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S p c Â'J T P IC M ADDRESS BY GEORGE AI LE .c MA iwI.STREi DIRECTOR FEDERAL DEPOSIT INSURANCE CORPORATION BEFORE THE SEMINAR ON CONTEMPORARY PROBLEMS IN BUSINESS AND BANKING MONTGOMERY, ALABAMA A p r i l 7, 1975 © ètLÂUi ,(yv\Ttvvv 'A,1\A MjAJrCW P l a y b o y m a g a z i n e b e g a n a n a r t i c l e in its F e b r u a r y issue WITH THE ASSESSMENT "AMERICA^ BANKS ARE IN TROUBLE," M l/ OF THAT ARTICLE WAS "BANKS ON THE BBRINK,” is t THE TITLE NUMEROUS OTHER Mm I POPULAR JOURNALS, MOT KNOWN FOR THEIR COVERAGE OF THE FINANCIAL WORLD — amd INCLUDING HARPER'S, ËSQÜIRE, THE HfMLY.ORK flMAZjJiE T he V i l l a g e V o i c e — have published artic le s raising QUESTIONS ABOUTr THE SOUNDNESS OF OUR BANKING SYSTEM, Re ADIN* SUCH COVERAGE I AM OFTEN REMINDED OF THIS FAMILIAR EXCERPT FROM A CHILDREN S STORY: "One d a y P e n n y P e n ny w a s p i c k i n g up c o r n in t h e FARMYARD WHEN AN ACORN FELL OUT OF A TREE AND STRUCK HER ON THE HEAD, 'GOODNESS GRACIOUS H E !' SAID HENNY P e n n y , 'The s k y is f a l l i n g . /V Iif THE KING I m u s t go a n d t e l l - 2 - I DO NOT BELIEVE THAT THE SKY IS FALLING ON OUR INDUSTRY OR ON the Am e r i c a n e c o n o m y a n y m o r e t h a n it w a s f a l l i n g in t h a t s t o r y , Ho w e v e r , I d o b e l i e v e t h a t , w h e n r e c e n t m o n t h s a n d t h e c o m i n g TERM OF THE 9ATH CONGRESS ARE REVIEWED BY ECONOMIC HISTORIANS, THEY MAY SEE EFFECTS ON BANKING SUBSTANTIALLY MORE SIGNIFICANT THAN THOSE WROUGHT BY THE ACORN WHICH STRUCK H e NNY PENNY, Ev e n t h o u g h m a n y of t h e c o n c l u s i o n s r e a c h e d in t h e PRESS ARE EXAGGERATED, EVENTS OF THE PAST EIGHTEEN MONTHS HAVE SERVED t o FOCUS THE ATTENTION OF BANKERS, BANK REGULATORS AND THE CONGR ESS ON SOME VERY REAL PROBLEMS. THE FAILURES OF THE Fr a n k l i n Ra t i o n a l Ba n k a n d o t h e r l a r g e i n s t i t u t i o n s d e m o n s t r a t e d THAT SIZE ALONE DOES NOT INSURE SAFETY. TOGETHER WITH THE SHOCKING LOSSES OF SOME FOREIGN EXCHANGE DESKS, THE PUBLICITY WHICH HAS BEEN GIVEN BANK RELATIONS WIlH REITs AND W. T. GRANT s, THE OVERHANG OF OTHER LOAN LOSSES THAT WILL UNDOUBTEDLY OCCUR BEFORE THE RECESSION ENDS, AND THE DISTRtSS MERGERS OF -C S e c u r i t y Ra t i o n a l B a n k a n d B e v e r l y H ills n a t i o n a l Ba n k , t h e be FAILURES HAVE UNDERSCORED THE RISKS INHERENT TO SUCH FUNDAMENTAL - 3 FEATURES OF MODERN BANKING AS INTERNATIONAL OPERATIONS, THE HO LDING COMPANY AND LIABILITY MANAGEMENT BANKING. THUS, ALTHOUG! THE BROAD BASE OF PUBLIC CONFIDENCE IN OUR SYSTEM OF BANKING AND BANK SUPERVISION REMAINS UNSHAKEN, BANKING S IMAGE IS SOMEWHAT TARNISHED M o r e o v e r , t h e e c o n o m i c o u t l o o k for t h e r e m a i n d e r of 1975 and 1976 thirties. c o n t i n u e s to be m o r e g l o o m y than a n y since the Pr e s i d e n t Fo r d in h i s Ec o n o m i c Re p o r t of t h e Pr e s i d e n t s t a t e d "The e c o n o m y is in a s e v e r e r e c e s s i o n , u n e m p l o y m e n t is t o o h i g h a n d w i l l r i s e h i g h e r . inflation T he r a t e of is a l s o t o o h i g h , a l t h o u g h s o m e p r o g r e s s has been ma d e in l o w e r i n g it. A r t h u r Q k u n , r e s p e c t e d e c o n o m i s t a n d f o r m e r Ch a i r m a n of t h e P r e s i d e n t 's Co u n c i l of Ec o n o m i c A d v i s o r s , is r e p o r t e d to h a v e used the term "d e p r e s s i o n " in r e f e r r i n g to t h e c o n d i t i o n of the economy. In t h i s c o n t e x t , it is w e l l t o r e c a l l t h a t history suggests that significant changes in o u r financiai SYSTEM USUALLY OCCUR IN RESPONSE TO PERIODS OF ECONOMIC INSTABILITY OR CRISIS. A l o n g w i t h t h e s t r a i n s of r e c e n t m o n t h s a n d t h e p r o s p e c t OF FURTHER INSTABILITY, COMPETITIVE INNOVATION AND AGGRESSIVENESS BY SOME GROUPS OF INSTITUTIONS MAY ALSO PROVIDE IMPETUS FOR Co n g r e s s i o n a l a c t