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Statement of
William McChesney Martin, Jr.,
Chairman, Board of Governors of the Federal Reserve System,
before the
House Committee on Banking and Currency,
on
H. R. 5845, H. R. 7878, H. R. 8230, H. R. 8245, and H. R. 8247
September 24, 1963,
You have asked for the comments of the Board of Governors
of the Federal Reserve System on five bills proposing greater latitude
for banks and for savings and loan associations in their financial
activities.
Four out of the five bills relate to national banks, and the
fifth to savings and loan associations.
The bank bills propose:
1. To create another exception to the rule laid down in the
National Bank Act that a national bank n shall not underwrite any issue
of securities, " a change that would apply as well under the Federal
Reserve Act to all State banks that are members of the Federal Reserve
System.
2. To authorize conventional loans by national banks on
real estate—that i s , loans not insured or guaranteed by Federal
agencies--to run longer, and to run higher in relation to the value of
the property.
3. To authorize loans by national banks to a single borrower
in double the size now permitted by law,
4.
To authorize larger and longer loans by national banks
on forest tracts.
Of them all, one thing may be said in common: they would
relax limitations that were adopted by the Congress to safeguard these
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institutions and the public they serve from clangers that may seem
remote today but have been all too real at other periods of our
history.
Fortunately, conditions in the economy today are good.
During a comparatively long period of relative prosperity, or at least
one unbroken by an economic setback on the scale we suffered in the
1930's, we have made great progress in improving the techniques by
which our financial institutions meet the public's needs.
We know
more than we formerly did about avoiding depressions, and I wish I
could say with confidence that we will never see another.
not think we can afford to proceed on that premise.
But I do
Particularly, I
question whether at this time, when our economy is doing well, we
should relax credit standards further.
H. R, 5845: Underwriting by Commercial Banks
H. R. 5845, dealing with a subject known in capsule form
as "revenue bond underwriting by commercial banks,"is the most
controversial of the four bank bills, and I will begin my discussion
with it.
State-backed obligations of public housing agencies.
The
bill would modify section 5136 of the Revised Statutes by means of
two amendments.
The first would confer upon national banks (and
State banks that are members of the Federal Reserve System) special
powers with respect to short-term obligations of public housing
agencies that are secured by an agreement by the State to lend to the
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agency an amount sufficient to pay such obligations at their maturity.
Investment in such obligations would not be subject to the ordinary
limitations and requirements of section 5136 with respect to banks'
securities investments, and banks could also underwrite and deal in
such obligations .
R. S. 5136 presently exempts from its limitations and
restrictions "general obligations of any State"—that is, obligations
that are backed by the full faith and credit of a State. As amended by
section 602{a) of the Housing Act of 1949, R. S. 5136 also exempts
short-term obligations of public housing agencies secured by agree¬
ments of the kind contemplated by H. R. 5845 that are entered into by
the United States Public Housing Administration.
If the agreements
contemplated by the proposed amendment would pledge the general
credit of the State to the payment of the obligations involved, the
conferring of "exempt" status on such obligations appears to be justified
as a matter of principle.
We have some suggestions for technical
changes in this portion of the bill that are incorporated in the draft
attached to my statement.
Revenue bonds.
In its provisions dealing with the subject of
revenue bond underwriting by commercial banks, H. R. 5845 proposes
to grant to banks by process of law certain underwriting privileges
that the Comptroller of the Currency recently undertook to grant by
process of redefinition.
The Comptroller's action, however, has
-4-
created a situation in which national banks would seem to have even
broader privileges than H. R. 5845 would grant either to national
banks or to State banks that are members of the Federal Reserve
System.
The National Bank act now provides that a national bank
"shall not underwrite any issue of securities, " and the Federal
Reserve Act makes this prohibition applicable also to State member
banks.
