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For release 1:00 p.m.
Central Daylight Time
May 17. 1966

Remarks of J. L. Robertson
Vice Chairman of the Board of Governors
of the
Federal Reserve System
at the
75th Diamond Jubilee Anniversary Convention
of the
Illinois Bankers Association
Peoria, Illinois
May 17, 1966

An Alternative to Fossilization

When I appeared before this group in 1963, I ex­
pressed some unpopular ideas. Your tolerance of them has
led to my return. Events in the last three years have dem­
onstrated the soundness of those ideas and emphasized the
reasons why they will be accepted - eventually.
The gist of them is quickly stated: first, federal
supervision of commercial banks should be consolidated in
a single agency, and second, that agency should be an inde­
pendent Federal Banking Commission. The bank supervisory
powers now exercised by the Comptroller of the Currency and
the Federal Reserve and all powers and functions now vested
in the Federal Deposit Insurance Corporation would be trans­
ferred to the new Commission, the members of which would be
appointed by the President on a nonpartisan basis.
Today I feel even more strongly about the need for
the Federal Banking Commission than I did when 1 first made
the proposal. And 1 am pleased to report that in the ensu­
ing years it has attracted a gratifying - although as yet
inadequate - degree of support. Unification of the federal
supervisory functions is imperative in order that the bank­
ing industry may operate under a single set of federal "rules
of the game" - ground rules that would apply uniformly and
equitably to all federally-insured banks.
We are now faced with a situation in which the "rules
of the game" have become so different for one group of banks
than for other groups that competitive equality, which is es­
sential for a sound banking system, is less and less of a
reality. If carried much further, the debilitating conse­
quences may be the undoing of the dual banking system, and
that could lead to the unification of supervisory powers but in a form that many would abhor.
This is not the kind of problem that is solved by
sitting back and hoping it will go away. It is not a prob­
lem that arises principally from the personalities of the
heads of agencies. It is ingrained in the legislative fab­
ric. Only by remedial legislation can the present crazy-quilt
pattern of federal bai
and regulations become a

- 2 -

congruous system of fair and readily understandable rules,
which will not only benefit banks but also be in the gen­
eral public interest.
My purpose today is not to expound again the merits
of a Federal Banking Commission, for I am confident that
the tide is running in its favor and will soon be too strong
to be resisted - even by those who are inclined to espouse
the maintenance of the status quo. Rather, I want now to
ask you to look over the horizon again, but in a slightly
different direction. I would like to invite your consider­
ation of the wisdom of seeking and developing uniform "rules
of the game" that would cover a broader range of financial
institutions. I have in mind commercial banks, mutual sav­
ings banks, and savings and loan associations.
In recent years the competition among these institu­
tions has become intense - to put it mildly. Commercial
banks have moved further and further into the financial
areas in which mutuals and savings and loans specialize.
As a result, those specialized institutions have felt, more
and more, the pinch of the limitations imposed on their op­
erations by law and regulation. This has understandably led
to efforts to relax those limitations so that such institu­
tions may broaden the scope of their activities.
It is natural, perhaps, that commercial bankers have
generally reacted adversely to these efforts of mutual thrift
institutions to enlarge their powers. We must remember, how­
ever, that both mutual savings banks and savings and loan
associations were originally created to meet financial needs
that - in all candor - were simply not being met by commer­
cial banks.
Not too long ago, commercial banks catered to a se­
lect clientele of businessmen, farmers of substance, and
wealthy individuals. They did not encourage the patronage
of men in overalls; and consumer loans were considered a bit
immoral. This contributed to the origin in the northeastern
states of mutual savings banks - banks devised to encourage
thrift among the working classes by offering them a safe
place to invest their modest weekly or monthly savings - sav­
ings often too small to be welcomed by the commercial banks.

