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L.C'D tN PfCOR.OS
JUI~ 1 9 \IMi ' . <.":t.
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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
befor~
the
Committee on Banking, Housing and Urban Affairs
United States Senate
March 27, 1984'
SECTlO,~.
·"'°'"-·
•i'
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' ·~ ~ . 'J;"''
111,
I , ajn. pleased to come before you as
one of
the
conclu"ding witnesses in what has been a thorough and searching
examinatio~
of proposals to restructure the law governing bank
and thrift holding company activities.
culmination pf a
t~,
proposals
These hearings are a
long process of evaluation of legislative
simplify regulatory procedures and to assure a
- competitive envir9nment for the provision of financial services.
Heaiings on vaii9us bills of this kind began in the
Since then this Commi tt~e has held 44 days of
fa_ll of 1981.
hearings, heard more than, 235 witnesses, and has before it over
y,ooo
pages of .testimony.
analysis
of
hi~torical
This extensive record -- including
problems,
present difficulties,
and
future solutions ·,:;._ provides a solid foundation on which to
build legislative decisions at this session of Congress.
-I
have
on
several
occasions
emphasized
to
this
Committee the basic framework within which we in the Federal
app~~ac~
Reserve
and
innovative·
•
economical
time,
these questions.
banking
and
We want to see a competitive
financial
system,
providing
l
a~p
efficient services to consumers.
we believe
that
banks,
and
depository
At the same
institutions
generally, perform a unique and critical role in the financial
system and the economy -- as operators of the payments system,
as custodians of the bulk of liquid savings,
suppliers of short-term credit,
monetary policy and the economy.
continued
governmental
concerns
and
as
the
as unbiased
link
between
This ·unique role implies
about
·''
the
stability
and
-2-
impart'iali ty -of
r~flected
these
institution
in - the federal
concerns
that
are
"safety -net" long provided by the
diSCOUnt WindOW and depOSi t
Insurance I
by regu'latory protection
agains't undue risk, and - by policies to discourage conflicts of
in'terest' and undue concentration of banking resources..
As a
corollary fo these cdncerns, and as a result of our practical
experience
in
regula-ting - 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
ins.ti tut ions are a part; banking in'sti tut ions cannot be wholly
separated from the
fort~nes
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
~efinitions
of a bank and thrift institution~ on the scope o~
regulatory
authority,
and
on
possible
simplification
of
regulatory approaches toward .bank holding companies.
'In my testimony in· January in Salt Lake City,
sugg'ested 'new
legislation
is
I
urgently ·needed dealing· with
several areas:
(a)
-(b)
a strengthened definition of bank;
a definit~on -of a qualified thrift;
( c) · 'new procedures to streamline applica·tion of the
bank and thrift holding company Acts:
I
.
-3.
the powe~s . of depository
(d)
institutions holding
companies: and
( e)
_statutory guidelines to govern the di vision of
state and
ban~ing
federal
authority
in
the
area of
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,
legislation.
those questions could be deferred
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 defini.n,C3 what . is a bank -- a
fundamental b.uilding block for any legislation to clarify the
role of banks and bank holding
and economic system.
Holding
Co~pany
broa~ly
accepted.
thrift
~ompanies
New procedures
within our financial
for applying the Bank
Act and simplifying 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.
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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.
I.
Definition of Bank
The definition of "bank" is a crucial provision of the
Bank Holding Company Act.
are covered by the Act,
It defines those institutions which
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
depo~i tory
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- fir-ms.
conflicts
of
As
interest
a
~nd
result,
establisht:d
concentration
of
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resources are undercut or jeopardizf?d ~
These . same
t~chniques.
are ·'be·i-ng used to ·undermine the Congressional prohibition on.
interstate. banking.
in existing -law is
competitive
The haphazard 1axploi tat ion. of "loopholes'-'.
refl~cted
unfairness
and
in an understandable sense of
coul,d,
in .time,
safety and soundness of the·banking and
jeopar,dize
payme~t~
the
system.
The
developments are broad in scope, as re.fleeted in the tabulat.ion
in Appendix A.
To deal with this. situation,
re-definition of the term
institu'tion
la~t
year we, suggested a
"bank" . to include any depository
(other than a FSLIC· insured-institution) that is
(a) FDIC insured,
(b) eligible for F~IC insurance, or (c) ·which
takes transaction accounts and makes
comme~cial
loans.
This
definition was included in the FIDA legislation and was adopted
in Senator Proxmire's bill
(S. 2134) and a
number o-f
bill~
introduced in.the House.
Ou,: review of this proposal in the: light of comments
made at the hearing-suggests
three. changes.,
con~ideration
should be given to
First, industrial banks that ar.e
no~ ·:fe~erally,
insured and do not of fer .deposit accounts with checking or
other third.· party transaction c_apabili ties shquld be excluded.
Appendix B describes these. ins ti tut ions and the scope of .their
activities.
Second,
state-chartered
thrift
ins~itutions
(also .
described in Appendix B), which are not federally insur.ed and
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which would have been covered by the definition of bank
described qbove, should be encompassed within the same holding
company rules as federally insured S&Ls because of the focus of
many of
these
state
institutions on home
ins ti tut ions could be exempted
from
lending.
These
coverage by 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 -- that is, joint sale of banking or
thrift
products
or
integrated
operations
of
these
institutions with owners engaged in impermissible activities
for bank holding companies.
considerable importance,
C.
This limitation, on which we place
is explained in detail
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.
a proposal is contained in Section 104 of
allow a
including
"consumer bank 11
to
take
transaction accounts,
all
s.
forms
Such
2181, which would
of
deposits,
and make cont:;i.une.c
loans,
as
well as a wide variety of other types of credit extensions,
including some commercial loans.
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Such
an
approach
would
permit
es~ential
industrial firms·to enter into
commercial
and
depository institution
activities.,
irici'uding access
manne~
would inevitably undermine public policy objectives
tha~
~rl~orpo~ated
to· the payments
system,
in a
in th~ Bank Holding Company Act generally,
and
''there 'would be the appearance of unfair competition ·with banks
subject ·to the Act. ·
In' such ci'rcumstances,
the
regulated
banking· sector would i nevi t-ably wither -and much of the· banking.
bus'iness would t:ake 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·dem6nstrates that we are beginning to see
that·
~igratio~
that '19%
today.
In this connection,
of 'commercial
portfolios
banks
(narrowly defined)
now
have
I
would point out
commercial
loan
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 equa·lity requires that
the recent and current·-proliferation of nonbank banks not be
blessed by grandfatber provisions,
subject
to a
reasonable
period of time to permit divestiture where this is necessary.
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......
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II.
Definition of Qualified Thrift
Essentially the same problems of consistency with the
a~ise
public policy objectives of the Bank Holding Company Act
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 acthd ties of the· parent firm,
an ability to obtain_
long-term government-spdnsored credit, favorable
tax
treatment,
.
.
'
and a freedom to bra·nch intrastate and interstate -- privileges
that are denied
'
'
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banks,
there has
~ommercial
b~en
banks.
