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69 t h

C on gress

1st Session


f R ep ort

I No. 83


lAmvAmr 12, 1936.— Committed to the Committee of the Whole House on the
state of the Union and ordered to be printed

Mr. M c F a d d e n , from the Committee on Banking and Currency,
submitted the following

(To accompany H. E. 2]

The Committee on Banking and Currency, to whom was referred
the bill (H. R. 2) to amend an act entitled “ An act to provide for
the consolidation of national banking associations,” approved
November 7, 1918; to amend section 5136 as amended, section 5137,
section 5138 as amended, section 5142, section 5150, section 5155,
section 5190, section 5200 as amended, section 5202 as amended,
section 5208 as amended, section 3211 as amended, of the Revised
Statutes of the United States; and to amend section 9, section 13,
section 22, and section 24 of the Federal reserve act, and for other
purposes, having considered the same, report it back to the House
with the recommendation that the bill do pass with the following
On page 6, line 15, after the word “ notes” strike out the comma
and insert the words “ and/or.”
On page 6, line 15, after the word “ debentures” strike out the
words “ and the.”
On page 6, line 16, strike out the word “ like.”
On page 7, line 24, after the word “ notes” strike out the comma
and insert the words “ and/or.”
On page 7, line 25, after the word “ debentures” strike out the
words “ and the like.”
On page 15, at the end of line 22, strike out the colon and insert
a period.
On page 15, beginning with line 23, strike out down to and includ­
ing line 25 on the same page.
On page 16, beginning with line 9, strike out down to and including
line 4 on page 17.
On page 17, line 5, after the abbreviated word “ Sec.,” strike out
u 11” and insert “ 10.”
20366 0 — 58-------24



On page 19, line 2, after the word “ insurance,” insert a comma
and the words “ if it is ■customary to insure'slldh st^ph*^’?'*0 '
On page 21, line 9, after the abbreviated word “ Sec^,” strike out
“ 12” ana insert “ 11.”
On page 21, line 16, after the abbreviated word “ Sec.,” strikeout
“ 13” ana insert “ 12.”
On page 23, line 11, after the abbreviated word “ Sec.,” strike out
“ 14” ana insert “ 13.”
On page 24, line 18, after the abbreviated word “ Sec.,” strike out
“ 15” and insert “ 14.”
On page 25, line 3, after the abbreviated word “ Sec.,” strike out
“ 16” ana insert “ 15.”
On page 26, line 3, after the abbreviated word “ Sec.,” strike out
“ 17” ana insert “ 16.”
This bill is in effect identical with H. R. 8887 as it passed the House
in the last Congress, but which failed of passage in tne Senate during
the closing days of the session.
There are two changes of form in H. R. 2 as compared with H . R.
8887. Section 15 which related to the safe-deposit business and
section 17 (b) which related to the investment-securities business have
been combined and carried over as section 2 (b) • The policy of the
bill remains the same but instead of appearing in the bill as new
grants of power (as they appeared in H. K. 8887) they now appear
ias a confirmation and regulation of an existing banking service or
business. It is a matter of common knowledge that national banks
have been engaged in the investment-securities business and the safedeposit business for a number of years. In this they have proceeded
under their incidental corporate powers to conduct the banking
business. Section 2 (b) recognizes this situation but declares a public
policy with reference thereto and thereby regulates these activities.
Sections 7, 8, and 9 and the last proviso to section 1, which relate
to branch banking, have been clarified as to phraseology by these
same sections as drafted in H. R. 2. Some amendments onered upon
the floor of the House in the preceding Congress have been co­
ordinated with the text and on the whole the language has been
simplified. No change, however, has been made in the policy of the
bill in this respect.
Every section of the bill is an amendment of the national bank
act itself or of provisions of the Federal reserve act which relate to
national banks. The general purpose of the bill is to adjust the
national banking laws to modern banking conditions along the lines of
conservative banking, and without any deviation from the high stand­
ard which has been set by the nations! banking system. Some of the
provisions in the bill extend and enlarge the powers of national
banks, but only in the manner in which State banks and trust comanies generally have been successfully operating within recent years.
>ther sections of the bill affirm and regulate practices which have
grown up within the national banking system under the exercise of
incidental corporate powers. These practices are common to both
the State and national banks. Other sections of the bill relate
entirely to questions of procedure and not to banking powers. An
attempt is made to eliminate some of the rigid formalities in this
direction. Several sections of the bill declare a Federal Govern-