i o n . T he d e v e l o p m e n t a n d i m p l e m e n t a t i o n of E l e c t r o n i c F u n d s T r a n s f e r Sy s t e m s a n d t h e Co m p t r o l l e r 's r u l i n g in t h i s a r e a ; f e a r of h o l d i n g c o m p a n y c o m p e t i t i o n on t h e p a r t OF SOME INDUSTRIES; THE INTERSTATE PRESENCE OF LARGE HOLDING COMPANY SYSTEMS; THE AMBITIONS OF MANY BANKERS WITH RESPECT TO THE SECURITIES FIELD; THE ABILITY OF THRIFT INSTITUTIONS TO COMPETE DIRECTLY WITH COMMERCIAL BANKS; AND THE RAPID GROWTH AND RESULTING ECONOMIC POWER OF THE LARGEST HOLDING COMPANIES WILL ALL PROVIDE GRIST FOR THE LEGISLATIVE MILL, AS CONGRESS ATTEMPTS TO BALANCE THE VARIOUS INTERESTS SEEKING TO MAINTAIN OR ENHANCE THIS COMPETITIVE POSITION. F i n a l l y , a n d m o s t i m p o r t a n t in a s s e s s i n g t h e p r o s p e c t s FOR SIGNIFICANT LEGISLATION, THE CONGRESS JUST ELECTED IS LIKELY - 5 TO BE THE MOST REFORM-MINDED AND CONSUMER-ORIENTED IN THE Na t i o n 's h i s t o r y . In t h e a f t e r m a t h of Wa t e r g a t e a n d c o n f r o n t e d WITH ECONOMIC CONDITIONS WHICH SEEM TO CRY FOR ACTION, THIS Co n g r e s s is l i k e l y to a s s e r t itself w i t h r e s p e c t t o b o t h t h e INISTRATI ON AND VARIOUS INTERESTS. As YOU KNOW, IN BOTH THE SENATE AND THE hOUSE, NEW chairmen — S e n a t o r Pr o x m i r e a n d Co n g r e s s m a n Reu ss -- h e a d THE RESPECTIVE BANKING COMMITTEES, EACH IS A KNOWLEDGEABLE AND VIGOROUS LEGISLATOR AND EACH IS KNOWN TO BE LESS THAN SATISFIED WITH THE PERFORMANCE OF THE INDUSTRY OR THE AGENCIES IN CERTAIN AREAS, ALSO, IT SHOULD BE NOTED THAT FAR GREATER COOPERATION MIGHT BE EXPECTED BETWEEN THE TWO COMMITTEE CHAIRMEN THAN HAS OCCURRED IN THE RECENT PAST, THEREBY ENHANCING THE PROSPECTS FOR THE PASSAGE OF SIGNIFICANT LEGISLATION. IN ADDITION TO CHANGES IN THE LEADERSHIP AND ORGANIZATION, THERE HAS, OF COURSE, BEEN CONSIDERABLE TURNOVER IN THE MEMBERSHIP OF BOTH HOUSES WITH THE NEW MEMBERS TENDING TO BE SOMEWHAT YOUNDER AND MORE LIBERAL, In THE HOUSE OF REPRESENTATIVES, - 6 FOR EXAMPLE, THERE ARE 92 NEW MEMBERS, lU THE BEST OF TIMES, SUCH CIRCUMSTANCES WOULD PRODUCE FERMENT, In THE CURRENT ECONOMIC AND POLITICAL CLIMATE, SIGNIFICANT CHANGE IN THE REGULATORY ENVIRONMENT IS LIKELY, I WILL TOUCH ON SOME OF THE AREAS WHERE CHANGE MIGHT BE EXPECTED, Ba n k e r s s h o u l d a n t i c i p a t e a g r e a t e r e m p h a s i s on t h e VARIOUS ASPECTS OF CONSUMER PROTECTION, IF FOR NO OTHER REASON, THE PRESENCE OF M r . Pr OXMIRE AS CHAIRMAN OF THE SENATE COMMITTEE on B a n k i n g , Ho u s i n g a n d Ur b a n A f f a i r s w o u l d a s s u r e i t , T his p r o c e s s is a l r e a d y u n d e r w a y . As a r e s u l t of LEGISLATION ENACTED DURING THE LAST CONGRESS, WE AT THE ARE IN THE PROCESS OF STRUCTURING AND STAFFING AN OFFICE OF Ba n k CusreFt&R A f f a i r s w h i c h w i l l be d i r e c t l y r e s p o n s i b l e to t h e B o a r d of D i r e c t o r s a n d w i l l be c h a r g e d w i t h i m p l e m e n t i n g t h e PROVISIONS OF THIS Act AS ¡WELL AS PROMOTING CONSUMER INTERESTS, No t w i t h s t a n d i n g t h e FBIC's t r a d i t i o n a l f o c u s on s a f e t y a n d SOUNDNESS, BANKERS SHOULD EXPECT THAT THE FDIC AND THE OTHER AGENCIES WILL PROTECT THE RIGHTS OF CONSUMERS UUST AS VIGOROUSLY - / AS IT PURSUES GOAL OF CAPITAL ADEQUACY T he r e l a t i o n s h i p b e t w e e n b a n k s a n d t h e i r c u s t o m e r s is LIKELY TO ALTER EVEN FURTHER IN .1975 WITH THE tSTABLISHMEN T OF THE LONG-DISCUSSED AGENCY FOR CONSUMER ADVOCACY. SIMILAR LEGISLATION NARROWLY MISSED ENACTMENT IN EACH OF THE LAST THREE SESSIONS OF CONGRESS, ÎHE CURRENT PROPOSAL, WHICH HAS BEEN REPORTED OUT OF THE SENATE GOVERNMENT OPERATIONS COMMITTEE, PROVIDES FOR THE ESTABLISHMENT OF AN INDEPENDENT AGENCY "TO REPRESENT THE INTERESTS OF CONSUMERS BEFORE FEDERAL AGENCIES ANDD COURTS, RECEIVE AND TRANSMIT CONSUMER COMPLAINTS, DEVELOP AND DISSEMINATE INFORMATION OF INTEREST TO CONSUMERS, AND