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EMERGENCY ACQUISITION OF BANKS OR
BANK HOLDING COMPANIES
HEARINGS
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
OF THE
COMMITTEE ON
BANKING, HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE
NINETY-FOURTH CONGRESS
F I R S T SESSION
ON
S. 890
TO AMEND T H E BANK H O L D I N G COMPANY ACT O F 1956, AS
AMENDED, TO P R O V I D E S P E C I A L P R O C E D U R E S F O R T H E
A C Q U I S I T I O N O F F A I L I N G BANKS OR BANK H O L D I N G COMP A N I E S AND F O R T H E A C Q U I S I T I O N OF BANKS OR BANK
H O L D I N G COMPANIES I N E M E R G E N C I E S AND TO P R O V I D E F O R
T H E A C Q U I S I T I O N B Y BANK H O L D I N G COMPANIES O F BANKS
O U T S I D E T H E I R STATE OF P R I N C I P A L BANKING O P E R A T I O N S
I N EMERGENCY S I T U A T I O N S AND S I T U A T I O N S INVOLVING A
F A I L I N G BANK OR BANK H O L D I N G COMPANY
J U L Y 22 AND 28, 1975
P r i n t e d for t h e use of the
Committee on Banking, Housing and Urban Affairs
U.S. GOVERNMENT PRINTING OFFICE
56-713 0
WASHINGTON : 1975
COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
WILLIAM P R O X M I R E , Wisconsin, Chairman
JOHN SPARKMAN, Alabama
HARRISON A. WILLIAMS, JR., New Jersey
THOMAS J. McINTYRE, New Hampshire
ALAN CRANSTON, California
ADLAI E. STEVENSON, Illinois
JOSEPH R. BIDEN, JR., Delaware
R O B E R T MORGAN, North Carolina
JOHN TOWER, Texas
EDWARD W. BROOKE, Massachusetts
BOB PACKWOOD, Oregon
JESSE HELMS, North Carolina
JAKE GARN, Utah
KENNETH A. MCLEAN, Staff Director
ANTHONY T. CLUFF, Minority Staff Director
SUBCOMMITTEE
ON
FINANCIAL
INSTITUTIONS
THOMAS J. McINTYRE, New Hampshire, Chairman
WILLIAM PROXMIRE, Wisconsin
JOHN SPARKMAN, Alabama
H A R R I S O N A. WILLIAMS, JR., New Jersey
ADLAI E. STEVENSON, Illinois
JOHN TOWER, Texas
EDWARD W. BROOKE, Massachusetts
JESSE HELMS, North Carolina
WILLIAM R. WEBER, Assistant Counsel
(II)
CONTENTS
Page
S. 890
Report of the Comptroller of the Currency
25
32
LIST OF WITNESSES
Robert C. Holland, Member, Board of Governors, Federal Reserve
System
Frank Wille, Chairman, Federal Deposit Insurance Corporation
Joe Sims, Acting Deputy Assistant Attorney General, Antitrust Division,
Department of Justice
Ralph A. Beeton, president-elect, Association of Registered Bank Holding
Companies
2
35
85
98
ADDITIONAL STATEMENTS AND DATA
Reprint of address by Frank Wille, Chairman, Federal Deposit Insurance
Corporation, before the 74th Annual Convention of the Conference of
State Bank Supervisors
Letters to Senator Mclntyre from:
Gerald M. Lowrie, executive director, government relations, American
Bankers Association
Lawrence E. Kreider, executive vice president-economist, Conference
of State Bank Supervisors
Kenneth J. Benda, president, Independent Bankers Association of
America
(in)
44
110
112
116
EMERGENCY ACQUISITION OF BANKS OR BANK
HOLDING COMPANIES
TUESDAY, JULY 22, 1975
U.S. Senate,
COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS,
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS,
Washington, D.C.
The subcommittee met at 10 a.m. in room 1202, Dirksen Senate
Office Building, Senator Thomas J. Mclntyre, (chairman) presiding.
Present: Senators Proxmire and Mclntyre.
Senator M C I N T Y R E . The subcommittee will come to order.
This morning the subcommittee will take up S. 890, a bill, and
I quote:
To provide special procedures for the acquisition of failing banks or bank
holding companies and for the acquisition of banks or bank holding companies
in emergencies and to provide for the acquisition by bank holding companies
of banks outside their state of principal banking operations in emergency situations and situations involving a failing bank or bank holding company.
This bill was introduced on February 28 of this year by myself
and Senator Proxmire at the request of the Federal Reserve Board.
The bill calls for two changes in present law. First, it would speed
up the process by which the Federal Reserve may approve an acquisition by a bank holding company when the bank or bank holding
company to be acquired is in severe financial difficulty. This provision
has already been extended to banks making a similar acquisition
under the Bank Merger Act.
Secondly, the bill would amend the Bank Holding Company Act
to permit bank holding companies to go across State lines to effectuate
such acquisitions whenever the Board finds that there is either an
"emergency requiring expeditious action" or "probable failures."
The failure, or near failure, of several large banks in the past few
years has prompted a reconsideration of the adequacy of the tools
available to both the Fed and the F D I C to deal effectively and expeditiously in such situations.
Notwithstanding the issue of adequacy of emergency provisions
already contained in present law, it should be noted that, perhaps,
the most significant factor pertaining to recent bank failures has been
the maintenance of public confidence in the strength of our banking
system as a whole, despite the well-publicized deterioration of a few
poorly or fraudulently run institutions.
As we consider this emergency bank holding company legislation,
therefore, let us not overplay the word "emergency," for the present system does work.
(1)
2
At this time, I am pleased to welcome as our first witnesses, Governor Robert Holland of the Federal Reserve Board and Chairman
Frank Wille of the Federal Deposit Insurance Corporation. Both the
Comptroller of the Currency and the Conference of State Bank
Supervisors are submitting written statements for the record.
Gentlemen, if you would, please summarize your testimony with
the understanding that your written statements will be incorporated
into the record in their entirety. This will permit us to use our time to
best advantage for questions and answers.
Governor Holland, will you proceed, sir?
STATEMENT OF ROBERT C. HOLLAND, MEMBER, BOARD OF
GOVERNORS, FEDERAL RESERVE SYSTEM
Mr. HOLLAND. Thank you, Mr. Chairman. I would like to say that
the Board appreciates very much the scheduling of this hearing.
We know that Members of the Senate have a very heavy schedule,
and we appreciate your working on this bill.
We believe we are bringing to you not a trivial or simply a technical
proposal, but something that has the potential—if financial lightning
should strike in the form of a big bank failure—of preventing a lot of
heartache for a lot of people.
The financial experiences of the last couple of years have raised
significant issues with respect to the regulation and supervision of
the Nation's banking institutions.
One very important area to which we at the Federal Reserve are
giving increased attention is the development of more expeditious
methods of dealing with problem banks.
The Federal Reserve System is strengthening its program covering
banks under its jurisdiction to place increased emphasis on the
identification, surveillance, and timely resolution of current and
potential problem bank cases. This action has had first priority
among our broad sweep of studies addressing key problem areas in
banking supervision and regulation. I t is humanly impossible—and
even undesirable—for supervisors to prevent all bank problems; but
it is practical to aspire, as we do, to recognizing problems early and
moving promptly to try to remedy them.
But we still have to face the fact that there is a gap in the range
of feasible remedial measures we could use if our preventive measures
should somehow not succeed in forestalling a bank failure. I n that
eventuality, the best solution of the problem in most cases is for the
troubled bank to be taken over by another bank.
Bank mergers, where permitted by State branching laws, can
sometimes serve this purpose effectively. The alternative of bank
holding company acquisition of a failing bank, however, even where
permitted by State laws, is substantially inhibited by two Federal
statutory constraints. One enforces certain time delays in the approval and consummation of all bank holding company acquisitions.
The second effectively prevents any holding company acquisition of
banks across State lines.
I n our view, either or both of those limitations can interfere with
actions needed to protect the public interest in some cases, and this
concern is behind our recommendation of these changes in the law.
3
The first recommendation essentially involves procedural amendments to the Bank Holding Company Act designed to permit the
immediate or expeditious consummation of a transaction under the
Bank Holding Company Act in certain problem bank and bank
holding company situations. These amendments are intended to
parallel the already existing provisions provided in the Bank Merger
Act, and those procedures have worked well for a decade. The details
of this recommendation are explained in my written statement. I
believe that the proposed changes are not controversial. I know of
no opposition to them.
In the interest of time, let me jump over to page 8 in my statement
and underline the policy emphasis that leads us to make this recommendation. We see the need for this amendment because of existing
statutory limitations.
The existing statutory delay provisions in the Bank Holding
Company Act have effectively eliminated bank holding companies
from bidding in emergency situations, since usually a bank in severe
financial difficulty may not be able to survive the statutory 30-day
delay before consummation is permitted. These provisions have thus
unnecessarily limited the number of potential acquirers of a problem
bank, and that elimination of potential acquirers can increase the
anticompetitive risks in such acquisitions by limiting the pool of
potential acquirers to banks already in direct competition with the
problem bank.
For example, in the case of Franklin National Bank, the delay provisions effectively limited potential acquirers to other banks located
in New York City.
The holding company can be a procompetitive form of bank expansion, and the acquisition of a failing bank by a bank holding company should not be effectively foreclosed in infrequent problem bank
situations, because of delay requirements not similarly imposed in
bank mergers. Waiver of the usual delay provisions undoubtedly
would be warranted in only a small number of cases, and in those
cases the waiver should produce net public benefits.
The other and more serious and more sensitive constraint on bank
holding company acquisitions is geographical in nature. As you know,
under the Bank Holding Act, the Board may not approve any further
acquisition of a bank by a bank holding company across State lines.
This provision was made part of the original Bank Holding Company Act of 1956 in order to halt the further expansion of several
large multi-State bank holding companies then in existence. I t was
based in large part on Congress concern that, unless this trend were
halted, widespread and frequent acquisitions by major bank holding
companies could eventually lead to an undue concentration of banking
resources in the United States.
The Board is of the opinion that the present law could, in the case
of a large problem bank or a problem bank holding company controlling a large bank, operate in contravention of both the national
and local interest.
When one stops to think of the practicability of the American
banking structure, one realizes that the limitation of takeover buying
to in-State bidders can, in the case of a large problem bank, severely
limit the number of potential acquirers and can result in an increased
4
concentration of banking resources within a State. That is contrary
to the intent of the Congress in passing the Bank Holding Company
Act.
I n most of our States, the number of locally owned banks big enough
and strong enough to absorb a large problem bank are very few.
When adverse news triggers enough outflows of funds to significantly
weaken a big bank, it may become necessary in the public interest to
fold it into a larger and stronger institution. As you know, this occurred
in New York and California, but in those States big in-State banks
were available to acquire the problem banks involved. Had institutions of the size of Franklin National or U.S. National failed in many
other States, however, no banks in those States would have been large
enough to acquire them. In such circumstances, the need to be able
to arrange acquisitions across State boundaries would become very
real.
The Board, therefore, recommends several amendments to the Bank
Holding Company Act designed to permit out-of-State acquisitions
in certain emergency and failing bank situations involving a large
bank or bank holding company controlling a large bank.
We propose to limit those acquisitions to a bank having assets in
excess of $500 million or a bank holding company controlling a bank
having assets in excess of $500 million. We pick that figure for three
basic reasons:
First, failure of such an institution, we believe, could have damaging
effects in both the international and national markets, and on the
national economy and the regional economy in which the failing
bank is located.
Second, we believe there may be, few, if any, prospective acquirers
of such an institution within any State.
And, third, the most likely, in-State acquirers may well be institutions of comparable or greater size, which might often pose problems
under the antitrust laws, and threaten an increased concentration
of banking resources within the State.
We chose $500 million as a cutoff figure, because it would cover
major money center banks and regional banks, and yet it would
not be so extensive an exception as to create potential loopholes in the
multi-State prohibitions of the Bank Holding Company Act.
Also, we believe that in cases involving smaller problem banks,
local acquisitions, where appropriate, can more readily be arranged
b y the F D I C and by State authorities than can transfers of the liabilities and assets of large institutions. Under the bill as proposed,
the Board could use this authority to approve a multi-State acquisition only when it finds, in weighing the statutory competitive and
other factors, that the public interest would best be served if the bank
or banks involved were acquired by an out-of-State bank holding
company.
We anticipate that this authority would rarely be used and only
in cases presenting very special circumstances, such as those involving
Franklin National Bank.
In our view, these relatively rare situations should not and would
not contravene the central purpose of the multi-State prohibition of
the Bank Holding Company Act, which was directed at preventing
large concentrations of financial resources through frequent multiState acquisitions of banking institutions.
5
The Board is sensitive to the fact that the prohibition on multiState branching was designed to prevent the evolution of a few large
banking institutions. While there would be only a very limited number of instances in which we would even consider making exceptions
to section 3(d), we could conceive that you might want to narrow the
amending language even more than was originally suggested. That is,
a strict limit could be placed on the number of acquisitions any single
holding company would be allowed to make under such an exception.
This limit should be more than one, in order not to encourage potential
bidders to wait until an ideal acquisition opportunity was presented,
but it could well be less than five, in order to forestall excessive
expansions of financial power.
In our view, this kind of limit would serve to preclude any possibility of undue concentration of economic resources being created
through exceptions to section 3(d).
Let me sum up what I am saying here in as plain terms as I know
how. We hope a big bank will never get in serious trouble again, but
we don't think it is right to assume that will be so.
Good contingency planning calls for being ready to deal with that
kind of circumstance. Under present law, if a big bank here or there
gets in very serious trouble, there really are only three alternatives
facing the regulators:
We can fix it, if we're able. Otherwise, we nail the bank's doors
shut, figuratively speaking, and pay off deposits of $40,000 or less;
or third, we sell it to a very big nearby competitor.
We think neither of those second or third alternatives is advantageous to the public interest, and that is why we favor passing this
bill—to provide a proper competitive option, when no other good
choice exists. We believe that is in the interest of the public as a whole.
Thank you, Mr. Chairman.
Senator M C I N T Y R E . Thank you, Governor.
[Complete statement of Governor Holland, a copy of the bill
being considered, and a report from the Comptroller of the Currency
follow:]
6
Statement by
Robert C. Holland
Member, Board of Governors of the Federal Reserve System
I am pleased to appear before this Subcommittee,
on behalf of the Board of Governors of the Federal
Reserve System, to discuss the Board1s reasons for
recommending the enactment of legislation embodied in
S. 890.
The financial experiences of the last two years
have raised many significant issues with regard to the
regulation and supervision of the nation's banking
institutions.
One very important area that we at the Federal
Reserve are giving increased attention is the development of more expeditious means of dealing with problem
banks.
The Federal Reserve System is strengthening
its program covering banks under its jurisdiction to
place increased emphasis on the identification,
surveillance and timely resolution of current and
potential problem bank cases. This action has had
first priority among our broad sweep of studies
addressing key problem areas in banking supervision
7
- 2 and regulation.
It is humanly impossible -- and
even undesirable -- for supervisors to prevent all
bank problems; but it is practical to aspire, as we
do, to recognizing problems early and moving promptly
to try to remedy them.
There remains, however, a gap in the range of
feasible remedial actions that could be undertaken if
preventive measures should somehow not succeed in
forestalling a bank failure.
In that eventuality,
the best solution of the problem in most cases is
for the troubled bank to be taken over by another
bank.
Bank mergers, where permitted by State branching
laws, can sometimes serve this purpose effectively.
The alternative of bank holding company acquisition
of a failing bank, however, even where permitted by
State laws, is substantially inhibited by two Federal
statutory constraints.
One enforces certain time delays
in the approval and consummation of all bank holding
company acquisitions. The second effectively prevents
any holding company acquisition of banks across State
lines.
8
- 3 In our view, either or both of those limitations
can interfere with actions needed to protect the public
interest in some cases. Accordingly, the Board has
placed two separate statutory recommendations before
the Congress, both of which are now embodied in S. 890.
The first recommendation essentially involves
procedural amendments to the Bank Holding Company Act
designed to permit the immediate or expeditious
consummation of a transaction under the Bank Holding
Company Act in certain problem bank and bank holding
company situations. The amendments are intended to
parallel existing provisions in the Bank Merger Act.
The second recommendation would amend the Bank Holding
Company Act to grant the Board authority to approve an
acquisition of a bank across State lines by a bank
holding company when the Board determines that a large
bank or bank holding company controlling a large bank is
in severe financial difficulty, and the public interest
would best be served if the bank involved was acquired by
9
- 4 an out-of-State holding company.
I will discuss each
of these recommendations in turn, referring to the current
law, the main reason therefor, the key arguments for
changing the law at this time, and the Boardfs reasons
for recommending the specific amendments proposed in
S. 890.
Certain time schedules for the provision of
notice and hearing ""* were enacted as part of the
original Bank Holding Company Act of 1956, as a
compromise between giving bank chartering authorities
an absolute right to deny a holding company application
1/ Under existing law, the Board, before approving
an application for the acquisition of voting shares or
assets of a bank under section 3 of the Bank Holding
Company Act, must: (1) give notice to the Comptroller
of the Currency if the applicant or bank involved is a
national or district bank or to the appropriate State
supervisory authority if the applicant or bank involved
is a State bank; (2) allow thirty days within which the
views and recommendations of the Comptroller of the
Currency or the State supervisory authority, as the
case may be, may be submitted; and (3) if the supervisory authority so notifed files a written disapproval
of the application within the thirty-day period, the
Board must provide a hearing on the application, and
base its decision on the record of that hearing.
10
- 5to acquire a bank and giving such authorities only an
informal consulting role vis-a-vis the Board's final
decision in the case.
The Board in section 1(1) of S. 890 has recommended,
first, that the regular thirty-day notice period be
shortened to ten days if the Board advises the supervisory authority that an emergency exists requiring
expeditious action.
Secondly, section 1(1) as proposed
would give the Board the authority to waive notice and
hearing requirements entirely if the Board finds that it
must act immediately on an application to prevent the
probable failure of a bank or bank holding company
involved in the proposed transaction.
Both of these
suggested amendments parallel provisions subsequently
enacted in the Bank Merger Act -- provisions which have
worked well in the nearly fifty instances in which
they have been used over the past ten years.
In the Board's judgment, the present requirement
for thirty-day notice to the relevant bank supervisor
might work against the public interest in the context of
11
- 6 a problem bank or bank holding company situation
where immediate or expeditious action is called
for.
From a practical standpoint, the primary
supervisory authority in such a situation would be
actively involved in the process of screening potential
acquirers and would also be desirous of having an
acquisition quickly consummated.
Similarly, the pro-
tracted hearing requirements in the case of recommended
disapprovals by the supervisory authority are ill-suited
to a failing bank or bank holding company situation
where the public interest demands that decisions be made
quickly on the basis of available evidence.
There is an additional statutory delay to be
dealt with.
Under existing law, the Board must
immediately notify the Attorney General of any approval
of a proposed bank acquisition, merger or consolidation
transaction under section 3 of the Bank Holding Company
Act, and such transaction may not be consummated before
the thirtieth calendar day after the date of approval
by the Board.
12
- 7 This requirement was added to the Bank Holding
Company Act in 1966 in order to conform with the
standard consummation procedures being established in
the Bank Merger Act. The purpose of the provision was
to eliminate conflicts between the Board's decisions
under the Bank Holding Company Act and the Attorney
General's enforcement of the antitrust laws, which might
otherwise require the unwinding of a transaction after
that transaction had been approved under the Bank
Holding Company Act.
However, the Bank Merger Act provides for an
exception to this delay in problem cases, while the
Bank Holding Company Act does not.
The Board is
recommending that, in cases involving problem banks
or bank holding companies, the consummation procedures
of the Bank Holding Company Act be fully conformed to
those in the Bank Merger Act.
Accordingly, it is proposed that, when the
Board has advised a supervisory authority of an
emergency requiring expeditious action, consummation
be permitted five calendar days after the date of
13
- 8 approval.
In cases where the Board has found that
it must act immediately to prevent the probable
failure of a bank or bank holding company, it is
recommended that immediate consummation be permitted.
In the Board1s judgment, there appears to be no public
policy reason for not having parallel consummation
procedures for bank mergers and bank holding company
acquisitions in problem bank situations, since the
same reasons exist for not waiting thirty days for
the Attorney General's competitive judgment in both
cases.
As a practical matter, the Federal banking
agencies in such situations have regularly followed
the practice of informally consulting with the Attorney
General in advance in any case large enough to raise
substantial competitive questions.
The existing statutory delay provisions in
the Bank Holding Company Act have effectively eliminated bank holding companies from bidding in emergency
situations, since a bank in severe financial difficulty
may not be able to survive the thirty-day consummation
delay.
These provisions have thus unnecessarily limited
the number of potential acquirers of a problem bank.
56-713 O - 75 - 2
14
- 9 This can increase the anti-competitive risks in such
acquisitions by often limiting the pool of potential
acquirers to banks already in direct competition with
the problem bank, e.g., in the case of Franklin National
Bank, other New York City banks. The holding company
can be a pro-competitive form of bank expansion, and
its use should not be effectively foreclosed in
infrequent problem bank situations because of delay
requirements not similarly imposed in bank mergers.
Waiver of the usual delay provisions undoubtedly would
be warranted in only a small number of cases, and in those
cases the waiver should produce net public benefits.
Another -- and more sensitive -- constraint on
bank holding company acquisitions is geographical in
nature.
Under the Bank Holding Company Act, the Board
may not approve any further acquisition of a bank by
2/
a bank holding company across State lines.—
2/ The precise words of section 3(d) provide that the
Board may not approve any application under section 3 of
the Bank Holding Company Act: ff. . . which will permit
any bank holding company or any subsidiary thereof to
acquire, directly or indirectly, any voting shares of,
interest in, or all or substantially all of the assets
of an additional bank located outside of the State in
which the operations of such bank holding company's
banking subsidiaries were principally conducted. . . . "
15
- 10 This provision was made part of the original Bank
Holding Company Act of 1956 in order to halt the
further expansion of several large multi-State bank
holding companies then in existence.
It was based
in large part on Congress1 concern that, unless
this trend were halted, widespread and frequent
acquisitions by major bank holding companies could
eventually lead to an undue concentration of banking
resources in the United States.
In particular, it
was thought that, absent this provision, holding
companies would be used to avoid the multi-State
branching provisions of the McFadden Act, and it
thus was also intended to preserve the rights of
o/
the States in this area.—
3/ Under the terms of this provision, a bank holding
company can only acquire a bank outside of its principal
State if the State in which such bank is located takes
action to specifically permit such acquisition. If a
State took such action, the Board would still have to
decide the application under the statutory standards
of the Bank Holding Company Act. At the time of this
Act's passage in 1956, no State granted such permission.
Except for Iowa, which has enacted a law giving a single
grandfathered multi-State bank holding company permission
to acquire additional banks in that State, and Maine,
which recently enacted a law which would allow acquisition
of a Maine bank by an out-of-State bank holding company if
a Maine bank holding company is given reciprocal rights in
that holding company's State, the situation remains
essentially unchanged with no other States granting such
permission.
16
- 11 The Board is of the opinion that section 3(d)
could, in the case of a large problem bank or a problem
bank holding company controlling a large bank, operate
in contravention of both national and local interests.
The limitation to in-State bidders may, in the case of
a large problem bank, severely limit the number of
potential acquirers and result in an increased concentration of banking resources within a State -- contrary
to an intent of Congress in passing the Bank Holding
Company Act.
In most of our States, the number of
locally-owned banks big and strong enough to absorb
a large problem bank are very few. The only smaller
banks strong enough to undertake such a venture may
be those affiliated with powerful commercial or
financial interest domiciled either in this country
or abroad.
The problem created by the constraints imposed
by section 3(d) has been sharpened as banks, particularly
large banks, have moved increasingly from asset to
liability management.
This shift in emphasis has led
17
- 12 many larger institutions to search far afield for
money market funds. While this has often been of
considerable benefit to the customers and communities
they have served -- particularly in those areas where
widespread branching is not permitted and local deposit
generation is thereby limited -- liability management
has increased banks1 exposure to the risks created by
any substantial net outflow of such nonlocal and often
volatile funds.
When adverse news triggers enough outflows of
funds to significantly weaken a bank, it may become
necessary in the public interest to fold it into a
larger and stronger institution. As you know, this
occurred in New York and California, where big in-State
banks were available to acquire the problem banks
involved.
Had institutions of the size of Franklin
National or U.S. National failed in many other States,
however, no banks in those States would have been
large enough to acquire them.
In such circumstances,
the need to be able to arrange acquisitions across
State boundaries would become very real.
18
- 13 The Board therefore recommends several amendments to the Bank Holding Company Act designed to
permit out-of-State acquisitions in certain emergency
and failing bank situations involving a large bank or
bank holding company controlling a large bank.
Under
section 1(3) of S. 890 as proposed, the Board would
have the authority to make exceptions to the multi-State
prohibitions of section 3(d) whenever the Board finds
that an emergency requiring expeditious action exists
with respect to a bank or bank holding company, or that
it must act immediately in order to prevent the probable
failure of a bank or bank holding company.
The proposed
authority would be limited, however, to cases involving
a bank having assets in excess of $500 million or a
bank holding company controlling a bank having assets in
excess of $500 million.
There are three basic reasons
for limiting this authority to the case of a large bank
or bank holding company controlling a large bank:
first, the failure of such an institution can have
19
- 14 damaging effects in both national and international
markets and on the national economy; secondly, there
may be few, if any, prospective acquirers of such an
institution within any State; and thirdly, the most
likely in-State acquirers are likely to be institutions
of comparable or greater size, which might often pose
problems under the anti-trust laws and threaten an
increased concentration of banking resources within
the State.
The Board chose a $500 million asset cut-off
figure because it would cover major money-center and
regional banks, whose failure might have an adverse
effect on regional, national or even international
financial markets, yet would not be so extensive an
exception as to create a potentially significant
loophole to the multi-State prohibitions of the Act.
Also, in cases involving smaller problem banks, local
acquisitions where appropriate can be more readily
arranged by the FDIC and State authorities than can
transfers of the liabilities and assets of large
institutions.
20
- 15 The choice of any cut-off figure involves
various public policy considerations by the Congress.
The Board stands ready to supply the Subcommittee
with additional data on this issue if that would be
helpful.
On the basis of data prepared by the Board1s
staff, a $500 million cut-off would cover not only
the large money-center and regional banks but also,
4/
in most cases, the largest bank in any State.—
From our analysis of cases in which emergency or
failing bank procedures have been used under the
Bank Merger Act, it appears only three banks acquired
under emergency approval procedures have had assets
in excess of $500 million (Security National Bank
of Long Island, Franklin National Bank of New York,
and United States National Bank of San Diego).
Thus,
the Board anticipates that this provision would be
applicable only in rare cases where there may be significant effects upon the national and international economy.
4/ From the Board's figures as of December 31, 1974,
this asset cut-off would appear to include some 210
commercial banks across the country, including
the largest bank in 39 States and the District of
Columbia, and the two largest banks in 35 States and
the District of Columbia.
21
- 16 Under section 1(3) of S. 890 the Board could
use this authority to approve a multi-State acquisition
only when it finds, in weighing the statutory competitive
and other factors, that the public interest would best
be served if the bank or banks involved were acquired
by an out-of-State bank holding company.
The Board
thus anticipates that this authority would rarely be
used and only in cases presenting very special circumstances, such as those involving Franklin National Bank.
In our view, these relatively rare situations would not
contravene the central purpose of the multi-State
prohibition of the Bank Holding Company Act, which
was directed at preventing large concentrations of
financial resources through frequent multi-State
acquisitions of banking institutions.
The Board is sensitive to the fact that the
prohibition on multi-State branching was designed to
prevent the evolution of a few large banking institutions. While there would be only a very limited
number of instances in which the Board would consider
22
- 17 making exceptions to section 3(d), the amending
language could be narrowed even more than was
originally suggested.
A strict limit could be
placed on the number of acquisitions any single
bank holding company would be allowed to make under
such an exception.
This limit should be more than
one, in order not to encourage potential bidders to
wait until an ideal acquisition opportunity was
presented, but it could be less than five, in order
to forestall excessive expansions of financial power.
In our view, this kind of limit would serve to
preclude any possibility of undue concentration of
economic resources being created through exceptions
to section 3(d).""
5/ As a corollary to its recommended amendment of
section 3(d), the Board has felt it necessary to also
recommend an amendment in section 2 of S. 890 overriding certain provisions of State law in situations
involving a problem bank or bank holding company where
expeditious or immediate action is required.
Section 7 of the Bank Holding Company Act reserves
to the States their rights to exercise such powers and
jurisdiction which they now or in the future may have
with respect to banks, bank holding companies, and
subsidiaries thereof. In problem bank or
(continued)
23
- 18 The Board hopes, of course, that no significant
bank will so misbehave that it becomes threatened with
57(Continued) bank holding company situations, the
normal circumstances which may have led a State to enact
a statute prohibiting the formation of bank holding
companies within its borders or otherwise restricting
the entry of out-of-State bank holding companies do not
apply and therefore such provisions should not be controlling when the Board has approved such application
under the immediate or expeditious action provisions
recommended in S. 890. In such cases, the national
interest argues that Federal law be supreme. In
practical terms, even though a State may favor an
acquisition by an out-of-State holding company approved
by the Board under its immediate or expeditious action
provisions as an alternative to failure, it would
probably be impossible either for a State legislature
to enact in time any necessary amendments to its laws,
or for a State court to interpret the terms of an
unclear statute. The delays involved in trying to
pursue either of the above courses of action could be
crucial. Section 2 of S. 890 would solve these problems
by providing that in any case where the Board has approved
an application under the immediate or expeditious action
provisions of S. 890, the holding company may acquire and
operate the bank involved as a subsidiary notwithstanding
section 7 or any provision of State law which would
otherwise prevent the acquisition or restrict the
operations of that holding company.
Section 2, however, leaves intact State restriction
on multi-bank holding companies, so that an out-of-State
bank holding company which acquired a bank with the Board!s
approval under the immediate or expeditious action provisions could not gain a competitive advantage over an
in-State holding company by acquiring a second bank under
those provisions. The McFadden Act restrictions on multiState branching would not be affected by section 2 of
S. 890 as such restrictions are a matter of Federal law.
24
- 19 failure.
It would be imprudent, however, not to
be prepared to deal with that eventuality.
As a
matter of good contingency planning, the Board
recommends prompt enactment of S. 890.
It will
serve the public interest both by facilitating
the speedy and efficient resolution of problem
bank and bank holding company cases we may
encounter and by increasing the likelihood of
more competitive acquisitions in such situations.
