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09
Minutes for November 30, 1966
To:
Members of the Board
From:
Office of the Secretary
Attached is a copy of the minutes of the
Board of Governors of the Federal Reserve System on
the above date.
It is not proposed to include a statement
with respect to any of the entries in this set of
minutes in the record of policy actions required to
be maintained pursuant to section 10 of the Federal
Reserve Act.
Should you have any question with regard to
the minutes, it will be appreciated if you will advise
the Secretary's Office. Otherwise, please initial
below. If you were present at the meeting, your
initials will indicate approval of the minutes. If
you were not present, your initials will indicate
only that you have seen the minutes.
Chm. Martin
Gov. Robertson
Gov. Shepardson
Gov. Mitchell
Gov. Daane
Gov. Maisel
Gov. Brimmer
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Federal Reserve Bank of St. Louis
Minutes of the Board of Governors of the Federal Reserve
System on Wednesday, November 30, 1966.
The Board met in the Board
Room at 10:00 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Robertson, Vice Chairman
Shepardson
Maisel
Brimmer
Mr. Sherman, Secretary
Mr. Kenyon, Assistant Secretary
Mr. Young, Senior Adviser to the Board and
Director, Division of International Finance
Mr. Holland, Adviser to the Board
Mr. Molony, Assistant to the Board
Mr. Fauver, Assistant to the Board
Mr. Hackley, General Counsel
Mr. Solomon, Director, Division of Examinations
Mr. Shay, Assistant General Counsel
Mr. Partee, Associate Director, Division of
Research and Statistics
Mr. Sammons, Associate Director, Division of
International Finance
Mr. Leavitt, Assistant Director, Division of
Examinations
Messrs. Plotkin, Robinson, and Via of the
Legal Division
Messrs. Egertson, Maguire, and Poundstone, and
Miss McShane of the Division of Examinations
Ayproved items.
The following letters were approved unanimously
after consideration of background material that had been made available
to the Board.
Copies are attached under the respective item numbers
indicated.
Item No.
Letter to The Colonial Bank and Trust Company,
Waterbury, Connecticut, approving the establishment of an in-town branch.
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11/30/66
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Letter to Adrian State Savings Bank, Adrian,
Michigan, approving the establishment of an
in-town branch.
2
Letter to Wells Fargo Bank, San Francisco,
California, approving the establishment of
a branch in Lodi.
3
Letter to International Banking Corporation,
New York, New York, granting permission to
increase its investment in International
Trust Company, (formerly Mercantile Trust
Company), Montreal, Canada.
4
Letter to Bank of America National Trust
and Savings Association, San Francisco,
California, granting permission to establish two branches in Bolivia--one in La
Paz and the other in Santa Cruz.
5
Report on competitive factors.
Unanimous approval was given to
the transmittal to the Comptroller of the Currency of a report on the
competitive factors involved in the proposed purchase of assets and
assumption of liabilities of The Bark River State Bank, Bark River,
Michigan, by The Escanaba National Bank, Escanaba, Michigan.
The con-
clusion stated that while the proposed acquisition would eliminate some
competition existing between the two banks, the overall competitive effect
would not be significantly adverse.
Membership on Florida Citrus Commission.
In connection with a
recent discussion by the Board of persons who might be considered for
appointment to the Board of Directors of the Jacksonville Branch, Federal
Reserve Bank of Atlanta, question had arisen whether membership on the
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Florida Citrus Commission would fall within the purview of the Board's
1915 resolution that persons holding political or public office can not,
consistent with the spirit and underlying principles of the Federal
Reserve Act, serve as directors or officers of Federal Reserve Banks.
The conclusion reached in a distributed memorandum from the Legal Division dated November 28, 1966, was that membership on the Florida Citrus
Commission would appear to be nonpolitical in character and more in the
nature of a public service, and therefore would not involve the holding
of an office of the kind contemplated by the 1915 resolution.
There was general agreement with the Legal Division's position
and it was understood that the Atlanta Reserve Bank would be advised
accordingly, for reference in cases that might arise in the future.
There was attached to the Legal Division's memorandum a summary
of actions taken by the Board through June 6, 1966, on questions that
had arisen under the 1915 resolution.
Comments made with respect to the
summary were to the effect that while it might not appear to reveal a
completely consistent pattern, the overall record seemed generally supportable.
It was noted that some instances involving activities of a
Political character by Reserve Bank directors, particularly in connection
With political campaigns, may not have been brought to the Board's attention.
However, letters had been sent to the Reserve Banks from time to
time reminding them of the 1915 resolution.
There was no indication
that Board members desired to modify significantly at this time the
practices that had been followed, as revealed by the summary.
