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FOR RELEASE ON DELIVERY
MONDAY, MAY 5, 1975
12:15 p.m. C .D.T.
(1:15 p.m. E.D.T.)

BANK HOLDING COMPANY REGULATION

Remarks of

Philip E. Coldwell
Member
Board of Governors
of the
Federal Reserve System

Before
the
Bank Holding Company Administration
Conference

International Hotel
New Orleans, Louisiana

May 5, 1975

Bank Holding Company Regulation
As most in this room are undoubtedly aware, with the
passage of the amendments to the Bank Holding Company Act in 1970,
the Federal Reserve was given the job to administer the regulation
of bank holding companies, to approve or deny the acquisition of
banks or nonbank companies, and to determine the industries which
would be so closely related to banking as to qualify for bank
holding company acquisition.

After four years of action on such

applications, it is now time to take a look at the developments in
the bank holding company sphere and assess the changes which this
new legislation has brought about in the banking industry structure.
First, it is apparent that the bank holding company idea
caught on rather rapidly.

From December 31, 1970 through December

31, 19 75, the Federal Reserve processed 3,638 applications, of which
3,496 were approved and 142 were denied, or about a 4 per cent re­
jection rate.

In this four-year period, the number of bank holding

companies increased from 1,424 to 1,586.

One-bank holding companies

were about 89 per cent of all companies in 1970, but about 83 per cent
in 1974.

Meantime, the multibank holding companies increased from 161

at the end of 1970 to 272 at the end of 1974, an increase of nearly
69 per cent.

In view of the Federal Reserve’s action in these fields,

it is of interest to see the change in the control of bank deposits by
holding companies in the four-year time span.




At the end of 1970,

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bank holding companies' subsidiary banks held 52 per cent of total U.S.
deposits, with 18 per cent controlled by multibank holding companies and
34 per cent by one-bank holding companies.

Toward the end of 1974,

however, the per cent of total U.S. deposits controlled by bank holding
companies had reached 69 per cent with multibank holding companies
accounting for 39 per cent and one-bank holding companies for approx­
imately 30 per cent.

It is clear that the biggest change in these

figures’ is in the per cent of U.S. deposits held by the multibank
holding companies which has risen from 18 to 39 per cent or more than
doubling in this four-year period.

The per cent of U.S. deposits held

by one-bank holding companies has actually declined and the per cent
held by all bank holding companies rose approximately 32 per cent.
Our report would not be complete without a quick look at
the number of nonbank subsidiaries controlled by bank holding
companies.

At the start of 1971, there were 3,632 nonbank subsidiaries

controlled by bank holding companies.

At the end of 1973, this figure

had risen to 4,812 and at the end of 1974, approximately 5,000 such
companies were controlled by bank holding companies.
Having completed the facts of the current situation, let
us turn now to some of the regulatory issues faced in the early days,
those being faced today, and what issues are likely to face the reg­
ulators in the handling of bank holding company problems for tomorrow.




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It should be remembered that the 1970 legislation was an amendment
to the 1956 Bank Holding Company Act and that many of the issues
which we will mention as important to the Board1s consideration in
1970-1973 had been raised as early as 1956 and in the intervening
fourteen years.
Among the early issues faced were the structure or degree
of concentration to be permitted, the size of bank which could be
acquired, and the definition of markets.

Certainly, without clear

understanding of the markets served by the bank holding companies
requesting acquisitions, there could hardly be any focus upon the
concentration to be permitted or the competitive limits.

Among

the most difficult early issues to be faced in nonbank acquisitions
were the lack of data and limited experience in interpreting
evidence of public benefits, needs, and convenience.

Another

group of major decisions occurred when determining permissible
nonbank activities.

As bank holding companies requested approval

for entrance into a new field, the Board held hearings and deter­
mined whether the requested nonbank activity was closely related
to banking.
Finally, a good many of the early issues were also
entangled with grandfather and successor right decisions.

In these

areas the Board had to struggle with the evidence indicating
ownership over a long period of time or evidence which seemed to




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indicate that the company had been acquired just for purposes of
multibank holding company expansion in the period since likelihood
of the law's passage became clear t<. the public.

Throughout these

decisions there was a strong question to be resolved as to the
degree to which the Board of Governors should delegate decision­
making to its Federal Reserve Banks.

As the years wore on, such

delegations have increased.
By 1974, the Board of Governors had established a fairly
firm pattern for determining competitive implications of a proposed
acquisition.
areas.
system.

Precedents had been set in a number of different

But then new problems were becoming evident in the banking
The Board was faced with questions about capital adequacy,

liquidity, servicing of debt, managerial and financial condition,
future competition, leveraging, and laundrj list expansions.