PERFORM OTHER FUNCTIONS TO PROTECT AND PROMOTE THE INIERESTS OF CONSUMERS," WlTH A FEW' EXCEPTIONS, THE AGENCY WOULD BE EMPOWERED TO INTERVENE IN ALL PROCEEDINGS BEFORE FEDERAL AGENCIES AND COURTS IN WHICH CONSUMERS HAVE AN INTEREST. IN SHORT, THE AGENCY WOULD BE THE ADVOCATE OF THE CONSUMER WITHIN GOVERNMENT— PRESUMABLY COUNTERBALANCING THE ESTABLISHED VOICES OF OTHER INTERESTS. BECAUSE OF THE EXPLICITLY O O PARTISAN ROLE OF THE AGENCY, IT WOULD NOT MAKE RULES OR OTHERWISE ACT AS A REGULATOR, GIVEN THE MOOD AND THE MAKE-UP OF THE Co n g r e s s , b a n k e r s s h o u l d e x p e c t p a s s a g e of t h i s l e g i s l a t i o n in 1975, A n o t h e r p i e c e of l e g i s l a t i o n w h i c h r e c e i v e d m u c h a t t e n t i o n in t h e S3rd Co n g r e s s — the Ad m i n i s t r a t i o n v e r s i o n of t h e Hu n t Co m m i s s i o n r e c o m m e n d a t i o n s — has b e e n r e i n t r o d u c e d S e n a t e a s t h e F i n a n c i a l In s t i t u t i o n s A ct of 1975, in t h e I a m su re THAT I NEED NOT REVIEW IN DETAIL THE SUBSTANCE OF THIS PACKAGE: EXPANDED DEPOSIT AND THIRD-PARTY PAYMENT POWERS FOR THRIFT INSTITUTIONS; EXPANDED LENDING AUTHORITY FOR BOTH THRIFT INSTITUTIONS AND NATIONAL BANKS; REVISION OF THE TAX LAWS TO PLACE ALL FINANCIAL INSTITUTIONS ON AN EQUAL FOOTING; PROVISION FOR STOCK THRIFT INSTITUTIONS AT THE FEDERAL LEVEL; A PHASE-OUT of R e g u l a t i o n Q; e x p a n d e d p o w e r s f o r c r e d i t u n i o n s a n d a g e n e r a l OVERHAUL OF FEDERAL STATUTES PERTAINING TO THEM; AND CERTAIN OTHER PROVISIONS PROVIDING FOR GREATER FLEXIBILITY IN THE COMPETITION AMONG FINANCIAL INSTITUTIONS. WlTH THt EXCEPTION 9 OF SIGNIFICANT REVISION OF THE PROVISIONS PERTAINING TO Re g u l a t i o n Q, t h e b i l l p r o p o s e d to t h i s s e s s i o n of Co n g r e s s by the Ad m i n i s t r a t i o n e m b o d i e s t h e p r o p o s a l s I h a v e a l r e a d y mentioned Un f o r t u n a t e l y , a l t h o u g h s o m e l e g i s l a t i o n a l o n g t h e s e I IMPS r MiAY BE ENACTED IN THE NOT~TOO~DISTANT FUTURE, THE PROSPECTS LinCO FOR ACTION THIS YEAR AND PERHAPS EVEN MEXT MUST BE CONSIDERED DIM. HIS ASSESSMENT FLOWS FROM THE FACT THAT SENATOR Pr OXMIRE HAS ALREADY SUGGESTED THAT HE HAS "RESERVATIONS A30UT THE LEGISLATION," AND FROM THE FACT THAT CONGRESSMAN 5T, GERMAIN S SUBCOMMITTTEE ON FINANCIAL INSTITUTIONS, SUPERVISION, REGULATION and In s u r a n c e d o e s n o t a p p e a r l i k e l y to m o v e on t h i s b i l l u n t i l IT HAS CAREFULLY CONSIDERED BOTH THE SPECIFIC PROPOSALS IN THE BILL AS WELL AS OTHER RELATED ISSUES SUCH AS AGENCY RESTRUCTURING. A c c o r d i n g l y , o n e s h o u l d n o t e x p e c t a c t i o n of t h e F i n a n c i a l In s t i t u t i o n s A ct u n t i l 1976 a n d t h e n it is f a i r to e x p e c t t h a t THERE WILL BE SIGNIFICANT MODIFICATIONS. - 10 - AS I HAVE INDICATED ON MANY OCCASION, I AM IN FULL SUPPORT OF LEGISLATION ALONG THE LINES PROPOSED BY THE HUNT Co m m i s s i o n I SHOULD NOTE AT THIS POINT THAT I DO HAVE ONE SERIOUS DISAGREEMENT WITH THE ADMINISTRATION PACKAGE AS INTRODUCED THIS term, A m o n g t h e c h a n g e s t h e Ad m i n i s t r a t i o n has m a d e is thi EXTENSION OF AUTHORIZATION TO SET DEPOSIT RATE CEILINGS UNDER Re g u l a t i o n 9 for f i v e a n d a h a l f y e a r s , In the or iginal version OF THE BILL, A GRADUAL PHASE-OUT OF DEPOSIT RATE CEILINGS WAS CALLED FOR OVER FOUR YEARS, BEGINNING EIGHTEEN MONTHS AFTER THE BILL WAS ENACTED, ACCORDING TO NEWSPAPER REPORTS, THIS CHANGE IN THE LEGISLATIVE PACKAGE WAS DESIGNED TO MAKE IT MORE POLITICALLY ACCEPTABLE TO THE THRIFT INDUSTRY, WHILE ONE CAN APPRECIATE THE ADMINISTRATION'S SENSITIVITY TO POLITICAL CONSIDERATIONS IN SEEKING TO OBTAIN THE PASSAGE OF AN IMPORTANT PIECE OF LEGISLATION, ITS DECISION TO COMPROMISE IS DISAPPOINTING, It HAS BEEN DEMONSTRATED TIME and time again that Re g u l a t i o n Q c e i l i n g s a r e d i s c r i m i n a t o r y a n