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11/30/66
Application of St. Joseph Valley Bank (Items 6-9).
Pursuant to
the understanding at the meeting on November 23, 1966, there had been
distributed a memorandum from the Legal Division dated November 29
submitting a revised draft of statement reflecting Board approval on
October 17 of the application of St. Joseph Valley Bank, Elkhart,
Indiana, for permission to merge with First Old State Bank, also of
Elkhart.
There were also submitted revised dissenting statements of
Governor Robertson and Governor Brimmer.
Issuance of the order in the matter, the majority statement,
and the dissenting statements was authorized.
Copies of the documents,
as issued, are attached as Items 6-9.
Emergency lending accommodations (Item No. 10).
There had been
distributed a memorandum from Mr. Holland dated November 29, 1966, noting
that the authority given to the Federal Reserve Banks with respect to
emergency lending accommodation to nonmember depositary-type institutions
in the event of extraordinary liquidity pressures would expire December 1,
1966.
The authority was initially provided for a 60-day period in the
Board's letter to the Reserve Banks of July 1, 1966, and it was subsequently renewed for an additional 90 days.
Mr. Holland recommended, for
reasons stated in the memorandum, that such authority be extended for a
further period of 90 days to March 1, 1967.
The recommendation was approved unanimously; a copy of the telegram sent to the Federal Reserve Banks pursuant to this action is attached
as Item No. 10.
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Governor Robertson commented that although he had no objection
to extending the authority for the further period of 90 days, he felt
that as a general rule it was undesirable to extend temporary programs
indefinitely in the absence of a demonstrated need.
He would prefer to
terminate such programs as soon as appropriate and reconstitute them if
necessary.
Governor Brimmer noted that the current study of the discount
mechanism included an effort to develop a long-range policy to guide
Federal Reserve emergency credit assistance to member banks, nonmember
depositary institutions, insurance companies, and other appropriate
institutions.
He suggested that there might be reason to hold the cur-
rent program of emergency lending accommodation in place pending the
development of a long-range policy such as contemplated by the discount
study, rather than to have to resort to ad hoc measures if an emergency
Should arise.
It was generally agreed that the situation should be reviewed
again prior to March 1, 1967, with a view to determining, in light of
considerations such as had been mentioned, whether further extension of
the emergency lending accommodation program would seem desirable.
Legislative proposals.
Mr. Hackley reported that Mr. Smith,
General Counsel of the Treasury, had advised that the Treasury was preParing its legislative program for consideration at the next session of
Congress and stated that he was checking, at the suggestion of Under Secretary Deming, to determine whether the Board continued to be interested
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in pushing for two pieces of legislation; namely, legislation that would
permit a member bank to borrow from its Reserve Bank on the security of
any sound assets without paying a "penalty" rate of interest, and legislation to facilitate economic use of Reserve Bank balances with foreign
central banks by permitting the investment of such balances in obligations of foreign governments or monetary authorities that would mature
within 12 months and were payable in a convertible currency.
Mr. Smith
indicated that the Treasury was much interested in both proposals.
The Board confirmed that its position in support of the two
legislative proposals had not changed, and it was understood that Mr.
Hackley would advise Mr. Smith accordingly.
Governor Shepardson suggested that the Board push vigorously
during the forthcoming session of Congress for action on two other
Pieces of legislation; namely, legislation that would authorize the
Board to fix reserve requirements on a graduated basis according to the
amount of deposits and would make such requirements applicable to all
insured banks, which banks would be afforded access to Federal Reserve
discount facilities, and legislation that would require insured banks
to pay at par all checks drawn upon them.
There was general agreement that active support of such legislation would be desirable.
On the proposal for graduated reserve require-
ments applicable to all insured banks, attention was drawn to the
continuing withdrawal of banks from membership in the Federal Reserve
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11/30/66
System, including some institutions of substantial size.
It was sug-
gested that at an appropriate time the staff submit to the Board a
draft bill on the subject along with letters that might be sent to the
appropriate Congressional Committees recommending the enactment of such
legislation, and that an analysis of the size and distribution of the
principal nonmember banks also be provided.
Governor Brimmer commented that he had been working with members
of the staff on the preparation of material bearing upon the position
that might be taken by the Board at the appropriate time with respect to
proposed legislation that it was understood would be considered again at
the forthcoming session of Congress to provide for Federal chartering of
foreign banks operating in the United States and placement of responsibility for the chartering and supervision of such institutions in the
Comptroller of the Currency.
He was hopeful that a memorandum on the
subject would be available for Board consideration in the near future.
Chairman Martin mentioned that he had been in receipt of
some questions about investments by Edge and agreement corporations
in companies engaged in underwriting abroad.
