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Statement of
J. Dewey Daar.e
Member, Board of Governors of the Federal Reserve System
before the
Subcommittee on Domestic Finance
of the
Committee on Banking and Currency
of the
House of Representatives
on
S. 1698
and related bills

September 2, 1965

Mr. Chairman, you have requested my views on S. 1698,

While

I am afraid they will add little to the testimony already presented by
the many witnesses who have preceded me, my views can be simply stated.
I am one of the majority of the Board of Governors who agree with Chairman
Martin in supporting all of the provisions of S. 1698, principally because
it would avoid uncertainty and unscrambling inimical to the public
interest in an area of business with special characteristics.

I am also

one of the majority of the Board who agreed with Chairman Martin in
supporting the original bill, for the reasons he outlined in his state­
ment to the Senate Subcommittee on Financial Institutions last May.
Although my observation may be an academic one at this point, I still feel
strongly that the approval of bank mergers should rest exclusively in the
hands of the bank supervisory authorities who, as your Committee pointed
out in 1960, have a thorough knowledge of banks and the banking business.
Those authorities should be charged, as they were in the Bank Merger Act
of 1960, with considering the competitive factor--highly important though
it is--as one of several factors in determining whether a merger is in
the public interest.

In short, on this latter point I believe that the

structure of banking should be shaped by the bank supervisory authorities
on the basis of broad considerations of public interest, not shaped by
others looking solely toward a narrow competitive test.
As it now stands, however, and despite the emphasis of the
legislative history in the adoption of the Bank Merger Act, the Sherman
Act and the Clayton Act are construed as requiring the Attorney General
to seek a court order to s t ^ a^ g ^ s e^^fcat he believes will diminish
competition to too great al d^g^^^^^fe^^oiough a bank supervisory agency
has approved the merger as w ^ ^ ^ ^ ^ ^ ^ p u b l i c interest.




LIBRARY

Since

- 2 -

responsibility for administering these laws--the Sherman Act, Clayton
Act, and Bank Merger Act--is divided among the courts, the Attorney
General, and the three banking agencies, conflicting decisions on bank
merger cases are to be expected.

This is particularly true since there

is as yet little agreement in or out of Government on such basic questions
as how the impact of a bank merger in a market is to be measured, or even
how the relevant markets are to be defined.
The Congress should not be expected to supply specific criteria
when there is no consensus as to what the guidelines should be.

It is

not surprising, therefore, that neither the antitrust laws nor the Bank
Merger Act offers much help to bankers or their lawyers who are trying
to discover whether the Government will approve a proposed merger*

In

1960, the House Banking and Currency Committee decided against attempt­
ing to specify the "situations where a merger would benefit the public,"
The Committee report commented that "framing a standard to guide the
supervisory agencies in weighing the effects of a proposed merger on com­
petition" was "the most difficult task (it) faced in considering the bill,"
The report added that "out of the hearings one principle emerged, on
which all witnesses seemed to agree, as a starting point:

Some bank

mergers are in the public interest, even though they lessen competition
to a degree."

The quotations are from pages 10 and 11 of the Committee

report on the Bank Merger Act (H. Rept, 1416, 86th Cong., 2d sess.).
I agree wholeheartedly with the Committee report’s conclusion
that if the Clayton Act is interpreted as "banning mergers having a




- 3 -

given effect on competition, regardless of the benefits flowing from the
merger , 1 the Clayton Act standard is not an appropriate test.
1

The effect

on competition should be only one factor, while often the most important,
to be considered in reaching a balanced judgment as to whether a merger
is in the public interest.
Although I am not very sanguine as to the feasibility of
harmonizing decisions under the Bank Merger Act with the conflicting
standards of the antitrust laws, at the least, as Chairman Martin pointed
out to you, the time left open for contradictory positions to be taken
can be limited, and is limited, by this bill.

Meantime perhaps some

ways of reconciling the statutory requirements may be found.

Along this

line the Comptroller of the Currency has presented an interesting argu­
ment to the Court in the Mercantile Trust-Security Trust merger case,
to the effect that the Clayton Act may be read in harmony with the Bank
Merger Act, "by the Court*s taking into account the banking factors
enumerated in the Bank Merger Act to determine if the effect of the merger
upon competition, if adverse, is sufficiently adverse as to constitute a
substantial lessening of competition under the antitrust laws.

Nothing

in the Philadelphia case or the Lexington case is contrary to the con­
struction. .

If responsibility is to remain divided there would seem

to be room in ‘
the broad language of the statutes to find some such
harmonious construction.
Where responsibility is divided, responsible officials should
try all the harder to reconcile their differences, to the extent that




- 4 this is compatible with the discharge of their respective duties.