d c a u s e s e v e r e dysfunctions in o u r f i n a n c i a l MARKETS, tt I has a l s o -b e e n a r g u e d WITH FORCE THAT BY VIRTUALLY ELIMINATING COMPETITION FOR DEPOSITS; THE REGULATION Q CEILINGS INCREASE THE NEED FOR BANKERS TO RESORT TO MORE VOLATILE MONEY MARKET INSTRUMENTS; LEVEL OF RISK IN THE SYSTEM, THEREBY INCRtASJ ALSO; BY DENYING SMALL SAVERS ACCESS TO INTEREST RATES WHICH A FREELY FUNCTIONING MAF*KET WOULD SET; REGULATION Q CEILINGS MAY HAVE ACTUALLY DISCOURAGED SAVINGS WHICH MIGHT OTHERWISE HAVE BEEN PUT IN PRODUCTIVE USE IN ADDITION TO THE FACT THAT INTEREST RATE CEILINGS HAVE BEEN COUNTER-PRODUCTIVE IN PURELY ECONOMIC TERMS; THERE IS ANOTHER SIDE OF REGULATION Q WHICH HAS RECEIVED TOO LITTLE ATTENTION; EVEN BY THE MOST OUTSPOKEN ADVOCATES ON THE PART OF CONSUMERS, REGULATION 0 CONSTITUTES A SUBSIDY OR SHELTEis TO THE HOUSING AND THRIFT INDUSTRIES AND TO MORTGAGE BORROWERS WHICH IS FUNDED BY WHAT CONSTITUTES A TAX ON LOW AND MIDDLE INCOME SAVERS. TOTALLY APART FROM THE FACT THAT THE DEVICE HAS DEMONSTRABLY FAILED TO PROVIDE A STABLE FLOW OF HOUSING; IT IS WRONG THAT THE BURDEN FOR PROVIDIN G THIS SUBSIDY SHOULD FALL ON THOSE WHO CAN LEAST AFFORD IT, HOWEVER LAUDABLE THAT goal, W ith i n f l a t i o n a t p r e s e n t l e v e l s , THE INEQUITY IS ESPECIALLY CRUEL, I#M WELL AWARE THAT ABRUPT ELIMINATION OF REGULATION 8, WITHOUT MEASURE TO AVOID DISLOCATION, WOULD BE IRRESPONSIBLE. Su c h m e a s u r e s h o u l d n o t , h o w e v e r , p r o v i d e e x c u s e t o d e l a y t h e ELIMINATION OF THIS UNJUST AND INEFFICIENT INTERFERENCE WITH THE MARKET MECHANISM, and I SINCERELY HOPE THAT BOTH BANKERS M e m b e r s of Co n g r e s s w i l l c o m e to a p p r e c i a t e t h e e x t e n t to WHICH THE ATTEMPT TO ALLOCATE CREDIT TO HOUSING, TO PROTECT THE THRIFT INDUSTRY AND TO EFFECT MONETARY POLICY THROUGH Re g u l a t i o n Q is i n e f f i c i e n t , i n e f f e c t i v e , a n d , m o s t i m p o r t a n t l y It WOULD INDEED BE IRONIC IF THIS WERE IGNORED BY UNJUST, Co n g r e s s in t h i s p e r i o d of h i g h i n t e r e s t in c o n s u m e r p r o t e c t i o n On e s u b j e c t w h i c h has GENERATED WIDESPREAD INTEREST AND WHICH IS LIKELY TO RECEIVE FAVORABLE CONSIDERATION IS THE PAYMENT OF INTEREST ON CERTAIN FUNDS OF THE UNITED STATES, A NUMBER OF BILLS HAVE BEEN INTRODUCED ON THIS SUBJECT., INCLUDING one by in t h e S e n a t e b y Ch a i r m a n Pr o x m i r e a n d a n o t h e r in t h e Ho u s e Co n g r e s s m a n Pa t m a n for h i m s e l f a n d C h a i r m a n Re u s s . T he Pr o x m i r e b i l l w o u l d p r o v i d e f o r p a y m e n t of i n t e r e s t on s u c h f u n d s "a t a r a t e n o t l e s s t h a n o n e p e r c e n t a g e p o i n t b e l o w t h e e f f e c t i v e F e d e r a l f u n d s r a t e /' a n d w o u l d c h a r g e t h e a p p r o p r i a t e a g e n c y with enforcing the provision through its c e a s e a n d d e s i s t p o w e r s . T he R e u s s /Pa t m a n p r o p o s a l a l s o p r o v i d e s for t h e p a y m e n t of interest at a rate not less th an one percent b e low the Fe d e r a l FUNDS RATEj HOWEVER, IT ALSO CONTAINS A PROVISION REQUIRING THE COMPENSATION OF BANKS FOR SERVICES PERFORMED FOR THE GOVERNMENT, GIVEN THE INTEREST OF THE RESPECTIVE CHAIRMEN IN THE PASSAGE OF LEGISLATION, BANKERS SHOULD EXPECT AC IN THIS AREA AND SHOULD PREPARE THE MOST EFFECTIVE CASE POSSIBLE FOR INCLUSION OF THE SORT OF ” COMPENSATIONn PROVISION SUGGESTED IN THE PATMAN/REUSS PROPOSAL A HOTLY DEBATED ISSUE WHICH IS LIKELY TO RECEIVE THE ATTENTION OF CONGRESS IN THE COMING WEEKS IS THE. PROPOSED 14 MORATORIUM ON THE FURTHER DEVELOPMENT OF ELECTRONIC FUNDS T r a n s f e r S y s t e m , A s y o u p r o b a b l y k n o w , a Na t i o n a l Co m m i s s i o n WAS CREATED BY CONGRESS TO ENGAGE IN A THOROUGH STUDY OF EFTS AND ITS RAMIFICATIONS AMD TO SUBMIT COMPREHENSIVE RECOMMENDATIONS to Co n g r e s s c o n c e r n i n g r e g u l a t i o n in t h e a