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STUDY OF FINANCIAL BANKING INSTITUTIONS W.S. Congress. LAWS ACT OF 1957 Senati . HEARINGS BEFORE A SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY UNITED STATES SENATE EIGHTY- FIFTH CONGRESS FIRST SESSION ON A PROPOSED BILL TO AMEND AND REVISE THE STATUTES GOVERNING FINANCIAL INSTITUTIONS AND CREDIT JANUARY 28, 29, 30, 31 , FEBRUARY 1, 4, 5, 7, 8, 11, 12, 14, 15, AND 18, 1957 ᏢᎪᎡᎢ 2 Printed for the use of the Committee on Banking and Currency UNITED STATES GOVERNMENT PRINTING OFFICE 84444 WASHINGTON : 1957 COMMITTEE ON BANKING AND CURRENCY . J. W. FULBRIGHT, Arkansas, Chairman A. WILLIS ROBERTSON, Virginia HOMER E. CAPEHART, Indiana JOHN W. BRICKER, Ohio JOHN J. SPARKMAN, Alabama J. ALLEN FREAR, JR., Delaware IRVING M. IVES, New York WALLACE F. BENNETT, Utah PAUL H. DOUGLAS, Illinois PRESCOTT S. BUSH, Connecticut A. S. MIKE MONRONEY, Oklahoma FRANK J. LAUSCHE, Ohio J. GLENN BEALL, Maryland FREDERICK G. PAYNE, Maine JOSEPH S. CLARK, Pennsylvania J. H. YINGLING, Chief Clerk ROBERT A. WALLACE, Staff Director SUBCOMMITTEE ON BANKING A. WILLIS ROBERTSON, Virginia, Chairman HOMER E. CAPEHART, Indiana JOHN J. SPARKMAN, Alabama JOHN W. BRICKER, Ohio J. ALLEN FREAR, JR., Delaware IRVING M. IVES, New York PAUL H. DOUGLAS, Illinois WALLACE F. BENNETT, Utah A. S. MIKE MONRONEY, Oklahoma JOSEPH S. CLARK, Pennsylvania PRESCOTT S. BUSH, Connecticut DONALD L. ROGERS, Counsel II CONTENTS Page 454 Brief section-by-section analysis of committee print bill ……. Statement of 684 Adair, John A. , president, Exchange National Bank, Atchison, Kans…Baker, J. A., coordinator of legislative services, National Farmers 568 Union___. Bent, James E., chairman, Federal Home Loan Bank System committee ; accompanied by W. Franklin Morrison, chairman, Federal Legislative committee ; and Harold P. Braman, executive manager, 645 National Savings & Loan League__ Bliss, George, chairman, Home Loan Bank Act and Federal Savings & Loan Insurance Corporation subcommittee, United States Chamber 659 of Commerce_ Brownell, Herbert, Jr., Attorney General ; accompanied by Robert Bicks, Acting First Assistant, Antitrust Division Department of 1009 Justice . Brumbaugh, D. Emmert, chairman, committee on Federal deposit in522 surance, American Bankers Association____. Bubb, Henry A.: Subcommittee on Savings & Loan Associations, advisory 467 committee__ Chairman, legislative committee, accompanied by Stephen Slipher, vice president, and T. Bert King, Washington counsel, United 607 States Savings & Loan League_. Cocke, Erle, president ; accompanied by Lee P. Miller, chairman, committee on Federal legislation ; Gibbs Lyons, past president, National Bank Division ; Frank L. King ; D. Emmert Brumbaugh, chairman, committee on Federal Deposit Insurance ; and Paul A. Warner, chairman, committee on Federal legislation , savings and mortgage 522 division, American Bankers Association____ Cook, H. E., chairman ; Maple T. Harl, director ; Royal L. Coburn, general counsel ; Neil G. Greensides, acting assistant to chairman ; Edward H. De Hority, acting chief, Division of Examination ; Wiliam G. Loeffler, controller ; and Edson Cramer, chief, Division of Re891 serve and Statistics, Federal Deposit Insurance Corporation _---Cosgriff, Walter E., president, Continental Bank & Trust Co., Salt 635 Lake City, Utah……. Cravens, Kenton R., chairman , accompanied by Everett D. Reese, Subcommittee on National Banks ; Reese H. Harris, Jr., Subcommittee on Federal Deposit Insurance Corporation ; Henry A. Bubb, Subcommittee on Savings and Loan Associations ; and William W. Pratt, Subcommittee on Federal Credit Unions, Advisory Committee for the Study of Federal Statutes Concerning Financial 467 Institutions and Credit--547 Du Bois, Ben, secretary, Independent Bankers Association__ 675 Ely, J. Wallace, president, Robert Morris Associates__. 579 Fleming, Sam M., Association of Reserve City Bankers__ Flournoy, Seaborn J., investor and stockholder, American National 745 Bank, Portsmouth, Va --Gannon, J. Deane, director, Bureau of Federal Credit Unions, Depart1035 ment of Health, Education, and Welfare-Gidney, Ray M., Comptroller of the Currency ; accompanied by L. A. Jennings, Deputy Comptroller of the Currency ; T. V. Roberts, chief counsel ; L. R. Stover, assistant counsel ; and Roy T. Englert, as775 sistant counsel, Office of the Comptroller of the Currency.. 752 Gilbert, Lewis D., New York, N. Y___ III IV CONTENTS Statement of-Continued Grant, James W., accompanied by David R. Weinberg, representing Credit Union National Association_____ Harris, Reese H., Jr., Subcommittee on Federal Deposit Insurance Corporation, Advisory Committee__ Howell, Charles R., chairman, legislative committee, accompanied by Logan R. Ritchie, president, National Association of Supervisors of State Banks .. King, Frank L., American Bankers Association_ Leighton, William, New York, N. Y.. Lyon, William A. , accompanied by Morris Crawford, National Association of Mutual Savings Banks ---. Lyons, Gibbs, past president, national bank division, American Bankers Association _- _Morton, John F. , president, Great Western Savings & Loan Association, Los Angeles, Calif McDonnell, William A., chairman, finance committee, accompanied by Norfleet Turner, national bank and Comptroller of the Currency subcommittee ; Burnham Yates, chairman, Federal Reserve subcommittee ; and George Bliss, chairman, Home Loan Bank Act and Federal Savings and Loan Insurance Corporation subcommittee ; United States Chamber of Commerce___ Miller, Lee P., chairman, committee on Federal legislation, American Bankers Association__ Pratt, William W., Subcommittee on Federal Credit Unions, Advisory Committee__ Reese, Everett D., Subcommittee on National Banks, Advisory Committee__. Robertson, Albert J., Chairman ; Ira Dixon and William J. Hallahan, members, Federal Home Loan Bank Board_. Robertson, J. L., member, Board of Governors, Federal Reserve Board. Roper, Robert L., legislative director, National Association of Credit Men___. Speckman, Lawrence F., president, Lincoln Building & Loan Association, Louisville, Ky. Turner, Norfleet, national bank and Comptroller of the Currency subcommittee, United States Chamber of Commerce_. Walker, Fred, director, First National Bank of Arlington, Va --Warner, Paul A., chairman, committee on Federal legislation, American Bankers Association__. Yates, Burnham, chairman, Federal Reserve subcommittee, United States Chamber of Commerce_-_. York, W. C., deputy commissioner, State of North Carolina Insurance Department-Letters, statements, memorandums, etc., submitted for the record byAbernethy, L. F. , executive vice president and cashier, Bank