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July 15, 3.957

Mr. Chairman:
The bills that are the subject of this hearing have for
their objective a complete streamlining of Federal statutes relating
to financial institutions, including national banks, member banks of
the Federal Reserve System, insured banks, Federal savings and loan
associations, and Federal credit unions.

The legislation would

rearrange provisions of law on this subject in a more logical order,
eliminate obsolete provisions, correct technical defects, and make a
number of substantive changes designed to clarify and improve the
operation of these statutes.
The Board of Governors is thoroughly in accord with the
objectives of this legislation and believes that enactment of such a
codification of the banking laws would be in the public interest.
The Board!s adverse comments on a few provisions should not be con¬
strued as indicating lack of general approval.
Most of the changes which would be made by the bill in the
Federal Reserve Act are purely technical and would merely serve to


bring that Act up to date by eliminating deadwood and clarifying
ambiguous provisions.
no special comment•

Such changes are clearly desirable and require

As to the changes of substance which would be

made in Federal Reserve law, it may save time to review briefly those
which the Board endorses or to which it has no objection and then
direct attention to the few provisions of the bill which the Board
would oppose or with respect to which it would have serious question.


In the order in which they occur in Title II of the bill
and not necessarily in the order of their importance, the following
provisions would make substantial changes in existing law which meet
with the approval of the Board or to which the Board would have no
objection. Most of these changes are in accordance with recommendations
which were made by the Board last year to the Senate Banking and
Currency Committee.
Expenditures for Federal Reserve Bank branch buildings
(§ 4(c)). - The present statutory dollar limitation on the aggregate
costs of construction for Federal Reserve Bank branch buildings would
be eliminated.
Franchise tax (§ 7(b)). - A new provision would require each
Federal Reserve Bank to pay 90 per cent of its annual net earnings to

-3the United States as a franchise tax. This would have the effect of
restoring the franchise tax provision which was repealed in 1933 when
the Reserve Banks were required to subscribe half of their surplus to
the capital stock of the Federal Deposit Insurance Corporation.


proposed specific statutory direction for the transfer of annual net
earnings to the Treasury would replace the somewhat complicated and
awkward procedure under which the Federal Reserve System, since 1947,
has paid to the Treasury approximately 90 percent of its annual net
Rotation of membership on Federal Advisory Council
(§ 8(a)). - The bill would make any member of the Federal Advisory
Council who has served six consecutive terms of one year each ineligible
to serve again as a member of the Council until after an intervening
period of not less than three years• Such a provision for rotation
in the membership of the Council would have the advantage of obtaining
broader representation and wider experience over a period of time.
Majority vote of Board members (§§ 10(b), 39(l), and 42). Certain provisions of present law require designated actions of the
Board to be approved by a stated number of Board members. For example,
permission for the carrying of reduced reserves by member banks in out¬
lying sections of reserve and central reserve cities requires the affirma¬
tive vote of not less than five members of the Board.

These and similar

provisions would be modified by the bill to require such actions to be
taken on the affirmative vote of a majority of the members of the Board
in office at the time the action is taken.
Repeal of authority for business loans. - The proposed
revision of the Federal Reserve Act would omit and thereby repeal
section 13b of the present Federal Reserve Act authorizing the Federal
Reserve Banks to make working capital loans to industrial or commercial
businesses. This authority has not been utilized extensively in recent
years and in any event it is believed to be inconsistent with central
banking functions. Repeal of these provisions has heretofore been
recommended by the Board. Their repeal would mean that the Reserve
Banks would repay to the Treasury approximately $27-1/2 million which
has been paid by the Treasury to the Reserve Banks under these pro¬
Rotation of directors of Federal Reserve Banks (§ 17(a)). Under the bill no director of a Federal Reserve Bank who has served
two consecutive terms of three years each would be eligible to serve
again as a director until after an intervening period of not less than
three years, with a modification of the rule as to the chairman of the
board of directors. Like the similar provision with respect to members
of the Federal Advisory Council, this provision would insure broader
representation and wider experience on the boards of directors of the
Federal Reserve Banks.
Residence of Federal Reserve directors (§ 17(a)). - Every
Federal Reserve Bank director would be required to be a resident of

