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For release on delivery
9s30 AM, MST (11^30 AM, EST)
January 16, 1984

Statement by
Paul A* Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on Banking, Housing and Urban Affairs

United States Senate
Salt Lake City, Utah

January 16, 1984

For a Chairman of the Federal Reserve Board, there is
a special pleasure in the opportunity to come to Salt Lake City
to participate with the Senate Banking Committee in a discussion
of the basic rules to guide the development of our banking system*
The senior Senator from this state has been leading the effort to
achieve constructive and timely responses to the need to change
our banking laws to meet todayes conditions.

In that respectr

Mr, Chairman, you follow in the tradition of another native sonf
Marriner Eccles.' As Chairman of the Federal Reserve Board for
more than 13 years during the 1930's and 1940fs, he spearheaded
the effort to rewrite banking laws to meet the needs of his time
and for many years thereafter.


Your sponsorship, Senator Garnp

of legislation to rededicate our office in Washington in his
name is an appropriate and welcome recognition of a man to whom
we owe a great deal*
Drawing on his experience as a businessman and innovative
banker in Utah, Marriner Eccles greatly strengthened the Federal
Reserve and did much to repair the financial system after the
ravages of the banking crisis of the early 1930fs and the depression.
He instinctively recognized the crucial importance of a sound
banking system to the proper functioning of our economy, and the
necessary role of the Federal Government in setting out an appropriate
legislative framework, supported by effective supervision and

He was, of course, particularly conscious of the

responsibilities of the Federal Reserve, as the Nation's central
bankf in protecting the stability of the banking system*


built well, and in reviewing the problems we face today, I am
struck by many parallels between the basic issues that were
before the country then and now,
But, as you well know, under the pressure of technological
and market change? there is also a pressing need to adapt the
legislative framework to todayss conditions lest crucial continuing
objectives of public policy be eroded or overturned•

In earlier

testimony before you, I have reviewed the dangers of permitting
the situation to evolve in haphazard and potentially dangerous
ways, influenced not just by natural responses to market forces,
but by often capricious effects of existing and now outmoded
provisions of law*

The result would be not just unfair competitive

distortions but also an unintended unravelling of basic tenets
of public policy that the legislative structure has been designed
to promote.
To summarize our basic approach toward these matters,
our point of departure is the basic proposition that banks, and
depository institutions generally, continue to perform a unique
and critical role in the financial system and the economy —


operators of the payments system, as custodians of the bulk of
liquid savings, as key and impartial suppliers of short-term
credit, and as the link between monetary policy and the economy.
This unique role implies continuing governmental concerns about
the stability and impartiality of these institutions —


that are reflected in the federal "safety net" long provided by
the discount window and by deposit insurance, by regulatory protection


against undue risk, and by policies to discourage conflicts of
interest and undue concentration of banking resources.

We also

believe that these concerns must, to a degree, encompass business
organizations of which banks are a part ~

bank holding companies


for the basic reason that a bank or depository institution cannot
be wholly separated from the fortunes of its affiliates and from
the success or failure of their business objectives.
Those fundamental concerns are broadly reflected in the
proposed legislation before the Committee.
There are now two major proposals, S. 2181, the Financial
Services Competitive Equity Act, which was introduced by the
Chairman, and S. 2134, the Depository Institutions Holding Company
Act Amendments of 1983,, introduced by the ranking Minority member,
I w c7
Senator Proxmire. Both of these bills have S. i-&6-9-, the Administration's
proposed Financial Institutions Deregulation Act, which has been
endorsed by the Board, as a common base.

These bills differ in

the scope of new powers authorized bank holding companies and in
some other important areas, and I also recognize that inclusion
of certain provisions of S. 2181 for discussion purposes does
not necessarily imply endorsement*

But I also believe it important

to emphasize that these bills have key provisions that are identical
or similar, suggesting and reflecting an emerging broad consensus
on the core of constructive legislation.

Thus, I believe the raw

materials for coherent action are now before you, providing a
strong base for legislative action in a matter of months.