of Fort Mill, S. C.: Letter to Senator Thurmond___ Ackerman, Jasper, president, Exchange National Bank of Colorado Springs, Colo.: Letter to Senator Carroll . Adair, John A., president, Exchange National Bank, Atchison , Kans.: Article, American Banker, "Happy" Embezzlement Dip Didn't Last Long., etc‒‒‒‒ Statement. Addy, S. R. E. , president, Saluda County Bank, Saluda, S. C.: Letter to Senator Thurmond_. Alexander, E. R., Jr., manager, Woodruff State Bank, Woodruff, S. C. Telegram and letter to Senator Thurmond.. Angell, J. F., vice president, First National Bank of Colorado Springs, Colo. Letter to Senator Carroll__ Arthur, Harry M. , Union, S. C.: Telegram to Senator Thurmond___ Bray, Claude A. , executive vice president and cashier, Bank of Manchester, Ga___ Brennan, James, Denver, Colo.: Letter to Senator Robertson__ Brody, Maurice S. , director, Denver National Bank : Statement_‒‒‒‒ Caldwell, D. W. , vice president, First National Bank, Pueblo, Colo. : Letter to Senator Allott_--- Page 22 619 467 596 522 757 555 522 704 659 522 467 467 959 852 623 613 659 721 522 659 732 1050 515 693 698 1050 1050 514 1051 1051 1051 738 519 CONTENTS Page Letters, statements , etc., submitted for the record by-Continued 668 Coleman, Henry A., United States Chamber of Commerce_ Comptroller General of the United States : Report on committee print 840 bill______ Comptroller of the Currency : 827 List of nonpar banks, by States__ 827 Appendix A : Sections of title I favored___ 828 Appendix B : Suggested minor or technical changes. 830 Statement____ Cravens, Kenton R., chairman, advisory committee : 498 Statement 1047 Supplemental statement_. Credit Union National Association : 619 Statement__ 622 Revised statement on proposed section 15--Durick, Donald E., executive secretary, American Industrial Bankers 630 Association : Statement----Edmond, Paul F., executive vice president, Tarheel Bank & Trust Co., 1052 Gatesville, N. C.: Letter to Senator Robertson----. Farmers and Merchants National Bank, Walterboro, S. C.: Telegram 893 to Mr. Harl___ Federal Deposit Insurance Corporation : Letter to Senator Robertson enclosing telegram from Farmers and 892 Merchants Bank, Walterboro, S. C‒‒‒‒‒‒ 927 Exhibit A. Appointment procedure--Exhibit B. Survey of experience under Civil Service Board of 928 Examiners program_-928 Exhibit C. Field personnel of the Examining Division_. 929 Proposed amendment, section 59 (b ) , title I 929 Proposed amendment, section 33 (b ) , title III . 929 Insured banks as depositaries of public funds.. 930 Actuarial data relevant to deposit insurance_. 950 Explanatory statement re proposed assessment base---. Federal Reserve : 849 Report on committee print bill . 880 Statement . 886 Memorandum of technical comments. Ferebee, Percy B. , president, Citizens Bank & Trust Co. , Andrews, 1052 N. C.: Letter to Senator Robertson___ Fitzgerald, H. M., president, Citizens Bank, Micro, N. C. Letter to 1053 Senator Robertson Forman, M. W. , chairman and president, Bank of Springville, Ala.: 888 Letter to Senator Robertson___ Garris, O. A., president, First National Bank, La Jara, Colo.: Letter 514 to Senator Allott_. Hamer, R. P., president, Bank of Clinton, S. C.: Telegram to Senator 1053 Thurmond_. Hartz, Joseph R., president, First National Bank of Stevens Point, 518 Wis.: Letter to Senator Wiley. Health, Education, and Welfare Department : Report on committee 1047 print bill . Heimann, Henry H., executive vice president, National Association of 624 Credit Men : Statement……. High, S. E. , Jr., president, Lucama-Kenly Bank, Lucama, N. C.: Letter 1054 to Senator Robertson__. Home Loan Bank Board : Ownership of Federal Home Loan Bank obligations as of dates 997 indicated__ 1004 Addenda A. Amendments 1-8-. Addendum B. Technical amendments-1007 Hosler, C. H., president, Fullerton National Bank, Fullerton, Nebr.: Letter to committee___ 515 Independent Bankers Association : Article, Independent Banker, Le550 gality of Chain Bank Stock Option Deals challenged--. Investment Bankers Association of America, Murray Hanson : Letter to Senator Robertson _- _720 VI CONTENTS Letters, statements, etc., submitted for the record by-Continued Iowa Bankers Association, Des Moines, Iowa : Letter to Senators Martin and Hickenlooper-Jacobs, Sidney S., Denver, Colo.: Letter to Senator Robertson --Janney, Joseph N., Philadelphia, Pa.: Letter to Senator Clark_ Justice Department : List of proposed bank mergers held up or dropped as a result of antitrust investigations__ Four complaints under Sherman Act in which banks have been named as defendants___ Attorney General's prepared statement_-. Kansas City Wholesale Credit Association, J. N. Ham : Letter to Senator Carlson____ Leighton, William, New York, N. Y.: Letter to Senator Robertson enclosing recommendations .. Lloyd, W. D., president, Commercial Bank, Douglasville, Ga.: Letter to Senator Robertson…. Marks, Paul H., president, Flagler Federal Savings & Loan Association of Miami, Fla.: Letter to committee_ Marshall, William F., chairman, State Planters Bank, Walnut Cove, N. C.: Letter to Senator Robertson___ Martin, W. H., treasurer-manager, Livingston, Mont., Northern Pacific Employees Federal Credit Union : Letter to Representative Metcalf Metcalf, Lee, a Representative in Congress from the State of Montana : Letter to chairman___ Mississippi Bankers Association, C. E. Morgan, vice president : Telegram to Senator Stennis_. Moore, G. M., president, Grenada Bank, Grenada, Miss.: Telegram to Senator Stennis_. Murray, John E., commissioner of finance, Fond du Lac, Wis.: Statement_-_Murray, Joseph C. , Denver, Colo.: Letter to Senator Robertson__ Murray, Thomas E., Denver, Colo .: Letter to Senator Robertson_. National Association of Insurance Agents, Robert E. Battles, president : Letter to chairman__ National Association of Mutual Savings Banks, Harry E. Proctor, assistant general counsel : Letter enclosing memorandum re taxability of shares of Federal savings and loan associations__ National Association of State Savings & Loan Supervisors, Milton O. Shaw, president : Statement ----National Association of Supervisors of State Banks : Amendments__ National Farmers Union : Memorandum. Yardstick Family Farm Credit Legislation____. National Savings and Loan League : Speech of Senator Morse, States Rights Arguments Refuted .. NeSmith, Jimmy D., president, Williams Banking Co., Rhine, Ga.: Letter to Senator Robertson_ Nielson, K. A., West Fargo State Bank, N. Dak.: Letter to Senator Young . Norris, R. H., president, Security Bank, Edgefield, S. C.: Letter to Senator Thurmond__ Ohio Bankers Association : Recommendations_ Oliver, W. B., president, Bank of Pine Level, N. C.: Letter