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25
a CONGRESS
1ST SESSION
f%
^^
£%f\£\
Xt^ff I
IN THE SENATE OF THE UNITED STATES
FEBRUARY 28 (legislative day, FEBRUARY 21), 1975
Mr. PROXMIRE (for himself and Mr. MCINTYRE) (by request) introduced the
following bill; which was read tAvice and referred to the Committee on
Banking, Housing and Urban Affairs
A BILL
To amend the Bank Holding Company Act of 1956, as amended,
to provide special procedures for the acquisition of failing
banks or bank holding companies and for the acquisition of
banks or bank holding companies in emergencies and to
provide for the acquisition by bank holding companies of
banks outside their State of principal banking operations in
emergency situations and situations involving a failing bank
or bank holding company.
1
Be it enacted by the Senate and House of Representa-
2
tives of the United States of America in Congress assembled,
3 That section 3 of the Bank Holding Company Act of 1956
4
5
6
(12 U.S.C. 1842) is amended—
(1) by striking out subsection (b) and inserting
in lieu thereof the following:
26
2
1
" ( b ) Upon receiving from a company any application
2
for approval under this section, the Board shall give notice
3
to the Comptroller of the Currency, if the applicant company
4
or any bank the voting shares or assets of which are sought
5
to be acquired is a national banking association or a district
6 bank, or to the appropriate supervisory authority of the
7
interested State, if the applicant company or any bank the
8
voting shares or assets of which are sought to be acquired is
9
a State bank, in order to provide for the submission of the
10 views and recommendations of the Comptroller of the Cur11 rency or the State supervisory authority, as the case may be.
12 The views and recommendations shall be submitted within
13 thirty calendar days of the date on which notice is given, or
14
within ten calendar days of such date if the Board advises
15
the Comptroller of the Currency or the State supervisory
16 authority that an emergency exists requiring expeditious
17 action. If the Comptroller of the Currency or the State
18 supervisory authority so notified by the Board disapproves
19 the application in writing within this period, the Board shall
20 forthwith give written notice of that fact to the applicant.
21 Within three days after giving such notice to the applicant,
22
the Board shall notify in writing the applicant and the dis-
23 approving authority of the date for commencement of a
24 hearing by it on such application. Any Such hearing
25 shall be commenced not less than ten nor more than
27
3
1
thirty days after the Board has given written notice to the
2 applicant of the action of the disapproving authority. The
3
length of any such hearing shall be determined by the Board,
4 but it shall afford all interested parties a reasonable oppor5
tunity to testify at such hearing. At the conclusion thereof,
6 the Board shall by order grant or deny the application on
7
the basis of the record made at such hearing. In the event
8
of the failure of the Board to act on any application for ap-
9 proval under this section within the ninety-one-day period
10 which begins on the date of submission to the Board of the
11 complete record on that application, the application shall be
12
deemed to have been granted. Notwithstanding any other
13 provision of this subsection, if the Board finds that it must
14
act immediately on any application for approval under this
15 section in order to prevent the probable failure of a bank
16
or bank holding company involved in a proposed acquisition,
17 merger, or consolidation transaction, the Board may dis18 pense with the notice requirements of this subsection, and
19 if notice is given, the Board may request that the views
20 and recommendations of the Comptroller of the Currency
21 or the State supervisory authority, as the case may be, be
22
submitted immediately in any form or by any means
23 acceptable to the Board, and, notwithstanding the receipt
24 of any such views and recommendations or any recom25 mended disapproval by the appropriate authority,
the
28
4
1
Board may grant or deny immediately any such applica-
2
tion.";
3
(2) by striking out "Notwithstanding any other pro-
4 vision of this section/' in subsection (d) and inserting in lieu
5
thereof "Except as provided in subsection (f) of this sec-
6 tion/ ? ; and,
7
8
(3) by adding at the end thereof the following new
subsection:
9
" (f) Notwithstanding any other provision of this sec-
10
tion, the Board may approve any application under this sec-
11 tion which will permit any bank holding company or any
12
subsidiary thereof to acquire, directly or indirectly, any vot-
13 ing shares of, interest in, or all or a substantial part of the
14 assets of any additional bank located outside of the State in
15 which the operations of such bank holding company's bank16 ing subsidiaries are principally conducted, as determined
17 under subsection (d) of this section, if the Board finds that
18 an emergency requiring expeditious action exists with re19 spect to a bank having assets in excess of $500,000,000
20
or a bank holding company controlling a bank having assets
21 in excess of $500,000,000 or the Board finds that immediate
22 action is necessary to prevent the probable failure of a bank
23 having assets in excess of $500,000,000 or a bank holding
24
company controlling a bank having assets in excess of $500,-
25
000,000, and, in weighing the competitive, financial, and
29
5
1
other factors under subsection (c) of this section, the Board
2 finds that the public interest would best be served if the
3 bank or banks involved in such application were acquired
4 by an out-of-State bank holding company.".
5
SEC. 2. Section 7 of the Bank Holding Company Act
6 of 1956 (12 U.S.C. 1846) is amended by striking out the
7 period at the end thereof and inserting in lieu thereof the
8
following new proviso: ": Provided, however, That in any
9 case in which the Board has approved an application under
10 the immediate or expeditious action provisions of section 3
11 of this Act, the holding company involved may acquire and
12
operate the bank involved as a subsidiary notwithstanding
13 the provisions of this section or any provision of State law
14 which would otherwise1 prevent the acquisition or restrict the
15 operations of said holding company, unless the law involved
16 is one which prohibits multibank holding companies and con17 summation of the proposal would result in the applicant
18 having more than one banking subsidiary in that State.".
19
SEC. 3. Subsection (b) of section 11 of the Bank Hold-
20 ing Company Act of 1956 (12 U.S.C. 1849) is amended
21 to read as follows:
22
" (b) The Board shall immediately notify the Attorney
23 General of any approval by it pursuant to section 3 of a pro24 posed acquisition, merger, or consolidation transaction. If
25 the Board has found that it must act immediately in order to
30
6
1
prevent the probable failure of a bank or bank holding com-
2 pany involved in any such transaction, the transaction may
3 be consummated immediately upon approval by the Board.
4 If the Board has advised the Comptroller of the Currency
5
or the State supervisory authority, as the case may be, >of the
6
existence of an emergency requiring expeditious action and
7 has required the submission of views and recommendations
8
within ten days, the transaction may not be consummated
9 before the fifth calendar day after the date of approval by
10 the Board. In all other cases, the transaction may not be
11 consummated before the thirtieth calendar day after the date
12 of approval by the Board. Any action brought under the
13 antitrust laws arising out of an acquisition, merger, or con14
solidation transaction approved under section 3 shall be com-
15 menced prior to the earliest time under this subsection at
16 which a transaction approved under section 3 might be con17 summated. The commencement of such an action shall stay
18 the effectiveness of the Board's approval unless the court
19
shall otherwise specifically order. In any such action, the
20 court shall review de novo the issues presented. In any judi21 cial proceeding attacking any acquisition, merger, or con22 solidation transaction approved pursuant to section 3 on the
23 ground that such transaction alone and of itself constituted
24 a violation of any antitrust laws other than section 2 of the
25 Act of July 2, 1890 (section 2 of the Sherman Antitrust
31
7
1
Act, 15 U.S.C. 2 ) , the standards applied by the court shall
2 be identical with those that the Board is directed to apply
3
under section 3 of this Act. Upon the consummation of an
4 acquisition, merger, or consolidation transaction approved
5 under section 3 in compliance with this Act and after the
6 termination of any antitrust litigation commenced within the
7 period prescribed in this section, or upon the termination of
8
such period if no such litigation is commenced therein, the
9 transaction may not thereafter be attacked in any judicial
10 proceeding on the ground that it alone and of itself con11 stituted a violation of any antitrust laws other than section 2
12 of the Act of July 2, 1890 (section 2 of the Sherman Anti13 trust Act, 15 U.S.O. 2 ) , but nothing in this Act shall exempt
14 any bank holding company involved in such a transaction
15 from complying with the antitrust laws after the consumma16 tion of such transaction.".
32
T H E A D M I N I S T R A T O R O F NATIONAL BANKS
WASHINGTON, D.C. 20219
July
18,
1975
Dear Mr. Chairman:
We appreciate this opportunity to present the views
of the Office of the Comptroller of the Currency to your
Committee on S. 890, a bill to provide for the emergency
acquisition of banks and bank holding companies.
The bill makes two amendments to the Bank Holding
Company Act designed to expedite the purchase by a bank
holding company of a bank or other bank holding company
facing financial difficulty. The first eliminates the waiting
periods in the Act which now permit the banking agencies,
the Department of Justice and others to comment on or protest
an applica tion. Depending on the severity of the emergency,
the Board of Governors would have discretion under the amendment to shorten or eliminate entirely such waiting periods.
This office fully supports and urges the Committee to
adopt the foregoing amendment. This change would merely
bring the Bank Holding Company Act in line with the
emergency provisions already contained in the Bank Merger
Act. (See 12 U.S.C. 1828(c)(4) and (6).) The latter provisions have been used by this office in several instances
to approve the take-over by national banks of troubled
institutions under circumstances where the absence of the
emergency provisions would have resulted in the closing
and liquidation of the acquired bank.
The second amendment would permit the acquisition of
a troubled bank, having assets in excess of $500 million,
by a bank holding company located in another state. Under
the present law, a holding company whose principal subsidiary
bank is located in one state may not acquire any bank located
in another state unless the laws of the latter expressly
permit, it and at the present time no states do so. However,
under the proposed amendment, the Federal Reserve Board
still could not permit the acquisition of a second bank
by a one-bank holding company located in the same state
as the bank in trouble, if such state prohibits multibank
holding companies.
33
- 2 The findings which the Board must make prior to approval
of an across-state-line acquisition is either "emergency
requiring expeditious action" or "probable failure."
This office fully supports the idea of permitting
across-state-line acquisitions in emergency situations.
Relaxing state barriers to this extent serves two important
purposes. It provides a maximum number of potential bidders,
thus assuring the highest possible price for the benefit
of shareholders of the troubled bank and the FDIC. Secondly,
a wider range of potential bidders permits selection of
the least anticompetitive combination. However, this office
believes that both of these desirable ends would be furthered
by some strengthening amendments as follows:
1. We see no reason why the across-state-line provision
should be limited to acquisition by holding companies.
In many instances, e.g. multistate SMSAs, a medium-size
bank might be a more logical partner for a small troubled
bank than a holding company. In these situations, acquisition
by an out-of-state bank might be much more feasible. Thus,
we recommend that an enabling amendment be made either to
the Bank Holding Company Act, in that it deals with emergency
and probable failure situations, or to the Bank Merger Act
to give banks the same opportunities in this respect as
bank holding companies.
2. Second, we see no compelling reason to retain the
prohibition against acquisition of troubled banks by local
one-bank holding companies in states which do not allow
multibank holding companies.
This provision creates the
anomalous situation of an out-of-state holding company being
able to take over a bank where a company inside the state
would be forbidden. It is our opinion that, in these problem
cases, the banks and regulators should be able to have the
choice of banks and bank holding companies close to the
troubled bank. In addition, fairness would seem to dictate
that there not be discrimination against bank or holding
company in the national policy on these types of transactions.
Therefore, we recommend that the last qualifying phrase
of Section 2 beginning with the word "unless" be removed
from the bill.
3. The across-state-line provision limitation to
troubled banks with assets of $500 million or more may
need further consideration. The Committee must find the
right balance between minimum interference with state
prerogatives and maximum utility of the emergency procedure.
34
- 3 4. Lastly, we note that the bill does not require
that the State Banking Commissioner or the Comptroller
of the Currency certify to the Board of Governors the
existence of an emergency in order to invoke its provisions.
While it seems unlikely that the Board of Governors would
invoke the provisions without such a certification from
the chartering supervisor, who would have the most intimate
knowledge of the troubled bank * s condition, we recommend
that this be made explicit in the legislation.
^.Sincerely,
<\ \ ^ ^ > •
*~—-
Robert Bloom
First Deputy Comptroller
for Policy
Honorable Thomas J. Mclntyre
Chairman
Subcommittee on Financial Institutions
United States Senate
Washington, D. C. 20510
35
Senator
M C I N T Y R E . NOW,
Mr. Wille.
STATEMENT OF FRANK WILLE, CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION
Mr. W I L L E . Mr. Chairman, I welcome the opportunity to present to
you some views with respect to S. 890 which has been introduced at
the request of the Federal Reserve Board.
As to the first part of the bill, I think there is no significant exception to its provisions and we would urge that the committee promptly
enact the portion of S. 890 that would waive the 30-day waiting period
for the consummation of emergency acquisitions under the Bank
Holding Company Act.
We think that this would conform the act to provisions of the
Bank Merger Act and that probably the failure to include that kind
of a waiver in existing law was an oversight.
The second part of the bill is more controversial, I think, generally,
and it is the portion of the bill on which the F D I C has some
reservations.
Although this portion of the bill, which would allow interstate
acquisitions of troubled banks of $500 million or more, has been presented primarily in terms of the Franklin National Bank experience
last summer, it actually raises some very basic questions about the
Nation's banking system and its future.
Some of these issues include, for example, the obvious one, the
future of interstate banking and interstate branching; secondly, the
impetus that the bill's enactment would give to the concept of 100percent insurance of all deposits, a concept which the Congress over 40
years has generally rejected in favor of more limited Government
insurance; thirdly, the financial and legal capacity of the F D I C to
work out the problems of a large bank in distress; fourthly, the role of
the Federal Reserve in bank regulation generally and in that sense this
portion of the bill presents a part of the agency restructuring issue
which is before the Congress in a number of different forms in both
Houses; and, fifthly, the bill raises the treatment to be accorded shareholders and debentureholders of a bank in distress.
I discussed each one of these various issues at some length in a
speech in Kansas City which is attached to my statement. I am not
going to go into it all at this time, b u t I would be glad to answer any
questions you may have about these various issues.
I do want to say that we support the bill proposed by the Federal
Reserve in principle with some suggestions for amendment.
Having discussed the various issues, I stated in Kansas City:
The fact remains that defensible solutions become more difficult to
hammer out, the larger a bank in distress is.
There are several reasons for this. If a statutory merger or acquisition is contemplated without any form of Federal Reserve or F D I C
assistance, the takeover bank must be large enough to absorb the
risks of the failing bank and must have, or be able to obtain, sufficient
capital, to support a sudden expansion of its deposit base.
These risks are likely to include significant oversea exposures, the
larger the size of the problem bank and even the Nation's largest
banks may be quite unwilling to take on sizeable foreign exchange
risks, for example, without Government support.
36
Even if F D I C financial support or indemnities are provided, the
management of the takeover bank will probably also be expected to
take over a substantial portion of the assets and branch offices of the
failing bank.
Since there are only 107 banks with domestic assets of $1 billion or
more, only 51 with domestic assets of $2 billion or more and only 27
banks with domestic assets of $3 billion or more, it is obvious the
number of healthy banks capable of even a Government-assisted takeover of a large bank in distress decreases rapidly the larger the failing
bank is.
Under existing law, of course, none of these larger banks or their
parent holding companies would be eligible to acquire such a problem
bank unless they operated in the same State, even assuming the
terms of the transaction could be worked out to their satisfaction.
Now, the arithmetic of diminishing numbers on seeking candidates
for a deposit takeover was very much at work in the Franklin National
Bank case last summer.
Twenty banks and bank holding companies, each of which was
believed to have significant financial and managerial resources, were
contacted initially to determine the degree of their potential interest.
Antitrust clearances were obtained so that joint ventures might be
considered and organized if the smaller banks or bank holding companies among the 20—or not even limited to the 20—felt themselves
unable to proceed alone.
Of those contacted, only four became seriously interested and ultimately submitted bids—three of them under an antitrust cloud.
No joint ventures got off the ground, even though we had antitrust
clearance to proceed with them.
And we were extremely fortunate, despite these handicaps, that
Franklin National Bank was headquartered in New York State
because New York State has a relatively large number of potential
suitors and has statewide holding companies permitted by State law.
A larger pool of potential suitors would have been very desirable
last summer, and the F R B ' s proposal would certainly make a broader
canvass possible.
This is not the same as saying the final result would have been
achieved in a shorter span of time. In fact, contacting potential
out-of-State suitors as well as in-State suitors, and negotiating with
a larger group than we did in an effort to arrive at a uniform bid
package, might well have taken longer than the process actually did.
On the other hand, if a significantly larger number of potential
suitors had been identified, it might conceivably have been possible
to arrange a deposit takeover without any form of Government
assistance, or it might have been possible for the F D I C and the
Federal Reserve to have dictated the terms of the transaction and
still have had one or two banks left that would have taken the terms
offered.
I n my view, only if one of these two conditions existed would the
process of finding a final solution to the Franklin affair have been
"shortened considerably" as the F R B claims.
Nonetheless, enlarging the pool of potential suitors regardless of
the speed of resolution is likely to improve significantly the prospects
of successfully consummating a deposit assumption transaction at
37
all, and this is the basic reason I support the concept of the F R B
proposal.
Reviewing the experience of the last 5 years, however, I would
have to inform the Congress that in my judgment F D I C , under
existing law, can probably handle successfully and with reasonable
dispatch the potential failure of virtually any bank with less than
$2 billion in assets and, depending on the circumstances, banks of
even larger size.
If the Congress wishes to narrow the coverage of the F R B bill
to the area of clearest need, it can easily do so by raising the asset
cutoff proposed by the F R B to at least $2 billion.
At that figure only 51 banks in 15 of the Nation's most industrialized States would have been potentially subject to acquisition
under the bill's provisions as of October 15 last year.
This might be contrasted with the 208 banks in 38 States potentially
subject to acquisition under the $500 million cutoff proposed by the
FRB.
Proponents of a lower cutoff than even the $500 million proposed
by the F R B have pointed out that in each of the remaining 12 States
the largest commercial bank has less than $500 million in assets
and that such banks at least should also be covered under this proposed change in the law.
I personally tend to disagree with this argument, largely because
it ignores two options F D I C has under present law in dealing with
any such bank that finds itself in a failing condition—either one of
which I am sure the F D I C Board of Directors could and would use
in preference to a statutory payoff up to the insurance limit.
The first is direct F D I C financial assistance under appropriate
safeguards to insure correction of the bank's problems and ultimate
repayment and that is designed to keep the bank operating as an
independent institution.
This was the option selected to prevent the failure of the $1 billion
Bank of the Commonwealth in 1972, at that time not even the largest,
but the fourth largest bank, in the Detroit metropolitan area.
When that assistance was granted, Michigan law did not permit
the expansion of multibank holding companies, and the F D I C Board
found the bank's preservation as a significant competitor in a major
market to be essential for "adequate banking service in the community."
By analogy, I am confident a similar finding could be made for
the largest bank in a State, and possibly its nearest competitors as
well, if there appeared to be no feasible possibility of a procompetitive
acquisition by either an in-State or an out-of-State organization.
The second option available to the F D I C under such circumstances would be to stimulate the emergency chartering of a new
bank with capable management, partially capitalized with an F D I C
advance, and to permit that bank to acquire the deposits of the
failing bank in exchange for the liquid assets of the problem bank
and balancing F D I C cash.
That particular option was one that we used just the other day
in the State of Illinois when the State Bank of Clearing, a State
member bank of some $80 million in total resources, failed.
38
A new bank was chartered and successfully engaged in a purchase
and assumption transaction out of a receivership, with the F D I C
supplying a capital note to assist the formation of that bank to the
extent of $1,500,000.
The total capital which the organizers of such a new bank would
have to supply under these circumstances might approximate only
$5 million or so for each $100 million in deposits to be assumed.
Now, obviously if it were a $2 billion bank, that might be something like $100 million in total capital, of which the F D I C would
be prepared to contribute quite a significant portion.
The other items that I raised in that talk in Kansas City lead us
to suggest that S. 890 be amended to require in all cases the prior
concurrence of the primary supervisor of the bank to be acquired
by an out-of-State bank holding company under the bill's provisions.
T h a t is, the prior concurrence of the Comptroller of the Currency
in the event the bank is a national bank or the prior concurrence of
a State supervisor in the event it is a State-chartered bank that has
been acquired.
In those cases where F D I C financial assistance or indemnities
are contemplated, we also recommend that the bill be amended to
require the prior concurrence of the F D I C as well before the Federal
Reserve Board acts.
The most difficult problem in this bill, it seems to me, is the dollar
cutoff and on that I do not have a Corporation position.
I think that we have different views within our own Board.
However, I would say that the Congress seems to have two directions in which it can move on the $500 million cutoff proposed by
the Federal Reserve.
Obviously it can lower the figure and the basic argument for that
is that if you reduce the figure from $500 million to say zero, you avoid
creating a two-tier kind of banking system in which banks over the
cutoff tend to be preferred in some way because the public has been
led to believe that no matter what happens they will not be allowed
to fail.
If you have that connotation given to banks over the cutoff, whether
it is $500 million or $1 billion or $100 million, you have in effect
assured the people that deal with that bank that 100 percent insurance
applies to all the deposits in that particular bank, whereas insurance
only up to $40,000 per depositor (or $100,000 in the case of a public
depositor) applies to other banks.
This would create, I think, a disadvantage for the banks below
the cutoff.
I t is hard to quantify that, but I believe that it could emphasize
the development of a two-tier kind of banking system which would
concern all of us on the F D I C Board of Directors and which we would
prefer not to see.
However, you can't have this kind of a bill without settling on some
kind of cutoff. If you set it at zero, it means that you involve 50
States and every bank in the country in a possible acquisition under
emergency circumstances contemplated by the Federal Reserve Board.
If you set the figure at $100 million, about 800 banks are involved:
at $500 million, as I have said, 208 banks are involved; and at $2
billion, only 51.
39
I think it fair to say that Director LeMaistre of the F D I C Board
would prefer that there be no dollar cutoffs for the reasons that I
have specified.
My suggestion, contained in the Kansas City speech was to raise
the figure from $500 million to $2 billion, and thereby minimize the
two-tier effect.
In my view, modifying the bill's interstate acquisition provisions
along these lines would substantially minimize the damage which
might otherwise be done to the historical pattern of state primacy
in matters of bank structure, it would be consistent with the concept
of limited deposit insurance, it would be consistent with the regulatory
structure we presently have and I believe fairer to the shareholders
and debenture holders of insured banks in distress.
Thank you very much, Mr. Chairman.
[Complete statement of Chairman Wille follows:]
40
Statement of
F r a n k Wille, C h a i r m a n
F e d e r a l Deposit I n s u r a n c e C o r p o r a t i o n
M r . C h a i r m a n , I w e l c o m e the o p p o r t u n i t y to a p p e a r b e f o r e y o u r
S u b c o m m i t t e e t o d a y to testify with r e s p e c t to S. 890.
B a s i c a l l y , the b i l l can be divided into two p a r t s .
I shall first
d i r e c t m y c o m m e n t s to t h e r e l a t i v e l y n o n c o n t r o v e r s i a l p o r t i o n of t h e bill
r e l a t i n g to the p r o c e d u r a l r e q u i r e m e n t s for obtaining F e d e r a l R e s e r v e
a p p r o v a l of bank holding c o m p a n y a c q u i s i t i o n s in e m e r g e n c y s i t u a t i o n s .
P r e s e n t l y , the Bank Holding C o m p a n y Act r e q u i r e s the F e d e r a l R e s e r v e
to give t h i r t y d a y s ' n o t i c e to t h e p r i m a r y s u p e r v i s o r of any bank involved
in a p r o p o s e d bank a c q u i s i t i o n by a bank holding c o m p a n y and to hold a
h e a r i n g on the m a t t e r if the p r i m a r y s u p e r v i s o r d i s a p p r o v e s the a c q u i s i t i o n .
T h e Act a l s o p r o v i d e s for a n o t h e r 3 0 - d a y delay following a p p r o v a l by the
F e d e r a l R e s e r v e of such an a c q u i s i t i o n in o r d e r to allow the A t t o r n e y
G e n e r a l an o p p o r t u n i t y to b r i n g an a c t i o n c h a l l e n g i n g t h e a c q u i s i t i o n u n d e r
the antitrust laws.
Unlike t h e Bank M e r g e r Act, no p r o v i s i o n i s m a d e u n d e r
p r e s e n t law for waiving t h e s e r e q u i r e m e n t s in e m e r g e n c i e s o r in failing bank
situations.
In o r d e r to c o n f o r m Bank Holding C o m p a n y Act p r o c e d u r e s in
e m e r g e n c y s i t u a t i o n s to t h o s e p r e s e n t l y a p p l i c a b l e u n d e r the Bank M e r g e r
Act, S. 890 would a u t h o r i z e the F e d e r a l R e s e r v e (1) to s h o r t e n to 10 days
t h e p e r i o d for s u b m i s s i o n of v i e w s and r e c o m m e n d a t i o n s by the p r i m a r y
s u p e r v i s o r of a bank involved in a bank holding c o m p a n y a c q u i s i t i o n if the
F e d e r a l R e s e r v e finds "that an e m e r g e n c y e x i s t s r e q u i r i n g e x p e d i t i o u s
a c t i o n , " o r (2) to d i s p e n s e e n t i r e l y with notice to the p r i m a r y s u p e r v i s o r
41
- 2 -
o r to r e q u i r e i m m e d i a t e s u b m i s s i o n of h i s v i e w s and r e c o m m e n d a t i o n s
and to d i s r e g a r d any a d v e r s e r e c o m m e n d a t i o n s r e c e i v e d f r o m t h e p r i m a r y
s u p e r v i s o r if the F e d e r a l R e s e r v e finds "that it m u s t a c t i m m e d i a t e l y
. . .
in o r d e r to p r e v e n t the p r o b a b l e f a i l u r e of a bank o r bank holding
c o m p a n y involved in a p r o p o s e d a c q u i s i t i o n . . . . " When the F e d e r a l
R e s e r v e a c t s p u r s u a n t to the 10-day n o t i c e p r o c e d u r e d e s c r i b e d a b o v e ,
the a c q u i s i t i o n can be c o n s u m m a t e d five days a f t e r a p p r o v a l t h e r e o f ; and
when the F e d e r a l R e s e r v e g r a n t s i m m e d i a t e a p p r o v a l , the a c q u i s i t i o n can
be c o n s u m m a t e d i m m e d i a t e l y , with no delay to afford the A t t o r n e y G e n e r a l
an o p p o r t u n i t y to c h a l l e n g e the a c q u i s i t i o n p r i o r to i t s c o n s u m m a t i o n .
The C o r p o r a t i o n f a v o r s c o n f o r m i n g the e m e r g e n c y p r o c e d u r e s
a p p l i c a b l e u n d e r the Bank M e r g e r Act and the Bank Holding C o m p a n y Act
and would t h e r e f o r e r e c o m m e n d p r o m p t e n a c t m e n t of that p o r t i o n of S. 890
which would a c c o m p l i s h t h i s r e s u l t .
T h e p r i m a r y t h r u s t of the r e m a i n d e r of S. 890 i s to r e p e a l in p a r t
the p r o h i b i t i o n a g a i n s t bank a c q u i s i t i o n s by bank holding c o m p a n i e s a c r o s s
State l i n e s .
The bill would a u t h o r i z e the F e d e r a l R e s e r v e to a p p r o v e such
acquisitions -"if the B o a r d finds that an e m e r g e n c y r e q u i r i n g e x p e d i t i o u s
a c t i o n e x i s t s with r e s p e c t to a bank having a s s e t s in e x c e s s
of $500, 000, 000 o r a bank holding c o m p a n y c o n t r o l l i n g a
bank having a s s e t s in e x c e s s of $500, 0 0 0 , 0 0 0 , o r t h e
B o a r d finds t h a t i m m e d i a t e a c t i o n i s n e c e s s a r y to p r e v e n t
the p r o b a b l e f a i l u r e of a bank having a s s e t s in e x c e s s of
$500, 000, 000 o r a bank holding c o m p a n y c o n t r o l l i n g a
bank having a s s e t s in e x c e s s of $ 5 0 0 , 0 0 0 , 0 0 0 , and, in
weighing the c o m p e t i t i v e , f i n a n c i a l , and o t h e r f a c t o r s
. . . , the B o a r d finds that the public i n t e r e s t would
b e s t be s e r v e d if the bank o r banks involved . . . w e r e
a c q u i r e d by an o u t - o f - s t a t e bank holding c o m p a n y . "
42
- 3 -
Although p r e s e n t e d p r i m a r i l y in t e r m s of t h e F r a n k l i n N a t i o n a l
Bank e x p e r i e n c e l a s t s u m m e r , t h i s p a r t of the bill a c t u a l l y r a i s e s s o m e
v e r y b a s i c i s s u e s about t h e n a t i o n ' s banking s y s t e m and i t s f u t u r e c o u r s e
•which -we b e l i e v e d e s e r v e t h o r o u g h c o n s i d e r a t i o n by the C o n g r e s s ,
par-
t i c u l a r l y in light of o t h e r c u r r e n t l y p r o p o s e d c h a n g e s in F e d e r a l banking
regulation.
T h e s e i s s u e s i n c l u d e the following:
(1) the future of i n t e r s t a t e
banking and i n t e r s t a t e b r a n c h i n g ; (2) the i m p e t u s the b i l l ' s e n a c t m e n t would
give to the c o n c e p t of 100 p e r c e n t i n s u r a n c e for a l l d e p o s i t s ; (3) the f i n a n c i a l
and l e g a l c a p a c i t y of t h e FDIC to w o r k out the p r o b l e m s of a l a r g e bank in
d i s t r e s s ; (4) t h e r o l e of the F e d e r a l R e s e r v e in bank r e g u l a t i o n g e n e r a l l y ;
and (5) t h e t r e a t m e n t to be a c c o r d e d s h a r e h o l d e r s and d e b e n t u r e h o l d e r s of
a bank in d i s t r e s s .
E a c h of t h e s e i s s u e s w a s d i s c u s s e d in a r e c e n t s p e e c h
which I d e l i v e r e d b e f o r e the m o s t r e c e n t convention of the C o n f e r e n c e of
S t a t e Bank S u p e r v i s o r s , and I a m a t t a c h i n g a copy of t h a t s p e e c h for the
benefit of the S u b c o m m i t t e e .
F o r t h e r e a s o n s s e t f o r t h in that s p e e c h , t h e C o r p o r a t i o n r e c o m m e n d s
t h a t S. 890 be a m e n d e d to r e q u i r e in a l l c a s e s the p r i o r c o n c u r r e n c e of the
p r i m a r y s u p e r v i s o r of the bank to be a c q u i r e d by an o u t - o f - s t a t e bank holding
c o m p a n y u n d e r the b i l l ' s p r o v i s i o n s .