However, the statutes further provide that the prohibition of
underwriting (as well as "dealing" in securities) "fshall not apply to
obligations of the United States, or general obligations of any State
or of any political subdivision thereof. "
These provisions were enacted by Congress over 30 years
ago, and until recent months they were consistently interpreted, by
the Federal Reserve System and the Office of the Comptroller of the
Currency, to permit national banks and member State banks to under¬
write "municipal bonds" (a term used in the trade to include bonds of
States as well as smaller governmental entities) only when those bonds
were backed by the full faith and credit of a governmental body that
possessed general powers of taxation, including property taxation.
H. R. 5845, like similar bills introduced over the past decade, is
based on that interpretation, which the Federal Reserve System con¬
tinues to follow in applying the law to State member banks, and I shall
discuss the bill on that basis.
-5-
Besides issuing "general obligations," States, cities,
school districts, and other governmental authorities of various kinds
also issue securities that do not have the same "full faith and credit "
backing.
As examples, a State may issue bonds that are to be repaid
solely from tolls paid for use of a bridge, tunnel, or turnpike, or
from a particular tax source such as a gasoline sales tax or a
severance tax.
A city may issue bonds payable solely from the in¬
come of a municipal auditorium.
In many cases a State, instead of issuing in its own name
bonds payable solely out of a designated revenue source, will create
a Roads Commission or Turnpike Authority, with power to raise
necessary funds by selling its own bonds to the public.
Bonds of that
kind ordinarily are not binding on, or backed by, the State itself.
Such bonds may be general obligations of the Commission or
Authority that issues them, but since that body does not possess
general taxing power they have the same status as equivalent bonds
issued by the State but payable only from a particular source of State
income.
In other words, all of these securities are in the category
of "revenue bonds" and may not be underwritten or dealt in by com¬
mercial banks.
From the passage of the Banking Act of 1933 until recent
weeks, banks have not underwritten or dealt in revenue bonds because
of the statutory prohibition.
On the other hand, a few large banks,
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both national and state, do have departments that actively participate
as underwriters and dealers in bonds that are "general obligations"
under section 5136.
Either individually or as members of syndicates,
they submit offers for new issues of municipal "G. O. 's, " as they are
called, and if the offer is accepted they distribute the securities by
selling them to the investing public, including institutional investors.
Such banks also act as dealers—that is, they buy and sell G. O. 's
that are already outstanding and maintain inventories of such bonds
for sale.
These underwriting and dealing functions must be dis¬
tinguished, of course, from banks' investments in securities.
Under section 5136 and the Investment Securities Regulation of the
Comptroller of the Currency, a bank may purchase for investment
(the statute uses the expression "purchase for its own account")
securities of any kind, including corporate securities and revenue
bonds, that meet prescribed standards of quality.
The pending bill
does not relate to such investments, but rather to the authority of
banks to underwrite and deal in securities.
(For brevity, I shall
refer hereafter only to "underwriting,"! but "dealing" should also be
understood. )
Under section 5136, banks may underwrite G. O. 's without
any statutory restriction as to amount or specification as to quality.
Questions respecting quality and amount are taken care of by the
examination process.
-7-
H, R. 5845, on the other hand, is intended to permit banks
to underwrite only such revenue bonds as "are at the time eligible for
purchase by a national bank for its own account" (page 2, lines 23-25)—
that is, securities that are of "bank quality" and therefore already
eligible for bank investment.
The bill also is intended to forbid banks
to "hold, . . [revenue ] obligations [of any one issuer] * as a result of
underwriting, dealing, or purchasing for its own account. • • in a total
amount exceeding at any one time" 10 per cent of the bank's capital and
surplus (page 3, lines 2-9). In other words, if a bank already held
bonds of the X Turnpike Authority in its investment portfolio in an
amount equal to 6 per cent of the bank's capital and surplus, it could
not, as underwriter (or in any other capacity), buy bonds of a new
issue of that Authority in an amount exce ding 4 per cent of capital
and surplus.
In these respects, and others, the bill requires revision in
order to effectuate its intent, and a suggested rewording is attached to
this statement, for consideration in the event it is decided that legis¬
lation along these lines is advisable.
