View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

ATTACHMENT I

For release on delivery
Expected at 9:30 A.M. EST
March 27, 1984

Statement by
Paul A. Volcker
Chairman, Board, of Governors of the Federal Reserve Sytem
before the
Committee on Banking, Housing and Urban affairs




United States Senate
27, 1984

I am pleased

to cense before you as one of the

concluding witnesses in what has been a thorough and searching
examination of proposals to restructure the law governing bank
and thrift holding company activities.

These hearings are a

culmination of a long process of evaluation of legislative
proposals to simplify regulatory procedures and to assure a
competitive environment for the provision of financial services.
Hearings on various bills of this kind began in the
fail of 1981.

Since then this Committee has held 44 days of

hearings,, heard more than 235 witnesses* and "has before it over
7*000 pages of testimonyo

This extensive record ~

including

analysis of historical problems* present difficulties?
future solutions —~ provides a solid

and

foundation on which to

build legislative decisions at this session of Congress&
I ha.vm on

several

occasions

emphasised

to

this

Committee the b&sdc framework within which w© in the Federal
Reserve approach these qyastionsc,
and

innovative

banking

and

We want to see a competitive

financial

system

mconomi&zl and effleiesit sar^ie^s to consumer©»
tiaa®* we belles©

that ba^Jca^ and

depository

providing
ht thm ®E&e
institutions

generally,? perform a unique %m6. critical role in the financial
sysien mnd the economy - » as operator a of the payments system <
*
?
as custodians ©f the bulk of liquid

savings, as

unbiased

supplier©

as

between

of short-terii credit^

3non@tary policy a;nd tlie economy *
continued




governmental

concerns

and

the

link

This unique role implies
about

fha ^stability

and

-2-

impartiality

of

these

institution —

concerns

that

are

in the federal "safety net11 long provided by the

reflected

discount window and deposit insurance, by regulatory protection
against undue risk, and by policies to discourage conflicts of
interest and undue concentration of banking resources.

As a

corollary to these concerns, and as a result of our practical
experience

in regulating

bank holding

companies, we

also

believe that these basic policies must, to a degree, apply to
the holding companies of which banks and other

depository

institutions are a part; banking institutions cannot be wholly
separated from the fortunes of their affiliates and from the
success or failure of their business objectives.
A review

of

the

testimony before

this

Committee

indicates that these principles are broadly accepted.

Progress

has been made toward achieving some convergence of views on the
definitions of a bank and thrift institution, on the scope of
regulatory

authority,

and

on

possible

simplification

of

regulatory approaches toward bank holding companies.
In my testimony in January in Salt Lake City, I
suggested

new

legislation

is urgently needed

dealing

with

several areas;




(a)

a strengthened definition of bank?

(b)

a definition of a qualified thrift!

(c)

new procedures to streamline application of the
bank and thrift holding company Acts?

-3-

(d)

the powers of depository

institutions

holding

companies; and
(e)

statutory guidelines to govern the division of
state and

federal

authority

in

the area

of

banking organization powers.
There are a growing number of issues about interstate
banking that soon will need to be dealt with as well, but, with
one exception, those questions could be deferred
legislation.

The

exception

concerns

to later

Congressional

policy

toward the present movement toward regional interstate banking
arrangements.
Our analysis of the bills and much of the testimony
that have been placed before this Committee indicate elements
of agreement in several of the necessary areas.

There appears

to be an emerging consensus on defining what is a bank —

a

fundamental building block for any legislation to clarify the
role of banks and bank holding companies within our financial
and economic system.

New procedures

Holding Company Act and simplifying
broadly accepted.
thrift

for applying

the Bank

regulation seem

to be

Some convergence on the appropriate role of

institutions

and

their

holding

companies

may

be

developing, as well as on the need to rewrite guidelines for
state-federal

relationships.

Equally

clearly,

substantial

differences in defining the appropriate range of powers for
bank holding companies remain apparent•




It seems to me the time has come to consolidate areas
of agreement, to consider objections to the proposals before
the Committee, and to test alternative approaches to bridging
the remaining differences•

Today, I would like to share with

you our further thinking on the five key problem areas and, in
particular, address some possible solutions to the remaining
problems.
!•

Definition of Bank
The definition of "bank11 is a crucial provision of the

Bank Holding Company Act*

It defines those institutions which

are covered by the Act, and for them the boundaries for the
safeguards against excessive risk, conflicts of interest and
concentration of resources deemed appropriate as a matter of
public policy.
a

meaningful

The application of these policies depends upon
definition

that

encompasses

all

depository

institutions that perform essential banking functions.
Marketplace, technological, and

regulatory develop-

ments have seriously undermined the present definition, which
defines a bank as an institution which accepts demand deposits
and makes commercial loans•

Functional evasion of the purpose

of the Act is becoming the rule rather than the rare exception
through the creation of "nonbank banks" and other devices that
permit combinations of banking activity, and commercial, retail,
insurance and
policies




on

securities
conflicts

of

firms*

As a result*

interest

and

established

concentration

of

-5-

resources are undercut or jeopardized.

These same techniques

are being used to undermine the Congressional prohibition on
•interstate banking.

The haphazard exploitation of "loopholes"

in existing law is reflected in an understandable sense of
competitive

unfairness

and

could,

in time, jeopardize

the

safety and soundness of the banking and payments system.

The

developments are broad in scope, as reflected in the tabulation
in Appendix A.
To deal with this situation, last year we suggested a
re-definition of the term
institution

"bank" to include any depository

(other than a FSLIC insured institution) that is

(a) FDIC insured, (b) eligible for FDIC insurance, or (c) which
takes transaction accounts and makes commercial

loans.

This

definition was included in the FIDA legislation and was adopted
in Senator Prcxmire's bill . (S. 2134) and a number of bills
introduced in the House.
Our review of this proposal in the light of comments
made at the hearing suggests consideration should be given to
three changes.

First, industrial banks that are not federally

insured and do not offer deposit accounts with checking or
other third party transaction capabilities should be excluded.
Appendix B describes these institutions and the scope of their
activities.
Second,

state-chartered

thrift

institutions

(also

described in Appendix B ) , which are not federally insured and




-6-

which would have been covered

by the definition

of bank

described above, should be encompassed within the same holding
company rules as federally insured S&Ls because of the focus of
many of these
institutions

state

could

institutions on home

be exempted

lending.

from coverage by

These

the Bank

Holding Company Act if the relevant state regulator certified
their activities were appropriately confined.
Third, the nonfederally insured thrifts and industrial
banks that would be excluded

from the coverage of the Bank

Holding Company Act should be subject to rules which would
prevent "tandem" operation —
thrift

products

or

that is, joint sale of banking or

integrated

institutions with owners engaged
for bank holding companies.

operations —

of

in impermissible

activities

This limitation, on which we place

considerable importance, is .explained in detail
C.

these

in Appendix

Its basic objective is to prevent the kinds of tying that

are judged to be unfair or unsound for depository institutions,
including

joint offering of deposit products or loans with

other products of affiliated industrial and commercial firms.
We

believe

that

Congress

should

not

exempt

the

so-called "consumer bank" from the definition of a bank.

Such

a proposal is contained in Section 104 of S. 2181, which would
allow a
including

"consumer

bank"

to

take

all

forms

of deposits,

transaction accounts, and make consumer

loans, as

well as a wide variety of other types of credit extensions,
including some commercial loans.




-7-

Such

an

approach

would

permit

commercial

and

industrial firms to enter into essential depository institution
activities, including access to the payments system,

in a

manner that would inevitably undermine public policy objectives
incorporated in the Bank Holding Company Act generally, and
there would be the appearance of unfair competition with banks
subject

to the Act*

In such circumstances,

the

regulated

banking sector would inevitably wither and much of the banking
business would take place in institutions not subject to the
policy

restrictions

on

risk,

concentration of resources.

conflicts

of

interest,

and

The lengthening list of nonbank

bank acquisitions demonstrates that we are beginning to see
that migration today*
that

19% of

portfolios

In this connection, I would point out

commercial

banks

now

have

commercial

loan

(narrowly defined) equal to not more than 5% of

assets and that 47% have 10% or less of their assets in this
form*

Thus, almost half of the number of commercial banks in

this country, could, with some minor restructuring of their
portfolios, conduct basically the same activities as they do
today and escape application of the policies

of the Bank

Holding Company Act.
Finally, I believe competitive equality requires that
the recent and current proliferation of nonbank banks not be
blessed by grandfather provisions, subject

to a

reasonable

period of time to permit divestiture where this is necessary.




-8-

II,

Definition of Qualified Thrift
Essentially the same problems of consistency with the

•public policy objectives of the Bank Holding Company Act arise
when

commercial

and

industrial

firms

acquire

thrift

institutions, particularly in the light of the broader powers
provided such institutions in recent legislation.
state

initiatives

have

provided

Indeed some

state-chartered

thrifts

essentially the full panoply of banking powers and more.

At

the same time, there may be institutions with no restrictions
on the activities of the parent

firm, an ability to obtain

long-term government-sponsored credit, favorable tax treatment,
and a freedom to branch intrastate and interstate —
that are denied commercial banks*

privileges

As in the case of nonbank

banks, there has been increasingly clear recognition of the
need to adopt rules to assure equality of treatment of various
kinds

of

depository

overlapping powers.
strong

institutions

exercising

similar

or

The need for action is reflected in the

interest of a variety of financial and

nonfinancial

businesses in the acquisition of thrifts in order to benefit
from

thrifts8

bank-like powers, to gain access

to

federal

deposit insurance, and to participate in the payments mechanism.
The Administration proposals attempt to deal with this
question by requiring all thrifts, with certain exceptions for
grandfathered service corporations, to meet the requirements of
bank holding companies.




This approach has been opposed mainly

-9-

on the grounds that it is not necessary to apply the same rules
applicable to bank holding companies

to those thrifts that

Concentrate their assets in home mortgages.

In an attempt to

recognize these concerns, the concept of a "qualified thrift"
has been developed, reflected in the proposals of both Senators
Garn and Proxmire, to exclude thrifts truly specializing in
residential

mortgage credit

from comparable

rules to those

limiting the scope of activities of bank holding companies*
We would support this general approach.
meet an adequate

Thrifts that

"specialization" test rooted in the public

policy concern of support

for residential mortgage

lending

could be owned by commercial or industrial firms as unitary
thrifts are now.
In developing the specifics of such an approach, we
would

endorse

the

recommendation

of

the

FHLBB

that

an

underwriter of corporate debt and equity not be permitted to
own a thrift, whether or not it meets the qualifying assets
test.

We would also rely upon a single direct

proportion

of

mortgage-backed

assets

held

securities.

in
An

residential
optional

test of the

mortgages
test

of

or

limited

commercial lending, such as not more than 25% of its assets in
certain qualifying commercial loans, as proposed

in S. 2181,

would leave open the clear possibility that institutions not
engaged substantially in home mortgage lending would retain the




-10-

liberal treatment with respect to permissible activities now
accorded to unitary S&Ls.

For example, with such a test, 75%

^f all commercial banks today could be treated

as thrifts

because they have less than 25% of their assets in qualifying
commercial loans? only six commercial banks would qualify under
the 60% of assets in residential mortgages part of the dual
test of S. 2181*
We believe an appropriate test would require that to
be eligible
treatment,

for unitary

savings and

loan holding

company

institutions must devote at least 65% of

their

assets to residential mortgages or mortgage-backed securities.
For this purpose, mortgages would include both 1-4 family and
multi-family

dwelling

mobile home

loans, loans

participation

mortgages, mortgage-backed
for home

improvements,

interests in such instruments.

securities,
including

Based on this

definition, according to our calculations, almost three-fourths
of FSLIC institutions would currently meet this test.
believe

the

limits

on

commercial

lending

set

in

We also
the

Garn-St Germain Act remain appropriate for federally chartered
institutions, and

in the

light

of

the much

wider

powers

provided by some states for commercial lending, a supplementary
(not optional) limit on commercial lending could be considered
for eligibility of these state-chartered institutions.
We recognize some S&Ls and mutual savings banks that
could not meet the qualified thrift test currently, but still
wish to emphasize home lending and who wish to retain the



-11-

privilege of "unitary18 S&L treatment, should be permitted a
substantial period

in which

to conform

their

activities.

During this transition period, which could be five to ten
years, milestones should be set in terms of measuring progress
toward

achieving

the

required

asset

composition.

While

ownership by an industrial or commercial firm could be retained
during the transition period and thereafter, we do not believe
such thrifts should be permitted to operate in "tandem11 with
the parent commercial or industrial firms.
this suggestion

are

outlined

language in Appendix D.

in the

form

(The details of
of

legislative

The description of the limitations on

tandem operations is, as noted above, contained in Appendix C.)
In general, under this approach, those thrifts

(and

their service corporations) not meeting the asset test (or in
transition toward them) would generally have to conform to the
limitations on ownership of, and powers provided
holding

companies

generally.

to, bank

Special tax benefits and

the

access to long-term credit from the Home Loan Banks for these
nonqualifying

institutions should be reviewed.

