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Statement of

William McChesney Martin, Jr.,

Chairman, Board of Governors of the Federal Reserve System,

before the

Subcommittee on Financial Institutions

of the

Senate Committee on Banking and Currency

on

S. 2353, S. 2418, and H.R. 7371

March 16, 1966

The Bank Holding Company Act of 1956 has two chief objectives.
The first is to prevent undue concentration of control over banks in the
hands of any holding company, and the second is to prevent any holding
company from controlling both banks and nonbanking businesses.

The Act

prohibits formation of a bank holding company without the approval of
the Board of Governors of the Federal Reserve System, and prohibits
existing bank holding companies from acquiring more than 5 per cent of
any bank's voting shares without the Board's approval.

It also prohib-

its a bank holding company from engaging in any business other than
banking, or acquiring more than 5 per cent of the voting shares of any
such business, and requires the holding company to divest any such interests previously acquired.

In addition, it prohibits any subsidiary

bank from lending to or investing in its parent holding company or any
other subsidiary.
The principal issue presented by the bills before you this
morning relates to the coverage of the Bank Holding Company Act.

For

every holding company now registered under the Act, there are 10 or
more that are exempt, chiefly because the Act does not cover "one-bank"
holding companies.

The Board sees no basis in logic or equity for this

exemption, and recommends its repeal.
While there would obviously be no need for the Act to cover
one-bank holding companies if its only purpose were to prevent any
holding company from acquiring too many banks, it seems just as clear
that coverage of one-bank holding companies is necessary to accomplish




-2the Act's second objective.

In this connection, let me quote from this

Committee's 1955 report on the Act:
" * * * bank holding companies should confine their
activities to the control and management of banks and activities closely related to banking. They should not combine
management and control of banking activities with management and control of nonbanking activities. The divestment
requirements in this bill are designed to remove the danger
that a bank holding company might misuse or abuse the
resources of a bank it controls in order to gain an advantage in the operation of the nonbanking activities it
controls."
(S. Rept. No. 1095, 84th Cong., 1st Sess.,
pp. 13-14)
Abuses could come about "by requiring the bank's customers to make use
of such nonbanking enterprises as a condition of doing business with
the bank," as the committee report pointed out (p. 5 ) , or they could
take the form of denying credit to competitors of the bank's fellow
subsidiaries.

When a builder seeks a construction loan from a bank,

the loan should be made or denied without regard to whether the applicant will buy his lumber from a supplier that is owned by the same holding company that owns the bank.

When an automobile dealer seeks to

discount his customers' paper at a bank, the bank's decision should not
be complicated by questions of how it will affect the competitive position of another automobile dealership owned by the bank's parent company.
If a holding company is a finance company, the bank's decisions as to
whether it should make automobile loans directly should not be influenced by considerations as to whether its activities would take business
away from its parent finance company.
If you ask whether the Board can cite specific examples of
such abuses among the hundreds of one-bank holding companies in existence




-3today, the answer is "No."

Presumably, the organizers of these companies

are neither more nor less scrupulous than their counterparts in other
businesses.

But for companies now registered under the Act, no proof of

actual abuses was required.

The Congress decided, and the Board agreed,

that even in the absence of such proof, the potentiality for abuse in the
relationships between holding company, bank subsidiary, and nonbank subsidiary was sufficiently great to require divestment of nonbank businesses.
The Board believed then, and continues to believe, that this is just as
true for one-bank holding companies as for two-bank companies.

We sub-

scribe to another principle laid down in your Committee's report, that
"in general all bank holding companies should be required to observe the
same ground rules concerning formation and operation, insofar as Federal
legislation is concerned."

(id. at p. 14)

While it may be argued that multi-bank holding companies
should be treated differently from one-bank holding companies because
their operations have a greater impact on our economy, the facts are that
a finance company with assets of three billion dollars now controls a
single bank with deposits of three quarters of a billion dollars; the total
deposits of the banks shown on the list of one-bank holding companies recently published by this Committee is about fifteen billion dollars compared with about twenty-six billion dollars for the subsidiary banks of
all registered bank holding companies.

Moreover, about one-fourth of the

one-bank holding companies on the list are found in one-bank towns.
such situations, it is particularly desirable that the bank's credit
decisions be based solely on creditworthiness.




In

-4Let me turn now to questions of what kinds of organizations
should be included in the definition of "company."

At the outset, it

may be asked why the Act now covers only companies, and does not apply
to control exercised by an individual.