As I indicated, I have been discussing the bill on the basis
of the long-standing interpretation of what R. S. 5136 means today.
* The bill does not contain these bracketed words, but it seems
clear that the omission was inadvertent.
-8-
The situation is further complicated, however, by the fact that the
Comptroller of the Currency has recently announced a new interpreta¬
tion of the law.
He has redefined the term "general obligation" to
include an obligation that is backed by the full faith and credit of
the obligor, even though the obligor is a special authority without
taxing power.
Since "general obligations" are exempt from all of the
restrictions of R. S. 5136, the Comptroller's new interpretation goes
much farther than H. R. 5845 would go.
That i s , if one considers
revenue bonds to be "general obligations, " it means banks may under¬
write them without limitation as to amount and without reference to
the quality standards H. R. 5845 would apply.
The Board of Governors believes this interpretation to be
unwarranted by the statute.
In applying the law to State member banks,
we feel obliged to construe "general obligations" in its traditional
sense.
The result, at the moment, is that national banks are operat¬
ing under new rules that allow them much broader authority than this
bill is intended to grant, whereas State member banks are operating
under the rules in force when the bill was introduced.
Clearly, some
way must be found to apply one rule for all member banks, State or
national.
Accordingly, the proposed revision of H. R. 5845 that we
are submitting includes, as a last sentence, an explicit definition of
the statutory term "general obligations" which, it is hoped, would
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remedy this situation.
In the board's judgment, prompt enactment
of such a definition is urgently needed; its importance far transcends
that of either of the topics dealt with by H. R. 5845 in its present
form,
I now return to consideration of the bill on the basis of its
underlying assumption--that, contrary to the Comptroller's position,
existing law does not permit banks to underwrite revenue bonds.
The chief benefit asserted by proponents of revenue bond
underwriting by banks is that it would reduce the cost of long-term
governmental financing.
At present, revenue bonds are underwritten
almost solely by investment banking concerns; the largest are in
New York and other financial centers, but there are hundreds of
others throughout the country.
If commercial banks were permitted
to engage in this activity, it is claimed, competition among bidders
for new issues of revenue bonds would be broader and more intense,
with the result that issuers of revenue bonds would receive higher
bids and the costs of their financing would be correspondingly lower
than would be the case if banks were not permitted to compete in this
field.
Opponents of the pending bill, on the other hand, maintain
that competition among revenue bond underwriters already is intense
and effective, and that additional competition from a relatively small
number of commercial banks would have little or no effect on the
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costs of municipal financing.
They also assert that the quantitative
importance of the revenue bond segment of public financing has been
exaggerated, and that a number of recent issues, based on lease
arrangements in many cases, actually are G. O. 's and consequently
are already eligible for bank underwriting.
They further contend
that the main effect of permitting banks to underwrite revenue bonds
would be to take a first step toward releasing upon the economy the
evils that the Banking Act of 1933 sought to avert by separating com¬
mercial banking from investment banking.
Most of these evils can be grouped as undesirable conflicts
of interest.
It is said that many of the principal and unique functions
of commercial banks inevitably would be less effectively performed
if banks were permitted to expand their underwriting activities.
Banks could underwrite securities that might not be appropriate
investments for them for a variety of reasons.
However, if a
particular underwriting proved to be n sticky, " a bank might take the
securities into its investment portfolio rather than liquidate them at
a loss.
In this way, it is said, banks would not perform with
optimum efficiency their vital job as investment intermediaries.
The trust departments of banks are one of the main fidu¬
ciary groups of the country.
It is said that there would be conflict
between their fiduciary and underwriting functions.
Likewise, it
has been asserted that the advice and guidance given to correspondent
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banks and other customers by large metropolitan banks would be
affected adversely by wider participation of such banks in under¬
writing, since it would be difficult for a bank to maintain the position
of an impartial adviser when deciding whether to recommend purchase
of securities in which the advising bank itself held a position as under¬
writer or dealer.
