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For release on delivery
9:00 a.m. EDT
May 13, 1986
Statement by
Paul A. Volcker
Chairman, Board of Governors of the Federal Reserve System
before the
Committee on Banking, Housing and Urban Affairs
United States Senate
May 13, 1986
if1
*
I appreciate the opportunity to appear
before this
Committee today to discuss S. 2372, the Financial Institutions
Emergency Acquisitions Amendments of 1986.
That legislation
would make a number of important, but still limited, changes to
the
emergency
provisions of
the Garn-St Germain
Depository
Institutions Deregulation Act of 1982.
For your convenience, I have attached to my statement
a short, and I hope readable.* explanation of the bill.
In this
statement, 1 will focus on the principal issues involved —
urgent
need
effectiveness
for
of
action
the
and
the means
proposed
of
measures
balancing
with
the
the
appropriate
protection of the interests of individual states.
The federal banking regulators —
the Federal Reserve
Board-, the Federal Deposit. Insurance Corporation, and
Office of the Comptroller of the Currency —
the
have reached a
common judgment that the tools we have now for dealing with
emergency
situations
involving
failed
or
tailing
banks,
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-2i•.,,
including those within sizable bank holding companies, are not
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fully adequate.
That judgment was reached
in the light of
strains and pressures involving banks in entire
states or
regions of the country that, as a result of the turmoil in
energy and agricultural markets, face unu&ually severe economic
conditions.
The existing provisions of the Garn-St Germain Act
provide for emergency interstate acquisitions of failed banks
of $500 million or more.
Companion provisions for thrifts are
decidedly more liberal both with respect to size and other
criteria.
Both provisions have been decidedly helpful in
dealing with points of strain.
But the banking structure and
economic conditions in states heavily impacted by energy and
agricultural problems strongly indicates that these authorities
need
to be strengthened
problems —
actual
and
to provide
further
assurance
potential —
can
dealt
be
that
with
-3-
expeditiously and in a manner that will avoid a potentially
contagious and debilitating loss of confidence within a state*
Specifically, we are concerned that in states where
major banking organizations take the form of multi-bank holding
companies, we have the tools to deal with banks within that
holding company structure as a coherent whole rather
piece-by-piece.
than
Me also believe that, in some situations, we
can act more expeditiously, with less risk to confidence and to
other banks and with less cost to the FDIC insurance fund, if
mergers with out-of-state institutions can be arranged before a
bank actually fails or requires FDIC assistance.
Specifically, our strong recommendation
is that the
emergency acquisition powers be expanded to:
allow the interstate acquisition of a multi-bank
holding company, or some or all of the banks
within a holding
&''
company, when a significant
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portion of the banking
assets of a holding
company are impaired;
reduce the bank asset size criterion for such
interstate acquisitions to $250 million.; and
permit acquisition of failing as well as failed
banks •
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As members of this Committee are aware, a series of
developments over this decade have adversely impacted banks and
led to an unusual number of failures and more generalized
*'
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strains.
!j
in technology and market values have all played a part.
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Disinflation, strong competition, and rapid changes
Taken as a whole, the banking system has responded
constructively and resiliently to these pressures.
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There is.,
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indeed, highly encouraging evidence that the system as a whole
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is now gaining strength.
Specifically, for most banks, capital
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ratios have improved, earnings have increased and nonperforming
assets have been reduced.
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-5Nevertheless,
particularly
where
the
in
certain
economy
areas
is
of
the
heavily
country,
dependent
on
agriculture and energy, these strains have been particularly
great; and they have been aggravated by the sharp declines in
energy, agricultural, and land prices.
It is mainly in those
areas where we face a compelling need to be in a position to
deal with problem situations in a manner that will protect,
rather than undermine, the strength and stability of the whole,
including the vast majority of institutions
that are fully
capable of dealing with their own problems so long as general
confidence is maintained.
Fortunately, the* banks, large and small, that have
served
now-troubled
energy
and
farming
businesses
typically been in a relatively strong position.
e
generally
been
characterized
by
historically
have
They have
high
capital
ft
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ratios, good earnings and ample liquidity.
