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El Paso· Houston· San Antonio

July 1978

World Energy Shortage Produces Severance Tax Windfall for Texas


Joint Policy Established for Examination of Data Centers


Bank Holding Company Study Completed


Federal Reserve Regulations to Be Streamlined


Commercial Loan Charge-off's

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (

World Energy Shortage Produces
Severance Tax Windfall for Texas
By Edward L. McClelland

Lower taxes are an important reason that Texas
is gain ing population and industry faster than other
states. Texas is the only large state that has neither
a corporate nor a personal income tax, and excluding severance taxes, it ranks 49th in per capita
taxes paid to the state government. State taxes
paid by the average Texan were $273 in 1976, compared with $233 in New Hampshire. the lowest
state, and $408 for the average American.
One reason for the low tax burden on individuals
is that Texas ranks 48th in per capita expenditures
by state governments. In 1976, for example. Texas
spen t $547 per capita. Tha t exceeded only the $533
spent by Florida and the $502 spent by Missouri
and was well below the national average of $718.
Severance taxes on the production of crude oil
and natural gas provide an important source of
state revenues in Texas. accounting for a fifth of
all state tax collections in fiscal 1977. Thirty-one
states collect severance taxes on one or more natural resources, and Texas, as the leading producer
of oil and gas, collected two-fi ft hs of all severance
tax revenues in the nation.
Severance, or production , taxes are imposed on
the value of certain classes of natural resourcessuch as minerals, fuels. and timber-when they
are severed from the earth or water. This type of
tax is a convenient means of taxing nonresidents
since a large part of the production of natural resources typically is exported to distant markets,
July 1918/Volce

where out-of-state consumers must shoulder a considerable part of the cost of the severance taxes.
Many states, however, do not have extractive industries that can provide significant severance tax
revenues. Furthermore, even low tax rates on the
production of resources. such as timber, can retard
the development of an extractive indu stry and
cause it to develop in other states where taxes a re
lower. But the demand for many commodities is
relatively insensitive to prices, and this sets the
stage for effective severance tax programs, with
much of the cost "exported" to residents outside
the state. The principal oil- and gas-producing s tates
of Texas, Louisiana, and Oklahoma. therefore. coilect the major share of state severance tax revenues. New Mexico receives substantial severance
tax revenues from uranium, coal, copper, and potash mining, as well as oil and gas prod uction; and
Kentucky and Minnesota derive large severance
tax revenues from coal mining and are production,
Because severance tax rates are applied to the
value of the oil and gas produced in Texas. any
change in market price or quantity of production
directly affects the amount of taxes collected. The
fourfold increase in energy prices resulting from
restrictions in output achieved by th e Organization of Petroleum Exporting Countries (OPEC) produced a windfall for the state in increased severance tax revenues. But gains in oil and gas

production taxes are now slowing, and future collections will depend, in part, on Government pricing policies. Price controls have been in effect on
some classes of crude oil production since the
wage-price freeze in August 1971, while interstate
prices of natural gas have been regulated since
1954. However, it was not until after the 1973
Arab oil embargo that a comprehensive set of controls evolved. having the objectives of reducing
U.S. dependence on oil imports and restraining the
rise of domestic prices.
In the long run, however. severance tax collections will depend on the levels of oil and gas production. With proved reserves declining, the
incentive to explore and develop new oil and gas
reserves will depend largely on market prices and
drilling costs. Thus far. market prices have heen
high enough to stimulate the development of new
wells in known fields. But drilling costs are on
the rise. and whether future prices provide the incentives to explore in prospective areas where the
risk of failure is much greater remains to be seen.
Severance taxes in Texas
Texas levies severance taxes on the output of four
commodities-crude oil. natural gas. sulfur. and
cement. However, the revenues from oil and gas
are substantially greater than those from sulfur
and cement. For example. in the fiscal year ended
August 31, 1977. severance tax revenues from oil
and gas were $901 million, compared with $8.5
million from sulfur and cement.
The production of crude oil has long been a
source of tax revenue for Texas. Four years after
the 1901 discovery at Spindletop, the Kennedy
Gross Receipts Law was enacted. That law levied
a 1-percent tax on the gross value of crude oil
production and a 2-percent tax on the gross receipts of pipeline companies and wholesalers. The
law also served as a model for other states in taxing the production of their petroleum resources.
The tax rate set by the Kennedy Gross Receipts
Law on oil production was amended three times.
In 1907 the rate was lowered to 0.5 percent, but it
was raised to 1.5 percent in 1919 and to 2.0 percent
in 1923. However, the discovery of the giant East
Texas field in late 1930 led to a sharp break in oil
prices. Production from the East Texas field surged
to a third of the state's total output in 1931 and to
half in 1933, or to more than a fifth of total U.S.
production. Oil prices in Texas. which averaged
99 cents a barrel in 1930, fell as low as 25 cents a
barrel in 1933.

The Texas Legislature enacted a new severance
tax law on the production of crude oil in 1933, but
the tax rate of 2 percent of the market value of
crude produced was maintained. The tax rate was
subsequently increased in 1936 and 1941, and the
present rate of 4.6 percent was established in 1951.
Because natural gas had little or no value in the
early development of the petroleum industry in
Texas, no production taxes had been imposed on
it. But by the early thirties, markets for gas were
expanding. and gas production was becoming more
important and profitable. The legislature enacted
the first production tax on natural gas in 1931 at
the rate of 2 percent of the market value of gas
produced. Six subsequent changes in the tax rate
were made, and the current rate of 7.5 percent
was established in 1969.
Severance tax rates have been changed fairly infrequently, usually as part of an overall evaluation
of all sources of tax revenues when the state legislature makes significant changes in expenditures.
The state is currently running a budget surplus
and, therefore, is not likely to boost severance tax
rates. However. in the future. if state revenues fall
below expenditure levels or if the share of oil and
gas production taxes declines, it is quite possible
that the legislature would consider increasing severance tax rates.
Tax windfan 8S energy prices soared
In the late sixties and early seventies, production
tax revenues from oil and gas grew at nearly the
same rates, although oil revenues were nearly
double the gas revenues. Revenues increased dramatically when the OPEC cartel quadrupled
"world" oil prices in 1973. For example, from fiscal
1973 to fiscal 1974, Texas taxes collected from
crude oil production rose 65 percent to $347 million and gas production taxes rose 39 percent to
$173 million. In fiscal 1977. severance taxes from
oil and gas production were 170 percent greater
than four years earlier.
Oil and gas production taxes also provided a
growing share of total state revenues. In fiscal
1973, for example, they ranked as the fourth largest source of revenue and accounted for 7.5 percent of total revenues. The next year they moved
ahead of motor fuel taxes but still lagged behind
Federal funding and the general sales tax. In fiscal
1977, taxes on oil and gas accounted for 12.2 percent of state revenues. The increase in production
tax revenues from oil and gas resulted largely
from the sharply higher prices for these commodFederal R...rve Bank or OaUa,

Price controls and declines in production slowed the growth
of oil production taxes, while unregulated prices in the

intrastate market boosted gas production taxes in Texas




-- ---

----- ------------- --- --





SOURCE: Comptroller of Public Accounts, State 01 Texas.