It is, of course, possible for

an individual to achieve the sort of domination of a banking market that
the Act seeks to prevent a company from obtaining.

The same conflicts

of interest could also arise where an individual controls a bank and a
nonbanking business.

But the need to regulate this kind of activity on

the part of individuals is not as great as it is for corporations, because individuals generally are more limited than are corporations in
their ability to attract capital for expansion, and because control by
individuals generally is diffused when they die.
The decision to cover corporations but exempt individuals
entails some difficulty in deciding whether to cover holdings by groups
of individuals associated together in some form other than a corporation.
The Act now covers many such forms of association by defining "company"
to include (with certain exceptions) "any corporation, business trust,
association, or similar organization."

It excludes partnerships, however.

The Board is not aware of any need to disturb this exclusion.

Admittedly,

there are exceptions to the broad generalizations that corporations have
longer lives, and obtain capital more easily, than partnerships.

But

the Board is inclined to believe that the same reasons that support an
exemption for individuals alsosupport—
exemption for partnerships.




though

to a lesser degree—the

-5The next question arises when an individual extends his control
over banks beyond his death, as is commonly done through testamentary
trusts established for the benefit of a widow or children.

The Board sees

good reason to exempt the ordinary family trust, which may be regarded as
only a temporary extension of the control originally exercised by the individual who established the trust.

But when a will creates a trust that

is perpetual, with trustees who are not only replaceable but are authorized and indeed obliged to manage the trust's affairs so that it may
grow and prosper, the Board believes that the line between control by
individuals and control by corporations has been crossed, and that such
a trust should be subject to the Act just as a corporation should.

Again,

it is not easy to draw a line between trusts that should be exempt and
those that should be covered.

We believe after further study that the

provision we originally suggested, which is now incorporated in S. 2353,
would probably cover some family trusts that should be exempt, such as a
trust for the benefit of surviving children who might not be "named" in
the trust instrument.

We now suggest, therefore, that the bill be amended

to exclude from coverage trusts that must terminate within twenty-one
years after the death of individual beneficiaries living when the trusts
become effective.
By far the largest trust that would be covered by the bills before
you is that established in 1936 under the will of Alfred I. du Pont.
testimony before the House Banking and Currency Committee last year,
Edward Ball, cotrustee of the du Pont Estate, described the effect of
Mr. du Pont's will as follows:




In

-6"In that will, after making some preliminary bequests,
he established a testamentary trust, appointed trustees,
and made his wife the beneficiary of the income from that
trust as long as she lived. Mrs. du Pont is 31 years old.
Upon her death, all of the income from the trust properties
will be paid to the Nemours Foundation, which is the beneficiary of the trust. The Nemours Foundation is a taxexempt, charitable foundation and provides care for crippled children, not incurables, and aged men and women.
* * * It is a trust in perpetuity, and it is a charitable
trust.11 (Hearings on H.R. 7371, p. 44)
According to Mr. Ball's 1964 testimony before the same Committee, the
Nemours Foundation is a corporation, created in 1937, which embarked upon
its charitable function with $1 million paid over to it from the du Pont
Estate. "Mrs. du Pont has made an irrevocable assignment of 12 percent
of her income from the estate to the Nemours Foundation,"
"Last year (1963) this amounted to $1,007,026.71.

Mr. Ball added.

Upon her death, the

additional 88 percent, which last year amounted to $7,384,862.57, will go
to the foundation."

(Hearings on H.R. 10668 and H.R. 10872, p. 227)

The testimony further indicates that when the Bank Holding
Company Act was enacted, the estate controlled 24 banks and 5 nonbanking
enterprises, doing business in real estate, insurance, safe deposit box
rentals, small resort operation, and the manufacture of paper and pulp
products.

One of the five nonbanking corporations, the St. Joe Paper

Company, owned 100 per cent of the stock of six other companies — including
a railroad, a telephone and telegraph company, and a warehousing company-and 50 per cent of the stock of a corporation that manufactured cardboard
containers.

It also owned 52 per cent of the defaulted bonds of the

Florida East Coast Railway Co., in receivership at the time.

The railroad

emerged from receivership in 1961, under the control of the estate. The




-7banks in the Florida National group controlled by the estate expanded
from 24 in 1956 to 31 last year; the number has now dropped to 30.

These

banks are listed on page 7 of the Committee Print of February 1966, listing the organizations covered by S. 2353.
A handful of other trusts are included in the published list.
They include some employee-benefit trusts, which presumably are perpetual,
and a few perpetual charitable trusts.