- 3 -

Savings and loans originally had a similar function
of serving the low-income groups. From their outset they
were oriented to the great American goal of home ownership.
This was indicated by their early designation as "building
and loan associations". These organizations, in all sec­
tions of the country, provided, on one hand, a means through
which families could accumulate funds to buy a home; on the
other, they offered home financing tailored to the needs of
their modest-income borrowers.
To encourage the development of these mutual thrift
organizations and to facilitate their ability to fulfill
their worthy objectives, they were granted certain special
privileges. The most significant were favorable tax treat­
ment (either by exemption or by lower rates than were appli­
cable to commercial banks) and less stringent (if any) re­
serve and liquidity requirements.
As I hardly need remind people who are on the firing
line, commercial banks, savings banks, and savings and loans
now vigorously compete for deposit-type savings in the gen­
eral market. Only a few years ago competition for deposittype savings was confined largely to local market areas, and
even there many commercial banks did not actively compete
with the specialized institutions. Today they do - and
For years, savings and loans offered their sharehold­
ers higher interest rates than commercial banks could pay on
time accounts. But, particularly since last December, when
the ceilings on time deposit interest rates were raised, this
situation has drastically changed. The development of bank
certificates of deposit as a means to attract individuals'
funds, at interest rates in excess of the highest permis­
sible rate on bank savings accounts, has enabled commercial
banks to out-compete their thrift rivals in this market. In
some places today, banks are offering gimmick instruments,
such as savings certificates and savings bonds, that are at­
tracting substantial amounts of funds away from thrift insti­
tutions, at rates the latter simply cannot afford to pay be­
cause of the composition of their earning assets - long-term
real estate loans on which the interest rates were set when
the pattern of rates was lower. And because of the greater

- 4 -

sophistication of savers today, the market for these funds
has become more and more nation-wide.
Likewise, in the lending markets competition among
the several types of financial institutions has intensi­
fied. Commercial banks have substantially increased their
mortgage portfolios in the last few years. To combat this,
the lending powers of some savings and loan associations
have been extended beyond residential mortgage credit. Sav­
ings banks have tried to meet the problem of investment lim­
itation by gaining authority to acquire a larger proportion
of their investment holdings from beyond their home state
Such relaxations of the rules governing mutual in­
stitutions have provided only moderate relief. And even
that relief has been largely offset by the increasing dif­
ficulty for some mutuals to exist (let alone grow) in the
present economic environment - with its high cost of funds.
As this difficulty becomes greater, as it well may, pres­
sure will build up at both federal and state legislative
levels to broaden further the permissible activities of
the thrift institutions. The more intense the competition
from banks, the more intense will be the pressure for al­
leviating the restrictive rules governing those institu­
tions .
The direction of these pressures may be illustrated
by the banking legislation passed by the New York legisla­
ture the week before last. Included with provisions that
are designed to equalize the competitive strength of statechartered and national banks in New York are provisions that
authorize mutual savings banks and savings and loan asso­
ciations to invest up to a fifth of their assets in mort­
gages on real estate located in states other than New York,
and to expand their branching privileges. Other pending
legislative proposals would permit New York savings banks
to convert into commercial banks and authorize savings and
loans to receive demand deposits.
The prospect for prompt enactment of proposals like
these, in state and federal legislatures, may be dim. They




