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I
The following address, rrLegislation Facing Banking
Today,
" by W. Braddock Hickrnan, president of the Federal
Reserve Bank of Cleveland, is to be delivered at 9:30 a.rn.
Monday, Novernber 16, 1964, before tt,e 7 Oth annual conven-
tion of The Kentucky Bankers Association at the Brown Hotel
1n
Louisville, Kentucky. For release Monday P. M, rs and
af-ter, Novernber I6, 1964.
-zI would like to use this occasion to discuss with you rny thoughts about sorne
rnajor issues in banking legislation.
Although 1964 was a year in which very few
banking laws were put on the books, sorne people, including rny friend, Joe Barr,
the Chairrnan of the FDIC, believe that we are on the threshold of a period of
sweeping legislative changes.
I arn less willing to
go on record about
Mr. Barr, partly because I donrt know the answer,
and
this than
partly because of the well-
known reluctance of central bankers to forecast the future in
public. Nevertheless,
it is tirnely to take a look at sorne irnportant bills affecting banking that are under
consideration and that will certainly be discussed fully during the next session of
the Congress, whether they are enacted or not"
But before looking ahead, let's look back at the nìeager accornplishrnents
in the field of banking tegislation in L964" It has been weII said that to understand
the future
\Ã/e
rnust know the past.
To the best of rny knowledge, of the lnany
banking bills introduced in the 88th Congress, only four of significance were passed.
One pertained to the
liberalization of bank loans on forest tracts, â second to the
disclosure of financial inforrnation to stockholders, a third to rnoderately rnore
liberal lending lirnits on real estate loans under the Housing Act, and a fourth,
to
notification regarding significant changes in bank ownership. These actions were
hardly earth shaking; as one not-too-original cornrnentator observed, they caII to
rnind rrA rnountain laboring to bring forth a rnouse. "
rnore
-3'Why was so
little accornplished in the field of banking legislation in
1964?
Basically, I think the reason was the general conviction of the rnajority of the people
that our econornic systern and the financial institutions supporting it were working
pretty well" There were, of course, disagreernents within Congress on a nurnber
of rnajor iterns, as weII as between interested financial agencies and among various
pressure groups. But so far as the public was concerned, the area of agreernent
was large, and the areas of disagreernent correspondingly srnall" No one single
point of view carried sufficient weight in the popular rnind to bring about irnportant
Iegislative changes"
It would be
a rnistake, however, to judge the irnportance of the issues facing
banking today by the rneager legislative accornplishrnents of the recent past. Sorne
very fundarnental issues rernain very rnuch alive in the rninds of sorne very irnportant
people. Bankers, above all others, should be farniliar with
good ideas that are in
the public interest, as weII as bad ideas against which all of us should be prepared
to take a stand.
It seerns to rne that there are four areas in which legislation will be considered in 1965. The first and rnost irnportant one has to do with the structure of
the Federal Reserve Systern, and I shall return to this later, The second has to do
with sections of the Federal Reserve Act having to do with the discounting of eligible
papero a subject that could becorne critical in the event of a liquidity squeeze orl
banks. A third irnportant area has to do with the organízation of bank supervision
at the federal leveI" A fourth area has to do with legislation that, while not specifi-
cally banking legislation, should be of rnajor interest to bankers. I refer specifically
to the Interest Equalization Tax, which was passed by the Congress last Septernber,
and which
wiII corne up for consideration again in
rnore
I965"
1M'"
-4-
Braddock Hickrnan
Let us look first at the Interest Equalization Tax, which was intended to
help irnprove the U. S. balance of payrnents by reducing the outflow of U.
S.
capital to foreign countries. In effect, the legislation levies a tax on the sale
of foreign securities to Arnericans, rnaking it Tnore costly for other nations to
borrow capital funds in this country. As originally drafted, the legislation did
not affect banks or bank 1oans, but an arnendrnent--known as the Gore Arnendrnent-was added less than a rnonth before final passage. This arnendrnent gives the
President standby po\ñ/ers to extend the coverage of the tax to include bank
terrn loans to foreigners, specifically, loans rnaturing in rnore than one year,
if it appears that such Ioans are becorning excessive.
Under the Interest Equalization Tax legislation banks are requíred to
report detailed inforrnation about current loan cornrnitrnents to foreigners.
Such
reports currently are being filed with the various Federal Reserve banks,
and are transrnitted by us to the Treasury
filore
for evaluation.