In t h o s e c a s e s w h e r e FDIC f i n a n c i a l
a s s i s t a n c e o r i n d e m n i t i e s a r e c o n t e m p l a t e d , we a l s o r e c o m m e n d t h a t the
b i l l be a m e n d e d to r e q u i r e the p r i o r c o n c u r r e n c e of the FDIC a s w e l l .
43
- 4 -
As to the s i z e of b a n k s to which the b i l l ' s i n t e r s t a t e a c q u i s i t i o n
p r o v i s i o n s should apply, t h e r e a r e two d i r e c t i o n s in which C o n g r e s s can
go in an effort to avoid o r m i n i m i z e the c r e a t i o n of a t w o - t i e r banking
s y s t e m , i. e. , one in which a c e r t a i n c a t e g o r y of l a r g e b a n k s would, in
p r a c t i c a l effect, be a c c o r d e d 100 p e r c e n t i n s u r a n c e of d e p o s i t s while a l l
o t h e r b a n k s would be i n s u r e d only up to the s t a t u t o r y l i m i t ( p r e s e n t l y
$ 4 0 , 0 0 0 for nonpublic d e p o s i t s ) .
To avoid t h i s t w o - t i e r effect, the d o l l a r
cutoff in the bill could be e l i m i n a t e d a l t o g e t h e r , t h u s p e r m i t t i n g any failing
bank of any s i z e to be a c q u i r e d by an o u t - o f - s t a t e holding c o m p a n y with
appropriate regulatory approvals.
The o t h e r a p p r o a c h , which would m i n i m i z e but not e l i m i n a t e
the t i e r i n g effect, would be to i n c r e a s e the a s s e t cutoff figure s u g g e s t e d
by the F e d e r a l R e s e r v e f r o m $500 m i l l i o n to $2 b i l l i o n .
As m o r e fully
e x p l a i n e d in m y s p e e c h , I would p e r s o n a l l y p r e f e r t h i s l a t t e r a l t e r n a t i v e .
In m y view, modifying the b i l l ' s i n t e r s t a t e a c q u i s i t i o n p r o v i s i o n s along t h e s e
l i n e s would s u b s t a n t i a l l y m i n i m i z e the d a m a g e which m i g h t o t h e r w i s e be
done to the h i s t o r i c a l p a t t e r n of State p r i m a c y in m a t t e r s of bank s t r u c t u r e ,
to the c o n c e p t of l i m i t e d d e p o s i t i n s u r a n c e , to the r e g u l a t o r y s t r u c t u r e we
p r e s e n t l y h a v e and to the s h a r e h o l d e r s and d e b e n t u r e h o l d e r s of i n s u r e d
b a n k s in d i s t r e s s .
Attachment
44
^••^•^to
FDI€
N E W S RELEASE
K O H A l DttOMT INSUIANCI COtPOtATION
FOR IMMEDIATE RELEASE
PR-30-75
(4-29-75)
THE FEDERAL RESERVE'S PROPOSAL FOR
I N T E R S T A T E ACQUISITION O F LARGE BANKS
IN T R O U B L E : B A S I C I S S U E S I N A S I M P L E B I L L
A d d r e s s of
F r a n k Wille, Chairman
Federal Deposit Insurance Corporation
Before the
74th Annual Convention
of t h e
C o n f e r e n c e of S t a t e B a n k S u p e r v i s o r s
K a n s a s City,
April 29,
Missouri
1975
FEDERAL DEPOSIT INSURANCE CORPORATION, 550 Seventeenth St. N. W., Washington, D. C. 20429
•
202-389-4221
45
E a r l i e r t h i s y e a r , the F e d e r a l R e s e r v e B o a r d p r o p o s e d l e g i s l a ^
tion (S. 890, H. R. 4008) w h i c h would p e r m i t it to a p p r o v e the a c q u i s i t i o n
by an o u t - o f - s t a t e bank holding c o m p a n y of a l l o r a s u b s t a n t i a l p o r t i o n
of the a s s e t s of any $500 m i l l i o n bank l o c a t e d in a n o t h e r State if the
B o a r d finds e i t h e r that "an e m e r g e n c y r e q u i r i n g e x p e d i t i o u s a c t i o n
e x i s t s " with r e s p e c t to such a bank o r s o m e p a r e n t holding c o m p a n y o r
that " i m m e d i a t e a c t i o n is n e c e s s a r y to p r e v e n t the p r o b a b l e f a i l u r e " of
the bank o r i t s p a r e n t and if the B o a r d a l s o finds "the public i n t e r e s t
would b e s t be s e r v e d " by such an o u t - o f - s t a t e a c q u i s i t i o n .
Although p r e s e n t e d to the C o n g r e s s a l m o s t s o l e l y in t e r m s of
t h e F r a n k l i n N a t i o n a l Bank e x p e r i e n c e l a s t s u m m e r , t h i s r e l a t i v e l y
s i m p l e , s t r a i g h t f o r w a r d bill a c t u a l l y r a i s e s s o m e v e r y b a s i c i s s u e s
about the n a t i o n ' s banking s y s t e m and i t s future c o u r s e .
While I favor
the bill in p r i n c i p l e , and b e l i e v e that in s o m e i n s t a n c e s it could be a
useful a d d i t i o n a l tool in the s u p e r v i s o r y w o r k s h o p for dealing with the
p r o b l e m s of a l a r g e bank in d i s t r e s s , I will u r g e the C o n g r e s s not to
e n a c t it without t h o r o u g h l y c o n s i d e r i n g i t s i m p a c t on t h e s e u n d e r l y i n g
*/ The p r o p o s e d l e g i s l a t i o n a l s o a u t h o r i z e s the c o n s u m m a t i o n of
c e r t a i n bank holding c o m p a n y a c q u i s i t i o n s in d e s i g n a t e d e m e r g e n c i e s
without waiting the p r e s e n t l y r e q u i r e d 30 days (a delay d e s i g n e d to
p e r m i t an a n t i t r u s t a t t a c k a g a i n s t the p r o p o s e d a c q u i s i t i o n ) . In t h i s
r e g a r d , the bill m e r e l y p r o p o s e s to c o n f o r m e m e r g e n c y p r o c e d u r e s
u n d e r the Bank Holding C o m p a n y Act with t h o s e p r e s e n t l y in f o r c e
u n d e r t h e Bank M e r g e r Act. T h i s p r o v i s i o n is n o n c o n t r o v e r s i a l and
should be e n a c t e d p r o m p t l y .
5 6 - 7 1 3 O - 75 - 4
46
- 2 -
issues and its relationship to other proposals for statutory change which
will undoubtedly be suggested by the Federal Reserve, the FDIC and the
Comptroller as a result of our joint experience over the last few years.
If the Congress, after such a review, still wishes to pursue the Board's
proposal, I hope it will do so only after adopting a number of amendments,
the effect of which would be to limit the Board's open-ended discretion to
approve emergency acquisitions of the kind contemplated.
As State Supervisors, you are keenly aware that the bill would
allow the Board of Governors to override State law provisions that
might expressly prohibit such an acquisition.
The other basic issues
that I see in the bill are these: (i) the future of interstate banking and
interstate branching; (ii) the impetus the bill's enactment would give to
the concept of 100 percent insurance for all deposits; (iii) the financial
and legal capacity of the FDIC to work out the problems of a large bank
in distress; (iv) the role of the Federal Reserve in bank regulation
generally; and (v) the treatment to be accorded shareholders and
debenture holders of the bank in distress.
The deference to be given State law in a matter of this kind is
clearly up to the Congress.
Its constitutional power to enact the Federal
Reserve's proposal is no longer open to question, so the issue becomes
purely one of congressional policy.
While Federal preemption of State
47
- 3 -
idw can be w e l l d o c u m e n t e d in o t h e r r e g u l a t o r y f i e l d s , t h e C o n g r e s s
up to t h i s point h a s t a k e n c o n s i d e r a b l e c a r e to a c c o m m o d a t e i t s
e n a c t m e n t s b e a r i n g on c o m m e r c i a l bank s t r u c t u r e to explicit r e s t r i c _ ns found in State l a w .
No doubt t h i s h a s b e e n l a r g e l y due to the
e x i s t e n c e , s i d e by s i d e , of n a t i o n a l and State b a n k s , and the c o n g r e s sional c o n c l u s i o n t h a t a v i a b l e s y s t e m of dual c h a r t e r i n g r e q u i r e s b a s i c
equality b e t w e e n the two s y s t e m s in a m a t t e r a s c o m p e t i t i v e l y i m p o r t a n t
a s the g e o g r a p h i c l o c a t i o n of the b a n k ' s offices.
this simple.
But t h e m a t t e r i s h a r d l y
The c o m p e t i t i v e e n v i r o n m e n t faced by c o m m e r c i a l b a n k s ,
r - g a r d l e s s of c h a r t e r , is j u s t a s influenced - - and s o m e o b s e r v e r s would
say m o r e so - - b y i m p o r t a n t F e d e r a l r e g u l a t i o n s like Q, by the o p e r a t i n g
p o w e r s , including s p e c i f i c a l l y the b r a n c h i n g p o w e r s , of f e d e r a l l y c h a r t e r e d
s a v i n g s and loan a s s o c i a t i o n s and by the a c t i v i t i e s of o t h e r nonbank i n s t i t u t :n-
F e d e r a l S&Ls a r e not bound, a s you know, by any M c F a d d e n Act
o r by any s t r i c t u r e s about c o m p e t i t i v e equality laid down by the S u p r e m e
Court.
In o p e r a t i o n a l a r e a s , n a t i o n a l banks m a y be r e s t r a i n e d by State
law in only l i m i t e d s i t u a t i o n s while State b a n k s f r e q u e n t l y find t h e m s e l v e s
l i m i t e d to w h i c h e v e r law o r r e g u l a t i o n , F e d e r a l o r S t a t e , i s the m o r e
restrictive.
E v e n in s t r u c t u r a l m a t t e r s , n a t i o n a l a n t i t r u s t policy m a y
p r e v e n t c o m p l e t i o n of an a c q u i s i t i o n which h a s a l r e a d y p a s s e d m u s t e r
u n d e r State law o r State a d m i n i s t r a t i v e d e c i s i o n .
D e f e r e n c e to State law
i s , t h e r e f o r e , a " s o m e t i m e " thing in c o n g r e s s i o n a l p o l i c y , and I doubt
48
- 4 -
t h a t a p h i l o s o p h i c a p p e a l p i t c h e d on that b a s i s will p r o v e v e r y p e r s u a s i v e if C o n g r e s s s e e s a n e e d to o v e r r i d e State law in the e m e r g e n c y
s i t u a t i o n s e n v i s a g e d by t h e F e d e r a l R e s e r v e .
The F R B ' s bill does m a k e two c o n c e s s i o n s to State law.
First,
it would not p e r m i t m o r e t h a n one a c q u i s i t i o n in the s a m e State by the
s a m e o u t - o f - s t a t e holding c o m p a n y if State law p r o h i b i t s m u l t i b a n k h o l d ing c o m p a n i e s .
Second, it would not p e r m i t an e m e r g e n c y a c q u i s i t i o n
by an i n - s t a t e holding c o m p a n y if State law p r o h i b i t e d such an a c q u i s i tion.
Both c o n c e s s i o n s a r e c o n s i s t e n t with the B o a r d ' s c o n c e r n for a
p r o c o m p e t i t i v e r e s u l t in e a c h p o t e n t i a l u s e of i t s new a u t h o r i t y , although
i n s o m e f a c t u a l s i t u a t i o n s an a c q u i s i t i o n of a l a r g e bank in d i s t r e s s by an
i n - s t a t e holding c o m p a n y m i g h t be j u s t a s p r o c o m p e t i t i v e a s i t s a c q u i s i t i o n
by an o u t - o f - s t a t e holding c o m p a n y .
H o w e v e r , given the c l e a r t r e n d
t o w a r d s t a t e w i d e o p e r a t i o n of m u l t i b a n k holding c o m p a n i e s - - even in
h i t h e r t o unit banking S t a t e s - - the B o a r d ' s r e c o m m e n d a t i o n in t h i s r e g a r d
i s not u n r e a s o n a b l e .
No doubt l o c a l a m o t i o n s will r u n high if B a n k A m e r i c a
C o r p o r a t i o n o r C i t i c o r p a c q u i r e s a m a j o r bank o u t s i d e C a l i f o r n i a o r New
Y o r k when an i n - s t a t e holding c o m p a n y in the s a m e State a s the bank in
d i s t r e s s w a s r e a d y , willing and a b l e to c o m p l e t e the s a m e a c q u i s i t i o n - but t h a t s o r t of e m o t i o n i s not m u c h different than the r e a c t i o n we a l l
h e a r when a new bank e n t e r s a banking m a r k e t w h e r e e x i s t i n g b a n k s
49
- 5 -
previously had the competition all to themselves.
The examples of
that type of entry are so widespread, we can hardly fault the Federal
Reserve in making the choice it did in drafting the proposal now before
Congress.
I have even less trouble with the interstate banking issue which
is so obviously a part of the Federal Reserve's proposal.
There is
significant interstate banking going on today, even if a bank headquartered
in one State cannot establish deposit-receiving branches in another State.
A number of major banking corporations have "grandfather" rights in
other States under the Federal Bank Holding Company Act. Large banks
regardless of their headquarters location already compete for any significant commercial, international, correspondent or corporate trust business throughout the nation. The 1970 amendments to the Bank Holding
Company Act, and the Board's decisions under those amendments, have
•iven a strong impetus to the acquisition and development of nonbank
subsidiaries operating across State lines, many of them in retail as well
as wholesale lending activities. The Comptroller's recent rulings on
CBCTs, unless checked by the Congress or the courts, are likely to add
significant new pressures in the direction of nationwide, or at least
"ntorstate, banking. Full interstate banking will come in time, although
many banks and bank customers might prefer not to see -v.; t evoiatic
take place.
50
- 6 -
T h e F e d e r a l R e s e r v e ' s p r o p o s a l is a v e r y l i m i t e d ,
intermediate
s t e p in the d i r e c t i o n of full i n t e r s t a t e b a n k i n g , and I doubt that C o n g r e s s
w i l l be i m p r e s s e d by any c l a i m that the e n a c t m e n t of the F e d ' s b i l l , only
o c c a s i o n a l l y a p p l i c a b l e a s it would b e , will c a u s e i r r e p a r a b l e h a r m to
t h o u s a n d s of s m a l l e r , c o m m u n i t y b a n k s a c r o s s the l a n d .
Congress may
be c o n c e r n e d that u n d e r the bill the p e r c e n t a g e of c o m m e r c i a l bank a s s e t s
a l r e a d y h e l d by t h e l a r g e s t b a n k s in t h e c o u n t r y will i n c r e a s e significantly
by a c q u i s i t i o n r a t h e r than i n t e r n a l g r o w t h .
T h e l a r g e s t bank in t h e c o u n t r y ,
h o w e v e r , h a s l e s s t h a n 4 p e r r e n t of t h e t o t a l d o m e s t i c a s s e t s of the n a t i o n ' s
c o m m e r c i a l banking s y s t e m , and the a c q u i s i t i o n of even a $2 billion bank
in t r o u b l e would not i n c r e a s e t h a t p e r c e n t a g e by m o r e than 0. 2 p e r c e n t .
The United S t a t e s h a s one of the l e a s t c o n c e n t r a t e d c o m m e r c i a l banking
s y s t e m s in the w o r l d , and t h e e n a c t m e n t of the F e d e r a l R e s e r v e ' s p r o p o s a l
is not l i k e l y , by itself, to c h a n g e that s i t u a t i o n in any s u b s t a n t i a l w a y .
I c o n s i d e r the o t h e r four i s s u e s I h a v e identified in the F R B ' s bill
a s m o r e s e r i o u s and m o r e t r o u b l e s o m e .
The c l e a r t h r u s t of the F e d e r a l R e s e r v e ' s p r o p o s a l i s that if a
l a r g e bank is in failing condition, u n d e r no c i r c u m s t a n c e s should t h e r e
be an F D I C payout of i n s u r e d d e p o s i t s up to the s t a t u t o r y c e i l i n g , now
$40, 000 for m o s t d e p o s i t o r s .
R a t h e r , a t a k e o v e r by s o m e h e a l t h y bank
should be a r r a n g e d , at w h a t e v e r c o s t , so a s to avoid the d a m a g e to puc-li
51
- 7 -
confidence in both n a t i o n a l and i n t e r n a t i o n a l m a r k e t s which m i g h t follow
an FDIC payoff of a l a r g e i n s u r e d bank.
In point of fact, e v e r y f a i l u r e
o r n e a r - f a i l u r e in FDIC h i s t o r y of a bank with m o r e t h a n $100 m i l l i o n
in a s s e t s h a s b e e n r e s o l v e d eithex by m e a n s of a d e p o s i t a s s u m p t i o n
t r a n s a c t i o n o r by m e a n s of d i r e c t f i n a n c i a l a s s i s t a n c e to k e e p the bank
going, r a t h e r than by an FDIC payoff up to the i n s u r e d a m o u n t .
None-
t h e l e s s , the net effect of the b i l l ' s e n a c t m e n t would be to e l i m i n a t e any
u n c e r t a i n t y a s to the safety of d e p o s i t funds o v e r $40, 000 so long a s t h e
bank in which the d e p o s i t i s m a d e h a s m o r e than $500 m i l l i o n in a s s e t s .
We at the FDIC have a l r e a d y s t a t e d publicly o u r d e t e r m i n a t i o n
to e x p l o r e the p o s s i b i l i t y of a r r a n g i n g a d e p o s i t a s s u m p t i o n t r a n s a c t i o n
w h e n e v e r a bank of any s i z e f a i l s , p r e c i s e l y b e c a u s e the net r e s u l t of
such a t r a n s a c t i o n i s to p r o t e c t all d e p o s i t o r s 100 p e r c e n t , even if t h e i r
a c c o u n t s a r e o v e r the s t a t u t o r y i n s u r a n c e l i m i t .
We h a v e pointed out,
h o w e v e r , that a r r a n g i n g such a t a k e o v e r t r a n s a c t i o n is n e v e r a u t o m a t i c .
Under p r e s e n t l a w , the F D I C ' s d i s c r e t i o n in choosing b e t w e e n the s e v e r a l
m e t h o d s a v a i l a b l e to it when a l a r g e bank fails i s not u n l i m i t e d .
Further-
m o r e , if the failing bank p r e s e n t s significant r i s k of financial l o s s to an
a c q u i r i n g bank, e i t h e r in e a r n i n g s p e r f o r m a n c e o r c a p i t a l e x p o s u r e , a
willing p u r c h a s e r m a y not be a v a i l a b l e or the FDIC m a y conclude that the
p r i c e such a p u r c h a s e r i s willing to pay for the t r a n s a c t i o n is totally
52
- 8 -
i n a d e q u a t e to c o m p e n s a t e the F D I C for the n u m e r o u s g u a r a n t e e s a g a i n s t
l o s s which the t a k e o v e r bank m a y r e q u i r e b e f o r e p r o c e e d i n g .
In o t h e r
words, under present c i r c u m s t a n c e s , neither large depositors nor a
b a n k ' s m a n a g e m e n t can be fully confident that in the event of t r o u b l e
a l l of the b a n k ' s d e p o s i t s will be 100 p e r c e n t safe o r quickly a v a i l a b l e .
T h i s u n c e r t a i n t y h a s b e e n a significant d i s c i p l i n e on the m a n a g e m e n t p o l i c i e s of m o s t b a n k s , p r o b l e m o r n o n p r o b l e m ,
and~corporate
t r e a s u r e r s and o t h e r s u p p l i e r s of i n s t i t u t i o n a l funds a r e today r e i n f o r c i n g
that d i s c i p l i n e in the light of our four l a r g e bank f a i l u r e s and n e a r - f a i l u r e s
*/
in the p a s t four y e a r s .
At l e a s t with r e s p e c t to banks of the a s s e t s i z e
d e s c r i b e d in the b i l l , the net effect of i t s e n a c t m e n t m i g h t be to r e m o v e
that d i s c i p l i n e and e n c o u r a g e g r e a t e r r i s k s in a s s e t and l i a b i l i t y m a n a g e m e n t than m i g h t o t h e r w i s e be t a k e n .
As a bank r e g u l a t o r who is a l s o
c o n c e r n e d with the c a p a c i t y of the n a t i o n ' s deposit i n s u r a n c e r e s e r v e s
to a b s o r b l a r g e bank f a i l u r e s , I would r e g a r d any such d e v e l o p m e n t a s
both i m p r u d e n t and s h o r t s i g h t e d .
M o r e o v e r , e l i m i n a t i n g any u n c e r t a i n t y a s to the safety of d e p o s i t s
o v e r the i n s u r a n c e ceiling in b a n k s l a r g e r than a specified s i z e will tend
_*/ Bank of the C o m m o n w e a l t h , D e t r o i t , 19 72; United States National
Bank, San Diego, 1973; F r a n k l i n National Bank, New Y o r k , 1974; and
S e c u r i t y National Bank of Long I s l a n d , 1975.
53
- 9 -
to m a k e banks of l e s s e r s i z e " s e c o n d - c l a s s c i t i z e n s " a m o n g the n a t i o n ' s
b a n k s and will tend to r e i n f o r c e the t r e n d , c l e a r l y evident in 1974, t o w a r d
a " t w o - t i e r e d " banking s y s t e m .
By t h a t , I m e a n the p r e f e r e n c e of c o r p o -
r a t e and i n s t i t u t i o n a l t r e a s u r e r s , a f t e r United S t a t e s N a t i o n a l and F r a n k l i n
N a t i o n a l , for the l a r g e s t m o n e y - c e n t e r b a n k s in New Y o r k , Chicago and
San F r a n c i s c o a s c o m p a r e d with p e r f e c t l y sound banks of l e s s e r s i z e and
only r e g i o n a l c o v e r a g e .
T h i s p r e f e r e n c e showed up in 1974 in d e p o s i t
w i t h d r a w a l s and liquidity s t r a i n s at a n u m b e r of r e g i o n a l b a n k s and in the
r e l a t i v e l y g r e a t e r a s s e t g r o w t h of the l a r g e s t m o n e y - c e n t e r b a n k s .
As a
m a t t e r of s e l f - d e f e n s e , b a n k s with t o t a l a s s e t s n e a r the s i z e b r e a k
specified in the bill can be e x p e c t e d to a r g u e for an even l o w e r cutoff
point, t h e r e b y adding to the i m p e t u s for 100 p e r c e n t i n s u r a n c e of a l l
deposits.
F o r t u n a t e l y , in e v e r y r e v i e w of the d e p o s i t i n s u r a n c e p r o g r a m
to d a t e , C o n g r e s s h a s r e s i s t e d any g e n e r a l m o v e m e n t t o w a r d s 100 p e r c e n t
i n s u r a n c e for all d e p o s i t s and h a s r e a f f i r m e d i t s i n i t i a l d e c i s i o n in favor
of l i m i t e d c o v e r a g e .
Since the F R B p r o p o s a l r u n s c o u n t e r to t h i s l o n g -
standing p o l i c y , i n s o f a r a s $500 m i l l i o n b a n k s a r e c o n c e r n e d , I think
C o n g r e s s will be p e r f e c t l y j u s t i f i e d in looking h a r d at the d o l l a r cutoff
s u g g e s t e d and in seeking to l i m i t the c o v e r a g e of the bill to the s m a l l e s t
n u m b e r of banks n e c e s s a r y to r e m e d y s o m e d e m o n s t r a t e d s h o r t c o m i n g
in the p r e s e n t s y s t e m of r e s o l v i n g the p r o b l e m s of l a r g e banks in d i s t r e s s .
54
- io What, then, h a s the e x p e r i e n c e of the l a s t few y e a r s told us about
the c a p a c i t y of the p r e s e n t s y s t e m in this r e g a r d ?
F i r s t , the FDIC with
significant F e d e r a l R e s e r v e a s s i s t a n c e s u c c e s s f u l l y a r r a n g e d d e p o s i t
a s s u m p t i o n t r a n s a c t i o n s for the n a t i o n ' s two l a r g e s t bank f a i l u r e s and
d i r e c t f i n a n c i a l a s s i s t a n c e to a t h i r d l a r g e bank to p r e v e n t i t s f a i l u r e .
T h e s e t h r e e banks r a n g e d in a s s e t s i z e f r o m s o m e t h i n g o v e r $ 1 . 2 billion
in the c a s e of the Bank of the C o m m o n w e a l t h and United S t a t e s National
Bank to $ 3 . 6 billion in the c a s e of F r a n k l i n National Bank.
Second, the
a c t u a l t r a n s f e r of d e p o s i t s f r o m the failed bank to the a s s u m i n g bank took
p l a c e s m o o t h l y and efficiently within h o u r s of the c l o s i n g of both United
S t a t e s N a t i o n a l Bank and F r a n k l i n National Bank, with no panic at a l l
a m o n g the 1, 0 0 0 , 0 0 0 d e p o s i t o r s of the two i n s t i t u t i o n s .
Literally hundreds
of e x a m i n e r s and o t h e r p e r s o n n e l in all t h r e e F e d e r a l a g e n c i e s w o r k e d
c o o p e r a t i v e l y at the t i m e of c l o s i n g to m a k e t h i s r e s u l t p o s s i b l e .
Third,
it took a significant a m o u n t of t i m e in all t h r e e c a s e s to w o r k out a s a t i s f a c t o r y solution in a d v a n c e :
slightly o v e r t h r e e m o n t h s f r o m F D I C ' s
i n i t i a l i n v o l v e m e n t in the c a s e of F r a n k l i n National Bank, about seven
w e e k s a f t e r F D I C ' s i n i t i a l i n v o l v e m e n t in the c a s e of United S t a t e s N a t i o r ^ l
Bank, and about seven m o n t h s in the l e s s - p r e s s i n g c a s e of Bank of the
Commonwealth.
In the c a s e of the two f a i l u r e s , the t i m e r e q u i r e d s e e m s
to have v a r i e d in d i r e c t p r o p o r t i o n to the c o m p l e x i t y and v o l u m e of the
p r o b l e m s facing the bank in t r o u b l e , the d e g r e e of i n t e r e s t shown - - and
55
- ii -
the r i s k s faced - - b y potential acquiring banks, and the extent and nature
of I'DIC or F e d e r a l R e s e r v e a s s i s t a n c e needed to make the transaction
f e a s i b l e from the point of view of potential a c q u i r e r s .
Fourth, the total
FDIC outlay in t h e s e three c a s e s to date (most of which it expects to
r e c o v e r in time) amounted to about $510 m i l l i o n , an amount equal to
roughly o n e - s i x t h of the aggregate deposits in the three banks.
Each
outlay was funded e s s e n t i a l l y out of the FDIC's current r e v e n u e s , now
running at about $1 billion per y e a r , rather than from the principal of
the deposit insurance trust fund accumulated s i n c e 1933.
The s i z e of
that trust fund, now $6. 2 billion, a s well as the Corporation's statutory
right to call on the T r e a s u r y for $3 billion m o r e if this i s needed for
insurance p u r p o s e s , i s considerable a s s u r a n c e that the FDIC, financially,
can handle m o r e frequent and even l a r g e r bank failures and n e a r - f a i l u r e s
+har the t h r e e I have m e n t i o n e d .
T h e s e t h i n g s s a i d , the fact r e m a i n s that d e f e n s i b l e s o l u t i o n s
b e c o m e m o r e difficult to h a m m e r out the l a r g e r a bank in d i s t r e s s i s .
T h e r e a r e s e v e r a l r e a s o n s for ••1 i s .
If a s t a t u t o r y m e r g e r o r a c q u i s i t i o n
i s c o n t e m p l a t e d , without any f o r m of F e d e r a l R e s e r v e o r FDIC a s s i s t a n c e ,
the t a k e o v e r bank m u s t be l a r g e enough to a b s o r b the r i s k s of the failing
bank and m u s t h a v e , o r be able to obtain, sufficient capita] to s u p p o r t a
sudden e x p a n s i o n of i t s d e p o s i t b a s e .
T h e s e r i s k s a r e likely to i n c h . d e
significant o v e r s e a s e x p o s u r e s the l a r g e r the s i z e of the p r o b l e m bank,
56
- 12 -
and even the n a t i o n ' s l a r g e s t b a n k s m a y be quite unwilling to t a k e on
s i z e a b l e f o r e i g n e x c h a n g e r i s k s , for e x a m p l e , without G o v e r n m e n t
support.
E v e n if FDIC f i n a n c i a l s u p p o r t o r i n d e m n i t i e s a r e p r o v i d e d ,
the m a n a g e m e n t of t h e t a k e o v e r bank will p r o b a b l y a l s o be e x p e c t e d to
t a k e o v e r a s u b s t a n t i a l p o r t i o n of the a s s e t s and b r a n c h offices of the
failing bank.
Since t h e r e a r e only 107 b a n k s with d o m e s t i c a s s e t s of
$1 b i l l i o n o r m o r e , only 51 with d o m e s t i c a s s e t s of $2 billion o r m o r e
*/
and only 27 b a n k s with d o m e s t i c a s s e t s of $3 billion o r m o r e ,
the
n u m b e r of h e a l t h y banks c a p a b l e of even a G o v e r n m e n t - a s s i s t e d t a k e o v e r
of a l a r g e bank in d i s t r e s s d e c r e a s e s r a p i d l y the l a r g e r t h e failing bank
is.
Under e x i s t i n g l a w , of c o u r s e , none of t h e s e l a r g e r b a n k s o r t h e i r
p a r e n t holding c o m p a n i e s would be e l i g i b l e to a c q u i r e such a p r o b l e m
bank u n l e s s they o p e r a t e d in t h e s a m e S t a t e , even a s s u m i n g the t e r m s
of t h e t r a n s a c t i o n could be w o r k e d out to t h e i r s a t i s f a c t i o n .
The a r i t h m e t i c of d i m i n i s h i n g n u m b e r s in seeking c a n d i d a t e s for
a d e p o s i t t a k e o v e r w a s v e r y m u c h at w o r k in the F r a n k l i n National Bank
case last summer.
Twenty b a n k s and bank holding c o m p a n i e s , e a c h of
which w a s b e l i e v e d to h a v e significant f i n a n c i a l and m a n a g e r i a l r e s o u r c e s ,
w e r e c o n t a c t e d i n i t i a l l y to d e t e r n i n e the d e g r e e of t h e i r p o t e n t i a l i n t e r e s t .
*/
As of O c t o b e r 15, 1974.
57
- 13 -
A n t i t r u s t c l e a r a n c e s w e r e o b t a i n e d so that joint v e n t u r e s m i g h t be c o n s i d e r e d and o r g a n i z e d if the s m a l l e r b a n k s o r bank holding c o m p a n i e s
a m o n g the twenty felt t h e m s e l v e s unable to p r o c e e d a l o n e .
