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MAY 23, 1956/1

Mr. Chairman and Members of the Committee:
Before discussing the bank merger bills now pending before
this Committee, it maybe helpful to describe briefly the nature of
the Board's functions and responsibilities in this general field
under existing law.
At present the Board is vested with authority to enforce
the provisions of the Clayton Antitrust Act where applicable to banks•
Section 7 of that Act prohibits any corporation from acquiring the
stock of other corporations engaged in commerce where, in any line of
commerce in any section of the country,, the effect may be substantially
to lessen competition or tend to create a monopoly. However, as far as
banks are concerned, this section applies only to acquisitions of stock.
It does not apply to acquisitions of bank assets and does not cover
bank mergers and consolidations.
Apart from the Clayton Act, the Board has other functions

present law which involve consideration of the competitive as-

pects of banking and possible tendencies toward monopoly in the banking field. Under the recently enacted Bank Holding Company Act, every
bank holding company which proposes to acquire additional banks must
first obtain the Board's consent and in determining whether to give
such consent the Board is required to consider certain factors, including the effect of the proposed acquisition upon the preservation

of competition

in the field of banking.


Other provisions of existing law which vest limited authority in this general field in the bank supervisory agencies are
those of section 18(c) of the Federal Deposit Insurance Act. Under
that section, the Board, the Comptroller of the Currency, and the
Federal Deposit Insurance Corporation, in their respective areas of
authority, are required to pass in advance upon mergers and consolidations of banks, but only in cases in which the capital stock or surplus of the resulting bank will be less than the aggregate capital
stock or aggregate surplus, respectively, of the banks involved.
Effect of Pending Bills
It is understood that three bills relating to bank mergers
are now before the Committee - S. 334l and S. 3424, and H. R. 9424,
which was passed by the House last month. The Federal Reserve is
directly concerned with these bills only as they apply to banks. In
general, as far as banks are concerned, the pending bills would amend
section 7 of the Clayton Act so as to bring acquisitions of bank assets under the coverage of that section, in addition to the present
coverage of acquisitions of bank stock.

The bills would also require

prior notice of any proposed bank merger to be given to the Attorney
General and to the Board of Governors at least 90 days before the
merger is to take effect if the combined capital accounts of the
merging banks exceed a certain amount.
As indicated last year in testimony before this Subcommittee
and before the Judiciary Committee of the House of Representatives,

-3the Board of Governors favors the principle of subjecting bank mergers
and consolidations to Federal supervision and control, with a requirement for consideration of the competitive effects of such mergers.


believes, however, that it would be desirable to make certain changes
in the pending legislation on this subject.
Desirability of Advance Approval
It is the Board's opinion that the law should require the
advance approval by a Federal bank supervisory agency before any
bank merger or consolidation takes place. As previously indicated,
under section 18(c) of the Federal Deposit Insurance Act the Federal
bank supervisory agencies, i.e., the Board, the Comptroller of the
Currency, and the FDIC, are now required to pass in advance upon
mergers and consolidations of banks only where there is a resulting
diminution of capital and surplus. The Comptroller of the Currency
has additional authority as to approval of mergers involving national

However, because of the limited nature of the present authority,

many bank mergers do not have to be approved in advance by any Federal
agency. The Board believes it would be desirable to extend this authority so as to require advance approval for every bank merger and
consolidation, irrespective of diminution of capital, to be given by
the Comptroller of the Currency where the resulting institution will
be a national bank, by the Board where the resulting institution will
be a State member bank of the Federal Reserve System, and by the FDIC
where the resulting institution will be a nonmember insured bank.

The pending legislation requires 90-day advance notice of
mergers, but does not require advance approval. The Board questions
whether, in the case of banks, the advance notice procedure would be as
desirable or as effective as provision for advance approval. It would
be helpful to the banks involved to have advance consent by the Government, since this would give them in proper cases a measure of assurance
that the proposed action is not inconsistent with the law. Also it
would eliminate any necessity for an effort on the part of the Government
to enjoin a bank merger or to dissolve one after it had once taken place.
There are obvious difficulties in attempting to unscramble the assets
and liabilities of constituent banks after a merger has occurred, and
particularly so after a lapse of several months or more. Furthermore,
in some cases, it is not necessary for a Government agency to have as
much time as 90 days in which to consider proposed bank mergers and the
competitive aspects of such transactions. On the other hand, there may
well be cases in which 90 days would not be adequate. Moreover, it does
not seem necessary in the Board's opinion to require that notice be given
to, or permission obtained from, two different agencies of the Federal
Government for the consummation of the same transaction.
Enforcement Authority
The pending bills would leave unchanged those provisions of
the Clayton Act which now vest in the Board of Governors authority to
enforce the provisions of section 7 of that Act where applicable to


Under present law, that authority is limited by reason of the

statute's applicability only to acquisitions of bank stock, and its
practical significance has been lessened by the recent Bank Holding
Company Act which requires prior approval of the Board for acquisitions
of bank stock by bank holding companies. Under the proposed amendment
to section 7, however, the Board's responsibilities would extend to all
types of bank mergers, whether carried out under Federal or State
ties in the antitrust field. The Board would be called upon to consider
the competitive or monopolistic aspects of every such transaction even
though it had previously been considered and approved by one of the
other Federal bank supervisory agencies or by the appropriate State

The principal functions of the Federal Reserve System lie in
the field of monetary and credit policy and bank supervision.