-5-
According to recent official pronouncernents, it seerns likely that the
Interest E,qlaalization Tax will be renewed alter its presently scheduled terrnination
in Decernber I965,
and
it is at least conceivable that the tax could be extended to
terrn loans rnade by banks on a cornpulsory rather than a standby basis" Let rne
say that
I arn personally disturbed over both of these possibilities--the possible
renewing of the Interest Equalizatton Tax and the possible inclusion of bank term
lending" The tax serves as an artificial constraint upon the flow of capital
throughout the worId, and is alrnost bound to bring forth a spate of retaliatory
rneasures by other nations, such as irnport quotas and tariff s, export subsidies
and the
like. If the rationale of the tax is to bring interest rates here and abroad
into closer alignrnent, so as to better balance capital flows, there is a better way
to accornplish the sarne result. SpecificaIIy, we could adjust the rnovernent of
capital funds by the use of open rnarket operations--by influencing the availability
of credit and interest rates. This, as yorl know, is the task of the Federal Reserve
Systern and of rnonetary policy, and could be accornplished in a free rnarket with-
out artificial restraints or hindrances. I believe bankers should express thernselves
forcefully on this subject when the Interest Egualization Tax is brought up in the
Congress next yeat.
rnore
-6-
\M, Braddock Hickrnan
Let us turn now to the rnatter of bank supervision and the choice between
centralized or decentralized authority. ,{s you know, at present the responsibility
for exarnination and supervision of cornrnercial banks is shared by three federal
agencies, and the state banking departrnents. The Cornptroller of the Currency
supervises national banks; with the cooperation of state authorities, the Federal
Reserve Systern supervises state rnernber banks, and the FDIC, insured state nonrnernber banks. This tripartite arrangernent has rnany advantages and has worked well
in the past, Recently, however, conflicts and controversies have ernerged arnong the
federal agencies, reflecting a general lack of cooperation, principally between the
Cornptroller of the Currency and the Federal Reserve Systern.
I will not enurnerate the various points of controvêrslr since this would take
up all of rny tirne and then sorne.
The irnportant point
is that these controversies
all focus attention on a single fundarnental issue. That issue is whether centralized
control over all banks would be better for banking and for the general public than
our present decentralized systern,
The
bill introduced by Congressrnan Multer
(and fathered by Governor
J, L.
Robertson of the Federal Reserve Board) would place in a single agency all phases
of bank supervision that are now distributed arnong the three federal agencies. Proponents of the
bill argue that such consolidation would do away with disagreernents
in applying rules and regulations to banks
and thereby elirninate inconsistencies at
the federal level, which is true so far as it goes. Proponents of the bili also contend that a r-lnified agency would relieve the Board of Governors of an onerous burden
and allow the Systern to devote
so
far as it
its full tirne to rnonetary policy, which is also true
goes.
rnore
'W. Braddock Hickrnan
-7-
Despite these advantages, I arn not convinced that the unified agency
approach
is in the public interest. It
wouLd
in effect elirninate the dual banking
systern as \Me know it and place rnonolithic power in the hands of a srnall board or
a single individual" The unified approach rnight work well under one individual or
board, and rnight be disastrous under another" In any event, I arn always uneasy
about great concentrations of power"
Besides opening the way for possible rnisuses of power, the unified agency
approach rnay sacrifice certain advantages in the present setup.
For one thing,
the burden of bank supervision borne by the Federal Reserve is not an unrnixed
blessing" Because we supervise banks, as well as forrnulate rnonetary policy,
\Ã/e
are in a good position to observe the irnpact of rnonetary policy on the banking
systern, and this we need to do to be effective" In addition, the unified agency
rnay not have all the advantages clairned for it.
Centralized bank supervision
would not necessarily irnprove the quality of supervision, even though it rnight
elirninate sotne inconsistencies, It seerns doubtful that such an approach would
autornatically provide better solutions to such cornplex problerns as bank chartering,
rrtergers, branching, and deposit insurance. I suspect that under the unified
systern, the sarne technicians would be pr:ocessing these rnatters in rnuch the sarne
way as they are today, but without the present checks and balances.
rnore
-8-
IM. Braddock Hickrnan
The fundarnental issue under our present decentralized systern
is whether
rnen of good
wiII can reach reasonably consistent positions on rnatters having
do with bank
regulation. If the regulatory authorities fall out
and issue conflicting regulations, the banking systern
to
arnong thernselves
will be divided into splinter
groups and will lose out in the cornpetitive struggle with rnore rationally supervised
financial institutions. I believe that the present systern can be rnade to work,
as
in the past, by the restoration of a spirit of cooperation anlong the regulatory
agencies.