Points of Growing Consensus
Analysis and discussion of these proposals suggest
the framework for legislative action can be built on three
essential elementss

New statutory definitions to clarify what is
a bank, what is a thrift, and the proper scope
of powers for state-chartered banks;


Streamlining of the procedures of the Bank
Holding Company Act; and


Expansion of the powers of bank holding companies.

Other issues, including new rules for interstate banking
and payment of interest on demand deposits and reserves at the
Federal Reserve Banks, also need early resolution.

As a practical

matter, these areas may not have achieved the same degree of

We would like to see progress in those directions

and we welcome the efforts of your Chairman to advance the

However, we do not believe inability to achieve

full agreement in all those areas should necessarily delay
legislation dealing with the "core11 elements of the bills before
I do believe that there is a broad agreement that new
definitions of the terms "banks11 and "thrifts" are urgently
necessary to assure an orderly framework for the development
of the financial system, to promote competitive equity, and to
establish clearly the competitive rules for the various segments
of the financial services industry.
possible disagreement —
banks —

One significant area of

the appropriate role for so-called consumer

I will comment upon at a later point.


Sirnilarly, with respect to the definition of thrifts,
there has been increasingly clear recognition of the anomalies
that arise as thrifts achieve and implement powers much more
comparable to commercial banks, but still operate under more
liberal provisions of law —

such as the absence of restrictions

on ownership, the ability to obtain long-term governmental
lending, favorable tax treatment, and the freedom to branch
intra-state and inter-state —

denied commercial banks.


growing similarity of powers, combined with differences in
regulatory approaches, result in competitive inequalities and
thus in tensions that undermine legislative intentions.


that is reflected in the strong interest of a variety of financial
or non-financial businesses in the acquisition of thrifts in order
to benefit from bank-like powers and to participate in the payments
mechanism, but without the restrictions applicable to banks or
bank holding companies.
Looked at from another direction, there is recognition
of the fact that the public policy rationale for the favorable
regulatory, tax, and credit treatment of thrift institutions is
fundamentally rooted in their activity as home lenders.


sequently, the essential idea that a thrift should be defined
by a test set forth in terms of residential lending activity
seems to be increasingly accepted, as well as the corollary that
such institutions should not operate in "tandem" with non-depository

Again, there are differences on the specifics of the test

that need to be resolved and that I will discuss later.

Recent developments strongly point to the need for
another provision defining the role of depository institutions


provisions which provide a framework for the discretion of states
in authorizing new powers for state-chartered banking institutions•To the extent Congress, in the national interest, finds it necessary
to circumscribe the activities of depository institutions and their
holding companies, such limitations could be rendered null and void
over time by unrestrained state action.
There are various approaches toward dealing with this
anomaly in the dual banking system, reconciling a desirable
element of flexibility for the states to experiment with new
kinds of banking powers while avoiding developments that undermine the overall policy intent of the Congress with respect to
bank and bank holding company powers.
among these approaches.

What remains is to decide

Meanwhile, we at the Board, in view of

existing law and expressions of Congressional intent, have indicated
that we could not approve the acquisition of state-chartered banks
by bank holding companies with the apparent intent of undertaking,
under relevant state law, widespread insurance activities, beyond
the state in which the bank is chartered.

This is one illustration

of the urgent need for Congressional direction in setting appropriate
The streamlining of the procedures for dealing with bank
holding company applications, and eliminating the burden on
applicants to demonstrate net public benefits,is broadly supported
by affected institutions and also appears ready for action.


recent amendments to our regulation governing bank holding
company activities, the Board has gone as far as it felt it
could, consistent with present law, to speed up procedures and
lessen regulatory burdens.

The approach encompassed in the bills

before you would permit further progress in these directions by
eliminating the "benefits and burdens" test of present law,
limiting bank holding company examinations and reports, providing
for expedited notice procedures for approval of new activities,
and setting out new and simplified criteria for determining the
permissibility of new activities generally.
The third area with which any bill must deal is defining
the degree of expanded bank holding company powers.

Again, I

believe a nascent consensus has developed for a broader test
than incorporated in present law.