Given

the economic and financial developments in ib»73 end 1974, it is noc
surprising that the Board denied a number of acquisition requests
in order to conserve the capital and managerial r ftention of the
parent company to problems surfacing in its own family of banks,
nonbanks, or within the bank holding company itself.
As banl- holding companies and banks often found it diffi­
cult to obtain new equity capital in the capital markets during the
past two years, the question of debt became of increasing concern
tc the Board.




This raised with the Board of Governors a clear

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question of debt servicing capacity and in a number of cases the
Board denied the acquisition because it concluded that the acquiring
holding company was incurring debt which could not reasonably be
serviced.

Similarly, in a number of recent cases, the creation of

a one-bank holding company seemed designed primarily to permit such
company to take over the debts of a private individual which he had
contracted in order to purchase the stock of the bank.

In a few

cases, applications were made where the holding company was not only
to take over that debt but also debt created by loss in other
endeavors.

Where no minority stockholders existed, the Board could

view such applications as personal restructuring but even for these
the Board faced a question of the public interest and benefit by
such use of the holding company device.
Certainly an important and difficult matter for the Board
has been the question of future competition.

In cases where a

multibank holding company requested a significant acquisition in an




area in which it might either enter on a foothold or a de novo basis,
the Board found real problems in approving such acquisition by a
major potential competitor.

Similarly, where a multibank holding

company was already a force within the banking market, the acquisition
of banks in the nearby suburban areas raised questions of future
competition.

Court cases have limited the application of such future

competition rulings just as they have rulings by the Board that all
stockholders must be given the same offer.




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Probably one of the most troublesome problems facing the
Board in acting on applications by bank holding companies in 1974
was when an applicant controlled a bank or banks in difficult
financial straits.

Most of the difficulties were associated with

capital adequacy, liquidity, managerial competence, classified
assets and internal operating problems.

It was not the intention

of the Board to publicly penalize such banks by denials of their
acquisition requests.

The intent was to signal a "go-slow" policy

on bank holding company expansion where capital and liquidity
positions were less than satisfactory.

As a result of this policy,

some holding companies withdrew pending applications in view of this
attitude of the Board.
Another major problem of the past year has been leveraging.
This problem usually occurred when a bank holding company applied to
acquire a finance company, leasing operation, or mortgage banking
company and then to leverage a small amount of capital heavily.

As

a result of problems which have surfaced in such companies during
the past year, the Board has begun to limit its approval for such
acquisitions to a definable leveraging ratio.

Foreign acquisitions

were also troublesome where the Edge corporation first bought a small
amount of stock of the foreign company only to find that it would
need to acquire a sizably larger proportion of shares in order to
protect its original investment.

In a few instances, it has appeared

that the holding company's bank subsidiary expanded its credit to
minority-owned companies abroad and the bank later on applied for




-7additional stock with the request based on a protection of not
only the minority stock owned but the credit extended.
During the four years of processing acquisition requests,
the Board has been paying increasing attention to the job of regula­
tion of the holding companies.

In essence, its position has been

that the holding company should serve as a source of strength to
its subsidiaries.

The Board has thus looked at a number of holding

companies recently to see whether capital could be downstreamed
into banks by origination of debt capital by the parent bank holding
company.

The Board similarly has been concerned with management at

the holding company level and by diversion of management talent re­
sulting from the requisition of nonbank companies x^ithout competent
management, especially when such companies were of the type not
formerly managed by the holding company.

It has recently become

apparent that such nonbank subsidiaries can be a ma jor problem for a
bank holding company.
The problem associated with real estate investment trusts,
advised by bank holding companies, as well as problems created by
direct loans by finance and other nonbank subsidiaries, have surfaced
questions of the effects on bank subsidiaries of the same company.
In a few cases there have been attempts to transfer paper between a
troubled nonbank subsidiary to a bank subsidiary by means of corporate
transfers and sales and purchases of investments.

Of course, such

transfers are severely limited by the Federal Reserve Act but in a
few cases the transfers x^ere made over and above the limits in the Act,

creating a violation.

As a result of these problems, the Board has

been studying means by which early warnings can be achieved of
problems in the nonbank subsidiaries— problems which might spill
over to threaten the solvency, liquidity, or soundness of the holding
company and its bank subsidiaries.

A new report on inter-company

transfers has been developed which will provide some of the informa­
tion needed to monitor such transfers.

The Federal Reserve Banks

and Board of Governors have not set a course, as yet, on examination
of nonbank subsidiaries, though the Reserve System units have done
a substantial number of inspections.