Of t h o s e
c o n t a c t e d , only four b e c a m e s e r i o u s l y i n t e r e s t e d and u l t i m a t e l y s u b m i t t e d bids - - t h r e e of t h e m u n d e r an a n t i t r u s t cloud.
got off the g r o u n d .
No joint v e n t u r e s
And we w e r e e x t r e m e l y f o r t u n a t e , d e s p i t e t h e s e
h a n d i c a p s , that F r a n k l i n National Bank w a s h e a d q u a r t e r e d in New York
State w h e r e t h e r e w a s a r e l a t i v e l y l a r g e n u m b e r of p o t e n t i a l s u i t o r s ,
i n - s t a t e , to be c o n t a c t e d .
A l a r g e r pool of p o t e n t i a l s u i t o r s would have b e e n v e r y d e s i r a b l e
l a s t s u m m e r , and t h e F R B ' s p r o p o s a l would c e r t a i n l y m a k e a b r o a d e r
canvass possible.
T h i s is not the s a m e a s saying the final r e s u l t would
h a v e b e e n a c h i e v e d in a s h o r t e r span of t i m e .
In fact, c o n t a c t i n g p o t e n -
t i a l o u t - o f - s t a t e s u i t o r s a s well a s i n - s t a t e s u i t o r s , and n e g o t i a t i n g with
a l a r g e r g r o u p than we did in an effort to a r r i v e at a u n i f o r m bid p a c k a g e ,
m i g h t well have t a k e n l o n g e r than the p r o c e s s a c t u a l l y did.
On the o t h e r
hand, if a significantly l a r g e r n u m b e r of p o t e n t i a l s u i t o r s had b e e n i d e n t i fied, it m i g h t c o n c e i v a b l y have b e e n p o s s i b l e to a r r a n g e a deposit t a k e o v e r
without any f o r m of G o v e r n m e n t a s s i s t a n c e or it m i g h t have b e e n p o s s i b l e
for t h e FDIC and the F e d e r a l R e s e r v e to have d i c t a t e d the t e r m s of the
t r a n s a c t i o n and s t i l l h a v e had one o r two banks left which w e r e willing to
bid.
In m y view, only if one of t h e s e two c o n d i t i o n s e x i s t e d would the
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p r o c e s s of finding a final solution to the F r a n k l i n affair h a v e b e e n
' s h o r t e n e d c o n s i d e r a b l y " a s the F R B c l a i m s .
Nonetheless,
enlarging
t h e pool of p o t e n t i a l s u i t o r s r e g a r d l e s s of the s p e e d of r e s o l u t i o n , i s
l i k e l y to i m p r o v e significantly the p r o s p e c t s of s u c c e s s f u l l y c o n s u m m a t i n g a d e p o s i t a s s u m p t i o n t r a n s a c t i o n at a l l , and t h i s i s the b a s i c
r e a s o n I s u p p o r t the c o n c e p t of the F R B p r o p o s a l .
Reviewing the e x p e r i e n c e of t h e l a s t five y e a r s , h o w e v e r , I would
h a v e to i n f o r m the C o n g r e s s t h a t in m y j u d g m e n t F D I C , u n d e r e x i s t i n g
l a w , can p r o b a b l y handle s u c c e s s f u l l y and with r e a s o n a b l e d i s p a t c h the
p o t e n t i a l f a i l u r e of v i r t u a l l y any bank with l e s s t h a n $2 billion in a s s e t s
and, depending on the c i r c u m s t a n c e s , b a n k s of even l a r g e r s i z e .
If the
C o n g r e s s w i s h e s to n a r r o w t h e c o v e r a g e of the F R B bill to t h e a r e a of
c l e a r e s t n e e d , it can e a s i l y do so by r a i s i n g the a s s e t cutoff p r o p o s e d by
t h e F R B to at l e a s t $2 b i l l i o n .
At t h a t f i g u r e , only 51 banks in 15 of t h e
*/
nation's most industrialized States
would have b e e n p o t e n t i a l l y s u b j e c t
to a c q u i s i t i o n u n d e r the b i l l ' s p r o v i s i o n s a s of O c t o b e r 15, 1974.
This
m i g h t be c o n t r a s t e d with t h e 208 b a n k s in 38 S t a t e s p o t e n t i a l l y s u b j e c t
to a c q u i s i t i o n u n d e r the $500 m i l l i o n cutoff p r o p o s e d by the F R B .
* I Arizona, California, Georgia, Illinois, Maryland, M a s s a c h u s e t t s ,
M i c h i g a n , New Y o r k , North C a r o l i n a , Ohio, O r e g o n , P e n n s y l v a n i a ,
T e x a s , Washington and W i s c o n s i n .
59
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P r o p o n e n t s of a l o w e r cutoff than even the $500 m i l l i o n p r o p o s e d
by the F R B h a v e pointed out t h a t in each of the r e m a i n i n g 12 S t a t e s the
l a r g e s t c o m m e r c i a l bank h a s l e s s t h a n $500 m i l l i o n in a s s e t s and that
such b a n k s at l e a s t should a l s o be c o v e r e d u n d e r t h i s p r o p o s e d c h a n g e in
t h e law.
I d i s a g r e e with t h i s a r g u m e n t , l a r g e l y b e c a u s e it i g n o r e s two
options FDIC h a s u n d e r p r e s e n t law in dealing with any such bank that
finds itself in a failing condition - - e i t h e r one of which I a m s u r e the FDIC
B o a r d of D i r e c t o r s could and would u s e in p r e f e r e n c e to a s t a t u t o r y payoff
up to the i n s u r a n c e l i m i t .
The f i r s t i s d i r e c t FDIC f i n a n c i a l a s s i s t a n c e ,
u n d e r a p p r o p r i a t e s a f e g u a r d s to i n s u r e c o r r e c t i o n of t h e b a n k ' s p r o b l e m s
and u l t i m a t e r e p a y m e n t , d e s i g n e d to k e e p the bank o p e r a t i n g a s an i n d e pendent institution.
T h i s w a s the option s e l e c t e d to p r e v e n t the f a i l u r e of
t h e $1 billion Bank of the C o m m o n w e a l t h in 1972, at t h a t t i m e not even
the l a r g e s t , but the f o u r t h l a r g e s t , bank in the D e t r o i t m e t r o p o l i t a n a r e a .
When that a s s i s t a n c e w a s g r a n t e d , Michigan law did not p e r m i t the e x p a n sion of m u l t i b a n k holding c o m p a n i e s , and the FDIC B o a r d found the b a n k ' s
p r e s e r v a t i o n a s a significant c o m p e t i t o r in a m a j o r m a r k e t to be e s s e n t i a l
for " a d e q u a t e banking s e r v i c e in the c o m m u n i t y . " By analogy, I a m c o n fident a s i m i l a r finding could be m a d e for the l a r g e s t bank in a S t a t e , and
p o s s i b l y i t s n e a r e s t c o m p e t i t o r s a s w e l l , if t h e r e a p p e a r e d to be no f e a s i b l e
p o s s i b i l i t y of a p r o c o m p e t i t i v e a c q u i s i t i o n by e i t h e r an i n - s t a t e o r an outof-state organization.
The second option a v a i l a b l e to the FDIC u n d e r such
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c i r c u m s t a n c e s would be to s t i m u l a t e the e m e r g e n c y c h a r t e r i n g of a
r.ew bank with c a p a b l e m a n a g e m e n t , p a r t i a l l y c a p i t a l i z e d with an FDIC
a d v a n c e , and to p e r m i t that bank to a c q u i r e the d e p o s i t s of the failing
bank in e x c h a n g e for the liquid a s s e t s of the p r o b l e m bank and b a l a n c i n g
FDIC cash.
The equity c a p i t a l which the o r g a n i z e r s of such a new bank
would h a v e to supply u n d e r t h e s e c i r c u m s t a n c e s m i g h t a p p r o x i m a t e only
$5 m i l l i o n o r so for e a c h $100 m i l l i o n in d e p o s i t s to be a s s u m e d
--a
s u m r e a d i l y within the r e a c h of m a n y g r o u p s .
The B o a r d ' s p r o p o s a l r a i s e s in a d i r e c t way the agency r e s t r u c t u r i n g i s s u e with which it h a s b e e n w r e s t l i n g s i n c e l a s t O c t o b e r , including
s p e c i f i c a l l y the F R B ' s own r o l e in bank s u p e r v i s i o n and i t s r e l a t i o n s h i p
with o t h e r bank s u p e r v i s o r s .
You will have noted the p o w e r to a p p r o v e
an i n t e r s t a t e a c q u i s i t i o n of the type d e s c r i b e d h a s b e e n left, in the F R B
p r o p o s a l , solely to the d i s c r e t i o n of i t s B o a r d of G o v e r n o r s u n d e r the
broadest possible standards.
Nothing in the l a n g u a g e p r o p o s e d would
r e q u i r e the B o a r d , b e f o r e a c t i n g , to r e c e i v e a c e r t i f i c a t i o n f r o m the
p r i m a r y s u p e r v i s o r of the bank in d i s t r e s s c o v e r i n g e i t h e r t h e condition
of the bank which r e q u i r e s e m e r g e n c y a c t i o n o r the m e r i t s of the proposera c q u i s i t i o n when c o m p a r e d to o t h e r p o s s i b l e s o l u t i o n s .
Even g r a n t i n g
that the B o a r d would be likely to c o n s u l t the C o m p t r o l l e r of the C u r r e n c y
if the bank in d i s t r e s s w e r e a l a r g e n a t i o n a l bank o r the a p p r o p r i a t e State
S u p e r v i s o r if a S t a t e - c h a r t e r e d bank w e r e involved, nothing in the lan^u ^^
61
- 17 -
of the bill p r o p o s e d would r e q u i r e such a d v i c e to be h e e d e d .
Similarly,
even though the p r o p o s e d a c q u i s i t i o n m a y be contingent on FDIC financ i a l a s s i s t a n c e o r i n d e m n i t i e s , nothing in the bill r e q u i r e s t h e B o a r d to
c o n s u l t with, or h e e d the a d v i c e of, the FDIC p r i o r to a p p r o v i n g the
transaction.
The bill i g n o r e s the h a r d q u e s t i o n s which m a y a r i s e if a c h o i c e
m u s t be m a d e b e t w e e n s e v e r a l eligible o u t - o f - s t a t e holding c o m p a n i e s
all vying for the o p p o r t u n i t y of p u r c h a s i n g the bank in d i s t r e s s .
By i t s
p o w e r to a p p r o v e , the B o a r d of G o v e r n o r s can undoubtedly p r e d e t e r m i n e
the s u c c e s s f u l s u i t o r .
Will t h a t c h o i c e be m a d e , for e x a m p l e , on the
b a s i s of which lead bank, in the B o a r d ' s view, is m o s t a d e q u a t e l y c a p i t a l i z e d even if that j u d g m e n t differs f r o m the j u d g m e n t of the lead b a n k ' s
primary supervisor?
Will that c h o i c e p o s s i b l y depend on which l e a d
bank is m o s t c l o s e l y a d h e r i n g to the c r e d i t " g u i d e l i n e s " of the m o m e n t ,
laid down by the B o a r d in the e x e r c i s e of i t s m o n e t a r y functions?
Will
the B o a r d tend to p r e f e r t h a t bank holding c o m p a n y m o s t of w h o s e s u b s i d i a r y banks a r e F e d e r a l R e s e r v e m e m b e r s r a t h e r than the holding
c o m p a n y with a g r e a t e r p r o p o r t i o n of n o n m e m b e r s ?
How will the B o a r d
weigh a choice b e t w e e n two equally p r o c o m p e t i t i v e p r o p o s a l s - - one f r o m
an i n - s t a t e holding c o m p a n y and one f r o m an o u t - o f - s t a t e holding c o m p a n y ?
If the p r i m a r y s u p e r v i s o r is a t t e m p t i n g to w o r k out a solution u n d e r the
Bank M e r g e r Act, will the B o a r d defer s o m e a l t e r n a t i v e bank holding
56-713 O - 75 - 5
62
- 18 -
a c q u i s i t i o n u n d e r the p r o p o s e d b i l l , o r will it t h r e a t e n the u s e of i t s
new p o w e r in an effort to s p e e d up a c t i o n by the p r i m a r y s u p e r v i s o r ?
If the p r o b l e m bank i s a l a r g e n o n m e m b e r bank, will the B o a r d p r e f e r
t h e u s e of its new a u t h o r i t y to the e x t e n s i o n of a d i r e c t or conduit loan
f r o m the F e d e r a l R e s e r v e d i s c o u n t window?
Q u e s t i o n s like t h e s e a r e i n h e r e n t in any bill which v e s t s v i r t u a l l y
u n r e s t r a i n e d p o w e r in the B o a r d of G o v e r n o r s to d e t e r m i n e when, o r
when not, to u s e the new a u t h o r i t y it h a s r e q u e s t e d .
I would s u g g e s t that
t h e only way such conflicts can be c o m p l e t e l y avoided i s by r e q u i r i n g the
c o n c u r r e n c e of the p r i m a r y s u p e r v i s o r b e f o r e the B o a r d a c t s .
If FDIC
f i n a n c i a l a s s i s t a n c e or i n d e m n i t i e s a r e an i n t e g r a l p a r t of such an outo f - s t a t e a c q u i s i t i o n , then the F D I C ' s c o n c u r r e n c e should a l s o be r e q u i r e d
b e f o r e the B o a r d a c t s .
If the B o a r d finds t h i s r e s t r a i n t on i t s p r o p o s e d a u t h o r i t y to be
u n p a l a t a b l e , I will r e c o m m e n d that the C o n g r e s s defer action on the whole
p r o p o s a l until it r e v i e w s the e n t i r e s t r u c t u r e of bank r e g u l a t i o n at the
F e d e r a l l e v e l and h a s d e t e r m i n e d w h e t h e r or not it w i s h e s the F e d e r a l
R e s e r v e to continue to have r e s p o n s i b i l i t i e s in m a t t e r s of bank s u p e r v i sion in addition to i t s r e s p o n s i b i l i t i e s in the m o n e t a r y field.
To e n a c t
the F R B p r o p o s a l without a m e n d m e n t s b e f o r e that d e t e r m i n a t i o n is m a d e
would be a c l e a r c a s e of prejudging the u n d e r l y i n g i s s u e of r e g u l a t o r y
s t r u c t u r e o r letting it go by default.
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- 19 -
The a b s e n c e of m e a n i n g f u l s t a n d a r d s for the e x e r c i s e of t h e
B o a r d ' s d i s c r e t i o n a l s o r a i s e s the q u e s t i o n of w h e t h e r the f a i r n e s s of
che c o n s i d e r a t i o n offered to d e b e n t u r e h o l d e r s and s h a r e h o l d e r s of the
bank to be a c q u i r e d should play any p a r t in t h e B o a r d ' s d e c i s i o n to
a p p r o v e an e m e r g e n c y a c q u i s i t i o n by an o u t - o f - s t a t e bank holding c o m pany.
The F D I C , in the e x e r c i s e of i t s r e s p o n s i b i l i t i e s a s p o t e n t i a l
r e c e i v e r in t h e c a s e of a bank which i s thought likely to fail, h a s a
f i d u c i a r y duty to obtain the h i g h e s t p r i c e it p o s s i b l y can for the going
c o n c e r n value of the p r o b l e m b a n k ' s b u s i n e s s .
The C o r p o r a t i o n h a s
a t t e m p t e d to c a r r y out t h i s duty by seeking to e n c o u r a g e at l e a s t two
p r o s p e c t i v e p u r c h a s e r s to bid on a u n i f o r m b a s i s for the d e p o s i t s , a s s e t s
and offices of the p r o b l e m bank which a r e to be t r a n s f e r r e d .
Our e x p e r i -
ence h a s b e e n that a n e g o t i a t e d d e a l with only one i n s t i t u t i o n , o r a bidding
p r o c e d u r e in which t h e r e is known to be only one b i d d e r , a l m o s t n e v e r
D i o d u c e s a f a i r p r i c e for the r e c e i v e r s h i p e s t a t e o r for the d e b e n t u r e
h o l d e r s and s h a r e h o l d e r s of the c l o s e d bank.
Will the B o a r d of G o v e r n o r s ,
u n d e r i t s p r o p o s e d b i l l , be r e q u i r e d to follow any s i m i l a r p r o c e d u r e ?
Or
will it be p e r m i t t e d to c o n s i d e r the s p e e d of r e s o l u t i o n m o r e i m p o r t a n t
than the f a i r n e s s of the c o n s i d e r a t i o n offered?
Obviously, t h e s e two c o n -
s i d e r a t i o n s m a y p r e s e n t an i n s o l u b l e d i l e m m a in a p a r t i c u l a r c a s e , but
it i s no a n s w e r to s u g g e s t that the c o n s e n t of the p r o b l e m b a n k ' s d e b e n t u r e
h o l d e r s and s h a r e h o l d e r s will have to be obtained in any event b e f o r e t v e
64
- 20 -
B o a r d of G o v e r n o r s i s c a l l e d upon to a c t .
T h i s i g n o r e s the e m e r g e n c y
n a t u r e of t h e p r o p o s e d a c q u i s i t i o n and the fact that the C o m p t r o l l e r of
i;he C u r r e n c y and m a n y State S u p e r v i s o r s h a v e the a u t h o r i t y to waive
s h a r e h o l d e r o r d e b e n t u r e h o l d e r a p p r o v a l in a p p r o p r i a t e c a s e s .
After c o n s i d e r i n g all of t h e s e u n d e r l y i n g i s s u e s , it will be m y
r e c o m m e n d a t i o n to the C o n g r e s s t h a t it p a s s the F R B p r o p o s a l only
a f t e r it is a m e n d e d to i n c r e a s e t h e a s s e t cutoff f r o m $500 m i l l i o n to
$2 b i l l i o n and to r e q u i r e in all c a s e s the p r i o r c o n c u r r e n c e of the p r i m a r y s u p e r v i s o r of the bank to be a c q u i r e d .
In t h o s e c a s e s w h e r e FDIC
f i n a n c i a l a s s i s t a n c e o r i n d e m n i t i e s a r e c o n t e m p l a t e d , the bill should be
a m e n d e d to r e q u i r e the p r i o r c o n c u r r e n c e of the FDIC a s w e l l .
In m y view, t h e s e a m e n d m e n t s will s u b s t a n t i a l l y m i n i m i z e the
d a m a g e which m i g h t o t h e r w i s e be done to the h i s t o r i c a l p a t t e r n of State
p r i m a c y in m a t t e r s of bank s t r u c t u r e , to the concept of l i m i t e d d e p o s i t
i n s u r a n c e , to the r e g u l a t o r y s t r u c t u r e we p r e s e n t l y have and to the
s h a r e h o l d e r s and d e b e n t u r e h o l d e r s of t h e bank in d i s t r e s s .
They w i l l ,
m o r e o v e r , n a r r o w the c o v e r a g e of the bill to t h o s e s i t u a t i o n s in which
t h e n e e d for additional r e g u l a t o r y flexibility in the c a s e of l a r g e b a n k s
in d i s t r e s s h a s b e e n m o s t c l e a r l y d e m o n s t r a t e d .
65
Senator M C I N T Y R E . Governor Holland, would you respond to the
suggestion that the cutoff level be raised from 500 million to 2 billion?
Mr. HOLLAND. Well, Mr. Chairman, if we had to choose which way
to move that number, we would move it down rather than up.
Senator M C I N T Y R E . Well, that's interesting because I have a letter
here from a constituent up in New Hampshire who says, and I quote,
" I t is important that the asset test be reduced from 500 million, where
it presently stands, to no minimum at all or if need be 50 million or
100 million. As you are aware, a 500 million minimum wipes
New Hampshire right off the map. If one of the larger banks got in
trouble here, it would make sense to have outsiders bidding.''
Mr. HOLLAND. I don't want to be part of a proposal that wipes New
Hampshire off the map.
Senator M C I N T Y R E . He meant only in a financial way.
Mr. HOLLAND. Our feeling about it is this. The risks one runs in
setting the number too high are entirely disproportionate to the
benefits one gains. If you set the number too small—smaller than it
needs to be—what will happen is that the provision will not be used,
because there will continue to be in those cases banks within the State
or sources of capital within the State working with the primary supervisor who are able to bolster the bank, sustain the bank, or reinvigorate
the bank. The bank will continue on, and this provision will not be
used. So that risk, it seems to me, doesn't represent all that much
damage. But if you set the number too high, and, as a result, we find
that we have an institution in trouble which we can't handle in any
other way than by this out-of-State acquisition arrangement, and we
don't have this way either, that would turn out to be a real tragedy
for the locality. And so if we were going to change the number we would
lower it, not raise it.
Senator M C I N T Y R E . Well, Mr. Wille, your testimony seems to
indicate that any problem situation with a bank of 2 billion in assets
or less is one that you can handle; and I want to ask you, weren't
you really lucky in the Franklin National Bank Case?
Mr. W I L L E . Well, I want to talk about the historical record here
because I think that that is important. Given the emergency basis
on which this proposal has been made by the Fed, I don't think that
there has been any question of the F D I C ' s ability to respond quickly.
In the case of a bank of the size that your constituent has raised
in his letter to you, of $50 million to $100 million, we have an accumulated insurance fund of more than $6.2 billion and we have a
call on the Treasury for $3 billion more. In addition, we are adding
to the F D I C insurance fund about $500 million a year. I n resolving
the problems of those smaller banks, whether they are below $100
million or $500 million or wherever that intermediate figure is, it is
not a difficult matter for the F D I C to come up very promptly with
the kind of cash needed to balance off a purchase and assumption
transaction. We recently had a $80 million bank in Illinois go down,
as you know, the State Bank of Clearing. That was resolved in the
space of 24 hours; a new bank was chartered and capitalized, and it
took over and assumed the deposit liabilities of that bank the Monday
after a Saturday failure. We have other instances of that. We did the
same thing in the Northern Ohio Case, a bank of about $125 million
or $130 million. Recently last year, the American Bank and Trust
66
of Orangeburg, S.C. was handled in the same way, a bank of about
$150 million in assets. So that I think that with regard to these banks—
and certainly any others that are below the cutoff suggested by the
Fed—there is no difficulty insofar as F D I C ' s coming up quickly
with the necessary cash and capitalization which may be needed
to continue banking services in a given community. That is true
under existing law. Moreover, with respect to those large banks in
States such as New Hampshire that don't have a bank of $500 million
as their largest bank, and there are some 12 States in which this is
the case, I have stated that if the largest bank in a State or even its
nearest competitors are in difnculty, I have no doubt that the F D I C
would attempt to work out a solution such as the one we worked
out at the Bank of the Commonwealth in Detroit 4 years ago. The
Bank of the Commonwealth was a billion dollar bank.
Michigan had a holding company moratorium at that time. The
options available to us by way of acquisition were accordingly limited
to the city of Detroit, and we came to the conclusion that it would be
anticompetitive and not in the public interest to permit the Bank
of the Commonwealth to be merged into one of the larger Detroit
banks. We came to the conclusion by way of that analysis that the
Bank of the Commonwealth was competitively essential for adequate
banking service in the Detroit community and we supplied financial
assistance directly to the Bank of the Commonwealth to keep it going,
the amount of which was $35.5 million. So the effect of our action was
to keep and preserve a billion dollar institution with only $35.5
million and that rescue effort has been successful.
If we look at the record, therefore, the question, it seems to me, if
you are considering the emergency nature of this proposal and possible
contingencies in the future, is to what extent the F D I C has been
inhibited in its solution of a failing bank situation. As my statement
indicates, I would be the first to say that as a bank problem becomes
larger the problem of resolution becomes more severe because the
possible partners for a successful takeover are fewer in numbers. The
Fed's proposal would help in those limited situations.
The Franklin National Bank was actually a $4 billion bank, at
least when we started down the road to such a solution. By the time
it failed it had deposits of only $1.5 billion more or less, a Federal
Reserve loan of $1.7 billion and total assets of around $3.6 billion.
That kind of a bank does present problems. There are no two ways
about it. You need a very large bank to manage such a takeover.
I t would have been helpful if we had been able to include some of the
largest banks in California or Chicago or Texas in our potential list
of the suitors that we tried to get interested in the Franklin situation.
Conceivably one of them might have been willing to merge or
acquire the Franklin Bank under the Bank Holding Company Act
without F D I C guarantees or financial assistance by way of a capital
note. I have my doubts about that, but I think at least it would have
been more likely than under the present law we have, where we had
to look to the organizations in New York or who were capable of
establishing a bank in New York.
T h a t limited us primarily to the larger banking organizations in
New York, of which there were some upstate holding companies
as well as downstate banks included in our list of 20. I t also meant
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that we had to look at the foreign-owned banks that were subsidiaries
of major European banks, and we actually inquired as to Canadianowned subsidiaries and Japanese-owned subsidiaries as well.
But I would not be hesitant at all to say that a $4 billion bank clearly
did present some problems to us. We had problems to a degree in the
United States National Bank in San Diego, but I think partly, even
though that bank was considerably smaller, the problems that we had
were those of newness rather than of complexity or of international
ramifications, which were so much more apparent in the Franklin
situation.
My judgment, coming at this from the point of view of the historical
experience of the F D I C , is that in cases where the assets of the bank
are below $2 billion we are likely to be able to handle that with considerable expedition and dispatch, particularly in light of the experience we have gained both in the United States National and Franklin.
That's a judgment question. I don't say that my judgment necessarily
is the only one. I think that what your constituent is talking about is
his fear of the two-tier effect, which is precisely the thing that troubles
me about the whole proposal, if you have a dollar cutoff in it.
The trouble Director LeMaistre, and I am sure many others are
concerned about, is the apparent favored status that banks over the
cutoff would have in the event there's trouble, and there is no real way
of getting around that unless you set the figure at zero.
So that in a sense your constituent is correct. But if you set the
cutoff at zero, what you have got is the potential acquisition of some
14,500 banks, not all of which will be in trouble, thank goodness, but
nevertheless 14,500 banks, all of which, if they do get into trouble,
might be handled on an emergency basis, with an interstate acquisition
under a bill with no dollar cutoff.
To the extent the power is used under those circumstances, you have
in effect created interstate branch banking. And I myself think that
we are heading in that direction anyway, but obviously it will be a very
emotional issue for many community banks around the country if
they felt that that kind of a provision could create interstate competition within their own communities.
So balancing out these different factors, which I think are conflicting, I come out at a higher cutoff. Others come out at a lower cutoff.
I might add that if you go to zero as cutoff, what you have really said
is that you might just as well forget a limited Government insurance
program of $40,000 or $100,000 for public funds. What you have got
in that case is basically 100-percent insurance of all deposits, and I am
not at all certain that if Congress had to address that issue directly
it would move in that direction.
Putting the cutoff at zero means, in effect, that the Government is
guaranteeing the banking system against failure.
Senator M C I N Y T R E . Senator Proxmire.
Senator PROXMIRE. Gentlemen, you know that this bill was introduced by Senator Mclntyre and myself by request, and I emphasize
by request. I am not an enthusiastic supporter of this bill. In fact, I
think that, on the basis of what I have heard and seen so far, we might
be better off not passing this bill. There are several problems. One is
that we have had a very severe, steady relentless increase in concentration of our big banks. I have before me a chart showing the increased
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percentage of total deposits held by the 10 largest, 25 largest and so
forth. The 10 largest banks have increased their percentage every
5-year period consistently without exception, and in the last year alone
they went from 25.6 percent of all deposits to 28.9 percent, a colossal
jump.
Furthermore, there has been, of course, an immense growth in the
deposits of our banking system but fantastic with the 10 largest.
They have gone from $31 billion in deposits in 1950 to $249 billion in
deposits in 1974, outpacing inflation, anything that you can mention,
and every year the growth seems to be bigger and the concentration
heavier.
I am concerned that this bill, if it became law, might tend to concentrate even more the assets of our banks. Mr. Holland, Mr. Wille
has said that the F D I C could handle successfully the potential failure
of banks that have less than $2 billion in assets. In fact, they could
handle some of those that have a little more than $2 billion. In view of
that and in view of the fact that the F D I C is the insurer of all the
banks in the country, the Agency that ultimately takes the risk of
failure, I am not sure that there is the need for this legislation, particularly in light of Mr. WihVs recent statement that there are no
serious problems in banks over $1 billion.
Mr. W I L L E . Mr. Chairman, I would just like to correct that for the
record. What I said was there are no billion dollar banks on our
problem bank list. I would have to say that there are some problems in
banks that are over $1 billion.
Senator PROXMIRE. Well, there are always problems in every bank.
There are even problems for Senators who think they have a safe
seat. Nothing is absolutely 100-percent sure. But they aren't problem
banks.
Mr. Holland?
Mr. HOLLAND. Well, I can't make that statement for our problem
bank list—that there are no billion dollar banks on it. And I think
now banks have had a number of months to get better, so that this is
not the worst situation we can count upon ever seeing. I believe it
is wise to plan for contingencies.
I have a very healthy respect, and some friendship as well, with
the people in the F D I C who handle these failing bank situations when
they have to be taken care of, and they do an effective, competent,
thorough job very much in the public interest. But they can be more
effective the smaller the bank. It's a matter of judgment, I think,
as to how large the bank gets before its chances of not being able to
be handled are not worth the risk. When we are talking about risk,
I think it would be very serious, if a very large bank that none of us
would want to have fail turned around and failed.
Senator PROXMIRE. YOU see, what concerns me is whether this is
the way to solve the problem of unsoundness in some of our banks.
Isn't the responsibility really of good regulation or effective and efficient regulation? Isn't it up to the various regulatory authorities to
see that the banks follow policies that would require the banks to be
sound? I'm just concerned that this might provide some sort of a
disincentive for effective regulation.
The regulators may feel :
It doesn't matter if the bank gets in bad shape. We can merge it out of existence.
We can always have somebody take it over in Texas or New York or California.
So we don't have to worry so much about insisting on sound practices.
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Mr. HOLLAND. Well, I think we all take it as very much our obligation to push sound practices as much as we can. But it is only practical
to say that we shouldn't take all the risk out of banking——
Senator PROXMIRE. Well, I wouldn't say to take all the risk out
of banking. I think that certainly overstates the position I have taken.
I would say to be able to eliminate the risk of failure, that's something
different than taking all the risk out of banking. I could see that banks
may lose money over several years, but they should have the capital
to cushion the risk. They should be able to take risk to diversify their
loan portfolios so, if they have some loans that turn out badly, they
can still survive.
That's what I'm talking about.
Mr. HOLLAND. But even with the best kind of examiners—and
I hope that we have got good ones and they are getting better—I
don't believe we could sit here at the table and tell you that we have
taken all the risk of failure out of banking.