S. 2134 and S. 2181 approach

the matter in a somewhat different way; both would have the
practical result of permitting and directing the Federal Reserve
to permit holding companies to engage in a somewhat broader range
of services and the differences between the bills should be

Both bills follow the Administration proposal on

expansion of securities powers of bank holding companies, including
revenue bond underwriting, and mutual investment fund powers.
All of this has long been supported by the Federal Reserve Board.
In addition, both S. 2181 and S. 2134 would further provide for
underwriting of mortgage-backed securities.

Finally, the latter

bill would promote competitive equity in this area by applying the
Glass-Steagall Act to nonmembers as well as Federal Reserve member
Proposals to extend powers of bank holding companies to

underwriting and brokerage and to real estate brokerage*

appear, to varying degrees, more controversial.

S. 2181 provides

one possible approach toward dealing with the concerns about
banks acquiring "healthy" thrifts by limiting such acquisitions
across state lines.

Various limitations have been suggested for

the exercise of real estate development powers.

While I will

touch upon most of these areas more specifically, we hope and
anticipate that further agreement could be reached in the weeks
ahead on the basis for proceeding.
I look forward to further opportunities to work with the
Committee as it reconciles various points of view.

But I also

want to emphasize as strongly as I can that the basic "core"
elements for constructive legislation do seem to be falling
into place, and the opportunity for action is here.
Major Issues That Need Resolution
Title I of S. 2181 draws on the base of the Administration
FIDA proposals, but with certain significant changes and additions,
including some consistent with my earlier testimony.

S. 2134 is

also built on the Administration proposals, but is more limited.
The remaining Titles of S.2181 deal with a variety of other
banking issues.

These include:

authorization for regional inter-

state banking compacts; interest on demand deposits and on reserves;
pre-emption of state interest rate ceilings on business, agricultural,
and consumer credit; and federal rules on deposit availability.
Finally, the bill also adds provisions on consumer leasing, credit
card fraud, expanded powers for credit unions, and an authorization
for bankers' banks to invest in export trading companies.

So far as holding company powers are concerned, S* 2181
would make five important changes from the Administration bills
limitations on tying of banking and insurance products; the
scope of real estate development; provisions to avoid excessive
concentration of resources; the definition of the term bank;
and the proposed thrift definition.
I believe there is agreement that tying of the provision
of bank credit or other banking services to the sale of products
or services by other affiliates of a holding company could impair
impartiality in credit decisions and competitive equity.


existing Bank Holding Company Act, Federal Reserve regulations,
and anti-trust laws already contain safeguards and prohibitions
against conflicts of interest in this area*

S. 2181 would add

a number of additional limitations and procedural requirements
specifically directed toward the linkage of insurance and banking
products, to reinforce the prohibition on tying.

Similar questions

could arise in the real estate brokerage area.
We recognize the concerns that motivate the new provisions.
At the same time, cumbersome detailed requirements could impose
burdens not encountered by other businesses, including retail,
securities and insurance firms, that might provide insurance
services in combination with other services and products, including
credit, such as personal loans.

We note, for instance, that the

proposed provision would not be applied to thrift holding companies.


These potential competitive differences would be
ameliorated by extending any tougher anti-tying provisions
to thrift holding companies and by curtailing the ability of
other businesses to acquire non-banks or consumer banks to
which these provisions would not apply.

Within that framework,

I believe fair and reasonable procedural safeguards could be
The provisions of 8. 2181 limit the scope of real estate
development activities, while S. 2134 would not authorize such

We believe there is a reasonable middle course.

The term "real estate development" is itself an ambiguous
and poorly defined activity, ranging in some concepts to including
housing and commercial construction; speculative purchase of land;
and owning, managing, and maintaining office buildings and other
commercial properties.

Taken as a whole, real estate development

is an activity that experience has taught has large speculative
elements; it is marked by cyclical instability, and the risks and
large commitments potentially involved could bias lending decisions,
As I understand it, however, the main concern of many banks interested in "real estate development" is taking more passive equity
positions in projects managed by others, usually in connection
with lending commitments, or to help facilitate the sale and
exchange of property.
The Administration proposals provided some basic and
desirable limitations on risk by confining investment in real
estate development subsidiaries to five percent of holding company


capital, and S. 2181 would rule out construction activity as

We support those provisions* but also believe it might

be desirable to adopt certain other limitations on the scope of
real estate development activities.