Hies and masked the decline in oil and gas production in Texas after 1973.
If the OPEC nations had not boosted world oil
prices and severance taxes from oil and gas in
Texas had increased at about the trend rate of
growth in the late sixties and early seventies. Texas
tax collections for fiscal 1974-77 would have been
about half the sum actually collected. or about
$1.3 billion less. The increase in revenues attributable to the OPEC oil price boost is about the
same size as the $1.1 billion increase in the budget
surplus during the same four-year period. Hence,
the rise in oil and gas prices has put off the need
to raise severance taxes or revenues from other
sources .
Despite the sharp increase in oil and gas production tax revenues since fi scal 1973, the windfall
that accrued would have been substantially greater
if domestic price controls had not been imposed
on crude oil. The three energy acts since 1973 have
July 191B!Voice

restricted the growth of oil and gas production tax
revenues, but the effect on gas severance taxes
was nominal since sales of natural gas shifted rapidly from the regulated interstate market to the
unregulated intrastate market.
The Energy Petroleum Allocation Act, January
1974, adopted the two-tier system of prices for
"old" and "new" aU, which placed a ceiling on old
oil and left new oil prices unregulated. 1 The Energy Policy and Conservation Act, December 1975,
1. "Old" oil was defined as o il properties that were pro-

ducing prior to 1973, with the exception of s tripper
wells producing less than 10 barrels a day.
"New" oil was defined as stripper wells, oil reserves
discovered after 1972, and all the production from old
proper ties that exceeded their average monthly output
in 1972, That average, called the mo nthly base production control level, was defined as the volume of output
that old properties produced during the corresponding
months in 1972.

established a composite, or weigh ted-average. price
for crude oil and effectively put a ceiling on new
oil. Finally, the Energy Conservation and Production Act. August 1976. set up a three-tier price
structure by deregulating stripper well production
and retaining a composite price for lower- and
upper-tier oil.
These acts, plus the decline in production of
crude oil, caused a leveling off in oil production
tax revenues. In fact. oil tax collections declined
slightly in fiscal 1977 and, for the first time, fell
below collections from the production of gas.
While oil tax revenues doubled from fiscal
1973 to fiscal 1977. revenues from natural gas more
than tripled as producers redirected sales to the
intrastate market, where prices- not subject to
controls-rose much faster th an on gas distributed

If the OPEC nations had not boosted world
oil prices and severance taxes from oil and
gal in Texas bad increa.ed at about the trend
rate of growth in the late sixties and early
seventies, Texas tax collectioDs for
1974-71 would have been about half the
sum actuaUy collected, or about 1.3 billion

Oil severance tax revenues would have been
higher if domestic oil prices had not been co,ntraIled. Using the average price of new oil in 1974
and 1975 and stripper oil prices in 1976 and 1977
as proxies for free market prices for Texas crude,
oil production taxes in 1973-77 would have been
about $1 billion greater than actual collections. A
similar estimate can be made for natural gas. Assuming the free market value of Texas natural gas
would have been at least as high as the average
price of intrastate gas in Texas. severance tax revenues would have been about $340 million higher
than they were. It appears. therefore, that at least
$1.3 billion of severance tax revenues was forgone as a result or price controls.

Prospect. for severance taxes
The sharp rise in tax revenues rrom oil and gas
production appears to be over and a return to the

slower rates of growth in the 1960's is imminent,
given the current tax rates. Oil tax revenues in
fiscal 1978 have been unchanged rrom the comparable period a year ago, even though the price
ceilings ror upper. and lower-tier oil were raised
for the first time since July 1976. And the rate of
increase in gas tax revenues has slowed to nearly
half the rate in fiscal 1977.
Tax revenues from oil production apparently
will be constrained by both the trend of production
in Texas and prices. Prospects for any sizable increase in production are, at best. debatable. and
prices appear to be stabilized by supplies as well
<15 regulations. Oil industry spokesmen indicate
th at about 3 million barrels of crude oil are now
going unsold daily in the free world, and an additional 6 million barrels a day are not being pro·
duced because the market will not absorb them at
current prices. These sources estimate it may take
three to five years before growth in world demand
exerts any significant upward price pressures. This
supply situation also constrains OPEC.
While crude prices in Texas average about $5 a
barrel less than the landed cost of imported crude
oil. it is expected that prices will increase at about
the rate or inflation. Under the Energy Conservation and Production Act, the composite price or
upper- and lower-tier oil is permitted to rise at
the rate of increase of the GN P defl ator. up to a
maximum of 10 percent per year. Stripper oil
prices could increase faster but that is not li kely.
niven the current supply conditions.
The President's proposed special wellhead , or
cost equalization. tax on crude oil probably would
not have a significan t impact on production tax
revenues in Texas. Under that program. wellhead
taxes would be imposed on existing supplies of
old and new oil in amounts equal to the differen ce
between curren t oil price ceilings and the world
price. Such a scheme would significantly raise do·
mestic oil prices. But it would have little effect on
the current rate or oil production tax collections
in Texas because the production tax would be
levied before the wellhead tax is imposed.
An alternative measure to reduce oil imports.
should the wellhead tax not be enacted, is an oil
import ree. Such a levy would increase the price
or imports by $5 to $6 a barrel and leave the current controls on domestic oil prices unchanged.
Again, the decrease in consumption due to a higher
average price would come at the expense or foreign suppliers. so oil production taxes would be
little affected.
Federal Reserve Bank of Dallas

The growth in gas production tax revenues is
slowing largely because intrastate prices are leveling off. For example, new contract prices for
intrastate gas averaged $1.93 per thousand cubic
feet (Mcf) last year, while prices on renegotiated
or amended contracts were about $2.01. Those averages were down from the high paid for gas but
substantially above the interstate ceiling of $1.49.