As in the case of rionbank
increasingly clear
recognit~on
of the
need to adopt rules to assure e~uality of treat~ent o~ various
kinds
of
depository
_Qv~rlapping
powers.
institutions· .exercising
similar
or
The need for action is reflected in the
strong interest of a v.ariety of fin.ancial
and rionf inancial
businesses in the acquisition of thrifts in order to benefit
from
thrifts'
bank-like
pow~rs,
to '.gain access
to
deposit insurance, and to participate. in the paymen7s.
The Administration proposals
~ttempt
to
question by requiring all thrifts, with.certain
grandfathered service corporations, to meet the
bank holding companies.
d~al
federal
me~hanism.
with this '
exc~ptions
for
require~~"~~
of
This'appr-0ach. 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.
recognize these concerns, the concept of a
In an attempt ·to
"qualified thrift"
has been developed, reflected in the proposals of both Senators
Garn and P'roxmire,
to exclude t_hrifts 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.
Thrifts that
publi~
meet an adequate "specialization" test rooted in the
policy concern of support
for
residential mortgage
lending _
could be owned by commerc;ial-- or in'dustr ial 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 slngle direct t~st of the
proportion
of
mortgage-backed
assets
held
securities.
in
An
residential
optional
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 ins ti tut ions not
engaged substantially in home mortgage
l~nding
would retain the
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liberal treatment with respect to permissible activities now
accorded to unitary S&Ls.
For example, with such a test,
of all commercial baqks
today could be treated as
75%
thrifts
because they have less than 25% of their assets in qualifying
commercial loans: only six
com~ercial
banks would
qual~fy
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 mortgages,
mobile home
loans,
loans
participation interests
for
mortgage-backed
home
improvements,
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
li~its
on
commercial
~endipg
set
We also
in
the
Garn-St Germain Act remain appropriate for federally chartered
institutions, .and
in
the
light ,of
the
much
provided by some ·States for commerci_al lendipg I
wider
powers
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
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privilege of "unitary" S&L treatment,
substantial period
in
which
should be permitted a
to· conform· their
During this transition period,
activities.
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 "tandem" with
the parent commercial or industrial firms.
this
suggestion
ar~
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
not meeting the asset te~t (or in
s
transition toward them) would generally have to conform to the
their service
corporati~ns)
limitations on ownership of,
holding companies generally.
and powers provided
to,
bank
Special tax benefits and
the
access to long-term credit from the Home Loan Banks for these
nonqualifying institutions should be reviewed.
time, methods should be
develop~d
At the same
to permit mutual institutions
to take advantage of powers permitted bank or thrift holding
companies ih stock form.
III.
Bank Holding Company Procedures
The
provisions
on
third ·core
bank
element
holding
of
cnrnpany
legislation
procedures.
is
the
s.
2181,
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s.
2134, and FIDA contain
identical provisions on
essen~ially
this point and I believe that this reflects widespread support
for procedural
These
areas:
.
~implification.
provisions
make
improvements
in
two
major
they change the present somewhat complex applications
process into a notice procedure;
cocpanies on more equal
and they put bank holding
footing with their
competitors by
changing the "benefits vs. adverse effects" test and formal
hearings
requirements.
Instead,
new
activities
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 effect$ on bank
safety and soundness.
The
thrust
of
reducing the scope for
intended
to
companies
reduce
by
these provisions,
a
provision
judicial review by competitors,
the burden
government
and
placed
regulation
consistent with protection of
to
upon
a
b~nk
minimum
the public policy
embodied 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,
Formal rulemaking procedures would,
remain _necessary before decisions
to
add
new
activities to the list of permissible holding company powers,
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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
Comrnod~ ty
Futures
Trading Commission in the area of commodity brokerage and the
SEC in the case of securities activities,
reporting
requirements
duplication of effort.
in
order
to
for supervisory and
avoid
unnecessary
However, the statute provides adequate
authority to take whatever regulatory or data gathering steps
that may be necessary to ensure comp! iance 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.
IV.
New Activities of Bank Holding Companies
The fourth element of needed legislation is expanded
powers for holding companies.
for holding companies to:
s.
2181 provides new authority
(a) sponsor and distribute mutual
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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
financial
broader range
of
suppliers
of
services strongly suggest a presumption broadening
the range of powers permitted bank holding companies.
The
point is reinforced by technological developments that enhance
the options in the delivery of such services.
stressed at
the outset,
However,
those objectives must
against other public policy concerns:
be
as I
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,
soundness.
development,
In
certain
much
more
raise few questions
other
areas,
significant
of
safety and
such
as
real
risks
to
the
estate
holding
company, and potentially to the bank itself, arise.
Questions
about conflicts of interest and tying for
of
"'I
number
the
-15-
activities have been discussed in detail by the witnesses that
have preceded me in recent weeks.
Review of comments made d_uring these hearings . and
other information has suggested a number of areas in which the
Committee might bridge differences by
earlier proposals.
mod~fying
or
limiting
In particular, we have attempted to address
carefully the safety and soundness and the competitive fairness
considerations
that
agreement on a
subst~ntial
powers.
appear
to stand
in
broad~ning
the
way of broad
of bank holding company
In my testimony today I would like to review each of
the categories of
propos~d
new activities in light of those
considerations.
(a)
Securities Activities -
Underwriting Municipal
Revenue Bonds and Mortgage-backed Securities,
and Sponsoring
and Distributing Mutual Funds
Both S. 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
a~d
managing trust
~ssets.
The Board
believes that these activities involve a manageable degree of
risk
for
ban~ing
substantial
gain
orgaf?-izations and
for
customers
in
·-:;,:;>rv ices and lo"wer costs.
.•
there
terms
is potential
of a
for
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
suggests
that
the
provision of
credit
bank
affiliate, or guarantees of underwritten obligations by bank
affiliates,
would
affiliated
provide
underwriters,
Underwriting
and
loan
a
distinct
or
that
bUSineSS
advantage
to
temptations
W0Uld
potential detriment of the bank or
be
its
to
Strong I
bank
link
tO
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 might reflect adversely on the
bank itself.
account
We approach
these arguments with some care
of
that
securities
the
is
fact
not
bank
proposed
and
underwri ti~g
of
of
the. ·rather
.
taking
corporate
successful
coexistence of bank affiliated and independent underwriters of
municipal
general
obligation bonds.
S. 2134 already contain a
s.
Moreover,
2181
and
number of provisions specifically
designed -to· promote competitive equity and
limit
risk
to
affiliated.banks.
Those
bills
already
require
activities of the holding company,
that
all
including
securities
its s-ubsidiary
banks, be conducted in a separate holding company affiliate.
The affiliate must
be
separatel'y capitalized
in
a
manner
comparable to similar firms not affiliated with a bank holding
..
-17-
company.
The present rules contained in sect ion 23A of the
Federal Reserve Act and the proposed 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.
0
Nevertheless,
a
cautious approach
in this area
is
justified and a number of suggestions proposed by others to
assure
compet~tive
attention.
Thus,
equity
and
avoid
conflicts
deserve
it may be reasonable to prohibit a
bank
holding company's securities or investment company· affiliate
from using the name of an affiliated bank or bank holding
company
(in
the
interest
of
appropriate
disclosure,
an
indication of company affiliation.should be permissible}.
may also be desirable
employees
of
a
to
securities
require
that
affiliate
or
the
officers
investment
It
and
company
advisor be separate from those that operate an affiliated bank,
and that information on the financial activities bf the bank's
customers not be made available to the securities affiliate and
vice versa.
