View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

T / ( M 4

A*

^JntUy

^^

OUTLINE OF SPEECH TO RESERVE CITY BANKERS
PHOENIX, ARIZONA
April 2, 1977

Legislative matters have become an increasingly important aspect
of our work at the "Federal Reserve in recent years.

I want to

discuss today nojt^oiily some of the ^jirrefit legislative issues
bio* ^

tz

/rfttii

with which we have been concerned, J?ut~also what I see as an
emerging new trend in the relationship between the Federal
Reserve and the Congress.
A.

First let me give you some facts to show how our
legislative work has expanded:
1. In 1960 the Chairman of the Federal Reserve testified

^ ^ ^

on four occasions before three Congressional com-

y

mittees, and one other Board member testified once.
(Total:
2.

5 occasions; 3 different committees)

In 1961, the Chairman testified three times before
two committees, and no other Board members testified
at all.

3.

In 1975, the Chairman testified 18 times before 8
committees, and other Board members t e s t i f i t i m e s
before 9 committees.
committees)
_

(Totals

44 occasions, 9 different
/

A

|i

j

- 24.

In 1976, the Chairman testified 14 times before 6
committees and other Board members testified 25 times
before 9 committees.

(Total:

39 occasions; 12

different committees)
Thus, we have seen something like a tenfold increase in
Congressional appearances in a period of about 15 years.
B.

In addition to these formal appearances before the Congress,
t /
~ aaJL £ <VV4 r^^r
J
* X CA^T^m
ve have frequent informal meetings with Congressional groups

\

or individual members of Congress*

We are asked each

year to comment upon literally hundreds of letters
received by members of Congress from their constituents.
In addition, we receive dozens of requests from the
Banking Committees, and other Committees whose jurisdiction may touch aspects of our work, for reports on
proposed legislation, for legislative drafting assistance,
for comment upon regulatory Issues of current significance}
and for the conduct of studies or research.

(Might mention

recent staff study on payment of interest on demand deposits
as an example.)
C.

We take this work very seriously, and a great deal of
time and attention is devoted to our communications with
the Congress.

We are fully aware that statements from

-

3the Board, particularly in the area of monetary policy,
are watched carefully by the banking industry and financial
markets.

Furthermore, we are proud of the reputation the

Board has for pro^ji^ing careful and thoughtful work, and
we want to preserve that reputation*

II*

The causes of this increase in our legislative work are
quite clear*
(^A*

Not since the early 1930s has Congress given such
extensive consideration to fundamental changes in our
banking system and our system of bank regulation*

There

are a number of reasons for this: j
1*

During the past decade bankers have become far more
innovative than they traditionally have been*

This

has been reflected in expansion into new areas of
financial activity; such as the spread of bank holding
companies; the development of new methods of marketing
bank services: ventures into various aspects of the
securities business (e*&*, brokerage activities,
private placements).

These innovations have stirred

up competitors and have led to legislative scrutiny
of bank activities*

- 42.

The failure of several very large banks, followed by
some unfortunate disclosures of so-called "problem
lists", has aroused legislative concern about the
health of the banking system.

3.

Growing interest in "consumerism" has given rise to
many legislative proposals relating to the creditgranting process.

4.

Certain types of financial institutions —
and loan associations —

savings

that have historically had

limited powers have sought to expand their powers.
5.

Several broad studies of the structure of our financial
institutions —

the Commission on Money and Credit, the

Hunt Commission, the FINE Study (Financial Institutions
in the Nationfs Economy) — have sparked debate on key
issues in financial regulation.
6.

Changes have occurred in the makeup of the Congress.
Both the Senate and House Banking Committees have new
chairmen, each of whom has pronounced opinions on
these matters.

Congressional staffs have increased,

and the number of committees and subcommittees having
jurisdiction or some interest in our areas has proliferated.
^Last year we testified before 12 standing committees.
(In 1960 we testified before only three./] Indeed,
many of our important appearances in past few years
have been before committees other than Banking, such
as Government Operations, Budget, and Joint Economic.

- 5III. As a result of;many of, these factors, Congress has been ^
s

tfitf expanding^ the responsibilities of the Federal Reserve^ J ^ ^ Jtt
.'principally in the areas of consumer protection and bank
regulation and supervision.
A.

Starting with the Truth in Lending Act in 1968, Congress
has enacted a number of measures inttended to deal with
consumer grievances in the credit area, and it has imposed
upon the Board substantial rulemaking and enforcement
responsibilities for such legislation. We now have a
separate Division of Consumer Affairs at the Board, and
the Board today has rule writing or enforcement authority
under:
1.

Truth in Lending Act (requires disclosure to borrowers
of the costs of credit)

2.

Fair Credit Reporting Act (regulates the use of
consumer credit reports)

3.

Equal Credit Opportunity Act (prohibits discrimination
in the granting of credit)

4*

Fair Credit Billing Act (establishes requirements
for the correction of billing errors)

5. Home Mortgage Disclosure Act (requires public disclosure by lenders of the number and dollar amount of
mortgage loans)

- 66.

