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Statement by Chairman Martin of the
Board of Governors of the Federal R e s e r v e System
Regarding Bank Holding Company Legislation
Before the Senate Banking and Currency Committee
July 5, 1955
During the past 15 years numerous bank holding company m e a s u r e s
have been introduced in the Congress ranging from s o - c a l l e d "death sentence' 1
to "freeze 11 bills. One proposal after another has bogged down in d i s a g r e e ment among those who wanted no legislation at all and those who sought to
put an end to the holding company device,
controversy.

Each has been beset by intense

Past efforts of m e m b e r s of Congress and those in Federal

or State regulatory agencies who have sought to reconcile sharply divergent
viewpoints and at the s a m e time devise effective m e a s u r e s have not met
with s u c c e s s .

Over the years, the R e s e r v e Board has changed its own

views as to the nature of legislation best adapted to meet the existing
problems in this field.
Existing provisions of law/, originally enacted in the Banking Act of
1933, have proved entirely inadequate to deal with the special problems
presented by bank holding companies.

It has been,

and still is,

the

Board's view that additional legislation is essential to deal effectively
with these problems.
Three years ago when asked to e x p r e s s its views on a then pending bill, the Board undertook a complete review of the bank holding



-2situation and of the legislation it felt would best deal with it. After intensive
study the Board reached conclusions that were set forth in a letter and
accompanying memorandum to the House Banking and Currency Committee
on April 11, 1952.
In complying with your request for our v i e w s , we must, of c o u r s e ,
give you our best judgment.

The fact that we are not in accord with

H.R. 6227, which has been passed by the House, cannot be ascribed to
any desire to delay further or defeat legislation on this subject, for you also
have before you a m e a s u r e , S* 2350, that does accord with our best judgment.
And as I have indicated, remedial legislation to deal with these problems
is essential and is long overdue.
We believe, as we have said previously, that the principal problems
in the bank holding company field a r i s e from two circumstances:
(1) The unrestricted ability of a bank holding company group
to add to the number of its banking units, thus making possible the
concentration of commercial banking facilities in a particular area
under single control and management; and
(2) The combination under single control of both banking and
nonbanking e n t e r p r i s e s , thus permitting departure from the
principle that banking institutions should not engage in business
wholly unrelated to banking, which involves the lending of other
people ! s money, whereas other types of business enterprise do
not involve this element of trusteeship,
I should like to submit for the record a memorandum of the Board's
views, including comments on H. R. 6227 which you have under consideration,



-3This memorandum reiterates the views expressed on behalf of the Board
before the House Banking and Currency Committee on February 28, 1955.
In brief, the Board believes that the major objectives of the l e g i s lation could be effectively accomplished by a bill which w o u l d - (1) Define a bank holding company as a company which
controls a majority (or possibly 25 per cent) of the stock of
any one bank, with no exceptions from the definition;
(2) Require approval by an agency of the Federal Government, after consulting with the appropriate State authorities,
before a bank holding company could acquire the stock of any
bank, if thereafter its stockholdings in that bank would
exceed five per cent;
(3) Require bank holding companies with in a prescribed
period to divest themselves of their nonbanking i n t e r e s t s ,
with a minimum of specific exemptions, but with administrative authority to make certain limited exemptions with
respect to companies engaged in bank-related b u s i n e s s e s
and with respect to situations in which an exemption would
be desirable to prevent hardship or to protect the public
interest.
The bill H. R. 6227 would go beyond these minimum requirements
in regulating bank holding companies.

Operations under its provisions

would be possible for the Board but would present s o m e serious administrative difficulties.



-4-

While we would favor a number of changes in the provisions of
the bill, the principal provisions that concern us may be briefly mentioned.
In the first place, the bill's definition of bank holding company
would not only impose an undesirable discretionary responsibility on
the Board, but would not, we believe, accomplish one of the major purposes of the bill.

In addition to covering any company which owns 25

per cent or more of the stock of two or more banks, the definition would
cover any other company which might be determined by the Board to
exercise a controlling influence over two or more banks.

We feel that

it is unnecessary and undesirable to vest the administering agency with
such discretionary authority.

Moreover, we believe that the definition

should cover a company which controls only a single bank, since it s e e m s
clear that the potential abuses which may result from the combination of
both banking and nonbanking interests under single control could very
well exist in a c a s e in which only one bank is involved as in c a s e s in
which a holding company controls two or more banks.
Secondly, the bill would prohibit 1 , a bank holding company from
acquiring additional banks outside of the State in which it has its principal
office or carries on its principal business or in any State except in a c c o r d ance with the branch laws of that State.