r e a by D e c e m b e r of 1976, To date. , no Ch a i r m a n has b e e n a p p o i n t e d , n o t a l l p o s i t i o n s on Co m m i s s i o n h a v e b e e n f i l l e d a n d no s t a f f h a s b e e n a p p o i n t e d , the Y et i m p l e m e n t a t i o n of v a r i o u s s y s t e m s - has p r o c e e d e d a p a c e , A n d , of c o u r s e , m o r e s i g n i f i c a n t t h a n t h e p r o j e c t s of a n y INDIVIDUAL BANK OR. GROUPS OF BANKS HAS BEEN THE COMPTROLLER'S RULING THAT SUCH FACILITIES ARE NOT "BRANCHES" WITHIN THE MEANING OF THE HcFADDEN ACT THEREBY FREEING NATIONAL BANKS FROM THE GEOGRAPHIC RESTRICTIONS OF STATE LAW IN DEVELOPMENT OF THESE SYSTEMS, Co n c e r n e d t h a t d e v e l o p m e n t s in t h i s a r e a , a n d e s p e c i a l l y the Co m p t r o l l e r 's r u l i n g , w o u l d s i g n i f i c a n t l y a l t e r t h e s h a p e OF COMPETITION BEFORE CONGRESS HAS THE BENEFIT OF THE e m i s s i o n 's a d v i c e , S e n a t o r Pr o x m i r e a n d R e p r e s e n t a t i v e St . - 15 Ge r m a i m i n t r o d u c e d b i l l s in t h e i r r e s p e c t i v e c h a m b e r s c a l l i n g FOR A MORATORIUM ON DEVELOPMENTS IN THIS AREA. HEARINGS ON S e n a t o r Pr o x m i r e 's b i l l w e r e h e l d on Ma r c h 14, 1975» The b i l l HAS BEEN STRONGLY BACKED BY THE IBm A WHICH BELIEVES THAT IHE SMALLER INDEPENDENT BANKERS WILL BE PLACED AT A SIGNIFICANT DISADVANTAGE TF UNREGULATED » ÏHE DEVELOPMENT CONTINUES CO BILL HAS BEEN VIGOROUSLY OPPOSED BY THE COMPTROLLER,» THE FEDERAL Re s e r v e B o a r d , t h e F e d e r a l Ho m e Lo a n B a n k B o a r d , t h e A n t i t r u s t D i v i s i o n of t h e Ju s t i c e D e p a r t m e n t , t h r i f t i n d u s t r y g r o u p s , and the Am e r i c a n Ba n k e r s A s s o c i a t i o n * T he FDIC's p o s i t i o n on t h i s b i l l , in w h i c h I c o n c u r , w a s s u b m i t t e d to t h e ■S u b c o m m i t t e e on on Ma r c h 14« "We F inanc ia l . In s t i t u t i o n s A s u m m a r y of o u r v i e w s s t a t e d ; o p p o s e t h e t o t a l m o r a t o r i u m on EFT facilities r e q u i r e d b y t h e p r e s e n t t e r m s of t h e b i l l a n d w o u l d URGE INSTEAD EXPLICIT CONGRESSIONAL GUIDANCE ON WHETHER OR NOT SUCH FACILITIES CONSTITUTE BRANCHES UNDER PRESENT FEDERAL LAW FOR PURPOSES OF APPLYING THE PROVISIONS OF STATE LAW WHICH MIGHT GOVERN THEIR LOCATION AND APPROVAL, If THIS APPEARS NEITHER DESIRABLE NOR FEASIBLE AND THE CONGRESS BELIEVES SOME MORATORIUM SHOULD BE ENACTED WHILE IT AWAITS THE REPORT OF THE NATIONAL COMMISSION OR JUDICIAL DETERMINATION OF THE "BRANCH" QUESTION, WE RECOMMEND THAT THE MORATORIUM NOT APPLY TO THE ESTABLISHMENT OF SUCH FACILITIES ACROSS STATE LINES (UNLESS, POSSIBLY, SUCH FACILITIES ARE AFFIRMATIVELY AUTHORIZED BY EXPLICIT STATUTE IN THE STATE OF INTENDED LOCATION.) I AM OPTIMISTIC THAT CONGRESS WILL ADDRESS THE KNOTTY ISSUE OF WHETHER THESE FACILITIES ARE "BRANCHES" AS WE HAVE SUGGESTED, I DO BELIEVE, HOWEVER, THAT IF ANY MORATORIUM IS ENACTED IT WILL ALLOW A CERTAIN DEGREE OF DEVELOPMENT TO PROCEED IN IHIS AREA SO THAT THE COMMISSION WILL HAVE A BODY OF EVIDENCE ON WHICH T1O BASE ITS ASSESSMENTS. YOU ARE NO DOUBT FAMILIAR WITH THE LEGISLATION ORIGINALLY - 17 INTRODUCED BY CHAIRMAN Re USS AS THE "LOWER INTEREST RATE ACT OF 1975/ WHICH WOULD HAVE SET A SPECIFIC GOAL FOR THE CONDUCT OF MONETARY POLICY AND WOULD HAVE IMPLEMENTED A PROGRAM OF MANDATORY CREDIT ALLOCATION. AFTER DIVISION OF THE TWO PROPOSALS INTO SEPARATE BILLS AND EXTENSIVE AND OFTEN HEATED HEARINGS; THE EFFORT RESULTED IN A CONGRESSIONAL RESOLUTION; NOT HAVING THE FORCE OF LAW OR REQUIRING THE PRESIDENT*$ SIGNATURE; CALLING UPON THE F ed TO CONDUCT MONETARY POLICY SO AS TO LOWER INTERES! RATES AND TO MAKE PERIODIC REPORTS TO CONGRESS, ÏHE PROPOSAL FOR MANDATORY CREDIT ALLOCATION WAS SCHEDULED IN COMMITTEE, L ik e l y t o a p p e a l to Co n g r e s s a s a m e a n s of d i r e c t i n g THE FLOW OF RESOURCES