Banks might ·be prohibited from guaranteeing or
providing letters of credit to support obligations that are
underwritten by a securities affiliate.
·so far as mutual
funds are concerned,
provisions of the Investment Company Act,
applicable
suggestions
..,..
above,
appear
the existing
together with the
generally adequate
to
-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 of
conglomerates
equality,
I
not
various
financial
including banks.
believe that
products
To
by
assure
restrictions of
the
financial
competitive
kind
I
have
described above, .if adopted, would need to be accompanied by
provisions
giving
the
Board
certain
discretion
in
their
application should nonbank conglomerates develop combinations
of services prohibited bank holding companies.
Questions have also arisen over bank holding
participation in brokerage services.
~ompany
. The Federal Reserve,
you know, has permitted "discount" brokerage -- that is,
passive provision of b:c:okerage
adv_ice -.- under present law.
court challenge,
for
services
Because that
the
further
question
combining such services with
provid~ng
a
ruling
the
investment
is
under
we believe it should be explicitly provided
in, the proposed legislation.
howeve,r I
without
as
Qf
You may wish to review,
the
appropriateness
investment advice -- that
Of
is,
full . range of brokerage services -- within the
framework of a bank holding company.
-19-
The
innovations
mortgage
in
techniques.
and are
market
communications
is
being
transformed
techno~ogy
and
in
by
marke,ting
Banking organizations are major mortgage lenders
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
What
government-relat~d
agencies.
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,
Risks
potential
and conflicts
participation
in
risks
of
would be suJ:>stant ially defused.
interest
underw~.i ting
in
in
bank holding
company
those circumstances would
appear to be manageable within the confines of the anti-tying
rules already contai?ed 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 depository
•
institution
}?-olding. compan.ies
- J
to _provide,
t~rough
their
subsidiary banks, guarantees or letters of credit to support
. :
.
'.
.
'
mortgag~ pools , e~taJ::>.lished and
underwritten by securities
affiliates.
of
The appropriateness of combining those two aspects
f~nancing
In
services could be re-examined.
summary,
..
we
believe
adequate
techniques
are
available to satisfy
legitimate concerns about bank holding
~
• .'
,
•
I
l
I
0
:'
-20-
company activity in the securities area,
security
underwriting
remains
so long as corporate
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
I
•
problems of competitive equity.
It has been suggested that the
ability of a bank holding company real estate broker t6 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 a·s
holding company or
its
.
the
'
subsidiary bank,
strengthening
already strict rules against explicit or implicit tying,
the
and
enhancing enforcement through providing a private ri'ght ·of·
action,
could provide considerable protection agai'~~t- ab~se.
Possibly,
a
further step could be taken 1:-y prohibiting any
mortg~ge loans by a subsidiary bank or thrift' of a depcis i tory
''
-21-
1
hold{ng company to a'ny customer of an affilia't ed ·real estate
brokerage firm.
It
fair
should
not
be
.
to limit i'oans by.
necessary
nor
'
a holding
would
it
seem
'
company mortgage banking
,
subsidiary
to
the
customers
of
the
affiliated
broker.
No~de~osi tory firms are today p~r~f tted t6 c·o~bine ownership of·
brokerage
and
mortgage
banking
subsidiaries.
Of
appropriate supervisory steps would' and could be
course,
taken
to
prevent reciprocal lending arrangements or other steps to evade
this limitation.
Smaller banks, without mortgage banking subsidiaries,
might be .. put in a difficult competitive position -by such a
.
.
Consequently, such an approach might. ·be
limitation:
accompanied ·by an
.
exemption
for ,smaller banks,
.
reasonably
'
related to· a relative unavailability of competfrig broke'rage
I
•
It should be possible,
services.
analogy to
pro.visfons
of
Title VI
for
instance,
of
the
to draw an
Garn-St Germain
•
c
Depository Institutions Act of 1982, which permits bank holding
companies
to offer
insurance br.okerage .servi'ces where
they
would other~ise be impermissibl~ ii their c~n~olidated assets
were $50 million or less, or in towns
of
i.i~ae·r
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
in~tant
access to an array of
provide~~
credit, enabling their customers to compare
conditions.
In
these
circumstances,
term~
real
of mortgage
ahd
estatfi,! brokerage
appears to be an area in which bank holding companies can draw
on
relevant
experience,
undertake
little
additjonal
risk
(particularly if tie-ins are avoided), and increase competitive
outlets.
In my past
expressed
serious
appear~nces
concern -about
before this
the
Com~i·ttee,
potential
risks
I have
and
conflicts for bank holding companies under the ?eneral .rubric
of "real estat~ development."
Those concerns rem~in.
Presen:t proposals deal with those risks py limiting
the capital a bank holding company could apply to real estat.e
development
activity
limiting
activities
or
by
prohibiting
construction
limitations which should be reinforced by also
the
·subsidiary.
(a)- conf.ining
leverage
I
would
"real
g~
of
the
real
estate
d~vel~pment
further 1?Y urging you to consider:
estat~
development"
to
passi~e
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
understane to be the basic objective _of most bank holding
companies in the .r._eal estate development area -- to part,icipate
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
~isk
implications of a bank, as lenderi
participating i~-a project in which an.affiliate has an equity
interest·.
be.~
They suggest that a bank _in those circumstances will
-willing to- extend credit and to carry a weaker credit
longer to .one of its
•own• projects,
and perhaps be less ·
willing to extend· credit t·o 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
project~
affiliate is an equity
(c)
in which a bank .,real estate
patticip~nt;
Insurance Brokeraga 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.
Thrift
institutions already, have unlimited authority 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. 2181, in Section 107,
provisions that· attempt
inequity problems.
inform their
products
to
contains a number of new
reduce
tying and competitj.ve
It would 1 for example, require banks to
customers of· the· availability of
elsewhere,
allow
customers
purchasing
insurance
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
the
ability
of
holding
organizations· to participate in this activity.
company
We would,
however,· suggest that to the extent· Congress deems these
provisions
necessa·ry
when
financial
institutions
sell
insurance, they .should also be· applied to thri.ft 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
appro~ches
could
also
be
given
possible
parti~i~ation
for phasing in greater bank
insurance brokerage area.
to
in the
·Again, it might be useful to build
upqn Title VI of the Garn-St Germai~ ~ct, which permits bank
holding company participation ln
insuranc~
brokerage
activi~ies
in CaSeS Where the holding:. Company IS COnSOlidated aSSetS are
$50 mill ion or ·1ess, in towns of · 5; 00 O or fess, or otherwise
where the holding company demonstrates that existing insurance
agency ·facilities
are
inadequate.
For
instance,
those
.
.
1 imi t'ations might .. be gradually increased by some amount over
time up to a limit,
~hich
w6uld provide an occasion for
f~rther
Congressional review. ·
If
b~nk
underwri'ting,
holding companies are permiited to engage in
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 insutance underwriting that raise issues of
risk that require special s~feguards and fimitations 'ori such
· matters
·~as
amount of capital investment.·
Moreover,
I have
,
'
earlier suggested that banks not be permitted to lend to
companies in which their holding company affiliates had very
substantial equity interests.