Federal Trade Commission Improvements Act (requires
the Board to define unfair and deceptive practices for
banks)

7*

Consumer Leasing Act (requires disclosure similar to
those of Truth in Lending in connection with consumer
leases of personal property)

In 1970, Congress extended the reach of the Bank Holding
Company Act to include one bank holding companies.
^

I*

A

Since

1970, holding company regulation has become an increasingly

r

filtyr
(a

k

h

^

important part of the Board's work, such that today,! in

f
fiM^u*

M

p

terms of volume of matters considered by the Board^ holding
^

company regulation is one of the largest categories of
Board activity.

IV.

Let me now turn to a discussion of the legislation that is
of principal interest to the Federal Reserve.

It is tempting

to say that our number one legislative priority is to be
left alone for a while.

We already have an ample amount
Itk

hr<H

hot

i f

of legislation to deal w i t h ^ W e " ' h a v e t r a n s m i t t e d s e v e r a l — u

nC

\

^xcgxaittuxve proposals to uuugtess
pa© t. iewyearB
^legislative
Congress auxxug—cue
during Lite pasrfew
years ji^^ ^
Jr^oA.

W

Mi

ft

/ f a i f j k ^

fer&l

that-remain-of concern to us^howaveM^ c
4
A* International Banking Act — The Board continues to

support legislation that would adopt the principle of

V*

I
|

fcs
rt W

^ for
^
* *

iS*

- 7national treatment with regard to the entry and
expansion of foreign banks in the United States. [with
the retirement of Congressman Rees from the House of
Representatives, however, we lost a forceful advocate
for this legislation in the Congress, andjI do not

L^jun^

have high hopes for the passage of this legislation
this year.
B.

Our Bank Supervisory Improvement Bill --[In January of this
-V

tJXi^t

year the Board sent to Congress an omnibus draft bill)dealing J
with j^uimber^f^nattera.^ bank and bank holding company
supervision. Among other things, the bill would:
1.

Create a Federal Bank Examination Council (to be
comprised of representatives of the Fed, FDIC and
Comptroller) to Improve and make uniform bank
examination procedures/

2. Provide civil (money) penalties for violations of
banking laws and regulations.
3*

Tighten limits upon insider loans.

4.

Improve the Board's ability to deal with failing
bank situations, by
(a) eliminating a statutory 30-day waiting period
to consummate the acquisition of a failing bank
by a bank holding company, and

- 8(b) allowing a holding company to acquire a falling
bank In another state where the falling bank has
assets over $500 million or Is one of the three
largest banks In the state.
5. Authorize the Board to compel divestiture of nonbank
subsidiaries of bank holding companies where a serious
financial risk is presented to a subsidiary bank.
Expand grounds for removal of bank officers and
directors to include gross negligence in management
of bank and continuing disregard for safety and
soundness.

(Present law requires showing of personal

dishonesty).
Senate Banking Committee last year approved many of these
t!

proposals,

and I think the chances are good that this

Congress will enact legislation covering all or many of
S

^

j

C#

w e sent to

foXA-M^' {/b^*
f

i

these
matters.
pr ' r * t
. ^
i
^
N0Wys and Interest on Reserves —

/ y

In January

Congress a staff study on payment of interest on

demand deposits.

That study showed that our banking system

j

has been evolving in the direction of paying interest on what

,ijr
^
Jc ^ C
9
'
J. or -1

) J.y^C

l

are in essence demand deposits.

For example:

*/ Civil penalties, insider loans, divestiture of nonbank subsidiaries
^
expanded grounds for removal — numbers 2, 3, 5 and 6 in the above
list. , ,
.
/ f i ^

J

•

i

^

- 9—

banks and thrifts in the six New England states
offer NOW accounts

—

banks nationwide may make transfers from savings
to checking accounts upon telephone order of customer

—

banks may accept savings deposits from state and
local governments

—

businesses may now hold savings accounts at banks (up
to $150,000 per Institution)

—

banks and thrifts may make transfers to third parties
from customers9 savings accounts with preauthorization
of customers.
A

<u

for

We teld^Congress^ we would be sending up our recommendations
soon based upon the staff study, and we are presently in
the process of developing specific legislative proposals.
A principal objective we have is to guide the evolution ^
toward the payment of e^Uhsft interest on transactions
balances in an orderly and gradual manner. While the
full Board has not yet had a chance to consider the
details of such a package, it would in my view be likely
to include the following elements:
atr?*u

1.

ft*

depositary institutions nationwide would be permitted
to offer NOW accounts to h o u s e h o l d h ^ 1 * * * ™ )
(but not to businesses or nonprofit organizations)

2.

the effective date of this authority would be delayed
for two years in order to allow institutions to
adjust to transitional cost pressures,

- 10 to make appropriate plans regarding such things as
service charges, advertising and computer programs,
and to afford state legislatures an opportunity to
take any necessary actions to grant NOW account powers
to state-chartered institutions
ft

3.

tioio

the interest ceiling applicable to such accounts would
be uniform among all institutions

r\ v

4.