After further consultations

with interested groups, we will be prepared to suggest more
precise legislative language*

In any event# we believe the

Board should have clear authority to maintain minimum capital
and maximum leveraging provisions for real estate subsidiaries
in the interest of the stability of the institutions and the
banking system.
Another provision of So 2181 is responsive to the concerns
expressed by some, including the Federal Reserve Board, about the
possible potential for an excessive concentration of resources
from a combination of banks and insurance or other non-banking
companies within a holding company.

Specifically, the bill

provides that a holding company accounting for more than 0«3
percent of domestic deposits could not invest more than 25% of
its capital in any one class of permissible nonbanking activities.
1 appreciate the ingenuity of the proposed approach.

But I am

both concerned about the arbitrary elements inherent in a doublebarreled statistical test, and whether it would in fact effectively
accomplish the stated purpose.
Preliminary analysis suggests, for instance, the largest
bank holding companies could acquire controlling interests in
the largest insurance companies.

We are studying this matter

further to see if in fact a simpler and more direct test may


adequately achieve your purpose.

The complication does not,

of course, arise in the context of S. 2134, which would provide
for no expansion of insurance powers.
One of the ways in which S. 2181 differs from the
Administration proposal is in carving out a major exception
to the general definition of a bank.

The proposal raises

technical and drafting problems, but I would like to focus today
on the policy issues.

S. 2181 would, in effect, legitimize the

idea of a so-called "consumer bank" operating outside the framework of the Bank Holding Company Act.

In effect, a class of

banks concentrating primarily on consumer business would be
established free from the general banking rules against conflicts
of interest, concentration of resources, and assumption of undue

Moreover, while the proposal formally attempts to limit

interstate acquisition of consumer banks, the provisions for
exempting industrial banks from the Bank Holding Company Act
would open an avenue for substantial undermining of the restrictions on interstate banking.
Thus, under the proposal, a bank holding company would
be able to add interstate deposit-taking and other consumer
services to the range of interstate business lending and other
activities already permitted under the rubric of Edge Act affiliates,
loan production offices, and finance companies.

While we favor

review and liberalization of restrictions on interstate banking,
we believe that question should be approached directly on
its own merits, and outside the context of the definition

of the term "bank" that has such important implications for the
policy objectives of the Bank Holding Company Act.
For nonbanking companies —

insurance companies, invest-

ment housesf retailers, and industrial firms —

the practical

effect would be to provide direct access to the payments system
and to facilities for offering insured deposits to the general
public in conjunction with a range of credit services.


those nonbanking companies would appear to be able to engage
in the equivalent of interstate banking, at least through
industrial banks,- and probably through the ability of their
nationwide office networks to act on behalf of consumer banks
owned by these companies.
The overall result would be to provide commercial and
investment firms major benefits of being a bank, while not
subjecting them to rules applicable to banking institutions


that is, limitations on the range of activities and ownership,
and protections against conflicts of interest, concentration of
resources, and excessive risk.
It has been suggested that these nonbank banks do not
raise these public policy issues because they could not engage
in the range of commercial lending that characterizes the activities
of a typical commercial bank.

I question whether this is a valid

Virtually the same issue was faced by the Congress

in 1970 when it considered an exemption from bank holding company
restrictions for small banks.

It concluded then that ties between

firms engaged in commercial and industrial activities and
banks, even if those banks were to be engaged predominantly
in consumer lending, raised serious problems because of potential
conflicts, and could encourage increasing cartelization of our
economy through the exercise of preferential lending*
Even more immediately, the proposed arrangement appears
competitively unfair to established banks, undercutting the
public policy objectives sought by the Bank Holding Company
Act, by giving essential benefits of being a bank to those
that are not subject to these rules*

Any system based on this

inequality of treatment will inevitably come under strain.
I would strongly suggest adoption of the definition of
bank contained in S, 1609 and S. 2134.