At the same

time, methods should be developed to permit mutual institutions
to take advantage of powers permitted bank or thrift holding
companies in stock form.
III.

Bank Holding Company Procedures
The

provisions




on

third
bank

core

element

holding

of

legislation

company

procedures.

is

the

S. 2181,

-12-

S. 2134, and FIDA contain essentially identical provisions on
this point and I believe that this reflects widespread support
"for procedural simplification.
These
areas:

provisions

make

improvements

in

two

major

they change the present somewhat complex applications

process into a notice procedure; and they put bank holding
companies on more equal

footing with their

competitors

changing the "benefits vs. adverse effects11 test and
hearings

requirements.

Instead,

new

activities

by

formal

could

go

forward, after notice to the Federal Reserve Board, unless the
Board found grounds for disapproval under specific statutory
criteria.

Those statutory tests include adequacy of financial

and managerial resources, protection of impartiality

in the

provision of credit and avoidance of adverse effects on bank
safety and soundness.
The

thrust

of

these provisions,

and

a provision

reducing

the scope for judicial review by competitors,

intended

to

companies

by

consistent
embodied

reduce

the burden

government

placed

regulation

with protection

to

upon

bank

a

minimum

of the public policy

in the specified criteria.

is

holding
level
interests

Agency procedures would

not be burdened by formal hearings and judicial review at the
instance of competitors.
of course, remain

Formal rulemaking procedures would,

necessary

before

decisions

to add

new

activities to the list of permissible holding company powers,




-13-

and the Board could continue to request public comment on
notices and hold informal hearings, where necessary, to obtain
'"information necessary to make decisions*
We also believe the new procedures set out in S. 2181,
S. 2134 and FIDA provide the Board with adequate supervisory
authority over the activities of the holding company and its
nonbank

subsidiaries

after

they are

in operation.

Those

procedures would emphasize the desirability of relying upon
other

regulatory

agencies, such

as

the Commodity

Futures

Trading Commission in the area of commodity brokerage and the
SEC in the case of securities activities, for supervisory and
reporting

requirements

duplication of effort.

in

order

to

avoid

unnecessary

However, the statute provides adequate

authority to take whatever regulatory or data gathering steps
that may be necessary to ensure compliance with

the Bank

Holding Company Act.
My

conclusion

is that

these provisions

adequately

balance the need for reducing unnecessary regulatory burdens
with the requirements for adequate supervision to enforce fully
the provisions

of

the Bank

Holding

Company

Act*

These

provisions seem to me ready for inclusion in legislation*
1v

*

MgJL Act i vi t ies o f Bank jtoj^ching^^
The fourth element of needed legislation is expanded.

powers for holding companieso
for holding companies to%




S* 2ISI provides new authority

(&}< sponsor and distribute mutvml

-14-

funds

and

underwrite

and

distribute

revenue

bonds

and

mortgage-backed securities (b) engage in real estate brokerage
•and

development,

underwriting,

(c) provide

insurance

brokerage

(d) own a thrift institution, and

and

(e) take part

in other services of a financial nature.
Considerations of competitive equality and potential
benefits

to consumers of a broader

range of suppliers

financial services strongly suggest a presumption
the range of powers permitted

of

broadening

bank holding companies*

The

point is reinforced by technological developments that enhance
the options in the delivery of such services•
stressed

at the outset, those objectives must

against other public policy concerns:

However, as I
be balanced

assurance of fair and

open competition in the provision of credit and other services,
maintenance of impartiality of banks in credit judgments, and
avoidance of practices that can undermine the strength of the
bank itself.

Balancing these objectives is surely the most

difficult task before you.
Certain of the proposed activities, including those
involving essentially "agency" activities, such as real estate
and

insurance brokerage, raise few questions of safety and

soundness.
development,

In certain
much

more

other

areas,

significant

such

as

real

risks

to

the

estate
holding

company, and potentially to the bank itself, arise.

Questions

about conflicts of interest and tying for * number

of the




-15-

activities have been discussed in detail by the witnesses that
have preceded roe in recent weeks.
Review of comments made during these hearings and
other information has suggested a number of areas in which the
Committee might bridge differences by modifying or limiting
earlier proposals.

In particular, we have attempted to address

carefully the safety and soundness and the competitive fairness
considerations

that appear

to stand

in the way of broad

agreement on a substantial broadening of bank holding company
powers.

In my testimony today I would like to review each of

the categories of proposed new activities in light of those
considerations *
(a)

Securities Activities - Underwriting

Revenue Bonds and Mortgage-backed

Municipal

Securities, and Sponsoring

and Distributing Mutual Funds
Both S 9 2181 and S. 2134 would authorize bank holding
companies to underwrite municipal revenue bonds and

similar

instruments and to sponsor and distribute mutual funds*
Board

supports

both

of

these

activities,

based

on

The

a

considerable period of experience with bank underwriting of
general obligation bonds and managing trust assets.

The Board

believes that these activities involve a manageable degree of
risk

for banking organizations and

substantial

gain

for customers

services and lower costs.




there is potential

for

in terms of a variety of

-16-

At the same time, bank performance of these services
has been opposed because of several concerns.

One line of

concern

by a bank

suggests

that

the provision

of credit

affiliate, or guarantees of underwritten obligations by bank
affiliates,

would

affiliated

provide

underwriters,

underwriting

and

loan

a

distinct

or

that

business

advantage

temptations

would

be

to
to

strong*

bank
link

to

potential detriment of the bank or its customers.

the
It is

alleged that investment flows might be influenced by the bank's
interests* or that poor investment or underwriting performance
by a holding company affiliate night reflect adversely on the
bank itself*
We approach
account

these arguments with soEte care

of the

that bank

securities

fact

is not proposed

and

underwriting
of

fhe

of

rather

taking

corporate
successful

coexistence of bank affiliated and independent underwriters of
municipal

general

obligation bonds*

Moreover^

S* 2183. and

S* 2134 already contain a number of provisions
designed

to promote competitive

equity

&n&

specifically

limit

risk

to

affiliated banks*
Those

bills

already

require

that

all

activities of the holding company,* including

securities

its subsidiary

banks* be conducted in a separate holding company affiliate^
Tlie affiliate must be separately

capitalised

in a manner

comparafcle to similar firsas not affiliated with a bank holding




company*

The present rules contained

Federal Reserve Act and the proposed

in section 23A of the
new section 23B would

limit intercompany transactions and require that they be on
market

terms.

All these

provisions

provide

fundamental

protections against conflicts of interest and unequal tax and
regulatory treatment.
Nevertheless, a cautious approach

in this area is

justified and a m m h a r of suggestions proposed by others to
assure

competitive

attentioiiu

equity

&i
*d

avoid

conflicts

deserve

Thus,, it may be reasonable to prohibit a bank

holding company"& securities or investment company affiliate
from using the name of &n affiliated bank or bank holding
company

{in the internet

of appropriate

disclosure* an

indication of company affiliation should be parei&aibic:) o
t o y also be desirable
ia

tc requira

employees of a s^o^rities

that

It

the officers and

affiliate o£ investment company

advisor be gaparat^ fagom thoea that, operate an affiliated h&tik
and! tliat information on the fina^cJal sictivitiea o.£ ths bsnk9 s
;
cuatomera iiot be sso^ a.^ailafcie to the securities a f f i l i a t e an
^ic@ ?^rsa,

Ba.^ka might i^e p^o>*ibited

pro^iclincg l e t t e r s

of

credit

oncler writ ten by a securities
So far
provisioaa of
applicable




from guaranteeing or

to support obligations

are

affiliata.

^JS .mutual fund© are cos^eerned^

th^ l.ov^gtaient Company hct0

suggestions

t'hat

above*

>aj;-po^.i

the curi^tiDg

tog^th#r witb the

generally

adecoate

t^

-18-

assure

independent

investment

judgment.

However,

those

provisions could be reviewed to determine if any other special
provisions are necessary to assure independence from the bank
affiliate.
I have noted

in earlier

testimony a trend

toward

conglomerates of financial services, and toward the explicit or
implicit

tying

conglomerates
equality,

of various
not

financial products by

including

banks•

To

assure

financial

competitive

I believe that restrictions of the kind

I have

described above, if adopted, would need to be accompanied by
provisions

giving

the

Board

certain

discretion

in

application should nonbank conglomerates develop

their

combinations

of services prohibited bank holding companies.
Questions have also arisen over bank holding company
participation in brokerage services.
you know, has permitted
passive provision
advice —

The Federal Reserve, as

"discount11 brokerage —

of brokerage

under present law.

services

that is, the

without

investment

Because that ruling

is under

court challenge, we believe it should be explicitly provided
for in the proposed
however,
combining

the

further

legislation.
question

such services with

You may wish to review,

of

the

investment

providing a full range of brokerage
framework of a bank holding company.




appropriateness
advice —

services —

that

of
is,

within the

-19-

The
innovations

mortgage

market

in communications

techniques.

is

being

technology

transformed
and

by

in marketing

Banking organizations are major mortgage lenders

and are familiar with the credit analysis and have other
expertise necessary to establish mortgage pools and evaluate
the underlying risks of the constituent elements in the pool*
They can already underwrite mortgage bonds guaranteed by the
government or sold by government-related agencies.
What is at issue here is whether a bank affiliate
should be permitted to underwrite private securities.

Should

the authority be confined to securities backed by 1-4 family
mortgages*

potential

risks would be substantially

defused.

Risks and

conflicts

of

company

participation

interest

in underwriting

in bank holding

in those circumstances

would

appear to be manageable within the confines of the anti-tying
rules already contained in present law and in S. 2181.

As in

other areas, however, questions of competitive equity have been
raised, particularly

in view of the ability of

institution

companies

holding

to

provide,

depository

through

their

subsidiary banks, guarantees or letters of credit to support
mortgage

pools

affiliates.

established

and

underwritten

by

securities

The appropriateness of combining those two aspects

of financing services could be re-examined.
In

summary,

we

believe

adequate

techniques

are

available to satisfy legitimate concerns about bank holding




-20-

company activity in the securities area, so long as corporate
security

underwriting

remains

prohibited*

The

potential

benefits to competition and in terms of reducing underwriting
costs, in these circumstances, point to action along the lines
proposed

by the Administration, and by Senators Garn and

Proxmire,
(b}

Real Estate Brokerage and Development

As I suggested earlier, the main issue in providing
authority for bank holding companies to engage in real estate
brokerage is not risk but potential conflicts of interest and
problems of competitive equity.

It has been suggested that the

ability of a bank holding company real estate broker to offer
assured

bank

financing, or even the

impression

that

such

assured financing is available because of the ownership tie
between affiliated broker and bank lender, could be sufficient
to divert business away from the independent and toward the
bank or thrift affiliated broker*
As with the case of securities affiliates, limitations
on the holding company broker using the same name as the
holding

company or

its subsidiary

bank, strengthening

the

already strict rules against explicit or implicit tying, and
enhancing

enforcement

through providing a private right of

action, could provide considerable protection against abuse.
Possibly a & firtt'h&v &££-;> could h& taken by "'pxohiblii'ng miy
,
moxtQ&gQ lo^ns by & ^bsifiiary b&ok ot thrift oil & daposito^y




-21-

holding company to any customer of an affiliated real estate
brokerage firm*
It should
fair —

not be necessary —

nor would

it seem

to limit loans by a holding company mortgage banking

subsidiary

to

the

customers

of

the

affiliated

broker*

Nondepository firms are today permitted to combine ownership of
brokerage

and

appropriate

mortgage

banking

subsidiaries *

Of

course,

supervisory steps would and could be taken

to

prevent reciprocal lending arrangements or other steps to evade
this 1i m i t a t i on•
Smaller banks, without mortgage banking subsidiaries,
might be put in a difficult competitive position by such a
limitation.