Senator PROXMIRE. Well, now you have the power to tell the banks
to cease and desist from unsound practices.
Mr. HOLLAND. Each of us does with respect to banks under our
supervision.
Senator PROXMIRE. And so do, of course, the other regulatory
agencies have the same kind of power. Why do the regulators lack
the will to effectively regulate? Why weren't they able to take effective
action with respect to Franklin National?
Mr. HOLLAND. Each of us may have our own view. I t isn't that we
lack the will to regulate effectively. This is a world with a lot of
possibilities in it. Men might calculate that it might get better over
time, and then look back and see that it has not gotten better. Our
record is speckled with cases like that. I t is a matter of human action
trying to regulate human action.
Senator PROXMIRE. Let me give you some examples The Wall
Street Journal carried an article about the insider dealings at United
States National, and yet regulators sat mute for 3 years. Franklin's
asset structure took a long time to get into the shape it did. We are
told that as far back as 1970 some analysts were moving their investors out of Franklin.
Greater disclosure might have protected other investors. Yet the
regulators sat pat until 1974. Security National's real estate portfolio,
with a loss of at least $140 million, could not have been put together
overnight. What does it take for the regulators to move against
practices that have the potential to ripen into unsafe or unsound
conditions?
Mr. HOLLAND. I think these experiences that you have just cited
have been ones that have given us dedication for quicker and more
vigorous followup where the examiners detect something. I can't
cite the specifics of those cases, because the three banks you cited
don't happen to be ones that we examined. I say that, knocking on
wood. I believe that we all face the problem of how to get our examiners
to detect problems and how to get our supervisors and our superior
officers to follow up vigorously and firmly when the examiners spot
problems and the bank managements have not responded to the
examiner criticism.
Senator PROXMIRE. NOW, what has happened in recent years, in
the last 2 or 3 years, with the four banks that I have mentioned, has
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been the exception, really, since the F D I C came into existence in—
what was it—1933 or 1932? At any rate, over the great sweep of time,
the more than 40 years we have had great success and very, very few
bank failures; isn't that true?
Mr. HOLLAND. That is true. That is why we waited until now to
bring this bill up to you.
Senator PROXMIRE. This is why it seems to me, if we can reestablish the good practices that we went through in the thirties and the
forties and the fifties and the sixties, it seems to me that is a better
answer than to have a situation that could result in having a bank
taken over by larger banks. The only ones that you can point out the
purpose of the bill, would be a big bank to move in and take over
another bank and, therefore, get greater concentration than it should.
Mr. HOLLAND. Well, I believe very often in these cases, when a
bank gets in that serious difficulty, the alternative of a multi-State
acquisition would actually add less to concentration than trying to
resolve it with any kind of merger or affiliation within the State. The
most troublesome concentration of all is when there is a larger and
larger share of the total banking resources in an individual market or an
area that is tied up within an individual bank.
Being able to reach out of State in that case would avoid adding to
such concentration.
Senator PROXMIRE. Well, I think you make that point clearly,
if you agree with the fundamental notion here that we ought to rely
on merger as a solution.
Let me read from your statement and indicate what I am talking
about.
Maybe Mr. Wille would like to comment.
You say at the bottom of page 11 and the top of page 12, and I
quote—this is from Mr. Holland's statement:
The problem created by the constraints imposed by section 3(d) has been
sharpened as banks, particularly large banks, have moved increasingly from assets
to liability management. This shift in emphasis has led many larger institutions
to search far afield for money market funds.
While this has often been of considerable benefit to the customers and communities they have served—particularly in those areas where widespread branching is not permitted and local deposit generation is thereby limited—liability
management has increased banks' exposure to the risks created by any substantial
net outflow of such nonlocal and often volatile funds.
Isn't this exactly the kind of, at least pushed to an extreme, unsound
banking practice that regulators could prevent and should prevent?
Mr. HOLLAND. I think when pushed to the extreme it should be
criticized and remedied by bank examiners, insofar as they're capable
of conceiving it and accomplishing it in a human kind of business.
And I think you will find all the Federal bank regulators trying to
sharpen up their measurements of liability management and liability
risk and moving in accordingly. But I do believe, Senator, that the
way the financial system of this country is evolving, there is no way
around the inevitable move toward a large share of banking resources
coming from outside the locality.
That is, as our own citizens and businesses and pension funds, and
so forth, become more able to invest in money market instruments,
become more knowledgable, become more affluent, a larger share of
funds will flow through these national money markets and our in-
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stitutions will need to go to those markets for funds that are needed in
their localities.
When that happens, you begin to run the kind of risk
Senator PROXMIRE. SO you will have those Texas boys taking over
the Wisconsin banks or the Wall Street crowd. Section 9 of the bill,
which really concerns me very deeply, would allow the Board to
approve an acquisition, even if the banks primary superior disapproved. And I take it that Mr. Wille has been critical of that provision
too; is that right, Mr. Wille?
Mr. W I L L E . Yes, sir.
Senator PROXMIRE. Who
knows better the condition of a bank,
the Board or the supervisor? You see, if existing supervision is inadequate, isn't it a question of how it can be changed to make it more
effective? Why shouldn't the Board be prohibited from approving
any transaction the primary supervisor or the F D I C disapproved, or
why shouldn't the primary supervisor be allowed to appeal to a U.S.
Court of Appeals, and the Board be required to document its finding
of potential failure?
Mr. HOLLAND. Can I take that in reverse order? The kind of problem
bank we are talking about, I think, is usually poised on the edge of a
timing problem that would argue against trying to work out something through a court, and might even argue against airing in a court
some of the kinds of considerations that are impelling an effort at an
immediate takeover in order to save the institution from a deposit
run.
Senator PROXMIRE. SO, there would be no public record or public
discussion?
Mr. HOLLAND. N O , not in those cases. 1 would expect that we make
the same kind of filing that do we in regular holding company cases,
which would be a public statement of reasons for approval in every
one of those cases.
The other question here is how to handle supervisory cooperation.
How it is handled in this bill is exactly parallel with how it is handled
in existing statutes for ordinary mergers and ordinary holding company affiliations. In every one of those cases the relevant language
reads just as it does for this bill: that the approving regulator has the
say. He is, however, expected to consult with the other agencies that
are involved. Indeed, that has happened in every case that I know of,
and there hasn't been any problem.
I do believe it makes sense to have the final responsibility rest on
one approving agency, rather than on a triumvirate or tripartite
group. I'm a believer in accountability in this kind of circumstance,
particularly when it has such exigencies associated with it and such
risk associated with it. There is a great deal to be said for saying,
consult with the other agencies, get all their views, but in the end you
bear the responsibility for making the decision. T h a t means you're
accountable to Congress, and to the courts if there is a suit, if the
people believe it was a poor decision.
Senator M C I N T Y R E . I'm sitting here wondering: is it fair to say the
larger the bank, the greater the incentive to effect a merger, rather
than to liquidate? I have been wondering, since I have been on this
subcommittee, I am told by those who know more about banking
than I do, that this country has been through, we have been through—
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and we may not be out of it yet—a period of great economic and
financial stress; and at the same time, told by those who know more
about banking investment than I do, that we need to restructure
banking, we are outmoded. I t isn't adequate for the 1980's and the
1990 s
' Now, Mr. Wille, you say that you can envision difficulty anytime
you tackle a bank that is in trouble with assets of over $2 billion. I
understand we have banks in this country with assets of $50 billion.
Now, why shouldn't we put together some sort of legislation that
would permit us to bring everything to bear in the event that we had
a bank of that size in serious trouble, because suddenly they're in
trouble, I mean they're going along fine and everybody thinks they're
in great shape, and all of a sudden the Bank of America or one of the
large banks is in serious trouble.
What would be the effect on this country's economic position?
What would be the ripple effect? See, why shouldn't we have some
sort of legislation like this to give us every tool to bring to bear in the
case of a major bank crash or deterioration?
Mr. W I L L E . If that question is addressed to me, Mr. Chairman, I
would say that my statement does support, with some amendments,
this proposal. I could see some limited usefulness to this kind of an
interstate acquisition bill. I think one of the things that is very
interesting historically to look at, is the Bank of the Commonwealth
experience in Detroit, because there was a situation where a large
bank was in trouble—a large State member bank. I t was in trouble,
but we did not end up merging that bank out of existence. A merger
frequently is the easy supervisory answer to a problem, bank. Yet
what we did in the case of Bank of the Commonwealth was to look at
the competitive structure of the Detroit market and the identity of
the acquiring banks that possibly could have been included in a
purchase or merger transaction with that bank, and came to the conclusion that if the merger market were limited to the city of Detroit,
the answer would be anticompetitive and against the public interest.
We have a section of the F D I C Act which allows us to assist a bank
whose continued existence we believe to be essential to provide adequate banking service in a community.
Now, the definition of community is a very broad one. If you have
a big bank, the community served by that bank could conceivably be
nationwide. Similarly, if you have a bank which is primarily headquartered in Detroit, the community may be the whole Detroit area.
I n this particular case, we came to the conclusion that the Bank of
the Commonwealth was worth preserving as an independent institution, and we were able to propose and to develop a rehabilitation
plan to keep that bank alive without failure, having made the finding
that it was in danger of closing and that its continued existence was
essential for adequate banking service in the community.
I happen to think we would be able to do that in the case of most of
the larger banks to which this bill is addressed. I can't be absolutely
certain, however, that we would be able to work it out with that
particular kind of rehabilitation program we did with the Bank of the
Commonwealth; and one of the things that gave us a lot of uneasiness
in the Bank of the Commonwealth experience, I might add, was that
the debentureholders and shareholders of the bank had to approve
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the final plan, and there was a delay involved in getting those approvals, but they were obtained.
The net effect was that we were able to save a billion dollar bank
with an infusion of only $35.5 million on a 5-year loan.
If you compare those proportions, I think that you will see that so
long as we can handle the major banks in any State or the largest
banks in the country on the same basis, the kind of solution worked
out in the Bank of the Commonwealth situation is probably within
the financial capability of the F D I C . My only reason for support of
this particular proposal on interstate acquisition is there are some
cases that I can conceive of where that solution would not work, and
I think then you are quite right that having this anchor to windward
migrht be helpful.
Senator M C I N T Y R E . Governor, the Comptroller has suggested
that out-of-State acquisitions, if permitted should extend to banks
as well as bank holding companies. Do you have any comment for
that?
Mr. HOLLAND. Yes, Mr. Chairman. We thought about that possibility when we went through the review that led to this legislative
proposal. We didn't put it forward for two reasons. One is because
that would require a change in the legislation over which he has direct
responsibility, and we were making this proposal for legislation that
we administer. We thought we were best advised to confine our
suggestions to our own legislation. But the same logic regarding
competition and rescue would attach to an interstate merger by a
bank as to this interstate holding company acquisition. We could,
however, envision one disadvantage of interstate branching, or at
least one objection to it in a number of States where there are not
only laws but traditions and attitudes about branch banking, local
as well as interstate for that matter. We did believe that in a State
where the State law, State banking practices, and State banking
supervisor were not in favor of branching, that the State supervisor
might be better able to handle his own supervisory activities and
apply his own rules if he were dealing, not with what was a branch
of a bank headquartered out of State, but rather with a local corporation—a bank that was owned by an out-of-State holding company
and thereby would still remain a corporation in his State subject
to all his rules and controls.
Senator M C I N T Y R E . Mr. Wille, do you want to comment on that?
Mr. W I L L E . The Comptroller is absolutely right, that the logic
of the Fed's proposal would lead to an extension of this same authority
to the Bank Merger Act which incidentally is not implemented
solely by the Comptroller of the Currency. I t is also implemented
by the Federal Reserve for State member banks where they are the
resulting banks in particular mergers and by the F D I C where nonmember banks are the resulting banks. The judgment as to whether
the Fed's concept should be extended that far is obviously a political
one going to the likelihood of acceptance of that kind of a bill given
the number of banks in this country that we have and the fact that
all 50 States would be involved. Beyond that, I have no comment on
the Comptroller's suggestion. I think it is logically purist to suggest
that the Fed's bill be extended that far.
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Senator M C I N T Y R E . Governor Holland, would you please comment
on the anomalous situation whereby an in-State holding company
might be ineligible as merger partner while under this bill an acquisition by an out-of-State holding company would be permitted if we
were to adopt this legislation. Should we or should we not amend
the Bank Holding Company Act to perhaps require the exhaustion
of in-State possibilities before going interstate?
Mr. HOLLAND. Some of the same logic that we were mentioning
before applies to that as well. One could make the case that if an
out-of-State holding company is to be empowered to buy a bank, at
least an in-State company should be allowed to also even if ordinarily
State law didn't provide for that. The reason we didn't make t h a t
suggestion runs to some of the reasons that Frank and I were mentioning before. But logic is, I think, a little weaker in favor of that
than it is in favor of the interstate holding company suggestion. In
the first place, that would be a direct Federal empowering of an inState holding company that under a State's own statutes had been
held not to be able to make such an acquisition. T h a t seems like a
larger step than needs to be taken in terms of providing a kind of
accident insurance for banks. If a State wants to do that, it is able
to do so with its own legislation. If I may say so, I would hope that
in a number of those States there would be a move to parallel in
their State holding company legislation this kind of action by the
Federal Government, because I believe it is a sensible, practical sort
of accident insurance, if I can use that term, for big banks in trouble.
However, there is one additional fact here that ought to be borne
in mind respecting in-State acquisitions. An in-State holding company
buying another bank in the same State would be more likely to
raise the level of concentration of banking resources in that State,
and would be more likely to represent a more anticompetitive acquisition than would an acquisition by an out-of-State holding company.
We had that in mind, too, in confirming our suggestion to an out-ofState takeover only.
Senator M C I N T Y R E . D O you care to comment, Chairman Wille?
Mr. W I L L E . The problem that you raise is one that actually could
be easily corrected by State law as Governor Holland has mentioned.
If the bill is passed in this form which allows interstate acquisition
by bank holding companies but doesn't do anything to permit intrastate acquisitions where such acquisitions are not presently allowed
by State law, the easy response if a State wants to change that result
is to amend its own State statutes so that intrastate holding companies would have the same emergency powers of acquisition and of
course that would enlarge even further the proof of possible merger
nartners for a bank in distress. So that Governor Holland is quite
correct there, that this particular problem is one which could be
remedied by State action if the States were so minded.
As to the question of concentration, concentration is a complex
subject but it depends on what concentration you're looking at. If
you're looking at concentration at the State level, Governor Holland
is correct in saying that this extension of the bill could increase concentration at the State level which might not be desirable.
On the other hand, the concentration that Senator Proxmire was
talking about was concentration on the national level looking at
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nationwide deposit totals and the aggregations of banking resources
nationwide. Many economists believe that the only concentration to
look at is the concentration in local banking markets and that is the
subject on which numerous people differ, myself included, so that
when you talk about concentration there is not one easy answer.
I might say that I can conceive of a situation within a State where
the acquisition by an in-State holding company is not necessarily
anticompetitive and where it may be more desirable as a competitive
matter than an interstate acquisition.
Senator M C I N T Y R E . Well, here is an example I would like both of
you to answer. You take the case of a unit banking State, we might
have the situation where an out-of-State bank-holding company
could acquire a bank and still be only a one-bank holding company
as permitted by State law, while an existing one-bank holding company
under an acquisition would in effect become a multibank holding company. Are we not therefore faced with a policy choice of which of these
courses would have a more desirable result?
Mr. HOLLAND. Well, if I understand your example, we have in our
legislative suggestions said that in that case we believe it is more
consistent with the indicated thrust of public policy to let the out-ofState holding company acquire a single bank within the State than to
let a multiple in-State bank holding company develop by an in-State
acquisition of a second bank by an existing one-bank holding company. It's a matter of judgment.
Senator M C I N T Y R E . YOU say this even though the State in question may prohibit banks from coming in from outside?
Mr. HOLLAND. Yes. Because, if I understand your example, it is
also prohibited for its within-State holding companies to acquire
a second bank. So either wTay, you see, one would be overriding express
State statutes, and it is a case of which one will do the greater harm
to what was intended in shaping those State laws. I believe in that
case the acquisition by the out-of-State bank holding company
would do less damage and would be more effective for the kind of
rescue you would accomplish.
Senator M C I N T Y R E . Chairman Wille.
Mr. W I L L E . I would answer that question myself by saying either
the Congress or a given State legislature is going to have that policy
choice and one or the other would have to face up to it in the final
determination.
Mr. HOLLAND. If I may, Mr. Chairman, I would just like to say,
I don't regard this bill—though it talks about letting a big bank be
bought by a holding company—as doing big banks any favor. Or even
as guaranteeing their deposits. Because the power is in the law doesn't
mean that it will be used in every case. This bill is permissive, not
mandatory. It's rather the fact that a sick whale is harder to take care
of than a smaller fish. One of the problems of sheer size is that it can
be harder to handle. I t is in a sense that kind of disadvantage in size
that this bill is trying to be some accident insurance against.
Senator M C I N T Y R E . Chairman Wille, regarding your full deposit
insurance scenario, what is the current posture of the F D I C given the
choice of liquidation and deposit payout versus effecting a merger
with the likely assumption of questionable assets? Are you forced in
any way to follow the path of least resistance; that is, the path of least
cost?
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Mr. W I L L E . Yes; in some way we are required to follow the path
of least cost. I don't consider that to be the area of least resistance
necessarily. Our statute says that we may pay out insurance up to
$40,000 in the case of most depositors, or $100,000 in the case of public
depositors if there is a bank failure, or we can attempt to work out of
receivership a purchase and assumption transaction such as we did in
Franklin and the United States National Bank whereby the deposits
of the failed bank go over to a healthy bank. The statute says that
we must in making the decision on a purchase and assumption, consider the cost "to the corporation'' and that means obviously the cost
to the F D I C fund of the choice we select. Frequently this turns on the
proportion of uninsured deposits and the quality of the assets in the
failed bank. Your comment about assets going over to an acquiring
bank, I think, is not correct. In fact, if we have a deposit assumption,
in most cases there is not a transfer of questionable assets to the sound
bank acquiring those deposit liabilities. In most cases where a smaller
bank fails, F D I C has provided cash rather than the assets of the
failed bank, and any problems in the asset structure of the bank that's
going down are worked out by the F D I C in receivership.
Now, when we get a large bank such as Franklin or U.S. National,
that's when you get into the problem of how much cash F D I C can
advance without jeopardizing public confidence in the other banks
among the 14,500 in the country. In both of those cases, we attempted
to use as much of the asset structure of the failed bank as would be
acceptable to the takeover bank, and fortunately, the amount of
assets required to be taken over by European-American was substantially less than the asset total of Franklin because the deposits
they took over on the day of closing were substantially less than the
asset total of the bank. What the European-American took over by
way of sound Franklin assets was $1.4 billion which roughly equaled
the deposits they took over less the purchase price paid. Similarly, in
the U.S. National, we attempted to work out a transaction in which
as much as possible of the sound assets of the U.S. National were
taken over the the successful bidder; in that case, the Corcker Bank.
Senator M C I N T Y R E . T O what extent, Governor Holland, does this
bill preserve alternative approaches, and what weight should anticompetitive considerations be given, and where should they come into
play?
Mr. HOLLAND. This bill would add an alternative option. At least
for banks above its size cutoff, it provides an alternative way of
remedying a failing bank situation. In the course of considering such
an application, the Bank Holding Company Act itself compels us to
take into consideration the degree of competition and any anticompetitive effects that would come from an acquisition. I would expect
the Board, as it looked at this as an option, to be influenced by the
degree of anticompetitiveness of any other option.
If there were an in-State option that was reasonably good financially and it wasn't anticompetitive, I would expect that acquisition
would be the one to be approved by whomever was the authority
and this out-of-State provision wouldn't even come into play.
But if there were nothing other than an anticompetitive or maybe
financially shaky alternative within the State, then I would expect
the provisions of this bill to be used. Of course, when we're operating
77
under this bill, the provisions elsewhere in the Bank Holding Company
Act would require the Board to consider whether or not this acquiring
bank holding company was bringing in an anticompetitive force.
Let me give you an example. Suppose, for example, the bank in
trouble happened to be located in a city that was just across the river
from another State and there was a large city just across the river
i n the second State, and one of the larger banks in that neighboring
city was one of the organizations trying to buy the failing bank in the
first city.
I think, in that case, we would have to give some anticompetitive
weight to the proximity between those two organizations and see if
there wasn't more procompetitive rescue option that could be used
without that bank being allowed to expand its position in those
respective States.
These days we are learning that competition doesn't stop at State
lines, particularly in those places where we have metropolises that
spread across several States.
Senator M C I N T Y R E . Well, Mr. Wille, how do you assess the Fed's
suggestion that the permissible number of out-of-State acquisitions
might number more than one, but say less than five?
Mr. W I L L E . Oh, I think that is an appropriate pullback from the
open-ended kind of bill actually submitted by the Fed, which would
allow any number of acquisitions by the same out-of-State bank
holding company in the same State, so long as the State law allows
multi-bank-holding companies.
It's new suggestion is one which is designed, I am sure, to allay the
fear that one of our major bank holding companies, such as BankAmerica or Citicorp, could have multiple acquisitions in one State,
whereas it might not be allowed for an instate holding company.
I think the suggestion that the number of acquisitions by any single
out-of-State bank holding company be limited is perfectly appropriate.
Senator M C I N T Y R E . Governor Holland, Chairman Wille has suggested that the uncertainty of whether in a problem situation all of the
bank's deposits will be 100 percent safe or quickly available, has been a
significant discipline on the management policy of most banks.
Could the net effect of this bill be to remove that discipline and
encourage greater risk in asset and liability management than otherwise might be taken? How do you assess this potential problem?
Mr. HOLLAND. I t doesn't seem to me the bill adds that much more
assurance to holders of deposits in larger institutions. We face this
kind of consideration, of course, in rescuing a bank of any size.
The more sure the depositors of that bank are that they will get
paid off in case of trouble via one or another procedure that can be
used to pay them off, the less incentive they have to themselves
discipline bad banking behavior. That disincentive already exists to
some extent. I don't believe this bill will add to it much. I really
don't.
To be honest with you, I don't believe the large depositors and large
creditors of a giant bank will be that much more reassured by the
knowledge that there is a possibility that the Federal Reserve Board
might approve that organization being taken over by another large
organization if it gets in trouble.
O - 75 - 6
Digitized for56-713
FRASER
78
I think they would be inclined to exercise about as much discipline
on that management one way or the other.
I might say that the experiences of the last 2 years, when indeed no
big depositor lost money in U.S. National or Franklin National, have
nonetheless sufficed to stir a good many corporate treasurers to ask
tougher questions of their banks. I cite that as an indication that the
larger depositors can be disciplinarians even when they have had the
experience of not having lost money.
Senator M C I N T Y R E . Mr. Wille, in your Kansas City speech, you
identify five problem areas, one could conclude that you are implicitly
suggesting that each of these issues: one, the interstate issue; second,
the full deposit insurance issue; third, the capacity of the F D I C in
problem areas; fourth, the role of the Fed in bank regulation generally;
and five, the treatment to be accorded shareholders and debenture
holders of banks in distress; should each be the subject of future
inquiry by this committee before the action contemplated in this bill
shall be taken; is that correct?
Mr. W I L L E . Yes, sir. I believe that the members of the committee
should be very conscious of some of the implications of this bill as I
outlined them to the best of my ability in that Kansas City speech.
Senator M C I N T Y R E . Would incorporation of the amendments you
suggested suffice?
Mr. W I L L E . I t would not answer all of those issues, but some I
take more seriously than others. As I explained in that speech, I have
less reservations about the interstate branching implications of this
proposal than others.
I have considerable concern, as I have said, about the 100 percent
deposit insurance aspect of the proposal, and I might say that, while
I agree that corporate treasurers have been asking a lot harder questions of banks in which they have deposited money in the last few
years, the question that I would have is whether they would continue
to do that if this bill became law since they would know that every
bank over $100 million or $500 million or $2 billion was likely to, if it
got into trouble, have a solution worked out for it whereby it was
acquired by another sounder banking organization.
With respect to the issue on the F D I C ' s capacity to handle large
banks in distress, I have indicated to you that our experience would
lead us to believe that in most cases of banks below $2 billion, F D I C
could successfully handle such problems—and possibly even larger
banks, especially if we followed the Bank of the Commonwealth
example where direct assistance was given to a major competitor in a
given market in order to preserve that competitive influence.
The role of the Federal Reserve System in bank regulation generally
is implicit in the bill as it is now written, because it would give the
Board of Governors additional authority in an area where it hasn't
really had it before, especially if it could override the express wishes
of the primary supervisor of the bank in question.
I acknowledge our proposed amendments would reach that particular aspect of the bill.
Finally, the question of fairness to shareholders and debenture
holders is a very difficult one. I don't think that really is considered
in the bill as proposed nor is it solved in all cases by my suggested
amendments.
79
If you have a proposal which has been developed by the supervisory
agencies or by the acquiring bank alone, there are powers in the
comptroller, as you know, to waive shareholders approval in the case
of the failing bank—a power we exercised in the Security National
situation—so, that, in effect there may be no opportunity for the
shareholders to reject the price offered by the acquiring bank—
Chemical Bank in that case—and similarly under the bill as proposed
I assume that if the bank to be acquired was a national bank, the
same waiver could apply, and you might have a situation in which
the terms of the transaction were not necessarily to the benefit of or
not necessarily fair to the shareholders of the bank in trouble.
We have seen as we did in Franklin and in U.S. National that the
franchises which the bank had by way of branch offices, the one in
Long Island, the other in southern California, were enormously valuable to the takeover bank, despite the condition of the bank, and
that the terms of the transaction were such that they did not have to
discount the value of those franchises because they were taking over
unreasonable risks or problems on the asset side.
Whether or not the considerations that go into competitive bidding
would apply—and F D I C always tries to follow competitive bidding
in receivership cases—in an arranged or negotiated interstate takeover of the kind contemplated by the proposed bill is hard to say.
Obviously the interstate acquisition might take one or two forms,
either form that was present in the Chemical-Security transaction or
it might take the form of a sale out of receivership, so it is a little
hard to answer the question as to the impact of this particular proposal on debenture holders and shareholders, and I don't think the
amendments that have so far been suggested really handle that
question adequately if competitive bidding or F D I C assistance is
not required.
Senator M C I N T Y R E . We have been discussing here this morning
mainly the controversial part of this bill, the interstate features.
Do you think there is any merit, Mr. Wille, in a temporary type of
bill covering the situation for a year or two? Do you see any merit
in that, learn by experience, and so forth?
Mr. W I L L E . Our experience with temporary bills is they frequently
become permanent, as you know, and I think that some of the issues
presented by this bill should be faced up to by the committee, not with
the thought that it is a temporary bill, but that it is likely to become
permanent.
Now, I hesitate in answering that because of the remark that
Governor Holland made earlier with respect to the banks which are
currently being watched by the Federal Reserve System.
We obviously take a different view of some of the problems to
which he referred and have not ourselves included any billion dollar
bank on the F D I C ' s problem list which includes State member banks
as well as national banks along with insured nonmember banks.
Senator M C I N T Y R E . Would you like to comment on that question,
the temporary 1-year or 2-year
Mr. HOLLAND. Yes, Mr. Chairman. We didn't advocate that
because you never know when one of these circumstances is going to
arise. I t may arise in a few months. I t may not arise for 5 years. But
we could understand if the Congress said there were some imponder-
80
ables in here and some questions about how frequently this would
happen and how much interstate penetration there would be. Perceiving those questions or those imponderables, I can see that you
might want to check on how the Fed was doing. If you put a time
limit on this bill and had us come back and testify before it were
either renewed or made permanent, I am sure my colleagues would
find that satisfactory. I certainly would.
I would like to suggest that it be longer than a year, because I
don't think these kinds of events will take place very often; but making it a couple of years' or 5 years' duration and then having us
account to you for our stewardship under this provision sounds very
reasonable to me.
Senator M C I N T Y R E . Before he left Senator Proxmire left some questions to ask and I will ask Mr. Weber, staff counsel, to direct those
questions to the witness, please.
Mr. W E B E R . Section 1 of the bill would allow the Board to permit
such acquisition in emergency situations or in potential failure situations. This goes much too far.
If a bank is not even in the potential failure category, why does the
Board need this extraordinary power?
Shouldn't there be a bill of particulars on what an emergency is as
delineated in the statute, and should not the F D I C have a right of
first refusal on these mergers if they think they can handle the insurance risks in a better way?
Mr. HOLLAND. Would you like me to comment on that, Mr.
Chairman?
Mr. W E B E R . Either or both. I am just reading these questions for
Senator Proxmire.
Mr. HOLLAND. If there is a better option available than allowing
multi-State acquisition, I would expect the supervisors, who I expect
to be working very closely together in these cases, to choose that better
way.
We see this as something in the order of a last resort arrangement,
not a first resort that we give preference to over good acquisitions
within a State or a good endeavor to rebuild the bank out of strong
new capital and new entrepreneurship in the area.
Those are alternatives which clearly have been preferred by State
legislatures and up to now by Congress, and I would respect that.
I don't believe that the definition of what is an emergency and what
is a failing bank needs to be as specified in advance as the thrust of
that question might suggest.
I have to say that sometimes those of us in the bank supervi^ ory
and regulatory business are a little puzzled at the rather elaborate
wording in the Bank Merger Act that distinguishes this expeditious
action area from the probable failure area.
Those two provisions—one that allows for some shortening of the
time delay and the more extreme one that involves getting rid of the
delay entirely—have seemed some sort of a puzzle. Why doesn't
Congress have just the one where we get rid of all time delay? But we
understood that it grew out of a concern for providing as much time
as was practical in connection with the situation at hand.
In point of fact, we have used both provisions. I think we have
used them nearly 50 times in the 10 years since they were written into
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the Bank Merger Act. I believe the record of those uses really makes
quite clear, on a case-by-case basis, the meaning of an emergency
situation requiring expeditious action and one involving probable
failure. I would expect that most bankers and lawyers would find
that kind of case evidence clearer than an attempt to write some sort
of generalized definition of the term.
Mr. W I L L E . My comment on that would be kind of similar.
I would get to the F D I C point in just a moment.
The Senator's inquiry goes to the question which Governor Holland
has answered; that is, the difference between the 10-day action and
the immediate action under the bills' provisions.
That format was taken bodily out of the Bank Merger Act sections
to which this bill attempts to conform the Bank Holding Company
Act and I agree there is some puzzlement as to why you would use
the 10-day provision if you have got a pressing emergency that you
feel should be handled either on an overnight or a weekend basis or
something like that.