The sharp rise in tax revenues from oil and
gas production appears to be over and a
return to the slower rates of growth in the
1960's is imminent, given the current tax

Downward pressure on intrastate prices could
develop if producers who have held back from
negotiating contracts become pressed for cash. If
a higher ceiling for interstate gas is not forthcoming soon, those strapped for cash may opt to sell
in the intrastate market, and with enough such
sales, intrastate prices would drift down.
Deregulation of natural gas prices would quickly
step up production tax collections. The Congress
is currently debating a bill to extend price controls
until December 31, 1984. The bill provides for the
extension of price control to the interstate market,
and an initial price ceiling of $1.93 per Mcf is proposed for "new" gas. 2 That ceiling would be allowed to rise at the rate of inflation, as measured
by the GNP deflator, plus 3.7 percent annually
from April 1977 to April 1981 and then at 4.2 percent a year until December 1984. The ceiling for
"old" gas would be adjusted annually by the GNP
deflator. Production from stripper gas wells, which
produce up to 60,000 cubic feet of gas a day and
are not associated with any other producing well,
would be priced initially at $2.09 per Mcf and
allowed to rise at the rate of inflation. Natural gas
prices would be deregulated in 1985.
The proposed legislation would slow the growth
in gas production tax collections. The sharp rise
in collections in recent years reflects increased
sales in the unregulated intrastate market at prices
higher than the proposed ceiling. Nearly a fifth of
the state's total gas production is now being delivered at contract prices of more than $1.93 per Mcr.
July 197B/Voice

The law would not roll back prices under existing contracts that are above the proposed ceiling,
and production taxes on gas sold for more than
$1.93 per Mcf would continue at current levels.
However, prices in expiring contracts would not
generally be allowed to be rolled over at the $1.93
ceiling price. If the price in an expiring gas contract were greater than $1.00 per Mcf in the intrastate market or $0.55 in the interstate market, the
renewed contract price would be held at the old
contract price and would only be increased at a
rate equal to the rise in inflation. Gas in expiring
contracts priced less than $1.00 per Mcf in the intrastate market or $0.55 in the interstate market
would be subject to ceiling prices of these amounts.
Currently, about three-fifths of the gas produced
in the state is delivered at prices of $1.00 or less
per Mcf in the intrastate market and $0.55 or less
in the interstate market.
Historically, most gas contracts were written for
a 20-year term, but since the Arab oil embargo,
prices in new contracts have been renegotiated
annually. Therefore, the mix of expiring contracts
in any year is a number of 20-year-old contracts
with relatively low prices and a number of shortterm contracts with relatively high prices. And
because most expiring contracts would not be permitted to be rolled over at current market pricesabout $2.00 per Mcf in the intrastate market and
$1.49 per Mcf in the interstate market-the increase in gas production taxes would taper off and
then rise at the controlled rate.
Future of oil and gaB production
Severance tax collections depend in part on the
amounts of oil and gas that can be produced. And
production depends in part on the price incentives
producers have to explore and develop additional
reserves of oil and gas. Prior to the quadrupling
of oil prices by the OPEC cartel, the incentive to
drill was clearly on the decline in Texas, as elsewhere. After peaking in 1956 at 21,519 well completions , drilling activity in the state began a long
decline that was reversed only with the 1973 oil
boycott. The number of oil and gas we1ls com-

2. "New" gas is defined as production from a well in a
reservoir discovered on or after April 20, 1977, produc·
tion from a reservoir from which no gas was produced
in commercial quantities prior to April 20, 1977, or production from a well thaI is 2.5 miles or more from the
surface location of an oil well.

Price controls on crude oil have led to a multiplicity
of production categories and wellhead prices

14-----------------------------------------------------OOI.LARS PER BARREL
















/---------,,, , /
, "
.___----"---- 'OlD



















SOURCE: DeGoIyer and MacNaughton.

pleted in the stale dropped to a low of 7,728 in
1971, rose modestly to 8,494 in 1973, and then
climbed to 14,247 completions last year.
The rise in intrastate gas prices to more than
$2.00 per Mcf provided a major stimulus to expand
drilling activity, but the boost in interstate gas
prices from $0.52 per Mcf to $1.42 in September
1976 added further to drilling operations. Moreover, the unregulated price for new oil until July
1976 and the $10.99-per-barrel ceiling price imposed in July 1976 also encouraged drilling.
Drilling costs, however. have risen sharply.
Higher costs have resulted from both the continuing inflation and the increased demand for drilling

equipment. supplies. and services. Moreover, with
drilling activity now shifting to more difficult and
higher-risk areas, costs may rise even faster.
Whether drilling activity would rise significantlygiven time to expand rigs, supplies, and crewswith current prices of oil and gas is not known.
Drilling costs in the United States rose 11 percent in 1977 and are forecast to rise 12 percent this
year, according to industry sources. But some cost
increases were substantially greater, depending on
location and depth of well. For example. offshore
drilling costs rose 16 percent last year to $143 a
foot for a 12,500-foot well, while the cost of drilling
a 10,000-foot well in East Texas rose 15 percent.
Federal R8.8rve Bank of Dallas

And those sharp increases are outpacing the rise
in prices and suggest that the boom in drilling will
slow as profit margins are eroded.
In spite of increased drilling, proved reserves
and oil and gas production in Texas continue to
decline. Proved reserves of crude oil peaked at
14.5 billion barrels at the beginning of 1968 and
decreased to 8.5 billion barrels by the beginning
of 1978. Oil production rose until 1972, reaching
a peak of 1.29 billion barrels, but then dropped to
1.13 billion barrels last year. Proved recoverable reserves of natural gas reached a high of 125.4 trillion
cubic feet at the end of 1967 but shrank to 62.2
trillion cubic feet by 1978. Natural gas production
expanded until 1972, when output was 8.7 trillion
cubic feet, but sagged to 6.8 trillion cubic feet last
Although the energy legislation taking shape in
the Congress extends price controls on oil and gas

to the mideighties, the price ceilings on new reserves would be at higher levels than were proposed initially. And while the proposed ceilings
may not be as high as a free market might dictate,
they come closer to reflecting the replacement
costs of oil and gas resources. Therefore, incentives to drill and produce additional reserveseven in areas where the probability of success is
low or that require expensive tertiary methods of
production-will likely continue for some time.
For Texas, further increases in drilling activity
would slow the decline in oil and gas reserves and
extend the life of many fields. The higher ceiling
prices wiII provide the state with a continued high
level of production tax revenues. Thus, while the
new energy program does not allow the state to
reap an additional windfall in severance tax collections, the program does allow further growth
in this important source of revenue without increasing severance tax rates.