to Senator Robertson__. Pankoski, Ruth, Denver, Colo.: Letter to Senator Robertson_. Parish, R. P. , Jr., president, Bank of Greenwood, Miss.: Telegram to Senator Stennis__ Parsons, A. H., executive vice president, Andrews Bank & Trust Co., Andrews, S. C.: Letters to Senators Thurmond and Johnston…. Pate, Edwin, president, Commercial State Bank, Laurel Hill, N. C.: Letter to Senator Ervin____ Peacock, E. P., Jr., president, Bank of Clarksdale, Miss .: Telegram to Senator Stennis___. Person, T. C., cashier, Bank of Varina, N. C.: Letter to Senator Robertson Plowden, Charles N., president, Bank of Summerton, Summerton, N. C. Letter to Senator Thurmond___ (2 Page 715 1055 847 1015 1020 1029 720 766 1055 1055 1056 956 955 1072 1073 717 1057 1057 1058 718 844 604 569 646 1059 847 1059 845 1060 1061 1073 1061 1063 1073 1063 1064 4 CONTENTS Letters, statements, etc., submitted for the record by-Continued Seal, Leo W., president, Hancock Bank, Gulfport, Miss .: Telegram to Senator Stennis_. Seeman, George, Denver, Colo.: Letter to Senator Robertson___. Shackelford, A. D. , president, National Bank of Wilson, N. C.: Statement .. Silverberg, Marvin, New York Furniture House, Inc. , Denver, Colo.: Letter to Committee____ Soss, Wilma, president, Women Shareholders in American Business, Inc.: Statement_. Speckman, Lawrence F., president, Lincoln Building and Loan Association, Louisville, Ky.: Statement--. Stanley, J. H. , vice president and cashier, Depository of Lake View, Lake View, S. C.: Letter to Senator Thurmond …. Stennis, John, a United States Senator from the State of Mississippi : Statement Stone, H. Chase, president, First National Bank of Colorado Springs, Colo. Letter to Senator Carroll ___‒‒ Tate, C. Lacy, president, Waccamaw Bank & Trust Co., Whiteville, N. C. Telegram to Senator Ervin__ Teeters, Owen C., cashier, St. Johns National Bank, St. Johns, Mich. : Letter to Representative Bentley .. Texas League of Municipalities : Resolution of bank's underwriting revenue bond issues__ Thompson, A. R. president, Pennsylvania Credit Union League : Letter to Senator Robertson__. Thurmond, Strom, a United States Senator from the State of South Carolina : Letter to Senator Robertson___ Tilghman, Harrison, Easton, Md .: Statement_ Tiller, L. S., executive vice president, Indian River Citrus Bank, Vero Beach, Fla.: Letter to Senator Smathers enclosing amendments____ United States Chamber of Commerce : Statement on convertible debentures United States Savings and Loan League : Recommended revisions specifically referred to in statement of Mr. Bubb___. Technical revisions suggested.. Vance, Robert M., president, M. S. Bailey & Son, bankers, Clinton, S. C.: Letter to Senator Thurmond_. Waldbaum, Louis A., national bank stockholder, Denver, Colo.: Letter to committees__ Walker, E. F., vice president and cashier, Traders & Farmers Bank, Haleyville, Ala.: Letter to Senator Robertson_. Walker, Fred, director, First National Bank of Arlington, Va.: Appendix, Examination by Directors ---Weatherford, Z. L., president, Bank of Red Bay, Ala.: Letter to Senator Robertson__. Williamson, W. G. , vice president and cashier, Citizens Bank, Vienna, Ga.: Letter to Senator Robertson__. Zacharin, Samuel, Homler Credit Union, New York, N. Y.: Letter to committee Zeitlin, Eugene, Gonser Realty Co., Denver, Colo .: Letter to committee VII Page 1072 1064 631 956 755 614 1065 1072 515 1066 715 716 1066 1049 1068 517 664 611 612 1070 1071 889 730 1071 1071 846 956 ; STUDY OF BANKING LAWS (Financial Institutions Act of 1957) MONDAY, JANUARY 28, 1957 UNITED STATES SENATE , COMMITTEE ON BANKING AND CURRENCY, SUBCOMMITTEE ON BANKING, Washington, D. C. The subcommittee met, pursuant to call, in room 301 , Senate Office Building, at 10:05 a. m., Senator A. Willis Robertson (chairman of the subcommittee) presiding. Present : Senators Robertson, Frear, Clark, Bricker, and Bennett. Senator ROBERTSON. The subcommittee will be in order. Today the Subcommittee on Banking of the Senate Banking and Currency Committee is beginning hearings on a committee print bill to codify the banking and credit laws. The bill is the result of the study of the Federal statutes governing financial institutions which I, under the designation of the chairman of the full commitee, have been conducting on behalf of the committee since last July. The bill is based on recommendations submitted by the Federal supervisory agencies, by the various trade organizations in the financial field, by our 27- man advisory committee, and by many individuals. We are richly indebted to all of those groups for their helpful cooperation. I was pleased that the Economic Report of the President, which was released last Wednesday, endorses our study. The report at page 49 states in part : The exceptionally heavy demands which economic expansion is placing on credit and capital markets have directed attention increasingly to questions concerning the adequacy of our financial facilities, and of the laws and regulations which govern their operation. Alert to these problems, the Senate Committee on Banking and Currency during the past year made an extensive and constructive investigation of Federal laws affecting financial institutions. The economic report went on to cite that there were broader problems not covered by the study which should be studied , and the President strongly recommended the appointment of another Monetary Commission to operate perhaps along the line of the Aldrich Commission, which was authorized in 1908 and submitted its report in the summer of 1912. On the basis of that report the Congress in 1913 passed the Federal Reserve Act. Of course, that Commission would study one of the vital problems of every nation, which is a stable currency. Everybody knows that we have not had a stable currency for a long time. Probably it was about as stable as we have known it in recent years, in 1928. In 1929 our exports and our imports were balanced and the prices received by the farmers with relation to the prices they paid for manu451 452 STUDY OF BANKING LAWS factured goods were about as favorable to the farmers as any they had had for a long time. Of course, it wasn't perfect, it never has been perfect, but it was going along pretty well. Then we had too much speculation, or gambling, if you please, on the stock exchanges, and we had a financial bust of the equity values. Then followed a period of depression that had already started abroad. Before this downward trend was over we were in the midst of probably the worst depression that the Nation has ever had. Debts were so pressing and the money with which to pay them so scarce that the President had to declare a bank holiday