On the other hand, the law is written with the option of either 10
days or zero delay. That would not be an inhibiting factor as far as
the Federal Reserve Board is concerned.
The question about the F D I C ' s prior concurrence I think is misplaced unless the F D I C is being asked to provide guarantees against
loss, a hold harmless agreement or financial support of one kind or
another in the proposed transaction.
Some of these interstate acquisitions probably will not involve the
F D I C in any way, and I don't see any reason in those cases why
there should be F D I C prior approval.
The proposed amendment which we have drafted at the request
of the committee would go to the issue that I am pointing out here,
that our approval should only be required in advance if it appears
that F D I C financial assistance of one form or another is necessary.
Mr. W E B E R . The next question: Under section 1 the Board is not
even required to select the least anticompetitive alternative.
There is no definition of "public interest" which will allow the
Board to choose an out-of-state acquisition over an in-state alternative.
Further, the term "weighing" may have the effect of lessening the
antitrust standard over their acquisitions.
The standard is now that the Board cannot approve an anticompetitive acquisition unless the competitive factors are "clearly outweighed" by some need in the community. This is a fairly high standard and perhaps should be tightened.
Your language indicates a lessening of this requirement by insisting
the word "weighing" which indicates that all of these factors are equal.
They are not.
The competitive factors are paramount. This language may cast
some doubt upon the existing standard.
Mr. HOLLAND. We didn't intend it to do so, and I would expect
that we would give heavy weight to anticompetitive possibilities as
we tried to apply this.
We did believe it was wise to use a single phrase like weighing public
interest here rather than trying to specify in a hierarchical kind of
way or in some kind of order the various factors that are supposed to
be applied in the bank holding company acquisition, because in one
82
of these failing bank situations it is hard always to predict the particular circumstances or the particular troublesome involvements.
There may be times when even on an interstate basis the only
bidder, the only one willing to walk in there and pick up that headache—and that is what that failing bank is going to be, a king-sized
headache—may be one who has already some competitive presence in
some markets in which the failing bank deals. If one has to weigh
that choice against the alternative of having the bank closed, then it
seems to us that the clear test ought to be which one we think the
public interest is better served by. We would intend to give strong
weight to the anticompetitive factor, but we feel that we will also
have to give strong weight to whether the bidder has the financial
strength to do what needs to be done to save the situation. I t seemed
to us that a single label was the safest way to try to deal with a situation that is hard to predict in all its details.
If Congress were to take the Senator's suggestion and to provide an
ending date on this legislation, say, 2 or 5 years out and have us come
back, the Congress could see very clearly how that was applied.
I believe that would be a better way to do it than to try to write in
detailed definitions in the bill because in the nature of the case these
situations are hard to forecast and hard to describe in advance.
Mr. W I L L E . I think that is a fair comment, that the normal anticompetitive considerations which might be involved in a bank merger
or bank holding company application just aren't viewed the same way
when a failing bank is involved and you are trying to prevent the
public trauma of a deposit payoff or interrupted banking service.
Even the Department of Justice has indicated considerable flexibility on this particular issue.
I would say that in the normal case they would never have given
a clearance for the acquisition of the Franklin assets and liabilities by
Manufacturers, Hanover, Chemical, or the Citibank of New York.
They did indicate that there were adverse competitive factors
present in such an acquisition by any one of those three, but I am
rather certain that the Antitrust Division would not have attempted
a suit to block that particular acquisition even had it gone to one of
the three banks.
So that by the nature of the case, as Governor Holland points out,
assuming that there are no less anticompetitive options available,
the case is just not the same as the normal bank acquisition.
Mr. W E B E R . The final question: Doesn't the section 2 provision
actually result in a statutory preference for out-of-state acquisitions
in unit banking States that do not allow multibank holding companies?
Thus, one of the effects of this legislation will be to bring pressure
upon States to change their branching and holding company laws.
Isn't this one of the real thrusts of this legislation?
Since arguably this bill isn't really necessary to assure a safe and
sound banking system—doesn't it really pose a threat to existing
rules against interstate banking?
Mr. HOLLAND. We don't regard this proposal as a "camel's nose."
This is a limited proposal, endeavoring to try to deal with the situation
that we don't believe you can be sure that we can deal with under
present banking law and with our present banking structure.
I t is that kind of limited protection that we seek.
83
I believe passage of this bill is thoroughly consistent with States
continuing to prohibit multiofEce banking within the boundary of
their State, and continuing to enjoy that kind of arrangement.
I don't see that it either prefers or oppresses that kind of situation.
Mr. W E B E R . Mr. Wille?
Mr. W I L L E . I wouldn't have any comments. I think the drafting
of this proposal is the-Fed's and Governor Holland can answer that.
Senator M C I N T Y R E . There may be some additional questions which
we will be furnishing you for the record.
I just want to say, as I have said so many times. I thank both of
you for your excellent testimony here. You are helpful and I appreciate
your being here with us.
We will recess this subcommittee until 10: o'clock Monday
morning.
[Whereupon, at 11:40 a.m., the subcommittee hearing was adjourned
to reconvene at 10 a.m. Monday July 28, 1975.]
EMERGENCY ACQUISITION OF BANKS OR BANK
HOLDING COMPANIES
MONDAY, JULY 28, 1975
U.S. SENATE,
COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS,
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS,
Washington, B.C.
The subcommittee met at 10 a.m. in room 5302, Dirksen Senate
Office Building, Senator Thomas J. Mclntyre (chairman) presiding.
Present: Senators Proxmire and Mclntyre.
Senator M C I N T Y R E . The committee will come to order.
This morning the subcommittee will conclude its consideration of
S. 890, the Emergency Acquisition of Banks or Bank Holding Companies. This morning we will hear from Mr. Joe Sims, Acting Deputy
Assistant Attorney General, Antitrust Division, Department of
Justice.
I'd appreciate it if you would summarize your statement and also
introduce who is accompanying you at the table. Please summarize
your statement, with the understanding that it will be incorporated
in the record in its entirety.
Mr. SIMS. With me today is Neal Roberts, assistant of the Antitrust Division.
I will try to summarize the statement as briefly as I can.
STATEMENT OF JOE SIMS, ACTING DEPUTY ASSISTANT ATTORNEY
GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE
Mr. SIMS. S. 890 would do basically two things. The two major
features of this proposed legislation are emergency procedures and
the out-of-State option. I t would also permit bank holding companies,
in certain limited emergency situations, to acquire banks located
in States other than those in which the holding companies' principal
banking operations are conducted.
The two principal features of this proposed legislation—emergency
procedures and the out-of-state option—are closely related. Both are
designed to help resolve the practical and competitive problems that
can develop when a bank encounters such serious financial difficulties
that its acquisition by another strong banking institution is the
only practical means of avoiding a bank failure and the resulting
erosion of public confidence in the banking system itself. Both deserve
the support of this subcommittee and of the Congress.
(85)
86
On the procedural point, Mr. Chairman, I will note that S. 890
would amend the Bank Holding Company Act to conform it to the
Bank Merger Act. We believe that this would add desirable flexibility
to the Act and we strongly support the addition of these new
procedures.
If I might turn now to what is probably the more controversial
part, the feature which adds the out-of-State option. Under present
law, a bank holding company may only acquire additional bank
subsidiaries in the State in which its principal banking operations
are conducted. The out-of-State option provided by this bill would
empower the Federal Reserve Board, in certain limited circumstances,
to approve an acquisition of a bank by a bank holding company whose
principal banking business is in another State.
The Board would be empowered to approve such an acquisition
only if it found that an emergency requiring expeditious action exists
with respect to a bank with assets greater than $500 million or a
bank holding company controlling such a bank, or if it found that
immediate action is necessary to prevent the probable failure of such
a bank or a bank holding company controlling such a bank.
The Board could not approve an out-of-State acquisition unless
it also found that, in weighing the competitive, financial, and other
factors required by the act, the public interest would best be served
if the bank or banks involved in the application were acquired by
an out-of-State bank holding company. Currently, multistate banking
at the retail level is prohibited by restrictions on both banks branching across State lines and multistate bank holding company operations.
These restrictions are controversial restrictions on which many
people have very different opinions.
Considerations of whether these restrictions are still desirable
today is not necessary to deciding whether or not to approve the
conditions suggested in S. 890. Rather, it would create only a very
limited exception, and only where such an exception would serve the
public interest. We strongly support the out-of-State option.
The availability of this option could make the resolution of problems
similar to those encountered in the U.S. National and Franklin
National situations, a much easier task. The competitive problems
which arose in those contexts were serious, and legislation of this
nature could be extremely helpful if similar problems should arise
in the future.
Really, Mr. Chairman, it boils down to a simple proposition. If
a bank is failing or in such other serious difficulty that banking authorities believe that the most reasonable solution to the problem is
acquisition by another bank or bank holding company, today the
options are limited to those banks within the state in which the failing
bank is located.
S. 890 would allow the acquisition in appropriate situations by
bank holding companies in other states as well. This would do two
things.
No. 1, it would enable the bank supervisory authorities to have more
flexibility in determining who should be able to acquire the institution
and presumably, would give them a considerably better chance of
making arrangements which would be both competitively desirable
and which would least adversely affect the financial institutions and
other government agencies.
87
Second, it would in our view provide a procompetitive opportunity in.
some instances where none exist today. There are situations in which
large banks, perhaps the largest bank in a particular State, would
be in such serious financial conditions as to make acquisition both
desirable and appropriate.
If the potential acquirors are limited to those within that State,
especially in the situation where the bank is one of the largest banks
in the State, the competitive issues are going to be serious.
If on the other hand, the opportunity is present for the Federal
Reserve System to look outside the State to those bank holding
companies which do not compete or compete only to a significantly
lesser degree with the failing institution, the opportunities for solving
the problem without serious competitive difficulties are measurably
increased.
Thus, we strongly support the out-of-State option with one caveat.
Under the terms of S. 890, the out-of-State option only becomes a
possible alternative where the assets of the failing bank exceed $500
million. This might be a reasonable criteria in some States. However,
it is far too large to serve any purpose in some States. Congress should
ensure that the potential benefits of this legislation extend to all banking customers and all communities, regardless of where they live or
in which State they are located. Thus, it should consider alternatives
to the proposed minimum figure, or alternative criteria, for example,
a bank could be acquired by an out-of-State holding company if the
bank were a specified size, or one of the largest commercial banks in
the State or if it controlled a specified percentage of total State
commercial bank assets.
Since the bank structures of the State vary considerably, it seems
unlikely that statutory language would cover all appropriate situations.
Therefore, we believe the most desirable solution would be to eliminate
any legislative minimum assets size and rely instead, on general
standards.
These should be sufficient for any State and should set forth in
clear terms the intents of Congress in this area. In this way the
purposes of the legislation can be expertly applied in the widely varying
structure and a proper account can be taken of concentration and local
markets served by the troubled bank and its potential acquirers.
To summarize, we feel that the out-of-State option feature is as
important a feature as the emergency procedure feature. I t is a familiar
maxim that substantive rules of law work only as well as the procedures
which implement them. Equally valid is the proposition that procedures made flexible enough to accomplish a particular goal cannot
do so if the underlying substantive rules are too rigid.
The goal of Congress in considering this legislation is, of course,
to provide for the resolution of the problems presented by failing or
floundering banks in a manner consistent with the public interest,
including the preservation of competitive banking structures. We believe that S. 890 is consistent with this goal, and we therefore strongly
support it.
I'd be happy to answer any questions.
[Complete statement follows:]
88
STATEMENT OF J O E SIMS, ACTING DEPUTY ASSISTANT ATTORNEY
ANTITRUST DIVISION, DEPARTMENT OF JUSTICE
GENERAL,
I appreciate the opportunity to appear before the Subcommittee to present
the views of the Department of Justice on S. 890. This bill would amend the Bank
Holding Company Act to provide special new procedures for the acquisition of
failing banks or bank holding companies and for the acquisition of banks or bank
holding companies where an emergency exists which requires expeditious action.
It would also permit bank holding companies, in certain limited emergency situations, to acquire banks located in states other than those in which the holding
companies' principal banking operations are conducted.
The two major features of this proposed legislation—emergency procedures and
the out-of-state option—are closely related. Both are designed to help resolve
the practical and competitive problems that can develop when a bank encounters
such serious financial difficulties that its acquisition by another strong banking
institution is the only practical means of avoiding a bank failure and the resulting
erosion of public confidence in the banking system itself. Both deserve the support
of this Subcommittee and of the Congress.
Procedurally, the goal of this legislation is to add new and, we believe, desirable
flexibility to the Bank Holding Company Act. Under the Act as it now stands,
there is only one procedure through which bank acquisition transactions can be
consummated. This procedure entails notice to a bank's primary supervisory
authority of its pending acquisition, and a thirty day period during which that
supervisor may make recommendations on the proposed acquisition to the Federal
Reserve Board.
It also provides for a hearing in the event that the supervisor disapproves of
the acquisition. Finally, it imposes a thirty day waiting period after approval
before consummation of the acquisition is permissible. Thus, the only procedure
available under the Act involves various mandatory delays, regardless of the
circumstances surrounding the acquisition in question.
As a general matter, we believe that this procedure is sound. Each of the steps
required serves a valid purpose, and the delays they cause do not work a hardship
in the ordinary situation. However, we believe that there are situations in which
delays are undesirable. Additional procedural flexibility should be incorporated
into the Act to cover such situations.
Recent events have demonstrated the usefulness of procedures which permit
a failing bank to be acquired in an expeditious manner by a strong banking institution in which the public has great confidence. The experience with the U.S.
National Bank of San Diego in 1973, and the Franklin National Bank of New
York in 1974, caused significant public concern. We would defer to the federal
banking agencies for expert opinion with respect to the problems that could have
resulted had U.S. National or Franklin National been closed and not immediately
succeeded by a strong acquiring bank. However, it seems clear that interruption
of the financial affairs of bank customers and the affected communities was
minimized by the rapid manner in which the transitions took place. In addition,
the ability to deal expeditiously with these situations undoubtedly prevented a
possible serious loss of confidence in the banking system itself, by assuring that
the system could and would continue to function, even with the demise of particular institutions. This confidence has traditionally been recognized as an
important factor in maintaining the liquidity and solvency of banks, even in
today's climate of substantial federal deposit insurance.
The acquisition transactions that helped resolve these two serious problems, and
have helped to resolve a relatively small number of other less serious situations
in the past, were structured as transactions subject to approval under the Bank
Merger Act. Unlike the Bank Holding Company Act, this Act already has procedures which can be used in emergency situations. Even though our antitrust
enforcement responsibilities have made us generally wary of procedures by which
acquisitions are quickly consummated, our experience with such situations under
the Bank Merger Act indicates that these emergency approval powers have not
been abused.
The question thus presented by this legislation is whether bank holding company acquisitions should be accorded equally expeditious alternative emergency
procedures. If the acquisition of a seriously troubled bank by a strong bank holding
company can quickly revitalize the bank, and restore the confidence of its depositors, such procedures should be available.
Holding company affiliation with a failing or seriously floundering bank, appears to confer two obvious benefits. First, infusion of necessary new capital, and
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the ability to balance off temporary, one-time losses, can be provided by an
institution with sufficient available resources. Second, notice to the public that a
bank rumored to be in serious trouble is now backed by a sound financial institution can reestablish confidence in the bank itself, heading off further, perhaps
irreversible liquidity problems.
For these reasons, we believe that alternative emergency procedures should be
available under the Bank Holding Company Act. S. 890 would provide such procedures, virtually identical to those already available under the Bank Merger
Act. Thus, we support this aspect of the bill.
The second major feature of S. 890 would amend the Bank Holding Company
Act to provide that I shall refer to as the "out-of-state option." Under present
law, a bank holding company may only acquire additional bank subsidiaries in the
state in which its principal banking operations are conducted. The out-of-state
option provided by this bill would empower the Federal Reserve Board, in certain
limited circumstances, to approve an acquisition of a bank by a bank holding
company whose principal banking business is in another state. The Board would be
empowered to approve such an acquisition only if it found that "an emergency
requiring expeditious action" exists with respect to a bank with assets greater than
$500,000,000 or a bank holding company controlling such a bank, or if it found that
"immediate action is necessary to prevent the probable failure" of such a bank or a
bank holding company controlling such a bank. Further, the Board could not
approve an out-of-state acquisition unless it also found that, in weighing the competitive, financial, and other factors required by the Act, the public interest would
best be served if the bank or banks involved in the application were acquired by an
out-of-state bank holding company. The bill would authorize the acquisition and
operation of the bank involved by the acquiring holding company notwithstanding
state laws, other than those which prohibit multi-bank holding companies.
With certain grandfathered exceptions, multi-state banking at the retail level
is currently prohibited by restricti6ns on both banks branching across state lines
and multi-state bank holding company operations. The reasons traditionally
given in support of the restrictions upon multi-state banking include the possible
development of undue economic, social and political power in the banking industry, and preservation of state and local control of locally-generated resources.
On the other hand, such legal restrictions deprive local borrowers and depositors
of the benefits which would be afforded by new competition from out-of-state
banking organizations. Whether these restrictions are desirable or not is a highly
subjective question on which opinions differ considerably. However, consideration
of this proposed legislation does not require an answer to that question, since it
would not significantly reduce existing restrictions on multi-state banking. Rather,
it would create only a very limited exception, and only where such an exception
would serve the public interest.
We strongly support the out-of-state option. The availability of this option
could make the resolution of problems similar to those encountered in the U.S.
National and Franklin National situations, a much easier task. The competitive
problems which arose in those contexts were serious, and legislation of this nature
could be extremely helpful if similar problems should arise in the future. Those
situations not only raised the questions of whether and when an emergency
takeover would be required, but also the question of what institution should be
allowed to make the acquisition. Clearly, even where the institution to be acquired
is ailing, various potential acquiring institutions can and do present varied competitive issues. Acquisition by a major direct competitor is clearly less desirable
than by a smaller or more distant institution. Thus, even where acquisition of the
troubled bank is the only answer, the availability of suitable alternative purchasers
is very important.
The present absolute restrictions on multi-state banking limit the purchasers of
a distressed bank to banking institutions located in the same state. Where the
troubled bank is relatively large, as was the case with both U.S. Natioual and
Franklin National, the competitive effects of the restrictions upon multi-state
banking are the most severe, since only the very large institutions located in the
same state would, as a practical matter, be capable of acquiring the troubled bank.
Typically, large banks are located in major cities, and in many states have widely
dispersed branch networks. Thus, when a troubled bank and its potential acquirers
are all large banks in the same state, they are very likely to compete in the same
markets. Merger or acquisition transactions among them are most likely to
eliminate existing competition and increase concentration in local banking
markets. Yet in spite of these competitive realities, present law does not permit
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regulatory authorities to approve the acquisition of a distressed bank by an outof-state institution, even though in many cases it would be competitively far
preferable.
Thus, passage of legislation along the lines proposed would be highly desirable
from a competitive standpoint. Out-of-state acquisitions would be permissible
in situations where the purchase of a large failing or floundering bank by an instate banking institution would be anticompetitive. An alternative procompetitive
resolution of such situations would thus become possible. An exception to the
general proscription of multi-state banking would be created, but it would be
a very limited exception, and one which would clearly serve the public interest.
Accordingly, we urge the Congress to adopt this feature of S. 890.
I would like to point out, however, what we believe to be a serious deficiency
in the bill as presently drafted. Under its terms, an out-of-state acquisition
only becomes a possible alternative where the assets of the troubled bank exceed
$500 million. This appears to be an attempt to approximate those situations where
the large size of a troubled bank substantially lessens the number of institutions
financially capable of making the acquisition and makes the competitive dangers
of an in-state purchase more serious. It may also be an attempt to approximate
the size of a bank whose failure, due to a lack of available alternative purchasers,
may have serious repercussions across the nation's entire financial community.
A $500 million figure might be a reasonable criterion in some states. However, it
is too large to serve any purpose in other states, where a bank of that size either
does not exist, or is far too large for any other bank in the state to acquire, or is
so competitively significant that its acquisition by any in-state purchaser would
be significantly anticompetitive. Moreover, while the $500 million figure may be
relevant to dangers of national or regional repercussions resulting from the
failure of a large bank, it is unsatisfactory when one considers the dangers of more
localized disruptions which could result from the failure of a bank which is "large"
in terms of the state in which it is located, but does not possess assets of $500
million.
Congress should ensure that the potential benefits of this legislation extend to
all banking customers and all communities, regardless of where they live or in
which state they are located. Thus, it should consider alternatives to the proposed
minimum figure. These might include a single smaller asset-size criterion, or
alternative criteria, e.g., a bank could be acquired by an out-of-state holding
company if the bank were a specified size, or if it were one of the largest commercial banks in its state, or if it controlled a specified percentage of total state
commercial bank assets. Of course, before an acquisition by an out-of-state holding
company could be made, the other statutory criteria also would have to be met.
However, since the banking structures of the states vary considerably, it is
unlikely that any specific legislative criteria could be developed to cover all
appropriate situations. Therefore, we believe the most desirable solution would
be to eliminate any legislative absolute minimum asset size and rely instead on
general standards. These should be sufficient to avoid anti-competitive resolution
of emergency situations in any state, and should set forth in clear terms the
intent of Congress in this area. In this way, the purposes of the legislation can
be selectively and expertly applied to the widely varying structures of commercial
banking in the several states. Proper account can be taken of concentration,
state laws governing bank expansion, local markets served by the troubled bank
and its potential acquirers and the nature of the emergency. Congress might
also consider procedures which would involve other regulatory agencies responsible for the resolution of emergency situations in the decision-making process.
To summarize, we feel that the out-of-state option feature of S. 890 is as
important and as necessary as the emergency procedure features. It is a familiar
maxim that substantive rules of law work only as well as the procedures which
implement them. Equally valid is the proposition that procedures made flexible,
enough to accomplish a particular goal cannot do so if the underlying substantive
rules are too rigid. The goal of Congress in considering this legislation is, of course
to provide for the resolution of the problems presented by failing or floundering
banks in a manner consistent with the public interest, including the preservation
of competitive banking structures. We believe that S. 890 is consistent with this
goal, and we therefore strongly support it.
Senator M C I N T Y R E . Mr. Sims, in your testimony you say that the
question of whether the current laws which prohibit interstate banking
are desirable or not is one which we do not have to answer here be-
91
cause this legislation would not significantly reduce existing restrictions on multistate banking. You then go on to propose that the dollar
limit which the Federal Reserve Board proposed should be eliminated.
Would that not be a significant reduction of the restrictions on
multistate banking?
Mr. SIMS. I think not, Mr. Chairman, because the legislation
would still provide, as it does now, that this procedure would be used
only in limited situations where a bank was failing or floundering
and after proper evaluation of the relevant criteria determines that
the out-of-State purchaser was the most appropriate purchaser.
I t seems to me under those conditions, the number of times when
this opportunity would be taken would be very small indeed. Looking
back into the past, the recent past, there have been a relatively small
number of situations where you can imagine this procedure having
been appropriate and thus it being even possible that an out-of-State
purchaser would have been chosen if that were the possibility.
I would not see any reason there would be a larger number of those
situations in the future.
Senator M C I N T Y R E . One of the concerns which has been expressed
with this piece of legislation is that concentration of control of banking
assets and deposits would be further heightened by allowing large
bank holding companies to cross State lines, gain footholds in new
States, and accelerate their already growing proportion of banking
business in this country. Would you comment on this issue please?
Mr. SIMS. Commercial banking in the United States is probably
one of the most unconcentrated major industries in the country.
There are some 14,000 or slightly less than that commercial banks.
I don't know what the exact concentration figures are, based on
national rankings, but it is not overwhelmingly significant. Even if
it were a very large number, banking is largely a local activity. Concentration ratios have significance only in responsible and reasonable
relevant economic markets.
There are banking markets in the country which are highly concentrated but there are no banking institutions, because of the various
restrictions on banking and State line restrictions, which have dominant positions in all or even many of the banking markets in the
country. I don't believe the concentration issue in banking is a significant issue in the context of this legislation.
Senator M C I N T Y R E . Well, just for your information, you may know
this, out of the more than 14,000 banks, the top 100 control 50 percent
or a little greater of all of the assets. And the top 10 control 29 percent
of all assets.
Mr. SIMS. Concentration rates are obviously relevant where they
apply to a relevant economic bank. Banking is not for most purposes,
a national market; it is a localized business and the fact that the top
100 banks control 50 percent of national banking assets has very little
significance for a goodly portion of the retail banking business.
Senator M C I N T Y R E . I'm glad you straightened me out. Should a
bank holding company which has been given permission to go ahead
and cross State lines in one of these circumstances be forbidden to
expand beyond the branches which it acquires?
Mr. SIMS. AS I understand the legislation, Mr. Chairman, a bank
or bank holding company would be subject to relevant State laws in all
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respects except to the extent that this legislation preempts those
State laws and this legislation would not preempt State multibank
holding company laws except in the instance of a failing or floundering
bank.
Senator M C I N T Y R E . If the law were wide open for additional
branches once they get their foot in the door, what would be your
opinion?
Mr. SIMS. I think to the extent that State law permitted branching
or multibank holding company operations by those banks or bank
holding companies within its State, at least my initial judgment is
that this legislation would not prohibit a bank once it had acquired a
bank or bank holding company within a different State to go ahead
and expand within the State to the extent other banks were permitted
by State law.
Senator M C I N T Y R E . In this situation, therefore, do you think it
would be a good policy under this law that the bank entering into
a new State would be grandfathered in to just the existing branches
as of the time it entered?
Mr. SIMS. I don't understand the question.
Senator M C I N T Y R E . Well, if the bank comes across State lines to
effect a merger or the bail-out of a failing bank, should we hold it to
whatever branches existed at that time or allow it to expand further?
Mr. SIMS. T O the extent State law would otherwise permit further
expansion, I would be reluctant to see acquiring out-of-State holding
companies limited to the facility it acquired, largely because that would
put them at a competitive disadvantage with other banking institutions
in the State.
To the extent banking laws of that State prohibited branching and/
or multibank holding corporations, I see no reason those restrictions
wouldn't continue to apply to an out-of-State holding company that
acquired banks under this legislation, and I see no reason to exempt
them from those limitations.
Senator M C I N T Y R E . OK.
Let me ask you a question which concerns us from the standpoint
of the bill as it is before us now or as Mr. Wille would amend it. We
are concerned that allowing interstate acquisition of only the largest
banks would create two classes of banks. As you know, the F D I C
insures depositors of all member banks up to $40,000.
When it is cheaper for the F D I C to arrange an acquisition than it
would be to absorb the losses from a payout, the F D I C will likely
try to arrange a merger. Now, if the F D I C and the Federal Reserve
Board were to arrange mergers for all the large banks and only payouts
for all the small banks which failed, wouldn't all large depositors,
that is all those who deposit more than $40,000 in an account, flock
to the large banks? Wouldn't we have legislated a monopoly on large
accounts for large banks?
Mr. SIMS. I don't believe, Mr. Chairman, that the out-of-State
option possibility presented in S. 890, would have that result. My
understanding of the F D I C current practice, and I believe this is
related in Mr. Wille's testimony before you, is that they make an
effort to merge out all troubled banks. Payout is an option which is
considered secondarily and not primarily.
93
In fact, it has been rather standard practice to merge out large
banks. The out-of-State option really doesn't do anything except
provide a larger source of potential acquiring institutions. I t doesn't
really add any impetus to the idea of merging banks out as opposed
to paying banks out.
A large bank or indeed, any bank which is in this kind of difficulty
is going to be dealt with, I would think, initially on the basis of
attempting to merge the bank out because it's simpler for everybody
involved, Even without the out-of-State option it would be my
expectation that there would be a significant effort made to have the
large banks in trouble merge. I don't think the out-of-State option
feature itself adds significantly to that possibility.
Senator M C I N T Y R E . The Comptroller has suggested that out-ofState acquisitions, if permitted, shoud extend to banks as well as
bank holding companies. Would you please comment?
Mr. SIMS. Certainly the rationale is similar. There are some further
difficulties in dealing with bank mergers than there are in dealing
with bank holding companies. I t is conceivable to me that a bank
holding company with some or all of its operations located in one
State could acquire a bank in another State and yet not have serious
difficulty with differing State standards or rules and regulations.
On the other hand, if a bank located in one State acquired branches
of another bank, located in another State, I would think there would
be some managerial difficulties in complying with State law and
regulations which might not exist in the holding companies' situation.
I see some additional problems which would have to be considered
and dealt with. The rationale is applicable to both situations.
If a bank is in trouble, the further away it is from its potential
acquirers the less directly competitive they are likely to be, and the
less likely it is that the acquisition will have adverse competition
effects. This is true in both holding company and branching situation,
but I could see some managerial problems in branching situations
which would have to be considered.
Senator M C I N T Y R E . There has been a fair amount of scepticism of
enacting the bill at this time. If one accepts Chairman Wille's statements that the F D I C has the capability of handling successfully and
with reasonable dispatch the potential failure of virtually any bank
with less then $2 billion in assets, and depending upon the circumstances, banks of even larger size, then are we not legislating on behalf
of this country's 51 largest banks?
Mr. SIMS. I'm not
Senator M C I N T Y R E . Has Mr. Wille
Mr. SIMS. I'm not positive of what
been lucky?
Mr. Wille meant when he said
the F D I C was capable of handling situations involving banks with
up to $2 billion. He may have meant they had the financial and operational capability to do so. He's obviously in a much better position
than I am to evaluate that point.
On the other hand, my concern is with competitive impact of these
kinds of transactions and it seems rather clear to me that the larger
the institutions involved, the more likely you are going to be limited
to banks with which the failing institution is directly competitive or
likely to be, and the more likely you are to have competitive issues
and on some occasions serious competitive issues.
56-713 O - 75 - 7
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Those have been avoided in recent years but the two or three large
troubled bank situations have come in States like New York or
California where there are a relatively large number of potential
acquirors, some of which have not directly been competing with the
troubled bank.
If we had troubles with a large bank irr many other States, competitive issues would have been much more significant. I view this
proposed legislation as preventive legislation in large part, providing
the procedural flexibility to prevent, in those cases where it's likely
to occur, the danger of having to accept anticompetitive results in
order to preserve the reputation and viability of banking institutions
or a banking system in a local area because of the lack of opportunity
to go outside the State borders.
Because of that I would think that this legislation is highly desirable.
Senator M C I N T Y R E . The bill uses the term "emergency," yet,
nowhere is the term defined. What should be the parameters of an
"emergency" as encompassed under this bill?
Mr. SIMS. Mr. Chairman, I have a little bit of difficulty answering
that because I am not a banking expert and am far from it. What we
have done in the past, and what the Bank Merger Act has contemplated in the past, has been to rely on the banking agencies to make
the determination that the situation with the banking institutions
was such that it required expeditious action.