A memorandum providing
information on the known cases had been prepared for him by Mr. Solomon
(Examinations), and copies would be made available to the other members
of the Board.
The meeting then adjourned.
Secretary's Note: Governor Shepardson
today approved on behalf of the Board
the following items:
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Letters to the Federal Reserve Bank of Richmond (copies attached
as Items 11 and 12) approving the designation of Ronald B. Duncan,
Carroll L. Marcus, John R. Tyburski, and Fred W. McCormick, III, as
Special assistant examiners.
Letter to the Federal Reserve Bank of Chicago (copy attached as
Item No. 13) approving the appointment of John R. Sweetland as assistant
examiner.
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Federal Reserve Bank of St. Louis
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BOARD OF GOVERNORS
Item No. 1
11/30/66
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, O. C. 20551
ADORES'S orrictAL CORFICOPONOCNCC
TO THIC EIOARO
November 30, 1966
Board of Directors,
The Colonial Bank and Trust Company,
Waterbury, Connecticut.
Gentlemen:
The Board of Governors of the Federal Reserve
System approves the establishment by The Colonial Bank
and Trust Company, Waterbury, Connecticut, of a branch
at the intersection of Route #69 and Stillson Road,
Waterbury, Connecticut, provided the branch is established
Within 18 months from the date of this letter.
Very truly yours,
(Signed) Karl E. Bakke
Karl E. Bakke,
Assistant Secretary.
(The letter to the Reserve Bank stated that the
Board also had approved a six-month extension
of the period allowed to establish the branch;
and that if an extension should be requested,
the procedure prescribed in the Board's letter
of November 9, 1962 (S-1846), should be followed.)
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Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS
Item No. 2
11/30/66
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OrFICIAL CORRESPONOENCIE
TO THIC BOARD
November 30, 1966
Board of Directors,
Adrian State Savings Bank,
Adrian, Michigan.
Gentlemen:
The Board of Governors of the Federal Reserve
System approves the establishment by Adrian State
SaVings Bank, Adrian, Michigan, of a branch in Ward
Plaza Shopping Center, at the intersection of Mill and
North Main Streets, Adrian, Michigan, provided the
branch is established within one year from the date of
this letter.
Very truly yours,
(Signed) Elizabeth L. Carmichael
Elizabeth L. Carmichael,
Assistant Secretary.
(The letter to the Reserve Bank stated that the
Board also had approved a six-month extension
of the period allowed to establish the branch;
and that if an extension should be requested,
the procedure prescribed in the Board's letter
of November 9, 1962 (S-1846), should be followed.)
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Item No. 3
11/30/66
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20351
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
November 30, 1966
Board of Directors,
Wells Fargo Bank,
San Francisco, California.
Gentlemen:
The Board of Governors of the Federal Reserve
System approves the establishment by Wells Fargo Bank,
San Francisco, California, of a branch in the downtown
commercial district of Lodi, San Joaquin County,
California, provided the branch is established within
six months from the date of this letter.
Very truly yours,
(Signed) Elizabeth L. Carmichael
Elizabeth L. Carmichael,
Assistant Secretary.
(The letter to the Reserve Bank stated that the
Board also had approved a six-month extension
of the period allowed to establish the branch;
and that if an extension should be requested,
the procedure prescribed in the Board's letter
of November 9, 1962 (S-1846), should be followed.)
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Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS
Item No. 4
11/30/66
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE
TO T4E BOARD
November 30, 1966.
International Banking Corporation,
399 Park Avenue,
New York, New York. 10022
Gentlemen:
As requested in your letter of October 19, 1966, the
Board of Governors grants consent for your Corporation to make an
additional investment in International Trust Company, Montreal,
Canada, in the amount of Can.$500,000 (approximately US$465,000
equivalent) by means of a contribution to paid-in surplus.
The foregoing consent is given with the understanding
that the investment now being approved, combined with other
foreign loans and investments of your Corporation, First National
City Bank, and First National City Overseas Investment Corporation,
will not cause the total of such loans and investments to exceed
the guidelines established under the voluntary foreign credit
restraint effort now in effect and that due consideration is being
given to the priorities contained therein.
Very truly yours,
(Signed) Karl E. Bakke
Karl E. Bakke,
Assistant Secretary.
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Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS
Item No. 5
11/30/66
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS
orrictAL
CORRESPONDENCE
TO THE BOARD
November 30, 1966.