We know very little about these

trusts, and it is possible that some of them should not be on the list.
In the survey we conducted at your Chairman's request, on which this list
is based, many other banks reported that 25 per cent or more of their voting shares were held by trustees, but it is impractical to investigate
each of these instances to determine whether the trust would be covered
under the proposed amendment.
One of the bills before you, S. 2418, provides that where two
trusts have a common beneficiary or trustee they shall be presumed to
control each other unless the Board determines that the presumption should
not apply.

While this provision seems unnecessarily broad, the Board rec-

ognizes that coverage of trusts poses special problems in connection with
the divestiture requirements of section 4 of the Act, and that some provision may be needed to prevent a token divestment to a newly created
trust controlled by the same trustees.

We recommend that you consider

amending section 4 by adding a provision to the effect that divestment to
any trust having one or more trustees in common with the divesting trust
shall not be considered as an effective divestment.




-8If the Committee agrees that long-term trusts should be covered,
conforming amendments will be required, as indicated in the attachment
at the end of my statement.
The third principal change in coverage recommended by the Board
is to delete the present exemption for registered investment companies and
their affiliates.

This exemption is now enjoyed exclusively by the

Financial General Corporation, a company that is not, itself, registered
under the Investment Company Act of 1940, but is affiliated with Equity
Corporation, a registered company.

The Board does not agree with the con-

tention that because companies registered under the 1940 Act are supervised
by the Securities and Exchange Commission there is no need for regulation
under the Bank Holding Company Act.

The SEC has no authority to prevent

an affiliate of a registered investment company from expanding its control
over banks or combining banks with nonbanking businesses.

SEC supervision

of such affiliates is for an entirely different purpose, and is limited to
dealings between the affiliate and the registered investment company.
Financial General now owns one subsidiary, Empire Shares
Corporation, which is a registered bank holding company owning three banks
in New York.

In addition, Financial General owns 18 other subsidiary cor-

porations, each of which owns one bank; two of these banks are in the
District of Columbia, one in Georgia, four in Maryland, one in Tennessee,
and 10 in Virginia.

Nonbanking interests of Financial General include

firms engaged in life insurance, fire and casualty insurance, industrial
and manufacturing activities, lease financing, and mortgage banking.




-9Financial General is exempt from the Bank Holding Company Act
because of a provision in section 2(a) excluding from the definition of
"bank holding company" any company "which is registered under the Investment Company Act of 1940, and was so registered prior to May 15, 1955
(or which is affiliated with any such company in such manner as to constitute an affiliated company within the meaning of such Act), unless
such company (or such affiliated company), as the case may be, directly
owns 25 per centum or more of the voting shares of each of two or more
banks." Under the Investment Company Act two companies are "affiliated
with" each other if either owns as much as five per cent of the other's
stock.

Financial General is "affiliated with" Equity Corporation, be-

cause the latter owns approximately 15 per cent of Financial General's
stock.

Neither Equity nor Financial General "directly" owns 25 per cent

of the stock of any bank, because in each case the bank stock is held by
a separate holding company that is a subsidiary of Financial General.
This exemption has enabled Financial General not only to continue to operate banks and nonbank businesses, but also to expand its
banking interests considerably since enactment of the Bank Holding Company
Act,

The company's latest annual report observed that it "is now the

largest interstate banking group in the East, and sixth largest banking
group in the United States."
been acquired since enactment.

Of the 21 banks under its control, 15 have
This expansion took place in several dif-

ferent States, despite the fact that Financial General's principal place
of business is in the District of Columbia.

For companies covered by the

Act, acquisitions of a bank outside the holding company's home State are




-10prohibited unless the acquisition is "specifically authorized by the
statute laws of the State in which such bank is located, by language to
that effect and not merely by

implication."

Although only one company has thus far taken advantage of this
exemption, it is available for use by others.

Any company wishing to

take advantage of this loophole may do so by acquiring five per cent of
the stock of any of the roughly 300 investment companies that were registered before May 15, 1955.

The Board believes that this possibility

for escaping regulation under the Act should be eliminated by repeal of
the exemption.
The Board also believes that nonprofit corporations engaged in
charitable, educational, or religious activities should not be permitted
to acquire banks free of regulation, or to combine banking and nonbanking
businesses.

We see no reason to assume that organizations of this kind

are immune, because of their nature, from the potentialities for trouble
that exist in the case of ordinary business corporations.