Really, based on our lack of expertise and their ownership of a
considerable amount of the governmental expertise in this area, I
would think that I would have to defer to the banking agencies for a
proper definition of "emergency".
We have not had any difficulty with the agencies.
Senator M C I N T Y R E . H O W do you assess the Board's suggestion that
the permissible number of out-of-State acquisitions might number
more than one but, say, less than five?
Mr. SIMS. I view that suggestion as an attempt to defuse some of the
fear about wholesale takeovers by out-of-State institutions in any
particular State.
The rationale offered by Governor Holland seems to be perfectly
logical. I would not like to limit potential acquisitions in any State to
one institution. Then you run the danger of the institutions watching
banks and trying to predict or speculate on whether this is likely to
be the most desirable situation to exercise their option.
On the other hand, some limitation—five, perhaps three, the number
is anybody's guess, would, it seems to me, significantly lessen the fear
and totally eliminate the possibility that one out-of-State organization
was going to come in and take over the banking institutions of a
particular State. His rationale seems logical, if in fact, that fear is a
considerable fear and that fear is such that it is likely to prove an
impediment to the enactment of this legislation.
Senator M C I N T Y R E . Page 49 of the transcript of Mr. Wille's testimony of last Tuesday—I want to read and ask you to comment from a
part of his answer.
As to the question of concentration, concentration is a complex subject but it
depends—it depends on your view, I think, on what concentration it is that you're
looking at. If you're looking at concentration at the state level, Governor Holland
is correct in saying that this extension of the bill could increase concentration at
the state level which might not be desirable.
95
On the other hand, the concentration that Senator Proxmire was talking about
was concentration on the national level looking at nationwide deposit totals and
the aggregations of banking resources nationwise. Many economists believe that
the only concentration to look at is the concentration in local banking markets
and that is the subject on which numerous people differ, myself included, so that
when you talk about concentration there is not one easy answer.
I might say that I can conceive of a situation within a state where the acquisition
by an in-state holding company is not necessarily anticompetitive and where it
may be more desirable than an interstate acquisition.
Would you comment on that?
Mr. SIMS. Yes, I guess I agree with that. Clearly, concentration is a
difficult complex subject and it does, as I tried to indicate before,
make a whole heck of a lot of difference what you mean when you
say concentration.
At a national level, concentration in banks is considered by many
to be a serious political problem but I don't believe it is considered to
be a serious economic problem. Concentration in various local banking
markets, which are in our view the most relevant measure of banking
concentrations, in many States is quite high.
The out-of-State option for acquisition of failing or floundering bank
holding companies or banks, seems to provide an opportunity in
many cases for perhaps even a decrease in concentration as a result of
taking care of the floundering bank problem.
On the other hand, it is conceivable that in a particular situation
acquisition by a particular out-of-State holding company of a particular
bank might be less procompetitive and or more anticompetitive than
acquisition by an interstate operation. I would think that that would
be the rarer situation than the contrary one.
Senator M C I N T Y R E . Mr. Sims, Senator Proxmire hoped to be here
this morning but unfortunately he can't make it. His staff member,
Mr. Marinaccio, has three or four questions he would like to ask you
for Senator Proxmire.
Mr. MARINACCIO. Mr. Sims, in your statement you say that the
availability of the authority which would be granted under this bill
would make the resolution of problems similar to those encountered
in U.S. National Bank and Franklin National Bank much simpler.
Why should the focus of the resolution of Franklin and U.S. National type situations be on multistate banking? Shouldn't we first
assure ourselves that by better regulation the failures of large institutions would be prevented.
You know that the regulatory authorities have power to prevent
potential unsafe or unsound practices. This together with examination
powers is a mighty potent weapon that has never been effectively
utilized.
Why not rely on regulation? Why rely on mergers? Why focus on
multistate banks to solve this problem?
Mr. SIMS. I have no disagreement with that focus at all. Obviously,
there are significant weapons at the hands of the bank regulators
with the use of which hopefully these kind of situations could be
prevented or significantly lessened in number. I am not really in a
position to say, based on my own knowledge or evaluation whether
or not they are doing a super job, a good job, a fair job or a bad job,
or an average job. I am not an expert in banking regulations.
Banking regulation is a first line of defense. I think what we're
talking about here today is what happens when for whatever reasons,
96
whoever's fault it is, you arrive at a situation where something needs
to be done in order to take care of the situation.
I think what we're talking about here is giving increased flexibility
to the banking regulators to take care of the situation if and when it
does arise. I don't think we're talking about it as a substitute.
Mr. MARINACCIO. Mr. Wille recommended that the minimum
acquisition size under the bill be raised to $2 billion or over. Since there
are only 50 banks in this size category, does it not concern you that
over the years—unless we focus on regulation—a shakeout might
result in a small number of these banking institutions operating
in and dominating every major banking market in the Nation.
Are you not concerned about the effect of this bill on concentration
in the Nation as a whole?
Mr. SIMS. N O , I'm not. I don't see this bill significantly adding to
concentrations in relevant banking markets. I would point out though,
that my testimony is slightly different than Mr. Wille's. I prefer to
see the size criteria lowered as opposed to raised and I think to the
extent that there is a fear that this is a bill which is going to affect
directly only the 50 largest banks, lowering the size criteria and allowing the Federal Reserve Board to utilize this procedure in its discretion
ought to lessen that fear.
Mr. MARINACCIO. Mr. Wille testified that Congress should address
a number of issues before it adopts this legislation—although he
agreed with the bill in principle. And the areas Mr. Wille said should
be addressed are the role of the Federal Reserve in supervision generally; treatment to be accorded shareholders and bondholders of
banks in distress; interstate banking; and 100-percent insurance for
all deposits.
These are significant issues. What is your view of the effect of this
provision of this bill on the incentive on banking management and
depositors on careful and prudent management of banking institutions?
Mr. SIMS. I'm trying to be precise on exactly what this bill does.
I t does two things. I t amends the Bank Holding Act. No effect,
from that position I would think, at all on any of those factors. We
have that procedure today and it's being used today. The other aspect
of the bill is the out-of-State option, and all the State option does is
increase the number of potential acquirers. I t doesn't exacerbate the
situation which might lead to a failing or floundering bank.
I really have some great difficulty in believing that the incentives
are simple and just the worry about whether or not there is going to
be payout of their failing bank or whether there is going to be a merger of their failing bank.
There are a lot of other incentives, and considerable incentives to
avoid these kind of situations whether or not it's a payout or merger transaction.
I'm quite dubious about this lack of incentives.
Mr. MARINACCIO. I am concerned that this bill provides no remedy
for public scrutiny of the alternatives available to the Board in choosing
one acquiring bank holding company over another. Shouldn't there
be a provision in this bill which in principle adopts the approach of the
antitrust laws for the entry of consent judgments; namely, some
judicial scrutiny?
97
Mr. SIMS. I'm not sure what my answer to that question is. I
have not considered that precise point before. I guess my initial
reaction and it is simply that, initial reaction, is that this procedure is
simply a carbon copy in all major respects of the Bank Merger Act
procedure.
The Bank Merger Act procedure has worked very well. We have
been consulted at various stages of the transaction; we have had
competitive input, the bank regulators have considered competitive
issues, and the procedure has not been abused. I guess on the basis of
that record, my initial reaction is that such procedures were not
necessary.
Mr. MARINACCIO. One final question. Under section 1 the Board
has not—is not required to select the least anticompetitive alternative.
There is no definition of public interest which will allow the Board to
choose an out-of-State acquisition over an instate alternative. Further, the term "weighing" (line 25, page 4) of the bill, may have the
effect of lessening the antitrust standard over their acquisitions. The
standard now is that the Board cannot approve an anticompetitive
merger unless the competitive factors are clearly outweighed by some
need in the community. This is a fairly high standard and should perhaps be tightened.
The language of the bill indicates a lessening of this stringent requirement by inserting the word "weighing" which indicates that all of
these factors are equal. They are not. The competitive factors are
paramount. This language might cast some doubt upon the existing
standards and lower the standards toward these mergers.
What is your comment on that?
Mr. SIMS. I do not read the bill to do that. The word "weighing"
to me is simply an indication that the Board should follow the standards set out in section (c), and I don't believe the word "weighing"
changes the standard at all.
However, I see no objection and probably some reason to changing
the language of the bill if this is viewed to be a possible area of ambiguity, to make it clear that the Board, in deciding who and when to
allow to proceed in this procedure, should follow the standards of
section (c) set out the same way they do today.
Mr. MARINACCIO. D O you think that there ought to be some clearcut definition of what constitutes an emergency and what constitutes a
potential failure?
Mr. SIMS. A S I indicated earlier, I don't believe that I or the Department of Justice is enough of a banking expert to really answer that
question effectively.
I think that is an issue that probably ought to be left to the discretion of the banking agency, and we have to admit our knowledge had
no share of that discretion.
Senator M C I N T Y R E . Before I let you go, I take it that you believe
there should be no dollar cutoff?
Mr. SIMS. T h a t would be our preference; yes, sir.
Senator M C I N T Y R E . Your answers have certainly been refreshing
and clear cut.
I want to thank you and your associate for your fine and helpful
testimony.
Mr. SIMS. Thank you.
98
Senator M C I N T Y R E . I would like to call now Mr. Ralph A. Beeton,
president-elect, Association of Registered Bank Holding Companies.
I understand that you are accompanied by Mr. Donald L. Rogers, the
executive director of the Association of Registered Bank Holding
Companies.
Glad to welcome you here this morning. I have your relatively short
statement. I t will be printed in its entirety in the record. Proceed.
Mr. B E E T O N . Thank you, Mr. Chairman.
STATEMENT OF RALPH A. BEETON, CHAIRMAN OF FIRST VIRGINIA
BANKSHARES CORP., FALLS CHURCH, VA., ACCOMPANIED BY
DONALD L. ROGERS, EXECUTIVE DIRECTOR
Mr. B E E T O N . Mr. Chairman and members of the subcommittee,
my name is Ralph A. Beeton, and I am chairman of First Virginia
Bankshares Corp., Falls Church, Va. I am appearing here today in my
capacity as president-elect of the Association of Registered Bank
Holding Companies. Accompanying me is Donald L. Rogers, who is
executive director of our association.
We appreciate the opportunity to present our views on the Federal
Reserve Board's bill, S. 890, to amend the Bank Holding Company
Act to permit bank holding companies to acquire banks across State
lines in emergency situations. Our association consists of bank holding
companies which are regulated by the Board pursuant to the act, and
therefore, our member companies have a direct interest in this
proposal.
I t is essential that the Congress establish a national policy to deal
with large bank failures in an efficient manner in order to avoid prolonged delays which could undermine public confidence in the banking
system. We believe it is in the public interest to amend the act to
give the Board authority to approve the acquisition of a bank by an
out-of-State bank holding company where the bank to be acquired is
facing financial difficulties. The need for this legislation was demonstrated in a most dramatic way by the failure of the Franklin National
Bank last year.
Before discussing the specific provisions of S. 890, we believe it is
important to enumerate the principles that should be inherent in
legislation of this nature:
1. The Board should be authorized to act in an expeditious
manner without unnecessary delays.
2. The Board should exhaust all possibilities of the rescue of a
bank in trouble by a banking organization within the same State as
the bank, before seeking an acquisition by an out-of-State bank
holding company.
3. The Board should give domestic banking organizations the
first priority in rescuing a bank in financial difficulty and should only
seek assistance from foreign-chartered institutions as a last resort.
4. The Board should consult the other appropriate Federal and
State banking agencies having jurisdiction over the bank in trouble at
each stage of the determinations required by the legislation.
5. The Board should be authorized to act before a bank has reached
the stage of imminent failure so that there is still some degree of
equity left in the bank and a greater probability that the acquired
bank will be a successful operation.
99
6. The national policy established by the legislation should not
be thwarted by any prohibitive or restrictive State statutes to the
contrary.
Paragraph (3) of section 1 of the bill would limit bank holding
company acquisitions across State lines to situations where the bank
in trouble has assets in excess of $500 million or the bank holding
company in trouble controls a bank having assets in excess of $500
million. This asset test would cover approximately 200 of the largest
banks in the country and would exclude 33,800.
There are two aspects of this asset definition that concern us. First,
there are 11 States (Alaska, Arkansas, Kansas, Maine, Montana,
New Hampshire, North Dakota, South Dakota, Vermont, West
Virginia and Wyoming) where the largest banks have less than $500
million in assets.
In these States, it does not appear likely that a smaller bank or
bank holding company would have the financial and managerial
resources to undertake the rescue of the largest banks. There could
also be antitrust considerations in the acquisition of the largest bank
by the second or third largest banking organizations. The failure of
the largest bank in one of these States would have a significant impact
in the State and would carry with it national repercussions.
Our second concern relates to the 33 bank holding companies that
have more than $500 million in assets, but do not control one bank
with more than $500 million in assets. Obviously, the failure of a
bank holding company of this size would be of national concern, even
though it has no affiliated bank as large as $500 million.
Any asset limitation must of necessity by an arbitrary one, and,
therefore, we would prefer that there be none, so that the Board would
have maximum flexibility to act. If there has to be an asset limitation,
then it should be no more than $100 million in order to cover the
problem areas we have discussed above. This would increase the number of banks protected by the bill from 200 to about 950.
Section 2 of the bill would amend section 7 of the Bank Holding
Company Act to permit the acquisition of a bank in trouble by a
bank holding company even though there may be prohibitive or
restrictive State statutes to the contrary. We support the principle
embodied in this amendment because the States should not be permitted to undermine the national policy which would be established
by the bill to handle banks in financial difficulties.
However, we object to the last clause of the amendment. The
"unless" clause would discriminate against the bank holding companies
in the 13 States (Alaska, Arkansas, Georgia, Illinois, Indiana, Kansas,
Kentucky, Louisiana, Mississippi, Nebraska, Oklahoma, Pennsylvania,
and Washington) where bank holding companies are prohibited from
acquiring additional banks within their home State.
The home State bank holding companies in these States would be
eliminated as possible candidates to bid on acquisitions and, thus, the
number of viable alternatives would be reduced.
Of necessity, the Board in these States would have to look to an
out-of-State bank holding company for assistance. We believe it is
logical and equitable for the home State bank holding companies to
have an equal opportunity with the out-of-State bank holding companies to make emergency acquisitions. Therefore, we urge that the
"unless" clause be stricken from section 2 of the bill.
100
The thrust of this legislation is to permit the Board to act quickly
in emergency situations. We are concerned that there could be long
delays if the bank holding company seeking to acquire a bank in
trouble was required to meet the stock registration requirements of
the Federal and State securities laws in order to issue stock to consummate the acquisition.
Since the actions taken here are directly comparable to emergency
bank merger cases and should not involve shareholder approval, the
primary purpose of the securities laws to provide disclosure to shareholders would not be applicable.
Therefore, we do not believe the shareholders would be harmed by
exempting emergency acquisitions from the securities laws and, in
fact, the bank shareholders would stand to benefit from a speedy
resolution of the bank's problems. We suggest that paragraph (3) of
section 1 of the bill be amended as follows:
(f) Notwithstanding any other provision of this section or t h e provisions of
a n y Federal or State securities s t a t u t e * * *
We agree with the proposed amendments in the bill to reduce the
waiting and comment periods in sections 3(b) and 11(b) of the act.
The comparable authority for emergency actions in the Bank Merger
Act has worked well, and the Board should have similar flexibility
under this act.
I want to stress again our belief that it is imperative that the Congress establish a national policy with respect to major bank failures
in the future.
Hopefully, the Board will never be required to exercise the authorit}^
provided in this legislation, but the Board should be given the necessary powers to act expeditiously to protect the public when required.
I shall be happy to answer any questions you may have concerning
our statement.
[Complete statement follows:]
S T A T E M E N T OF R A L P H A. B E E T O N , P R E S I D E N T - E L E C T , ASSOCIATION OF R E G I S T E R E D
BANK HOLDING COMPANIES
Mr. Chairman and members of the Subcommittee, m y name is R a l p h A. Beeton
a n d I am chairman of First Virginia Bankshares Corporation, Falls Church, Virginia. I am appearing here t o d a y in m y capacity as president-elect of t h e Association of Registered Bank Holding Companies. Accompanying me is Donald L.
Rogers, who is executive director of our Association.
We appreciate t h e opportunity to present our views on the Federal Reserve
Board's ("Board") bill, S. 890, to amend the Bank Holding Company Act ("Act")
to p e r m i t b a n k holding companies to acquire banks across State lines in emergency
situations. Our Association consists of b a n k holding companies which are regulated b y the Board p u r s u a n t to t h e Act, and, therefore, our member companies
h a v e a direct interest in this proposal.
IMPORTANCE OF NATIONAL POLICY
I t is essential t h a t t h e Congress establish a national policy to deal with large
b a n k failures in an efficient m a n n e r in order to avoid prolonged delays which could
undermine public confidence in the banking system. We believe it is in t h e public
interest to amend t h e Act to give the Board authority to approve t h e acquisition
of a b a n k b y an out-of-state b a n k holding company where the b a n k to be acquired
is facing financial difficulties. T h e need for this legislation was demonstrated in a
m o s t dramatic way b y the failure of the Franklin National Bank last year.
101
PRINCIPLES INVOLVED
Before discussing the specific provisions of S. 890, we believe it is important to
enumerate the principles that should be inherent in legislation of this nature:
1. The Board should be authorized to act in an expeditious manner without
unnecessary delays.
2. The Board should exhaust all possibilities of the rescue of a bank in trouble
by a banking organization within the same State as the bank before seeking an
acquisition by an out-of-state bank holding company.
3. The Board should give domestic banking organizations the first priority in
rescuing a bank in financial difficulty and should only seek assistance from foreignchartered institutions as a last resort.
4. The Board should consult the other appropriate Federal and State banking
agencies having jurisdiction over the bank in trouble at each stage of the determinations required by the legislation.
5. The Board should be authorized to act before a bank has reached the stage
of imminent failure so that there is still some degree of equity left in the bank and a
greater probability that the acquired bank will be a successful operation.
6. The national policy established by the legislation should not be thwarted
by any prohibitive or restrictive State statutes to the contrary.
$500 MILLION LIMITATION
Paragraph (3) of section 1 of the bill would limit bank holding company acquisitions across State lines to situations where the bank in trouble has assets in
excess of $500 million or the bank holding company in trouble controls a bank
having assets in excess of $500 million. This asset test would cover approximately
200 of the largest banks in the country and would exclude about 13,800.
There are two aspects of this asset definition that concern us. First, there are
11 States (Alaska, Arkansas, Kansas, Maine, Montana, New Hampshire, North
Dakota, South Dokota, Vermont, West Virginia and Wyoming) where the largest
banks have less than $500 million in assets. In these States, it does not appear
likely that a smaller bank or bank holding company would have the financial and
managerial resources to undertake the rescue of the largest banks. There could
also be antitrust considerations in the acquisition of the largest bank by the second
or third banking organizations. The failure of the largest bank in one of these
States would have a significant impact in the State and would carry with it national
repercussions.
Our second concern relates to the 33 bank holding companies that have more
than $500 million in assets, but do not control one bank with more than $500
million in assets. Obviously, the failure of a bank holding company of this size
would be of national concern, even though it has no affiliated bank as large as
$500 million.
Any asset limitation must of necessity be an arbitrary one, and, therefore, we
would prefer that there be none, so that the Board would have maximum flexibility to act. If there has to be an asset limitation, then it should be no more than
than $100 million in order to cover the problem areas we have discussed above.
This would increase the number of banks protected by the bill from 200 to about
950.
RESTRICTIVE STATE
LAWS
Section 2 of the bill would amend section 7 of the Bank Holding Company
Act to permit the acqusition of a bank in trouble by a bank holding company
even though there may be prohibitive or restrictive State statutes to the contrary.
We support the principle embodied in this amendment because the State should
not be permitted to undermine the national policy which would be established
by the bill to handle banks in financial difficulties.
However, we object to the last clause of the amendment. The "unless" clause
would discriminate against the bank holding companies in the 13 States (Alaska,
Arkansas, Georgia, Illinois, Indiana, Kansas, Kentucky, Louisiana, Mississippi,
Nebraska, Oklahoma, Pennsylvania and Washington) where bank holding
comapnies are prohibited from acquiring additional banks within their home State.
The home State bank holding companies in these States would be eliminated
as possible candidates to bid on acquisitions and, thus, the number of viable
alternatives would be reduced. Of necessity, the Board in these States would have
to look to an out-of-state bank holding company for assistance. We believe it is
logical and equitable for the home State bank holding companies to have an
102
equal opportunity with the out-of-state bank holding companies to make emergency acqusitions. Therefore, we urge that the "unless" clause be stricken from
section 2 of the bill.
SECTJKITIES
LAWS
The thrust of this legislation is to permit the Board to act quickly in emergency
situations. We are concerned that there could be long delays if the bank holding
company seeking to acquire a bank in trouble was required to meet the stock
registration requirements of the Federal and State securities laws in order to
issue stock to consummate the acquisition. Since the actions taken here are directly comparable to emergency bank merger cases and should not involve
shareholder approval, the primary purpose of the securities laws to provide disclosure to shareholders would not be applicable. Therefore, we do not believe the
shareholders would be harmed by exempting emergency acqusitions from the
securities laws and, in fact, the bank shareholders would stand to benefit from
speedy resolution of the bank's problems. We suggest that paragraph (3) of
section 1 of the bill be amended as follows: "(f) Nothwithstanding any other provision of this section or the provisions of any Federal or State securities statute * * *."
(New langage italic.)
WAITING A N D COMMENT P E R I O D S
We agree with the proposed amendments in the bill to reduce the waiting and
comment periods in sections 3(b) and 11(b) of the Act. The comparable authority
for emergency actions in the Bank Merger Act has worked well, and the Board
should have similar flexibility under this Act.
CONCLUSION
I want to stress again our belief that it is imperative that the Congress establish
a national policy with respect to major bank failures in the future. Hopefully,
the Board will never be required to exercise the authority provided in this legislation, but the Board should be given the necessary powers to act expeditiously
to protect the public when required.
Senator M C I N T Y R E . YOU said in your statement:
Our second concern relates to the ZZ bank holding companies that have more
than $500 million in assets, but do not control one bank with more than $500
million in assets. Obviously, the failure of a bank holding company of this size
would be of national concern, even though it has no affiliated bank as large as
$500 million.
Wouldn't the situation where a bank holding company fails be
better handled b y looking at each individual bank than b y some way
of saving the bank holding company?
Mr. B E E T O N . I don't understand
Senator M C I N T Y R E . What's the situation where a bank holding
company fails? You've got to look at each individual bank and the
bank holding company?
Mr. B E E T O N . I think if you look at our own company we have 1
bank out of 23 banks that is a little under $500 million. This bill would
not cover the company even though m y company is about $1 billion
in total assets.
The bill simply would not be applicable to us where you have the
$500 million limitation. This is a situation where at least one bank
in the holding company hasn't reached that level. Now, as I say, in
our own case we are $1 billion in resources with 23 banks and Falls
Church is just under $500 million, so that would not be covered.
Senator M C I N T Y R E . YOU express concern where a large bank holding
company finds itself in trouble. Is it safe to assume t h a t in such a case
a bank subsidiary will ordinarily be tapped for additional resources
and to what extent is this possibility taken into account under present
regulations?
1>G3
Mr. BEETON. I t ' s not possible.
Senator
MCINTYRE.
I t ' s not possible?
Mr. BEETON. I t ' s not possible.
Senator M C I N T Y R E . Mr. Beeton, the situation on the Senate floor
requires my presence for a few minutes. I hope to be back b u t I'll
ask Mr. Weber to ask the remaining questions for me.
If I don't get back, thank you very much for being here.
Thank you, Mr. Rogers.
Mr. ROGERS. Yes, sir.
Mr. W E B E R . Doesn't the
acquisition of an instate bank by a bank
holding company where the acquisition is not permitted under State
law cause some anticompetitive results to the other banks and the
bank holding companies located within that State?
Mr. B E E T O N . I S the question does the acquisition by an in State
bank by an out-of-State bank holding company cause problems within
the State?
lyir. W E B E R . What we're trying to get a handle on are the policy
problems you run into where you have a situation where a bank is
owned by a bank holding company as limited by State law. If you
have a bank holding company within a given State under the emergency situation, the acquisition of another bank would obviously make
it a multibank holding company and therefore, in contradiction to
interstate law.
On the other hand, a merger partner could come in and acquire a
bank and become a one bank holding company, which would comply
to State law. What should your choice be under the circumstances
from a congressional policy standpoint?
Obviously one way or the other we are going to have to override
State law.
Mr. B E E T O N . Well, we think it's healthy and probably in the best
interests of the current banking structural balance to have the inState one bank holding company. In these cases a national policy is
required to prompt such company to acquire an additional bank if the
acquisition otherwise measures up to the bank holding company actrequirements or the State bank requirements.
Mr. W E B E R . Given the incentive for a bank or bank holding
company to gain a foothold in another State via the acquisition
route, does this create in any way additional incentive for a bank
holding company to overreach its own capital limitations?
Mr. B E E T O N . I don't think the bank holding company would seek
to support and have a further commitment to a failing bank without
adding the capital. I don't believe it would be authorized to do that,
in the first instance by the Federal Reserve Board and I do not think
prudent management would follow that course of action.
Mr. W E B E R . There is a question of what the prospects are for
a repeat of the capital-short environment which provided the basic
thrust of this legislation whether it is likely to again come into play.
Mr. B E E T O N . With respect to the capital shortage that has existed
in the past.
Mr. W E B E R . That's correct. B u t to what extent could we expect
to encounter that again in the future?
Mr. B E E T O N . Oh, well, much depends on the economic forces of
the day. Economic decisionmaking or forecasting is so tentative
104
and active that it is difficult to—it would be difficult, considering the
past 15-18 months' environment, to predict just when occasions
might arise in the future for the need of this bill.
I ' m not—I don't have available information that the supervisory
authorities might have in their files but I don't think there is anything
on the immediate horizon which would tell us that we're going to
have a period similar to that 6 months period (May-November) that
we had a year ago, but we exist in a world market and these are
difficult times and have been difficult times, and I think that we
need the legislation in the event that we should again have periods
of liquidity crisis such as existed last year.
Mr. W E B E R . YOU seem to be very sympathetic to this bill, but
you make no mention of whether present regulation might not be
improved so as to obviate the need for this legislation. What are
your thoughts about this?
Mr. B E E T O N . AS a practioner or user of the regulations and all
three regulated banks in our bank holding company, I cannot be
critical of the methods and standards that the various agencies use.
In my particular bank holding company, we use the F D I C , the
Comptroller of the Currency and Federal Reserve System examiners
and I find them all to be helpful.
The differences are the various problems can come up within a
banking organization, particularly one of some size, dealing in other
than local markets. I mean the problems can come up quickly—much
like a storm at sea.
I t is very difficult to try to regulate judgment making as long as
we have the private banking system that exists in the United States
today. I t is very difficult in my judgment to think of all the regulations that you might have short of just supplanting the judgmentmaking process with regulation.
The judgment making process in banks—I just don't see how you
could improve upon that or have any new form of regulation which
would take the place of this in this bill.
Mr. W E B E R . In your statement you call for a national policy to
deal with large bank failures. This would seem to imply two things.
One, the possibility of future failures; and two, raises the issue of
whether we as a nation should continue to be hung up about the
relationship of public confidence and bank failure.
Would you please comment on these two points?
I n other words, should we be so concerned about the way the public
confidence will react in light of recent history of bank failures? Should
we be so concerned?
Mr. B E E T O N . Well, in my view there is a necessity to maintain
as high a level of public confidence in all financial institutions as
possible. Oftentimes a problem appears to be a problem today, will
be worked out tomorrow and that will depend upon things that are
beyond the control of the bank or the other similar institutions.
Something might occur outside (externally) that will create problems but I think that's the highest level of the confidence should be
maintained and that we should to continue the policy that has existed
with regard to that.
Mr. W E B E R . On page 2 of your statement, you express strong
preference for exhaustion of in-State remedies before going interstate.
105
This would seem to be in direct opposition to the testimony of the
Justice Department that from a concentration standpoint out-ofState acquisitions are preferred.
Would you please comment?
Mr. B E E T O N . Well, that statement is made with respect to the
current banking structure; that is, we support the State banking
structure, at least the structure built around the State system as
opposed to the Justice Department—pardon me, go back a minute.
Concentrating entirely within the State for taking over failing
banks or an emergency situation merging with another bank, you
would have the tendency to increase your concentration because if
the first, second, third or fourth largest bank should have to be taken
over there would be few viable sizable banks in the States that could
take one or the other of those over.
So you have the concentration problem. Our statement here is
intended to go as far as we can within the State and hopefully not
violate any of the concentration prohibitions; but we do subscribe
to the notion of permitting in-State banks to have the first choice and
allowing them to assume the burden of the failing bank whenever
possible and then going out-of-State, if that's the next step.
But it does provide the flexibility for the Board to do that rather
than to take many months as happened last year in the Franklin
case to try to perhaps work out something with in-State banks but
then there was a question at the end of whether any of the domestic
banks in New York could take over the Franklin Bank because or
possible antitrust problem.
Mr. W E B E R . What is the rationale for your preference of acquisition
by domestic institutions as opposed to foreign institutions?
Mr. B E E T O N . We regulate the domestic institutions and up to
now, we don't regulate the foreign institutions. You have substantial
concentration in foreign banking. A representative of the Justice
Department mentioned earlier this morning that we have almost
15,000 banks in this country and compared to any other nation of
similar size we are highly decentralized. We have decentralized
banking by numbers but perhaps concentrated in asset size at the
upper end to a certain extent.
Mr. W E B E R . We, as you know, the subcommittee at some point
toward the end of the year, hopes to take the up Fed's bill concerning
regulation of foreign banks. In your point 4, on page 2, when you say
the Board should "consult" with the primary regulators, does this,
in your opinion, mean concurrence of the primary regulator?
Mr. B E E T O N . N O , that isn't. We know that all of the agencies
work together. I've had firsthand experience with regard to one
failing bank and I know they work together, but we do not think
that you should receive—that the Board should have to receive the
prior certification of an emergency situation prior to acting because
when an emergency exists, it exists and in the interest of time, we
think that the requirement should not be included in the bill.
Mr. W E B E R . SO you believe the ultimate authority to handle it would
be the Federal Reserve Board. The Federal Reserve Board as the
single authority to approve or disapprove?
Mr. B E E T O N .
Yes.
