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Statement of
Sherman J. Maisel
Member, Board of Governors of the Federal Reserve System
before the
Subcommittee on Domestic Finance
of the
Committee on Banking and Currency
of the
House of Representatives
on
S. 1698
and related bills

August 30, 1965

Mr. Chairman:
I am pleased to have this initial opportunity to appear
before your Committee.

I believe that hearings such as this play

a valuable role in creating understanding of the extremely complex
problems involved in the area of banking and credit.

This and

similar efforts of your members help to improve the basic functioning
of our financial system.
Because I am the fourth member of the Federal Reserve Board
to appear in the current hearings, as well as its most junior member,
I probably cannot add much to your knowledge.

My colleagues who

testified previously have done an excellent job in explaining the
major problems which the Board faces under the Bank Merger Act.
My membership on the Board of Governors dates only from
May 1, 1965.

Therefore, I lack the long experience in these matters

of your previous witnesses.

During this period I have considered

only 10 proposed mergers (in which I voted to approve seven applica­
tions and to deny three).

We have also considered about 75 applica­

tions for new branches.
While my administrative experience has been short, I have
long been interested in the field of workable competition.

Since

joining the Board, I have given considerable thought and effort to
these problems.

In re-examining this topic, I was particularly

impressed with the careful consideration given to the problem of
banking structure by your Comnj4%^-^s>.. especially in the actions which
resulted in the Bank




-2-

I believe your Report on that bill established proper and
reasonable standards for administrative action.

I agree heartily

with your statement of the basic purposes of the statute:

namely,

that it is intended
"to promote a sound banking system, in the interest of
the Government, borrowers, depositors, and the public;
and to promote competition as an indispensable element
in a sound banking system."
I also believe that you established proper guidelines when you stated:
"We are convinced, also, that approval of a merger
should depend on a positive showing of some benefit to
be derived from it. . . .
We . . . reject the philosophy
that doubts are to be resolved in favor of bank mergers.
At the risk of saying the same thing another way, we feel
the burden should be on the proponents of a merger to
show that it is in the public interest, if it is to be
approved."
Equally admirable are the objectives stated in the Senate
Report:
"Vigorous competition between strong, aggressive, and
sound banks is highly desirable; lack of competition,
restraints on competition, and monopolistic practices
are undesirable."
I am concerned, however, because I feel that we are not
making as rapid progress as we should towards achieving these
desirable goals expressed by Congress.
To explain my beliefs it may be advisable to express my
general attitude on banking competition.

I am convinced that in this

field, as in others, vigorous competition benefits not only the
economy and the general public, but the competitors themselves.

As

an economist I feel certain that our national policy of encouraging




-3-

and maintaining competition is one of the most important forces in
our country's pre-eminent record of growth and productivity in
manufacturing, distribution, transportation, and finance.

Strong

competition is the lifeblood of our free enterprise system.
In the recent past, banking was characterized by a lack of
a strongly competitive drive.

Because of the enormous importance of

banking stability and continuity and in order to protect the economy
from the destructive effects of bank failures, an elaborate system
of supervision and governmental control of entry and expansion in
this field was established.
As a result of unfortunate past experiences, governmental
regulation and oversight of this industry have tended to bolster
existing organizations rather than to stimulate and enhance competi­
tion.

The Bank Holding Company and Merger Acts indicate that a

change in emphasis has been taking place, a change that I consider
to be strongly in the public interest.
My present conviction--which may be refined and modified
in the crucible of administrative experience--is that Federal bank
supervisors can do more than they have done to improve the competitive
functioning of our banking system.

Particularly it appears that, on

grounds of the national interest, they may well be justified in look­
ing with greater favor on expansion by the smaller competitors in a
market, and with less favor on expansion by the larger.

The latter

have advantages of personnel and resources that frequently enable
them to step into promising areas before such action is practicable




-4-

for their smaller competitors.

I believe this situation should be

actively recognized by supervisory agencies.

Affirmative efforts

should be made to increase the amount of competition in banking by
placing smaller banking organizations, whether existing or new ones,
on a more nearly equal basis &rith relatively gigantic competitors.
The development of a policy stressing further competition in indi­
vidual markets, its general adoption, and its realistic implementation,
constitute one of the most challenging tasks confronting Congress, the
Board of Governors, and coordinate agencies.
I believe it should be clear that in such an attempt to
maintain and improve competition among banks we must be concerned with
far more than the problems of mergers alone.
is extremely dynamic.