The Board believes that these

provisions are unnecessarily s e v e r e and also that they would deprive
the States of the right to regulate holding company banking in a manner
different from branch banking.

We feel that Federal regulation of bank

holding companies should not be tied to the branch banking laws of the


http://fraser.stlouisfed.org/
Federal States*
Reserve Bank of St. Louis

-5-

In the third place, the bill would prevent the approval of the
acquisition of stock of a State or national bank unless the transaction
is first approved by the appropriate State banking authority or by the
Comptroller of the Currency in the case of a national bank. We believe
that this requirement would result in an undesirable diffusion of
responsibility and give rise to duplication of effort and administrative
difficulties.

Consideration should be given to the views of the

Comptroller and the State authorities, but final responsibility should
rest with a single administering agency.
Finally, the judicial review provisions of section 9 of the bill
would give any person affected by any action or inaction of the administering agency a right to institute proceedings for judicial review,
with a trial of the facts de novo in the reviewing court.

These provisions

would in the Board's opinion be at variance with the spirit of the Administrative Procedure Act and would possibly result in a considerable
amount of litigation.

Of course, even without such provisions,

any

arbitrary, capricious, or unlawful action of the administering agency
would be subject to review by the courts. In any event, if provisions
for judicial review are to be included in the bill they should be confined
to the principal parties involved and should not provide for a trial of
the facts de novo.
The memorandum which I offer for the record discusses these
matters in more detail.



-6-

In summary, the Board recommends legislation along the lines
of S. 2350 because we feel that it would effec tively and equitably
provide needed regulation of bank holding

Attachment




companies.

MEMORANDUM OF THE VIEWS 0? THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
REGARDING BANK HOLDING COMPANY LEGISLATION
SUBMITTED TO THE SENATE BANKING AND CURRENCY COMMITTEE
ON JULY 5, 1955

The essence of the Board's position with respect to further
regulation of bank holding companies is that any new legislation on
this subject should be kept to a minimum necessary to meet whatever
problems may exist in this field which are not met by present law and
cannot effectively be dealt with by the States alone.
PRESENT PROVISIONS OF LAW
There are now on the statute books certain provisions
enacted in 1933,regulating affiliates and holding company affiliates
of banks which are members of the Federal Reserve System. Affiliates
of member banks are made subject to reports and examinations. Limitations are placed upon the amount which a member bank may loan to any
of its affiliates, including any holding company affiliate. Finally,
any holding company affiliate which desires to vote stock owned by it
in any member bank must first obtain from the Board of Governors a voting permit and, as a condition to the permit, the company must agree to
submit itself and its controlled banks to examination, to establish
certain reserve funds, to dispose of any interest in securities companies, and to declare dividends only out of actual net earnings.
These provisions of existing law, however, regulate the
activities of a bank holding company only if it happens to control a
bank which is a member of the Federal Reserve System and then only if
the holding company desires to vote the stock of that bank. In effect,
regulation is largely voluntary on the part of the holding company,
since it may be able to exercise effective control over its banks without
voting their stock. Even if a voting permit is obtained, the regulation to which a bank holding company is subject is aimed mostly at
protecting the soundness of the member banks in the group.

Present law, therefore, does not deal at all with two
apparent problems in the bank holding company field:




-2(1) In the first place, there is nothing in present law
which restricts the ability of a bank holding company to add to the
number of its controlled banks. Consequently, there can well be
situations in which a large part of the commercial banking facilities
in a large area of the country may be concentrated under the management
and control of a single corporation*
(2) In the second place, there is nothing in existing law
which prevents the combination under the same control, through the
holding company device, of both banking and nonbanking enterprises.
Obviously, this makes it possible for the credit facilities of a controlled bank to be used for the benefit of the nonbanking enterprises
controlled by the holding company. Moreover, the ordinary nonbanking
business requires a managerial attitude and involves business risks of
a kind entirely different from those involved in the banking business.
Banks operate largely on their depositors1 funds. These funds should
be used by banks to finance business enterprises within the limitations imposed by the banking laws and should not be used directly or
indirectly for the purpose of engaging in other businesses which are
not subject to the safeguards imposed by the banking laws.
ESSENTIAL FEATURES OF LEGISLATION
These two existing problems in the bank holding company
field could be met by legislation which would need to cover only four
essential features:
(1) The term "bank holding company" should be defined in
language generally adequate to cover all known bank holding company
groups which need to be covered, without attempting at this time to
cover all situations that might possibly arise.
(2) Bank holding companies should be required to obtain the
prior approval of a Federal agency before acquiring additional bank
stocks; and in granting such approval the administering agency should
give consideration to relevant standards stated in the law and to the
views of the appropriate State and Federal authorities.
(3) Bank holding companies should be required within a
reasonable time to divest themselves of ownership of stock and similar
equity interests in nonbanking enterprises with a minimum of specific
exceptions. The bill might give statutory exemption to bank holding
companies operated principally for charitable, religious, and similar
purposes. In addition, it should permit the administering agency to
exempt bank holding companies from the divestment requirements in
exceptional cases in which control of a bank may actually be necessary
in the public interest. Furthermore, the administering agency should
be given a limited authority to exempt shares of stock in businesses
closely related to the business of banking*