Turning now to the rnatter of eligible paper, lort rnay recall that bills were
introduced last year by Congressrnan Clarence Kilburn and Senator'W-illis Robertson
to liberalíze tlne regulations in the Federal Reserve Act dealing with rnernber bank
assets that can be pledged as collatexal when borrowing at the discount window"
Thus far there has been no action on either bill.
The Federal Reserve Systern
has taken a strong position on the need for this Iegislation and has recornrnended
favorable action by the Congress. Interestingly enough, the Cornptrollerrs office
has taken a position sirnilar to that of the Board of Governors, altho.ugh the two
agencies would probably
prefer sornewhat different versions of the final legislation.
rnore
-9-
lM. Braddock Hickrnan
The
bill that has been introduced would help the Federal Reserve
rnake
discounts and advances on the basis of sound collateral without irnposing a penalty
rnerely because the collateral did not rneet the archaic requirernents of rreligible
paperrr as defined in the Federal Reserve
Act. A change of this type would
acknowledge the changes that have taken place in both banking and the econorny
at large since the I'eligibilityrr requirernents were first written into the original
Act in 1913,
'We need a
rnore flexible credit rnechanisrn than is provided by
current provisions that allow banks to borrow at the discount rate only if they
use rreligible paperrr or Governrnent securities.
'W'hen
rnernber banks use other
collateral, they are subject to a penalty rate set I l2 percent
above the discount
rate. I rnight note that the 'religible paperrr requirernent represents
a
historical
hangover frorn the old "real billsrr doctrine, with which I arn sure rnany of you
are farniliar. The doctrine holds that banks should discount only short-terrn,
self-liquidating paper, used to finance the production and distribution of physical
goods" The present provisions exclude as collateral rnost of the assets now held
by banks, except at a penalty rate.
lTtO
re
- 10-
\M. Braddock Hickrnan
It is not surprisingtlnat rnost rnernber banks,
as
and the Federal Reserve banks
well, prefer U. S. Governrnent securities as collateral for purposes of borrowing
at the discount window, since that procedure involves less adrninistrative detail and
is sirnpler
and less
expensive, Thus, as long as banks have enough U. S, Govern-
rnents on hand, there is no problern under the present Act. But as you know, the
proportion of such securities held in bank portfolios has declined steadily since
'World'War II. At the end of 1945, for exarnple, cornrnercial banks had about
SIZS
$91
billion in loans and investrnents, of which U. S. Governrnents arnounted to
billion, or
73
percent. By the
end
of 1963, Governrnents held by banks had
shrunk to fi62 billion, and accounted for only 25 percent of total earning assets.
Further reductions in holdings of Governrnents, which could easily corne
about
for both supply
and dernand reasons, would encourage banks to
offer other
collateral to obtain Federal Reserve credit. Ultirnately, this could create serious
adrninistrative problerns. It is thus prudent to act now, when the situation is not
pressing. The Federal Reserve banks should be given the authority to allow rnernber
banks to borrow on any satisfactory collateral, subject to such requirernents as the
Board of Governors rnight wish to spe1l out in Regulation A. By so doing, the
Federal Reserve would be better able to rneet the needs of a dynarnic banking
systern and a growing economy. 1Ve should provide appropriate credit to rnernber
banks, when warranted, and thus help banks to rneet the legitirnate credit dernands
of businesses, consurners, and the general econorrty.
rr¡.ore
-Il-
W. Braddock Hickrnan
Now a word or two about recent proposals that would alter the structure
and independence of the Federal Reserve
Systern. As background, I think it is
irnportant to point out that the Federal Reserve is always interested in legislation
that would irnprove its effectiveness, whether the legislation would alter its structure
or would provide it with new or irnproved tools for efficient operation. This is
evident frorn our support of legislation designed to broaden the eiigible paper
provisions of the Federal Reserve Act.
'What
is of the utrnost irnportance for aII of us to realize is that there are
people in this country who do not want an independent, regional
, nonpartisan Federal
Reserve Systern. These individuals--including sonìe Congressrnen, lnany acadernic
economists, and vocal spokesrnen for powerful pressure groups--would like to
reorganíze our central banking systern and place it directly under the Executive
Branch of the Governrnent.