Bank of America National Trust
and Savings Association,
300 Montgomery Street,
San Francisco, California. 94120
Gentlemen:
The Board of Governors of the Federal Reserve System grants
its permission to Bank of America National Trust and Savings Association, San Francisco, California, pursuant to the provisions of Section 25 of the Federal Reserve Act, to establish two branches in
Bolivia, one to be located in La Paz, and one in Santa Cruz, and to
operate and maintain such branches subject to the provisions of
Section 25 and of Regulation M.
Unless the branches are actually established and opened
for business on or before December 1, 1967, all rights granted hereby
shall be deemed to have been abandoned and the authority hereby granted
Will automatically terminate on that date.
As you are aware with respect to the establishment of
foreign branches, funds provided by home office (whether in the form
of allocated capital, advances, or otherwise) should be regarded as
foreign assets for purposes of the voluntary foreign credit restraint
effort.
Very truly yours,
(Signed) Karl E. Bakke
Karl E. Bakke,
Assistant Secretary.
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Item No. 6
11/30/66
UNITED STATES OF AMERICA
BEFORE THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTE11
WASHINGTON, D. C.
In the Matter of the Application of
ST. JOSEPH VALLEY BANK
for approval of merger with
First Old State Bank
ORDER APPROVING iMRGER OF BANKS
t to the
There has come before the Board of Governors, pursuan
, an
Bank Merger Act, as amended (12 U.S.C. 1828(c), Public Law 89-356)
, a State member
aPPlication by St. Joseph Valley Bank, Elkhart, Indiana
approval of
bank of the Federal Reserve System, for the Board's prior
Indiana,
the merger of that bank and First Old State Bank, Elkhart,
under the charter and title of St. Joseph Valley Bank.
As an incident
to the merger, the two offices of First Old State Bank would become
d merger, in form
branches of the resulting bank. Notice of the propose
said Act.
aPProved by the Board, has been published pursuant to
light of
Upon consideration of all relevant material in the
the factors set forth in said Act, including reports furnished by the
Insurance Corporation,
Comptroller of the Currency, the Federal Deposit
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and the Attorney General on the competitive factors involved in the
Proposed merger,
IT IS HEREBY ORDERED, for the reasons set forth in the
toardts statement of this date, that said application be and hereby
iS
approved, provided that said merger shall not be consummated
(a) before the thirtieth calendar day follouing the date of this
Order or (b) later than three months after said date.
Dated at Uashington, D. C., this 30th day of November, 1966.
By order of the Board of Governors.
Voting for this action: Chairman Martin, and
Governors Shepardson, Hitchell, Daane, and
Haisel.
Voting against this action:
and Brimmer.
Governors Robertson
(signed)
Merritt Sherman
Merritt Sherman,
Secretary.
(sEAL)
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Item No. 7
11/30/66
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
APPLICATION OF ST. JOSEPH VALLEY BANK
FOR APPROVAL OF MERGER UITH
FIRST OLD STATE BANK
STATEMENT
St. Joseph Valley Bank, Elkhart, Indiana ("St. Joseph Bank"),
with total deposits of about $60 million, has applied, pursuant to the
sank Merger Act (12 U.S.C. 1828(c), as amended by Public Law 89-356), for
the Board's prior approval of the merger of that bank with First Old State
13ank, Elkhart, Indiana ("Old State Bank"), which has total deposits of
1/
The banks would merge under the charter and name of
about $20 m41lion
St. Joseph Bank, which is a member of the Federal Reserve System.
As an
incident to the merger, the two offices of Old State Bank would become
branche
s of St. Joseph Bank, increasing the number of its offices to
eight.
To assist in the consideration of this application, the banking
factors being of particular concern, a private oral presentation was held,
Pursuant to section 262.2(0(3) of the Board's Rules of Procedure (12 CFR
5 262.2(f)(3)), at which the president and the chairman of the board of
directors
of each bank presented views in support of approval, and submitted
to
questioning by the Board.
arine 30, 1966.
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I3S1
Competition. - The head office and four branches of St. Joseph
Elkhart;
Bank, and the head office and sole branch of Old State Bank, are in
St, Joseph Bank also operates a branch at Nappanee, about 17 miles to the
south.
has a
Elkhart, located approximately 15 miles east of South Bend,
A large
Population of about 45,000 and is the seat of Elkhart County.
it is
number of manufacturing firms support the economy of the city, and
also an important trade center.
second
St. Joseph Bank and Old State Bank--respectively, the
ion with
largest and the smallest banks in Elkhart--are in direct competit
2/
of each bank encompasses the city of
each other, The service area
portion being
Elkhart and its immediate environs, the only non-coterminous
the area served by the Nappanee branch of St. Joseph Bank.