cannot, however, be ignored. Nor can we disregard the
recommendations of two recent studies of our financial
institutions. In 1961, the report of the nongovernmental
Commission on Money and Credit of the C. £. D. recommended
"that the regulatory authorities be authorized to permit
greater flexibility to savings banks and savings and loan
associations to acquire a wider range of suitable long­
term debt instruments." In 1963, the President's Com­
mittee on Financial Institutions favored broader powers
for institutions specialized in their lending activities.
There is no question that, from the economic stand­
point, a good case can be made for the adoption of these
proposals and recommendations. They would foster an at­
mosphere of more vigorous competition among our nation's
financial institutions. Such competition would tend to
facilitate the transfer of financial resources from savers
to borrowers. The proposals would encourage initiative and
competition, which in turn would increase the contribution
of private financial institutions to economic growth.
As a practical matter, offering our specialized in­
stitutions the opportunities to adjust to changing condi­
tions and their willing acceptance of such opportunities
is - in my judgment - necessary for their survival. I re­
member when I was a small boy in Broken Bow, Nebraska, a
farmer plowed up a huge brontosaurus bone, which he brought
into town to show to his friends. I thought at the time
how strange it was that those giant dinosaurs had been un­
able to survive. Later I learned that they became extinct
because they were unable to adapt to their changing environ­
ment. Something like this faces our specialized financial
institutions. As the need for their limited services de­
creases - perhaps because of the expansion of commercial
bank activity in their field, or as commercial bank activi­
ties cause the cost of their funds to reach or exceed earn­
ings on loans in the specialized field - they must either
adapt to the change or risk becoming as extinct as the
It is insufficient merely to grant to mutual thrift
institutions broader lending powers. Desirable as this
may be, it would seem to leave us about where we are now with a number of different types of depositories known as




commercial banks, savings banks, savings and loan associ­
ations, et cetera, operating under an almost bewildering
maze of federal and state laws and regulations, competing
under ground rules that differ, if not conflict, for each
type of institution - rules that differ even among members
of the same type of institution, depending on the source
of their charters.
This, of course, describes our commercial banking
system today. And its correction in so far as federal bank
supervision is concerned is the principal reason behind my
proposal for consolidating federal supervisory powers in a
Federal Banking Commission.
To meet the problem of the mutual thrift institu­
tions, I suggest that we need a major change in our phi­
losophy about them. We must not regard them as perma­
nently tied to a specialized function, but as potential
candidates for full service financial status.
Accordingly, I propose that all depository institu­
tions be permitted to become comprehensive lenders and bor­
rowers, subject to uniform bank-style limitations on the
exercise of their powers.
Adoption of such a proposal would allow these de­
pository institutions (at their option) to exercise en­
larged powers, including the acceptance of demand deposits
and the acquisition of the full bank range of assets. While
a broad spectrum of lending and investment possibilities
would be opened up, local institutions could (if they de­
sired) concentrate on different sectors of the spectrum.
Their areas of concentration would depend upon community
needs and their own capabilities.
Failure to enlarge the lending powers of our thrift in
stitutions will impel them, I fear, to reach out for riskier
and riskier loans in their limited field. As the credit de­
mands in the specialized area decline or as commercial banks
absorb a greater and greater proportion of these demands,
the mutuals may be forced into higher-risk assets. Other­
wise, they will not produce earnings sufficient to pay in­
terest at competitive rates on funds placed with them.

- 7 -

The potential danger of this - not only to them but to
the whole financial system and the nation’s economic struc­
ture - is fairly obvious.
However, as you will already have inferred, enlarg­
ing the powers of mutual institutions is not the whole pro­
posal, nor would it be an appropriate solution. It may be
the desired solution of certain of those institutions, at
least temporarily. But the problem is to accommodate these
depository institutions to the future needs of our economy.
This means a substantial revision of the structure of the
depository system itself. The governing rules must be re­
vised - over time - to provide more uniform lending author­
ity, investment powers, reserve requirements, tax treatment,
branching privileges, and supervisory powers as to commer­
cial banks, mutual savings banks, and savings and loan as­
sociations alike.
This, of course, means that there is a corollary to
changing our philosophy toward mutual thrift institutions.
They must also change their philosophy toward themselves.
As we should assist their efforts to expand their opera­
tions, when they wish to do so, they should not resist as­
suming the responsibilities of commercial banks.
As they enlarge their powers and become full-service
financial institutions, they must relinquish the special
privileges that were designed to assist them in developing
as specialized thrift institutions. The inequities of tax
treatment must be eliminated. They should be required to
maintain reserves against deposits on a basis comparable
to that of banks that are members of the Federal Reserve
System. They should be required to maintain appropriate
liquidity. In other words, with the powers of a commer­
cial bank must go the burdens.
A basic structural change such as 1 have suggested
cannot and need not be accomplished overnight. The prob­
lem is one for long-run solution. That may take decades
rather than years. But we need to select the star to which
we should hitch our wagon. Once we have done that, we can
begin to determine how to reach our goal. In some respects,
legislation will be essential; in others, legislation may