mental policy with reference to branch banking. A detailed analysis
section t>y section follows:
Section 1: This section relates to a question of procedure. It
adds no new power to the national banks. It provided that a State
bank mav consolidate directly with a national bank under the
national charter. The same result can now be accomplished through
the State bank first converting into a national bank and then con­
solidating with another national bank. Consequently, the effect of
the section is to eliminate delay and expense in accomplishing a
result which is already provided for by law. At the end of this
section is a proviso in conformity with the branch banking policy
of the bill, which prohibits any such consolidated bank to retain
any branches which the State Dank may have had outside of the
city limits of the city of the consolidated bank and also prohibits
the retention of any branches whatever which may have been estab­
lished in a State which, at the time of the enactment of the bill,
prohibited branches.
Section 2: Section 2 is divided into two subsections (a) and (b).
Subsection (a) is not an enlargement of the powers of a national
bank but extends the term of its charter to an indefinite number of
Wars subject to forfeiture of the charter by reason of violation of
law, subject to termination by act of Congress at any time and to
termination through the appointment of a receiver on account of
insolvency. This extension of the life of the charters of national
banks is along the line of State legislation for the State banks in
Arkansas, Connecticut, Florida, Illinois, Kentucky, Maine, Massa­
chusetts, Minnesota, Nebraska, New Hampshire, New Jersey, New
York, North Carolina, Ohio, Oregon, Rhode Island, South Carolina,
Tennessee, Vermont, Virginia, and West Virginia. It will be noted
that these states include the important cities of New York, Buffalo,
Boston, Chicago, St. Paul, Minneapolis, Cleveland, Cincinnati,
Louisville, Omaha, Providence, Nashville, Richmond, and a number of
other lesser financial centers.
One of the principal advantages of the indeterminate charter is to
enable the bank to administer long-term and perpetual trusts. Many
of these trusts are in the nature of educational and charitable founda­
Subsection (b): This subsection is divided into two provisos,
each of which recognizes and affirms the existence of a type of busi­
ness which national banks are now conducting under their incidental
charter powers. They may be said to liberalize, in that they confirm
the conduct of this character of business; on the other hand, they are
restrictive in that the business is confined to definite limits by law.
The first proviso referred to recognizes the right of national nanks
to continue to engage in the business of buying and selling investment
securities but at the same time it makes a general definition of the
term “ investment securities” and gives the comptroller the authority
to make a further definition by regulation. This would give the
comptroller the authority to exclude by definition the right of a
national bank to purchase undesirable or unsafe investment securities.
This provision also limits the total amount which a national bank
may take of any one issue of such securities to 25 per cent of its capital
ana surplus, in this connection it may be noted that this is a busi­
ness regularly carried on by State banks and trust companies and has



been engaged in by national banka for a number of years. The
national Danks hold to-day in the neighborhood of 96,000.000,000 of
investment securities. The effect of this provision, therefore, is pri­
marily regulative.
The second proviso regulates the safe-deposit business of national
banks and prohibits them from investing an amount in excess of 15
per cent of capital and surplus in a corporation organized to conduct
a safe-deposit business in connection with the bank. This is a busi­
ness which is regularly carried on by national banks and the effect
of this provision is also primarily regulative.
Section 3: Section 3 is m the nature of a liberalization to the extent
that it would permit a national bank to purchase a piece of real estate
for Expansion of its banking matters without making it mandatory
upon the banks to make immediate use of the property for banking
purposes. In other words, the section simply strikes oiit the word
immediate” from the law. The existing law has operated as a
hardship upon national banks in this respect.
Section 4: Section 4 provides for the organization of banks in the
outlying districts of a city with a capital of $100,000 where the
population is in excess of 50,000.
Section 5: Section 5 is also in the nature of a confirmation
regulation of an existing practice. It permits national banks to con­
tinue to pay stock dividends but provides a definite procedure and
regulations of amount of surplus which the bank must have at the
time of the increase.
Section 6: This section does not add any new charter powers, but
is simply a clarification of an ambiguous provision of law relating to
the status of the chairman of the board of directors. It provides
that the president of the bank shall be a member of the board of
directors but not necessarily chairman thereof.
Section 7 : This section is a restriction upon branch banking. It
is a reenactment of existing law which permits a State bank to convert
into a national bank and to retain ail of the branches which the State
bank might have had regardless of their location, but restricts the
branches which may be retained solely to those which the State bank
may have bad within the limits of the city in which the.State bank is
located in a State which at the time of the enactment of the bill per­
mitted branch banking. Any branch which may have been estab­
lished even within the city limits under State authority given after
the passage of this bill would have to be reliquished, as well as any
branches which may have been established on the outside of city
limits under authority of State laws previous to the passage of the
bill. This section is in conformity with the branch banking policy
of the bill'which would confine all branch banking within the national
banking system tc citv limits and to prohibit national banks from
establishing any branches in States which prohibit State banks from
exercising tliis power.
Section 8: This section recognizes the right of national banks to
establish branches within those cities in which State banks have that
privilege at the time of the passage of the bill. Should a nonbranchDanking State in the future change its policy and permit the State
banks to have branches the national banks would be prohibited
from exercising similar powers. This section also as a practical