and a bank could not pay any money out at all. There were quick examinations to see what could be done and if the RFC could help the few banks that did not open up. Then the President said, money is too dear. We will make money cheaper. You remember what my predecessor, Senator Glass, said about devaluing the dollar and artificially increasing the value of its backinggold-going off the gold standard. He said it was an act of high immorality. In any event, there was no question about the fact that in 1933 and in 1934 money was very dear. The dollar was not stable. President Roosevelt said, "Our objective is to get a stable dollar." That was his objective. But then political expediency moved in on him in a big way and in January of the next year he asked the Congress : "Give me $4,800 million to spend as I see fit for relief and recovery," and Congress did what he asked. That was the commencement of the big deficit financing, and the dollar has never been stable since. We cannot go into that question , but that will be one question that this Monetary Commission will have to consider. One reason why I personally would like to see the President have the kind of Commission he asked for is that you will not get a stable dollar without treading on a good many toes. There are a lot of people who do not want a stable dollar. There are people who think they can make money with a tight dollar, and others who think they can make money with a cheap dollar. Then you have the byproduct of the competition of the few agencies that now handle the dollars. There are some tax advantages and some question as to whether you have to keep this reserve when somebody else does not have to have the same reserve with respect to loans. All of those things are broad questions of policy that our study did not embrace, and I want to make that very clear. In case we get requests from witnesses to go into thes broader matters, we cannot undertake that. Our study is largely technical. We are dealing with laws that go back to 1862 and that have never been codified . We have brought them all together, to show you that, and in the publication of the laws we are letting some bankers know for the first time the laws under which they operate. The Senator from New Mexico got a violent protest from the president of a building and loan association there about the provision in this tentative bill for the election of directors of the Home Loan Bank Board. He said under that law they are proposing a small State will never be able to elect a director. Of course, I pointed out that that is the present law, and has been ever since the law was passed, and that the Banking Committee recommended its continuance and the ad- STUDY OF BANKING LAWS 453 visory committee recommended its continuance. Of course, if he wants to change it, he will be heard. I suppose there were others who found out for the first time, after we brought all these laws together, some of the things under which they have been operating and never heard of before. The committee print was prepared under my direction by the committee counsel, Mr. Donald L. Rogers, with the help, as I say, of these Federal agencies and other splendid groups. I want to indicate again, as I did at the hearings of last November, that I am not finally committed to every section of the bill. There are 2 or 3 matters I put in because other people thought they ought to be in the bill. For instance, it was not my idea that we would go into the change of structure of the Federal Deposit Insurance Corporation, but there are some who thought it ought to be changed. The advisory committee thought it ought to changed, and I thought enough of their views to put it in for the purposes of the hearing. Some thought that the criminal laws on the future employment of bank examiners by banks , and loans to them from banks, were not tight enough and we should safeguard against another small bank situation such as occurred in Chicago. But since the language was put in there have been many complaints coming to me from former bank examiners who are now outstanding bankers, that it is unnecessarily drastic. We can consider all of the changes of that kind and they can be duly ironed out. However, I am hopeful these hearings in the next 3 weeks will develop suggestions to improve the bill. Incidentally, when I say "3 weeks," I wish to emphasize the "3," because I am informed that a House Appropriations Committee plans to finish action on its first appropriation bill , which is an appropriation of over $3 billion for the Treasury and Post Office Departments, before they recess on February 12 for the Lincoln Day speeches. Naturally we want to give all of our Republican colleagues an opportunity to get back among their constituents and make Lincoln Day speeches, because we think a lot of Lincoln. If Lincoln's views had prevailed after the war of 1861-65 we would have been in better shape than we were for 10 or 15 years. Senator BRICKER. I understand our side feels so secure that they have called off that week of speeches. Senator ROBERTSON. I did not know, but I saw some statement to the effect that they were really going to get the Congress 2 years from now, and I thought maybe they would start in on the Lincoln Day holiday. But if they already feel secure, that is different. The point I was making was that after the Lincoln Day holiday the House will pass this appropriation bill, and I am chairman of the subcommittee that handles it on the Senate side. So I will then have to hold hearings on that, and I would like very much to complete these hearings before that time. Senator BRICKER. May I say at the very beginning that I am indeed very grateful to you for the fine leadership you have given in preparing this bill. I agree wholeheartedly that it is not political in the sense that it is partisan in any way. It involves all of the people of the country and all of their financial interests. I am very grateful for the work of the Advisory Committee, of Mr. Cravens and his committee. I am particularly happy to have an Ohio representative, 454 STUDY OF BANKING LAWS Mr. Everett Reese, who is past president of our Ohio Association and of the National Bankers Association, with us at this hearing. I realize, of course, as you do, that some of the provisions are controversial, but I think we will work out a constructive bill so that we will have a codification of all the banking laws, and so that we may have the working tools by which we can improve and stabilize the whole banking structure of the country. Senator ROBERTSON . Thank you, Senator Bricker. The chairman wants to say he appreciates so much the cooperation that he has