The fact that they
•
ir have been able to draw on these strengths has provided a strong
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first line of defense in dealing with the present pressures.
Ordinarily, that should be adequate.
Supplementing
their
natural
strength,
the
Federal
Reserve is, of course, fully prepared to provide assistance as
part of
the process of
making
necessary
adjustments
to
pressures through its discount window on liquidity and changes
in deposit flows.
The availability of that kind of normal and
appropriate assistance by the central bank, backstopping the
resources and
resourcefulness
themselves, should
of
the banking
organizations
in itself enable solvent institutions to
•j
adjust to the situation.
j
However, there is one remaining potential danger to
stability of banking in these heavily impacted areas —
and
therefore to the entire economies of some states or regions.
The failure of a few important institutions —
handled
expeditiously
and
effectively --
could
unless
raise
unwarranted concerns about other, basically sound banks, and
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lead to a contagious and spreading loss of confidence.
It is
that contingency that we want to deal with and toward which the
proposed
legislation
precautionary.
used.
The
powers
sought
are
Perhaps they will, in the end, not have to be
I hope not*
that hope.
is directed.
But it surely would be imprudent to rely on
Recent earnings reports and other difficulties at a
few institutions point to the danger.
A prompt Congressional
response
strong
will,
in itself, provide
a
message
of
reassurance.
The case for this legislation is, I believe, widely
acknowledged
in the states most directly
debate, as I have observed
concerned.
it, revolves around
The
specific
provisions of the proposed legislation that balance the need
for effective action against the concerns of states, and banks
within a state, that they be able to preserve their ability to
determine the future of their state's banking structure,
p
'•f>f::.
-8In striking that public policy balance, Congress has
•:&
already concluded
that
interstate
banking
acquisitions are
appropriate in certain emergency situations —
• ill:'
>,*
failed banks of $500 million or larger.
those involving
in addition# separate
provisions of present law permit out-of-state acquisitions of
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both
failed
and
failing mutual
savings banks meeting
the
$500 million minimum asset size requirement and of savings and
loan associations without any restrictions as to size.
also point out that current provisions of law allow
4\[
I would
the
interstate or interindustry acquisitions of thrift institutions
"where severe financial conditions exist which threaten
the
stability of a significant number of insured institutions or of
insured
institutions
possessing
significant
financial
resources.
&; ;
*
Those provisions of existing law were adopted because
Congress
recognized
the need
for constructive
preventative
•;i;;
action to assure that a serious particular situation did not
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-9spread and get worse.
The same motivation lies behind the
I
present proposal.
While
the present
situation,
in our
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judgment, requires some further extension of authority for
"tr£
interstate bank acquisitions, care has been taken to limit the
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scope of that authority and to provide a key role for state
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bank supervisors; in fact, the proposal before you dealing with
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commercial banks is substantially narrower than the interstate
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acquisition arrangements for savings and loan associations that
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are now contained in the Garn-St Germain Act.
Main Provisions of the Legislation
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^—
—"
j,v.
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Perhaps the most important change in the proposed
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legislation would
be to permit
the
federal
supervisory
authorities to deal with the units of a multi-bank holding
company as an integrated whole.
simply reality,
This is a recognition of
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A number of states, including typically those impacted
by adverse energy and agricultural developments, have a banking
structure built around multi-bank holding companies.
Normally,
units in those holding companies operate with a large degree of
interdependence,
under
common
management.
financial condition of different banking
However,
the
units within the
holding company may vary substantially.
As things now stand, the law permits us to deal with
those units of a holding company bank-by-bank.
Some individual
banks within the holding company may reach the $500 million
size limit specified by the Garn-St Germain legislation, but
many units may not, even though the holding company is one of
the major institutions in the state.
In some cases, none of
the units meets the present size test, even if the holding
company
is far
larger.
Yet, the
failure of one or
two
important banking units of a holding company would be bound to
affect thie viability of the whole.
-11Th e proposed legislation deals with this situation by
enabling the sale of some or all the banks within a holding
company, or the holding company
itself, to an out-of-state
institution when at least one-third of the entire assets of the
holding company are in failing units, provided those troubled
units
collectively
reach
an
aggregate
asset
size
of
$250 million.