Consequently,

accompanied

by an exemption

such

an

approach

for smaller banks,

might

reasonably

related to a relative unavailability of competing
services *
analogy

be

brokerage

It should be possible, for instance, to draw an

to provisions

of Title VI of

the Garn-St Germain

Depository Institutions Act of 1982* which permits bank holding
companies to offer

insurance brokerage services where

would otherwise be impermissible if their consolidated

they
assets

were $50 million or less, or in towns of under 5,000, provided
a brokerage affiliate is required to permit or encourage a home
purchaser to explore other possible sources of credit.
Technology is providing both independent brokers and
those now associated with financial and retail




conglomerates

-22-

with almost instant access to an array of providers of mortgage
credit, enabling their customers to compare terms and
conditions*

In these circumstances, real estate brokerage

appears to be an area in which bank holding companies can draw
on

relevant

experience,

undertake

little

additional

risk

(particularly if tie-ins are avoided), and increase competitive
outlets*
In my past appearances before this Committee, I have
expressed

serious

concern

about

the

potential

risks

and

conflicts for bank holding companies under the general rubric
of "real estate development/1

Those concerns remain-

Present proposals deal with those risks by limiting
the capital a bank holding company could apply to real estate
development
activity —
limiting

activities

or

by

prohibiting

construction

limitations which should be reinforced by

the

subsidiary.
(a) confining

leverage

of

the

real

estate

also

development

I would go further by urging you to consider:
"real

estate

development"

to passive

equity

participation in projects or developments managed by others,
and (b) limiting bank loans to projects sponsored by affiliates
of a bank holding company*




-23-

The first change would be consistent with what we
understand to be the basic objective of most bank
companies in the real estate development area —

holding

to participate

in the potential benefits accruing only to equity participants
in a real estate project.

To achieve this goal* the rather

broad scope of the authorization for real estate development
activities contained in FIDA or S, 2181 could well be narrower,*
for example? participation could be confined to

investment

vehicles such as nonvoting common stock, preferred stock, or
limited partnership interests*
Some of those testifying have expressed concern about
the competitive and risk implications of a bank, as lender,
participating in a project in which an affiliate has an equity
interest.

They suggest that a bank in those circumstances will

be more willing to extend credit and to carry a weaker credit
longer to one of its

"own9 projects, and perhaps be less

willing to extend credit to competing projects, than if no
equity interest is involved.

To deal with this situation, it

might be useful to provide the Board with clear discretionary
authority to impose an aggregate or particular limitation on
loans by a bank

to projects in which a bank

real estate

affiliate is an equity participant*
{c)

Insurance Brokerage and Underwriting

Insurance brokerage by bank holding companies^ as is
the case with real estate brokerage, does not involve major




-24-

issues of risk; rather the focus of the testimony has been on
assuring competitive equity between bank affiliated brokers and
independent

distributors

of

insurance

products*

institutions already have unlimited authority

Thrift

to engage in

insurance brokerage/ and the broadening of this activity for
bank holding companies should provide competitive benefits so
long as abuse of the bank relationship is avoided.
S. 2181f in Section 107f
provisions

that

attempt

inequity problems.
inform

their

products

to

reduce

contains a number
tying

and

of new

competitive

It would, for example, require banks to

customers

elsewhere,

of

allow

the

availability

insurance

purchasing

customers

of

insurance

products from bank holding subsidiaries an adequate opportunity
to reject their contracts, and prohibit banks and their holding
companies from offering insurance until the customer is given a
commitment

that credit will be extended.

It does not seem

practically feasible to go much further in this area without
destroying

completely

organizations

to participate

however, suggest
provisions

the

that

necessary

ability

of

in this activity.

to the extent
when

holding

financial

Congress

company
We

deems

institutions

would,
these
sell

insurance, they should also be applied to thrift

institutions

and their holding companies, which are permitted

to broker

insurance without restrictions such as contained in Title VI of
the Garn-St Germain Act.




-25-

Consideration

could

also

be

given

to

possible

approaches for phasing in greater bank participation in the
insurance brokerage area.

Again, it might be useful to build

upon Title VI of the Garn-St Germain Act, which permits bank
holding company participation in insurance brokerage activities
in cases where the holding company's consolidated assets are
$50 million or less, in towns of 5,000 or less, or otherwise
where the holding company demonstrates that existing insurance
agency

facilities

are

inadequate.

For

instance,

those

limitations might be gradually increased by some amount over
time up to a limit, which would provide an occasion for further
Congressional review.
If bank holding companies are permitted to engage in
underwriting, careful attention will have to be given to
containing risk, avoiding concentration of resources and more
subtle

conflicts

of interest*

For example, there may be

particular lines of insurance underwriting that raise issues of
risk that require special safeguards and limitations on such
matters as amount of capital investment.
earlier suggested

Moreover, I have

that banks not be permitted

to lend to

companies in which their holding company affiliates had very
substantial equity interests.
In order to limit the potential for concentration of
resources associated with large bank holding companies
acquiring large insurance firms or vice versa, S. 2181 would




-26-

limit bank holding company investment in nonbanking activities
to not more than 25% of the holding company's capital if the
folding company's consolidated assets amount to more than 0.3%
of total domestic deposits.

However, our review of the data

indicates that this test does not effectively limit the ability
of some of the largest bank holding

companies

to acquire

control of some of the largest insurance companies.
I recognize that our attempt to devise a numerical
test of that kind must be arbitrary at the margin.

However, an

alternative approach could be to provide specific criteria on
the size of bank holding company participation in insurance
underwriting
banking.

and

insurance

underwriter

participation

in

This could be done by requiring that bank holding

companies enter
relatively

insurance

small

underwriting jSe noyo or

acquisitions.

Similarly,

through

insurance

underwriters would also be confined to d > novo or foothold
e
acquisition

of banks.

concentration

issues

This approach
and

it would

would

deal with

provide

time

for

the
the

participants, the Board, and state insurance regulators to gain
experience

in dealing

with

combined

insurance

and

banking

entities.
An alternative
holding

approach

company participation

would

be

to expand

in insurance

bank

underwriting

in

directions that flow naturally from existing bank functions.
For example, it would




seem

appropriate

for

bank

holding

-27-

companies to participate in insuring or guaranteeing the credit
risk in home mortgages and in real estate title insurance,
"Dollar

limits

casualty
company

on

individual

insurance
nonbank

policies

affiliates

experience, Congress

could

credit-related
underwritten

could
then

be

by

property
bank

lifted*

consider

holding

After

other

and

some

areas

of

insurance underwriting activity that might be appropriate as
part of a gradual evolution of bank holding company insurance
underwriting*
(d)

Ownershj^p of Thrifts

S. 2181 specifically permits bank holding companies to
acquire FSLIC insured thrifts, subject to the same kind of
limitations on interstate acquisitions as are written in the
Douglas Amendment and the same kind of branching restrictions
on the acquired thrift as are contained in the McFadden Act.
The Board has supported bank holding company acquisition of
thrift

institutions

presently

as

authorized

a

scope

reasonable
of

extension

activities.

We

of

their

recognize,

however, that acquisition of thrifts by bank holding companies
on an interstate basis may, in some situations, not be fully
consistent with the prohibition on interstate banking contained
in the Douglas Amendment*
that Congress

should,

The Board has indicated its views

in the

future, address

the overall

question of interstate banking in comprehensive legislation*
However, pending Congressional action on the overall question.




-28-

the Board believes it is reasonable to incorporate Douglas and
McFadden

type

limitations on thrift acquisitions

that are

proposed in S, 2181.
(e)

Financial Services

S. 2181 authorizes holding
"services of a financial nature,"

companies

to engage

This provision

in

provides

useful flexibility for the Board to deal with uncertain and
unknown

circumstances

in the

future*

We

recommend

its

inclusion in legislation*
The decision of Congress on the inclusion or exclusion
of the various activities that have been discussed above will
provide some guidance on the intended scope of this provision*
Additional guidance would be desirable with respect to other
activities that the Congress might consider to be within the
scope of this authorization.
ofJ5ta*L<5r:Chgrtered Banks
Much

concern

has

been

expressed

about

possible

authorizations to state-chartered banks of new authorities to
conduct nonbanking businesses that would not be permitted to
bank holding companies under present or new federal laws.

It

is reasonable to ask the question whether it makes sense for
the Congress to work out carefully balanced arrangements for
the conduct of nonbanking activities of bank holding companies
only

to

see

far

different

and

inconsistent

established for state banks under state law*




arrangements

-29-

Some states have adopted, and others are considering,
legislation to authorize state-chartered banks to engage in
insurance, securities, and real estate development activities?
and others have authorized state-chartered thrifts to engage in
virtually unlimited activities.

Last year, South Dakota

authorized state-chartered banks to engage in insurance-related
activities essentially in all of the states of the Union except
South Dakota*

The states are motivated in part by a desire to

make their financial institutions competitive with those in
other states and in part by a desire to obtain new employment
and revenues ~

inevitably at the expense of others.

As the

process gains momentum, more and more states will feel
themselves forced, in self-defense, to take similar steps.
threat is obvious ~

The

any sense of Congressional or federal

control over the evolution of the banking and financial system
will be lost.
S. 2181 attempts to deal with

this problem by

requiring that insurance activities be conducted in the state
and outside the state on the same terms.
considerably

further

by requiring

S. 2134 would go

that states may only

authorize activities for state-chartered banks to be conducted
within the state and for residents of that state.
In the light of current developments, it now appears
desirable to go somewhat further than the provisions of
S. 2134, while




still maintaining

flexibility

for

state

-30-

experimentation

and

innovation.

In

balancing

these

considerations, perhaps it is desirable to distinguish between
^hose activities that Congress may decide to prohibit or limit
for banking organizations because of safety and soundness
problems, and those that arise from conflicts of interest that
are particularly

important

for

the protection

of local

customers.
For example, if Congress reaffirms its decision to
exclude

banking

underwriting
participation

organizations

from

corporate debt and
of

these

participating

equity, and

organizations

in

in

limits the

real

estate

development, it would not seem to be desirable for the states
to have the authority to overrule the judgment of Congress and
expose the insured depository system to the greater risks of
these activities*

On the other hand, if Congress decides not

to authorize real estate or insurance brokerage because of
reasons of consumer protection and competitive equity, it would
not seem inconsistent with the federal interests if state
legislatures authorize banking organizations to participate in
these activities within the confines of their own state.

Here

the state may be in the best position to make the judgment
about what is necessary to protect local customers and local
interests.
Thus, the balance between federal and st^te interest
could be struck as follows:




states may

not

authorize

-31-

activities that Congress has ruled out of bounds for safety and
soundness reasons; the states may optionally authorize other
activities
borders.

but

only

if they

are

We would be prepared

conducted

within

their

to assist the Committee

in

drafting such a provision.
Other Provisions of S. 2181
My comments today have focused only on Title I of
S. 2181 as I believe

it is that

Title

priority attention of the Congress.
number

separately

requires

the

Detailed comments on a

of other Titles are contained

submitted

that

for the record.

in Appendices
Before my

to be

concluding

remarks, I would like to comment specifically on the provisions
contained in Title X on regional interstate banking.
Title X provides specific authority, for a five-year
period,

for states to authorize regional

acquisitions.

interstate banking

Such legislation would presumably resolve the

question of the constitutionality of regional arrangements that
have been authorized in New England and have been proposed in a
number of other areas of the country.

Yesterday, the Board

approved two bank holding company mergers under the reciprocal
arrangements of Massachusetts and Connecticut.

Although there

is a strong argument that these state laws are not consistent
with

the

prohibitions

against

discriminatory

burdens

on

interstate commerce established by the Commerce Clause of the
Constitution, there is an absence of clear and




unequivocal

-32-

evidence to that effects

Consequently, the Board proceeded on

the assumption of constitutionality and applied the criteria of
"the Bank Holding Company Act.
constitutional

interpretations

But plainly#
raised

the differing

by parties

to merger

applications demonstrates the need for Congressional action to
clarify this issue at this time.
We believe this is all the more important because of
our

concern

about

banking areas.

the permanent

establishment

of

regional

If Congress should decide to endorse regional

arrangements# in our view it would be desirable to limit them
to a transitional period.

We would also urge you to consider

the interstate banking question more broadly at an early date,
once the powers issues are settled.
Conclusion
I cannot emphasize strongly enough the urgent need for
definitive Congressional action on the legislation now before
you

during

postponed —

the

current

session.

Decisions

cannot

be

the failure to act only means that others have

acted and will continue to act, to markedly restructure the
financial system without the participation of the Congress.
These

actions, arising

out

of

market

initiatives,

state

legislation, court decisions and new federal regulatory rules,
are pushing at the outer boundaries of the legal

framework

established by Congress for the banking and financial systems.
In my judgment, they are pushing beyond




the basic policies

-33-

established by the Congress in setting out a broad distinction
between banking and commerce*
I am not speaking about theoretical concerns*

The

policies of the Bank Holding Company Act against excessive
risk,

conflicts

of

interest,

impartiality

in

the

credit-granting process, and concentration of resources have
long been considered essential parts of our financial system.
They are now being undermined by a haphazard pattern of
inter-industry

and

interstate

acquisitions

and

by

new

combinations of banking* securities, insurance and commercial
products.
The Bank Holding Company and Glass-Steagall Acts were
intended to prevent combinations of firms that underwrite
securities

and

take

deposits.