The banking structure

Constant change occurs in each banking market

as a result of four separate influences:
1.

Banks grow in their existing offices.

2.

Mergers, or an expansion of grou^ banking
through the medium either of holding corpora­
tions or of individual ownership, may alter
the basic framework.

3.

The structure can be and has been rapidly
changed by the granting to banks of the
tfight to establish branches in new locations.

4.

Finally, i c w banks may be brought into the
fe
market if the Comptroller of the Currency or
State supervisory authorities grant charters
for new institutions.

Alhadeff has shown that, in most cases, the banking structure
is influenced more strongly through branching and new entry than by
merging.1/
1/ D. H. Alhadeff, "Bank Mergers: Competition Versus Banking
Factors,” Southern Economic Journal, Vol. XXIX, No. 3, January 1963.




-5-

I have attached two tables which may help to illustrate
this fact*

The fi^st table shows that since 1950 the number of banking

offices has increased from 18,870 to 28,546.

In this period, while

there was a net decrease of over 400 banks caused by the excess of
mergers over new charters, the number of new branches increased by
over 10,000*

The table also shows equivalent changes for three of our

largest States— California, New York, and Illinois*

The contrasts,

reflecting differing patterns of development in states with state­
wide branch banking, with limited branching, and with unit banking,
are interesting*

We note again the high percentage of change arising

from branch policy*
The second table sho*js related information.

It makes clear

that, with the exception of Illinois, in the states with the highest
concentration ratio (defined as the smallest percentage of banks
holding over 50 per cent of deposits) a large amount of the concen­
tration is related to the large number and growth of branches.
The Commission on Money and Credit and the Committee on
Financial Institutions, established by President Kennedy and chaired
by Walter Heller which reported in April 1963, discussed this problem
at length.

Both pointed out that the supervisory authorities and the

statutes have no consistent approach or standards in their dealings
with these varied influences on competition and the banking structure.
In particular they note that although the effect on competition is
specified as a relevant factor in merger and holding company cases,
the statutory authority to grant charters and branches does not require
that the effect on competition be considered.




In your initial hearings and reports on the bank merger
problem, this Committee expressed concern that regulatory bodies were
often approving mergers for the wrong reasons; that is, because of
competition among themselves rather than among the banks.

It was

pointed out that since each agency acted on the basis of assumptions
as to what others might do rather than upon its own judgment, a
weaker policy than even the weakest of the agencies would adopt if
it held sole responsibility often resulted.
I fear that this same situation still exists with respect
to the over-all problem.

While s m e coordination has resulted from

your prior actions, it is still insufficient.

The amount of competi­

tion, its growth or destruction, emerging at the present in each bank­
ing market results from a vast number of uncoordinated decisions.
Many of these decisions are made without any recognition or considera­
tion of the major influence the decisions themselves wield on the
development of our total banking structure.

There is certainly no

attempt among the banking supervisory agencies to agree in any way on
what a logical competitive banking structure would be like in any
market.

Clearly, since there are no agreed-upon goals, any policy or

administrative action dealing with these problems can achieve a desir­
able result only by the purest chance.
The existing situation appears far from optimal if it is to
establish the type of competitive banking structure which Congress
has indicated it desires, and which I firmly believe to be most
advantageous for our country.




My brief experience indicates that if

-7-

these goals are to be achieved, Congress will have to give more
specific instructions in the spheres of branching and chartering.
In addition I believe there will have to be a better defined and
simpler procedure for coordination.
As to my personal views on the specific provisions of S. 1698
as passed by the Senate, I have mixed reactions.

I should perhaps

make it clear that I was not on the Federal Reserve Board when it took
a stand on this bill and I did not participate in the Board's discus­
sion of this matter.
Under the Bank Merger Act of 1960, the Attorney General
already is apprised of each proposed merger at least 30 days before
it can be approved or disapproved by the bank supervisory agency with
jurisdiction over the particular transaction.

The Attorney General is

required to make "a report on the competitive factors involved."
Although I am not familiar with the procedures of the Antitrust Division
of the Department of Justice, it appears to me not unreasonable to
require, in these circumstances, that a decision to prosecute under
the Sherman Act or the Clayton Act be made within 30 days after the
Comptroller, the Board of Governors, or the FDIC has approved a pro­
posed bank amalgamation.