- 8 -

simply be desirable as a means of helping mutual savings
banks and savings and loan associations to become fullservice commercial banks.
The proposal to permit mutual thrift institutions
to convert to commercial bank status is not visionary.
Such conversions have already occurred.
A recent instance was the conversion of the Society
for Savings in the City of Cleveland to the Society Na­
tional Bank. The basic approach used in that case and
others was to convert a mutual organization into a stock
company. The depositor-owners of the savings bank became
equity owners of a holding company that owned the national
Variations of this approach would include a distri­
bution of the accumulated surplus of the mutual to its de­
positor-owners, in the form of either cash or stock in the
successor institution. Legislation such as that now pend­
ing in New York State contemplates conversion into stock
companies along these lines.
Perhaps less cumbersome and more satisfactory ar­
rangements can be devised. Presently I see no theoretical
or supervisory reason why commercial bank operations could
not be handled entirely on a mutual basis. Mutual organi­
zations could be authorized by law to accept demand deposits.
Their entire operation could be safeguarded by suitable re­
serve requirements, commercial bank lending restrictions,
and specified liquidity ratios. Such reserve requirements
and liquidity ratios would need to be somewhat higher than
for stock companies in order to take the place of the cush­
ion of protection furnished by capital stock.
But whatever the approach, 1 am confident that, with
imagination and ingenuity, we can develop appropriate legal
and procedural means for achieving the goal. The task of
making it easy for mutual savings banks and savings and
loan associations to convert into full-service commercial
banks is not beyond the intellect and determination of man.
To recapitulate, the problems of competition among
commercial banks, mutual savings banks, and savings and

- 9 -

loans call for unbiased, thoughtful consideration. Our
need is for flexible uniformity rather than rigid special­
ization. Our responsibility is to accommodate our depos­
itory institutions to the expanding needs of our communi­
ties and our nation. This demands more than a broadening
of present institutional lending powers. It requires a
significant revision in our philosophy of the organization
and operation of the depository system.
This new philosophy calls for full competitive equal­
ity, if and when desired, for all depository financial in­
stitutions. Failure to provide adequately for institutional
change and to envision our depositories as integral parts
of a general financial system raises more than the risk of
fossilization. Such failure would lay the groundwork for
demands for further fragmentation by the creation of new
types of institutions with additional special powers to
meet newly-emerging needs.
This problem, like that in the field of federal bank
supervision, demands a solution. Maintenance of the status
quo is impossible. None of us can afford to sit on our
hands and do nothing. For the moment it may be the other
fellow whose ox is being gored, but that may not always be
the case.
If a rational and workable solution is not developed
and adopted, we may wake up one day to find that we have sev­
eral nation-wide financial depository systems, each with as­
sets and liabilities in the hundreds of billions of dollars.
They will have overlapping lending and investing powers unless I grossly misjudge the political climate and strength
of the pressures for legislative relief. But it is more than
likely that there will be unequal competitive abilities be­
cause of inequalities in taxation, reserve and liquidity re­
quirements, branching privileges, and governmental supervi­
sion. In that case, it might even be the commercial banking
system that becomes the extinct brontosaurus of the finan­
cial world.
Neither the extinction of the mutual thrift institu­
tions nor the extinction of the commercial banking system
is in the public interest. What is in the public interest -




which should ever be uppermost in our minds - is that our
nation’s financial institutions should be given the oppor­
tunity to adapt to changes in their environment. Only by
encouraging initiative and competition, in a climate of
equal opportunities and obligations, can we assure the
maximum contribution of our private financial system to
the nation’s economic growth and well being.