Yet

today

there

are

32 securities firms that own so-called nonbank banks which can
perform many of the essential functions of banks.

Court and

regulatory decisions are opening new avenues for bank holding
companies to undertake securities functions without clear
legislative guidance.
The Bank Holding Company Act was intended to prevent
combinations of commercial or industrial firms from owning
banks,

yet

today

there

are

retailers,

diversified

industrial-commercial conglomerates, and insurance firms that
own either nonbank banks or thrifts with banking powers*




-34-

The states are rapidly considering

and adopting

legislation granting state-chartered banks powers that, in some
cases, have not even been contemplated under federal law for
banks and bank holding companies, in large part reflecting
inter-state competition for jobs and tax revenue rather than
any judgment of the national interest in a stable banking
structure.
The federal financial regulators are also pressing
against the outer boundaries of their delegated authority.

The

Board has adopted the broadest definition of the term bank it
felt feasible under existing law in an effort to carry out what
it believes to be Congressional intent and to preserve the
ability of Congress to act without being faced with a fait
accompli.

That action is being challenged in the courts with,

thus far, unfavorable results.

The SEC has before it a

proposal to consider banks as broker-dealers when they engage
in discount brokerage, despite the exclusion of banks from the
securities laws because of the comprehensive system of bank
regulation.

Under existing law, the FDIC is considering the

question of whether state non-member banks should be authorized
by regulation to underwrite corporate debt and equity, despite
long-presumed

Congressional

intent

banking and corporate underwriting.

to separate

commercial

The Comptroller has before

it a well-known proposal to authorize a family of "nonbank"
national banks in 25 states.




We have been compelled to approve

-35-

the establishment by a New York bank holding company of a
nonbank bank in Florida, which would take demand deposits but
not make commercial loans as we have broadly defined them.
As things now stand, many of these specific issues
will be decided on a case-by-case basis in the courts —

but we

cannot expect those decisions to be guided by a policy
perspective on how the financial system as a whole should
evolve.

That, in the end, is the task of the legislature, not

of

courts

the

which

must

struggle

circumstances to yesterday's laws.

to

adapt

today's

Until all of us —

the

regulators, the banks, other competing industries, and the
courts —

have more Congressional guidance, every new decision

will be subject to legal challenge.
If Congress does not decide, decisions will still be
made.

But they seem certain to be conflicting, and not fit

into a coherent whole.

One clear risk is that the overriding

public interest in a strong, stable, and competitive financial
system will be lost.
The time for action is here.

Many elements of

comprehensive legislation are already broadly accepted.

I

believe the remaining elements and the necessary compromises
can be put together soon.

I hope and believe this Committee

can be the vehicle for moving ahead.







ATTACHMENT II
AMENDMENTS TO THE DEFINITION OF BANK
IN THE BANK HOLDING COMPANY ACT
1.

Definition of Commercial Loan

2.

Trust Company Exemption

3.

Limits on Demand Deposit Taking and Commercial
Lending of Grandfathered Nonbank Banks

4.

Limits on Activities and Geographic Expansion of
Grandfathered Nonbank Banks

5.

Treatment of FDIC Insured Savings Banks

6.

Requirement for Federal Insurance for Bank Holding
Company Subsidiary Banks
AMENDMENTS REGARDING STATE CHARTERED
DEPOSITORY INSTITUTIONS

1.

Amendment Regarding Banks

2.

Amendment Regarding Thrifts

AMENDMENTS TO THE QUALIFIED THRIFT LENDER
PROVISIONS OF THE SAVINGS & LOAN
HOLDING COMPANY ACT AMENDMENTS
1.

Definition of Qualified Thrift Lender

2.

Prohibition on Marketing by an Affiliate of an
Insured Thrift's Deposits
OTHER AMENDMENTS

1.

Amendment Regarding Mortgage-backed Securities

2.

Amendment Regarding Leasing Authority of National
Banks

Amendment to Definition of
Commercial Loan in S. 2851
Amend section 104(a)(3)(k) to read as follows:
"(k) The term 'commercial loan' means any loan
other than a loan the proceeds of which are used for personal,
family, household/ or charitable purposes, and includes broker
call loans, loans secured by real estate the proceeds of which
are used

for other

than personal, household,

family, or

charitable purposes, and the purchase of retail
loans, accounts receivable, and commercial paper.
loans shall not

include

the purchase

of

installment
Commercial

certificates

of

deposit, bankers acceptances, or obligations of the United
States

or

local

and

State

governments

or

agencies

or

instrumentalities thereof, the sale of Federal funds, or the
deposit of interest bearing funds*11

Explanation
S. 2851 defines commercial loan to exclude a number of
instruments that traditionally have been regarded as commercial
loans, including commercial real estate loans and the purchase
of

retail

installment

commercial paper.

loans,

accounts

receivable,

and

The bill also includes a definition of

"engaged in the business of making commercial loans" under
which an institution is not regarded as engaged in the business
of commercial lending if it devotes less than 10 percent of its
assets to commercial loans.




As so structured, the definition

-2-

such institutions from the Bank Holding Company Act if they are
and have been privately insured since the date of enactment of
the bill.
undergoes

The exemption would terminate if the institution
a change

in control

by

a

company

engaged

activities that are impermissible for bank holding

in

companies

under the BHC Act.
This
nonfederally

amendment
insured

is

designed

institutions

that

to

exempt

accept

those

transaction

accounts and that would be covered as banks under the Bank
Holding

Company Act by

definition contained
S. 2851.

This

virtue

of

the

in the previous proposed

amendment

is

necessary

commercial lending amendment is adopted.




commercial

only

lending

amendment
if

proposed

to

Amendment to S. 2851 to Prevent Federally-Insured
Thrifts From Engaging in Joint Marketing Operations
with Holding Company Affiliates
Amend section 107(c) to insert the following at the end
thereof:
"(4)

A new subsection

(d)(l)(G) shall be added to

read as follows:
8
1

(G)

offer

or

market

the products

or

services of any affiliate that is not a qualified thrift lender
nor offer or market its own products or services through any
affiliate that is not a qualified thrift lender.".

Explanation
This

amendment

would

prevent

joint

marketing

operations between FSLIC insured thrifts and their affiliates
if such affiliates engage in activities impermissible for a
bank holding company.

The amendment thus would subject thrifts

to the same limitation that applies to banks in furtherance of
the policy of separating banking and commerce*




-2-

of enactment

of

this paragraph

within

the

following

time

periods from the date of enactment of this paragraphs
(I)

within 2-1/2 years, 25 percent;

(II)

within 5 years, 50 percent; and

(III) within 7-1/2 years, 75 percent.

This a.m>&n&mant would raise the qualifying asset teat
In 8* 2SS1

fro& 60 percent

to 65 percent,; exclude

mortgage

originations and equity positions as qualifying assets,, limit
qualifying liquid assets to the amounts required by the PKLBB
for liquidity purposes, and delete

the provision

allowing

compliance with the asset test in only two out of every three
years*

An institution thus would be required

to devote a

significant portion of Its assets to noms lending in order to
qualify as a qualified thrift lender,,




Amendments to Qualified
Thrift Lender_JTestMJji,_£!1_i2851
Amend, section 107(b) to read as follows?

Me) * * *
(4) * * *
9
1

(B) A

qualified

thrift

lender

is

any

insured institution that, as determined by the Corporation* has
an aggregate of not less than 65 per centum of its assets
(Including

investments

institution)
domestic

invested

residential

made
in

by

loans

real

any
or

estate

subsidiary
securities

of

such

related

or manufactured

to

housing,

property used by an institution In the conduct of its business,
and liquid assets of the type a n . in such amounts as are
;d
required to be maintained under section. 5A of the Federal Home
Loan Bank Act*

a;ad thereafter

remains at or above

such

percentage on a; average basis in three out of every four
.a
quarters*

For

t'he ten-year period

following

the date of

enactment of the Financial. Services Competitive Equity Act, a
qualified

thrift

lender

shall

also

include

any

insured

institution that ^a.s chartered prior to October 15* 1982, as a
savings bank under state law if the Corporation determines that
the insured institution does not decrease the percentage of its
assets invested In Investments described in this clause below
the percentage it held on such effective ciate^ a n 2 increases
.c
such percentage of its assets by an amount, at. least equal to
the following percentages of the difference between

65 per

centum and the percentage of its assets so invested on the date




- 2 that are not permissible

for a multiple savings and

loan

holding company.
In addition, this amendment provides that
institutions may not engage within
nonbanking

activities

that

the

their home

Federal

Savings

insured

states
and

in

Loan

Insurance Corporation determines, after notice, to be unsafe
and unsound for insured institutions*

A similar amendment is

proposed for subsidiary banks of bank holding companies.




Amendment to S. 2851 to Limit Activities
of Insured Institutions
Amend section 107 of S. 2851 by adding the following
new paragraph (h):
1
1

(h) Section 408 of the National Housing Act

(12

U.S.C. 1730a) is amended by adding the following new paragraph:
1
1

(o) Notwithstanding any other provision of law,

an insured institution and any subsidiary thereof shall not
engage in (1) any activity outside of the state in which the
institution is chartered unless the activity is permissible for
a savings and loan holding company under paragraph

(2) of

subsection (c) of this section or (2) any activity within the
state

in

which

the

institution

is

chartered

that

the

Corporation has determined, after notice and an opportunity for
the submission of written views, to be unsafe or unsound for
insured

institutions.

Nothing

in

this

subsection

shall

prohibit an insured institution from engaging in any activity
permitted by statute for a Federal savings and loan association
or Federal savings bank.
Explanation
S. 2851 prohibits a subsidiary bank of a bank holding
company from engaging outside of the bank 1 s home state in
impermissible

nonbanking

activities.

This

amendment

would

amend the Savings & Loan Holding Company Amendments of 1967 to
prohibit an FSLIC insured

thrift

institution

from

engaging

outside of the thrift's home state in nonbanking activities




Amendment to S. 2851 to Limit In-State Activities of

Amend section 104(g) by deleting the word

i9

and'8 before

the numeral (2) and by adding before the period at the end
thereof the following:
11

, and (3) a State chartered bank subsidiary of a bank

holding company many not engage in, or acquire the shares of a
company engaged in, any activity within the state where the
bank is chartered that the Board has determined, after notice
and opportunity for the submission of written views, to be
unsafe or unsound for banks"
Explanation
S. 2851 prohibits state chartered banks that are owned
by bank holding companies from engaging outside of the state in
which the bank is chartered in nonbanking activities that are
prohibited for bank holding companies under the Bank Holding
Company Act*

S. 2851 would, however, permit state banks to

engage in such prohibited nonbanking activities within the
authorizing state*

This amendment would allow state banks to

engage in nonbanking activities authorized by state law within
the state unless the activity is determined by the Board to be
unsafe or unsound for banks*




Amendment to S. 2851 Regarding
Mortgage-backed Securities
Amend

the first sentence of section 104(e)(3) of

S. 2851 by inserting after the words "promisory notes secured
by" the words "one-to-four family"•

Explanation
This amendment limits underwriting of mortgage-backed
securities to 1-4 family real estate mortgages.




Amendment to S, 2851 Regarding
Leasing Authority of National Banks
Strike section 111 of the bill.

Non-full payout leasing raises significant issues of
safety and soundness that have not been adequately evaluated.




Amendments to S* 2851 to Limit the Grandfather
Rights of FDIC Insured State Savings Banks
Amend the first sentence of section 104(i) as follows:
1
1

(f)

Notwithstanding any other provision of this

Act/ a savings bank, as defined in section 3(g) of the Federal
Deposit Insurance Act, which is chartered under state law, and
which is or becomes a subsidiary of a bank holding company may
engage, directly or through an affiliate, in any activity which
it was permitted to conduct as a state-chartered savings bank,
pursuant to express, incidental, or implied powers under state
statute or regulation or under judicial interpretation of state
law on June 27, 1984. . . ."

Explanation
The bill currently provides open-ended

grandfather

rights to state-chartered FDIC insured savings banks to engage
in any nonbanking activities that are currently authorized for
the bank

under

state law or that may

authorized for state savings banks.

in the future be

This amendment limits such

grandfather rights to those activities performed by the savings
bank on June 27, 1984.




Amendment to Require Federal Deposit Insurance
for Bank Holding Company Subsidiary Banks
Delete section 104(k) of S. 2851.

Explana t i on
Section 3(e) of the Bank Holding Company Act currently
provides that every bank that is a subsidiary of a bank holding
company shall become and remain an PDIC insured bank*

S. 2851

would amend this requirement to permit the bank to insure its
deposits under state law in lieu of federal deposit insurance.
This amendment would maintain the current requirement for FDIC
insurance for all subsidiary banks of bank holding companies.