ARE DIRECT SUBSIDIES TO AID THE DEPRESSED HOUSING INDUSTRY, ÎHE EMERGENCY MIDDLE INCOME HOUSING A c Í; WH ICH HAS ALREADY PASSED THE HOUSE, WOULD PROVIDE A SUBSIDY TO FAMILIES WHOSE INCOMES DO NO 1 EXCEED 120 PERCENT OF THE MEDIAN INCOME OF THEIR AREA AND WHO WISH TO PURCHASE HOMES WHOSE VALUE IS BELOW A SPECIFIED AMOUNT, ÎHE PURPOSE OF THIS LEG ISLAT ION IS TO "REDUCE HIGH MORTGAGE INTEREST COSTS TO MIDDLE-INCOME FAMILIES AND TO STIMULATE EMPLOYMENT IN THE HOMEBUILDING un INDUSTRY DURING THE CURRENT EMERGENCY PERIOD. . . , j T 1$ INTERESTING TO OBSERVE THAT THIS MORE TRADITIONAL FORM OF CREDIT ALLOCATION IS PERFECTLY ACCEPTABLE TO MANY OF THE MOST VEHEMENT OPPONENTS OF CHAIRMAN Re US$' PROPOSALS, IT ANY EVENT, ABSENT A DRAMATIC REVERSAL OF TRENDS IN THE HOUSING INDUSTRY/ I WOULD EXPECT THE EARLY PASSAGE OF SOME LEGISLATION ALONG THESE LINES. A n o t h e r i s sue l i k e l y t o r e c e i v e t h e a t t e n t i o n of Co n g r e s s is t h a t of a g e n c y r e f o r m . Ch a i r m a n B u r n s has i n d i c a t e d THAT THE FEDERAL RESERVE BOARD IS LIKELY TO COME FORWARD LATER IN THE YEAR WITH COMPREHENSIVE RECOMMENDATIONS. THERE IS SOME INDICATION THAT CONGRESSIONAL LEADERSHIP WILL BE RECEPTIVE TO THE IDEA OF RESTRUCTURING THE AGENCIES, ALTHOUGH NOT NECESSARILY ALONG THE LINES PROPOSED BY THE FED. FOR MY OWN PART, I HAVE NOT RESOLVED IN MY OWN MIND PRECISELY HOW THE FEDERAL SYSTEM OF BANK SUPERVISION AND REGULATION SHOULD BE RESTRUCTURED. IT DOES SEEM CLEAR TO ME, HOWEVER, THAT EFFICIENCY AND COMMON SENSE DEMAND REORGANIZATION ALONG FUNCTIONAL LINES, FOR EXAMPLE 19 I FIND IT DIFFICULT TO JUSTIFY THE TRIPARTITE DIVISION OF EITHER EXAMINATION AND SUPERVISORY FUNCTIONS OR OF THOSE FUNCTIONS WHICH DEAL WITH STRUCTURE/ SUCH AS CHARTERING/ MERGERS/ HOLDING COMPANY ACQUISITIONS/ AND BRANCH AND FACILITY APPROVALS. SIMILARLY/ FUNCTIONS DEALING WITH TROUBLED AND FAILING INSTITUTIONS MIGHT ALSO BE CONSOLIDATED Co n s o l i d a t i o n a l o n g f u n c t i o n a l l i n e s c o u l d b e a c c o m p l i s h e d in ONE of TWO WAYS. FIRST/ ALL SUPERVISORY AND REGULATORY FUNCTIONS MIGHT BE COMBINED IN A SINGLE AGENCY. THIS AGENCY MIGHT BE THE FEDERAL RESERVE/ AS GOVERNOR SHEEHAN HAS SUGGES' îtifJ OR IT MIGHT BE ANOTHER AGENCY EITHER PRESENTLY EXISTING OR NEWLY CREATED, AS FORMER BOARD GOVERNOR ROBERTSON PROPOSED SOME YEARS AGO, ALTERNATIVELY, THE EXISTING AGENCIES MIGHT BE RETAINED WITH CERTAIN FUNCTIONS SHIFTED AMONG THE AGENCIES TO ELIMINATE OVERLAP AND MINIMIZE CONFLICT, IT IS INTERESTING TO NOTE THAT GOVERNOR B’ UCHER, ONLY LAST MONTH, SUPPORTED THE Ro b e r t s o n p r o p o s a l , s u g g e s t i n g t h a t t h e r e m a y be s i g n i f i c a n t DISAGREEMENT AT THE FED ON THIS ISSUE, I HAVE NOT YET DETERMINED WHICH ALTERNATIVE I FAVOR, Ho w e v e r , a s I h a v e i n d i c a t e d e l s e w h e r e , I w o u l d h a v e v e r y g r a v e reservations about a reorganization which invested independent f e d e r a l a g e n c y sole a u t h o r i t y both in o n e TO ADMINISTER MONETARY POLICY AND TO REGULATE OUR NATION'S 15,000 BANKS, SAY THIS FOR TWO REASONS, I FIRST OF ALL, THE EXPERIENCE OF RECENT MONTHS HAS MADE OBVIOUS THE IMPORTANCE OF CAREFUL AND EXPERT EXECUTION OF MONETARY POLICY AS WELL AS THE COST THAT COULD RESULT FROM ITS MISMANAGEMENT, It SEEMS TO ME THAT THE AGENT OF THIS DELICATE AND CRITICAL FUNCTION SHOULD NOT BE ASSIGNED FURTHER DUTIES OF ALMOST EQUAL MAGNITUDE AND COMPLEXITY IN ADDITION, IT SHOULD NOT BE FORGOTTEN THAT ALTHOUGH PRESENT SYSTEM IS UNSATISFACTORY IN MANY RESPECTS, IT DOES PROVIDE CERTAIN CHECKS AND BALANCES, WHILE OTHERS MAY DIFFER I WOULD FIND VERY DISTURBING THE VESTING OF SUCH PERVASIVE POWER OVER THE ECONOMY IN A SINGLE AGENCY E ither a s p a r t of a g e n c y r e s t r u c t u r i n g or s e p a r a t e l y , Co n g r e s s w i l l u n d o u b t e d l y e x a m i n e v e r y c l o s e l y t h e o p t i o n s 21 AND PROCEDURES PRESENTLY AVAILABLE IN DEALING WITH FAILING AND TROUBLED