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11:00 A. M. (E.D.T.)


Remarks of

Philip E. Coldvell


Board of Governors
of the
Federal Reserve System

at the

14th Annual Convention
of the
Independent Bankers of Minnesota

Alexandria, Minnesota
August 14, 1975

Multi-Bank Holding Companies--Dictator or
Servant to the Public Interest______

In developing my talk to you today, I recognized that many
of you are philosophically attuned to and have membership in the In­
dependent Bankers Association.

Presumably, this means that you have

a strong interest in maintaining independent ownership of banking in­
stitutions throughout the United States.

I have a strong interest in

that same idea though at a less comprehensive level.

But I suspect

that you view me more as the defender of large banks and bank holding

Let us see if we can blend our interests to find a com­

mon ground.

Of course I speak only for myself, not the Board or any

other of my associates in the Federal Reserve System.
I hope to persuade you that the Federal Reserve has no in­
tention of concentrating bank ownership to the point of monopoly control
for any banking market, and that the Federal Reserve is handling the
regulation of multi-bank holding companies in a responsible and effective

Similarly, I hope to persuade you that there is a reasonable

consensus which can be reached between those who favor multi-bank hold­
ing companies and those who are primarily interested in independent
bank ownership.

Further, it is my hope to obtain some recognition from

you that the holding company device is a means of achieving greater
competition in a sheltered and restricted-entry industry, and that


holding companies can increase the credit facilities for the people
of this nation and through competition provide banking facilities in
a broader form and perhaps at a lower cost.
I think that you will agree that some members of the bank­
ing industry have fallen short of the desired target of full ser­
vice to their communities, especially the vibrantly growing sectors,
and that in some banking markets competition is not a driving force.
For my part, I can freely recognize that affiliation with a
multi-bank holding company is probably not the best route for all
financial institutions.

As a matter of fact, only 15 per cent of

all banks are presently affiliated.

Furthermore, I recognize that

small consumer-oriented retail banks are the least likely to join
multi-bank holding companies and that, especially in the suburban
metropolitan areas, the continued presence of independent banks is
a strong innovative and procompetitive force.
Having laid out for you my aims for this speech, let us
quickly review the purposes of the Holding Company Act as amended in

It will be recalled that the basic holding company legislation

of 1956 did not regulate the one-bank holding company and consequently
one of the specific aims of the 1970 amendments was to close that
loophole of nonregulation.

It was clear that the loophole had to be

closed because, in the late 1960!s, many large banks began to form
one-bank holding companies, and some expanded their operations sharply.


Additionally, the law was amended to permit holding company entry in­
to a substantially greater range of non-bank activities.

But the

range of such activities was limited by requiring that the activity
must be closely related to banking and that performance of the activity
by bank holding companies must be in the public interest.
This background of purpose helps explain the large number
of one-bank holding companies in existence today, but why have we
continued to see the expansion of the multi-bank holding company struc­

There are at least three basic reasons.

First, the aggregate

capital of a holding company can be used to better serve the community.
Laws which limit the amount of credit extended to a single borrower
are mainly based upon the capital and surplus of the particular in­

Through efficient participations of overlines, the multi­

bank holding company can, in effect, aggregate the capital and surplus
of its banks, and thus can achieve a greater lending limit to serve
the growing industries of the community.

I should note here that this

function is also performed through the correspondent banking system,
which has served our economy well.

There are certain frictions in­

herent in this system, however, that are not inherent in the holding
company system.
The second reason for multi-bank holding company formation
is structural

because in states where branching is prohibited or

limited, the holding company device serves as a substitute for branch­

Admittedly, there are major problems in using holding company


subsidiaries as substitutes for branching.

Of course, legal and

regulatory restrictions are usually greater for a bank than for a

Flow of funds restrictions, for example, would be greater

between banks in a holding company than between branches in a bank;
loan restrictions for the bank would be greater; and the initial
capital requirement would ordinarily be higher for the bank.
In addition, banks are much more difficult to open and close
than are branches.

With all of the panoply of a unit bank--a

charter, a board of directors, individual capitalization and a variety
of other limitations— opening or closing a bank is costly in terms
of both time and money.

Primarily because of these factors, further­

more, the psychological impact on the community of closing a bank is
ordinarily high compared with closing a branch; and thus the cost to
the public image of the banking organization is higher.