-3(4) Finally, there should be a few administrative provisions
requiring the registration of bank holding companies, authorizing the
administering agency to obtain information necessary to pass judgment
on proposed acquisitions of bank stocks, and providing criminal penalties
for violations of the statute.
COMMENTS ON H. R. 6227
With these four essential features in mind - coverage,
expansion, nonbanking interests, and administration - the principal
comments of the Board with respect to the bill H. R. 6227 are summarized
below.
(1) Coverage
One of the most basic and at the same time most controversial
aspects of bank holding company legislation has always been the matter
of coverage or definition.
The present bill would define a "bank holding company11 as
any company which owns 25 per cent or more of the voting shares of
two or more banks or any company which might be determined by the Board
of Governors to exercise a controlling influence over two or more banks.
This definition goes further than necessary in certain respects.
In the first place, it is unnecessary and undesirable to vest the administering agency with discretionary power to bring under coverage of the bill
companies not meeting the stated definition. In the second place, a
definition based primarily upon majority stock control of a bank would
probably be adequate to cover all companies which would need to be regulated
in order to accomplish the objectives of the legislation. However, if in the
judgment of Congress such a definition would not be adequate for this purpose,
it would not appear objectionable to base the definition upon some lower
percentage test, even down to 25 per cent as provided by the pending bill.
In one respect the Board believes that the definition in this
bill would not be adequate to effectuate one of the two main objectives of
the legislation. It would not apply to a company which controls only
one bank and would not, therefore, require such a company to divest itself
of its nonbanking interests. Yet, it seems clear that the potential
abuses resulting from combination under single control of both banking
and nonbanking interests could easily exist in a case in which only one
bank is involved. In fact, if the one controlled bank were a large
bank, the holding company's interests in extensive nonbanking businesses
might very well lead to abuses even more serious than if the company
controlled two or more very small banks. For these reasons, the
Board would continue to urge that, whatever the percentage test may
be, the definition should be related to control of a single bank.




-4The pending bill would exempt from the definition of "bank
holding company" any mutual savings bank and any organization operated
exclusively for religious, charitable, and similar purposes where the
organization would otherwise be a bank holding company by reason of its
ownership of bank stocks on the effective date of the Act. It would
also exempt any company if the aggregate deposits of the banks controlled by it did not exceed $15 million on December 31, 1954.
In the Board!s opinion, it is questionable whether any
company which meets the stated definition of a "bank holding company"
should be exempted from the necessity of obtaining the prior approval
of the administering agency if it should decide to acquire additional
banks. In this respect the Board has somewhat modified the views
expressed by it in 1953 before the Senate Banking and Currency Committee.
It would not now recommend the inclusion of discretionary authority
in the administering agency to exempt companies from the expansion requirements of the bill. It does not believe that any hardship would
result from requiring even a charitable institution to comply with
these requirements.
On the other hand, it is recognized that there may well be
cases in which the exemption of certain companies from the divestment
requirements of the bill would be desirable in order to prevent hardship and to protect the public interest, as, for example, religious,
charitable, and similar organizations• However, the Board questions the
necessity for exempting mutual savings banks from the divestment requirements.
In order to cover unforeseeable emergency situations, it
might be desirable to give the administering agency a limited authority
to exempt a bank holding company from the divestment requirements if
the administering agency determines that the company's control of a
bank is necessary in order to provide needed banking facilities or to
assure the sound financial condition of the bank involved, subject to
revocation of the exemption when the need disappears•
Before leaving the matter of coverage, it should be noted
that the provision of the pending bill defining the term "company"
would include not only corporations and business trusts, but also any
partnership and "any similar organized group of persons". The meaning
of the phrase "organized group of persons" is not clear. In any event,
however, the Board feels that such a broad definition goes beyond the
necessities of the situation.
(2) Limitations on Expansion
The second requisite feature of the legislation - restrictions
on the expansion of bank holding company groups - would be dealt with
in the pending bill by provisions requiring the Board's prior approval
for any action which would result in a company becoming a bank holding
company or for any acquisition of bank stocks by a bank holding company