BANKS AS WELL AS EVALUATING THE CONDUCT OF EACH OF THE AGENCIES IN CONNECTION WITH THE USNB, FRANKLIN, AND S e c u r i t y Na t i o n a l c a s e s . H e a r i n g s on t h e s e c a s e s h a v e a l r e a d y BEEN SCHEDULED BEFORE CONGRESSMAN St . GERMAIN'S SUBCOMMITTEE on F i n a n c i a l In s t i t u t i o n s , S u p e r v i s i o n , Re g u l a t i o n a n d In s u r a n c e , T he F ed h a s f o r m a l l y p r o p o s e d l e g i s l a t i o n w h i c h WOULD ALLOW FOR THE INTERSTATE ACQUISITION OF BANKS HAVING MORE THAN $500 MILLION IN ASSETS BY BANK HOLDING COMPANIES. AND WE AT THE FBIC ARE PRESENTLY ENGAGED IN A COMPREHENSIVE REVIEW OF THE AREA WHICH MAY LEAD TO A PACKAGE OF RECOMMENDATIONS IN THE LATE SPRING OR EARLY SUMMER W h i l e t h e F ed b i l l p u r p o r t s o n l y to d e a l w i t h a n a r r o w PROBLEM, IT IS WELL TO SPEND A FEW MINUTES FOCUSING ON SOME OF THE ISSUES WHICH IT RAISES BECAUSE, IN MY JUDGMENT, THE BILL TOUCHES ON SOME OF THE MOST BASIC QUESiIONS FACING THE INDUSTRY and the Co n g r e s s in t h e c o m i n g m o n t h s a n d y e a r s . THE BILL HAS TWO FACETS, Es s e n t i a l l y FIRST, THE INITIAL PROVISION OF THE 22 BILL WOULD ALLOW THE BOARD TO ACT MORE PROMPTLY IN APPROVING HOLDING COMPANY ACQUISITIONS IN EMERGENCY SITUATIONS. ÏHIS PROVISION MERELY PARALLELS THE BANK MERGER A c t 's EMERGENCY APPROVAL PROVISIONS; AND IT IS QUITE SENSIBLE AND CLEARLY SHOULD BE ENACTED. ÏHE HEART OF THE BILL; HOWEVER; LIES IN ITS PROVISIONS WHICH WOULD GIVE THE FED VIRTUALLY UNFETTERED DISCRETION TO APPROVE INTERSTATE ACQUISITION OF LARGE DISTRESSED BANKS BY HOLDING COMPANY SYSTEMS. ALTHOUGH THE EVIDENCE SUGGESTS THAT THE PROPOSAL MAY ADDRESS A REAL NEED; NAMELY; THAT IN SOME MARKETS; THERE MAY BE FEW IF ANY POTENTIAL ACQUIRERS OF A DISTRESSED INSTITUTION AS A RESULT OF MARKET STRUCTURE OR STATE RESTRICTIONS ON BRANCHING; IT MAY BE OBJECTIONABLE IN A NUMBER OF WAYS. F irst of a l l ; it s h o u l d b e r e c o g n i z e d t h a t t h e b i l l INVOLVES A FURTHER EROSION OF STATE PROHIBITIONS OF THE OPERATION OF DEPOSIT-TAKING FACILITIES BY OUT-OF-STATE BANK ORGANIZATIONS. Ne e d l e s s to s a y ; i n t e r s t a t e b a n k i n g a l r e a d y e x i s t s to s o m e DEGREE — THROUGH LOAN PRODUCTION OFFICES; CORPORATE SUBSIDIARIES - ZD AND AFFILIATES, EDGE Ac t COMPANIES AND OTHER MEANS. NEVERTHELESS, THE BILL TAKES SUCH DEVELOPMENTS A SIGNIFICANT STEP FURTHER WITHOUT EITHER DIRECTLY ADDRESSING THE DESIRABILITY OF INTERSTATE BANKING GENERALLY OR SETTING FORTH SPECIFIC STANDARDS FOR DETERMINING WHICH AMONG THE POTENTIALLY MANY MERGER PARTNERS WOULD GET WHAT IN MANY CASES COULD BE A SIGNIFICANT ECONOMIC plum, W h i l e t h i s l a t t e r f l a w m i g h t be r e m e d i e d b y a m e n d m e n t INCLUDING SUCH STANDARDS, BANKERS SHOÜLD NOT IGNORE THE FACT THAT THIS LEGISLATION REPRESENTS ANOTHER STEP TOWARD FULL-SCALE INTERSTATE BANKING S e c o n d l y , it is u n c l e a r w h y t h i s p r o c e s s s h o u l d b e INVOKED AND THE KEY DETERMINATIONS MADE BY THE FEDERAL RESERVE Bo a r d r a t h e r t h a n t h e p r i m a r y s u p e r v i s o r of t h e d i s t r e s s e d BANK a n d / or BY THE FDIC WHICH INSURES AND MUST LIQUIDATE THE BANK IF IT FAILS. ÏHE BILL WOULD, IN EFFECT, INVOLVE THE SHIFT OF A SIGNIFICANT POWER — DISTRESS CASES — THE PRIMARY RESPONSIBILITY FOR LARGE TO THE FEDERAL RESERVE BOARD. T h i r d , e v e n t h o u g h t h e e x p r e s s p r o v i s i o n s of t h e l e g i s l a t i o DO NOT NECESSARILY PRECLUDE FAILURE AND A PAYOUT OF A BANK OVER $500 MILLION IN TOTAL ASSETS, THEY STRONGLY SUGGEST A PUBLIC POLICY OF DE FACTO 100 PERCENT INSURANCE FOR ALL DEPOSITORS AND CREDITORS IN BANKS EXCEEDING THE CUT-OFF. At THE VERY MINIMUM, ENACTMENT OF THIS LEGISLATION WOULD imply C o n g r e s s i o n a l r e c o g n i t i o n of t w o c l a s s e s of b a n k s a n d MAKE THOSE IN THE CLASS OVER THE CUT~OFF AT LEAST MARGINALLY SAFER THAN THOSE UNDER THE CUT-OFF, T h i s t i e r i n