- 5the Federal Reserve district served by his Federal Reserve Bank or to
reside within fifty miles of the Reserve Bank.
Federal Reserve Agents (§ 19). - The bill would eliminate
the present unnecessary requirement that Federal Reserve Agents and
Assistant Federal Reserve Agents be persons of "tested banking experienced
Other provisions would make it clear that a Federal Reserve Agent could
delegate ministerial functions to his Assistants and that an Assistant
Federal Reserve Agent could act in the place of the Agent during a
vacancy in that office as well as during the absence or disability of
the Agent•
Reports of State member banks (§ 23(b)). A new provision
would authorize the obtaining of special reports from State member banks
and thereby enable the Board to call for relatively simple reports
from smaller banks and more detailed reports from the larger member
banks engaged in a variety of banking operations.
Stock acquisitions in connection with absorptions (§ 23(d)), A new provision would permit a State member bank, with the Board's
approval, to purchase and hold for not more than 90 days the stock of
another bank as a step in connection with the absorption of such other
bank. Such temporary stock acquisitions would sometimes be convenient
as a step in the absorption process and the requiremeit for the Board's
approval would serve to prevent any abuses of this exception from the
general rule against the acquisition of corporate stock by member banks.

-6Shareholders ! U s bs and disclosure of stock ownership
(§ 23). - New provisions would require each State member bank to
maintain a l i s t of i t s stockholders and to notify the Board of anysingle transaction involving the transfer of 10 per cent or more of the
outstanding shares of the bank.

In addition, the record owner of any

such stock would be required to notify the Board of the names of any
persons having a beneficial or equitable interest in such stock in
excess of 5 per cent of the outstanding shares of the bank.


this requirement for disclosure of equitable ownership might be burden¬
some in some instances, the Board believes that the proposed provisions
have merit.
Investments in bank premises (§ 23(h)), - Under the b i l l ,
investments in bank premises by a State member bank would require the
Board's approval only if they exceed 100 per cent of the bank's capital
stock or 50 per cent of the bank's capital and surplus, whichever may
be greater.

Existing law requires Board approval in a l l cases in which

the investment would exceed 100 per cent of the capital stock.
Audits of State member banks (§ 24(c)), - A new provision
would authorize the Board, whenever i t deems i t necessary, to require
an independent audit to be made of a State member bank.
Confidentiality of examination reports (§ 24(f)). - Reports
of examinations of State member banks and related correspondence would
be made privileged against disclosure without the Board's consent,
except to committees of Congress upon request.

-7Loans to executive officers (§ 28(e)). - Present law prohibiting
loans by member banks to their executive officers includes an exemption
with respect to loans not exceeding $2,5OO, This exception would be
liberalized by increasing the dollar limitation to $5,000.

in addition,

a requirement that executive officers make reports of their borrowings
from other banks would be modified to make such reports unnecessary
where the indebtedness does not exceed $15,000, in the case of home
mortgage loans, or $5,000 in the case of all other extensions of credit.
Reserves of holding company affiliates (§ 33(b)). - under
present Law a holding company affiliate is required to maintain certain
reserves of readily marketable assets, and this requirement has been
interpreted as meaning that each of several holding company affiliates
of the same member banks must maintain the statutory reserve•


bill would make it possible, where such a multiple holding company
situation exists, for only one of the holding company affiliates to
carry the required reserve, provided it is designated for that purpose
by the Board, and provided that the designated company directly or
indirectly owns or controls the stock of the affiliated banks•
Audits of Board's accounts (§ 38(h)). - The bill would
require the Board to have its accounts audited annually by a firm of
certified public accountants, and reports of such audits would be
required to be submitted to the Banking and Currency Committees of

-8Conflict of interests (§ 38 (i_)) . - It would be made a criminal
offense for any employee of the Board or any Federal Reserve Bank to
accept employment in a member bank ?A thin two years after terminating
his employment "with the Board or the Reserve Bank, except with the Board's
approval. While the Board doubts that such a "conflict of interests"
provision is necessary, it would not object to the provision of the bill
on this subject•
Trust powers of national banks,- present provisions of the
Federal Reserve Act relating to trust powers of national banks would
be transferred to the National Bank Act as revised in Title I of the
bill and authority for granting such powers and regulation thereof
would be vested in the Comptroller of the Currency instead of the Board,
Since national banks are under the supervision of the Comptroller, the
Board would have no objection to this proposal.
Audits of Federal Reserve Banks (§39(m))« - The Board would
be required by the bill to take measures to insure that examinations of
the Federal Reserve Banks meet the highest standards of commercial
audits and the Board would be authorized to arrange for review by
certified public accountants of the adequacy of the procedures and
techniques followed in the examination of the Reserve Banks•


of the reports of examinations of the Reserve Banks, including each
examination of the System open market account, would be required to be
transmitted promptly to the Banking and Currency Committees of Congress.