Joint Policy Established for
Examination of Data Centers
A joint policy for the examination of data processing centers that provide services to financial institutions has been established by the Comptroller
of the Currency, the Federal Reserve Board, the
Federal Home Loan Bank Board, and the Federal
Deposit Insurance Corporation.
The new policy, effective May 31, 1978, will
eliminate duplication of examinations of data processors by more than one Federal regulator. Data
centers operated by one bank or thrift institution
will continue to be examined by the regulator responsible for that financial institution. However,
if a data center serves more than one class of bank
or thrift institution, regulated by different Federal
agencies, two alternatives are available. The center
July 197ft/Voice

will be examined either by a joint examination
team, representing more than one of the regulators, or by one of the regulators on behalf of the
others. In the latter case, the agencies will be rotated every two years. If the examining agency
considers the condition of a data center to be less
than satisfactory, the center will be examined
jointly until its condition improves to a satisfactory
AU insured banks or thrift institutions served by
an examined data processor will receive the examiner's conclusions, recommendations, and comments, except for those parts of the report dealing
with matters of a proprietary or competitive

Fair Housing
Advertising and
Poster Requirements
Fair housing advertising and poster requirements
have been updated by the Federal Reserve Board,
the Department of Housing and Urban Development, and other Federal supervisory agencies. The
revisions were made to take into account amendments to the Fair Housing Act and the Equal Credit
Opportunity Act.
Under the new requirements, banks that advertise loans "for the purpose of purchasing, constructing, improving, repairing. or maintaining a
dwelling" must prominently indicate in their ad-

vertisements that such loans are made without regard to race, color, religion, sex, or national origin.
This requirement can be satisfied in the case of a
written advertisement by displaying the symbol
with the equal housing lender legend. With respect
to an oral advertisement. the requirement is fuI~
filled by a statement that the bank is an "equal
housing lender."
All banks must also display an Equal Housing
Lender poster in their lobby. The poster states that
it is illegal to deny housing loans or discriminate
in the terms of such loans on the basis of race,
color. religion, sex, or national origin and that com~
plaints should be sent to the Assistant Secretary for
Equal Opportunity. Department of Housing and
Urban Development, Washington, D.C. 20410. Copies of the poster were sent to banks in February
1978. If additional posters are needed, state member banks may obtain them from the Federal Re~
serve; national banks. from the Comptroller of the
Currency; and state nonmember banks. from the
Federal Deposit Insurance Corporation.

Fed Proposes New Policy on Tax Transactions
Between Banks and Their Holding Companies
A new policy concerning tax transactions between
banks and their parent holding companies has been
adopted by the Comptroller of the Currency and
the Federal Deposit Insurance Corporation and has
been proposed by the Federal Reserve Board. The
policy requires that tax payments by a bank to its
parent holding company must approximate the
amount of its payments and the time at which
they would be made if the bank filed as a separate
entity. In addition, the new policy requires that
banks incurring a loss for tax purposes should
receive an equitable refund from their holding

If in the past a bank has transferred to its parent a deferred tax account in excess of the appro~
priate amount or prior to the appropriate time,
these transfers should be either reversed immediately or treated as an interest-paying loan to the
bank holding company.
Additional infonnation on the Board's proposal
may be obtained from the Holding Company Supervision Department, Federal Reserve Bank of Dallas.
(214) 651-6120.

Federal Relerve Bank of DaUsl

Bank Holding
Company Study

The effects of bank holding companies on banking
and related non banking fields have been a matter
of interest and controversy for some years. What
are the effects on competition, public benefits, the
convenience and needs of communities for banking and related services. the operating performance
and efficiency of bank and nonbank subsidiaries of
bank holding companies. the safety and soundness
of banking, and the concentration of banking resources?

A staff study for the Board of Governors of the
Federal Reserve System furnished recently to the
Senate Banking Committee provides a comprehensive review and evaluation of existing research
on bank holding companies. Releasing the study.
G. William Miller, Chairman of the Federal Reserve Board. cautioned that despite the large
amount of research that has been done. it is difficult
to draw unambiguous conclusions on the impact
of bank holding companies.
The prin cipal findings of the staff study. as
summarized by the Board. are as follows.
"Operating Policies
"An important consideration in evaluating the
performance of bank holding companies as well as
interpreting the implications of proposed changes
in regulatory and supervisory policies centers on
the extent to which BHCs operate their subsidiaries as single integrated en tities as opposed to
collections of common ly-owned but autonomous
companies. The available evidence is limited but
suggests that BHCs tend to operate their organizations more as integrated entities than as separate
operations. This is reflected in part by the fact that
BHCs typically try to exercise control. through
organizational structure, over the management philosophy and broad operating policies of both their
July 1978/Voice

bank and nonbank subsidiaries. In addition, BHCs
generally exercise at least some control over various specific operational areas. However, this
seems to be somewhat less so. on average. with
bank subsidiaries than with nonbank subsidiaries.
In addition. there appears to be more variance
among BHCs in the degree to which they integrate
their bank subsidiaries relative to their nonbank
subsidiaries. Finally. one factor which no doubt
limits full integration of any BHC system is the
legal rest rictions that apply to financial transactions
between a bank subsidiary and its bank and nonbank affiliates.
"The organizational structure and perceived behavior of BHCs have led many observers to expect
that they will have an important effect on the financial and operating performance of their subsidiaries. Because of the relevance of firm performance to several policy areas related to competition
and safety and soundness. and because of data
availability. BHC performance is the most extensively investigated facet of the BHC movement.
"Evidence from simple univariate analyses as
well as more sophisticated analyses has yielded
relatively consistent and conclusive results. First. it
is clear that multi-BHCs have had a significant effect on the asset structure of acquired banks. Most
notably, BHC banks hold less cash and u.s. government securities. more state and municipal bonds
and more loans per dollar of assets than independent banks. Second. in addition to holding what is
generally regarded to be a riskier portfolio. the evidence indicates that multi-BHC banks exhibit lower
capital-to-asset ratios than comparable independent
banks. Third. BHC banks exhibit significantly higher earnings and expenses subsequent to affiliation

while their profitability remains relatively unchanged. Finally, BHC banks do not grow any
faster than other banks. In short, BHC banks exhibit riskier portfolios and more leveraged capital
positions thun similar unaffiliated banks. but their
profitability and growth are no different.
"As with many of the issues raised by BHCs.
evidence on the impact of BHCs on performance of
nonbank affiliates is extremely limited. Therefore. any conclusions must be regarded as tentative.
In fact. only two of the 17 activities authorized
have been studied. In mortgage banking. the evidence from the one available study suggests that
BHC affiliates are not as profitable, do not grow
faster and are more highly leveraged than independents. With respect to the consumer finance
industry, the two studies show that BHC affiliates
are less profitable, more highly leveraged, incur
marginally higher interest expenses on borrowed
funds and grow faster than independent finance
companies. In sum, the only consistent evidence
from the two nonbank activiHes that have been
subjected to empirical investigation is that the nonbank affiliates of BHCs tend to be less profitable
and more highly leveraged than th eir independent
"In evaluating proposed acquisitions by BHCs, the
Board is required to consider the effect of the proposal on efficiency .... Since gains in efficiency may
be regarded as a public benefit. possible efficiency
gains must be weighed against possible adverse
competitive and financial effects of acquisitions.
"The large size of BHC organizations has led
many observers to expect that affiliation with a BHC
will lead to economies of scale as well as economies
of organization. The available empirical work deals
almost entirely with bank affiliates and suggests
that a bank can achieve some economies of scale
by affiliating with a bank holding company. However, it will also incur additional expenses. Small
affiliated banks-especially unit banks-may not
be able to achieve levels of output sufficient to offset these increased expenses un til they reach a
sufficient size. Thus. as affiliated bonks grow (over
$30 to $40 million), the economies of affiliation enable holding company subsidiary banks to operate
as, or more, efficiently than independent banks.
These same studies also suggest th at these gains
in efficiency taper off as the affiliated banks become