Another contra argument is that the credit-granting
decisions of a commercial bank should be made solely on the merits
of the bank-loan proposal, without being influenced by the bank's
position as underwriter--or prospective underwriter--of the would-be
borrower's securities.
A further argument made against the bill is that, in the long
run, it would actually lessen, rather than intensify, investment bank¬
ing competition.
It is pointed out that industrialized countries in which
investment and commercial banking are combined have not developed
anything like our strong and extensive investment banking industry.
From this it is argued that any immediate enhancement of competition
resulting from entry of commercial banks into this area would be
more than offset, in time, by a reduction in the number, the competitive
power, and the vigor of investment banking concerns.
At the same
time, there would be a tendency to undue concentration of economic
power in commercial banks.
Although these contentions are advanced against the limited
proposal of the present bill, it is apparent that, assuming their
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validity, their force would be multiplied if there were a possibility
that commercial banks' underwriting activities might be still further
expanded hereafter.
And that argument is emphatically advanced by
opponents of the bill--that H. R. 5345 does not present the entire
problem, but is only an entering wedge that would permit commercial
banks gradually to infiltrate much wider areas of investment banking.
In this connection it is said that, regardless of the good
faith of the sponsors of such bills and their protestations that no
further steps are contemplated, the logic of the situation cannot be
disregarded.
The pending bill would permit banks to underwrite
bonds issued, for example, by an Electric Power Authority that was
owned by a municipality.
It is argued that enactment of this bill
would enable such an authority to borrow more cheaply the funds
needed for generators and transmission lines, and that the benefits
would flow to the public in the form of lower rates for electric power.
Precisely the same argument could be made, however, in the case of
a city in which electric power production and distribution were in the
hands of a private corporation.
The quality of the securities would
be comparable in these two cases, and in each lower interest rates
would lead to lower electricity rates for consumers.
This being the case, it is argued, is it not inevitable that
the benefits of bank underwriting would be sought in the public utility
field, as an example, after municipal revenue bonds had been made
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eligible?
And is it reasonable to assume that the expansion would
stop there?
If homeowners who heat their houses with gas fuel are
entitled to legislative action designed to reduce their costs, is there
any sound reason for withholding similar benefits from those who use
oil for that purpose?
The argument goes somewhat along those lines.
I have outlined a number of points that have been considered
by the Board of Governors in reaching a judgment.
But enumeration
of arguments is only a step in the clarification of issues.
The essence
of the decision-making process is determining the validity of each of
those arguments and the weight to which it is entitled, balancing the
arguments for and against, and then deciding which side outweighs
the other, in the aggregate.
In one of the few areas in dispute that are subject to
quantitative analysis, we have found it feasible to make an independent,
although limited, study.
To test the extent to which interest costs differ between
revenue bonds and general obligation bonds of comparable quality,
data were tabulated on the terms of new bond offerings made in the
first half of 1963. All issues in amounts of $2 million or more which
carried a Moody' s Investors Service quality rating of A, and for
which public information on costs was available, were included in the
tabulation--99 issues in all.
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The simple average of net interest costs incurred on these
issues was 3.27 per cent for the revenue bonds and 3.00 per cent for
the G. O. 's. But more than half of this 27 basis point difference was
accounted for by factors other than disparities in the interest yields
required by investors—largely differences in average maturities.
Comparing reoffering yields to investors on identical 5, 10, and 20-year
maturities, revenue bonds in the tabulation provided average yields
only about 11 basis points higher than on G. O. 's. This unexplained
difference—less than one eighth of 1 per cent—represents the major
part of the differential which might be narrowed by permitting com¬
mercial banks to underwrite revenue bonds.
Other differences in the underwriting circumstances of
these issues were not large.
The average number of bids received
on the G. O. 's was 7, as against 6 on the revenue offerings, and the
difference between the lowest and next lowest bid was actually slightly
less on the revenues than on the G. O. 's. Moreover, underwriting
spreads (the gross compensation to the purchasing syndicates, in
terms of interest cost differentials) appear to have been as low, or
lower, for the revenue bonds as for the G. O. 's in this tabulation.