or its subsidiary or for the acquisition of substantially all of
the assets of a bank by a holding company which is nob a bank or
by a nonbanking subsidiary. In determining whether to give its
approval, the Board would be required to consider certain specified factors, including whether the effect would be consistent
with the preservation of competition in the field cf banking.
It is believed that these provisions should be expanded
to require prior approval before any bank holding company may
merge or consolidate with another bank holding company. On the
other hand, it would seem unnecessary to include any provision with
respect to acquisitions of bank assets by a holding company or subsidiary which is not itself a bank.
In the interest of minimum control, the Board suggests
that it would be sufficient to require prior approval for the acquisition of bank stocks only if, after the acquisition of the stock
of a bank, the holding company will own a substantial percentage of
the outstanding stock of that bank, say 5 per cent. Such a modification of the requirements of the bill would permit properly diversified investments in bank stocks where control is not the motive.
The Board's principal comments, however, with respect to
the expansion features of the bill relate to those provisions of
section 5 which are apparently aimed at protecting the rights of
the States in this field*
In the first place, the bill would make it impossible
for a bank holding company to acquire stock of any State bank, unless the appropriate State banking authority also approves the
application within 30 days. Similarly, if the bank involved is a
national bank, the application could not be approved unless also
approved by the Comptroller of the Currency. These provisions
would have the effect of diffusing responsibility for administration of the legislation and result in a lack of uniformity in the
application of the law. They would also involve duplication of
effort and give rise to administrative difficulties. The Board believes that it would be desirable to require the administering
agency to give due regard to the views of the State authorities and
the Comptroller of the Currency but that the final responsibility
for approving or disapproving any application should rest with the
administering agency alone*
The bill would further prohibit a bank holding company or
any of its subsidiaries from acquiring the stock of a bank or substantially all the assets of a bank outside of the State in which
the holding company or the subsidiary involved has its principal
office or conducts its principal operations. In addition, a bank
holding company or any of its subsidiaries would be prohibited from
acquiring bank stocks or assets in any State except within the geographical limitations applicable to the establishment of branches
under the laws of such State, or unless the acquisition is specifically and affirmatively authorized by State statute*




-6These severe provisions would in effect "freeze" the existing
status of most bank holding companies and would go beyond what the
Board conceives to be the necessities of the situation.
As the Board has previously indicated, it believes that
regulation of bank holding company groups should not be related to
the branch banking laws of the States and that the States should be
left free to deal differently, if they desire, with these two types of
multiple-office banking. The pending bill includes a provision which
would permit expansion of bank holding companies in non-branch States

if such expansion is affirmatively

authorized by the statutes

of the

State in question. However, there are, of course, no States which have
affirmative legislation of this kind. This provision of the bill
follows almost literally a provision of the national banking laws
which permits a national bank to establish out-of-town branches only
if affirmatively authorized by State law with respect to State banks.
However, before the enactment of that provision national banks had no
authority at all for the establishment of branches. The situation is
quite different with respect to bank holding companies whose existence
has been legislatively recognized for many years. It is believed,
therefore, that it is inappropriate to apply to bank holding companies
exactly the same principles which were applied to branches of national
banks. If any analogous provision is necessary here, it should make
the expansion of bank holding companies dependent, not upon affirmative
authorization by the States, but upon the absence of express prohibition
by the States.
In the Board's judgment the rights of the States in this
field can be effectively protected by provisions which would require
the administering agency to obtain and consider the views of the State
authorities before passing upon any application for the acquisition by
a bank holding company of control of additional banks. In any event,
provisions for this purpose should not go further than a prohibition
against the acquisition of the stock of any State or national bank in
any State in which the statutes of such State would prohibit such acquisition in the case of a State bank.
(3) Divestment of Nonbanking Interests
In order to meet the third requisite of the legislation, the
bill would require bank holding companies within two years to divest
themselves of any shares or other securities or obligations of any
company other than a bank and to cease engaging in any business other
than that of banking, or of managing or controlling banks, or certain
related activities described in the bill.
To the extent that this requirement relates to obligations,
as .distinguished from shares of stock, of nonbanking enterprises, the
Board believes that it goes further than necessary. Single control of
both a bank and a nonbanking business is usually made possible by control of stock rather than by ownership of obligations.