"Less sophisticated 'ratio' studies imply that affiliated banks have higher 'other' operating expense
ratios than unaffiliated banks. This is probably due
to management fees and other expenses charged
by the parent BHC as a means of transferring
funds within the organization, and hence, should
not necessarily be interpreted as evidence of organizational diseconomies or inefficiencies.
"There is only fragmentary evidence pertaining
to efficiency and the existence of scale economies
in the non banking activities of bank holding companies. The one available study indicated that
affiliated finance companies did not have significantly different operating expenses from unaffiliated companies.
"Safety and Soundness
"The past five years have seen increased concern
about the stability of the banking system. Particular interest has been focused on the impact of
BHes and expansion in the non banking areas on
bank safety and soundness. There are four avenues
through which the BHC form of organization may
be expected to affect the risk exposure of banks.
These include (1) expansion of banking type activities through nonbank affiliates, (2) expansion into
other bank activities. (3) multibank expansion and
(4) parent company leveraging.
"With respect to banking activities, multibank
expansion has resulted in increased risk exposure
through grea ter leveraging and riskier portfolios for
subsidiary banks than for independent banks.
Whether this is offset entirely or ameliorated by the
attendant geographic diversification is not known.
With respect to nonbank affiliates, the little available evidence indicates that such affiliates are more
highly leveraged than their independent counterparts. At the same time, there is also some weak
evidence of product-line diversification benefits
resulting from nonbank expansion which would
tend to reduce risk. Finally, available evidence
suggests that parent holding companies have leveraged significantly in recent years. In many cases,
this leveraging has provided equity funding for
BHC bunks; however, even with such equity injections, BHC banks as a group still tend to be more
highly leveraged than their independent counterparts.
"Although BHCs may maintain a riskier financial
position in their banking and nonbank affiliates
than do independent banks or comparable nonbank
firms, the diversified structure and legal organizaFederal R.llfYe BaDk of DaOe.

tion of BHCs makes it difficult to assess the net
effect of this increased risk exposure and whether
it has actually reduced safety and soundness in
the banking system. Moreover, it remains to be
seen whether this apparent risk-taking is greater
than is socially desirable.

"The Federal Reserve Board is required to consider the possible adverse effects of proposed
bank and nonbank acquisitions in deciding whether
or not they should be approved. This concern for
the competitive effects of BHC acquisitions arises
from the recognition that the degree and intensity
of competition in a market will determine economic
performance of the market in terms of the prices
paid and profits realized. The empirical studies
relevant to assessing the impact of BHCs on competition have not examined the impacts that BHCs
have had on market prices, price-cost margins or
profits. Rather they have focused on the effects of
BHCs on market structure and made inferences
about market performance from changes in market
structure. That is, if BHCs result in an increase in
the number of independent firms operating in a
market, for example, the inference is that this is
a positive structural effect that must have a procompetitive effect on market performance.
"In general. because of the apparent aggressiveness of BHCs and because the organizational form
provides a convenient mechanism to circumvent restrictive branching laws and other barriers to entry,
it has been anticipated that BHCs would have a
procompetitive effect on market structure. Certainly de novo expansion, to the extent that it results in new entry into markets, must be procompetitive. Bank holding companies have expanded
de novo, but the majority of this expansion has
been within markets in which the organization
already operated. Studies of the effects of BHCs
on banking market concentration-an important
dimension of bank market structure-have yielded
mixed results. The bulk of the work suggests that
BHC activity has had little systematic or significant
effects on banking market concentration and,
hence, little pro or anticompetitive effects.
"Conclusions regarding the competitive effects
of BHCs in non banking activities must be regarded
as highly tentative, because there have been so few
studies and these are subject to serious shortcomings. What evidence exists suggests that in consumer finance, BHCs may have had a procompetiJuly lB71l/Voice

tive effect since the relatively rapid growth of BHC
affiliates could be due to procompetitive pricing
policies. In mortgage banking, however, BHC affiliates are less profitable and more highly leveraged than independents. This provides little indication of either a pro or anticompetitive effect on
pricing behavior or performance. In short, available evidence suggests thatBHCs have little, if any,
effect on competition in banking or non banking

"Concentration of Banking and Financial Resources
"Throughout the history of legislation regulating
8HCs, the Congress expressed concern with various dimensions of concentration-market concentration and aggregate or undue concentration. This
reflects a concern about implications of market
concentration for competition and the possible implications of state and national levels of concentration for basic segments of the economic system as
well as the socio-political systems.
"Bank holding companies have not significantly
increased their control over aggregate financial resources in the economy as a whole; non banking
resources still account for less than 4 percent of
bank holding company resources. BHCs now control about 71 percent of domestic bank deposits,
but only about 8 percent of these deposits are outside lead banks. Thus, most of the recent increase
in BHCs' share of domestic deposits is due to conversion by existing banks to the BHC form of
organization and not to acquisitions by existing
"Bank holding companies also have not significantly increased concentration in commercial banking at the national, state or local levels. Nationally,
concentration in banking has declined gradually,
but steadily, since 1934. It has been estimated that
between 1968 and 1973, concentration is at most
2-3 percentage points above what it might have
been if bank holding companies had not existed.
Similarly, at the statewide level, concentration has
declined on average between 1960 and 1976 (although it increased slightly since 1970) or at best
remained stable, depending upon the measures
used. The greatest declines, however, have been
in the most and least concentrated states. Large increases in concentration directly attributable to
bank holding company acquisitions have been limited to the low and moderately concentrated states.
Locally, no Significant. systematic increases in concentration have been attributed to bank holding