There is only
it
°he other 1k in Elkhart and, like St Joseph Bank and Old State Bank,
its environs.
draus the pr pondorance of its business from the city and
These three banks compete in varying degrees with the offices of eight
Other banks that are located beyond the city (including four headquartered
in Elkhart County) and that range in deposit size from about $6 million to
would
tic:ire than $40 million. It does not appear that any of these offices
be adversely affected by the merger.
ion
The principal impact of the merger on banking competit
llould be in Elkhart.
Following the acquisition of Old State Bank by St.
two banks,
Joseph Bank, the city would be served by the offices of only
/ The area from which a bank derives 75 per cent or more of its deposits of
ndividuals, partnerships and corporations.
1
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one (the resulting bank) with deposits of about $80 million, and the
Other with deposits of about $95 million. As discussed below under the
banking factors, Old State Bank is headed for serious capital and management problems for which there appears to be no feasible solution other
than merger.
But, the merger would eliminate substantial existing
competition between the participating banks.
The effect of the merger on competition would be substantially
adverse.
Financial and managerial resources and future prospects. - A
merger with anticompetitive effects of the magnitude that are present in
this case may not be allowed under the amended Bank Merger Act unless the
adverse effects for competition would be "clearly outweighed in the public
interest by the probable effect of the transaction in meeting the convenience
and needs of the community to be served".
The banking factors are relevant
to this consideration to the extent that "they throw light on the capacity
3/
of the existing and proposed institutions to serve the community".—
Old State Bank has experienced substantial growth in both
dePosits and loans during the past few years.
This growth, however, has
exceeded the bank's ability to effectuate the needed corresponding additions
tO its capital account, even though it sold capital stock twice within the
last five years.
Old State Bank has enjoyed gross operating revenues that
are considerably above the average for member banks of comparable size in
Indiana; since 1964, however, the bank's net income has been much less than
the average for banks similarly situated.
No. 1221, 89th Cong.
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This incongruity is occasioned
2d Sess. 4 (1966).
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k,
essentially by loan losses that are attendant upon the imprudent
lending policies of Old State Bank.
The ability of Old State Bank to augment its capital is
affected by its recent record of less-than-average net earnings and
by its greater-than-average asset weaknesses.
result from the bank's lending policies.
Both of these factors
At the same time, these
factors impede the ability of the bank to attract the personnel
needed to facilitate implementation of the lending practices that
are required for improvement in its net earnings performance and in
its asset condition.
There is evidence that the directors of Old State Bank have
endeavored--although not to the point of precipitating open discord,
which could well prove harmful--to effect reforms in the lending
Practices of the bank.
The failure of this effort must be attributed
in part to the fact that the directors and their families altogether
hold only about 35 per cent of the bank's voting shares.
stockholder of the bank is its chief operating officer.
The largest
He has been
associated with the bank for many years and apparently enjoys a wide
following, both among the bank's other stockholders and in the community
generally.
Although he holds less than 8 per cent of the voting shares,
he is the dominant force in the bank. Thus, it seems unlikely that Old
State Bank will veer from its potentially hazardous course, given the
bank's present ownership.
In turn, the bank's condition and prospects,
together with the fact that its stock is widely held, combine to make
it of dubious attractiveness to individuals or groups who might be
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prospective buyers.
Male these considerations pose no immediate
threat to Old State Bank, they are a cause for concern about its
future.
In short, unless corrective action is taken, the bank is
headed for serious capital and management problems.
A solution to the predicament of Old State Bank by means
Other than merger with one of the two remaining Elkhart banks--which
are by far its principal competitors--is patently desirable.
State
law prohibits branching across county lines, however, and it also
restricts a bank frcm branching in a town, other than the location of
its head office, where banking facilities already exist.
Thus, the
°nly other possibilities for Old State Bank to be acquired by merger
4
lie with two Elkhart County banks,— the larger of which has deposits
of about $6 million.
Due to the small size of these banks, a merger
14ith one of them would not materially alter the prospects for Old State
Bank.
Finally, State law also precludes the acquisition of Old State
Bank by a bank holding company.
The banking factors with respect to St. Joseph Bank are
generally satisfactory, and it is capable of coping satisfactorily with the
difficulties that would be attendant upon the absorption of Old State Bank.
Convenience and needs of the community. - The merger would
eliminate an alternative source of banking services from the Elkhart
c°111munity, but it would also result in an orderly disposition of the
/ And
4aut
this assumes that the acquiring bank would be permitted by State
horities to transfer its head office to Elkhart.
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problems that beset Old State Bank.
(
L'
The adverse competitive consequences
of the merger could be minimized at some point in the future if Indiana
should decide to change the restrictions on the establishment and operation of branch banking offices.