Amendments to Grandfather Provision
in S. 2851 to Limit Demand Deposit Taking and Commercial
Lending by Grandfathered Nonbank Banks
Amend clause (ii) in the second and third sentences of
section 104(c)(2) to read as follows:
11

, such institution commences accepting demand

deposits or deposits that the depositor may withdraw by check
or similar means for payment to third parties and engages in
the business of making commercial loans,"

This amendment would prevent a grandfathered nonbank
bank that engages in the business of making commercial loans
from also accepting NOW accounts*




Amendments to Grandfather Provision in
S. 2851 to Limit Geographic Expansion of, and to Prevent
Joint Marketing Operations By, Grandfathered Nonbank Banks
Amend

section 104(c)(2),

to delete

the

"or" before

"(iii)" in the second and third sentences, and add in the second
and third sentences before the periods the following:
11

,

(iv) such

institution

increases

locations from which it conducted

the

number

of

its activities on June 27,

1984," or
1
1

(v)

such

institution

offers

or

markets

the

products or services of any affiliate engaged in activities not
permitted

for bank holding

companies under paragraph (8) of

subsection (c) of this section or the products and services of
the institution are offered to or marketed through any affiliate
engaged in activities not permitted for bank holding companies
under paragraph (8) of subsection (c) of this section"

Explanation
This amendment would prevent a grandfathered
bank from expanding geographically.
prevent

the grandfathered

together with affiliates
activities.

nonbank
engaged

nonbank

The amendment would also
bank

from being

in impermissible

operated
nonbanking

This joint marketing limitation covers the marketing

or offering of the nonbank bank's products and services through
such an affiliate or the offering or marketing of the affiliate's
products and services through the nonbank bank.




Amendment to S. 2851 to Limit
Trust Company Exception
Amend section 104(a)(l)(v) to read as follows:
1
1

(c) 'Bank1 means • .
(v) any institution that functions solely in

a

trust

or

fiduciary

capacity/

such

as

described

in

subsection (a) of the first section of the Act of September 28,
1962 (12 tKS.C. 92a(a)), provided t h a t —
(I) all or substantially all of the deposits of
such institution shall be in trust funds and received in a bona
fide trust capacity, as determined by the Board, and solely as
an incident to bona fide trust services;
(II) any deposits of the institution shall not be
offered or marketed by or through a company that controls the
institution or any affiliate of such company;
(III) the

institution

does

not offer

demand

deposits or deposits subject to withdrawal by check or any
other similar means;
(IV) the institution does not obtain from Federal
Reserve Banks services specified in section 11A of the Federal
Reserve Act and does not exercise discount

and

borrowing

privileges pursuant to section 19(b)(7) of the Federal Reserve
Act; and
(V) all or substantially all of the income of the
institution

is derived

from

trust,

custodial

or

related

fiduciary service fees and not from lending or investing of
deposits; • . .fl




-2-

Explanation
This amendment ensures that the proposed trust company
exemption from the bank definition is limited to institutions
that function as fiduciaries.

The amendment limits the trust

company exemption from the bank definition to institutions that
do not accept

checking

accounts, market deposits

through

affiliates, or make use of Federal Reserve services and that
derive all or substantially all of their income from fiduciary
activities*




ATTACHMENT III
STATEMENT ON INTERSTATE BANKING

The basic Federal branch banking law, the McFadden Act
of 1927, has not been amended in any substantive manner since
1933.
The law effectively prohibits national banks from
branching interstate by limiting each national bank to
branching only within its home state, subject within that state
to any branching restrictions imposed by that state on
state-chartered banks. The Douglas amendment to the Bank
Holding Company Act of 1956 prohibits interstate expansion by
means of a bank holding company acquiring banks in another
state unless such acquisitions are explicitly authorized by
that state*
In spite of the statutory McFadden and Douglas
prohibitions, de facto there has been a large and increasing
amount of interstate banking in recent years. Some of that has
taken place through avenues specifically permitted by law.
According to a study by the Federal Reserve Bank of
Atlanta, U.S. bank holding companies in 1982 had 202 loan
production offices and 143 internationally oriented Edge Act
Corporations operating outside the parent1s home state; foreign
banking organizations had another 254 banking offices outside
their home state. There are probably more today.
More
important are the variety of finance companies, mortgage
companies, industrial banks and other offices with at least
partial banking capabilities operating outside the holding
company* s home state and many more exist now.
Technological advances are also providing large
opportunities for banks to expand geographically without brick
and mortar offices. By joining ATM networks, banks in some
cases have been able to reach out to existing or new customers
over state lines.
Looking ahead, banking through home
computers would be difficult to confine within a state8 s
boundary. But even without exotic technology, the relative
speed and simplicity of communications and transportation today
makes it much easier, particularly on the deposit side, to
conduct banking at a distance. Large businesses routinely
"sweep" deposits into "concentration accounts" at selected
banks. The combinations of print and broadcast advertising,
800 number telephone lines, deposit brokerage* and efficient
clearing mechanisms mean that the day of rather insulated local
deposit markets are gone. On the loan side, nationwide credit
cards are available to customers throughout the country.




The substantial number of "nonbank bank" applications
by bank holding companies/ stretching the fabric of existing
law, is one indication of the strength and depth of some banks1
desires to operate over a wider geographic area. The pressures
toward interstate operations arise from a number of sources.
Competition from non-depository businesses that can and do
provide financial services — including money market accounts
and other bank-like services — through interstate networks is
strong and pervasive. Thrift institutions, which have no
statutory bar to interstate branching, offer interstate
facilities in a significant number of cases. Moreover, banks
in slower growing areas naturally want to participate in more
rapidly expanding regions. Florida alone, for instance, has
attracted about 20 percent of all nonbank bank applications by
bank holding companies.
A number of relatively large banks that nevertheless
rank well below the largest money center institutions in size
apparently feel, with some urgency, that a stronger competitive
position in national and international markets requires a
larger size than can reasonably be attained within the
boundaries of a singly state. Some of the largest banks,
conversely, urgently wish to attain a wider and more stable
base of "retail" deposits and to expand their consumer
lending. At the other end of the spectrum, there are small
banks concerned about their ability to compete effectively
without being able to combine with others in a natural market
area that may extend over state boundaries.
Resistance to interstate banking for a variety of
reasons — including a desire of many banks to continue as
independent institutions — clearly remains strong. But the
pressures for change are apparent in initiatives by a number to
states toward more interstate banking. The growing number of
regional interstate banking arrangements is the most important
reflection of that change in attitude. Today 14 states have
enacted laws permitting reciprocal entry by bank affiliates of
bank holding companies headquartered in states within a
designated region; 12 more states are actively considering such
arrangements. Four states allow entry from any other state,
three without and one with reciprocity.
These liberalized
approaches toward interstate banking over recent years suggest
a significant change in thinkinq since the McFadden act and the
Douglas amendment were enacted.±.1

L' Attached are a chart showing interstate banking regions
and a table listing the status of interstate banking
legislation in the 50 states and the District of Columbia.




-3Substantive Issues in Interstate Banking
The time has come to review and clarify national
policy toward interstate banking, recognizing the economic and
competitive pressures driving toward liberalization of present
restrictions, while also protecting the safety and efficiency
of the banking system, preventing undue concentration of
economic resources, and assuring benefits to the users of
banking services.
One continuing objective of public policy is to assure
competition in banking, as in other industries. Ordinarily, we
would not expect that competition would be promoted by
confining an industry to a singly geographic market or a single
state. Indeed, we rely on the ability of additional firms to
enter markets as a competitive force leading to the best
possible products at least cost. Moreover, existing anti-trust
law appears to provide considerable protection against local
markets becoming non-competitive as the result of entry of
larger organizations.
Available empirical studies do not suggest that large
states with large banks and statewide branching are
experiencing increasing concentration of local markets. The
presumption that restrictions on entry into particular markets
imply some loss of competitive vigor, unless overridden by
other considerations of public policy, suggests that some
liberalization of interstate banking is appropriate.
That
presumption had added force in an environment in which other
large financial service firms are able to operate nationwide,
exploiting what economies of scale in technology or marketing
may be available. In effect, those firms may now be in a
position to skim off profitable areas of business from banks
committed to providing a full range of banking services.
Historically, a counter-argument to interstate banking
has been a strong antipathy to concentration of economic power,
particularly in the banking system, and a desire to maintain
banking resources in significant measure under control of local
banks, knowledgeable about the needs and circumstances of
smaller businesses and individuals.
Experience in states with large banks and statewide
branching suggests that these are not questions of
"either-oro" Attachments I and II provide a brief analysis of
experience in two of our largest states, one of which has had
statewide branching for decades and the other of which lias
permitted statewide operations only since 1976. In both cases,
large numbers of relatively small independent banks remain. In
California, a rapidly growing state, new banks are being formed




-4In relatively large numbers; in New York, a state that is
growing more slowly, relatively few new banks have been formed,
but the number of small independent banks (i.e., under $100
million) has dropped only modestly since statewide branching
was permitted * In both states, the competitive environment
appears healthy, with the consumer and businessman able to
choose between some of the largest banking institutions in the
world and small locally oriented banks. Should banks be
permitted to expand interstate more freely, we would anticipate
similar patterns to prevail.
A rush to expand geographically could pose certain
risks -— temptations to pay exceptionally high prices and to
leverage capital, to spread management thin, and to enter into
new types of lending or operations where experience may be
limited*
These risks can be dealt with through normal
supervisory processes,, particularly in evaluating financial and
managerial factors with respect to applications.
In
particular, a banking organization planning sizable expansion
programs should be able to demonstrate its ability to maintain
fully adequate capital and liquidity positions, to avoid
excessive use of goodwill on its balance sheet, and to provide
capable management for acquired institutions. The risks —
actual and potential •— from expansion into new banking markets
are typically more identifiable, and often less, than those
posed by entry into new nonbanking activities where bank
management may "have little or no experience.
Conce.n_tr a ti on
Viewed from a national perspective, restrictions on
interstate banking have been effective in forestalling large
concentrations of domestic banking resources, at least by the
standards of other countries.
The 10 largest banking
organizations control only abut 20 percent of all domestic
banking assets, and the 100 largest only a little more than
half.
Presumably, concentration ratios would tend to rise
with interstate banking, quite significantly so if such
activity is unrestricted* At the same time, the California and
Blew York experience referred to earlier suggests the process
would stop very far short of the concentration of institutions
c o n o n in other countries, with thousands of independent
organizations remaining*
A variety of safeguards should be included In
legislation liberalising Interstate banking to encourage
continuing diversification of banking resources. Taken alone,
ariti-trust laws »-~ focusec on the market shares of competitors




in particular markets — do not appear fully responsive to that
need. Essentially, those laws as applied to banking make
little distinction between the overall size of organizations
competing in particular markets, but rather focus on the size
of their presence in a single market alone*
Consequently,
those laws might be consistent with considerably greater
concentration, measured on a national or regional basis^ than
would be desirable*
Two kinds of limitations might be taken to forestall
any substantial risk of excessive concentration.
The
approaches are not mutually exclusive and would be
complementary* Both would, at the margin, involve essentially
arbitrary judgments,; for they would envisage a simple
quantitative measure of relative size* But, by responding
directly and logically to the concerns about concentration*
they would provide a more coherent approach than the present
"system"1 of implicitly relying on an almost total prohibition
on interstate acquisition as an indirect means of controlling
concentration levels.
The first approach would envisage limitations of che
largest banking institutions acquiring other banks.
For
iristancs^ the v&ry largest holding companies in terms of
domestic baviking assets Cor depository institution assets) ™
aay the top twenty-five -- Slight be prohibited from merging
with each othero
In addition, banks could be prohibited front
obtaining through acquisition more than some fixed share of the
nationwide total of such assets, although de novo or relatively
small acquisitions in other states could foe permitted*
The second approach would permit, or even encourage,
states to set limitations on the proportion of banking assets
Cor depository institution assets) within their own borders
that could be acquired through acquisitions or mergers of
institutions of significant size*
Specifically, such
acquisitions could be denied if the resultant institution would
hold more than, for example,? 15 or 20 percent of a state's
banking assets, Any such rule should be nontii scrim, inatoxy
been
in-state and out~-of-state banking organizB.tions*
Of course,, : nlec: implement ing tliesa approaches ^'ould
•
:
have to be carefully drawn to avoid anomalous r^eulto, The
important point is t~h&t the ; i t , n c a.. stsx^-wid/B
n a J c c l r?d
aoncentrat ion Ii HitB be f u1J.y observad c
Exceptions to these limitations should be permitted
for failing institutions* Indeed, in .light of the remnininq
strains aviaent in some sectors of tfae thrift ana banking
industries5 the emergency arrangements tor faili.ng i:astitntions
in. tlie Garn~St G^rsain Act & boa id b^ extended, Thev should be




-6liberalized in two ways: by not requiring that an instituton
actually be "closed" to qualify for emergency treatment/ and by
reducing or eliminating the $500 million size cut-off in the
Act.
The Dual Banking System
Interstate banking, by its nature, has implications
for the dual banking system*
Indeed, it is difficult to
conceive of a system of interstate branching that would enable
state law and supervision to govern the operations of banks in
sister states. Consequently, interstate branching could well
lead to a massive expansion of the national banking system.
If interstate banking operations are instead generally
confined to separately incorporated and chartered components of
a holding company, particular states could maintain authority
over the in-state operations of the holding company. Moreover,
there would be opportunity for a greater degree of local
control. For those reasons, a requirement that interstate
acquisitions generally take the form of a holding company
affiliate appears to fit more naturally our banking traditions,
at least over a long transitional period to a fully developed
interstate banking environment.
A Possible Policy Approach
Various approaches toward interstate banking have been
proposed over the years, ranging from modest changes in
existing arrangements to nationwide branching. For instance,
possible transitional approaches well short of nationwide
banking include:




(1) Branching throughout metropolitan areas that
extend across state lines, of which there are 35 at
present.
(2)

Expansion into contiguous states.