-9Federal Reserve notes (§ 43). - Present provisions of law
relating to the issuance of Federal Reserve notes, which have become
antiquated over the years and in many respects are ambiguous, would be
completely rewritten for purposes of simplification and clarification.
The revision would make no substantial change with respect to Federal
Reserve notes, although existing provisions regarding the redemption
of such notes would be eliminated as obsolete.

Redemption in the

traditional sense in gold or gold certificates is no longer permissible
and in any event Federal Reserve notes, like other types of currency,
have been legal tender for all purposes since 1933.
Powers of foreign branches of national banks (§ 44(f)). The Board would be empowered by regulation to authorize foreign branches
of national banks to exercise such further powers as might be usual in
connection with the transaction of the banking business in the foreign
countries in which they operate.

This authority is intended to enable

foreign branches of national banks to operate more effectively in the
foreign countries in which they do business.
Mergers and consolidations. - Title III of the bill, relating
to insured banks, contains in section 23 new provisions which would make
it necessary for all bank mergers or consolidations to be approved in
advance by the appropriate bank supervisory agency.

Thus, the Board's

approval would be necessary in connection with any merger or consoli¬
dation if the acquiring or resulting institution would be a State member

The Board would be required in such a case to consider, not only

the usual banking factors stated in the Federal Deposit Insurance Act,

-10but also whether the effect of the proposed transaction might be to
lessen competition unduly or to tend unduly to create a monopoly.


the question of competition, the Board would be required to consult
the Comptroller of the Currency and the Federal Deposit Insurance
Corporation and would be authorized to request the Attorney General's
opinion with respect to that question.

The Board believes that these

provisions would fill a gap in the present law.

They would insure

consideration by the Federal bank supervisory agencies, on a substan¬
tially uniform basis, of the impact of bank mergers upon competition
in the banking field.

A separate bill along the lines of these pro¬

visions of section 23 of Title III of the pending bill was passed by
the Senate last year and was endorsed by the Boards as well as by the
other Federal bank supervisory agencies.

There are two provisions in Title II of the bill which, while
not of the greatest importance, would make changes in present law
which in the Board's opinion would not be desirable.
Removal of officers and directors (§ 29)). - Provisions for
the removal of directors and officers of member banks, which are now
contained in section 30 of the Banking Act of 1933, would be repeated
in substance in section 29 of Title II of the bill as far as State
member banks are concerned.

Certain changes would be made in these

provisions as to which the Board would have no objection.

The Board

-11would, however, object to one of the proposed changes. Under the Adminis¬
trative Procedure Act, agency action may be set aside on judicial review
if the reviewing court finds that such action was "unsupported by sub¬
stantial evidence."

Despite this provision, the bill would include a

statement that any hearing held in connection with the removal of a
director or officer of a State member bank shall be held in accordance
with the provisions of the Administrative Procedure Act and be subject
to review as therein provided, except that the review by the court shall
be upon the "weight of the evidence," The Board sees no sound reason
for this departure from the general rule laid down in the Administrative
Procedure Act and the Board questions whether it is desirable to single
out the type of action here involved as an exception from the "sub¬
stantial evidence" rule uniformly applied in the case of all other
agency actions. Application of the "weight of the evidence" rule would,
of course, mean that the decision of an expert administrative agency in
proceedings for the removal of a bank director or officer could be upset
by a reviewing court even though that decision was clearly supported by
substantial evidence•
Use of reserves of holding company affiliates (Title II,
§33)• - Mention has already been made of one change which would be
made by the bill with respect to the reserve of readily marketable
assets required by present law to be maintained by holding company