As

Governor Mitchell pointed out in his testimony before this Subcommittee,
the Board of Governors and the Attorney General have achieved substantial
harmony on bank mergers,

Only one merger approved by the Board has been

challenged in court by the Attorney General,

Profiting from that

experience, we adopted a procedure under which a merger approved by the
Board may not be consummated for seven days, so that a reasonable time
will be allowed for filing an antitrust suit, if the Attorney General
concludes that it is his duty to do so.

Although the Board may find that

its statutory mandate under the Bank Merger Act of 1960 requires approval
of a merger in the face of an imminent suit by the Attorney General under
his differing responsibilities in the enforcement of the antitrust laws,
I am happy to say that this has not happened since the ManufacturersHanover merger*

And, as Governor Mitchell also pointed out, we hope

that as we gain better understanding of how to analyze the competitive
effects of a bank merger the possibilities of conflict will steadily
diminish,
An even clearer possibility for moving closer to harmonizing
standards and decisions, of course, remains open also for the bank
supervisory agencies themselves.

Frequently my views are solicited on

how best to attain and ensure this harmonization.

For my part I do not

view the matter as hopeless despite the deficiencies of the existing
blueprint; past experience has shown it can be workable as well as the
contrary.

If, however, one were to move in the direction of what on

the surface appears to be a more logical blueprint--a single Federal




- 5 Bank Supervisory Agency— I would suggest that the Federal Reserve System
is the best locus of authority.

This view reflects not simply institu­

tional bias, which I cheerfully concede, but a very real conviction that
the System not only can perform the job most efficiently and effectively
but also that the supervisory job contributes to the System1s effective­
ness in other areas.

My own bent rests more in the area of credit policy,

balance of payments, etc., than in the area of bank supervision.

Were the

System to lose its supervisory authority, however, the net result, in my
judgment, could only be some weakening in the effectiveness of monetary
policy formulation and implementation.

Eliminating the supervisory and

regulatory contacts would not improve our monetary policy deliberations
but instead would tend to insulate us from reality in formulating policy,
and this could not help but be reflected in the implementation process
as well.

It could only lead to a weakening of the regional character of

the System which I regard as a source of strength,

I think it could

make the administration of discount policy more difficult.

The de­

centralization of the System itself lends considerable weight to assign­
ing the task to the System, avoiding unnecessary and costly duplication.
I recognize that if the supervisory responsibility were to be
centered in the System it would necessitate streamlining procedures and
increasing delegation of authority by the Board while retaining those
contacts and authorities essential to maximizing our own present and
future contributions in the monetary field.

In short, the only conclusion

I can come to is that despite the added workload it would entail, all of




- 6 -

the examining, supervisory and regulatory powers relating to banks
should be placed in the Federal Reserve System,
Pending greater harmonizing of standards and decisions all
around, however, the public is clearly entitled to protection against
the harmful effects of breaking up a merged bank in those cases where
Government officials disagree as to the relation of the merger to the
public good.

Although it is argued that divestiture is possible, at

least in those instances where the bank has a number of branches, it is
impossible to restore the situation that existed before a merger took
place and the adverse public consequences of such divestiture must be
avoided.

I believe, therefore, that the provisions of S. 1698 that would

prevent consummation of a merger pending final determination of an anti­
trust suit are needed, notwithstanding the questions that have been
raised as to whether it is fair to banks to subject their mergers to
stricter antitrust controls than the mergers of other businesses.

And

in my view, immunity from divestiture for the bank mergers that have al­
ready taken place should also be granted on the same ground of clear and
compelling public interest.

I think it would be a mistake to decide

this question on the basis of what is fair to the litigants on either
side.

The banks may or may not have been entitled to share the widely-

held belief that their mergers could not be successfully attacked under
the Sherman Act or the Clayton Act.

Their lawyers who said they would

assume the risk of a divestiture order may or may not deserve to lie in
the bed they then made.
But this is not the aspect of divestiture that concerns me;
what concerns me is that breaking up the merged bank will hurt innocent




- 7 bystanders.

Assets can be forcibly transferred but not customers.

Borrowers would undoubtedly experience hardships.

And breaking up an

institution that performs highly specialized services for its customers,
involving confidential and fiduciary relationships, creates more serious
inequities in the community than those involved in requiring a corporation
that makes paint to dispose of its interests in another corporation that
manufactures automobiles.

I doubt that we should ask the beneficiaries

of a decedent's estate to pay the court costs and legal fees connected
with court proceedings to appoint a new executor or trustee, simply
because a bank’s lax^yers thought they could win a contest that turned
against them in the end.

I do not believe that this is sufficient cause

to penalize the public.
From the institutional standpoint, I confess that I find it
very difficult to visualize reconstituting the separate banks on a viable
basis.

And frankly X see no public interest to be served in attempting

to do so.

For example, from my own fair degree of familiarity with the

financial environment of Chicago and New York I would be surprised to
find that any real diminution of competition had followed the mergers
being contested.
I hope, Mr. Chairman, that these considerations of public
interest will lead your Subcommittee to favor the approach in S. 1698.