But for the

expansion-minded bank in a unit-banking state, faced with limited
growth at one location, the multi-bank holding company device can be
an attractive alternative.
A third reason for holding company affiliation has been the
favorable tax treatments.

Not only can bank owners trade their shares

in for the shares of the multi-bank holding company and defer tax
liabilities, but the holding company benefits from savings associated
with filing consolidated tax returns.

Subsumed in this argument is


of course the ability of owners of the shares of small banks to achieve
a more marketable stock through exchange for the more widely held
multi-bank holding company shares.
With these and other basic reasons for a holding company
affiliation, a large number of banks have moved into holding company
status, many of them during the past four and a half years since the
amendment to the Bank Holding Company Act.

In the early phases of

this new law the Federal Reserve,being assigned to the job of adminis­
tration, had a set of conditions to clarify before the full impact of
the Act could be achieved.

For example, in some states there was an

initial restructuring of ownership already in place.

Owners of large

chains of banks found it possible to move some of these banks into
multi-bank ownership status.

Similarly, for very large banks with

partially-owned affiliates, there was an immediate effort to re­
structure ownership and bring these affiliates into full holding
company subsidiary status.

Such efforts were limited, however, and

divestiture of some affiliates was required where competing positions
were in evidence.

For a number of major banks converting into multi­

bank holding company status, there were affiliates who competed between
themselves and whose aggregation into a single multi-bank holding
company would have given that holding company an unreasonably large
position in a single market.

In those instances, a very sharply re­

duced level of holding company subsidiaries were permitted from the
former affiliates.


Another area of administrative problems related to divestiture
of bank holding company ownership of impermissible assets.


example, some bank holding companies owned shopping centers, oil wells,
manufacturing companies, and a variety of other non-banking concerns.
Some of the bank holding companies were required, or will be required,
to divest such concerns.

Similarly, divestiture agreements were

sought where the basic holding company itself was in a non-banking
field ¿nid did not wish to convert to a bank holding company.
Finally, in the early administration, the Federal Reserve was
required to review the potential bank-related lines of activity in which
bank holding companies might be allowed to engage.
lines were established usually after public hearings.
and for the Federal

Such bank related
For the Board

Reserve staff, these reviews necessitated substantial

educational efforts as we attempted to assimilate and digest large
quantities of new information.

In those activities determined to be

permissible, we also had to struggle with a number of analytical prob­
lems that had not previously been considered.

Perhaps the best

example of such problems involved the determination of relevant product
and geographic markets for those activities.

Such determination was

necessary to form a basis for competitive considerations.
Our recent administration of the bank holding company law
has centered more upon the problems resulting from individual holding
company acquisitions, than upon the expansion of permissible areas of



It has been the Board's position, for example, that a

holding company should provide financial strength to its subsidiaries.
Thus when we see a holding company applying for ownership of a sub­
sidiary and recognize an unusually heavy debt burden for acquisition
of the subsidiary, we are quite often bent in the direction of denial
of that acquisition request.

Similarly, where we find that the

financial strength of bank subsidiaries is being diluted by transfers
into the bank of less-than-fully satisfactory assets from other holding
company subsidiaries, that finding has become an important consideration
regarding the holding company's application to expand.

Further, we

have resisted the expansion of holding companies where it has been
shown that capital is inadequate, earnings are weak, assets are of
poor quality, or where there is an exceptionally heavy reliance on
short-term interest sensitive funds.
Other problems recently addressed in the administration of
the Holding Company Act include non-accrual loan problems and intra­
company transfer problems.

Non-accrual status has been particularly

evident in loans to the real estate industry, but has
in certain business loans also.

been in evidence

Where such loans become a heavy

portion of a particular bank holding company's assets, the Board has
been increasingly reluctant to approve further expansion.

The intra­

company transfer problem is manifest in those situations where difficult
credits have been financed by either sale of the loan to the bank sub­
sidiary or by loans from a bank subsidiary to the non-bank subsidiary.


Overriding all of these problems has been the requirement
of the Board of Governors that there be a demonstration of the public
benefits from acquisition of either bank or non-bank companies.


have generally insisted that there be some demonstrated public benefit
in the form of improved service, more and broader outlets for credit,
increased competition between credit-granting institutions, or a
potential reduction in cost of credit.

In those limited cases where

some anti-competitive results have been demonstrated, we have approved
the cases only where the public needs and benefits have been clearly
evident and of sufficient importance to outweigh the anticompetitive
More recently, the Board has also been especially concerned
with adequate capital and liquidity, managerial strength, and ability
to service any acquisition debt incurred.