matter limits the branch banking activities of national banks to
«aties having a population in excess of 100,000.
Section 9: This section makes the same requirements as to State
member banks in the Federal reserve system which section 8 makes of
the national banks with reference to branch-banking. Under it a
State member bank wpuld be restricted, so far as future operations
a«e concerned, to the establishment of branches within the city limits
m which the parent bank is located in those States which permitted
branch banking at the time of the passage of this bill. If the State
changes its branch-banking policy and permitted the State banks to
have branches, State member banks oi the Federal reserve system
could not exercise such powers within the Federal reserve system.
This section further prohibits any nonmember State bank from bring­
ing into the Federal reserve system branches which have been estab­
lished on the outside of city'limits.
Section 10: This section is designed to restate and clarify section
4200 of the Revised Statutes which governs the amount of money
which a national bank may lend to any one person. The existing
law is composed of the original provisions of 1863 with a number of
a m e n d m e n ts and provises added from time to time and stands in
n e e d of clarification to clear up certain ambiguities. It is not the
purpose of this section to make any substantial liberalization or
restriction upon the business of national banks and the language of
the bill is therefore substantially identical in effect with that of the
existing law.
Subsection 4 is in the nature of a restriction upon the discount of
noncommercial paper. Through a loophole in the existing law there
is at present no limit upon the amount of this type of paper which a
national bank may discount since the limitation of the law runs
against the maker only and not against the indorser. Thi$ subsection
is designed to cure this defect in the law.
Under subsection 6 there is an enlargement of the power of national
banks in the matter of loans upon the security of nonperishable staple
commodities stored in bonded warehouses. This section would
permit a gradual increase of the loan up to an amount not exceeding
50 per cent of the capital and surplus of the bank provided each in­
crease in the amount of the loan snail be accompanied by an increase
in the value of the commodity collateral in proportion to the face
amount 6t the additional loan.
Section 11: This section is designed to cure a typographical error
in the agricultural credits act of 1923, and relates to tne total liabili­
ties of national banking associations.
Section 12: Section 12 is designed to clarify and correct a criminal
revision in section 5208, Revised Statutes, relating to the overcertication of checks.
Section 13: Section 13 relates to a matter of procedure and gives
the board of directors of a national bank the right to permit a junior
officer to certify reports to the comptroller in the absence of the
president and cashier.
Section 14: This section is in the nature of a liberalization for
both State and national banks in that it empowers the Federal
reserve banks to rediscount for any member bank an amount of
eligible paper equal to the amount which a national bank could
lawfully discount for its customers* Under the existing law a Federal




reserve bank can only discount an amount of eligible paper o f f any
one borrower n o t exceeding 10 per cent of the capital and surpltts
of the member bank. This section does not change the character
of classes of eligible paper. If the paper is already eligible for dis­
count and the national Dank act considers it safe for a national bank
to take it in certain stated amounts, it is considered by this section
to be safe for the Federal reserve banks to rediscount it in the same
amounts. The paper itself is considered liquid and in addition has
the indorsement of the member bknk upon it when presented for
Section 15: This section simply adds an additional criminal pro­
vision providing for the punishment of a national-bank examiner
who commits a theft from a bank examined by him.
Section 16: This section is a restatement of the existing law rela­
tive to loans by national banks upon the security of real estate.
It broadens the powers of national banks as to the time limit of the
loans upon city property but at the same time makes restrictions by
way of definitions. At the present time a national-bank may make a
loan upon first mortgage upon city property for a period not exceeding
one year. This section increases this penod to five years as a maxi­
mum. At the same time it defines a real-estate loan to be one with
respect to which the bank takes the entire obligation at the time of
making the loan. The purpose of this definition is to prevent the
possibility of a bank from purchasing real-estate bonds under the
guise of making loans upon the security of real estate. Such realestate bonds as may be purchased by a bank (should the comptroller
determine that any such bonds are “ investment securities” ) would be
acquired under section 2 (b) of the bill.
The State banks and trust companies are authorized to make long­
time loans upon the security of first mortgage upon city real estate.
National banks, by being limited to a one-year period, have found,
themselves handicapped m meeting the demands of their customers
in this respect. The section limits all such loans to an amount not
exceeding one-half of the savings deposits in the bank, and thereby
relates tne real estate loan business to savings deposits. This is a
logical connection. National banks have on deposit about $5,000.000,000 of savings deposits from about 11,000,000 depositors. This
constitutes a large proportion of the entire savings business in the
United States, and it has become necessary to recognize the right
of a national bank with certain definite restrictions to use these
funds in the same general manner in which the State banks and trust
companies are using them, which includes the right to make loans
upon city property, as provided above.
The enactment of this bill into law will put new life into the
national banking system. The cumulative effect of its provisions
will produce a situation in the Federal reserve system where the
rights of the national banks will be more nearly on a par with those
ot the State member banks. When the Federal reserve act was
amended to let State banks come into the Federal reserve system
with their full charter powers, the national banks, operating under
the old national bank act of 1864, found themselves, as compulsory
members of the Federal reserve system, placed at a considerable
disadvantage,. Many of these State banks are operating under
moaem banking codas. The amendments which had heretofore



heen made to the national bank act were not sufficient to enable
the national banks to compete on terms of equality with such State
member banks, while at tne same time they were compelled by law
to bear the chief burden in supporting the Federal reserve system.
The biU recognizes the absolute necessity of taking legislative
action with reference to the branch banking controversy. The
present situation is intolerable to the national banking system.
The bill proposes the only practicable solution by stopping the further
extension oi state-wide branch banking in the Federal reserve system
by State member banks and by permitting national banks to have
branches in those cities where State banks are allowed to have them
under State laws.
Your committee feels that the need for this legislation is even more
urgent than it was during the last Congress and respectfully urges
its passage.