companies. In genera!, local markets have tended
to exhibit more competitive structures.
"Within the more significant nonban king industries- mortgage banking, consumer finance compa nies, leasing and factoring-in which bank
hold ing companies have been permitted to expand,
the picture is more mixed. Bank hold ing companies
have not been a significant force in the leasing industry. Sign ificant consolidation and structural
change have taken place among consumer finance
companies, and a number of the top 100 firms have
been acquired by financ ial and nonfina ncial companies and banks; but bank holding companies
have not played an important role in this process.
Bank holding companies are important owners of
mortgage banki ng fir ms and now account for 42 of
the top 100 mortgage services, but very few have
been acquired since the early 70s. Factoring is the
one industry that now is most clearly dominated
by banks and bank holding companies which now
have about 56 percent of the factoring business
and 17 of the top 20 firms. Most of these fi rms have
been acquired since 1968.
"Convenience and Needs and Public Benefits
"The Board is required to consider the convenience
and needs of communities in evaluating proposed
BHC bank acquisitions .... Partially because of the
difficulty of conceptualizing and measuring public
benefits and convenience and needs, there have
been very few s tudies on the subject. Those few
that have been conducted reveal several points.
First, in considering BHC applications, the Board
focuses on several public interest considerations
including the ability to obtain additional capital,
provide addi tional or new services, increase competition, and improve efficiency and manageria l
resources. It is concluded, however, that if a serious anti competitive effect exists, convenience and
needs facto rs seldom, if ever have tipped the scale
in favor of approval. Second, the chief public benefit resulting from BHC activity has been the increased availability of credit to the local com!:1unily (through loans and municipal fina nce).
Counterbalancing this increased credit availability,
however, have been greater leveraging and some
indication of poorer operating performance in nonbank markets. Th ird, the one study of post acquisilion effects found that BHes have tended to fulfill most, but not all, of the public benefit actions
they have proposed-most notably with respect
to trust services and data processing services, recruitment, and loan expansion.

"Conclusions and Directions for Futwe Work
"The evidence suggests the principal economic
effect of the BHC movement to date has been to
fac ilitate increased leverage and the acquisition of
more loans and other risky asse ts, mainly for the
bank subsidiaries. To the casual observer, this
may suggest a weakening of the stability of the
fina ncial system. However, there are a number of
factors that must be considered. First, it is not
clear that increased risk taking by individual BHC
subsidiaries implies that the overall organization
has become more risky. This would be true only if
there were no benefits from organizational and
geographical diversification. Unfortunately, there
is little evidence on th e extent to which BHCs have
resulted in reduced risk through diversification.
Second, from a supervisory and public policy point
of view, increased risk taking in the system as a
whole should only be of concern if it is assumed
that the financial system has already achieved the
socially desirable level of risk. If the opposite is
the case, then the increased risk that might be attributable to BHCs would clearly be in the public
interest. Third, the increase in BHC leverage has
enabled the organizations to expand lending, particularly to consumers and state and local governments. While such lending may be riskier than
holding liquid assets or U.S. government securities, it clearly represents what might be viewed
as a potentially socially desirable use of financial
resources. An overall assessment, then, of the
effects of increased leverage attributable to BHCs
requires a balancing of what might, or might not,
be in creased organizational and/or system risk
against the benefits that result from increased
availability of funds .
"Few other aspects of BHC operations yield as
consistent results as the impacts on leverage. To
the extent that BHCs have resulted in increased
competition. the evidence suggests it is through
de novo expansion or footho ld entry rather than
by acquisition of significant competitors. The common argument. however, is that de novo expansion is costl y and not economical. Moreover, there
may be long delays between th e time an institution
expands in this way, until it becomes an effective
competitor. Again, however, next to nothing is
known about the alternative costs of entry and
foothold expansion.
"Perhaps the least is known to date about SHC
n"Onbanking activities. On ly two activities have
received attention at all in the published studiesmortgage banking and consumer finance-and here
Federa l Reserve Bank of Dallal

the evidence suggests little about the long run
impacts of BHCs. Not only are the studies few in
number. they also suffer from the weakness that
they cover a short time span at the early phase of
SHe involvement in the activity. Equally important-and this applies 10 most of the work on
BHes in general-much of the evidence on the
impacts of BHes was generated during the period
in which the economy experienced the greatest
decline in economic activity since the Great Depression. Thus. it is not clear whether the results
can be generalized.
"In terms of directions for future work that
would be relevant to formu lation of public policy.
there are several areas that seem critical. The fi rst
relates to the operational and organizational characteristics of a BHC and the extent to which it affects

risk taking. Included should be work on the relationship between diversification and risk as well
as (1) the extent to which risk may be transferred
from one subsidiary to another in a BHC and (2)
the role of capitalization in a BHe and its effects
on the riskiness of the organization. Second. additional attention is needed on the competitive effects
of BHC affiliation. Existing work has been directed
toward the effects on structure and not the implications for behavior. rivalry, and price-cost margins. Third. the work on efficiency and performance needs to be expanded with particular
emphasis on the effects of alternative means of
transferring fun ds with in a system on measured
efficiency. Fourth, there has been no analysis of
th e effects of BHCs on fund fl ows and allocation
of resources."

Texas Leads in Number
of New Banks in 1977

Texas accounted fo r 13 percent of all new-bank
openings in the United States in 1977. According
to figures released by the Comptroller of the Currency, 145 new banks began operations in 1977.
Twenty of these-the highest number in anyone
state-were in Texas. Olher states with a large
number of new-bank openings were California
[15}. Illinois (13). and Florida (10).
New-bank growth in Texas is again strong in
1978. As of June 1. eight new banks had opened
in Texas this year. one less than at the same time
last year.
Of the 28 new banks opened in Texas from
January 1, 1977, to June 1, 1978, 15 have national
charters and, thus, must be members of the Federal
Reserve System. This brings the total number of
member banks in the Eleventh District to 695 as
of May 31, 1 978.

July 19781Voice


Art Exhibited at the Dallas Fed


"A Chimera," etching by John Taylor Arms, 1948
(Courtesy of the Cleveland Museum of Art)

An exhibit of etchings, entitled "Between Past and
Present: French, English, and American Etching
1850-1950," will be shown at the Federal Reserve
Bank of Dallas from July 24 to August 18. The exhibit will be open to the public, free of charge,
from 9:00 a.m. to 3:00 p.m., Monday through Friday. The exhibit is on loan from the Cleveland
Museum of Art, which assembled the etchings
from its own and several private collections.
The 49 prin ts in the exhibit are divided into six
categories: coun try views, river views, cityscapes,


romantic monuments, picturesque views, and city
streets. Two basic themes are evident: the relationship between cou ntry and city and the juncture of
past and present.
The exhibit origina ted at the Federal Reserve
Bank of Cleveland and has traveled to Federal Reserve banks and branches in Cincinnati, Pittsburgh. Philadelphia , and Atlanta and to the Board
of Governors in Washington. D.C. It is part of a
System effort to make its facilities available for
community cultural activities .
Federal Reserve Bank of Dallas

Federal Reserve Regulations to Be Streamlined

AU Federal Reserve Board regulations and related
interpretations and rules are being critically re·
viewed for the purpose of modernizing and improving them. The review, the first of its kind
since the Federal Reserve System began operations in 1914, is being called "Augeas" after the
my thical Greek king whose stables were cleaned
by Hercules after SO years of neglect.
The review will be in two parts. First, the Board's
26 regulations will be studied for possible improvements in overall format and structure. This will
be followed by a detailed study of the purpose and
content of each regulation. The regulations will be
studied to determine whether they are required by
Jaw, what their costs and benefits are, whether
they continue to be in the public interest. whether
statutes underlying the regulations need revision,
and whether there are more desirable nonregulatory alternatives. After these factors are considered thoroughly. each regulation will be redrafted,

with changes ranging from simplification of the
language to elimination of parts of the regulation
not required by law. The Board may also make
recommendations to the Congress for statutory
Each Reserve Bank has been assigned regulations to review. The Federal Reserve Bank of
Dallas will review Regulation L. which restricts
the relationships a director, officer. or employee
of a member bank can have with other banking institutions: and Regulation 0, which prohibits memo
ber banks from extending credit to their own
executive officers. except as specified.
The review and any regulatory revisions or
recommendations to the Congress for legislative
changes are expected to be completed by the end
of 1979.