g is t r o u b l e s o m e for t w o r e a s o n s , It has BEEN ARGUED THAT LARGE DEPOSITORS AND OTHER INVESTORS ALREADY PERCEIVE THE VERY LARGEST FINANCIAL INSTITUTIONS TO BE INHERENTLY SAFER THAN OTHERS, CAUSING RESOURCES TO FLOW INTO THESE INSTITUTIONS FROM SMALLER INSTITUTIONS AND ENABLING LARGER INSTITUTIONS TO RAISE CAPITAL WITH GREATER EASE, If . THIS IS TRUE, ADOPTION OF A NATIONAL POLICY TO PREVENT FAILURE OF THE LARGEST INSTITUTIONS CAN BE EXPECTED TO EXACERBATE THE CURRENT DISADVANTAGED POSITION OF SMALLER INSTITUTIONS. It SHOULD BE NOTED THAT THE PROBLEM WOULD BE GREATEST NOT FOR "SMALL 25 INSTITUTIONS BUT RATHER FOR THE MED IUM~$I ZED BANK (SAY $100“$500 MILLION) WHICH IS DEPENDENT TO SOME EXTENT ON REGIONAL AND NATIONAL MONEY AND CAPITAL MARKETS, CONCERN TO THE THIS SHOULD BE OF SPECIAL GIVEN THE INCREASING NUMBER OF OUR IN1STITUT IONS WHICH FALL INTO THIS CATEGORY (FOR EXAMPLE, AMERICAN ank and T r u s t , No r t h e r n . O hio B a n k a n d v^e s t l a n d s Ba n k ), A pa r t FROM PRACTICAL OBJECTIONS, ONE MIGHT BE TROUBLED BY THE IMPLICATIONS THAT WHEN CERTAIN BUSINESSES BECOME VERY LARGE, (1) THEY CANNOT BE ALLOWED TO FAIL, AND (2) EXISTING PUBLIC POLICY WILL BE BENT TO PREVENT SUCH FAILURE Fo u r t h , t h o s e w h o h a v e o p p o s e d 100 p e r c e n t i n s u r a n c e FOR ALL DEPOSITORS AND CREDITORS WOULD SEEM LIKELY TO OPPOSE THIS LEGISLATION ON THE GROUND THAT IT WILL REDUCE THE DISCIPLINE ON RISK-TAKING (FOR BANKS ABOVE THE CUT.-OFF.). WHICH MARKETS IMPOSE, One MIGHT ARGUE THAT, UNLESS SUPERVISORY DISCIPLINE REPLACES MARKET DISCIPLINE, LARGE BANKS MIGHT WELL UNDERTAKE GREATER RISK THAN THEY WOULD HAVE UNDER DIFFERENT CIRCUMSTANCES, WITH THE CONSEQUENCE THAT THE POSSIBILITY OF FAILURE IS ENHANCED IN Tl: VERY INSTITUTIONS WHERE FAILURE IS VIEWED AS HAVING SUCH ADVERSE EFFECTS THAT IT REQUIRES SPECIAL HANDLING. A n d , f i n a l l y , Ch a i r m a n B u r n s ' l e t t e r to Co n g r e s s m a n Re u s s s t a t e s : "If , h o w e v e r , t h e B o a r d 's c u r r e n t r e c o m m e n d a t i o n HAD BEEN PART OF THE LAW LAST SUMMER, THE NUMBER OF POTENTIAL BIDDERS WOULD HAVE BEEN SIGNIFICANTLY LARGER, AND THE PROCESS OF FINDING A RESOLUTION TO FRANKLIN'S PROBLEMS WOULD HAVE BEEN SHORTENED CONSIDERABLY.n WHILE I SUPPOSE THAT THfc ARGUMENT COULD BE MADE THAT THE AVAILABILITY OF BANK OF AMERICA AND OTHER LARGE, NGN-NEW YORK INSTITUTIONS WOULD HAVE SHORTENED THE NEGOTIATIONS (BECAUSE THE BIDDERS COULD HAVE BEEN PLAYED OFF AGAINST ONE ANOTHER MORE EASILY), THIS ARGUMENT IS HIGHLY SPECULATIVE AT BEST, INDEED, IF THE SELECTION OF AN ACQUIRER IS TO BE ON OTHER THAN AN ARBITRARY BASIS, THE NEGOTIATION AND BIDDING PROCESS IS LIKELY TO BE LONGER RATHER THAN SHORTER AS A RESULT OF THE LARGER NUMBER OF INSTITUTIONS IN THE FIELD, T he PROSPECTS FOR THIS LEGISLATION ARE DIFFICULT TO ACCESS, I WOULD HOPE, HOWEVER, THAT CONGRESS WILL REJECT THIS 27 PIECEMEAL APPROACH AND WILL ATTEMPT TO DEVELOP A MORE SYSTEMATIC APPROACH WHICH DOES LESS VIOLENCE TO PROHIBITIONS ON INTERSTATE BANKING AND WHICH TREATS ALL BANKS EQUALLY. As THIS DISCUSSION SUGGESTS, THE OUTLOOK FOR THE 94t h Co n g r e s s is u n c e r t a i n , Ho w e v e r , m a j o r c h a n g e for t h e banking INDUS TRY AND ITS REGULATORS IS INEVITABLE, ÄS I STATED AT THE OUTSET; SIGNIFICANT CHANGES IN OUR FINANCIAL SYSTEM RESULT FROM PERIODS OF ECONOMIC CRISIS. THE ECONOMIC INSTABILITY OF OUR TIMES SHOULD LEAD THE INDUSTRY/ THE AGENCIES AND CONGRESS TC) IMAGINATIVEE )YET DISCIPLINED RESPONSE. WE MUST SEEK TO UNDERSTAND AND MANAGE THE FORCES AT WORK INSTEAD OF MERELY REACTING IN TRADITIONAL WAYS TO THE DILEMMAS WHICH NOW CONFRONT us. D u r i n g p e r i o d s of a b u n d a n c e a n d r a p i d e x p a n s i o n , it is POSSIBLE AND QUITE NATURAL TO AVOID OR POSTPONE HARD CHOICES, TO TOLERATE WASTE AND INEFFICIENCY, AND TO BENEFIT FROM THE OPERATION OF FORCES ONLY DIMLY UNDERSTOOD. HAT LUXURY J U i i i U 'U l irìn tìì- fr ir WE NO LONGER HAVE
@FedFRASER