·In order to 1 imi t the poten·t ial for concentration of
.
-
resm1rce's associated with large bank holding companies
acquiring large insurance firfus or vic~'versa,
~
. ,;
s:
2181 would
-26-
nonb~n~ing
limit bank holding company investment in
activities
to not more t.han. 25% of tl)e holding company's capital if the
holding company's consplidated assets amount to
of total domestic deposits.
However, our
~ore
than 0.3%
of the data
revie~
indicates that this test does not effectively limit the
abi~ity
of some of the_ largest bank holding companies to acquire
control of some
I
~f
the largest insurance
companie~.
recognize that our attempt to
test of that kind must be arbitrary at
a numerical
devis~
th~
However, an
marqi~.
alternative-approach could be to provide specific criteria on
.
'
--J-
..
~
'
............. -:~ ·- -
the size .o_f bank holding company participation in insurance
underwriting
and
insurance
underwriter
participation
in
banking.. '!his could be done by requiring 'that bank holding
en~er
companies
r~latively
insurance underwriting de !!.2Y.Q. or through
small
acquisitions.
Similarly,
underwriters would also be ,confined ,to
acquisition pf banks.
concentrati~n
participants,
experience
issues
~
.
insur~rice.
~
or foothold
This . approach would. deal with
and
the.~oard,
'
it. would
,
provide
time
for
the
the
and state insurance regulators to gain
in dealing· with combined insurance and banking
entities.
An· alternative approach
hol~ing.
would be
to
expand bank
co!Jtpany participation in insurance unde,rwriting in
directions. t_hat flow naturally from existing bank
For example,. it. would seem appropriate
for
bank
fun~tions.
ho_.lding
-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
insurance
nonbank
experience,
individual
underwr~tten.
policies
affiliates
Congress
credit-related
could
th~n
could
be
property
by
bank
consider
holding
After
lifted.
other
and
some
areas
of
insurance underwriting activity that might be appropriate as
part o( a
g~adu~l
evolution of bank holding company insurance
underwriting.
(d)
s.
·Ownership of Thrifts
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 _as
presently
howev~r,
authorized
~easonable
a
scope
ext ens-ion
of . acti v:i ties.
We
of
their
recognize,
that acquisition of thrifts by bank holding companies
on an interstate basis may, in ,some situations,
not be fully
consistent with the .prohibition op interstate banking contained
in the Douglas Amendment •. The_ Board has indicated its views
that
Congress
should,
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
McFadden
type
proposed in
s.
limitations on
s.
(e)
rea~onable
to incorporate Douglas and
thrift acquisitions
that are
2181.
Financial Services
2181
"services of a
authorizes holding companies
financial
na·ture.
11
to engage
in
This provision 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.pn the inclusion or exclusion
of the various activities .that have been discussed ab'ove 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.
v.
Activities of State-Chartered 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 "law_s.
It
is reasonable to ask the question wh.ether it makes· sen~e for
the Congress to work out carefully balanced arrangemeri;ts for
the ~onduct of nonbanking activiti~s of bank holding·companies
only
to
see
far
different
and
inconsistent · arrangements
established for state banks .under state law.•
-
-~ ·~·
.
,,. ~ '
·.
-29-
Some states have adopted, and others are considering,
legislation to authorize state-chartered banks to engage in
insurance, securities, and real'es~ate d~velopment actlvities;
and others have authorized state-chartered thrifts to engage in
virtually unlimited activities.
Last
year,
South· Dakota
authorized st.:-ate.:.cnartered 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
insti~utions
competitive with those in
other states and in part by a desire to obtain new employment
and revenues· -- inevitably at ·the ·expense of others.
process gains momentum,
more and
more stat'es will
As the
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
syste~
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
that
s. 2134 would go
states
may
only
authorize activities for state-chartered banks to be conducted
within· the state and for residents o·f that state.
In the-light of current developments, it now appears
desir'able to g'o somewhat
s.
213·4, 'while
st i 11
further 'than the provisions of
maintaining
flexibility
for
state
-30-
experimentation
and
innovation.
In - balancing , these
considerations, perhaps it is desirable to.distinguish between
those
activitie~
that Congress may decide to prohibit or limit
for banking organizations because - of
and soundness
s~fety
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
corporate debt
of
these
from
and
participating
equity, .and
organizations
in
limits
real
in
the
estate
development, it would not .seem to be desirable for the states
to.have the authority to
overrul~ .th~
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 t,he 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 state interest
could
be struck
as
follows:
states . may
not
authorize
I
--
-31-
Cop9~ess
activities that
soundness reasons:
activities
borders.
but
has ruled out' of bound$ for safety and
the states
onJy
if
they
optionally authorize other
~ay
are
conducted
We WOl:Jld be prepared to assist
within
their
the Committee
in
drafting suqh a provision.
Other Provisions of S. 2181
My comments . today have focuseg
s.
2181 as
I
believe it
is
th~t
Title
priority attention of the Congress.
remarks, I would
l~ke
that
requires
the record.
in Appendices
to be
Before my concluding
int~~~tate
banking •. ,
Title X provides specific authority,
for states to authorize regional
acquisitions.
the
to comment specificall¥ qn the provisions
contained in Title X on regional
period,
of
Detailed comments on a
number of other Titles are _contained
submitted separately for
only on Title I
Such legislation would
for a
inter~tate
pr~~u~~~~y
question of the cons ti tutionali ty of.- re.g~<;?nc~.!
. -'
number of other areas of the country.
~~ve
banking
:r;·esolve the
~~:rangements
~
have been authorized in New England and
five-year
that
been proposed in a
Yesterday,
approved two bank holding company mergers under
arrangements of Massachusetts and Connecticut.
·th~
the Board
reciprocal
Although there
is a strong ar_gument that these state laws are not cons.i_stent
with
the
prohibitions
against
~~~~@~s
discriminatory
~
on
interstate commerce established by the Commerce Q!euse of the
,, 1!1• ....
Constitution,
I
1,_
.:
there is an absence of c ..;_~~r and
unequivocal
-32-
evidence to that effect.
Consequently, the Board proceeded on
the assumption of constitutionality and appl.ied the criteria of
the Bank Holding Company Act.
constitutional
interpretations
But plainly,
the differing
raised 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 resional
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 consiger
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
~~gul~tory
are pushing at the outer boundaries of the
lec;rnJ. framework
established by Congress for the banking and
In my
ju~gment,
finq~Gial
they are pushing beyond the bc;ti;1iq
rules,
~¥~~ems.
poliqi~s
-33-
established by the Congresa in setting out a broad distinction
between banking and commerce.
I am not speaking about theoretical
The
of the Bank Holding Company Act against excessive
poli~ies
risk,
concerns~
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
combinations of
interstate
banking~ -
acquisitions
and
by
new
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,
ye~
today
ther~
are
retailers,
diversified
industrial-commercial conglomerates, and insurance firms that
own either nonbank banks or thrifts with banking powers.