Another proposed change in this respect would be

to permit a holding company affiliate to use such reserve for
additions to capital of affiliated banks as well as for the replace¬
ment of capital in such banks. This reserve was originally

-12intended to enable a holding company affiliate to come to the aid of
its subsidiary banks in times of stress or emergency, the Board
questions whether the proposed broadening of this provision to permit
the reserve to be used for capital additions would be consistent with
the purposes of the law, since, if it were used in normal times for
such purposes, it might well become depleted and not be available when
it would be needed in unusual circumstances in order to maintain the
sound condition of the holding company affiliate's subsidiary banks,

Most of the provisions of this bill outside of Title II
have no direct effect upon the Federal Reserve


Title I of

the bill, however, relating to national banks, includes two provisions
which are of concern to the Board because of their possible effect
upon the soundness of the banking system.
Cumulative voting. - Under present law cumulative voting in
elections of directors of national banks is mandatory, and this has
been the case since 1933. Cumulative voting is based on the principle
of permitting due representation of minority shareholders on a corpora¬
tion's board of directors.

Section 26(c) of Title I of the bill would

permit cumulative voting only if provided for in the national bank's
articles of association. The Board feels that the principle of cumula¬
tive voting is sound and questions whether the proposed change should

-13be made unless Congress is satisfied that cumulative voting has produced
undesirable results so great as to outweigh the obvious justice of
giving proper representation to minority interests. Since the contents
of the articles of incorporation of a national bank are determined by
a majority of the bank's shareholders, it is obvious that the practical
effect of the proposed change would be to eliminate all cumulative
voting in elections of national bank directors. Although proponents
of this change have contended that cumulative voting has given rise to
situations in which minority shareholders have been able to place an
undesirable individual on the board of directors of a national bank,
the Board doubts whether abuses of this kind have been so great as to
justify abandonment of the basically sound principle of cumulative

It should be borne in mind in this connection that minority-

elected directors often can stimulate other directors to greater ac¬
tivity in behalf of a bank and, furthermore, that if a minority-elected
director should engage in unsound activities, he would be subject to
removal under the law.
Debt limit of national banks. - Section 37 of Title I would
increase the maximum limit of a national bank's total indebtedness from
100 per cent of its capital stock to 100 per cent of its capital stock
and surplus.

This considerable expansion in the borrowing ability of

national banks would, in the Board's opinion, be unnecessary and un¬
desirable. Although bank borrowings may occasionally be necessary in
limited amounts and for limited periods in order to avoid liquidation

-14of assets that might otherwise be necessary, it is a practice that
should not be encouraged because it tends to dilute the cushion of
protection which is afforded depositors by a bank's capital and surplus.
Enlargement of the borrowing limits as here proposed might well encourage
national banks to hold smaller amounts of liquid assets and to rely
unduly upon borrowings for necessary adjustments.

In the case of an

emergency requiring unusual borrowing, the discount facilities of the
Reserve Banks are readily available. To encourage the ability of na¬
tional banks to borrow outside the Reserve Banks would tend to diminish
the restraining influence that the Reserve Banks are directed by law
to assert upon borrowing member banks which may be making undue use of
credit for speculative purposes.
Before concluding this statement, the Board would like to
bring to the attention of the Committee certain proposed changes in
Federal Reserve law which are not included in the pending bills but
which, in the Board's opinion, should appropriately be incorporated
in this legislation.
Repurchase agreements, - For many years the Federal Reserve
Banks in connection with their open market operations have utilized
repurchase agreements as a convenient and flexible means of helping to
smooth out temporary irregularities in the money market.