On the other hand, the adverse impact
on the community if the condition of Old State Bank should ultimately
decline to failure could not be so easily minimized and, indeed, probably
could not be materially lessened at all.
It should be stressed that Old State Bank cannot now be fairly
Characterized as a "failing firm"; the bank is nowhere near that
5/
condition.-
But the law permits a merger, notwithstanding its adverse
competitive consequences (if not sufficient to be violative of section 2
of the Sherman Act), provided one of the banks faces difficulty of
sufficient gravity to warrant remedial action in the interests of maintaining its soundness, and there is no feasible alternative solution to
6/
its problem:- It is the best judgment of the Board that the evidence in
the case before it meets this test.
The Board has not been unmindful, in its protracted deliberations
on this matter, of the merit in the considerations advanced by the dissenters in arguing for denial of the application.
But the complex and
i
/ See International Shoe Co. v. FTC, 280 U.S. 291 (1930), which established
to be a defense to an action under section 7 of the Clayton Act if, before
th merger, "there being no other prospective purchaser," one of the firms
faced the grave probability of business failure". Id. at 302.
V See H.R. Re . No. 1221, 89th Cong., 2d Sess. 3 (1966); 112 Cong. Rec.
337-38 (1966). See also, United States v. Philadelphia Nat'l Bank, 374
u.S. 321, 372 n. 46 (1963).
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difficult circumstances faced by Old State Bank, considered in the light
of the likely ramifications for the bank and the community it serves if
the merger is not allowed, cause the Board to conclude that the wiser
course for the public interest is to opt on the side of caution.
Summary and conclusion. - The effect of the merger of St. Joseph
Bank and Old State Bank on competition would be substantially adverse.
It is the judgment of the Board, however, that the anticompetitive consequences would be clearly outweighed in the public interest by the effect
of the transaction in avoiding for the Elkhart community the adverse
consequences likely to result from the capital and management problems
of Old State Bank.
There is about an even chance--as near as it can be
reckoned--that, unless corrective action is taken, the condition of Old
State Bank will steadily worsen, and there is no feasible alternative
solution to its problems.
Accordingly, the Board concludes that the application should
be approved.
November 30, 1966.
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Federal Reserve Bank of St. Louis
Item No. 8
11/30/66
DISSENTING STATEMENT OF GOVERNOR ROBERTSON
The Bank Merger Act, as amended this year, forbids the
Board of Governors to approve a merger "whose effect ... may be
substantially to lessen competition", unless the anticompetitive effect
"clearly outweighed in the public interest by the probable effect
. in meeting the convenience and needs of the community . • . ."
Although conceding that this merger will have a substantially
adverse impact on banking competition in Elkhart, the majority states
that this injury to the public interest is overbalanced by the importance
°f "avoiding for the Elkhart community the adverse consequences likely
to result frcm the capital and management problems of Old State Bank."
am unable to find any basis for that holding.
The majority Statement
does not mention any "adverse consequences" whatsoever; the only other
tlialltion of that matter is an equally indefinite reference to "the
likelY ramifications for • .. the community .
if the merger is not
Al/lowed%
Furthermore, the majority acknowledges that Old State Bank
'nowhere near" the condition of a "failing firm", and that the
hesent situation poses no immediate threat to the bank.
On the basis
tnore than thirty years of bank supervision, and careful scrutiny of
the examination reports, I do not consider Old State Bank to be a
11
erifts problem II case, and, indeed, the majority does not claim that
the bank has serious problems. Consequently, it is difficult to see
flY legal justification for the authorization of a merger that admittedly
is s
ubstantially anticompetitive.
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Federal Reserve Bank of St. Louis
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To describe the situation bluntly, the Board's action today
appears to rest solely on the fear that, some time in the future, Old
State Bank might become a less effective force in banking competition
in Elkhart because it might develop serious capital and management
problems, and that the best way to guard against the future possibility
that the community may cease to have three actively-competing banks is
to eliminate one of them now by permitting one of the others to absorb
it.
I have no desire to caricature the Board's decision, but I am unable
to see its rationale in any other light.
At best, the authorization of this merger is premature.
It
Permits immediately a substantially anticompetitive transaction in
order to forestall the possibility that such a transaction might have
to be permitted at some time in the future.
The Board's action is
analogous to amputating the patient's arm because treatment designed
to save the arm would be painful and might fail, in which event amputation
r 1.1.42z1t be necessary later.
4
At worst, the Board's action involves an admission -- which
consider unwarranted -- that bank supervision is impotent to achieve
correction or improvement in a bank whose management or policies we
t'egard as unsatisfactory.
We are told that the directors of the bank,
although aware of defects in its lending practices, have hesitated to
effect reforms for fear of "precipitating open discord".