(3) Expansion de novo or by acquisition, into any
metropolitan area above a minimum size.
(4) Encouragement of reciprocal arrangements among
states.
(5) Interstate banking limited to de novo operations
or small acquisitions (conversely, some have proposed
limiting or prohibiting small acquisitions in the
interest of maintaining local banks).
(6)

Regional arrangements.

-7Each of those approaches (and any others that could be
developed) has particular strengths and weaknesses; each could
be debated. However, much of the recent thinking in states,
and within the banking community, has focused largely on the
last of those options — regional arrangements. Consequently,
it would be useful to focus on that approach as a point of
departure.
An advantage of regional arrangements seen by many is
the opportunity for regional organizations to reach a size
necessary for an effective national or international presence,
and then to become more effective competitors of the largest
banking institutions in all phases of banking.
However, the approach suffers from some clear
weaknesses. The regions may be defined in a discriminatory
way, aimed at encouraging particular combinations of banks and
excluding others, without clear and objective rationale.
Specifically, some proposals appear to be driven by a desire to
exclude New York and California banks, or simply large money
center banks. By their nature, sizable regional arrangements
would permit combinations of banks long distances (and several
states) apart, without permitting even limited operations in
some contiguous states. Metropolitan areas might be left, in a
banking sense, bifurcated. Viewed as a permanent arrangement,
regional compacts would tend to Balkanize banking, with a
tendency toward regional concentrations.
Because of these potential weaknesses, a federal
framework is required for regional arrangements. For example,
such weaknesses can be substantially ameliorated if states
entering into such regional arrangements were also required
after relatively few years —- say three — to permit reciprocal
entry by banks in any state that has enacted a regional
arrangement or otherwise provides for entry of banks of any
other states.£/

2/ Regional arrangements are the subject of a constitutional
challenge that is now before the Supreme court. A federal
framework, such as suggested above, could be put in place if
the Supreme Court sustains regional arrangements or even if the
court were to find them unconstitutional on grounds of
violation of commerce or compact clause requirements. However,
if the court were to find that such arrangements violate the
equal protection clause, there would be a substantial question
whether such arrangements could be permitted even if sanctioned
by Federal law. See Exhibit C.




-8r
In this approach, any state, if it so chose^ could
continue entirely to "opt out" of full interstate banking*
But,, if it chose to enter into a regional arrangement, it would
also have to be prepared to consider those arrangements as a
transitional approach toward a broader arrangement encompassing
all states willing to provide reciprocal privileges•
As suggested above, all interstate acquisitions would
be subject to federal limitations designed to protect against
undue concentration, and states would be able to limit the
proportion of their banking assets acquired by a single banking
organization* In the first stages at least, these interstate
operations should be undertaken by means of separately
incorporated units of a holding company rather than by direct
branches.
The number of states that ultimately might wish to
enter into regional (or nationwide) arrangements within this
broad framework must, for the time being, remain unknown.
Consequently, the possibility would exist that little progress
would be made toward interstate banking, even for limited
operations within metropolitan areas. Yet, the status quo is
hardly satisfactory, and the legitimate pressures toward
interstate operations that have impelled "nonbank banks" would
continue to seek "unnatural" channels. Consequently, with due
notice, the Congress should authorize interstate branching
within metropolitan areas and for neighboring areas of
contiguous states.
Conclusion
The need for Congressional action is urgent to guide
the orderly evolution of the banking system and to reaffirm
certain basic principles that have guided the banking and
financial systems, adapting them to present circumstances.
Markets will continue to respond and change will take place.
The only question is whether that change will take place in a
constructive framework of rules established by the Congress
after a careful weighing and balancing of the vital public
interests that are now before you for review. Taking account
of both market forces and recent state initiatives, a
comprehensive approach now requires a resolution of the issues
involved in interstate expansion.







New
England

End Commerce! Bank Deposits
ft

Bonk of Bos.cn

No L.eg.slation Actively Pendmg

NOTES
NEW ENGLAND REGION
Rhode Island's law provides for a "national trigger" under
which the regional requirement expires on July 1, 1986, and
thereafter acquisitions will be permitted from any state with a
reciprocal statute.
SOUTHEAST REGION
The southeastern states that have enacted regional-reciprocal
laws differ to some extent in their definitions of the region.
For example, the Georgia statute excludes Maryland, West
Virginia and Arkansas, while the North Carolina, South
Carolina, Florida and Virgina statutes include these states,
MIDCENTRAL REGION
Kentucky has a law whicTi allows interstate acquisitions with
its contiguous states with reciprocal agreements. Kentucky has
been included and proposed for inclusion in the Southeast
region and portions of the Midcentral region. The Kentucky
statute contains a national trigger provision under which
acquisitions from any state will be permitted on a reciprocal
basis after July 15, 1986.
Maryland, Tennessee, Virginia, West Virginia and Washington,
D.C. have been included or proposed for inclusion in both the
Southeast and portions of the Midcentral regions.
MIDWESTERN REGION
Indiana and Illinois have been proposed for inclusion
portions of both the Midcentral and Midwest regions.

in

The South Dakota law permits any out-of-state bank holding
company to acquire one existing South Dakota bank, but
thereafter limits the bank's ability to open additional
branches.
WESTERN REGION
The western states that have enacted regional-reciprocal laws
differ to some extent in their definitions of the western
region. For example, both the Utah and Idaho statutes exclude
California, while the Oregon statute includes this state.
The proposed Nevada statute contains
provision effective January 1, 1989.

a national

trigger

Texas has not been proposed for inclusion in any of the
regions, but is considering legislation to establish a 10 state
region, including certain states in the Western, Southeast, and
Midwest regions.
The Washington legislature passed
reciprocal law on April 19, 1985,




its

proposed

national

INTERSTATE BANKING LEGISIATION BY STATE
(as of May 1, 1985)

STATE

, Alabama

STATUS OF
LEGISLATION

TYPE

REGION (if any)

None

Alaska

Effective

National

All States

Arizona

Effective
October 1, 1986

National

All States

Arkansas

Defeated

RegionalReciprocal

SOUTHEAST (14 States & DC)
AL, FL, GA, LA, MD, MS, MO,
NC, OK, SC, TN, TX, VA, WV, DC

California

Proposed

NationalReciprocal

Colorado

None

Connecticut

Effective

Delaware

None

District of
Columbia

RegionalReciprocal

NEW ENGLAND (5 States)
ME, m, NH, RI, VT

Proposed

RegionalReciprocal

SOUTHEAST (11 States)
AL, FL, GA, LA, MD, MS,
NC, SC, TN, VA, W

Flor ida

Effective
July 1, 1985

RegionalReciprocal

SOUTHEAST (11 States & DC)
AL, AR, GA, LA, MD, MS, NC,
SC, TN, VA, W , DC

Georgia

Effective
July 1, 1985

RegionalReciprocal

SOUTHEAST (9 States)
AL, FL, KY, LA, MS, NC,
SC, TO, VA

Hawaii

None

Idaho

Effective
July 1, 1985

RegionalReciprocal

WEST (6 States)
Wk, OR, MT, W, UT, WY




-2-

STATE

STATUS OF
LEGISLATION

Illinois

Proposed

RegionalReciprocal

MIDWEST/MIDCENTRAL (6 States)
IN, IA, KY, MI, MO, WI

Indiana

Awaiting Governor's
signature. Effective
date January 1, 1986

RegionalReciprocal

MIDCENTRAL (4 States)
IL, KY, MI, CH

Iowa

None

Kansas

None

Kentucky

Effective

RegionalReciprocal
(National
trigger after
2 years
(1987))

MIDCENTRAL (7 States):
MO, IL, IN, CH, TN, VA,

TYPE

REGION (if any)

W

Louisiana

None

Maine

Effective

Open Entry

All States

Maryland

Awaiting Governor's
signature. Effective
date July 1, 1985

RegionalReciprocal

SOQTHEAST/MIDCENTRAL
(contiguous only until 1987;
14 states & DC thereafter)
AL, AR, DE, FL, GA, KY, LA,
MS, NC, PA, SC, TN, VA, W , E

Massachusetts

Effective

RegionalReciprocal

NEW ENGLAND (5 States)
CT, ME, NH, RI, VT

Michigan

Proposed

RegionalReciprocal
(National
trigger after
2 years)

MIDWEST (5 States)
IL, IN, MN, CH, WI

Minnesota

Proposed

RegionalReciprocal

MIDWEST (4 States)
IA, ND, SD, WI

Mississippi

None

Missouri

Proposed

RegionalReciprocal

MIDWEST-SOUTH
(8 States)
AR, IL, IA, KS,
KY, NE, OK, TN




-3-

STATE

STATUS OF
LEGISLATION

Montana

None

Nebraska

None

Nevada

Proposed

RegionalReciprocal
(National
tr igger
1/1/89)

New Hampshire

Defeated

NationalReciprocal

New Jersey

None

New Mexico

Defeated

RegionalReciprocal

SOUTHWEST (5 States)
AZ, CO, OK, TX, UT

New York

Effective

NationalReciprocal

All States

North Carolina

Effective
July 1, 1985

RegionalReciprocal

States & DC)
AL, AR, FL, GA, KY, LA, MD,
MS, SC, TN, VA, W , DC

North Dakota

None

Ohio

Proposed

RegionalReciprocal
(National
trigger after
4 years)

MIDCENTRAIi/MIDWEST
(13 States & DC

Oklahoma

Effective
July 1, 1986

Pennsylvania

Effective

WEST (11 States)
AK, AZ, CO, HI, "ID, MFf NM
OR, UT, m, WY

for
DE,
MO,
WE,

2 years)
IL, IN, KY, MD, ME,
NJf PA, TN, VA, W ,
DC

None

Phcde Island

REGION (if any)

None

Oregon

TYPE




RegionalReciprocal

WBOT_(8_ States)
AK, AZ, CA, HI, ID, W, UT,

RegionalReciprocal
(National
tr igger
6/30/86)

NEW
CT, ME, m , NH, VT

-4STATUS OF
LEGISLATION

TYPE

South Carolina

Effective
July 1, 1986

RegionalReciprocal

SOUTHEAST (12 States & DC)
AL, AR, FL, GA, KY, LA, MD,
MS, 1C, TN, VA, W , DC

South Dakota

Effective

National!/

All States

Tennessee

Effective
July 1, 1985

RegionalReciprocal

SOUTHEAST (13 States)
AL, AR, FL, GA, IN, KY,
LA, MS, MO, NC, SC, VA, WV

Texas

Proposed

RegionalReciprocal

SOUTHWEST (10 States)
AZ, AR, CO, KS, LA,
MS, MD, NM, OK, WY

Utah

Effective

RegionalReciprocal

WEST (11 States)
AK, WA, OR, ID, WY, MT
CO, NM, AZ, W, HI

Vermont

None

Virginia

Effective
July 1, 1985

RegionalReciprocal

SOUTHEAST (12 States & DC)
AL, AR, FL, GA, KY, LA,
MD, MS, NC, SC, TN, WV, DC

Washington

Awaiting Governor's
Nationalsignature, Effective Reciprocal
date July 1, 1987

West Virginia

None

Wisconsin

Proposed

Wyoming

None

STATE

RegionalReciprocal

REGION (if any)

All States

MIDWEST (7 States)
IL, IN, IA, MI, MN, MO, OH

II A South Dakota bank that is acquired by an out-of-state bank holding
company may not thereafter open additional branches by merger, consolidation
or otherwise, and the out-of-state holding company may not acquire any
additional existing banks in South Dakota.