The experience of the Georgia Rural Roads Authority,
whose bonds recently became eligible for bank underwriting in
consequence of a constitutional change, is cited by proponents of this
legislation as an example of the possible benefits to be received.
Of
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the 3 latest bond offerings of that Authority, in August 1953, January
1962, and October 1962, only the last—in October 1962--was under¬
written by banks. But analysis indicates that the differences in yields
on these issues were mainly attributable to changes in the general
market.
Thus, if reoffering yields on these Georgia's and on all
A-rated bonds issued in August 1953 and October 1962 are compared,
we find that there was little difference in the relative movements.
And underwriting spreads do not appear to have declined significantly
over this period on the Georgia issues, despite inclusion of banks
in the syndicates bidding for the last of these offerings.
Our conclusions from these observations are that there is
not much latitude for competitive reductions in interest costs between
revenue and G. O. bonds of similar quality, and that one recent
instance of a change in classification--the Georgia case--does not
indicate that inclusion of banks as underwriters brought a significant
decline in interest costs to the issuer.
Nor does the record cited
suggest that the participation of banks in competition for G. O. bonds
has produced underwriting spreads that are lower than those on
revenue issues of similar size and quality.
It should be pointed out, moreover, that even if bank under¬
writing of revenue bonds were to result in some narrowing of the
relatively small existing interest rate differential, the cost would
tend to be borne by issuers of general obligation bonds. If banks
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were to broaden markets for revenue bonds through sales to regular
clients, this might well bring an offsetting reduction in purchases of
G, O.'s by these same clients. Some upward adjustments in yields
on G, O, issues would be the probable result. All in all, the
prospective interest cost benefits of commercial bank revenue bond
underwriting do not appear to us to be of significant dimensions.
It appears, therefore, that the revenue-bond proposal
before the Committee would not produce, to any substantial extent,
the benefits that its proponents have advanced as its principal merit
and justification.
The Board believes, moreover, that the principle
of separation of commercial banking from investment banking
(including underwriting and dealing), which was recognized and
adopted by Congress in the Banking Act of 1933, is a sound and
significant one. It tends to minimize the possibility of banks being
subjected to conflicts of interest that might affect adversely their
ability to devote themselves single-mindedly to their primary function
of serving their depositors, borrowers, correspondents, and trust
accounts.
For these reasons it is our judgment that the benefits to
be derived from maintaining the principle of separation of commercial
banking from the securities business decidedly outweigh the limited
benefits that might result from enactment of the second part of H. R,
5345, Accordingly, the Board recommends against enactment of that
part of the bill.
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H. R. 7878: Mortgage Loans
Another of the bank bills on which you have asked for our
comments, H. R. 7878, would raise the limits on conventional real
estate loans by national banks in two respects: the maximum maturity
would be increased by 50 per cent, from 20 to 30 years; the maximum
loan-to-value ratio, which was raised from 66-2/3 to 75 per cent
only 4 years ago, would be further raised to 80 per cent.
Today,
there is an ample supply of mortgage funds; total mortgage credit has
been rising by record amounts; and commercial banks themselves have
recently added larger amounts than ever before to their mortgage
portfolios.
National banks do not seem to be suffering from a competi¬
tive disadvantage as a consequence of the present loan limits.
In the
past year, the conventional real estate loan portfolios of national banks
increased somewhat more, proportionately, than did those of Statechartered commercial banks.
Nor are commercial banks as a whole
pressing against the existing limits; their conventional home loans
are currently made for an average term of about 16 years, well under
the 20-year limit of existing law, and the average loan-to-price ratio
is roughly 60 per cent, compared with the 75 per cent limit now in
effect.
Already in the postwar period, mortgage credit standards
have been progressively relaxed, partly in an effort to meet a pent-up
demand for housing and partly in an effort to stimulate the economy.
In the Board's judgment, this is not the time to relax standards still
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further.
Even if the process of relaxation has been both safe and
stimulative, it would seem preferable to reserve further steps in
this direction for a time of greater need and surer effect.