IT&L Program Postponed
The Treasury's new Tax and Loan Investment
Program is being postponed until appropriations
are obtained from Congress. The program was
originally planned to begin July 6. 1978.
Under the new program, banks and other financial institutions that hold Government tax and
loan deposits will be obligated. for the first time,
to transfer the funds to Federal Reserve banks in
one business day or pay interest on them. The
Treasury Department will also begin paying for
certain services the depositaries provide that currently are not compensable.

July 1878/Volce


Commercial Loan
The Robert Morris Associates, an organization of
bank credit officials. has recently published a
study of 1977 loan charge-offs. The data are not
necessarily representative of all banks since participation was voluntary, However, the publication
includes reports from 751 banks that were estimated to have about 54 pert:ent of all loans outstanding in U.S. commercial banks during 1977.
All regions and all size banks were represented.
Gross loan charge-offs at these banks in 1977
averaged 0.64 percent of their average loan portfolio. For each $5 charged off, about $1 was recovered. Net charge-offs. therefore. averaged almost exactly one-half of 1 percent of average loan
By region, net charge-offs averaged highest in
the Atlanta Federal Reserve District (0.82 percent)
and lowest in the Dallas District (0.28 percent).
By bank size, net loan charge-offs were highest
for the smallest size group of banks, under $50
million in total assets, (0,74 percent), and lowest
for banks with $100 million to $200 million in
total assets (0.30 percent). Excepting the smallest
size group, net charge-offs tended to vary directly
with asset size, the highest percentage net chargeoff being reported for banks over $5 billion in total
assets and declining with succeeding smaller size
groups, However, size was no guarantee that loan
charge-oft's would be high or low for individual
banks. The dispersion was great within every size
By type of loan, net charge-offs as a percentage
of loan portfolio were highest on loans to financial institutions (0.98 percent) and lowest on securities loans (0.02 percent). In this tabulation the
"financial institutions" category included real estate investment trusts. Following in descending
order after loans to financial institutions were loans
to individuals, farming, commercial and industrial
firms, real estate, "all other," and securities.
The greatest amount of dollars charged off was
for loans to real estate investment trusts, with
charge-oft's on loans to real estate subdividers and
developers a strong second. In terms of the incidence of charge-otIs, individuals were cited
most often, but this category of loans was well

down the list in terms of total dollars charged off.
In the Dallas Federal Reserve District (56 banks
reporting), charge-offs in descending order, both in
total dollars and in number of times cited, were:
individuals , single-family housing construction,
real estate subdividers and developers, real estate
investment trusts, holding companies, and industrial building construction.
The data presented on loan charge-offs by size
of bank and type of loan for each Federal Reserve
District should not be used to generalize about all
banks in each District since the number of hanks
in each cell was necessarily small. With this reservation in mind, for the Dallas District the total
dollars charged off was highest or second highest
for loans to individuals or to commercial and industrial firms for each size group of banks-the
only exception being banks in the group with $1
billion to $5 billion in assets, where real estate
loans ranked second in total dollars charged off.
In three of the six size groups of banks, real estate loans ranked third in total dollars charged off.
The report also includes limited data on experience with international loans and a forecast by the
participating hanks that the greatest incidence of
loan charge-offs in 1978 will occur for real estate
subdividers and developers, Single-family housing
construction, and eating places. Real estate investment trusts hold fourth position in this list.

APR Computer Program
Available to Member Banks
A FORTRAN computer program used by the Federal Reserve System to calculate the actual annual percentage rate for consumer instalment loans
is now available to member hanks. free of charge.
The program, primarily useful for checking the
accuracy of a hank's own APR calculations, will
be released in the form of a source card deck.
Procedures for use and sample test cases will
also be provided. Member banks wanting the program should contact, by letter, the Consumer Affairs Section of the Federal Reserve Bank of
Federal Re.erve Bank of DaUa.

Consumer Credit
An amendment to Regulation Z requiring banks.
savings and loan associations. and credit unions
to retain all records of consumer credit transactions dating back to July 1, 1969, has been adopted
by the Federal Reserve Board. Previously, Regulation Z required creditors to keep the records for
two years from the dale the loan was made.
Th e record keeping extension. effective May 19,
1978, is a temporary move until uniform rules for
enforcement of the Truth in Lending Act are agreed
on by the Federal financial regulatory agencies. One

Officers' and Employees' Salary
Surveys Offered Again in 1978
The Federal Reserve Bank of Dallas is again conducting an Officers' and Employees' Salary Survey
program for member banks in the Eleventh District.
To participate, bankers should complete the questionnaire that was recently mailed to all member
banks in the District. If your bank did not receive
the qu estionnaire or if you have any questions,
please call the Bank and Public Information Department, (214) 651-6261.
Approximately 350 banks participated in the surveys las t year. In return, they received reports
containing extensive salary and personnel data for
31 official positions and 26 employee positions.
Data are given on the average, minimum, and
maximum salary of each position, along with information on seniority, bonuses, retirement, insurance, and other incentives. Comparisons are provided on the basis of bank size and geographic
The Federal Reserve Bank of Dallas first offered
the Officers' Salary Survey program in 1972 and
expanded the program a year later to include an
Employees' Salary Survey.
July 1978/Voice

policy under consideration involves reimbursement
to borrowers for certain violations that may have
occurred more than two years ago. Consumer
groups were concerned that evide nce of such violations could be destroyed before the new enforcement guidelines were implemented. To eliminate
this possibility, the Board has extended indefinitely
the length of time creditors must retain consumer
credit records until the regulators adopt a uniform
enfon::ement policy and one examination is completed under the new guidelines.