. Xf

the interest rate ceiling £or-sevewt3r-years would
be below that applicable to passbook accounts at
member banks. "^After a specified period suck' rate
A

N

ceiling^ would be removed, with standby authority
in the Board to reimpose ceilings

N>
£ O

5.

all financial institutions would be required to
maintain reserves at the Federal Reserve on their

^

^

transactions balances/or, perhaps, only on their

j

S
^

yjt

£

\

6.

s

^

not merely upon reserves held against transactions
balances or NOW accounts)

i

S;
7.
I \
** *
^

the Federal Reserve would be authorized to pay interest
on all reserves required to be held with it (i..e.,

v

\

^

J

^

^

y»

NOW account balances^

the ranges within which the Federal Reserve is
authorized to fix reserve requirements would be lowered.

I think that there would be substantial merit in such a
package, and I believe the chance that the 95th Congress
will enact such legislation ranges from fair to good.

- 11 V.

In closing it might be well to step back and take a broad
look at the developing relationship between the Federal
Reserve and the Congress ^uring the past 64 years,. Over the
years since 1913 Congress has taken a number of steps to
protect the independence of the Federal Reserve as the
nation's central bank (e,.£., eliminated audit by GAO in 1933;
removed Secretary of Treasury and Comptroller from Board in
1935), and while the basic concept of independence remains
under scrutiny and even attack, I believe the American public
has come to value the concept.

One need only recall the

excesses in the use of executive power during the early
years of this decade to appreciate how important it is that
the monetary authority be free from day^tcp-day partisan-*
political control.

Indeed, many thoughtful members of Congress

have been opposed to recent proposals to make the term 6f the
Chairman of the Federal Reserve ^rpuglily coterminous with that
of the President precisely because of the political implications of such proposals.
What has been most interesting to me, however, has been
the emergence of a new accommodation between the Congress and
the Federal Reserve in recent years.

The concept of inde-

pendence liapwts not only independence from the executive

control, but independence from day-to-day polljti^al control
by the Congress itself. Yet the Federal Reserve is the
creation of the Congress, and Congress is understandably
reluctant to abandon completely its authority over its
creation.

Moreover, I believe the Congress has come to

recognize that the Federal Reserve has evolved as an agency
with a demonstrated capacity to perform its duties in a
thoughtful and responsible manner.

Congress has frequently

drawn upon the Board's extensive research capacity for
study and analysis of issues of wide public importance, ,
p&d the fact that Congress has seen fit to confer upon the
Board the responsibility for developing regulations in the
consumer protection area reflects, we believe, a fundamental
confidence in the ability of the Federal Reserve to perfprm
SICV&

YC

Kth'sJL

fr>^if-*r~

i£&ponslbly.
The problem that the Congress has faced, however, has
been how best
to assure itself that the Federal Reserve is
indeed
performingthe
its
duties
whilecentral
at the bank.
same
time
protecting
value
of properly,
an independent
fl.r.y.

An answer to this problem has been developing in the use
of oversight hearings.

Beginning in 1975, with the

adoption of House Concurrent Resolution 133, the Board has
been presenting to Congress each quarter its targets for

- 13 monetary policy for the ensuing 12 months.

These hearings

have provided a valuable opportunity for an exchange of
views between the Congress and the Board on monetary policy,
and I believe that there is a mutual feeling that this
process has worked well.
Within the past month, we have embarked upon a new series
of oversight hearings, dealing with the condition of the

J

banking system.

We now expect that each six months we will

be presenting a detailed report to the Congress on this
subject.

Furthermore, within the next few days we will be

presenting testimony to the Senate Banking Committee on the
1977 budget of the Federal Reserve System, and I expect that
this process will be repeated periodically in the future.
Finally, our proposal for a Bank Examination Council wojiltT*
provid^ for annual reports to Congress by the Council, which
fct/y Uil{
cptsid become a focal point for oversight hearings,
r

*

We think this technique of oversight hearings offers
much.

On one hand, it avoids the expenditure of resources

and the threat to intrusion into the policy-making process
inherently involved in the use of—fehe General Accounting
Office

m audits of thet System aad in subjecting the

Federal Reserve to the appropriations process.

On the other

hand, yt provided a meaningful and effective opportunity for

^

- 14 members of Congress to deal directly with the Board in a
review of the Board's performance of its responsibilities in
C

ft

fr

/c

the areas of monetary policy, bank supervision and operation
O
>
of the Federal Reserve System generally.
-We-are hopeful that the evolution of our relationship
with Congress will continue in this form, and that the
perennial proposals to subject the Federal Reserve to

.iA-W

vf to GAO audit or to the appropriations process, or to cneate=-ar
ponoiithic Federal BaptetugToiuinlsaieu, will wither away.
While pe are hopeful in this regard, *?6~are by no means
certain that such will be the result* and I fear that much
fry 4-k/u.1 * tLr
i<, 7
of Qur energy may still have to be devoted to warding off
J»ad* legislation^

A*-,

&

^ A y C e

p ,

^