106
Mr. W E B E R . I n his prepared statement Chairman Wille said,
"A merger frankly is the easy supervisory answer to a problem
bank." Now Chairman Wille also mentioned two additional options:
(1) stepped up financial assistance to a failing bank; and (2) the
chartering of a new bank to assume the assets of a failing one.
How do you view the effectiveness of each of these tools and do
you agree with Mr. Wille that in banks with assets of under $2 billion
that the F D I C ' s present ability to act is adequate?
Mr. B E E T O N . Well, now, to answer the first question. He's in the
insurance business and up to this time he's been able apparently to
fund the problem banks by making arrangements to have their deposit
liabilities assumed by others through the use of current receipts.
Now, as a subscriber or user to the insurance program of the F D I C ,
I can say they raise the level of premium assessments or reduce rebates
each time they do that. So, therefore, it does add to our costs as
insureds, each time that the corporation (FDIC) has had to do that.
I'm convinced that this is one alternative to the problem. I can
tell you that the loss to the stockholders and, therefore, the equity that
is involved in the bank, suffers from the chartering of a new bank or
the assumption of the bank's liabilities by another bank even though
the Chairman spoke of the fiduciary relationship that exists between
the F D I C as receiver and those shareholders. I t is in my view more
costly than working out an arrangement between another bank or
bank holding company to take over the failing bank.
I think that I can demonstrate to you that you would be saving
more money in the end by working out an acquisition of a failing bank
rather than trying to rely on the corporation (FDIC) which has about
$6 billion in trust funds and another $3 billion available borrowing
capacity to take over failing banks. But in this case it would seem to
me that the private sector could work out the failing bank problem
first with the private—another bank in private sector, a bank holding
company rather than relying on the F D I C .
I'm sure the Board will certainly consider its alternatives in t h a t
regard.
Mr. W E B E R . I'd like to ask you several questions that other witnesses have answered.
The Comptroller has suggested that out-of-State acquisitions, if
permitted, should extend to banks as well as bank holding companies. Would you please comment?
Mr. BEETON. Should?
Mr. W E B E R . Should extend to banks as well as bank holding
companies.
Mr. B E E T O N . Yes, if you could have out-of-State merger as well as
bank holding companies acquisitions. Our association has not taken a
position on that. Personally, I would say that the logic would appear to
be about the same.
There are some administrative difficulties in my view in his proposal,
simply because a State bank may be involved. Our present banking
structure—in our present banking structure assuming you permitted
interstate mergers, you could have State banking authorities of one
State supervising a bank that is engaged in interstate banking through
branches in more than one State. But from the national bank point of
view I could see the logic to his proposal. He supervises all national
banks.
107
Mr. W E B E R . What about the concept of emergency? No where is the
term defined. What should be the parameters in this type of legislation?
Mr. BEETON. I think when it's known upstairs that there is not
enough money in the bank to pay the incoming credit letter that a
true emergency exists, a situation can develop over a period of time or
it is suddenly discovered that there is a tremendously large loss that
results either from a trading account fictitious loans, or from some
form of embezzlement or other.type of activity.
I would think that the Federal Reserve Board would be in the
best position to make that determination. I t is very difficult to define.
Mr. W E B E R . What about the Board's suggestion that the permissible number of out-of-state acquisitions might number more
than one, but, say, less than five?
Me. B E E T O N . I think that that would be a—certainly an approach
to the problem or the question that some concern has been expressed
over more concentration within States. I would think that that would
be an approach to it. I would rather see it as it is, being aware of the
Board's past concern over concentration and administration of
other laws, I would think it would be better to leave it more flexible
and if a problem develops, then the Congress could address the problem
at that time.
Mr. W E B E R . I have some additional questions here but perhaps
only for the record. I have no further questions.
Mr. MARINACCIO. I have only one question. Of course, public
confidence is extremely important in bank institutions. How best
can public confidence be enhanced—whether by better regulation
or by disclosures or rather by this kind of merger legislation, which
some feel might create a disincentive to effective regulation. You
say that the Board be authorized to move while there is still some
degree of equity left in the institution.
Why shouldn't the controlling group controlling shareholders—
why shouldn't it be a condition that before the Board could approve
one of these acquisitions controlling shareholders equity would be
eliminated? This would prevent controlling shareholders from being
unjustly enriched by unsound banking practices—we all know that the
remaining properties of distress banks represent valuable properties in
most cases.
May I have your comment on that, please?
Mr. B E E T O N . I'm not quite sure what you want me to comment on.
I don't believe that the controlling shareholder exists, depending
upon what you mean by controlling shareholder. Whether some particular law will enrich that person. I don't think that any of the banks
or other businesses or bank holding companies start out on the premise that they are going to be a failure and therefore that they are
going to have some special rights or privileges as a result of bad judgment on the part of the directors, officers or trustees that they have
entrusted their funds to.
I simply don't believe that there would be any advantage to any
shareholder as a result of the poor policies within a bank or bank
holding company related to this bill.
Does that answer your question? I'm not quite sure.
Mr. MARINACCIO. Not really, but I think the focus of the question
was if shareholders and the management representing shareholders
108
particularly controlling shareholders do engage in unsafe and unsound
practices to the extent to which they put in extreme distress whether
or not their equity control should be eliminated before their public
remedy has given them that advantage.
Mr. B E E T O N . I certainly don't think that they ought to be permitted
to—these outside forces should be permitted to put the bank or bank
holding company in such distress and there should be regulations to
prohibit that.
Senator PROXMIRE. Gentlemen, what concerns me most about
this legislation is the effect it may have on concentration, making the
big banks bigger and concentrating banking resources. We've had a
very strong tendency over the last few years and particularly the last
3 or 4 years of greatly increasing the size of our biggest banks, the 10
biggest banks, the biggest banks have greatly increased their proportionate share of total assets over a few years ago.
I t seems this legislation may very well defeat that. I recognize it
is a very serious problem, but I think the nature of the problem
is that the banking capital has become a much smaller proportion of
bank liabilities. Big banks have super leverage. Now with the average
capital or the 10 biggest banks around 4 percent, they are vulnerable
to a sharp blow or setback or some major mistakes. This was not the
situation before. I just wonder if there isn't some way that we can
reestablish the fine record we had in the 1930's, and 1940's and 1950'sSince the F D I C was established in the early 1930's, we had no signifi.
cant bank failures until the 1970's. Why do we need this?
Mr. B E E T O N . We need this in the event that as a result of a series
of judgments or in the event that the financial markets change and
they are tentative and do change rapidly almost, so it is very difficult
at times to plan or forecast matters or things that come into play in
the economic market.
We can in the trading account, we don't have trading accounts or
deal in foreign funds but I can see the rapidity with which events
can occur.
Senator PROXMIRE. Why can't we have better and more careful
regulation, insisting on sounder banking, measures that would help
prevent the three or four banks that got into serious trouble in the
last 3 or 4 years? Why wouldn't this do the job?
Mr. B E E T O N . If you did that, you would have to have a series of
regulations about what investments a bank can or cannot make, and
this would be entirely different than currently exists. Even then the
matter of judgment is going to be broken and you are going to have
situations which in my view, develop just from being in business.
Senator PROXMIRE. They didn't develop by the way, in the 1940's,
1950's or 1960's. I t seems to me if the regulators had been doing
their job and were on top of the situation and acted in time, we
wouldn't have had these problems and the very difficult situations we
admittedly have now.
I t seems to me the answer is sound regulations rather than permitting the big shark to swallow the not so big shark. Perhaps I
should say whale. I should not say shark, not in this day and age of
"Jaws."
109
Mr. B E E T O N . Again, it is a matter of what you would say to the
particular bank management at the time and perhaps they need
stronger tools to take action and perhaps that area of the regulation
should be reviewed. I do think that when you do have problems
and will continue to have them over the years that the Federal Reserve Board should have such authority as is set forth in this bill.
Senator PROXMIRE. My point is, they have the tools, they could
act, but they haven't acted. They could have acted since 1969 with
respect to U.S. National and 1970 with respect to Franklin but they
didn't do this.
Mr. B E E T O N . I'm not too familiar with this observation. But there
is a case in New Orleans I think it was in the courts for 7 or 8 years.
I t was a problem bank. I'm just—if you need more authority to regulate the management judgment making process within the banks,
then they should have it.
Senator PROXMIRE. I'm not talking about that. I t is an extremely
high standard proof I think.
Mr. B E E T O N . Well, I think they were trying to get rid of the controlling shareholders in the bank in New Orleans.
Senator PROXMIRE. Would you gentlemen agree that these issues
I'm going to list should be resolved before we move forward with the
legislation?
This was the statement by the Chairman of the Federal Deposit
Insurance Corporation who testified here and who has lots of experience. These are the issues he said we should resolve first.
The future of interstate banking; two, 100 percent insurance for all
deposits; three, the financial and legal capacity of the F D I C to work
out the problems of the large banks in distress; four, the role of the
Federal Reserve in banking regulations generally; and fifth, the
treatment to be accorded shareholders and bondholders of a bank in
distress.
You feel that this is a pretty good list of issues that we should resolve and should be resolved before we act on this legislation?
Mr. BEETON. I feel that the distinguished chairman has given you a
list to work on but I also feel that in view of the nature of this particular bill with its limited scope, that you could proceed with this
and then take up those other issues that he has referred to there.
Senator PROXMIRE. All right.
Thank you very, very much.
I understand that Chairman Mclntyre had to be elsewhere. I want
to thank you for your testimony.
The subcommittee will stand recessed.
[Whereupon, at 11:30 a.m. the hearing was adjourned.]
[The following letters were received for the record:]
Digitized for 56-713
FRASER
O - 75 - 8
110
GOVERNMENT
AMERICAN BANKERS ASSOCIATION
RELATIONS
1120 CONNECTICUT AVENUE. N.W„ WASHINGTON. O.C.EOO3B
EXECUTIVE DIRECTOR
GERALD M. LOWRIE
302/447-4097
July 25, 1975
The Honorable Thomas J. Mclntyre
Chairman, Subcommittee on Financial I n s t i t u t i o n s
C o m m i t t e e on Banking, Housing and Urban Affairs
United S t a t e s Senate
Washington, D. C. 20510
D e a r Senator Mclntyre:
The purpose of t h i s l e t t e r i s t o outline t h e views of t h e American Bankers
Association on t h e f i r s t section of S. 890 which would amend t h e Bank Holding
Company Act of 1956 by providing t h e Federal Reserve Board with special p r o cedures and additional flexibility in dealing w i t h bank holding company acquisitions
of banks o r bank holding companies in emergency s i t u a t i o n s .
F o r purposes of comment, t h e bill can be divided into two sections: t h e
f i r s t would s t r e a m l i n e t h e emergency procedures f o r a bank holding company's
acquisition of a bank o r bank holding company facing financial difficulties; t h e
second section would p e r m i t a bank holding company t o acquire an o u t of s t a t e
bank o r bank holding company in similar c i r c u m s t a n c e s . Our c o m m e n t s in t h i s
l e t t e r a r e directed toward t h e f i r s t section of t h e bill which we view a s r e l a t i v e l y
noncontroversial. We would like t o d e f e r forwarding t h e p o s t u r e of our A s s o c i a tion on t h e second section of t h e bill pending a more thorough analysis of t h e
r e c e n t l y submitted s t a t e m e n t s of t h e Federal bank regulatory agencies a s t o i t s
implications.
Under existing provisions of t h e Bank Holding Company Act, t h e F e d e r a l
Reserve Board i s required t o give 30 days advance notice t o t h e p r i m a r y s u p e r visor of any bank involved in a contemplated acquisition by a bank holding company
and t o provide f o r a hearing if t h e p r i m a r y supervisor objects t o t h e acquisition.
T h e r e i s also a provision f o r an additional 30 day delay subsequent t o approval of
t h e acquisition by t h e F e d e r a l Reserve Board so a s t o provide t h e U. S. D e p a r t m e n t
of Justice with an opportunity t o i n i t i a t e an action challenging t h e acquisition under
t h e a n t i t r u s t s t a t u t e s . Unlike t h e Bank Merger Act, no provision i s contained in
t h e Bank Holding Company Act which authorizes t h e F e d e r a l Reserve t o expedite
t h e s e procedural r e q u i r e m e n t s in emergency o r failing bank s i t u a t i o n s .
Ill
Section one of S. 890 would amend the Bank Holding Company Act so as to
bring its emergency procedures into conformity with those presently applicable
under the Bank Merger Act. More specifically, the Federal Reserve would be
authorized to reduce to 10 days the period for submission of views by the primary
supervisor of the bank involved in emergency situations, completely dispense with
notification of the primary supervisor, or require the immediate submission of
his views. Furthermore, the Board may discount any adverse recommendation
received from the primary supervisor when the Board finds "that it must act
immediately... in order to prevent the probable failure of a bank or bank holding
company involved in a proposed acquisition..." In addition, under the proposed
amendment, when the Board acts in accordance with the 10-day notice procedure,
the acquisition can be consummated 5 days after Board approval. Finally, when
the Board grants immediate approval, an acquisition can be consummated immediately, without time to afford the U. S. Department of Justice an opportunity
to challenge an acquisition prior to consummation.
Based on comments and statements made by the Federal bank regulatory
agencies in connection with the problems encountered over the past two years in
dealing with certain bank failures or potential failures, we recognize a need for
augmenting the existing acquisition procedures available to the Federal Reserve
Board in dealing with such emergencies. Accordingly, we view section one of
S. 890 as representing an appropriate extension of the failing bank doctrine and
as providing a reasonable means of handling emergency situations for bank holding
companies and banks. Our Association, therefore, endorses favorable consideration of this portion of the bill by your Subcommittee on Financial Institutions.
As indicated above, the second section of the bill, providing for the acquisition of failing banks or bank holding companies by bank holding companies across
State lines, is more controversial in nature and raises many important policy
issues on which even the bank regulators have found difficulty in reaching agreement. While some of the concerns may be more hypothetical than real, we too
see a number of basic questions which must be carefully addressed.
Our Association appreciates this opportunity to express our views on the
first part of the bill, and we will convey our recommendations on the second part
of S. 890 in the very near future.
Sincerely,
Gerald M. Lowrie
Executive Director
Government Relations
112
CS
IBS
I S T A T I U M K BUMOIWSOMl
OFFICE OF THE EXECUTIVE VICE PRESIDENT-ECONOMIST
July 25, 1975
Senator Thomas J. Mclntyre
Chairman
Senate Subcommittee on Financial
Institutions
Dirksen Building--Room 5300
Washington, D. C. 20515
Dear Senator Mclntyre:
RE:
S. 890
The Conference of State Bank Supervisors (CSBS) whose
regular members comprise the primary regulatory and
supervisory authorities for the Nation's nearly 10,300
state-chartered commercial and mutual savings banks is
pleased to express its views with respect to S. 890.
The bill contains two major proposals. The first would
amend Section 3 of the Bank Holding Company Act which
now requires that in connection with proposed bank holding company mergers, acquisitions or consolidations the
Fed shall give thirty-day advance notification to the
primary regulator - the Comptroller of the Currency or
the appropriate state bank supervisor. S. 890 proposes
to amend Section 3 of the Act to permit the Federal Reserve Board, when it determines that a bank of $500 million or more in assets, or a bank holding company controlling a bank of such size is in severe financial difficulty to: (a) shorten to 10 days the period required
for the primary regulator of the bank involved in a bank
holding company acquisition to submit his views or recommendations ; (b) require the immediate submission of
such views; or (c) eliminate entirely the notification
to the primary supervisory authority if the Fed finds it
"must act immediately on any application for approval
under this section in order to prevent the probable
failure of a bank or bank holding company involved in a
proposed acquisition, merger, or consolidation transaction..."
While the Conference of State Bank Supervisors agrees in
principle with the desirability of facilitating emergencytype acquisitions, consolidations or mergers of failing
1015 EIGHTEENTH STREET, N.W. • WASHINGTON, D.C. 20036 • (202) 296-2840
113
banks or bank holding companies, it is strongly opposed to the
waiver of notification requirements as specifically proposed in
S. 890. The Conference believes that in all intrastate and interstate acquisitions, consolidations or mergers under the Bank Holding Company Act provisions, the primary regulator - the Comptroller
of the Currency or the appropriate state bank commissioner - should
be notified in advance of action contemplated by the Fed; that the
concurrence of such primary regulatory be given before the Fed could
act under the proposed amendments to the BHCA; and that such actions
be consistent with the principle of competitive equality as set
forth by Congress and the Courts relative to the McFadden Act.
In situations involving emergency mergers or acquisitions, the primary supervisory authority would almost without exception be actively and intimately involved in the process of locating and evaluating
possible acquirers of the troubled institution. It would seem unrealistic to disregard the views of the primary regulator in such
instances, or for the Fed to proceed in these situations absent
notification to or concurrence of such official. Notification and
concurrence requirements would also tend to lessen the danger of
usurping state authorities in the matter of determining the banking
structure within a state, a prerogative to which the Congress has
shown deference in the past.
The second important proposal contained in S. 890 would amend the
Bank Holding Company Act by authorizing the Federal Reserve Board
to approve out-of-state acquisitions or mergers when the Fed determines that a bank of $500 million or more in assets, or a bank
holding company controlling a bank of such size is in severe financial difficulty. At the present time, under the Bank Holding Company
Act, an out-of-state acquisition is prohibited to bank holding companies unless the acquisition is specifically authorized by the laws
of the state in which the bank to be acquired is located. The effect
of this requirement is that out-of-state acquisitions, for all intents
and purposes, are prohibited to bank holding companies. S. 890 would
give deference to state law in interstate acquisitions by prohibiting more than one acquisition in the same state by the same out-ofstate holding company if state law prohibited multibank holding companies, and the bill would not permit an emergency acquisition by an
in-state holding company if state law prohibited such acquisition.
CSBS does not believe that any clear showing has been made that the
out-of-state acquisition authority under the BHC Act is needed at
this time as a matter of national policy.
FDIC Chairman Frank Wille, in a speech before the Conference of
State Bank Supervisors on April 29, 1975, addressed himself to the
capacity of the FDIC to work out the problems of a large failing
bank. In Mr. Wille's speech, a copy of which he provided to your
subcommittee at the time of his appearance on July 22, he noted that
the FDIC's trust fund is now $6.2 billion; that its current income
is running about $1 billion per year; and that the Corporation has
114
the right to call on the Treasury for $3 billion more if this is
needed for insurance purposes. Mr. Wille added that the above
constituted "considerable assurance that the FDIC, financially,
can handle more frequent and even larger bank failures and nearfailures. .. " than those involving the $1.2 billion Bank of Commonwealth, the United States National Bank and the $3.6 billion
Franklin National Bank.
In addition to the absence of a clear showing that the out-of-state
acquisition authority is needed at this time under the proposed
amendments to the Bank Holding Company Act, S. 890 raises the
questions of interstate banking, and whether, if such activities
are valid for bank holding companies, they should also be permitted
to banks. These are questions of such importance, and with sufficient ramifications to the banking structures of all fifty states,
that Congress should consider them within a context broader than
that involving a legislative proposal for handling banks or bank
holding companies that might become serious problems at some future
time.
In considering questions inherent in a bill of this nature, CSBS
desires to point out that while the interstate provisions of S. 890
would permit a larger number of bidders for a troubled bank or bank
holding company, and thus facilitate efforts of the regulatory authorities, the bill does contain incentives to solve such problems
via out-of-state rather than by in-state means, even when anticompetitive factors do not exist relative to an in-state acquisition
or merger. This situation would arise whenever an out-of-state bank
holding company, desirous of gaining access to a distant market area,
offers a higher premium to stockholders or debenture holders than
that made by an in-state bank holding company for a troubled bank.
Another problem which the Conference of State Bank Supervisors has
considered in connection with S. 890 is whether the $500 million
cut-off figure should be increased or lowered. There is a divergence
of views among our Supervisors on this issue. Some believe, as does
FDIC Chairman Frank Wille, that the cut-off figure should be raised
perhaps to $2 billion on the grounds that interstate acquisitions or
mergers should be limited to those few situations where present
methods for handling troubled banks and bank holding companies would
be inadequate. On the other hand, some of our Supervisors believe
the figure should be reduced to $100 million or a lower figure,
feeling that the failure of a smaller bank in a non-money center
state could prove tragic to the residents of such state.
In summary, while CSBS supports amendments to the Bank Holding
Company Act to permit prompt or immediate mergers or acquisitions
of failing banks or bank holding companies, CSBS insists that
notification to and concurrence of the primary supervisor be required
before the Federal Reserve Board is permitted to act under amendments proposed in S. 890. Because there has not been a clear showing
115
that the out-of-state amendments to the Bank Holding Company Act
are necessary at this time, and because of the serious questions
raised by such a provision, CSBS cannot support this section of
S. 890 as presently written.
If, despite reservations expressed by CSBS, the Subcommittee believes that as a matter of national policy a measure similar to
S. 890 is necessary, CSBS urges that such legislative proposal
be considered to be of an emergency nature; that it be limited
in effectiveness to no more than two years after enactment, with
the provision for a Congressional review one year following its
enactment to determine whether or not it should be allowed to
expire.
Sincerely,
//
-
.
Lawrence E. Kreider
Executive Vice President Economist
LEK:drj
116
President
KENNETH J. BENDA, President
Hartwick State Bank
Hartwick, Iowa 52232
First Vice President
CHARLES 0. MADDOX JR., President
The Peoples Bank
Winder, Georgia 30680
Second Vice President
EDWARD A. TRAUTZ, President
East Lansing State Bank
East Lansing, Michigan 48823
'ndependmi
Treasurer
WILLIAM P. GIVENS, President
The Merchants National Bank
Muncie, Indiana 47305
°"'?«ZZ
BANKERS ASSOCIATION OF AMERICA
EXECUTIVE
DIRECTOR;
HOWARD
BELL
•
SECRETARY:
GENE
MOORE
BOX 217, HARTWICK, IOWA 52232
July 28, 1975
The Honorable Thomas J. Mclntyre
Chairman
Subcommittee on Financial Institutions
Committee on Banking, Housing and
Urban Affairs
5300 Dirksen Senate Office Building
Washington, D.C. 20510
Dear Senator Mclntyre:
Thank you for the invitation to appear before the Subcommittee on Financial Institutions of the Senate Committee
on Banking, Housing and Urban Affairs with respect to S. 890,
a bill to amend the Bank Holding Company Act of 1956 to
provide for the acquisition of failing banks on an interstate
basis in emergency situations. Unfortunately, and as we informed
the staff early last week, due to scheduling conflicts, those
bankers in the Association which specialize in this area are
unavailable, and we hope the following written comments will
be a satisfactory response. IBAA does, however, very much
appreciate the Subcommittee's thinking of us with regard to
this important subject.
First, we offer no objection to bring the Bank Holding
Company's notification requirements into parity with similar
stipulations in the Bank Merger Act, the effect of Section
1 (1) of S. 890.
Second, we are profoundly concerned over Section 1 (2)
and (3) which would allow the Federal Reserve Board to permit
bank holding companies to acquire additional banks located
outside of the State in which the operations of such bank
holding companies' banking subsidiaries are principally conducted.
117
Initially, we would like to turn to some technical points
in these parts of the bill which we believe need to be cleared
up in any event. The $500,000,000 triggering mechanism of the
new subsection (f) on page 4, lines 9-25, and page 5, lines
1-4, is addressed to both banks with assets in excess of $500,
000,000 and to bank holding companies controlling a bank with
assets in excess of $500,000,000. Obviously a failing bank
with such assets could be acquired regardless of who was the
owner. However, does the bill also mean that, if the bank
holding company with a bank in excess of $500,000,000 and with
other smaller depositories in its structure got into difficulties
for reasons quite beside anything related to any of its bank
activities — say, a faulty finance company subsidiary operation -that these solvent bank properties could be acquired on an interstate basis simply because the holding company happened to own
a perfectly sound $500,000,000 bank? Indeed, does the action
language of the bill go as far as its stated purpose on page 1:
".... to provide special procedures for
the acquisition of failing banks or bank
holding companies and for the acquisition
of banks or bank holding companies in
emergencies...."
It seems to us that these ambiguities are fairly important
matters since they raise the question of whether this is legislation aimed at shoring up banks, those central facilities of
community financial life which such depositories are, or at
underpinning bank holding companies, which do not have anywhere
nearly similar responsibilities to the public. If S. 890 is
acted upon by the Subcommittee, IBAA would hope that the measure
would definitively state that it is meant only to cover banks
which are in serious trouble.
However, even more importantly we are disturbed over the
modifications these changes would work on the present effects
of the interstate acquisiton ban which then Senator Douglas
of Illinois attached to the Bank Holding Company Act on the
floor in 1956. At that time, he was seeking some certain
statutory tool, that was not dependent on judicial interpretations
of the general antitrust laws, which are inherently vague and
conducive to prolonged litigation, to prevent heavy concentrations
of deposits and, hence, economic power in a few nationally
oriented bank holding companies. IBAA believes he found that
instrument, and we have been supporters of its letter ever since.
118
One can sympathize with the difficulties faced by the
Federal financial regulators when dealing with situations
such as that involving Franklin National Bank and can believe
that Governor Holland's testimony on S. 890 had some merit.
Nevertheless, as we assay intrastate concentration trends
and court opinions based on present law dealing with the
intrastate operations of multibank holding companies, IBAA
cannot subscribe to an erosion of the Douglas formula for
preventing such trends on an interstate or national scale.
As discussed subsequently, if there are problems with failures,
the better solution seems to be closer supervision instead of
encouraging "take overs" as substitutes for scrutiny.
We would like here to cover the nature of intrastate
tendencies to illustrate our point as far as the rise of
concentration in general is concerned. Although bank holding
companies' growth slowed after passage of the 1970 amendments
to the Bank Holding Company Act, the share of commercial bank
deposits held by bank holding companies continued upward from
55% in December 1971 to 65% in December 1973. By year end
1973, bank holding companies controlled more than 60% of
commercial bank deposits in each of 21 states. Furthermore,
the five largest banks (mainly multibank holding company banks)
controlled more than 85 percent of deposits in the'state's
major metropolitan markets in 13 of these states.
Nearly all of the Nation's largest banks are now owned by
multibank holding companies. In numerous states, especially
those with unit banking or restricted branching, the bank holding
company movement has, since 1970, entailed a rapid consolidation
of banking units. (Samuel B. Chase, Jr., and John J. Mingo,
"The Regulations of Bank Holding Companies", a paper presented
at the December 1974 meeting of the American Economic Association,
p. 3) As the bank holding company movement has matured, however,
some fundamental changes in the direction and speed of holding
company expansion have become apparent. A reduction in bank
holding company expansion occurred in 1974 due largely to a
drastic decline in the price of bank holding company stock which
increased the difficulty of making acquisitions of other banks.
(Business Conditions, Federal Reserve Bank of Chicago, February
1975, p.3. While the total number of bank holding company and
merger applications acted upon by the Fed fell from 717 to 671
in 1974, a 6.4% decline, the "denial rate" increased significantly
from 4.3% in 1973 to 7.1% in 1974. However, the rate of rejections of bank holding company formations was largely responsible/
rather than an increase in the rate of rejections of acquisitions.)
119
While the Fed was belatedly tightening its policy toward
bank holding company growth, a countervailing policy toward
bank holding company growth by acquisition was established in
1974 by the Supreme Court in its landmark decision in United
States v. Marine Bancorporation, Inc., et. al. (418 U.S. 602)
In this antitrust case the Government challenged an acquisition
by a bank holding company of a bank in a geographic market,
though in the same state, other than the one in which it was
a competitor, on the ground that it would lessen the competitive
potential of the bank holding company. In its decision the
Supreme Court held that in applying the doctrine of potential
competition to commercial banking, courts must take into account
the effect of extensive federal and state regulation of banks,
and in particular, state statutory barriers to de novo entry
and to expansion following entry into a new geographic market.
(418 U.S. 602) In effect, the decision removes the restraints
of the Clayton Act from geographic market extension mergers by
bank holding companies in any state which limits branching or
restricts the activities of bank holding companies. Thus, in
31 states where such state limitations exist,bank holding
companies can acquire independent banks outside their geographic markets — though only in the same states due to the
Douglas Amendment — relatively free of antitrust law constraints.
In a more recent decision in U.S. v. Citizens and Southern
National Bank et. al., the Supreme Court further limited the
effectiveness of the antitrust laws in restraining the growth
of bank holding companies by acquisition or merger. Justice
White, in a minority opinion, pointed out that the decision
permits the dominant commercial bank in Atlanta further to
entrench its position and that two other rivals, which together
with C&S control more than 75 percent of the banking business
in Atlanta, would probably follow suit, further increasing
concentration in this market. (Supreme Court opinion of June 17,
1957.)
Given these trends, IBAA places great importance on those
laws which discourage their emergence or perhaps more accurately,
their further emergence, in an interstate or national dimension.
We believe S. 890 would have the opposite effect.
Above, this letter made mention of another solution to the
"Franklin" situation—closer supervision. One realizes this
can be a hard course to take, especially when one considers that
a very short period of disastrous trading in foreign exchange
can impair solvency. Nevertheless, it is a better route than
abetting larger and larger holding company grids that, in themselves, are more difficult to oversee and examine. If the
120
regulators need more examination or cease and desist authority
in emergency circumstances, IBAA believes it could be devised
and would be the better approach.
Finally, we would also point to Chairman Wille's statement
to this Subcommittee that the FDIC "can probably handle successfully and with.reasonable dispatch the potential failure
of virtually any bank with less than $2 billion in assets and,
depending on the circumstances, banks of even larger size."
(Appendix p. 14 to Statement of Frank Wille, Chairman of the
FDIC on S. 890, July 22, 1975) Therefore, at a minimum,S. 890
and its $500,000,000 floor seems to us to be "overkill".
Furthermore, IBAA would also like to associate itself with those
remarks of the FDIC Chairman in the same testimony demonstrating
the great range of undesirable discretion vested in the Federal
Reserve Board in determining when, or when not, to use the new
authority it has requested. Indeed, outside of the $500,000,000
base and some attention in Section 2, on page 5, lines 15-18,
to State embargoes on multibank holding companies, the bill is
devoid of meaningful checks on the Board's capacities, unless
one considers Section 3, relating to notifications to the Justice
Department,"meaningful". Even here, however, the Attorney General
must commence action at the earliest time the acquisition could
be consummated. If it is a probable failure situation, consummation can occur immediately upon Board approval. In effect,
this means the Justice Department would have almost no say in
the matter whatsoever.
With these considerations in mind, IBAA is able to support
Section 1 (1) of the bill but does not believe the public
interest would be best served by enactment of the balance.
Hoping these comments are of use in the mark-up scheduled for
tomorrow, I am
Very truly yours
Kenneth J. Benda
President
KJB/pas
o
@FedFRASER