The second proposal is to modify the asset size limit
for an individual bank or for banking units within a holding
company by reducing it from $500 million to $250 million.
That
reduction is in recognition of the fact that deeply troubled
institutions of that size, particularly when incorporated in a
larger holding company, may not in current circumstances be
salable within a state.
Indeed, in some cases the holding
company involved may be among the largest banking institutions
in the state.
In other instances, the larger institutions in
the state-, while able to cope effectively
with
their
own
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problems, may not be in a position to raise the amount of
capital, or to provide the liquidity or management resources
necessary for a major acquisition*
The third area of change would be to permit the sale
Mi
of "failing01 —
defined as a bank in danger of closing —
as
$]
well as "failed11 institutions.
meant to be rigorous —
that, while
technically
The definition of failing is
that is to only include an institution
still
solvent9
has no
reasonable
prospect for either maintaining the liquidity or raising the
capital
necessary
to maintain
itself
as
an
independent
institution without prolonged federal assistance.
The purpose
is straightforward.
Such a
"failing"
institution may be more attractive to a potential buyer than
one actually
in receivership.
The sale might be arranged
without disturbance to confidence.
a lesser cost, to the FDIC.
There would be no cost, or
-13Limitations on the Use of the Emergency Powers
As I indicated earlier, the debate on the proposed
legislation appears to center much less on questions of basic
purpose and rationale —
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which seems to be broadly accepted --
m
than on
the
appropriate
specific
protect the rights of states.
limitations
designed
to
This is a matter to which we
have devoted considerable attention.
We believe an appropriate
balance
with
•i
has
been
struck
operational effectiveness.
that out-of-state
consistent
the
need
for
That need includes the simple fact
purchasers
of
failed
or
very
troubled
institutions will simply not be available, or available only at
very heavy cost to the FDIC, unless the acquired banks can be
operated profitably in highly competitive markets.
Specifically:
Interstate acquisitions could only be made of
banks (or units in a holding company system) when
.
their operation as independent going concerns is
no longer feasible.
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-14Only the chartering authority —
state or federal
#1:
as the case may be —
M
could initiate the process
of interstate acquisition by determining the bank
is failed or failing.
A minimum-size requirement has been maintained,
although at a lower level.
An out-of-state
holding
company
acquirer
would
of a bank
have
expansion rights limited
its
or
bank
subsequent
to the three largest
metropolitan areas or cities within a state.
In all cases, consultation
with
the
relevant
state bank supervisor would be required as to the
possibility of an in-state solution.
In the case
of a failing or failed institution when the FDIC
provides
assistance,
bidding
priorities
of
present law favoring an in-state solution are
retained, and an objection by a state supervisor
-15could be overridden only by a unanimous vote of
the FDIC board.
In
the case of a
failing
institution where no FDIC assistance is provided,
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no interstate acquisition could proceed
if the
|
supervisor certifies that there is a qualified
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in-state
(or, when regional arrangements exist,
regional) acquirer
unless
the Federal Reserve
Board determines that the proposed in-state buyer
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does
not in fact
have
adequate
financial
if
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ifi
resources*
Finally, the authorities provided would end after
five years.
We
believe
these
safeguards
are
reasonable
and
workable, balancing the legitimate concerns of the states and
competing banks with the broader interest in effective action
to deal with emergency situations.
They build upon concepts
and tests in existing law, either for banks or thrifts.
I am
H
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I
tip1'
-16if,
n o t a w a r e o f s e r i o u s c o n c e r n s that those e x i s t i n g
iV
have been a b u s e d .
,
;
if:
authorities
So far as the "failing bank" test is -concerned, the
v
intent is plainly only to deal with institutions that, in terms
;
of strong
liquidity
pressures or
Impaired
capital, would
"
j
otherwise require large and prolonged official assistance if
!
;
they
are
able to survive at all# with ancillary risks to the
FDIC fund.
I
to make them wards of the government for an indefinite period.
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In effect, the only alternative to merger woula be
If such institutions were permitted actually to fail,
it
is widely
accepted
that
they
would
be
eligible
for
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interstate acquisition.