Exhibit A

SMALL BANKS IN THE CALIFORNIA BRANCH BANKING ENVIRONMENT

Proposals to reduce barriers to bank geographic expansion, whether
on a statewide basis or an interstate basis, raise questions relative to the
future of smaller banking institutions.
with the statewide firms?

Specifically, can small banks compete

Will there be incentives for the formation of new

banks in markets characterized by a large percentage of total assets being
held by a few statewide firms?
The data suggest that, while the large banks in a statewide
banking state control a large percentage of state banking assets, this
does not mean that smaller banks cannot compete in the state's major banking
markets.

The California experience, developed over several decades of

statewide branch banking, illustrates the possibilities for small banks.
Table 1 presents the size distribution of California banks at year-end 1984.
As the table indicates, 332 of 435 banks have assets of less than $100 million,
and only six institutions have over $5 billion of assets.

Table 1
Number and Asset Size Distribution of California Banks
Asset Size

Less than $10 million
$10 million to $25 million
$25 million to $50 million
$50 million to $100 million
$100 million to $250 million
$250 million to $500 million
$500 million to $1 billion
$1 billion to $5 billion
Over $5 billion




Number of
Banks

17
100
121
94
58
21
7
11
6
435

Percentage of Total State
Banking Assets Held by Firms
in Each Size Class
__
0.05
0.78
1.93
3.00
3.90
3.35
2.44
10.59
73.96
100.00

A - 2%
In spite of the dominant asset position of the largest banks,
there appears to have been adequate incentives for the formation of new
banks in California.

Table 2 presents the rate of bank formation in

California over the years 1970 through 1983,
banks were chartered in California.

In these years, 355 new

In 1983, California accounted for

16.9 percent of all new banks in the United States.

Thus, the existance

of statewide branch banking does not appear to have deterred investors in
new banks.

Table 2
Bank Chartering in California, 1970 - 1983
Year

Number of New Banks

_

_ _

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983

6
7
17
24
18
17
13
14
13
24
46
42
53
61

New Bank Charters in
California as a Percentage
oj M l New_U.S. Bank Charters
3.4
3.6
7.3
7.2
5.0
6.9
8.1
9.1
8.8
11.8
22.4
21*1
16.8
16.9

These data suggest that, at least in California, the existence of
large statewide banks has not led to the demise of small banks.
the incentives for new bank formation have been maintained.




In addition,

Exhibit B

SMALL BANKS IN THE NEW YORK BRANCH BANKING ENVIRONMENT
The State of New York has had a shorter history of statewide
banking than California, and the comparison may be of interest in
evaluating the existence of small banks in a state containing many of the
nation's largest banking organizations. New York adopted statewide banking
in 1976, and therefore has had less than a decade of experience, as compared
to the long history of statewide banking in California.
Table 1 presents the asset size distribution for banks in New York
as of the end of 1984. As in California, the largest banks hold the overwhelming percentage of total statewide banking assets. Yet, as in California,
there are a significant number of smaller institutions; 85 of the 149 banks,
or 57 percent of all banks, have assets of less than $100 million.

Table 1
Number and Asset Size Distribution of New York Banks
Number of
Banks

Asset Size

Less than $10 million
$10 million to $25 million
$25 million to $50 million
$50 million to $100 million
$100 million to $250 million
$250 million to $500 million
$500 million to $1 billion
$1 billion to $5 billion
Over $5 billion

11
17
28
29
23
9
7
12
13
149

Percentage of Total State
Banking Assets Held by Firms
in Each Size Class
0.02
0.09
0.29
0.60
1.09
0.95
1.28
6.20
89.46
100.00

Table 2 presents the record of new bank charters in New York for the
period 1970 - 1983. Although the bank formation rate in New York was substantially
lower than in California, the difference can probably be explained by the




B - 2.
differences in growth rates between the two states.

Like the California

Table 2
Bank Chartering in New York, 1970 - 1983
Year

Number of New Banks

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983

2
4
4
3
6
4
1
5
2
1
2
2
1
3

New Bank Charters in
New York as a Percentage
of All New U.S. Bank Charters
1.1
2.1
1.7
0.9
1.7
1.6
0.6
3.3
1.4
0.5
1.0
1.0
0.3
0.8

experience, however, the New York data do suggest that small banks survive
the expansion of branch banking and that new banks will be formed regardless
of the degree of statewide dominance of the largest organizations.




EXHIBIT C
Litigation Involving Regional
Reciprocal Statutes

The Board has issued seven orders approving interstate
acquisitions of banks by bank holding companies pursuant to
regional

interstate banking

statutes.

Six of

the

orders

involve New England acquisitions pursuant to statutes enacted
by Connecticut, Massachusetts and Rhode Island—' and one

1/
1.

Bank of New England Corporation/CBT Corporation, 70 Fed.
Res. Bull. 374 (March 26, 1984), approving the merger of
the fourth largest Massachusetts bank holding company and
the largest bank holding company in Connecticut.

2.

Hartford National Corporation/Arltru Bancorp, 70 Fed. Res.
Bull. 353 (March 26, 1984), approving the acquisition by
the second largest Connecticut bank holding company of the
eighth largest bank holding company in Massachusetts.

3.

Bank of Boston Corporation/Colonial Bancorp, 70 Fed. Res.
Bull. 524 (May 18, 1984), approving the acquisition by the
largest bank holding company in New England of the fourth
largest bank holding company in Connecticut.

4.

Bank of Boston Corporation/RIHT Financial Corporation, 70
Fed. Res. Bull. 737 (Aug. 20, 1984), approving Bank of
Boston's acquisition of the second largest bank holding
company in Rhode Island.

5.

Fleet Financial Group, Inc., 70 Fed. Res. Bull. 834
(October 4, 19&4), approving the acquisition by the largest
bank holding company in Rhode Island of o[e novo banks in
Boston and Hartford.

6.

Hartford National Corporation, 71 Fed. Res. Bull. 43
(November 19, 1984), approving the acquisition by the
second largest bank holding company in Connecticut of a de
novo bank in Providence.




C-2
order involves the southeast region, the merger of Florida and
Georgia bank holding companies.—
Each of the applications for Board approval to acquire
a bank across state lines pursuant to regional

interstate

statutes was protested before the Board—' on the basis that
the regional interstate statutes violate the Commerce, Compact
and

Equal

Protection

Constitution*

Clauses

of

the

United

States

The Board addressed each of these issues and

made detailed findings in a lengthy Appendix to its first two
AI

approval orders involving regional interstate statutes.—7
With respect to the Commerce Clause issue, the Board
determined that absent the authorization of Congress in the
Douglas Amendment of the Bank Holding Company Act, 12 U.S.C.
1842(d), the regional interstate statutes impose a burden of
the type found by the courts to violate the Commerce Clause.
The Board then considered the authorization by Congress in the
Douglas Amendment and found that the Douglas Amendment does not
appear on its face to show an intent by Congress to authorize

—'
SunTrust Banks, Inc./SunBanks, Inc,/Trust Company of
Georgia, 71 Fed. Res. Bull. 176 (January 8, 1985), approving
the merger of second largest Florida bank holding company and
the third largest bank holding company in Georgia.
Jy
Citicorp, New York, New York, protested each application,
and it has sought judicial review of each of the Board's
approval orders. Northeast Bancorp, Stamford, Connecticut,
challenged the first two Board orders.
iy

See the first two cases listed in note 1.




C-3
discriminatory restrictions of the type involved in regional
interstate

arrangements

and

legislative history offered

that

the

provision's

little guidance.

scant

Despite

its

doubts about the authorization of discriminatory state action
in the Douglas Amendment, the Board decided it should hold
state

statutes

unconstitutional

authorizing

interstate

banking

arrangements

only upon clear and unequivocal evidence.

Applying this test and based upon judicial guidance contained
in IowaIndependent Bankers Association v. Board of Governors,
511 F.2d 1288 (D.C. Cir. 1975), the Board concluded that "while
the issue is not free from doubt, there is no clear and
unequivocal basis for a determination that [the Massachusetts
and Connecticut statutes] are inconsistent with the Commerce
Clause. . . . "

Bank of New England Corporation, 70 Fed. Res.

Bull. 374, 377 (1984)? Hartford National Corporation, 70 Fed.
Res. Bull. 353, 354 (1984).
The Board also found there was no basis to hold that
the regional

interstate

statutes clearly and

violate the Compact Clause.

unequivocally

The Board applied the standard

ennunciated by the Supreme Court in United States Steel Corp.
v. Multistate Tax Commission, 434 U.S. 452, 470 (1978), that an
agreement among the states does not establish a compact in
violation of the Compact Clause unless it enhances state power
at the expense of federal supremacy.

The Board read the

Douglas Amendment as conferring on the states authority to
regulate entry of out-of-state bank holding companies without




C-4
impinging on the federal interest in such regulation as that
concept has been articulated

in the Supreme Court's Compact

Clause cases.
Finally, the Board concluded the regional interstate
statutes do not clearly and unequivocally violate the Equal
Protection Clause.

Under the traditional case law of the

Supreme Court applicable at the time of the Board's decision,
which upheld state economic legislation if it was rationally
related to a legitimate state purpose, the Board found regional
interstate statutes to be rationally related to legitimate
state purposes in establishing a banking system responsive to
local and regional needs, including responsiveness to local
credit needs, avoiding undue concentration of banking resources
and providing an opportunity for an experiment with limited
interstate banking.
Each

of

the

Board's

approval

orders

has

been

challenged in the United States Court of Appeals for the Second
Circuit.

The Court of Appeals has stayed consummation of the

interstate acquisitions and mergers on two occasions —

to

allow the Court of Appeals to hear the case and, even after the
Court

of

Appeals

rendered

its

decision

upholding

the

Connecticut and Massachusetts statutes as constitutional, to
permit Supreme Court review.

As a consequence of these stays

by the Court of Appeals none of the interstate transactions
approved in the Board's seven orders, including the d<e novo
acquisitions, has been consummated.




C-5
The

decision

of

the

Court

of

Appeals,—

filed

August 1, 1984, upheld the constitutionality of the Connecticut
and Massachusetts regional interstate statutes and affirmed the
Board1s approval orders•
Amendment

The Court

found that the Douglas

constituted a renunciation of federal interest in

regulating the interstate acquisition of banks by bank holding
companies.

In deciding that the states have the authority to

lift selectively the ban on interstate acquisitions of banks
imposed by Congress in the Douglas Amendment

and thereby to

create interstate banking regions, the Court noted that nothing
in the language or legislative history of the Douglas Amendment
supports the contention that an individual state must permit
acquisitions by all out-of-state bank holding companies if the
state permits acquisitions by any.
The Supreme Court was requested to review the decision
of the Court of Appeals, and in January 1985 the Supreme Court
6/
agreed to hear the case.—
The State of New York, New York
State Bankers Association and both United States Senators and
certain members of the House of Representatives from New York
filed briefs

with

the Court

statutes as unconstitutional.

opposing

regional

interstate

The State of Massachusetts

1L' Northeast Bancorp, Inc. v. Board of Governors of the
Federal Reserve System, 73o~F. 2d. 203 (2d Cir. 1984).
fj
Northeast Bancorp, Inc. v. Board of Governors of the
Federal Reserve System, No. 84-363 (argued April 15, 1985).




C-6.
joined with the bank holding companies of Massachusetts and
Connecticut that were parties to the challenged acquisitions in
filing briefs in support of the regional statutes.

The case

was argued before the Supreme Court on April 15, 1985.
The issues originally placed before the Court involved
the Commerce Clause and Compact Clause of the Constitution, and
centered, as they had before the Board

and the Court of

Appeals, on an interpretation of the Douglas Amendment
whether

that

Amendment

provided

an

"unmistakably

and

clear11—'

authorization by Congress to permit the states to discriminate
and burden commerce through regional interstate statutes.
The

Supreme

Court

decision,

with

four

justices

dissenting, on March 26, 1985, in the case of Metropolitan Life
Ins. Co. v. Ward, No. 83-1274, prompted the petitioning parties
to raise an argument under the Equal Protection Clause not
originally raised before the Supreme Court although, as noted
above,

it was raised before

the Board.

The Metropolitan

decision held that state legislation that taxes out-of-state
insurance companies at a higher rate than in-state companies in
order

to

promote

in-state

business

at

the

expense

of

out-of-state competitors was unconstitutionally

Z'
South-Central Timber Development v. Wunnicke 104
S.Ct. 2237, 2242 (1984) — requiring that federal legislation
authorizing a departure from normally applicable Commerce
Clause standards must be "unmistakably clear" —• was decided
after the Board issued its first interstate order but employing
the standard used by the Board.