Some of these inspections

have been to determine the general health and condition of a bank
holding company;

others have been made because some particular

problem about a company or nonbank subsidiaries became known to
the System.
Looking d o ™ the road to the future issues which we can
perceive, it is rather clear that the early identification of
problems will be a primary regulatory effort of the Federal Reserve.
The resolution of such problems will depend to a large extent upon
early identification followed by creating procedures which will screen
these problems from the bank subsidiaries.

It may be that the Federal

Reserve will need additional legislative authority to force divestment
of nonbank subsidiaries whepj^kttff^^ubsidiaries are in significant
trouble and are threatening, the' safety and soundness of the bank
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subsidiary.




ni

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LIBRARY

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A recurring issue, but one which seems likely to be
significant in the coming years, is the level of concentration
to be permitted in each banking market.

If the Federal Re­

serve continues its present pattern, there will be limitations on
such concentration and the limitations are likely to be challenged
by bank holding companies and perhaps even individual banks.

The

concentration ratios by market and by State are sharply divergent,
as past legislation has permitted some major companies to achieve
great concentration of deposit holdings while others, particularly
in unit bank States, have been held to relatively modest ratios.
In my opinion, the Federal Reserve will increase its
emphasis upon the convenience and needs and the measurement of
public benefits to be achieved by further acquisitions by the
major holding companies.

As banking markets develop and additional

offices arc available to the population, it may well be substantially
more difficult for a multibank holding company to prove that its
acquisition of a bank is in the public interest by providing greater
competition or providing services not presently rendered to the public.
Similarly, in my view, there will be additional scrutiny by the
Board of Governors on cases where the public benefit cannot be clearly
established but instead is simply to benefit an individual.

Also,

it seems to me that the Board will be looking with considerable
interest at its prior position that virtually unrestricted de novo
entries are pro-competitive.




In line with my comments above, it would




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scem to me that as banking markets become saturated, a de novo
entry might be a problem to that market, limiting the growth and
perhaps even challenging the profitability of existing banks.
Moreover, it seems to me, that the Board will be looking
at its laundry list, possibly to permit expanding into other non­
bank fields, but within very limited areas.

In fact, proposals

to find as permissible additional nonbank activities may take much
less time in the coming years than in the past years.
With regard to the problems and regulation of holding
companies after they are established, it seems to me that one of
the principal needs will be to ensure that the bank, nonbank and
holding company expansion itself does not lead to problems which
cannot be determined within early identification times.

Regulation

of banks and bank holding companies has already caused the Board
to request legislation to permit the thirty-day waiting period to
be waived and Lo permit emergency interstate acquisitions of large
problem banks.

It is likely that the Board will request changes

in penalties to enforce the Bank Holding Company Act, because we
have found that sheer voluntary compliance, even with the threat of
denials for future applications, is insufficient to correct some
of the abuses showing up either in the holding company or in its
subsidiaries.

In my opinion, the Board will be faced with decisions

which raise questions about the protection of independent banks as
the banking markets become more saturated.

Such protection would be




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aimed primarily at market area protection and certainly with no
attempt to diminish competition.
Similarly, I think the Board of Governors will be
faced with limiting expansion-minded companies to those acquisitions
which can be handled within the capital and managerial resources of
the bank holding company.

I believe there will be greater limita­

tion on use of interest-sensitive purchased money liabilities for
these companies and perhaps greater limitation of debt to be issued
for acquisitions, unless the earnings of the company clearly can
justify the issuance and repayment of the debt within its maturity
schedule.
Finally it is my belief that the Board will be faced with
an increasingly difficult group of application decisions.

In only

a few States have holding companies made no major efforts and these
are largely States prohibiting them, but .nultibank companies are noL
very active in the State-wide branching States.

As structural,

questions persist, there may be a new rash of applications to beat
legislative challenges.

For the Board, the problem will be to watch

the concentration of assets and further competition so as to insure
the public interest in the best available banking services.

As the

primary candidates for acquisition are exhausted, the movement may
slow, leaving independent banks in the less desirable areas.

It

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will be a problem for the Board to watch carefully that such small
banks are not backed into an isolated situation where economic
pressure can force unprofitable operations or an uneconomic sale
of the bank.

Undoubtedly there will be changes in correspondent

patterns as holding companies expand, but one can hope that the
correspondent services would still be available to the independent
banks even if such banks are competitive with subsidiaries of the
holding companies.
In summary, the Board and the Federal Reserve, charged with
supervising the holding company area, have faced a number of challeng­
ing questions in regulation of this Act.

We will look with great

care, and in fact are already studying, the whole holding company
movement, measuring the public interest and efficiency of such
holding companies.

Without prejudging that study and its results,

let me just say that holding companies appear to be accomplishing
some of their expected benefits to the public, but they are also
creating some unexpected problems as they explore the best method
to manage substantially larger and more complex companies with both
bank and nonbank subsidiaries.




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