If that premise is accepted,, the new
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provision for "failing" banks appears certainly reasonable as a
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matter of further protecting the FDIC fund and the stability of
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other banks that could be infected by a confidence crisis.
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Such a provision has already been adopted for thrifts.
Strong
preference would be provided for an in-state "solution," if in
-17fact such a solution exists —
in fact, that protection would
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be stronger than if, under current law, the banks failed and
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FDIC funds were more directly at risk.
/)+***
In all cases of failing institutions, the board of
<*•</
directors or the stockholders of the institution itself would
have to agree to a proposed merger.
I
Some have questioned
V." J
whether that might lead to a preference for an out-of-state
partner willing to pay a higher price.
That is one reason that
the relevant state supervisor has been provided an effective
veto power so long as there is, in fact, a feasible in-state
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partner ready, willing, and able to provide the necessary
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capital and other support.
Other questions have arisen with respect
to the
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necessity to deal with the units of a multi-bank
company as a whole*
holding
In some instances, dismemberment of a
holding company may indeed be possible.
But that will not
always, or even typically, be consistent with achieving
the
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-18purposes of the legislation -- speedy and orderly disposition
of severe problems in a manner consistent with the stability of
the banking system over an entire state or region*
Specifically, in cases where the failed or
failing
units within a holding company are key units of -the system,
piece-by-piece disposition would imply that sister banks are
cut adrift, without the operating, accounting, and
product
delivery systems often centered in lead banks or the holding
company itself.
Units that might have been both solvent and
liquid within the holding company structure would find their
viability undermined
if they had to maintain
themselves as
,
j
independent units -- units that would inevitably be tinged by
their
past
association
organization.
with
a
failed
holding
company
Nor are individual units of a holding company
likely to be attractive to potential out-of-state acquirers.
1
The associated
J
uncertainties
and potential disruptions are
1
precisely what the bill is designed to avoid.
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-19Conclusxon
It is an unhappy fact that economic conditions in some
states have brought strains and strong pressures on elements of
the banking system in those areas.
At the same time, there is
i
every reason to believe those problems can be contained and
diffused
in a manner
that will preserve
and
support
essential stability of the banking system, and
the
thus avoid
aggravating already difficult economic circumstances.
i
To assure
that result, supervisory
and
regulatory
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agencies do need some limited additional authorities so that
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they can act with dispatch and at minimum cost, both in
financial terms and in terms of maintaining confidence.
Those
authorities would be provided by S» 2372.
.
The bill has been carefully drafted to limit its scope
totally to emergency situations for a limited period, at the
[
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same time reconciling conflicting demands of public policy.
Congress in the past has acted with care and effectiveness in
h•
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providing necessary authority to deal with problem areas in
both the banking and thrift industries.
Failure to act now could only increase the risks that
the ultimate costs would be far greater*
*'*{>'
*'•&•
We want to forestall
a crisis, not to pick up the pieces after the damage has been
done.
I strongly recommend you take the crucial
further
steps required by the present situation with the clear sense of
urgency the situation demands.
'it
Financial Institutions Emergency Acquisitions Amendments of 1986
T
If:
General Provisions
The Federal banking regulators have requested that the
Garn-St Germain Act of 1982—which permits acquisition
across state lines of failed banks having assets of $500
million or more—be changed and augmented in the following
respects:
That the size threshold for interstate emergency
acquisitions be lowered from $500 million to $250
million.
That an interstate rescue be permitted when a bank is
f?
f ailing"--in danger of closing--rather than actually
closed.
That the interstate acquisition of a bank holding
company or of some or all of the banks in a bank
holding company be permitted if the assets of the
banks in danger of closing in the holding company
total $250 million or more and constitute at least 33
percent of the banking assets of the holding company.
That the out-of-state banking company be permitted to
expand its operations to the three largest cities or
metropolitan areas in the state of the acquired
banking institution.
II.