These agree¬

ments are in the form of a purchase and sale and they are used only to

-15implement open market operations pursuant to regulations of the Federal
Open Market Committee. However, such transactions admittedly have some
of the attributes of a loan and present law contains no specific reference
to these transactions• Accordingly, the Board believes that a clarify¬
ing amendment which would specifically authorize such repurchase agree¬
ments by the Federal Reserve Banks would be desirable.
Fiscal agency operations by the Federal Reserve Banks. Under various provisions of present law, the Federal Reserve Banks are
authorized or directed to act as fiscal agents of the United States
and of a number of departments and agencies of the Federal Government.
The activities of the Reserve Banks as such fiscal agents have increased
tremendously in recent years. More than 3,100 of the approximately
18,600 employees of the Federal Reserve Banks are now engaged full time
in fiscal agency operations on behalf of more than 25 Governmental
agencies in some 50 different capacities. It has become increasingly
evident that, in addition to the general authority of the Board to
supervise the Reserve Banks, the law should contain some more specific
authority for the over-all coordination of the fiscal agency operations
of the Reserve Banks, In five instances such authority now exists;
and it would be helpful if it existed in all cases 80 as to make certain
that the many activities which the Reserve Banks are required to
perform on behalf of Government departments and agencies do not become
inconsistent with the over-all purposes of the Reserve Banks or unduly

The Board, therefore, recommends that this legislation

include at an appropriate place a provision making all fiscal agency

-16operations of the Reserve Banks specifically subject to supervision
and regulation by the Board.




Since 1933, the law has

prohibited member banks from paying interest on demand deposits,
directly or indirectly, by any device whatsoever, and has required the
Board of Governors to fix maximum rates of interest which may be paid
by member banks on time and savings deposits.

Similar provisions are

contained in the Federal Deposit Insurance Act with respect to payment
of interest on deposits by nonmember insured banks.

For many years,

the matter of determining whether particular practices involve a payment
of interest on deposits has presented substantial and almost impossible
administrative problems.

Questions arise, for example, as to whether the

furnishing of free parking f a c i l i t i e s , special printing of checks, lower
rates of interest on loans to depositors, and numerous other practices
constitute indirect payments of interest under the broad language of
the statute.

In order to make the law more workable, the Board recom¬

mends that the words "directly or indirectly, by any device what¬
soever" be deleted from the statute and that the words "payment of
interest 11 be expressly defined as including only cash payments made,
or credits given, by a bank for the account or benefit of a depositor.
In the Board!s opinion such a change would carry out the basic purposes
of the statute and at the same time make possible a more practical ad¬
ministration of the law.

-17In this connection, the Board also recommends that the law
be clarified so as to make the same rules as to what constitutes a
payment of interest on deposits apply to member banks and nonmember
insured banks alike. Obviously this was the intent of Congress when
the law was originally enacted. However, in the application of the
statute, the Board has ruled that absorption of exchange charges by
member banks is a payment of interest, whereas the Federal Deposit
Insurance Corporation has taken the opposite position with respect to
nonmember insured banks• As a result, member banks in some sections
of the country have been placed at a serious competitive disadvantage
with respect to nonmember banks, and the check collection process has
been slowed up by the unnecessary circuitous routing of checks drawn
on nonpar banks.

If the law should be amended as previously suggested

by the Board to define interest as including only cash payments or
credits, it is believed that absorption of exchange would come within
that definition. However, if the law should not be amended to include
such a definition, the Board believes that the law should be amended
either by including an explicit statement regarding absorption of
exchange charges by both member and nonmember insured banks, or, in
the alternative, by authorizing either the Board or the FDIC to define
a "payment of interest11 for both classes of banks.
It should be emphasized that this recommendation is made only
for the purpose of removing existing inequities which have arisen in
this field and not for the purpose of forcing "par clearance" upon

banks that now charge exchange. The Board's proposal relates not to
the making of exchange charges but to the absorption of such charges
as a device for paying interest on deposits. The purpose is simply to
make the same rules applicable to all insured banks and to preclude
situations in which nonmember insured banks are permitted to absorb
exchange while competing State and national member banks are not allowed
to do so.
With respect to this matter, the report of the Senate Banking
and Currency Committee recognized that the law should apply uniformly
to both classes of banks, but stated that the Board and the FDIC
should resolve the question by developing uniform regulations for both
member and nonmember insured banks. However, all efforts for such
uniform regulations, over a period of many years, have proved fruitless.
In the Board's opinion, the problem is one which can be resolved only
by specific legislation.
In view of the length of this statement, it may be appropriate
in conclusion to say again that the Board endorses the general objectives
of the pending legislation. With the few exceptions that have been
indicated, the Board approves the provisions of the bill insofar as they
affect the Federal T e serve System.

Enactment of such a codification of

Federal statutes relating to financial institutions is long overdue and
the Board hopes that it will be approved.