already been assured he is going to received from both sides of the Congress and this subcommittee. Incidentally, this subcommittee was increased by four members because this was regarded as one of the most important measures we will handle at this session. As Senator Bricker says, there will be no politics in this if we can help it. We are dealing with everybody's money, and everybody's business, and it makes no difference whether the man in that business is Democratic, or Republican , or Socialist , or what not. We will study it from the technical financial viewpoint, and not from a partisan viewpoint. There has been prepared a section by section analysis of the committee print bill we are considering, which for the information of all concerned will , without objection , be inserted in the record at this point. (The analysis referred to follows :) BRIEF SECTION BY SECTION ANALYSIS OF COMMITTEE PRINT BILL ENTITLED "FINANCIAL INSTITUTIONS ACT OF 1957" TITLE I-NATIONAL BANK ACT CHAPTER 1. SHORT TITLE AND DEFINITIONS Section 1. Short title.- Same short title as contained in 12 U. S. C. 38. Section 2. Definitions. -New section defining terms used in this act. CHAPTER 2. COMPTROLLER OF THE CURRENCY Section 3. Office of Comptroller of the Currency.-Revision of 12 U. S. C. 1 by substituting the word "office" for the obsolete word "bureau," by eliminating the obsolete reference to national currency and by clearly stating the Comptroller's responsibility for supervising national banks. Section 4. Appointment of Comptroller. - Subsection ( a ) revises 12 U. S. C. 2 by eliminating obsolete reference to $ 15,000 annual salary for Comptroller as requested in recommendation 1. Subsection (b ) revises 12 U. S. C. 3 by providing for "a surety bond" and eliminating reference to "two responsible sureties ." Section 5. Deputy Comptrollers .- Revises 12 U. S. C. 4, 5, and 6 by authorizing the appointment of two additional Deputy Comptrollers as requested in recommendation 2 and by eliminating obsolete language. Section 6. Chief National Bank Examiner.- Same as 12 U. S. C. 7, except specificaly authorizes title of "Chief National Bank Examiner." Section 7. Employees and salaries.- Revises 12 U. S. C. 8, 9, 9a, and 10 by eliminating reference to classification of clerks by the Secretary of the Treasury as requested in recommendation 3, and by eliminating duplicating and obsolete provisions. Section 8. Conflicts of interest prohibited .--Subsection ( a ) revises and strengthens 12 U. S. C. 11 regarding conflicts of interest on the part of the Comptroller and Deputy Comptrollers . Subsection (b ) is a new provision governing conflict of interests of employees of the Comptroller . STUDY OF BANKING LAWS 455 Section 9. Seal.-Same as 12 U. S. C. 12. Section 10.-Office facilities.-Same as 12 U. S. C. 13. Section 11. Annual report.- Same as 12 U. S. C. 14. CHAPTER 3. ORGANIZATION OF NATIONAL BANKS Section 12. Articles of association.- Same as 12 U. S. C. 21. Section 13. Organization certificate.- Subsection (a ) is the same as 12 U. S. C. 22. Subsection (b ) is the same as 12 U. S. C. 23. Section 14. Commencement of business .- Subsection ( a ) is the same as 12 U. S. C. 26, except that in the first sentence "one hundred per centum" is substituted for "fifty per centum" as provided for in recommendation 12. Subsection (b ) is the same as 12 U. S. C. 27. Subsection (c ) is the same as 12 U. S. C. 28. CHAPTER 4. CAPITAL, STOCK AND SHAREHOLDERS Section 15. Capital.- Subsection ( a ) is the same as the first two sentences of 12 U. S. C. 51. Subsection (b) is a revision of 12 U. S. C. 53 based on recommendation 12. Subsection (c) is the same as the last two sentences of 12 U. S. C. 51. Section 16. Capital stock.- Same as 12 U. S. C. 52. Section 17. Payment by bank of deficiency in capital stock.- Same as 12 U. S. C. 55, except obsolete provisions eliminated. Section 18. Increase in capital stock .-Same as 12 U. S. C. 57, except for provisions relating to stock purchases under section 31 ( a ) ( 9 ) of this act. Section 19. Decrease in capital stock.- Same as 12 U. S. C. 59, except reference to circulation deleted. Section 20. Preferred stock.- Revision of 12 U. S. C. 51a, 51b, 51b-1, and 51c to authorize issuance of preferred stock generally and not solely on an emergency basis. Based on recommendation 45D by the advisory committee. Section 21. Capital notes and debentures.-New provision based on recommendation 45D. Section 22. Dividends.- Subsections ( a ) , ( b ) , and ( c ) are a revision of 12 U. S. C 60 as provided in recommendation 13, including the 2-year amendment in subsection (b) recommended by the advisory committee. Subsection ( d ) is a revision of 12 U. S. C. 56 as requested in recommendation 13. Section 23. Shareholders' list.-Revision of 12 U. S. C. 62, including proposal of recommendation 17 (1 ) to delete reference to creditors plus new provision in last sentence of subsection ( b) relating to the reporting of stock transactions. Section 24. Shareholders' liability.- Subsection ( a ) is the same as 12 U. S. C. 66. Subsection ( b ) is the same as 12 U. S. C. 67. CHAPTER 5. DIRECTORS OF NATIONAL BANKS Section 25. Number of directors.- Revision of 12 U. S. C. 71a by eliminating reference to members of the Federal Reserve System. Provision for member banks will be found in section 23 ( h ) of title II of this bill. Section 26. Election of directors.- Subsection ( a ) revises 12 U. S. C. 71 by eliminating a duplicating provision on the number of directors and the last sentence thereof. Subsection (b) is a revision of 12 U. S. C. 75 as provided in recommendation 20. Subsection ( c ) is the same as the first two paragraphs of 12 U. S. C. 61, except the provision on cumulative voting is amended. as provided in recommendation 15. Subsection (d ) is the same as the last sentence of 12 U. S. C. 71 plus 12 U. S. C. 74. Subsection (e ) is the same as 12 U. S. C. 72. Section 27. Qualifications of directors.-Same as 12 U. S. C. 72. Section 28. Oath of directors.- Same as 12 U. S. C. 73. Section 29. Removal of officers and directors.- Revises 12 U. S. C. 77 by (1 ) eliminating reference to member banks ( see sec. 29 of title II of this bill ) ; ( 2 ) by substituting the words "has violated or is violating" for the words "have continued to violate" ; ( 3) by substituting the words "has engaged in or is engaging in unsafe or unsound practices" for the words "have continued unsafe 456 STUDY OF BANKING LAWS or unsound practices" ; and (4 ) by providing that the hearing must be held pursuant to the Administrative Procedures Act and shall be subject to review. Section 30. Liability of directors.