H. R. 3247: Loans to Single Borrowers
You have also requested comment on H. R. 8247, which
would raise the limit on loans by a national bank to a single borrower
from 10 per cent to 20 per cent of the bank's capital and surplus. The
present 10 per cent limit was established to make certain of diversi¬
fication and thus avert the danger inherent in concentrating too large
a portion of a bank*s resources in a few large loans. There is little
evidence of a need today to double this loan limit, especially since
loan participations are available to meet the needs of large borrowers,
and the present law contains numerous exceptions for loans that are
regarded as particularly safe or are secured by specified types of
collateral.
The proposed change would permit banks to concentrate
lending risks unduly, and could intensify pressures from large
national accounts to increase their loan commitments, thereby
diverting loanable funds away from local borrowers.
H. R. 8230: Loans on Forest Tracts
The fourth bank bill on which comments were requested is
H. R. 8230, which would authorize national banks to lend more
liberally on forest tracts.
Present law limits such loans to 40 per cent
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of the "appraised value of the economically marketable timber offered
as security" and the term must not exceed 2 years unless the loan is
to be amortized, in which case the limit is 10 years.
The bill would
change the basis for evaluating the security to the "appraised fair
market value of the growing timber lands, and improvements thereon."
It would authorize loans up to 60 per cent of this value for a 3-year
term or, if amortized, up to 75 per cent for a 15-year term.
Relatively few loans on.forest tracts are now being made by member
banks, and reports from most of the Federal Reserve Banks indicate
their members generally lack experience with such loans.
The Board
would not recommend favorable action on the proposal unless further
study reveals greater evidence of a need for it.
H. R. 8245: Savings and Loan Associations
Finally, you have requested the Board's comments on H. R.
8245, relating to savings and loan associations.
This bill would
authorize Federal savings and loan associations to establish special
savings accounts (that i s , deposit accounts) for pension or retirement
trust funds, and would authorize these associations and other members
of the Federal Home Loan Bank System to act as trustees for stock
bonus, pension, and profit-sharing plans. It would also broaden the
investment authority of Federal savings and loan associations to
include obligations of Federal agencies and of the States and local
governmental entities, including special obligations as defined by the
-20-
Federal Home Loan Bank Board. Federal savings and loan associa¬
tions would also be authorized to make loans for "furnishing, equipping,
or promoting tbe livability of a home," as well as for paying the
expenses of a college education or acquiring a mobile dwelling.
Other
provisions of the bill would qualify institutions insured by the Federal
Savings and Loan Insurance Corporation as depositaries for funds of
the Federal Government, grant to savings and loan associations
authority similar to that granted to banks last year to establish
service corporations, and authorize small business investment
companies to place idle funds in FSLIC-insured institutions.
Furthering the efficiency of operations of savings and loan
associations, along with that of other financial institutions, is of
course desirable, and we therefore recommend favorable consideration
of an extension of the Bank Service Corporation Act to cover such
associations.
The Board believes, however, that before the question
of granting additional powers to savings and loan associations is taken
up, action should be taken to strengthen supervision, safety, and
liquidity of these institutions, and to provide safeguards against
conflicts of interest.
This was the position taken by the Administration
and the Board in connection with proposals to increase FDIC and FSLJC
insurance coverage, and we believe it is applicable with at least equal
force in this case.
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Now, in conclusion, a few general observations.
All of these proposals involve in one way or another the
position of particular financial institutions in relation to that of their
competitors. And all affect in some degree the ability of the institu¬
tions concerned to obtain a greater share of the profits available
from the rendition of the services they commonly offer, or would like
to offer.
In part these proposals raise questions of equity and
justice: the right of each to compete with others on equal terms,
insofar as the law—and in this instance the supervisory authorities,
operating within the law—can make the terms equal; also the right
of all to gain for themselves the greatest profits they can achieve
in full and fair competition with others.
If that were all, the verdict would be easy and obvious.