The definition contained

in these bills seems to have a wide measure of support as evidenced
by its inclusion not only in these two bills, but also in legislation proposed by Chairman St Germain, the FDIC, and by the
Federal Reserve as well.
Earlier in my testimony, I mentioned the importance of
an adequate definition of what is a thrift institution eligible
for the special benefits provided by law for these institutions,
S. 2181 suggests a dual test for thrift eligibility for treatment
as a unitary savings and loan holding company -- 60% of assets
in residential mortgages and mortgage-backed securities or no
more than 25% of assets in certain qualifying commercial loans.
The second alternative and independent test leaves open the
possibility that institutions not engaged very substantially in

home mortgage lending would retain liberal treatment with
respect to activities and banking.

For example, 75 percent

of commercial banks could be treated as thrifts because they
have less than 25 percent of their assets in qualifying
commercial loans (only six commercial bariKs would qualify
under the first test alone).

If, however, the bill were

modified to provide a true dual test «- i.e., both a minimum
residential mortgage and a maximum business credit test —
believe the real intent of this provision would be met.


point is that only firms truly committed to residential mortgages
should be provided the existing benefits of unitary holding
company treatment, and a single test of residential mortgage
lending, as provided in S. 2134, should be adequate, providing
the percentage is sufficient, taking account of current federal
limitations on commercial lending powers of thrifts.
Plainly, a problem would be posed by this approach for
many savings banks which traditionally have had many securities
in their portfolios but which wish to maintain a basic thrift

Moreover, institutions with mutual ownership

which fail the test would have difficulty in taking advantage
of the full range of holding company powers that would be available to stock institutions.
A large part of tne answer could be found in transitional
arrangements extending over years; those arrangements could set
out benchmarks for measuring progress toward the objective.



addition^ the possibility of non-specialized mutual institutions
exercising holding company-type powers through subsidiaries could
be exploredo
I also note that S. 2134 would limit tandem operations
of a qualifying S&L with its non-banking owner? that is the
joint offering of products and discounting to common customers
would be discouraged.

Those provisions seem to me important to

maintain the separation of banking and commerce.

The general

prohibitions on bank holding companies underwriting corporate
securities should be applicable to thrifts as well*

The further

question also arises as to the extent to which thrifts not
eligible for unitary treatment should be afforded access to
FHLBE credit.
I will not at this time burden you with detailed
comments on the remaining nine Titles of S. 2181.

So far

as two of those are concerned, I indicated our broad support
for payment of interest on reserves and interest on demand
deposits in my testimony last September.
Title X would authorize regional interstate banking
compacts for a 5-year period.

I previously expressed my concern

about the Balkanization of the banking system implicit in regional
compacts along what must inevitably be arbitrary lines.

At the

same time, some evolutionary easing of present state restrictions,'
appears appropriate*

While I believe there are more efficacious


approaches than regional arrangements, we would not oppose
Congressional authorization of regional compacts if viewed as
a temporary and transitional matter.

That, as I understand it,

would be the purpose of the provisions of 3. 2181.
We will be happy to submit detailed comments on the
provisions about bankers1 banks, consumer leasing, delayed
availability, usury ceilings and credit card fraud at an early
I am convinced that the efforts to improve the legislative framework governing the financial system, taking account
of the vast changes in the regulatory and technological environment for the conduct of banking, are now ready to bear fruit.
The discussion and debate on new powers, new definitions and
on competitive equity have been reflected in a "core" area of
near consensus, and the remaining issues are ripe for decision.
Workable proposals and the necessary information are at hand.
We still have an opportunity to shape the direction
of the financial system in a manner that recognizes and
accommodates market forces but also recognizes enduring concerns
of public policy.
But we don't have unlimited time.

Far from it.


present arrangements are in disarray, and events, willy-nilly,
are forcing change that may, or may not, be consistent with
considered judgments about the public interest.


We want competition, and the benefits to the consumer
inherent in competition.

We also want a safe and sound banking

system, stable in itself, and contributing to a larger economic
If we act —
those aims.

we can further both

We want to cooperate with you actively in working

toward that end.

and act promptly —