-34-
The states
are
considering and adopting
rapid~y
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
Board has adopted
~he
o~
their delegated authority.
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
securities laws
regulation.
becau~e
ex~lusion
of banks from the
of the comprehensive system of bank
Under existing law, the FDIC is considering the
question of whether state non-member banks should be authorized
by regulation to underwrite corporate qebt and
long-presumed
Congre~sional
intent
banking.and corporate underwriting.
to
eq~ity,
despite
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 conf 1 ict ing, 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.
* * * * * * * *
TABLE OF APPENDICE8
A.
ownership of Nonbank Banks
s.
Activiti~s
of Industrial Banks and Privately Insured
Savings and Loan Associations
c.
Limits on Tandem Operation&
D.
Amendments to the National Housing Act to establish a
Qualifying Test
for
the
Holding Compdny Exemption
•
Unitary Savings
and
Loan
APPENDIX A
OWNERSHIP OF NONBANK BANKS
1.
Securities firms (32).
firm~.
are owned by securities
Most of the nonbank banks
At least 32 securities firms
own nonbank banks, including major firms such as E.F. Hutton,
Prudential-Bache,
Shearson/American Express,. Merrill
Lynch,
Management & Research co., Marsh & McLennan, Drexel
Fid~lity
Burnham Lambert, and
J~
&
w.
Seligman.
Although some of these
•
-
#
,
•
nonbank banks are state chartered trust companies that do not
accept demand deposits and that have been organized to perform
trust services to the
pa~ent
organization, a number of other
nonbank banks owned by .securities firms do engage in demand
deposit taking and consumer- lending (e.g_.,
Bank).
.
..
2.
..!.§1_.
Dreyfus Consumer
Diversified financial and industrial conglomerates
A number of companies engaged in diversified commercial
and industrial activities also have acquired nonbank
including
Gulf
& Western
Industries
(movies,
banks,
commercial
finance, etc. ): , Avco Corp. (manufacturing of aircraft engines,
electronics, thrift and finance companies), Control Data Corp.
(data
processing,
(automobile
finance
manufactur~),
companies),
Chrysler
.Corp.
Parker Pen Company (manufacturing,
insurance, and thrift companies), and Automated Data Processing
(data processing).
•
f~
_....
-2-
3.
Other
financial
services
organizations
(9).
Nonbank banks also have been acquired by organizations that
- off er a wide range of financial services, such as Household
Finance Corporation and Beneficial Corporation, and Bradford
National Corp.
Citizens
and some bank hold fng
Fidelity,
Comerica,
and
U.S.
companies,
Tiust
such as
Corporation.
Norwalk savings Bank, Anchor savings Bank, Greater Providence
Deposit C6rporation, and Teachers
servi~e
Corporation also own
nonbank banks.
4.
Insurance
c~mpanies
(3).
Several
insurance
companies have .acquired nonbank- banks, including Prudept ial,
. Travelers, and Mutual Benefit Life Insurance Co. · Aetna has
withdrawn its application to acquire a nonbank bank.
5.
Retail cor.ipanies .(3).
Retail companies also have
acquired nonbank banks, including McMahan Valley Stores, and
J.C. Penney Company.
;'
r-
,
I
NONBANK BANKS*
- Acquired/
Formed
Parent Company
Bank
CALIFORNIA
American Pacific Corp.,
.Irvine, California
application
denied
1.
American Pacific Natl. Bank
& Trust co., Newport Beach
2.
Associates National Bank,
Concord
Gulf & Western Corp.,
New York, New York
1980
3.
Avco National Bank,
Anaheim
Avco Corp.,,
Greenwich, Connecticut
1982
4.
Capital Guardian Trust Co.,
Los Angeles
The Capital Group Inc.,
Los Angeles, Californii
1968
s.
Pacific securities Depository
Trust co., San Francisco
Pacific coast Stock
Exchange, San Francisco,
California
1974
6.
Security Trust Co.,
Los AngelP.s
Bradford National Corp.,
New York, New York
1981
7.
Trust Services of America
Inc., Los Angeles
Calif. Federal Savings &
Loan Association,
Los Angeles, California
1982
8.
Valley National Bank
of Salinas '
Household International,
Prospect Heights, Illinois
1981
9.
western Family Bank N.A.,
Carlsbad
McMahan Valley Stores,
Carlsbad, Calif6rni~
1982
COLORADO
10.
Resources Trust Co.,
Englewood
_ I~tegrated Resources Inc.,
1983
New York, New York
CONNECTICUT
11.
Citizens National Bank,
Fairfield
Norwalk savings Bank,
Norwalk, Connecticut
* In addition, Dimension Financial_ Corporation has filed
applications to charter 31 national banks in 25 states.
1983
-2-
Bank
Parent Company
Acquired/
Formed
DELAWARE
12.
Beneficial National Bank
(USA), Wilmington
Beneficial Corp.,
Wilmington, Delaware
1983
13.
Colonial National Bank,
Wilmington
Teachers Service
Organization,
Willow Grove, Pennsylvania
1982
14.
Delaware Charter Guarantee
& Trust Co., Wilmington
Corporation Service co.,
Wilmington, Delaware
1977
First National Bank
commercial credit corp.,
Baltimpre, Maryland
1983
l~.
·Of Wilmington
16.
E.F. Hutton Trust Co.,
Wilmington
E.F. Hutton Group Inc.,
New York, New York
1983
17.
E.F. Hutton Bank,
Wilmington
E.F. Hutton Group Inc.,
New York, New York
1983
18.
First National Bank of
Harrington, Harrington
J.C. Penney Company, Inc.,
New York, New York
1983
Principals of the
Templeton Group of mutual
funds, Nassau, Bahamas
1983
FLORIDA
19.
· 20.
Templeton Management &
Trust Co. N.A., Ft.
Lauderdale
U.S. Trust Company of
Florida, N.A. Palm Beach
-· ·u. s. Trust corporation
1984
·New York, New York
GEORGIA
21.
Capital City Bank,
Hapeville
· Prudential-Bache
securities Inc.,
New York, New York
1983
ILLINOIS
22.
Chicago Title & Trust Co.,
Chicago
Lincoln National Corp.,
Fort Wayne, Indiana
1979
23.
Midwest securities
Trust co.,-Chicago
Midwest stock Exchange,
Chicago, Illinois
·
1973
24.
Washington National Trust
Co., Evanston
Washington National corp.
1975
-3-
Bank
Parent Company
Acquired/
Formed
HARYLAND
~5.
T. Rowe Price Trust Co.,
Baltimore
T. Rowe Price & Associates
Inc., Baltimore, Maryland
MASSACHUSETTS
26.
Boston Safe Deposit
& Trust co.
Shearson/American Express
Inc., New York, New York
1981
27.
Investors Bank & Trust Co.,
Boston
Eaton & Howard, Vance
Sanders Inc., Boston,
Massachusetts
1969
28.
Fidelity Management Trust
co., Boston
Fidelity Management &
Research co.,
Boston, Massachusetts
1981
29.
Marsh & McLennan Trust co.,
Boston
Marsh & McLennan Inc.,
New York, New York
1983
30.