C-7
discriminatory.
advance

The Court held

interests

rationally

that this statute did not

related

to

legitimate

purposes under the Equal Protection Clause.

state

This case thus

raises a question as to whether regional interstate statutes
which apply different rules to different groups of out-of-state
banks, depending on geographic

location, violate the Equal

Protection Clause.
A decision by the Supreme Court that the regional
statutes are unconstitutional on Commerce Clause or Compact
Clause grounds could be remedied by an amendment to the Bank
Holding Company Act showing the intent of Congress to permit
regional

interstate

compacts,

since

the Congress has

the

authority to sanction by federal statute state laws burdening
commerce or creating a compact.

Congress does not appear to

have

violations

the

authority

Protection

Clause

to sanction
should

the

Court

decide

of

the

that

Equal

regional

statutes are unconstitutional on that basis.
The past practice of the Court

indicates

that a

decision is likely to be issued in June or July, 1985.




ATTACHMENT IV
STATEMENT ON DEFINITION OF BANK

Public policy has long recognized that commercial
banks perform a unique and critical role in the economy and the
financial system. They are operators of the payments system;
they are custodians of the bulk of liquid savings; they are the
principal suppliers of short-term credit; and they are the
critical link between monetary policy and the economy.
Moreover, the fortunes of individual institutions are so
intertwined that instability of one may infect another. In
recognition of these circumstances? a federal safety net —•
specifically the Federal Reserve discount window and federal
deposit insurance — has long been provided to help protect the
system. Individual banks are subject to a system of regulation
and supervision to help assure their safety and soundness.
Integral to that approach, the Bank Holding Company
Act allows ownership of a bank by another company only if that
company engages in activities that "are closely related to
banking and a proper incident thereto.11
That provision is
designed to enforce a basic separation of banking and commerce,
and thus limit conflicts of interest and avoid undue
concentration of resources. The law also provides for some
supervision and inspection of the holding company as a whole,
recognizing that, in practice, the fortunes of one enterprise
within a holding company cannot be wholly separated from those
of its affiliates. The provisions of the Bank Holding Company
Act also provide restrictions on interstate banking by a
holding company, paralleling the restrictions on interstate
branching in the McFadden Act.
The basic concerns about the separation of commerce
and banking remain valid, and should be a point of departure
today in considering the "nonbank bank" issue. The definition
of a bank is critical to a policy that sets out to separate
banking and commerce and to enforce restrictions on interstate
banking. The Bank Holding Company Act defines a bank as an
institution that both accepts demand deposits and makes
commercial loans. That definition was designed to exclude
savings and industrial banks (which at the time had little or
no demand deposits or other transactions accounts or commercial
lending authority) and limited-purpose trust companies.
While thrift institutions today increasingly do
commercial lending and can accept transaction accounts of
individuals, FSLIC-insured institutions remain exempt under the
terms of the Garn-St Germain Act passed in 1982. Moreover, as




-2other forms of transactions accounts have developed with the
basic characteristic of demand deposits, institutions with a
bank charter can also take all kinds of deposits from the
public (including under court rulings NOW accounts) other than
demand deposits and make commercial loans without coming under
the restrictions of the Bank Holding Company Act* These are
the so-called "nonbank banks/ 1 for which there have been
hundreds of applications.
Specifically, one form of "nonbank bank" may be owned
by any company — a steel company, a retailer, a securities
firm, an insurance company, or a real estate developer. The
parent company is not subject to any of the limitations of the
Bank Holding Company Act designed to limit risk or conflicts of
interest and to avoid unfair competition or excessive
concentration of economic power. Thus, in its present guise,
the "nonbank bank" undermines the basic separation of banking
and commerce — a concept with deep roots in both English and
American traditions.
That seems to be the fundamental issue at stake in
closing the "nonbank bank" loophole. By permitting commercial
companies to provide through subsidiaries almost all the same
functions as full service banks, and to obtain access to the
payments system, the discount window, and deposit insurance,
both the principle and the practical reality of the present
restrictions of the Bank Holding Company Act will be seriously
undermined over time. The competitive position of those banks
still subject to the Act will inevitably be damaged,
potentially weakening the system as a whole.
The "nonbank bank" is also, and today more commonly, a
device by which a bank holding company, or a commercial firm,
can escape from the restrictions on interstate banking
encompassed in the Douglas Amendment to the Bank Holding
Company Act. In fact, interstate banking is a reality in many
areas through Edge Act subsidiaries, loan production offices,
finance company and mortgage banking affiliates, credit card
operations, ATM networks, and otherwise. The nonbank bank
offers the added avenue of on~site offices for a full range of
consumer business or commercial lending combined with deposit
taking. Although some liberalization of current restrictions
is justified, that question should be approached on its own
merits rather than by permitting interstate banking through an
unintended "back door" device, with the inefficiencies and
inequities that involves.
There is a broad consensus that it is important to
preserve the basic policies of the Bank Holding Company Act and
that, accordingly, it is essential to close the "nonbank bank"




-3loophole as part of any legislative approach toward banking.
Basically satisfactory legislative provisions to achieve that
were contained in separate bills last year* One was reported
by the House banking committee and another adopted by the full
Senate. While detailed differences in approach were not fully
resolved, it appeared that it was other provisions of proposed
banking legislation, rather than basic disagreements on the
"nonbank bank" question that stymied enactment.
H.R. 20 basically follows the approach of this
consensus.
It broadly applies the provisions of the Bank
Holding Company Act to all FDIC-insured commercial banks
whatever their particular mix of business. In addition, those
uninsured institutions that offer transaction accounts and make
commercial loans would continue to be covered. This approach
is broadly satisfactory so far as it goes, as would be the
similar provisions of H.R. 15.
These bills would bring so-called consumer banks
clearly within the scope of the provisions of the Bank Holding
Company Act. The suggestion has been made by others that banks
primarily aimed at serving the consumer might be exempted from
the general principle of the separation of banking and commerce
and from any restrictions applicable to ordinary banks on
interstate banking.
However beguilingly presented as a "family bank"
proposal, such an initiative is misguided. The great bulk of
the number of existing banks and other depository institutions
are already "family" or "small business" oriented. There are
almost 20,000 banks and thrifts in this country, nearly all
actively competing for consumer business. Many of them do
little commercial lending; for instance, almost 20 percent of
commercial banks have 5 percent or less of their assets in
loans to businesses, and nearly half have less than 20 percent
of assets in such loans.
There is no justification for permitting commercial,
industrial or securities firms to compete with these
institutions for insured deposits and other banking services
under different ground rules as to ownership. The effect could
only be to undermine the public policy objectives incorporated
in the Bank Holding Company Act generally, and there would be
the appearance and reality of unfair competition with banks
subject to the Act.
Do we really want, for example, a retail business to
be able to gather deposits under the protection of federal
insurance and to use those deposits to fund a credit card they
sponsor more cheaply than retailing competitors? Do we want to




-4bless interstate consumer banking simply because there is a
nonbank owner? Do we want to encourage joint marketing efforts
and "tie-ins," implicit or explicit?
If we are not sensitive to these concerns, then what
is the justification for the present restrictions in the Bank
Holding Company Act?
Some of the "family bank" concepts propose a kind of
sugar coating in the form of higher capitalization, "life-line"
banking requirements, and rules requiring prompt deposit
availability.
If these are indeed valid objectives of
legislation — and no justment is made on that point now — the
legislation should apply to all depository institutions and not
to just a special few.
In other respects, the coverage of H.R. 20 must be
broadened. As drafted, H.R. 20 has no provision with respect
to the treatment of thrift institutions — savings banks and
savings and loans.
For some federally insured thrifts — namely, those
owned by multiple savings and loan holding companies — no
legislative action appears required since their holding
companies would remain subject to the Savings and Loan Holding
Company Act, which has restrictions similar to those of the
Bank Holding Company Act*
However, others —
including
PDIC-insured savings banks and privately insured thrifts —
would be subject to neither Act, and unitary S&L f s may engage
in substantial nonresidential lending activities without any
limitations on the commercial or industrial activities of their
corporate owners. Left unattended, the effect would plainly be
to deflect the energies now reflected in "nonbank banking" into
banking in the guise of thrift institutions —
"nonthrift
thrifts."
In recent years, powers available to thrifts have
become much more like those available to banks, and indeed the
range of thrift powers today, particularly those of
state-chartered institution, often exceeds that of banks.
Paralleling that development, there has also been increasingly
clear recognition of the need to adopt rules to assure
reasonably comparable regulatory treatment.
Considerations of competitive equity alone dictate
that the privileges of, and restrictions on, banks and thrifts
be brought into a more coherent relationship. But it is not
just a matter of competitive equity. Restrictions on powers of
bank holding companies and on "nonbank banks" will inevitably
be undercut, and rapidly, to the extent thrift institutions




-5with banking powers can simply substitute as a vehicle for
undertaking a wide range of banking services, violating the
basic separation of banking and commerce.
Difficult questions are posed by firms that already
have operations on both sides of the line between commerce and
"thrift banking." A number of industrial or commercial firms
own thrifts, and operate those thrifts as separate and distinct
entities without significant problems arising.
Those
combinations might logically be permitted to continue on their
present basis. However, in the environment we now face, these
questions need to be approached with an eye toward the future,
and a firm policy established with respect to which new
combinations are acceptable and which are not.
To deal with this problem, only those thrifts that
have a high percentage of their assets in home mortgages should
be exempt from the same rules as to ownership applicable to
banks and multiple S&L holding companies. Accordingly, present
law should be strengthened to require that such a "qualified"
thrift institution have at least 65 percent of its assets in
residential mortgages or housing-related investments.
There is no sound rationale for including residential
mortgage originations and sales in such a calculation.
Commercial banks, mortgage banks, and others are all active
mortgage originators. The distinguishing characteristic of an
S&L and many savings banks historically —
and the
characteristic that historically has justified special federal
support — was that they devoted relatively large portions of
their own resources to support housing.
A substantial commitment to investment in housing
should continue to be the test for exemption from certain
policies embodied in the Bank Holding Company Act and the
Savings and Loan Holding Company Act for multiple S&L holding
companies. Furthermore, any holdings of liquidity included in
a thrift test should be confined to amounts legally required.
A further step is necessary to limit conflicts of
interest and tie-ins when a qualified thrift has a commercial
owner. Specifically, joint marketing of services and products
should be prohibited.
"Nonthrift thrifts" need not be brought under the Bank
Holding Company Act administered by the Federal Reserve.
Rather, institutions that have essentially the same
characteristics as commercial banks should have broadly
parallel restrictions on combinations with commercial firms,
and those restrictions should be administered by the




-6appropriate regulator —
for savings and loans and federal
savings banks, the Federal Home Loan Bank Board* Moreover,
about three-guarters of all savings and loans would meet this
proposed thrift test and thus would not be restricted as to
commercial ownership.
H.R. 20 does not prohibit an affiliation of thrift
institutions and nonmember banks with securities firms. That
existing loophole in the Glass-Steagall Act should be closed in
the interest of competitive equity and the purposes of the
Glass-Steagall Act* Such a provision has been recommended by
the Federal Home Loan Bank Board with respect to thrifts* In
all these areas, appropriate transition periods should be
provided and other detailed questions need to be resolved*
Finally, the Chairmen of the Senate and House Banking
Committees have strongly supported July 1, 1983, as the
appropriate date for grandfathering nonbank banks. Even before
that date, institutions were well aware that the nonbank bank
loophole was a matter of policy and Congressional concern.
H.R. 20 would grandfather about 24 FDIC-insured nonbank banks;
most of these are small in asset size, with at least 10
essentially engaged in trust activities and six or seven in
credit card operations. Given this situation, grandfathering
as of the July 1, 1983, subject to appropriate conditions to
assure that their grandfather status is not abused by expansion
geographically or otherwise, would not be inconsistent with the
objectives of the Act.
Should the grandfather date be moved toward the
current date, an increasing number of insurance, securities,
and retail firms that were fully on notice about the likelihood
of federal legislation would be permitted to retain bank
operations.
Few of these institutions have yet made
substantial investments, and the larger number of charter
rights that would be involved would increasingly impair the
objectives sought by H.R. 20.
A Federal District Court in Florida has enjoined the
Comptroller from issuing final nonbank bank charters because it
found, as a matter of law, that the National Banking Act does
not permit the Comptroller to issue a charter which does not
provide for the exercise of full National banking powers. As a
result of that decision, final National bank charters for new
nonbank banks are not currently possible, and the Federal
Reserve Board has suspended processing such applications by
bank holding companies. However, state-chartered nonmember
"nonbank banks" can still be created. While final disposition
of the legal issues involved for the National banks may take
some time, any reversal of the District Court opinion will




-7quickly touch off a flood of new National nonbank banks*
Consequently, the need for clear and effective action to deal
with the nonbank bank questions continues to rest with the
Congress*