In case after case around

the Board table, the Members of the Board have insisted that the funda­

strengths of the holding company and its banking subsidiaries

be demonstrated before an expansion can be approved.

The Board has

paid special attention to the managerial strength of both the holding
company and its subsidiaries.

Similarly, we have focused attention

on the ability to service debt where the holding company requests
approval for an acquisition using debt as a means of payment.


Board has been insistent that a clear schedule of repayment be estab­
lished and that a clearly reasonable forecast of earnings sufficient
to cover that repayment be presented.



Finally, the Board has been paying careful attention to the
pattern of structural development in banking within markets and states,
as well as across the nation.

It is almost a uniformly accepted fact

among multi-bank holding companies that acquisitions of even limited
size banks within any market where the holding company already holds a
dominant position, are

likely to be denied by the Board, barring

some unusual and clearly demonstrated public benefit.


horizontal acquisitions for established multi-bank holding companies
are, therefore, few and far between in the realm of applications
coming before the Board.

Instead, where a multi-bank holding company

wants to expand in its own market, e e novo applications are the safest
rule of the day.

The Board has ordinarily been disposed to approve

such applications because, unlike the horizontal acquisition of an
existing bank, the d¿ novo acquisition does not immediately increase
the concentration of banking resources and does not remove an in­
dependent decision-maker from the market.

In my opinion, even the

de novo applications may come under more severe questioning, if the
application relates to a banking market where the banking office per
population ratio is nearing the comparable ratio elsewhere.


recognize that the creation of an excessive number of banks or banking
offices could be detrimental to the long-term public interest, if
the community is already well served and if such offices were to so
diminish the profitability of existing offices that the resultant




banking units as a total became unprofitable and, therefore, of
questionable safety and soundness.

The Board lias also been steadily

mindful of the need to protect against over-concentration of banking
in a particular market, a state, or a region.

While we have set no

specific percentages as limits to the level of concentration, it is
clear that the Board has looked with favor upon the creation of a
number of major competitive units, rather than the further expansion
of a single unit or a small group of companies.
I might just mention here, however, that increased con­
centration in a state or region may not reflect, in the Board's view,
undesirable structural developments.

Holding company expansion

cannot take place without some degree of increased concentration.
While this increased concentration is occurring within the state,
furthermore, the availability of services and intensity of competition
within local markets throughout the state may also be occurring.


while the state or region may be important in a given case, it is
most often the local market--to which individuals and small and medium­
sized businesses are ordinarily restricted in acquiring loans— that is
of greatest concern to the Board.
For the above reasons and because of limited access to capital
markets, lower price earnings ratios, and possible dilutions of equity,
the rate of new applications handled has fallen sharply.

In the first

half of 1974 there were 697 applications completed, while in the




first half of 1975 the total fell about 46 per cent to 375 cases

Of particular interest has been the very sharp decline

in completed < e novo non-bank applications: down 57 per cent from 339
in the first six months of 1974 to 145 in the comparable period of

In contrast the de novo bank applications processed decreased

by only 10 per cent from 118 last year to 107 this year.

The handling

rate of applications for acquisitions of existing banks also fell 57
per cent while system processing of applications for acquisition of
existing non-bank firms declined only 28 per cent.

There were no

entries into new activities ruled on in the first half of 1975, while
four such cases were handled in the first six months of the past year.
As you may know, a majority of the applications processed by
the Federal Reserve are handled by the Reserve Banks under a compre­
hensive set of delegation criteria established by the Board.


of these criteria prohibits Reserve Banks from processing under delegated
authority any case in which any department of the Reserve Bank
recommends denial.

Thus all denials are issued by the Board.


the 171 cases processed at the Board in the first half of 1975, denials
accounted for almost 13 per cent compared to a denial rate of 9.6 per
cent in the January-June period of 1974.

Incidentally, approximately

a fourth of the applications by existing holding companies to acquire
an additional bank were denied by the Board during the first half of




Confession is good for the soul, and I admit that perfec­
tion in policy or administrative rulings is unlikely on several

First, one should recognize that the Board is a changing

group of me’

The present Board has only two members who were

present for the entire time from the 1970 amendment to the Holding
Company Act to date.

Obviously, some of the newer members can have

differing opinions from their predecessors.