Massachusetts co.,
Boston
Travelers Corp.,
Hartford, Connecticut
1969
31.
Trust Management Bank,
Boston
Rollert & Sullivan Inc.,
Boston, Massachusetts
1983
32.
Wellington Trust co.
of Boston NA
Wellington Management
Co./Thorndike, Doran,
Paine & Lewis,
Boston, Massachusetts
1982
Chrysler Corp., Inc.
Detroit, Michigan
1981
Investors Diversified
Services Inc.,
Minneapolis, Minnesota;
1979
MICHIGAN
33.
Automotive F,inancial
Services, Inc., Highland
Park
MINNESOTA
34.
IDS Trust Co.,
Minneapolis
-4-
Bank
-Acquired/
Formed
Parent Comp_any
MI::iSOURI
35.
NEw
Investors Fiduciary Trust
Co., Kansas City
DS1' Inc.,
Kansas City, Missouri
1972
I,
liAMPSHI~E
36.
Fidelity Bank & Trust Co.,
Salem
Fidelity Management &
Research Corp.,
Boston, Massachusetts
1983
37.
First Deposit National Bank,
Tilton
Parker Pen co.,
Janesville, Wisconsin
1981'
City Federal Savings &
Loan Assn., Elizabeth,
New Jersey
_
Drexel Burnham La.mbert
Group Inc.,
New York, New Yor~
1975
NEW JERSEY
JS.
City Trust
Elizabeth
39.
Drexel •.rrust
Paramus
40.
Dreyfus Consumer Bank,
t:ast <Jrdnge
Dreyfus Corp.,
New York, New-York
1983
41.
Merrill Lynch Bank & Trust.
Co., Plainsboro Township
Merrill Lynch & Co. Inc.,
New York, New York
1984
1972
Se~vices
N.A.,
-~o.,
'1983
NEW YO.RK
42.
Bradford Trust co.,
New York
Bradford National Corp.,
New York, New York
43.
Brown Brothers Harriman
Trust co., New York
Brown Brothers, Harriman
& co·. I New York' 'New Y,ork
44.
National Trust Company,
White Plains
Automated Data Processing,
Inc.
1983
4S.
Depository Trust Co.
of New York, New York
New York Stock Exchange
and other users
1973
46.
Dreyfus National Bank
& Trust co., New York
Dreyfus Corp.,
New York, New York
1983
~.'
• ...
' -
...
I
-5-
Acquired/
Formed
' Parent Company._
Fidelity Management &
Research Corp.,
Boston, Massachusetts~
47.
Fidelity National Bank
& Trust co., New York
48.
savings Bank Trust co.',
New York
'.•
~
49.
J. &
co.,
w.
\
. .
"
..
I'
..
1933
'1''•
J. & W. Seligman &
New York, New York
Trust,'
York
'
Mutual savings banks of
i~ew York State
'
·~
~eligman
Ne'tl
l
1984
·· ·
'1982
Co.~
NORTH CAROLINA
so.
Manning & Napier Trust ·
Co. Inc.
Manning & Napier·Advisors,
Inc., New York, New York
'
I
OHIO
51.
.'
'I
The Ohio co.· trust ..
department,,
. Columbus
.
'
~
._r
I
'
J
The Ohio co.,
Columbus, Ohio
·1976
{
52.
Citizens ~ideiity·i6hio),.
N.A., Cincinnati
Citizens Ffdeli ty
...
Corporation, Louisville,
Kentucky
1983
53.
Comerica Bank-Midwest,
N. A. , Toledo
Comerica, Incorporated
Detroit, Michigan
1983
Columbia Management co.,
Portland, Oregon
1980
OREGON
54.
Columbia Trust Co.,
Portlana
PENNSYLVANIA
55.
Philadelphia Depository
Trust co., Philadelphia
Philadelphia Stock
Exchange
1979
5o.
Vanguard Fiduciary Trust
co., Valley Forge
Vanguard Group of Investment Cos., Valley Forge,
Pennsylvania
1982
-6-
Parent Company
liank
Acquired/
Formed
RHODE ISLAND
~7.
Mutual Benefit Trust co.,
Providence
Mutual Benefit Life
Insurance co.,
Newark, New Jersey
1983
58.
Great Providence Trust co.,
Providence
Greater Providence Deposit
Corporation, Providence,
Rhode Island
1971
American Investment Bank
N.A., Salt Lake City
Leucadia National Corp.,
New York, New York
1983
UTAH
59.
V/ASHINGTON
60.
Frank Russell Trust Co.,
Tacoma
Frank Russell Co. Inc.,
Tacoma, Washington
1980
61.
savings ~an~ _Tius~~o.
Northwest, Seattle •
Shearson/American Express
Inc., New York, New York
1970
.-_:-
''
.
.
APPENDIX B
,,
ACTIVITIES OF INDUST.RIAL BA'.NKS AND
PRIVATELY INSURED SAVINGS AND LOAN ASSOCIATIONS
.. ,
A.
Industrial Banks
Historically,
Morris
Plari
banks
consumer-ori'ented
installment
industrial banks
or' industrial
institutions
credit
loan
(also referred to as
companies)
that · enga.ged
to consumers 'and
that
in
were
extending
accepted
savings
depo's'i ts or sold investment certificates, which are similar to
certificates of deposit.
They were called
industrial banks
because they served industrial workers who in the early part of
this' century often could not obtain credit
banks.
from commercial
Industrial' banks· tr a.di tionally did not accept checking
accounts' of-any type.
Although some fndustrial banks appear to
have· had the power to make commercial loans, this authority was
not -Widely exercised.!/
Since approximately 1980, however,
industrial
banks
the activities ·of
have· expanded· substantially,
I
and
these
•
institutions today offei a wide range·of financial services,
! / General background information regarding industrial ·banks
may be found in H. Jennings, The Consumer in Commercial Banking
( 1939): R. Saulnier, Industrial Banking Companies. and Their
Credit Practices (1940) and Amend the Bank Holding Company Act
of 1956; Hearings on S.2353, S.2418, and H.R. 7371 before a
Subcomm. of the Senate Comm. on Banking and Currency, 89th
Cong. 2d. Ses~. 155 (196'6).
· ·
·'
.
-2-
which make them
banks.
As
essenti~lly
Table
I
shows,
indistinguishable . froin commercial
there
industrial banks located in 21
are
approximately
states.~(
of these institutions are now permitted
loans.
l ,·200
Substantially all
to make commercial
Ten states have authorized their industrial banks to
offer NOW accounts,
and approximately 9.S industrial banks in.
those states have commenced offering such
accounts~
Nine states provide some sort of insurance for funds
deposited
in . industrial· banks}../
The FDIC has
industrial banks in Coloradp, Hawaii, Nebraska,
Utah are eligible for FDIC insurance.
number of other states
~ppear
:ruled- that
and -.
.Tennessee
-
Indqst~ial
banks in a
to be eligible for FDIC _i.nsurance
as a result of the Garn-St Germ.ain Depository Institutions Act
of 1982, but. the FDIC has. not taken a position regarding those
states.
