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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*