-7The bill would provide a number of specific exemptions from
the divestment requirements. "While some such specific exemptions maybe appropriate, they should be kept to a minimum and be explicit• It
may be desirable, for example, to exempt shares of a company engaged
solely in holding properties used by a subsidiary bank, in conducting
a safe deposit business, or in providing investment counsel to the
subsidiary banks. Also, it may be appropriate, as provided in this
bill, to exempt the ownership of not more than 5 per cent of the outstanding voting securities of a nonbanking company. It is questionable,
however, whether some of the exemptions provided are necessary or
desirable. For example, exception (5) in section 6(c) of the bill would
seem to permit a bank holding company which is itself a bank to own
any shares of nonbanking companies which it would be permitted to own
under State law. There appears to be no logical reason for such an
exemption. In fact, this exemption might operate to defeat the purposes of the legislation in some situations. The desirability of
certain of the other exemptions is also questionable, particularly
that in paragraph (4) with respect to shares owned prior to the date
of the Act, and that in paragraph (6) with respect to shares of an
investment company.
In any event, as against numerous'specific exemptions, it
would seem preferable to vest the administering agency with a limited
authority to exempt ownership of shares of companies which are determined to be closely related to the business of banking or of managing
or controlling banks. Such a provision should be coupled with the
additional provisions, previously suggested in this memorandum, for
the exemption of certain bank holding companies from the divestment
requirements in a very limited class of cases.
(4) Administration
The administrative provisions of the bill are contained in
sections 4, 9, and 10, -which relate, respectively, to registration,
reports and examinations of bank holding companies, hearings, and
judicial review of administrative action and criminal penalties for
violations of the Act.
The Board's only comment on these provisions relates to
section 9 which would give to any person directly affected by any order
or determination of the Board, or "affected11 by a failure of the Board
to take action, a right to judicial review, with a trial of the facts
de novo by the reviewing court. It is believed that no specific provisions for judicial review are necessary, since, even without such
provisions, any arbitrary, capricious, or unlawful action on the part
of the administering agency would be, and should be, subject to review
by the courts. However, if any provisions on this subject are included
in the bill, the Board feels that a provision for trial of the facts de
novo would be at variance with the spirit and intent of the Administrative
Procedure Act. The Board also believes that, instead of the vague provision for review at the instance of any person "affected", the right to
review should be limited to the principals in the proceedings involved.



-8(5) Other Provisions of the Bill
Certain provisions of the pending bill have no direct
connection with the two main objectives of the legislation.
Under section 7 of the bill, subsidiary banks would be
absolutely prohibited from making loans to, or investing in the
stock or securities of, their bank holding company or any other
subsidiary of the bank holding company. The Board believes that
these provisions are unnecessarily restrictive. Moreover, if any
provisions on this subject are deemed to be necessary, it is the
Board's view that they should be enacted in the form of amendments
to section 23A of the Federal Reserve Act, which now places certain
limitations upon loans by member banks to their holding company
affiliates or other affiliates. As tonon-memberbanks, the States
should be left free to determine what restrictions they may wish
to impose upon loans by State banks to their affiliated organizations.
Section 11 of the bill would make a number of technical
amendments to provisions of existing law. Insofar as these provisions would amend the Internal Revenue Code to afford appropriate tax relief to bank holding companies complying with the divestment requirements of the bill, they appear to be desirable,
although the Board does not feel specially qualified to comment on
their adequacy. However, the amendments proposed to be made to
existing provisions of law relating to holding company affiliates
of member banks have no apparent relation to the principal objectives of the bill. The existing provisions are aimed primarily at
maintaining the soundness of member banks in holding company groups.
It may be that in some respects they should eventually be modified,
but there appears to be no reason why they should not be continued
in force for the present,
CONCLUSION
The above comments on the pending bill have been made for
the purpose of helping, as far as possible, in the working out of
reasonable and effective legislation on this subject. By way of
summary, the Board believes that the principal objectives of the
legislation could be accomplished by a bill which, in addition to
certain administrative provisions, would include only (l) a definition of "bank holding company" as a
company controlling a majority (or possibly 25 per
cent) of the stock of any one bank, with no exceptions;




-9(2) a requirement that every bank holding company
obtain prior approval before acquiring the stock of any
bank if thereafter its holdings of the stock of that
bank will exceed 5 per cent, with provision for obtaining the views of State and Federal authorities; and
(3) a requirement that bank holding companies divest themselves of their nonbanking interests, with a
minimum of specific exemptions, but with administrative authority to make the limited exemptions heretofore mentioned.