Under the Garn-St Germain Act,
institutions that are
eligible for FDIC insurance include
any bank, banking association,
trust
company, savings bank, ind us trial bank or
similar financial institution which the
board of directors [of the FDIC] finds to be
operating substantially in the same manner
as an industrial bank ••
12
u.s.c.
§ 1813 •
. ~/
Three addftional sta"tes authorize
have no institutions operating.
~/
California, Colorado, Hawaii,
Nebraska, Rhode Island, and Utah.
industrial
Iowa,
Kansas,
banks
but
Minnesota,
'
·,:,·1·. ·.. ",
..
-3-
A few institutions in Florida, North Carolina and West
Virginia secured FDIC insurance prior to the Garn~Si Germain
Act, but the FDIC has not decided whether other institutions in
those states are el ig'i ble
located
in
California,
for · insurance. · Industrial
Florida
and
Iowa
presently
applitations for insurance pending with the FDIC.
banks
have
Four states
require their industrial banks to secure FDIC insurance if they
wish to accept deposits (or in some instances if they wish to
accounts).~/·
offer NOW
·Industrial banks ·that are
eligible
for FDIC insurance are also subject to reserve requirements and
~ederal Reserve·~ discount window.~/
have access to the
In
summary,
industrial
banks have
full
commercial
lending powers and are able to fund their commercial loans with
checking accounts and .. savings accounts that may be insured by
the FDIC.
'They. also have access to the Federal Reserve System
in its rote as lender of last resort for the banking system.
The NOW' accounts' offered by indus'trial banks· are
checking
accounts that perform the same function as demand deposits,
that are advertised as checking accounts, and for the majority
. ·'
of con~u~ers are the eq~ivalent of a conventional
.
'
ii
Florida, Hawaii, Tennessee ~nd West Virginia.
~/
12
u.s.c.
'
§· 461.
-4-
demand checking
.deposit.~/
The significant expansion of the
powers of industrial banks that has occurred since 1980 and
their
eligibility
for. FDIC.· insurance
has
rendered
them
institutions capable of frustrating the purposes of the Bank
Holding Company Act.
Indeed,
the potential that industrial banks have to
function as commercial bank-s has prompted a
largest bank .holding companies
number of the
in the country to acquire
industrial banks and approximately 50 such acquisitions have
occurred since 1980,
account powers.
when industrial banks first gained NOW
This rate of acquisitions is more than double
that which occurred in the period of
1971-19~9
•. A number of
these industrial banks have obtained FDIC insurance.
B.
State Chartered, Privately Insured S&Ls
State chartered, privateli insured savings and loan
associations
exist
in
five
states .2.1
As Table
II
shows I
there are approximately 394 such institutions, which control
6/
Unlike the traditional passbook or savings account,
withdrawals from NOW accounts may be made by checks given
directly to third parties. Although technically subject to the
right of the depository institution to require the depositor to
provide ·advance notice of withdrawal, this right is never
invoked with respect to NOW accounts.
Indeed, because
invocation of the notice by the depository institution would
require the dishonoring of checks given by the depositor to
third parties for value, the technical notice requirement
cannot as a practical matter be imposed with respect to NOW
accounts.
2.1
Maryland,
Pennsylvania.
Massachusetts,
'-
North
Carolina,
Ohio
and
-ssome $16 billion in deposits. 9 /
All of these
institutions
are authorized to make commercial loans and accept NOW accounts
and many may accept demand deposits.
The great majority.of
these institutions are mutual associations and ~bus raise no
issues under the Bank Holding Company Act or the Savings and
Loan Holding Company Act.
State chartered, privately insured S&Ls are eligible
for
FSLIC insurance,
instead.
but have opted for· private
insurance
Although these S&Ls are sometimes simply referred to
as "state irisured S&Ls," it is more accurate to describe them
as state chartered·S&Ls,
the deposits of which are privately
insured under"authority of state law.
These S&Ls are primarily
engaged in making residential mortgage loans and have the same
powers as other state chartered S&Ls in the relevant state.
For the most part,
such powers are generally comparable to
those of federally chartered S&Ls, although in some instances
the powers of state chartered S&Ls
exc~ed
those of
fed~rally
chartered institutions.
Many
state
mutual in form,
chartered,
privately 'insured
S&Ls
are
but approximately 30 such ins ti tut ions have
corporate parents. "These corporate parents are concentrated in
Ohio, Maryland, and North Carolina, and engage in a variety of
8/ If state insured savings banks are included,
would be $27.5 billion.
this amount
,,
-6-
activities, from simply holding the subsidiary S&L's shares to.
operating a chain of restaurants.
parent
organiz~tions,
In addition, some of these
such as Warner National Corporation and
Control Data Corporation, operate on a nationwide basis, and
engage in a
nonbanki~g
varie.ty of
activities
such as
the
computer business.
char~ered_,,
Al though state
privately insured. S&Ls are
currently primarily engaged in home lending,
they have the
capability to ,funptio.n in the .same manner as a commercial bank
to the extent that they may make commercial loans and of fer NOW
In
accounts.
addi~ion,
such
institutions
qualify
as
"depository ins ti tut ions" for purposes of the Monetary _Control
Act, and there;fore have access to the Federal Reserve discount
•
window.
'
Despi~e
1,
these facts, such
to the Savings anq Loan
able to avoid qoverage
H~lding
~nder
ins~itutions
are not subject
Company Act, and may also be
the Bank Holding Company Act,
particularly jf they do not
engage1 in commercial lending.
'
ability of these institutions to gain access
~o
The
the payments
mechanism and - the Federal Reserve discount window therefore
presents
a~
anomalous.situation in view of the
prudential . regulation
Consequently,
enjo.yed
by
~heir.
freedom from
corporate
parents.
these ins ti tut ions should be subjected to the
Savings and Loan Holding Company Act, just as other S&Ls.
;.•
..
'
. ..
Industrial Bank Activities By State..!/
State
NOWS
Authorized
(Date)
No. of
Institutions
Est. No.
Offering NOWS
Total Deposits
(All Types)
($ millions)
86
154
0
3
69
5
52
12
125
0
-29
2
34
6
0
3
8
70
0
3
0
0
0
0
0
0
0
0
0
0
0
34
1900
322
0
32
480
"309
181
9
NA
0
53
10
320
175
No
Yes
Yes (1971)
No
Yes (1980)
No
No
1
9
11
420
54
12
26
0
2
5
0
2
0
0
4
NA
668
NA
469
0
0
Yes (1980)
92
2
33
1205
95
4999
Arizona
Arkansas
Calif orni'
Colorado.£ '
Connecticut
Flor iaal/ · HawaiiYl/
Indiana
Iowa
Kansas
Kentucky
Maine
Minnesota
Missouri
Nebraska.£/
Nevada
North
Carolina
Oklahoma
Rhode Island
Tenn27see.£/l/
UtahVirginia
Washington
West
Virginial/
No
Yes
Yes
Yes
Yes
Yes
No
Yes
·No
No
No
No
No
No
No
No
0
TOTALS
Yes=lO
No =14
(1980)
(1982)
(1980)
(1949)
(1980)
....
~
)j Data as of 12/83. ·Substantially ·all industrial banks
are
' permitted to make commercial loans.