In effect, the Department would have a period

of at least 60 days--and usually longer--to decide whether to initiate
antitrust proceedings.

Without jeopardizing the public interest, it

appears that this administrative arrangement can obviate needless
uncertainty and can avoid the danger that banks, their stockholders,
and the banking public will be injured or inconvenienced by a subsequent
"unscrambling" of a merged institution.




-8-

I believe it is also important that the bill, as I understand
it, applies only to a merger as such, and does not confer continuing
antitrust exemption upon any merged institution.

That is to say, if

the Department of Justice decides not to seek to enjoin a merger under
the antitrust laws within the period prescribed, the transaction itself
is thereafter ixmmme from such attack.

However, the immunity is con­

fined to the merger alone; if the bank should thereafter engage in for­
bidden practices or gain monopoly power, the provisions of the anti­
trust laws would be applicable as in any other situation.
While I, therefore, support S. 1698 in general, I am unable
to support the provision that would exempt from the antitrust lav/s
all mergers of banks that were consummated prior to the bill's enact­
ment.

I found the statement of the Attorney General before your Sub­

committee on this matter extremely persuasive.

I feel that he has

established that this proposed section does raise a broad issue of
public policy and that its passage would give special treatment to a
few.
It seems to me that if I were in the position of Congress,
I would be reluctant to take these cases out of court.

The testimony

before your Subcommittee, including that of the Attorney General,
indicates that the cases will be very few.

I am not persuaded that

there is any compelling reason, from the point of view of the banks
involved or the communities they serve, to grant a special immunity
from the antitrust law

rs in these cases.

of some general princi

uch an immunity, questions of




In the absence

fairness to the parties and feasibility of divestiture plans may
properly be left to courts of equity familiar with the facts of each
case.
While I have been pleased to give my views on this particu­
lar bill, it should be clear that I believe the problem which your
Subcommittee faces is broader.

More is needed than merely the single

proposed improvement of the administrative procedures for regulation
of competition in banking which this bill proposes.

I believe that

other serious shortcomings exist in our current guidelines and pro­
cedures.

Attachments 2




TABLE 1
Change in Number of Banks and Branches
by Type of Change:
1950 to 1964
U. S.

California

1950
to
1954

1955
to
1959

1960
to
1964

1950
to
1954

14,205
4,665
13,870

13,881
6,443
20,324

13,486
9,790
23,276

New banks organized

342

538

Losses from mergers, consoli­
dations, etc.

666

New York

Illinois

1955
to
1959

1960
to
1964

1950
to
1954

1955
to
1959

1960
to
1964

1950
to
1954

1955
to
1959

1960
to
1964

206
949
1155

171
1121
1292

115
1556
1671

640
759
1399

560
966
1526

415
1303
1718

890
3
893

910
3
913

955

1,065

27

17

57

6

5

15

28

50

63

93?

776

62

73

17

86

150

70

8

5

9

1,909

3,559

5,250

192

464

601

227

373

426

1

1

Branches and facilities
ceasing operations, total

131

212

269

20

29

30

20

36

27

1

End of period:
Number of banks
Number of branches
Total number of offices

13,881
6,443
20,324

13,486
9,790
23,276

13,775
14,771
28,546

171
1121
1292

115
1556
1671

155
2127
2282

560
966
1526

415
1303
1718

360
1702
2062

910
3
913

Beginning of period:
Number of banks
Number of branches
Total number of offices

Branches and facilities begin­
ning operations, total

Note:




The number of banks and branches includes all commercial banks,
insured and non-insured, in the United States and possessions.
Facilities on siilitary bases are included as branches.

9-.

--

955
4
959

1005
4
I
t




TABLE 2
States with the Smallest Per Cent of Banks Holding
Over 50 Per Cent of Total Deposits
As of December 31, 1964

State

Number of
Banks

California

2

Per Cent of All
Banks in State
1.0%

Average Number of
Banking Offices per
Bank in this Group

Average Deposits
in Millions of
$ per Bank

611.5

8,590

Illinois

11

1.1

1.0

1,079

Michigan

5

1.4

51.2

1,241

New York

4

1.2

136.8

7,542

Pennsylvania

9

1.5

48.7

1,049