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Fo r R e l e a s e on D e l i v e r y Statement of C. Canby Balderston Vice Chairman Board of Governors of the Federal Reserve System before the Committee on Banking and Currency House of Representatives May 27, 1965 on H. R. 7371 The Board of Governors of the Federal Reserve System favors enactment of H. R. 7371. The bill would amend the definition of "com pany11 in the Bank Holding Company Act of 1956 so as to include, in addition to the corporations, business trusts, and similar organiza tions now covered, any other trust "unless by its terms it must ter minate within twenty-five years, or not later than the death of a named beneficiary." The bill incorporates amendments suggested by the Board in its report on H. R. 10668 that was introduced by your chair man in the last Congress. The Board's annual report submitted to the Congress on March 22, 1965, also recommended such an amendment to the Bank Holding Company Act of 1956 in addition to a number of other amendments. That Act requires bank holding companies (that is, companies that control two or more banks) to register with the Federal Reserve Board; prohibits their formation or expansion without Board approval; prohibits their banking subsidiaries from lending to or investing in the parent company or other subsidiaries; and bars the use of the holding company device to combine banks with nonbanking businesses. The Act was passed not only to prevent excessive concentration of banks under single control and management, but also to reinforce pro hibitions previously enacted against banks engaging in nonbanking businesses. Because the re es to divest themselves of non apparent as those for contr L ib r a r y - 2 - banks, it may be helpful to quote from the report of this Committee on H. R. 6227, 84th Congress, which became the Bank Holding Company Act of 1956: "The reasons underlying the divestment requirement are simple. As a general rule, banks are prohibited from engaging in any other type of enterprise than banking it self. This is because of the danger to the depositors which might result where the bank finds itself in effect both the borrower and the lender. It is for this reason, among others, that statutes limiting the investments of banks have been passed by both the Congress and State legislatures. "The bank holding company is under no such restric tion. It may acquire and operate as many nonbanking bus inesses as it has funds and the disposition to acquire. There are in the country today, as has been pointed out previously, bank holding companies which, in addition t& their investments in the stocks of banks, also control the operations of such nonbanking businesses as insurance, man ufacture, real estate, mining, and a number of others. "Whenever a holding company thus controls both banks and nonbanking businesses, it is apparent that the hold ing company's nonbanking businesses may thereby occupy a preferred position over that of their competitors in ob taining bank credit. It is also apparent that in critical times the holding company which operates nonbanking bus inesses may be subjected to strong temptation to cause the banks which it controls to make loans to its nonbanking affiliates even though such loans may not at that time be entirely justified in the light of current banking standards. In either situation the public interest becomes directly involved." The Act does not apply where the banks or other businesses are owned or controlled by an individual, as opposed to a "company, perhaps because the Congress felt that control by a company could con tinue indefinitely, whereas control by an individual could not extend beyond his lifetime. But the trust device can be used to achieve con trol for an indefinite period, and the potentiality for abuse through long-term trusts is just as great as in the case of the more normal -3forms of business organization now covered by the A c t fs definition of "company." The bill would close this loophole, while excluding trusts created for a limited period--up to twenty-five years, or for the life time of a named beneficiary. This would avoid covering trusts such as those frequently created to take care of the spouse or minor children of a decedent. The bill now under consideration does not incorporate one suggestion made by the Board in its report on H. R. 10668 last year. That suggestion was to delete from the definition of "company" the present exemption for nonprofit religious, charitable, or educational organizations. The current bill would repeal the exemption as to charitable or educational organizations, but retain the exemption for religious organizations. The Board renews its recommendation that this exemption be repealed in its entirety. As stated in the Board's first report, filed May 7, 1958, on operations under the Act of 1956, "the dangers aimed at by the Holding Company Act (unregulated expan sion of ownership of banks; banking and nonbanking interests being held by the same organizations; and lending by a bank to the organiza tion that controls it) are not absent simply because a holding company is operated for religious, charitable, or educational purposes." The bill before you omits a provision in the earlier bill designed to prevent a trust from escaping coverage by merging all of its banks into one bank with a number of branches. While the Board questioned the effectiveness of that provision, and would not recommend its reinstatement in H. R. 7371, I want to take this opportunity to renew another recommendation the Board has been making for the past -4seven years, and again this year, that would effectively deal with the problem. That is, the Board would amend the Holding Company Act to cover companies that own or control a single bank. While the one-bank cases obviously do not lead to banking concentration, the reasons for separating banking from nonbanking businesses are just as valid whether the number of banks involved is one or more than one. The Board welcomes the interest your Committee is showing in amendments to the Holding Company Act. I hope that your hearings both on this bill and on H. R. 7372 will convince you of the merits of these two bills, and lay the groundwork for subsequent action on the other recommendations of the Board.
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