Needless to say,
even temporary discord among the managers of a bank is undesirable, but
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Federal Reserve Bank of St. Louis
-.3-
termination of the very existence of the bank is an absurdly high price
to pay for the avoidance of managerial discord in the course of correcting
an unsound policy.
Furthermore, correction of the situation does not depend solely
Oti
appropriate action by the bank's officers and directors.
The powers
of Federal bank supervisors were recently expanded by Congress for the
very purpose of enabling us to ccpe with problem situations in the banks
We supervise and thereby to avoid the need for amalgamations that lessen
banking competition.
The principal function of supervision is to preserve
C sound and competitive banking system by helping banks to overcome the
Problems that inevitably arise.
A merger that substantially lessens
cornpetition should be a final recourse, rarely resorted to, rather than
a ready "out" that may be convenient and profitable for stockholders and
rnaY enable supervisors to shake off a problem, but is detrimental to the
Public interest.
For these reasons, the merger should not be approved.
November 30, 1966.
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Federal Reserve Bank of St. Louis
(1390
Item No. 9
11/30/66
DISSENTING STATEMENT OF GOVERNOR BRIMMER
As the majority acknowledges, the merger of Old State Bank
and St. Joseph Bank is unquestionably anticompetitive within the meaning
of section 1 of the Sherman Act and, consequently, within the meaning
of section 7 of the Clayton Act.
I agree that a merger with anti-
competitive effects of this magnitude may be in the public interest,
"provided one of the banks faces difficulty of sufficient gravity to
warrant remedial action in the interests of maintaining its soundness,
1/
and there is no feasible alternative solution to its problem."-
But
I can find no basis for the majority's assessment that the evidence in
the case before us meets the requisites of this proviso.
The majority concludes that the substantially adverse effects
of the merger -- which they admit are inescapable -- will be "clearly
outweighed in the public interest" by the avoidance for the Elkhart
community of "the adverse consequences likely to result from the capital
and management problems of Old State Bank."
Thus, by slighting a
virtually certain -- but undesirable -- result in favor of only a
remotely probable outcome, the majority provides a tenuous peg on
Which to hang a doubtful decision.
1
1/ Emphasis supplied in this quotation (and in others below) from the
majority's Statement.
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Federal Reserve Bank of St. Louis
13!)1
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Thus, we must examine carefully the logical basis of the
majority's judgement.
What exactly are the "adverse consequences"
that the merger will avoid?
Surprisingly, just this: "unless correc-
tive action is taken, the condition of Old State Bank will steadily
worsen."
How likely is this to occur?
"There is about an even chance."
Which means, of course, there must be about an even chance that the
expected worsening will not occur.
But leaving aside this different appraisal of the probable
future of Old State, what is its present condition?
The majority
admits that "Old State Bank cannot now be fairly characterized as a
'failing firm'; the bank is nowhere near that condition."
State Bank currently have any serious problems?
No.
Does Old
The majority
merely holds that "unless corrective action is taken, the bank is
headed for serious capital and management problems."
After much consideration, I have come -- reluctantly -- to
the conclusion that the majority has made a most peculiar decision that
cannot be supported by the facts in the record before us.
If the bank
does not yet have capital and management problems of a serious nature
(and there is not even a suggestion of the time horizon over which
such problems can be expected to emerge), where is the threat to the
bank's soundness?
Where is the gravity that compels the approval of
this substantially anticompetitive merger?
The simple -- and lamentable
truth is that there is presently no clear threat to the bank's soundness;
nor is there any urgency necessitating such a drastic remedy.
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Federal Reserve Bank of St. Louis
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Old State Bank is a particularly vigorous competitor, as its
record of substantial growth and high gross earnings clearly refloctc.
The bank has made an extra effort to tailor its business to meet the
needs of those members of the community who are not conveniently
served by the conventional modes of the banking business.
For example,
it is still the only bank in Elkhart that opens its doors on Saturdays,
thus making bank services more conveniently available -- an especially
significant contribution in view of the community's heavy concentration
of industrial employees.
Moreover, Old State Bank has not been reluc-
tant to innovate; it was the first bank in Elkhart to provide drive-in
service.
In short, all of the relevant evidence indicates that Old
State Bank is a highly effective competitor; indeed, the majority does
not purport to make a finding to the contrary.
The problems of Old State Bank stem directly from imprudent
lending policies and practices.
The responsibility for coping with
this situation properly belongs, in the first instance, to the bank's
directors and stockholders.
And, if the application were denied, they
would be forced to confront their failures to date and to search for
means to change the inadequate policies and practices, and rectify the
mistakes, of the bank's operating management.