Equality of opportunity is the very cornerstone of our society, and
the profit-motive the very foundation of the economy by which that
society is sustained.
But there is more here than that. For the
fundamental issue of public policy involved in these proposals is not
what these financial institutions are to be allowed to do, but what
risks they are to be allowed to take with other people's money.
Because they operate with other people's money, it has
been almost universally deemed in the public interest, and we so
-22-
deem it now, that commercial banks and savings institutions be
held to strict standards of prudence and care in their loan and invest¬
ment operations.
In the view of the Board, this is no time to relax
those standards further.
ATTACHMENT
Suggested revision of H. R. 5845. 88th Congress, with explanation
(Submitted by Board of Governors of Federal Reserve System)
A BILL
To assist cities and States by amending section 5136 of the Revised
Statutes, as amended, with respect to the authority of national banks
to underwrite and deal in securities issued by State and local
governments, and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled, That paragraph "Seventh"
of section 5136 of the Revised Statutes of the United States, as amended
(12 U.S.C. 24) is hereby amended—
(1) by striking out everything between "(1) " and the word
"prior" in the sixth sentence thereof and inserting in lieu
thereof the following:
"by an agreement between the public housing agency and the Public
Housing Administration or the State wherein the agency is situated,
in which the agency agrees to borrow from the Administration or
State, and the Administration or State agrees unconditionally to
lend to the agency,";
-2(2) by striking out the last sentence thereof and inserting
in lieu thereof the following:
"The limitations and restrictions herein contained as to dealing
in and underwriting investment securities shall not apply to
(1) obligations issued by
(a) any State or any political subdivision thereof
or any public agency of a State or political
subdivision (except obligations payable solely
from the proceeds of special benefit assessments)
or
(b) the International Bank for Reconstruction and
Development or
(c) the Inter-American Development Bank
which are at the time eligible for purchase by a national
bank for its own account;
(2) obligations issued by the Tennessee Valley Authority:
Provided. that no national bank shall at any one time hold obliga¬
tions issued by any one of such issuers, as a result of underwriting,
dealing, and/or purchasing for its own account (and for this purpose
obligations as to which it is under commitment shall be deemed to
be held by it), in a total amount exceeding 10 per centum of its
capital stock and surplus. The provisions of the preceding
sentence shall not apply to general obligations of any State or
of any political subdivision thereof, which are specifically
-3-
covered by another provision of this paragraph.
As used in this
paragraph, the term 'general obligations of any State or of any
political subdivision thereof' means only obligations that are
supported by an unconditional promise to pay, directly or indirectly,
an aggregate amount which (together with any other funds available
for the purpose) will suffice to discharge, when due, all interest
on and principal of such obligations, which promise (1) is made
by a governmental entity that possesses general powers of taxation,
including property taxation, and (2) pledges or otherwise commits
the full faith and credit of said promisor; and said term does not
include obligations that are to be repaid only from specified
sources such as the income from designated facilities or the pro¬
ceeds of designated taxes."
Explanation of suggested revision of H. R. 5845, 88th Congress
1. The language of H. R. 5845 requires only that "the State
agrees to lend to the public housing agency" (page 2, lines 3 and 4), To
reduce the possibility of misinterpretation, it is suggested that this
language be changed to read "the State agrees unconditionally to lend to
the public housing agency", so as to make clear that the exemption is
applicable only when the agreement by the State effectively pledges its
full faith and credit.
H. R. 5845 would insert an additional lengthy provision in the
sixth sentence of paragraph "Seventh" of R. S. 5136, which is already
extremly long and complicated. The substitute amendment would achieve the
same result, with at least equal clarity, by the insertion of relatively
few words in an earlier clause of the sentence.
2. In lines 17 to 19 on page 2 of H. R. 5845, reference is made
to "all other obligations issued by a State or political subdivision or
agency of a State or political subdivision". The proposed statutory pro¬
vision relates to so-called "revenue obligations", as distinguished from
general obligations. An existing provision of section 5136 of the Revised
Statutes completely exempts general obligations from the limitations and
restrictions of R. S. 5136. Presumably, the reference to "all other
obligations", etc., in the proposed new provision is intended to relate
back to that complete exemption of general obligations, so that the new
limited exemption applies only to "all other (municipal) obligations" than
those--in other words, to revenue obligations.