The nature of the changes considered cornes out clearly frorn a report
entitledrrProposals for knprovernent of the Federal Reserve Systern,rr that was
released this surnrner by the rnajority rnernbers of the Subcornrnittee on Dornestic
Finance of the House Banking and Currency Cornrnittee. The Subcornrnittee indicated
that it intended to consider a nurnber of proposals in public hearings when the next
Congress convenes in January.
The principal proposals of the Subcornrnittee
include the following:
t. Retire the stock of the Federal Reserve banks.
z"
Elirninate the Federal Open Market Cornrnittee, and invest all
power to conduct open rnarket operations in the Federal Reserve Board.
3"
Reduce the nurnber of Governors on the Board to
terrns to five years.
rrrore
five and shorten their
-rz-
W. Braddock Hickrnan
4. Make the terrn of the Chairrnan coterrninous with that of the President.
5. Provide for public audit of all expenditures of the Systern.
6. Provide that all incorne of the Systern be channeled into the Treasury
and
7.
all expenditures be authorized by Congressional appropriation.
Require that the President in his annual econornic reports set forth
rrguidelines'r concerning rnonetary policy, and express the sense of
the Congress that the Federal Reserve operate in the open rnarket so
as to achieve these guidelines.
B.
Transfer the present bank supervisory functions of the Federal Reserve
Systern to the Cornptroller of the
Curr€ncl, the FDIC, or
a newly
forrned Federal banking authority.
This is a watered-down version of proposals originally rnade by the Chairrnan of the House Banking and Currency Cornrnittee, and we rnight take heart frorn
this fact. On the other hand, the entire Iist of proposals received the enthusiastic
support of one of 'Washingtonrs most influential newspapers. In addition, one of
New York's leading newspapers, which favors the retention of the Federal Open
Market Cornrnittee and the regional structure of the Systern, endorsed the public
audit proposal and the elirnination of the capital stock.
rnore
\M. Braddock Hickrnan
-
t3-
Things have been relatively quiet in recent weeks insofar as the dialogue
about the tr'ed is concerned. Much of
this
can probably be explained by the
exciternent of the election carnpaign, and the need of rnany legislators to turn
their ternporary attention to other rnatters--including the irnportant rnatter of
being reelected. But this is only a lull in the storrn. The reconvening of the
Congress in January will bring forth a resurgence of interest in the structure
and organizatíor: of the Federal Reserve
Systern. The Chairrnan of the House
Banking and Currency Cornrnittee has prornised us rnore investigations, rnore
hearings, and rnore discussion--sorne of which could be inforrnative and fruitful.
In closing I should like to say that, despite rnuch discussion to the contrary,
I
do not believe the Federal Reserve Systern
\Ã/ay
will be
changed
in any fundarnental
over the foreseeable future. If the public really wanted change, this would
have been reflected in the platforrns of our two rnajor political
parties. Instead,
both platforrns were silent on the structure of our rnonetary system. Yet, silence
on this rnatter does not necessarily irnply
approval. V/hile the Fed is notrron
the spotrr at the rnornent, the public should be apprised of the fact that persistent
rnaneuvering is going on to bring about fundarnental changes in the Systern.
rnore
Vf
-14-
" Braddock Hickrnan
'Where does aII of
this corne out?
Changes
will corne about, in rny opinion,
only if the Systern rnakes a serious blunder, or if the Systern fails to act in
a
responsive, judicious and prudent rnanner. Stripped down to the fundarnentals,
the Federal Reserve rnust be responsive to the goals of the Arnerican þeople. This
rrì.eans that the
Federal Reserve rnust provide all the credit needed for balanced
and sustainable econorrric growth, but
Iead to price
it rnust not provide
so rnuch
credit as would
inflation, deterioration in credit quality, and a worsening of our balance
of payrnents position.
Recognition of the appropriate role of the Federal Reserve was clearly
revealed in a staternent by President Johnson, just before the election. Mr" Johnson
pointed out that, if there is restraint by labor and industry ín wage and price dernands
and
if govêrnrnent holds the line on spending, there is no reason why we
should
not have the rrrnonetary expansion essential to econornic growth. " The President
went on to say, however, that I'if inflation occurs, or if excessive outflows of funds
occur, the Federal Reserve Systern is in a position to do what is necessary"'l
Doing what
is necessary has never been an easy task--in fact, it taxes
the
resouïces of the Federal Reserve Systern to the utrnost, But so long as we perforrn
to the best of our ability in the public interest, I believe we will continue to have
the support of the rnajority of the people.
@FedFRASER