There is every reason
to conclude that, at the very least, there is an even chance that this
course would succeed.
Since it cannot be claimed that the bank yet
has "serious capital and management problems" (it is said merely to be
"headed for" such problems) there must be ample time for a vigorous
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Federal Reserve Bank of St. Louis
4 (
.r
11
A
-4-
effort to resolve its difficulties by means other than merger.
I
feel strongly, therefore, that the bank should be required to get on
with the task.
The denial of the application to merge would cast into sharp
focus for the stockholders of Old State Bank two basic alternatives:
(1) do nothing and, to the extent that the expectations of the majority
are warranted, ultimately risk putting into jeopardy their investment
in the institution; or (2) forge the necessary reforms -- if for no
other reason than to make the bank as attractive as possible for
Prospective buyers.
These options embody the crux of the matter.
To
be sure, the merger will permit the stockholders of Old State Bank to
sever their association with the institution conveniently and on
reasonably attractive terms, but the cost to the community will be
extremely high -- the loss of a vital, competitive commercial bank.
I do not believe the facts indicate that Old State Bank faces
any particularly "complex and difficult circumstances", or that merger
is the only feasible solution to its so-called 'predicament".
I do not
doubt for a moment the sincerity of the majority in its stated belief
that the "wiser course for the public interest is to opt on the side
°f caution" and approve the merger.
To me, however, the logical gaps
and fallacies in the analysis on which the majority bases its approval
suggest that the option was not simply for caution but for unwarranted
diffidence.
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Federal Reserve Bank of St. Louis
4394
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I am confident that, with the merger route closed as the easy
way out for the stockholders of Old State Bank, the appropriate reforms
in the bank's policies and practices would be forthcoming.
This course
would spare the Elkhart community, not only the impact of a bank
failure (which currently is simply a mirage), but also the certain
adverse consequences of a substantially anticompetitive merger.
Given
these considerations, I am convinced that it is plainly premature and
contrary to the public interest to allow the merger at this juncture.
I would deny the application.
November 30,1966
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Federal Reserve Bank of St. Louis
TELEGRAM
Item No. 10
11/30/66
LEASED WIRE SERVICE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON
November 30, 1966.
Presidents, all Federal Reserve Banks.
Board has authorized extension until March 1, 1967, of
authority described in its letter of July 1, 1966, with
respect to emergency accommodation to nonmember depositarytype institutions in the event of extreme liquidity pressures.
(Signed) Merritt Sherman
Sherman
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Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS
Item No. 11
11/30/66
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS
OFFICIAL
CORRESPONDENCE
TO THE BOARD
November 30, 1966
Mr. John L. Nosker, Vice President,
Federal Reserve Bank of Richmond,
Richmond, Virginia.
23213
Dear Mr. Nosker:
In accordance with the request
contained in your letter of November 23, 1966,
the Board approves the designations of
Ronald B. Duncan, Carroll L. Marcus and John R.
Tyburski as special assistant examiners for the
Federal Reserve Bank of Richmond.
Very truly yours,
(Signed) Elizabeth L. Carmichael
Elizabeth L. Carmichael,
Assistant Secretary.
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Federal Reserve Bank of St. Louis
4397
BOARD OF GOVERNORS
Item No. 12
11/30/66
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
ADDRESS orriciAL CORRESPONDENCE
TO THE •OARD
December 1, 1966
Mr. John L. Nosker, Vice President,
Federal Reserve Bank of Richmond,
23213
Richmond, Virginia.
Dear Mr. Nosker:
In accordance with the request contained
of November 28, 1966, the Board
letter
your
in
approves the designation of Fred W. McCormick, III,
ds a special assistant examiner for the Federal
Reserve Bank of Richmond.
Very truly yours,
(Signed) Elizabeth L. Carmichael
Elizabeth L. Carmichael,
Assistant Secretary.
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Federal Reserve Bank of St. Louis
4398
BOARD OF GOVERNORS
Item No. 13
11/30/66
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. VIM
AOONIC•111
orrictAL
CORRIESPONOICNCK
TO TUC 1110ANO
November 30, 1966
Mr. Leland M. Ross, Vice President,
Federal Reserve Bank of Chicago,
Chicago, Illinois.
60690
Dear Mx. Ross:
In accordance with the request
contained in your letter of November 22, 1966,
the Board approves the appointment of John R.
Sweetland as an assistant examiner for the
Federal Reserve Bank of Chicago. Please
advise the effective date of the appointment.
Very truly yours,
(Signed) Elizabeth L. Carmichael
Elizabeth L. Carmichael,
Assistant Secretary.
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Federal Reserve Bank of St. Louis
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