Second, these are human

beings who can and do make mistakes, though hopefully of a small
magnitude and without repetition.

Thirdly, there are obviously

cases where reasonable men can differ and the courts have occasionally
instructed us to reconsider an opinion.

Finally, other organizations

including the IBAA, have sought judicial review of several Board

In the past three weeks alone, the courts have rendered

judgments requiring formal hearings, or a modification of a Board

I personally feel no animosity concerning such rulings

unless they become so numerous as to constitute harassment.
an element of this latter in the demands for formal hearings.

There is
I feel we

can accommodate any individual or organization wishing to be heard
in our regular protest arrangements.

Excessive demands for formal

hearings can only slow the machinery and create backlogs of unsolved

Nevertheless, the Congress did provide for such formal hearings

and we will be responsive to legitimate requests.


In summary, the Board views the holding company device for
which it has regulatory responsibility as a means of improving


petition among credit granting units of this nation, and for provid­
ing greater public benefits.

It does not view this device as a cure-

all or as a panacea for all banking problems.

In fact the Board

recognizes that new problems have developed in some holding companies
and that others may develop in the future.

It has met these problems

by rather significant increases in examination, reporting, and in­
spection analysis, and has limited expansion of those holding companies
where problems have developed.
None of what I have said is likely to change the minds of
those who view every holding company as an economic or credit dictator,
or those who see the holding company device as a threat to the dual­
banking system.

But perhaps what I have said will create an open-

mindedness to see some benefits coming from the holding company arrange­
ments and perhaps a few will recognize that the Board of Governors has
gone to great lengths to protect the public interest, to insure
competitive conditions in the industry, and to require demonstrated
public convenience and needs before approving the expansion of bank
holding companies.

Moreover, the Federal Reserve has attempted to

insure that the holding companies themselves provide strength to their

In recognizing this, I would hope that you would see


the value of the Board's overview in this field.

But I think you

should also be cognizant of the fact that the Board of Governors is
administering a law passed by Congress, and that our powers of
interpretation have quite definite limits in handling this adminis­
The holding company approach has indeed been used rather
significantly since 1970, and as of December 31, 1974, there were onebank and multi-bank companies numbering 1,616 which accounted for 68
per cent of all banking deposits.

It might be noted that there were

828 non-member banks with $30 billion of deposits and 512 member banks
with $192 billion in deposits controlled by one bank holding com­

The multi-bank holding companies numbered only 276

and their bank subsidiaries totaling 2,122 were 61 per cent of all
banks affiliated with any holding company but only 15 per cent of all
banks in the country.

The multi-bank holding company bank sub­

sidiaries accounted for $287 billion in deposits or 38 per cent of
the nationfs total banking deposits.
Finally, when all is said and done today, I think we have to
recognize that the verdict is still out on the holding company device.
We may find that the banking industry has created in the holding
company arrangements just a poor substitute for branching and has
exposed the industry to additional unnecessary risks.

On the other

hand, we may find that the holding company arrangements have indeed


created a more competitive framework for our banking industry and
supply good and sufficient public benefits to warrant the continuation
and perhaps even some further expansion of the present arrangements.
We, at the Board, are in process of reappraising the results of the
holding company arrangements.

The Board has demonstrated its will­

ingness to ask for Congressional review of developments perceived to
be counter-productive to the public good or inimical to sound or
progressive banking in this nation.

And I can assure you that if our

reappraisal of the holding company activities does raise major questions
of the effectiveness in furthering the public interest, we will sur­
face these questions with the Congress.
Meantime, I think it would be well if the bankers of this
nation would be cautious about recommending additional legislative
limits and particularly outright abandonment of the holding company
device, for in effect, you are asking Congress and the legislatures,
to place limits upon the purchase and sale of commercial bank stock.
I have always thought it was a basic right of most Americans, unless
badly abused, to buy or sell the stock they wished in whatever form
and to whomever they wished to sell it.

If the majority of the owners

of the stock of a single bank wish to sell that stock to a multi-bank
holding company, I have thought it to be their right to do so.


we encourage Congress or additional State legislatures to limit this
transferability, I think we are entering into a dangerous field.


Limits to transferability may create a limited market, a closed
industry, or even a greater danger of concentration as the weaker
units fail and only the strong attract new capital investment.
Such limits could sentence banking to internal growth only and to
continued difficulty in meeting the credit needs of industries and
communities where expansive growth is desirable.