- Same as 12 U. S. C. 93. CHAPTER 6. POWER AND DUTIES OF NATIONAL BANKS Section 31. Corporate powers.-Subsections ( a ) ( 1 ) to ( 6 ) are the same as the comparable provisions of 12 U. S. C. 24. Subsection (a ) ( 7 ) is the same as the first sentence of paragraph 7 of 12 U. S. C. 24, except the reference to circulating notes is deleted. (See sec. 32 of this title. ) Subsection (a ) ( 8 ) revises paragraph 8 of 12 U. S. C. 24 as provided in recommendation 6. Subsection ( a ) ( 9 ) is a new provision authorizing stock options based on advisory committee recommendations 45E. Subsection ( b ) is the same as 12 U. S. C. 81. Section 32. Dealing in securities.- Subsection ( a ) is the same as the provisions following the first sentence of paragraph 7 of 12 U. S. C. 24, except that the reference to obligations of the Home Owners' Loan Corporation is deleted as provided in recommendation 4. Subsection (b) is a new provision based on recommendation 60. Section 33. Trust powers.- Same as section 11 ( k) of the Federal Reserve Act as amended in recommendation 34. Section 34. Maximum loan limitation.- Subsections ( a ) and (b ) ( 1 ) , ( 2 ) , (3 ) , ( 4 ) , and ( 5 ) are the same as the comparable provisions of 12 U. S. C. 84. Subsection (b) ( 6 ) amends subparagraph ( 6) of 12 U. S. C. 81 as proposed in recommendation 23 ( 1 ) . Subsection (b ) ( 7 ) amends subparagraph ( 7 ) of 12 U. S. C. 84 as proposed in recommendation 24. Subsection (b ) ( 8 ) amends subparagraph ( 8 ) of 12 U. S. C. 84 as proposed in recommendation 25. Subsection (b ) ( 9 ) , ( 10 ) , and ( 11 ) are the same as the comparable provisions of 12 U. S. C. 84. Subsection (b ) ( 12 ) is a new provision as provided in recommendation 23 ( 2 ) as amended by the advisory committee. Section 35. Maximum rate of interest.- Subsection ( a ) is the same as 12 U. S. C. 85, except for new provision in last sentence. Subsection (b ) is the same as 12 U. S. C. 86. Section 36. Real-estate loans.-Subsection ( a ) is the same as first paragraph of 12 U. S. C. 371, except ( 1 ) the words "under any provision of the National Housing Act" are substituted for the words "under the provisions of title II, title VI, title VIII, section 8 of title I or title IX of the National Housing Act” ; ( 2 ) the aggregate limit on real-estate loans is increased by providing an alternative of 20 percent of demand deposits as proposed by the advisory committee in recommendation 35 ; and ( 3 ) recommendation 35 ( 2 ) is added . Subsection (b) is the same as the second paragraph of 12 U. S. C. 371 . Subsection ( c ) amends the third paragraph of 12 U. S. C. 371 as proposed in recommendation 35 ( 1 ) as amended by the advisory committee. Subsection (d ) revises the fourth paragraph of 12 U. S. C. 371 by deleting obsolete reference to section 13 (b) of the Federal Reserve Act and to the Reconstruction Finance Corporation. Subsection (e ) adds a new provision as proposed in recommendation 35 (4) and modified by the advisory committee. Subsection (f ) adds a new provision as proposed in recommendation 35 (3 ) . Section 37. Limit on bank's indebtedness.-Amends 12 U. S. C. 82 by ( 1 ) striking paragraphs 1, 6, and 10 as proposed in recommendation 22 as amended by the advisory committee ; ( 2) by increasing the total amount of permitted indebtedness as proposed in recommendation 45B by advisory committee ; and ( 3 ) by adding a new exception at the end thereof as proposed by the advisory committee in recommendation 45B. Section 38. Holding of real estate.- Same as 12 U. S. C. 28. Section 39. Branches.- Same as 12 U. S. C. 36, except subsection ( b) is amended as proposed in recommendation 9, and subsection ( f) is amended as proposed in recommendation 11 . Section 40. Change of name or location.- Subsection ( a ) revises 12 U. S. C. 30 as proposed in recommendation 7. Subsection (b ) is the same as 12 U. S. C. 31. Section 41. Dealing with own stock.- Same as 12 U. S. C. 83. STUDY OF BANKING LAWS 457 Section 42. Depositories and financial agents.— Same as 12 U. S. C. 90, except reference to national currency deleted. Section 43. Investment in bank premises.-Revision of 12 U. S. C. 371d by increasing total permissible amount to 50 percentum of capital and surplus as proposed in recommendation 45C of the advisory committee, and by deleting reference to member banks. (See sec. 23 (j ) of title II of this bill. ) Section 44. Restrictions on engaging in banking business.-Same as 12 U. S. C. 378, except amended in subsection ( a) ( 2 ) as proposed in recommendation 36. Section 45. Acting as insurance agent or broker.- Subsections ( a ) and ( b) are new provisions as proposed in recommendation 45F by the advisory committee. Subsection ( c ) is the same as 12 U. S. C. 92, except for new sentence at end thereof. Section 46. Acts in contemplation of insolvency.— Same as 12 U. S. C. 91. Section 47. General provision for amending articles.-New provision. CHAPTER 7. NATIONAL BANK EXAMINATIONS AND REPORTS Section 48. Examination of banks.- Subsection ( a ) is the same as first paragraph of 12 U. S. C. 481 , except reference to definition of affiliates in Federal Reserve Act. Subsection (b ) is same as the second paragraph of 12 U. S. C. 481 , except the duplicating provisions of the fourth sentence are deleted and fourth sentence is made subsection ( c ) of section 49. Section 49. Expenses of examinations.-Same as 12 U. S. C. 482, except obsolete first sentence deleted and fourth sentence of second paragraph of 12 U.S. C. 481 set forth in subsection ( c ) . Section 50. Confidentiality of examination reports.- New provision based in part on recommendation 44. Section 51. State examination or license prohibited .- New provision as proposed in recommendation 5. Section 52. Reports by national banks.-Subsection ( a ) revises the first paragraph of 12 U. S. C. 161 based partly on recommendations 28, 29, and 58. Subsection ( b) is the same as the second paragraph of 12 U. S. C. 161. Subsection (c ) revises 12 U. S. C. 164 by eliminating obsolete reference to circulating notes. CHAPTER 8. CONSOLIDATIONS , MERGERS AND CONVERSIONS Section 53. Consolidation of national banks.- Revision of 12 U. S. C. 33 as proposed in recommendation 8. Section 54. Consolidation of State bank into national bank.-Revision of 12 U. S. C. 34a as proposed in recommendation 8. Section 55. Merger into national bank.-Revision of 12 U. S. C. 34 (b ) as proposed in recommendation 8. Section 56. Conversion of State banks.-Same as 12 U. S. C. 35. Section 57. Conversion, merger, or consolidation of national banks into State banks.- Same as 12 U. S. C. 214a, 214b, and 214c. CHAPTER 9 . VOLUNTARY DISSOLUTION , RECEIVERS, AND CONSERVATORS Section 58. Voluntary dissolution.