2/ Eligible for ·FDIC insu·rance._ · Many other industrial banks
appear to be eligible for FDIC insurance as a result of the
Garn-St Germain Act, but FDIC has not taken a position
regarding them.
ii
FDIC insurance required if deposits are offered. In some
instances, this requirement is applicable only if NOW accounts
are offered.
';:-
Privately Insured S&Ls
State
NOWS
Authorized
(Uate)
No. of
Institutions
Total Deposits
(All Types)
($ millions)
Maryland
Yes
105
6,000
Massachusetts
Yes (1973)
103 .!/
4,700
No. Carolina
Yes (1981)
43
1,800
Ohio
Yes (1981)
74
3,500
Pennsylvania
Yes (1980)
69
TOTALS
Yes=5
l:.l
394
115
16,115
Privately Insured Savings Banks
Massachusetts
Yes
159l/
11,400
1/ Only 2 of these are stock institutions, and neither of those
-two has a corporate parent.
2/ Only a ~ew stock institutions exis~, and only one of them
has a corporate parent.
ll
Some of thE;!Se institutions are ,also insured by the FDIC,
in which case the Massachusetts fund covers deposits in excess
of $100,000.
..
I
....
•
APPENDIX C
LIMIT ON TAN.DEM OPE.H.ATIONS
The availability of the exemption· from the activity
restrictions of the Savings and Loan Holding company Act for:
comp~nies
unitary savings and loan holding
of both federally
and non federally insured thrift institutions should be limited
to those tnri:tt institutions that are engaged primarily in
housing lending and tnat do not_ operate
in
taridem with
affiliated nonbanking organizations. - Witho~t a limitation on
tandem
operations,
many · business
organizations
may
feel
compelled to become affiliated with a thrift in order to remain
competitive,
and
',·
competition
increasingly compromised.
and
stability
would
be
The growing number' of securities,
insurance, retail, and manufacturing firms that have already
acquired S&Ls or nonbank banks suggests the danger.
To
prevent
such
an
occurrence,
a
variety
of
I
relationships falling under the general headin<;J of
"tandem
operations" should be prohibited for companies that wish to
take advantage of the unitary S&L holding company exemption.
The major element of this limitation is a prohioition on the
mutual of fer ing of produ"cts and services.
tandem operations would
~ncompass
Thus, prohibited
the sale or marketing of the
SbL' s products by nonbanking dff i liates and
the sale or
marketing oy the S&L of the products or services offered by
those affiliates.
For example,
the deposits of
the S&L
' l.
-2-
could not oe sold or marketed by its nonbank affilicttes.
similarly, the S&L could not offer or market the insurance,
securities, real estate or retail products of its
~ftiliates.
Tt1e or ter ing of discounts or incentives oy an S&L or its
affiliate to encourage a customer to purchase products or
services irom tne otner organization is another example of a
~ractice
that would oe oarred.
·rno:: tanaem operation provisiou could be implemented in
otn~r
ways.
suosidiary
Consideration might be given to prohibiting the
~biL
or
d
unitary S&L holding company from operating
at the same location with affiliates engaged in nonbanking
activities.
This would mean, for example, that an S&L .could
not provide space in its lobby for its nonbanking affiliates,
nor coulu it establish branch off ices or RSUs at the locations
of offices of those nonbankirig affiliates.
Similarlj, a sunsidiary S&L of a unitary S&L holding
'
company might not be permitted to provide - customer referrals
for its nonuankiny affiliates, nor could those affiliates refer
nusiness to the S&L.
Thus, a retail affiliate could not rely
on the S&L co maKe loans to the retailer's customers to finance
~urc:hases
securities
from tne retailer: and real estate.,
a.tf iliates
aftiliated S&L.
could
not
refer
insurance or
customers
to
the
.. •
.. .. .
APl'ENDIX D
Amendments to the National Housing Act to
Estdolish d uualifying Test for the Unitary Savings and
Loan Holding company Exemption
(Assuming a.Ten Year Phase In.)I:_"
8ection 408(n) of the National Housing Act (12
is
amende~
1730a(n))
''
as follows:
"(n) (l)
u.s.c.
..
A savings and
loan holding
company,
the
suosidiary insured institution of which devotes less than 65
percent Ot its dSSets to residential -mort~ages and related
investments on average during any year, shall not thereafter
.
,
commence,
or continue for
more
th'an
three years,
either
'
directly or indirectly, including through a subsidiary
(other
than dn
insured
.
.
institution),
any
business' activity
not
.
'
permissible for a multiple savings and loan holding company
"
under subsection (c) of tnis section.
For the purposes of this
.
-·
'
suosection, the term "related investments• means (A) securities
oacked by residential mortgages; (B) ·retail mobile.home loans;
( c)
home
improvement
loans;
( D) loans
to
finance
the
"
construction of residential properties; ( E) participations in
-
tne above loan.s; and (F) investments in service corporations
.
'
except that such investments snall be reduced oy an amount
proportionate to the
~mount
of such corporation's ass•ts that·
are not residential mortgages or r~lated inv~stments as defined
in tnis suosection.
ten fear
This paragrdph shall riot appiy during· the
period tollowing
the date ot
paragraph to .a, unitary savii:igs and
l~oan
enactment. of this
holding company, the
- 2 -
subsidiary insured institution of which does not meet the asset
composition test establish_ed by
enactment
of
this
paragra~n,
th~s
paragraph on the date of
provided
tnat
tne
insured
ins ti tut ion does not decrease the percentage of its assets
devoted to residential mortgages and related investments below
the
percen~age
-~t
held on the date of enactment of this
paragraph and increases, within the following time periods from
the date of enactment of this paragraph, such
perce~tage
of its
assets devoted to residential mortgages and related investments
by a_n amount at least equal to the following percentages of the
difference between 65 percentum and the percentage of its
assets dev_oted to residential mortgages and related investments
on the date ot enactment of this paragraph:
(i )
within two and one-half years, 25 percent um;
(ii)
within five years, 50 perceutum;
(iii)
.
*/
within seven and one-half years, 75 percentum.-
. -• ( 2 ). If! the ·event tna t an insured institution that is
owned or _controlled by a savings and loan holding company
otters or marKets the products or services of such savings and
loan hqlding ~ompany or of any other subsidiary of such holding
company,
or
the
products
and
services
of
such
insured
instituti 9 n are offered to or marketed through such holding
*/ · If a f ive;_year phase-in period were adopted,
transition periods could be reduced.
'
\
(
these
- 3 -
company ot
~u~y
of its other subsidiaries, such savings and loan
hole.ting compcmy and all subsidiaries thereof (other than an
insured
in~titution)
shdll not thereafter
com~ehce,
or continue
for more than three years, any activity not permissible for a
roultiple savings dnd loan holding company under subsection (c)
of this section.~/
•(3) .For the purpose of determining compliance with the
three and ten year periods described in this subsection, the
last· sentence of paragraph ( 2) of subsection ( c) hereof sndll
not be applicable.•
~/
These 'provisions against tandem 01:>erations are· identical
to tnose in s. 2134, ~8th Cong., 1st sess. (1983), introduced
by Senator Proxmire.
@FedFRASER