The Board

accordingly recommends repeal of the exemption for charitable, educational,
and religious organizations now included in section 2(b)(2) of the Act.
The original Bank Holding Company Act included tax provisions
designed to make sure that those who are forced to dispose of property
because of the divestment requirements of the Act will not suffer unfavorable tax consequences.

The Board believes that this same principle

should apply to divestitures required as a result of the amendments now
under consideration.
In addition to a broadening of the Act to cover holding companies that are now exempted, the Board recommends changes with respect




-11to dealings between subsidiary banks and their parent holding companies
or fellow subsidiaries.

Section 6 of the Act prohibits any "upstream"

or "cross-stream" loans or investments by a subsidiary bank--"upstream"
meaning from the bank to the holding company, and "cross-stream" meaning
from the bank to another subsidiary (which must, under the Act, be another
bank or closely-related business).
The Board believes that this prohibition is too rigid, in that
it prevents some portfolio adjustments between subsidiary banks that are
legitimate and economically beneficial.

We recognize the need for limits

on upstream and cross-stream credit, and believe that this can be accomplished readily by applying section 23A of the Federal Reserve Act.
Section 23A prohibits any bank that is a member of the Federal Reserve
System from extending credit (through loans or investments) totaling more
than 10 per cent of its capital and surplus to any one affiliate, or more
than 20 per cent for all affiliates.

We recommend that this limitation

be applied to all insured banks (whether or not they are members of the
Federal Reserve System) and that the definition of "affiliate" be broadened to cover bank holding companies and their subsidiaries.
These are the principal changes involved in the bills before
you.

All three bills would cover long-term trusts and repeal the exemp-

tion for registered investment companies and their affiliates.

In addi-

tion, all three bills would repeal the exemption for nonprofit charitable,
religious, or educational organizations.

S. 2353, introduced by your

Chairman at the Board's request, and H.R. 7371, which passed the House of
Representatives last September, would also repeal an exemption for
agricultural companies that is probably meaningless now although it was




-12designed in 1956 to cover a special case, and would repeal two other
special exemptions from the requirement that bank holding companies must
divest their interests in nonbanking businesses,

One of these exempts

certain labor, agricultural, and horticultural organizations from the
divestment requirement.

The other allows a bank that is also a holding

company to keep nonbank stock it owned before the Act was enacted.

In

sum, the Board recommends, and the House of Representatives has approved,
extending coverage under the Act in seven respects.
changes are incorporated in S. 2418.

Three of these

The different effects of the

three bills as to coverage are shown on page 2 of the Committee Print
published by your Committee in November of 1965.
In addition, S. 2353 would, as I have explained, substitute
limitations on "upstream" and "cross-stream" credit for the prohibitions
now contained in section 6 of the Act.

S. 2353 also includes a number of

other amendments which are largely technical.

These are explained in the

memorandum that accompanied my letter to your Chairman submitting the
legislation; this memorandum is reproduced in the November 1965 Committee
Print.

Rather than taking your time now to go through the technicalities

of these changes, perhaps I can best assist you by responding to questions you may have regarding the three bills.

Attachment




ATTACHMENT
Technical Amendments to S. 2353
On page 5, strike line 24, and on page 6, strike lines 1 through 4,
inclusive, and insert in lieu thereof the following:
(b)

The second sentence of subsection (a) of section 3

of the Bank Holding Company Act of 1956 (12 U.S.C. 1842(a))
is amended by striking the words "for the benefit of the
shareholders of such bank" at the end of clause (i) and
inserting in lieu thereof the words "under a trust that constitutes a company as defined in section 2(b)".

On page 7, strike lines 20 through 23, inclusive, and insert in
lieu thereof the following:
"(4) shares held or acquired by a bank in good faith in
a fiduciary capacity, except where such shares are held under
a trust that constitutes a company as defined in section

Explanation:

2(b);"

Section 2 of S. 2353 would broaden the definition of

"company" to include long-term trusts.

The technical amendments above

are conforming amendments, to make sure that the exemptions now contained in section 3(a) and section 4(c) of the 1956 Act for shares held by
a bank in a fiduciary capacity will not be construed to exempt any longterm trust where the trustee is a bank.

These exemptions are needed to

permit banks to continue to hold shares of stock in banks and other companies in the course of their trust business, but they should be limited
to short-term trusts, such as those established by will to take care of
the spouse and children of the testator.