- Subsection ( a ) revises 12 U. S. C. 181 as proposed in recommendation 30. Subsection (b ) is the same as the second paragraph of 12 U. S. C. 181. Subsection (c ) is the same as 12 U. S. C. 182. Section 59. Appointment of receiver.- Subsection ( a ) is the same as 12 U. S. C. 191, except reference to personal liability of shareholders is deleted as proposed in recommendation 31 . Subsection (b ) is the same as 12 U. S. C. 192, except ( 1 ) the reference to personal liability is deleted as proposed in recommendation 31 and the reference to section 12B of the Federal Reserve Act is changed to the Federal Deposit Insurance Act. Subsection (c ) is the same as 12 U. S. C. 193. Section 60. Distribution of assets .- Revision of 12 U. S. C. 194 and 196 eliminating obsolete reference to national bank notes. Section 61. Winding up business of bank. -Revision of 12 U. S. C. 197 as proposed in recommendation 32. Section 62. Resumption of business.- Same as 12 U. S. C. 197a. 458 STUDY OF BANKING LAWS Section 63. Purchase of bank property.- Subsection ( a ) is the same as 12 U. S. C. 198. Subsection (b ) is the same as 12 U. S. C. 199. Subsection ( c) is the same as 12 U. S. C. 200. Section 64. Conservators.- Subsections (a ) , (b ) , and ( c) are the same as 12 U. S. C. 203, 204, and 205. Subsection (d ) is the same as 12 U. S. C. 206, except reference to withdrawal by depositors is eliminated. Subsections ( e) , (f) , ( g) , ( h) , and ( i ) are the same as 12 U. S. C. 207, 208, 209, 210, and 211. Subsection ( j ) is a new provision as proposed in recommendation 33. CHAPTER 10. MISCELLANEOUS Section 65. Emergency powers of the President.- Same as 12 U. S. C. 95 and 95a, except obsolete reference to Philippine Islands is deleted. Section 66. Ratification of certain acts.- Same as 12 U. S. C. 95b and 213. Section 67. Taxation of national bank shares.- Same as 12 U. S. C. 548. Section 68. Lawful reserves in Territories and possessions.-Subsection ( a ) is the same as 12 U. S. C. 143. Subsection (b) revises 12 U. S. C. 144 as proposed in recommendation 27. Section 69. Venue of actions.-Same as 12 U. S. C. 94. Section 70. Territorial applicability of act.- Revision of 12 U. S. C. 40 and 41. TITLE II-FEDERAL RESERVE ACT CHAPTER 1. SHORT TITLE AND DEFINITIONS Section 1. Short title.-Same as section 1 of the Federal Reserve Act. Section 2. Definitions.— Same as section 1 of Federal Reserve Act. CHAPTER 2. ORGANIZATION OF FEDERAL RESERVE BANKS Section 3. Federal Reserve districts.- Revision of first two paragraphs of section 2 of Federal Reserve Act as proposed in recommendation 46, plus requirement of only one Federal Reserve city in each district. Section 4. Branch offices.- Same as section 3 of Federal Reserve Act, except subsection ( c) added as proposed in recommendation 64. Section 5. Corporate powers of Federal Reserve banks.- Same as paragraph 4 of section 4 of Federal Reserve Act, except introductory portions amended as proposed in recommendation 50. Section 6. Capital stock of Federal Reserve banks.- Same as section 5 of Federal Reserve Act. Section 7. Division of earnings .- Section 7 of Federal Reserve Act amended by adding subsection (b) as proposed in recommendation 54. Section 8. Federal Advisory Council. - Section 12 of Federal Reserve Act amended as proposed in recommendation 52. CHAPTER 3. POWERS OF FEDERAL RESERVE BANKS Section 9. Receipt of deposits and collections.- Same as paragraph 1 of section 13 and paragraph 14 of section 16 of Federal Reserve Act. Section 10. Discount operations.- Same as paragraphs 2, 3, 4, and 5 of section 13 of Federal Reserve Act. Section 11. Discount of agricultural paper.-Same as section 13a of Federal Reserve Act. Section 12. Acceptances.- Same as paragraphs 6, 7 , and 12 of section 13 of Federal Reserve Act. Section 13. Advances.- Same as paragraphs 8 and 13 of section 13, except includes recommendation 70 and section 10b of Federal Reserve Act. Section 14. Open market operations.- Same as section 14 of Federal Reserve Act. Section 15. Government deposits.- Same as section 15 of Federal Reserve Act, except ( 1 ) eliminates obsolete reference to the Philippine Islands as proposed in recommendation 85E of the advisory committee ; and ( 2 ) eliminates obsolete reference to National Agricultural Credit Corporation as proposed in recommendation 71. & STUDY OF BANKING LAWS 459 CHAPTER 4. DIRECTORS OF FEDERAL RESERVE BANKS Section 16. Duties of directors.- Same as paragraphs 6, 7, and 8 of section 4 of Federal Reserve Act. Section 17. Classes of directors.- Subsection ( a ) is a revision of paragraph 9 of section 4 as proposed in recommendations 50 ( c ) , 51, and 52, with an amendment on the residence requirement. Subsection ( b ) is the same as paragraphs 10, 11, and 12 of section 4 of the Federal Reserve Act, except for the deletion proposed in recommendation 50 (d ) . Subsection (c ) is the same as paragraph 13 of section 4 of the Federal Reserve Act. Section 18. Selection of class A and B directors.- Same as paragraphs 15, 16, 17, 18, and 19 of section 4 of the Federal Reserve Act. Section 19. Federal Reserve agent.- Revision of paragraphs 20 and 21 of section 4 as proposed in recommendations 50 ( e ) , 53, and recommendation 85D of the advisory committee. Section 20. Compensation of directors, officers, and employees. - Same as paragraph 22 of section 4 of Federal Reserve Act. CHAPTER 5. MEMBERSHIP IN THE FEDERAL RESERVE SYSTEM Section 21. National banks as members.-Revision of paragraphs 6 and 7 of Federal Reserve Act as proposed in recommendation 47. Section 22. Admission of State banks as members.- Same as paragraphs 1, 2, 3, and 16 of section 9 of Federal Reserve Act, except recommendation 57 is incorporated therein. Section 23. Powers and duties of State member banks.- Subsection ( a ) is the same as the first sentence and part of the second sentence of paragraph of section 9 of Federal Reserve Act. Subsection ( b ) is a revision of the remainder of paragraph 6 of section 9, including in part recommendation 58. Subsection (c ) is the same as paragraph 13 of section 9. Subsection (d ) revises paragraph 20 of section 9 as proposed in recommendation 60. Subsections ( e ) , ( f ) , and ( g ) are the same as paragraphs 11, 4, and 5 of section 9 of Federal Reserve Act. Subsection ( h ) revises 12 U. S. C. 71a. Subsection ( i ) is a new provision. Subsection (j ) is a revision of section 24A and includes recommendation 45C by the advisory committee. Subsections ( k ) , ( 1 ) , ( m ) , ( n ) , and ( o ) are the same as paragraphs 21, 15, 10, 14, and 9 of section 9 of the Federal Reserve Act. Section 24. Examination of member banks.