Computation of APR for
Mortgages to Be Simplified

In order to simplify the computation of annual percentage rates for graduated-payment mortgages,
the Federal Reserve Board has proposed an amendment to Regulation Z. Since graduated-payment
mortgages, by their very nature, involve unequal
instalments, the computation of their annual percentage rate is difficult. To facilitate computation,
the proposed amendment would allow annual percentage rate computation tables prepared by the
Federal Housing Administration to be used when
homes are bought on a graduated-payment mortgage plan.
Graduated-payment mortgages, which involve
one payment period that is different from others,
have been developed by the FHA to help young
people, and others, to buy homes. Under these
mortgages, payments increase annually during
the first five or ten years of the mortgage.

"Ped Quotes~~
Brief Excerpts from Recent Federal Reserve Speeches, Statement!;, Publications, Etc.

Restraining inflation
"In our present circumstances, ... it is unlikely that macroeconomic policies alone
can achieve the low unemployment goals of the Humphrey-Hawkins bill without
running the grave risk of substantially exacerbating the inflation problem."
"One potential problem inherent in the planning for general economic policies
designed to control both unemployment and inflation is that trends in employment tend
to respond more quickly to changes in policy, including monetary policy, than do
trends in prices .... Because of this long tail on inflation, public policies are in danger
of giving insufficient weight to potential inflationary pressures unless they focus
on a plannng horizon that looks beyond the next year or two."
"While the current versions of the Humphrey-Hawkins bill take more account
than earlier versions of the threat that inflation poses to our economic health. they still
do not acknowledge adequately the crucial need to reduce inflation, both as an
integrated element in the process of achieving full employment and as a necessary
condition for effective public and private planning. There is a real risk that the
Humphrey-Hawkins bill, if enacted with the present lopsided emphasis, will accord by
law a back seat to the need for more effective control over inflation. It seems
paradoxical that this might take place at precisely the time when inflationary pressures
are coming to represent the major threat to the stability of our economic process."

J. Charles Partee, Member, Board of
Governors of the Federal Reserve System
(Statement before the Committee on Banking,
Housing and Urban Affairs, U.S. Senate,
May 9, 1978)

Too much regulation
" Your business of banking is an excellent example of the consequences that we are
experiencing from excessive regulation. I think that the purpose of your industry
should be to provide a safe, convenient place to store our savings. It should furnish a
cheap, fast means of effecting transactions and it should provide a system whereby
the savings of some of us can be used to create more goods and services
for all of us."
"The vast majority of banks and bankers are responsible. capable and honest people
who are equally able and willing to serve the public interest as well as their own.
And the public interest would be best served by removing the shackles of regulation
and restraint and giving them the freedom to strive toward doing so."
PhilipC. Jackson. Jr.. Member. Board of
Governors of the Federal Reserve System
(Remarks before the Alabama Bankers
Association, Mobile, Alabama, May 11, 1978)

Federal Relenre Bank of Dallas

Concentration in banking
"At the national level between 1968 and mid-1977, the 10 largest banking
organizations' share of domestic deposits declined from 20.4 per cent to 18.3 per cent
and the top 25's share dropped from 31.9 per cent to 26.0 per cent. The 100 largest
organizations' share declined from 49.7 per cent to 45.0 per cent over this period. A
similar pattern is found at the statewide level. ... Our review of over 400 local
markets, including 213 SMSAs, between 1966 and 1975, indicates that the majority
tended to become less concentrated and to exhibit a more competitive structure
irrespective of the measures used .... These figures tend to overstate concentration
since they do not reflect the rapid growth of bank type activities at savings and loans,
mutual savings banks and credit unions."
"The registered bank holding company share of domestic U.S. deposits increased
from 16 per cent in 1970 to 70.8 per cent in 1977 but about two-thirds of this
increase resulted from the inclusion of over 1,100 one bank holding companies under
the umbrella of the Act in 1971. This includes 16 of the Nation's 251argest banks.
Also, it is important to note that while bank holding companies account for 70.6
per cent of domestic bank deposits , all but about 6 per cent of these deposits are in the
lead banks of holding companies. Thus, expansion of bank holding companies' share
of deposits has been due principally to conversion in the legal status of existing banking
organizations to the holding company form and not to acquisitions of existing banks
by multibank holding companies."
Philip E. Coldwell. Member, Board of
Governors of the Federal Reserve System
(Statement before the Committee on Banking,
Housing and Urban Affairs, U.S. Senate,
March 7, 1978)

Borrowing against equity in homes
"Household borrowing against equity in existing homes has accounted for nearly half
of total home mortgage debt formation during the past 2 years, about double the
proportion during the previous 5 years .... Significant portions of the funds raised ...
have served to bolster personal consumption expenditures ... have supported
capital expenditures, substituted for other forms of household debt, or contributed to
acquisitions of financial assets."
David F. Seiders
"Mortgage Borrowing Against Equity in
Existing Homes: Measurement, Generation,
and Implications for Economic Activity"
(Staff Economic Studies, Board of Governors
of the Federal Reserve System, May 1978)
July tm/Volce


Loan classifications meaningful
"Examiners were successful in categorizing bank loans according to their relative
risks of default. Among the sample banks in the study. unclassified loans. substandard
loans. doubtful loans. and loss loans had average charge-off rates of .14 percent.
9.61 percent. 58.11 percent, and 94.75 percent, respectively, when these loans were
traced by their dollar amounts. Thus, doubtful and loss classifications generally
conform to their expected loss patterns. Substandard loans also follow the examiners'
expectations of 'loans involving more than a normal risk.' However, the loss
experience for substandard loans indicates that a large percent of such loans will
experience no further deterioration.
"The study also found that the loan classification procedure was successful in
identifying a major portion of loan charge-offs and over 85 percent of the larger loan
losses at the sample banks. Thus, a bank's pool of classified loans represents the
main source of future loan problems. Also, since classified loans in this study
represented an average of 2 to 3 percent of all loans, the examination process appears
to be reasonably efficient in separating problem loans from nonproblem loans."
Kenneth Spong and Thomas Hoenig
"Bank Examiner Classifications and Loan
Risk" (Unpublished paper, Federal Reserve
Bank of Kansas City, February 1978)

More on banking regulation and competition
"Banks, like a11 other business organizations in our country, should have the
freedom to open up shop where the needs are greatest and the opportunities strongest.
Not only should we allow state-wide branching by any bank organized within a state
but we should also authorize interstate full-service operations for any bank
authorized to do business in our country."
"I find it hard to understand how the House of Representatives could
overwhelmingly pass, as it did . a bill to give foreign banks the authority to branch
across state lines. It seems to me inconsistent to have these foreign visitors enjoy
privileges that we don't authorize for ourselves. Certainly we should have one
rule appl y to all who are striving to perform the same public function."
Philip C. Jackson, Jr., Member, Board of
Governors of the Federal Reserve System
(Remarks before the Alabama Bankers
Association, Mobile, Alabama, May 11,19781

Federal Reserve Bank of D.Ua.