The In Danger of Closing Test
The bill provides s qualitative test to determine when an
interstate acquisition may be made of a bank that is "in
danger of closing/1
- A bank is defined as f!in danger of closing" (1) if it
is not likely to be able to meet the demands of its
depositors or pay its obligations and there is no
reasonable prospect for it to do so without federal
assistance; or (2) if it has incurred or is likely to
incur losses that will deplete all or substantially
all of its capital and there is no reasonable prospect
of replenishment of its capital without federal
assistance; or (3) if there are other grounds for
closing the bank under state law.
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The appropriate federal or state chartering authority
must certify in writing that a bank is "in danger of
closing.lf The appropriate chartering authority is the
State bank supervisor in the case of state chartered
banks and the Comptroller of the Currency in the case
of federally chartered banks.
III.
State Banking Structure Protections
Careful protections to preserve the opportunity of an
in-state solution are included in the legislation.
The
particular safeguards depend on whether or not the FDIC
provides financial assistance in connection with the
interstate acquisition.
A.
Unassisted Acquisitions
In the case of acquisitions of failing institutions
that take place without FDIC financial assistance:
Before a failing institution can enter into
discussions with an out-of-state company, the
State bank supervisor must be notified and the
company must attempt to arrange an acquisition
within the state or within its region if the state
is part of a regional compact.
If in-state and regional efforts are unsuccessful,
any application for an out-of-state acquisition
must describe the efforts made to arrange an instate or regional acquisition and the reasons for
rejection of any in-state or regional proposal.
If an application is submitted for an out-of-state
acquisition, the Federal Reserve must consult the
State bank supervisor.
The State bank supervisor must be given a reasonable opportunity to object to approval of the
application — in no event less than 48 hours.
The Federal Reserve cannot approve the application
if the State supervisor certifies that an in-state
— Q—
or regional applicant has offered to acquire the
institution and has the financial and managerial
resources to be likely to be able to secure
regulatory approval.
The in-state or regional applicant does not have
to match or exceed the out-of-state bid. The
in-state or regional offer need only be sufficient
to recapitalize the failing banks and not involve
FDIC assistance.
Only if the Federal Reserve determines that the
in-state or regional party certified by the State
supervisor does not have the financial resources
to recapitalize the failing institution, can the
Federal Reserve approve an out-of-state acquisition.
The acquisition must be approved by the board of
directors of the bank that is in danger of closing
or its holding company.
FDIC Assisted Acquisitions
In the case of acquisitions of failed banks or those
that take place with FDIC financial assistance, the
•following safeguards are included in present law or in
the proposed legislation:
The FDIC may assist a merger or acquisition across
state lines only where the board of directors of a
failing bank requests that the FDIC do so.
If the best offer--in terms of lowest cost to the
FDIC—is made by an out-of-state company, then the
FDIC shall permit any in-state or other bidder
whose bid was within 15 percent or $15 million
(whichever is less) of the best offer, to submit a
new bid. In making a final determination on bids,
the FDIC is directed to give priority to an
institution from the same state. In considering
offers from different states, the FDIC is required
to give priority to offers from adjoining states.
Pr-
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The FDIC must consult with the State bank supervisor before the FDIC can assist an interstate
merger or acquisition.
The State bank supervisor must be given a
reasonable opportunity to object to the interstate
merger or acquisition—in no event less than 48
hours.
If the State supervisor objects to the interstate
acquisition, the FDIC may go ahead with the
transaction only by a unanimous vote of the FDIC
Board of Directors, and a written certification of
its decision must be provided to the State
supervisor.
IV.
Other Provisions
The bill specifically prohibits providing financial
assistance by the FDIC to any nonbanking subsidiary of
a holding company in an assisted interstate transaction.
If the FDIC provides financial assistance to a failing
bank with total assets of $250 nillion or more and the
bank is not acquired by an out-of-state company at the
time the assistance is given, the bank and its holding
company affiliates shall remain eligible to be
acquired by an out-of-state bank or holding company as
long as the assistance is outstanding.
The Federal Reserve would be authorized to waive
notice and hearing requirements in approving emergency
acquisitions•
The bill extends for five years the emergency
provisions of Title I of the Garn-St Germain Act.
Those provisions and the provisions added by this
legislation would sunset in five years.
@FedFRASER