The prose-

cuting and adjudicatory functions involved in the enforcement of the antitrust laws are only indirectly related to the Board's principal responsibilities*

They are of a character quite different from the functions

normally exercised by the Board in passing upon particular transactions
in the bank supervisory field. In other words, enforcement of the
antitrust laws and the function of bank supervision represent, we
believe, different spheres of governmental operation.
Under present law, in addition to the Board's authority to
bring proceedings for the enforcement of section 7 of the Clayton Act
where applicable to banks, the Attorney General has an injunctive

-6authorityj and the Board believes for the reasons indicated that the
enforcement of this section, whether with respect to acquisitions of
bank stocks or acquisitions of bank assets, is a function which should
not appropriately be vested in the Board.
Consideration of Effects on Competition
Under the pending bills, any bank merger which might
substantially lessen competition or tend to create a monopoly would
be prohibited. This would seem to mean that the effect on competition
would be the sole controlling factor in all cases, to the exclusion of
consideration of other factors which may well have an important bearing
upon the maintenance of sound banking.
Under existing banking laws, the Federal bank supervisory
agencies, in passing upon banking transactions within their respective
jurisdictions, give consideration to the competitive aspects involved.
However, they also take into account such matters as the adequacy of a
bank's capital structure, the competency of its management, its future
earnings prospects, and the needs of the community involved.

Thus, the

Board, in acting upon applications for the approval of branches, bank
mergers within its jurisdiction under section 18(c) of the Federal Deposit
Insurance Act, and voting permits required to be obtained by holding
company affiliates, considers the possible effect of the proposed transaction upon competition among banks; but in all such cases the Board
also considers the banking factors above mentioned.
The same is true under the recently enacted Bank Holding
Company Act*

That Act specifically requires the Board, in passing upon

-7applications by bank holding companies for the acquisition of bank
stocks or assets, to consider whether the proposed acquisition would
be consistent with adequate and sound banking, the public interest,
and the preservation of competition in the field of banking; but the
Act also requires the Board to consider the financial history and condition of the holding company and the banks involved, their prospects
and the character of their management, and the needs of the community
There have been in the past and there will doubtless be in
the future instances in which the over-all public interest would
clearly be served by a bank merger or consolidation even though it
might incidentally tend to substantially lessen competition. The Board
believes that, at least in the field of banking, the test should be
whether or not a merger would result in an "undue" rather than a
"substantial" lessening of competition.
For these reasons and in keeping with the practice followed
in passing upon other types of banking transactions, the Board believes
that it would be desirable that, in addition to providing for the prior
approval of every bank merger by the appropriate Federal banking agency,
that agency should be specifically required by the law to consider
whether the effects of the proposed merger might be to lessen competition unduly or to tend unduly to create a monopoly, but with the
added stipulation that the agency should also consider such factors
as the financial condition, adequacy of capital and character of management of the bank, together with the needs of the community. Moreover,
it would be desirable to authorize any Federal banking agency in its

-8discretion to request the views of the Attorney General as to the
competitive effects of the proposed merger. This would enable the
banking agency, whenever it was in doubt, to ascertain the attitude
of the Department of Justice regarding the competitive or monopolistic
aspects of the transaction before determining whether to grant its consent.
To restate its views, the Board is of the opinion that
appropriate and effective legislation with respect to bank mergers
should embody two requirements:

(1) Every bank merger should be made

subject to the advance approval of the Comptroller of the Currency,
the Board of Governors, or the FDIC, depending upon the nature of the
resulting bank, and (2) in passing upon bank mergers the Federal bank
supervisory agency concerned should be required by the law to consider, not only the financial condition, adequacy of capital and
character of management of the institution resulting from the merger,
but also the question whether the proposed transaction would unduly lessen competition and, where the competitive factor is significant, the agency should have authority to request the opinion
of the Attorney General on that point.
These features of bank merger legislation could, of course,
take the form of an amendment to the Clayton Act, although in that
event, as I have previously indicated, the Board feels that enforcement authority should not be vested in the Board.

It would be pref-

erable, however, in the Board's opinion, for the legislation to take

-9the form of an amendment to already existing provisions of the banking laws relating to the subject of bank mergers. In this connection,
I understand that the Treasury Department sent up to the Congress in
the last few days a draft of a bill, which would carry out the views
of the Board in this matter.

That bill would amend section 18(c) of

the Federal Deposit Insurance Act to require the prior approval of
one of the three Federal banking agencies for every bank merger irrespective of diminution of bank capital or surplus. Thus, any
merger without such approval would be illegal and expose the institution to attack. The bill would also expressly require the banking
agency concerned to consider the competitive aspects of each transaction, as well as the banking factors involved; and in the interest
of uniform standards would require the banking agency to seek the
views of each of the other two banking agencies with respect to the
question of competition

and in addition authorize the banking agency

concerned to request the opinion of the Attorney General with respect
to that question.
Legislation of this kind, the Board believes, would effectively accomplish the basic objective of providing means for
controlling bank mergers and preventing undue lessening of competition in the banking field through that means.