1973 acreage allotments program has been eliminated. P ou ltry and E gg s M eat Anim als T he outlook for poultry and egg producers is generally favorable, although they are faced with sharply higher feed costs. Consumer demand is strong, and the small pork supplies and high red meat prices are helping to support the prices of poultry and eggs. M oderate increases in broiler and turkey production are likely, but egg output may stay below year-earlier levels throughout most of 1973. W ith broiler and turkey production only slightly larger, prices will likely be above 1972 for most of the year. E gg prices have remained strong thus far and are expected to continue well above 1972’s low levels through the summer. Prospects for beef cattle and hogs are optimistic. Demand fo r red meat is boom ing. Cattle and hog prices are up sharply and are en cour aging farmers to expand production. Fed cattle marketings will probably increase m oderately as they did last y e a r ; larger hog marketings are indicated after midyear, with gains in the second half offsetting reductions in the first half. W ith consum er demand remaining strong, prospects are that livestock prices will continue to be firm but will weaken some after midyear. But even if hog prices soften in the second half, especially in the fall, the h og-corn feeding ratio will likely remain favorable. Dem and for feeder cattle is exceptionally strong, and prices are expected D airy P rod u cts M ilk production this year may be down slightly since higher feed prices, poor quality roughage, and short supplies of feed in some areas are slow ing gains in milk output per cow and are likely to intensify the culling of herds. numbers are also continuing to decline. N o te : M ilk cow to remain high. T his year’s sharply higher prices of feed and replacement livestock, driven up by strong demand, will mean larger outlays by some farm ers but a substantial boost to the incom e o f other farmers. Sada L . Clarke A new estimate made by the Department of Agriculture as this R e v ie w was going to press indicates that total realized net farm income in 1973 will not decline slightly, as anticipated earlier, but may instead hit a new record high about 9 percent above the 1972 peak. 20 MONTHLY REVIEW, APRIL 1973