This wording has both advantages and disadvantages. If the
reference-back of the term "all other obligations" were clear, it would
simplify the wording of the proposed new provision (compare language of
S. 3131, 87th Congress). However, there are over 40 lines of statute
between the reference to "all other obligations" and the prior language
to which it must be related, and readers might have serious difficulty
in making the necessary relation back. In addition, the language in
question refers to "all other obligations issued by a[n] ... agency of a
State or political subdivision"; however, since there is no earlier
mention of obligations of such agencies, reference to all other obliga¬
tions of such agencies might cause confusion and avoidable problems of
interpretation.
3. The amendment of R. S. 5136 proposed by clause (2) of
H. R. 5845 presumably is intended to permit underwriting of only such
revenue bonds as are "eligible for purchase by a national bank for its
own account". However, page 2, line 21, includes the words "to obliga¬
tions of", which were not included in earlier bills such as S. 3131,
87th Congress. The inclusion of these words seemingly causes the words
"eligible for purchase by a national bank for its own account" (page 2,
line 24) to be applicable only to obligations of the IBRD and the IDB.
Consequently, the amendment, if enacted in that form, might be interpreted
to mean that municipal revenue obligations are eligible for bank
-2underwriting regardless of whether they would be eligible as investments
for national banks. This clearly is not intended or desirable.
4. The proviso to clause (2) of the bill prescribes a maximum
limit on the amount of securities of the types previously described that
a bank may hold "as a result of underwriting, dealing, or purchasing for
its own account". H. R. 5845 departs from S. 3131, 87th Congress, by
omitting after "amount" on page 3, line 6, the words "with respect to any
one of such issuers". As a result of this omission, the proviso appears
to forbid a national bank to hold municipal revenue bonds or obligations
of the IBRD, IDB, and TVA in an aggregate amount,, for all those issuers,
exceeding 10 per cent of the bank's capital and surplus. It is presumed
that this excessively narrow restriction is not intended, and the language
of the bill should be amended to correct it.
5. It is believed that the best solution of the foregoing
problems would be to modify clause (2) of the bill as indicated in the accom¬
panying Suggested revision. That revision also includes some other modifications intended to achieve greater clarity and to avoid possible ambiguities.
6. If, however, it is decided to retain the shorthand expres¬
sion "all other obligations", etc. (see "2" of this Explanation), the
suggested substitute should be changed by omitting the penultimate sentence
and making appropriate changes elsewhere.
7. The purpose of the last sentence of the suggested substitute
is to prevent misinterpretation of the statutory term "general obliga¬
tions of any State or of any political subdivision thereof". The
Comptroller of the Currency, in recent months, has interpreted that term
in a way that would cover not only full faith and credit obligations of
a government with general powers of taxation but also revenue bonds pay¬
able solely from the income of a toll bridge, tunnel, or turnpike, or
from a specified limited tax source. The proposed definition of the term
has been made extremely explicit, in order to prevent such misinterpre¬
tations hereafter.
8. The draft bill to which this Explanation is attached would
revise H. R. 5845 with respect to both subjects covered by the bill.
However, as indicated by Chairman Martin's Statement, the Board does not
favor enactment of the second portion of the bill, which would authorize
banks to underwrite revenue bonds. The revision of that portion has been
submitted by the Board of Governors so that the bill, as reported by the
House Banking Committee, will be free from certain existing technical
defects, in the event that, contrary to the Board's recommendation, the
revenue-bond-underwriting provision is enacted. Consequently, if the
Board's recommendation is followed, all of the second proposed insertion
in R. S. 5136 (beginning near the top of page 2 of the suggested revision)
would be deleted with the exception of the last sentence (defining
"general obligations"), which should be enacted in any event.
@FedFRASER