-Same as paragraph 7 of section 9 and paragraphs 5 and 6 of section 21 of Federal Reserve Act. Section 25. Insolvency of member banks. - Same as section 6 of Federal Reserve Act. Section 26. Member banks making security loans.— Same as paragraph 7 of section 19 of Federal Reserve Act. Section 27. Member banks dealing with nonmembers.- Same as paragraph 8 of section 19 of Federal Reserve Act. Section 28. Restrictions on officers and directors of member banks .— Subsections (a ) , ( b ) , ( c ) , and (d ) are the same as subsections ( d ) , ( e ) , and ( f) of section 22 of the Federal Reserve Act. Subsection ( e ) revises subsection ( g ) of section 22 of Federal Reserve Act as proposed in recommendation 81 of the advisory committee. Subsection ( f ) and ( g ) are the same as 12 U. S. C. 501 and 12 U. S. C. 78. Section 29. Removal of directors.- Revision of 12 U. S. C. 77, including recommendation 84 and including other amendments similar to those described above under section 29 of title I. Section 30. Liability of Federal Reserve bank shareholders .- Revision of paragraph 4 of section 2 of Federal Reserve Act as proposed in recommendation 48. CHAPTER 6. AFFILIATES OF MEMBER BANKS Section 31. Definitions.- Same as 12 U. S. C. 221a, except subsection (a ) thereof is deleted. 84444-57- pt. 2- -2 460 STUDY OF BANKING LAWS Section 32. Dealing with affiliates.- Same as section 23A of the Federal Reserve Act. Section 33. Voting permits of holding company affiliates.-Same as all after the first two paragraphs of 12 U. S. C. 61, except subparagraph (3 ) is amended as proposed in recommendation 16, including the advisory committee's additional recommendation. Section 34. Agreement of State member affiliates .-Same as paragraph 22 of section 9 of Federal Reserve Act. Section 35. Securities affiliates.-Same as 12 U. S. C. 377. Section 36. Reports of State member affiliates.- Same as paragraphs 17, 18, and 19 of section 9 of Federal Reserve Act. Section 37. Examination of State member affiliates.-Same as paragraph 23 of section 9 of the Federal Reserve Act and paragraph 9 of section 21 of the Federal Reserve Act. CHAPTER 7. ORGANIZATION AND POWER OF BOARD OF GOVERNORS Section 38. Organization.- Subsections ( a ) and (b) revise paragraphs 1 and 2 of section 10 of Federal Reserve Act in recommendation 61. Subsections ( c ) , ( d ) , ( e ) , ( f) , and ( g ) are the same as paragraphs 3, 4, 5, 7, and 10 of section 10 of Federal Reserve Act, except amendments proposed in recommendations 62 and 68 are included in subsections ( d ) and ( e) . Subsection (h ) is a new provision as proposed in recommendation 85A of the advisory committee. Subsection ( i ) is a new provision regarding conflicts of interest. Section 39. General powers of board.- Subsection ( a ) is the same as subsec tion (a ) of section 11 of Federal Reserve Act. Subsection (b ) is the same as subsection ( b ) of section 11, except for change in voting requirement as proposed by advisory committee in recommendation 66. Subsections (c ) , ( d ) , ( e ) , ( f) , ( g ) , ( h ) , ( i ) , (j ) , and ( k ) are the same as subsections (c ) , ( d ) , ( e ) , ( f) , ( g ) , ( h ) , ( i ) , ( j ) , and ( 1 ) of section 11 of Federal Reserve Act. Subsection ( 1 ) is the same as subsection ( m ) of section except for change in voting requirement as proposed by advisory committee in recommendation 66. Subsection (m ) revises paragraph 7 of section 21 as proposed by the advisory committee in recommendation 85B. Subsections ( n ) and ( o ) are the same as paragraph 15 of section 16 and paragraph 10 of section 13 of Federal Reserve Act. Section 40. Open market committee.- Same as section 12A of the Federal Reserve Act. Section 41. Payment of interest.- Same as paragraphs 1, 12, and 13 of sec tion 19 of Federal Reserve Act, except for deletion made pursuant to recommendation 78. Section 42. Bank reserves.— Same as paragraphs 2, 3 , 4, 5, 6, 9, 10, and 11 of section 19 of Federal Reserve Act, except for change in voting requirement as proposed by recommendation 66 of advisory committee. Subsection (f) revises paragraph 14 of section 19 as proposed in recommendation 79. Section 43. Federal Reserve notes .- Revision of first 13 paragraphs of section 16 as proposed in recommendation 74, plus 12 U. S. C. 121a and 122a except for obsolete provisions . CHAPTER 8. FOREIGN BRANCHES AND FOREIGN BANKING CORPORATIONS Section 44. Foreign branches.- Same as section 25 of Federal Reserve Act, except for deletion in subsection ( a ) as proposed in recommendation 82 , and new authority in subsection ( f) as proposed in recommendation 83. Section 45. Organization of foreign banking corporations. - Same as paragraphs 1, 2, 3, 4, and 23 of section 25 ( a ) of Federal Reserve Act, except obsolete reference to Philippine Islands is deleted in subsection ( a ) . Section 46. Capital stock and shareholders.—Same as paragraphs 12, 13, 14, 15, 19, and 20 of secion 25 ( a ) of Federal Reserve Act. Section 47. Powers of foreign banking corporations. - Same as paragraphs 5, 6, 7, 8, 9, 10, 11, and 22 of section 25 ( a ) of Federal Reserve Act. Section 48. Taxation.- Same as paragraph 21 of section 25 ( a ) of Federal Reserve Act. Section 49. Voluntary liquidation and insolvency.- Same as paragraphs 17 and 18 of section 25 ( a ) of Federal Reserve Act. % STUDY OF BANKING LAWS 461 Section 50. Penalties.- Same as paragraphs 16, 24, and 25 of section 25 ( a ) of Federal Reserve Act. Section 51. Receipt of foreign property.- Same as paragraphs 3, 4, 5, and 6 of section 25 (b ) of Federal Reserve Act including recommendation 59. Section 52. Venue of actions for foreign transactions.- Same as paragraph 1 of section 25 (b ) of Federal Reserve Act. CHAPTER 9. REGULATION OF BANK HOLDING COMPANIES Section 53. Definitions.- Same as 12 U. S. C. 1841. Section 54. Acquisition of bank shares or assets.- Same as 12 U. S. C. 1842. Section 55. Interest in nonbanking organizations.- Same as 12 U. S. C. 1843. Section 56. Administration.-Same as 12 U. S. C. 1844. Section 57. Borrowing by bank holding company or its subsidiaries.- Same as 12 U. S. C. 1845. Section 58. Reservation of rights to States.-Same as 12 U. S. C. 1846. Section 59. Penalties.-Same as 12 U. S. C. 1847. Section 60. Judicial review .- Same as 12 U. S. C. 1848. Section 61. Savings clause .- Same as section 11 of the Bank Holding Company Act of 1956. CHAPTER 10 . MISCELLANEOUS Section 62. Settlement fund.-Revision of paragraph 16 of section 16 of Federal Reserve Act as proposed in recommendation 73, plus present provisions of paragraphs 17 and 18 of section 16. Section 63. Reservation of powers.- Revision of paragraph 6 of section 10 of Federal Reserve Act as proposed in recommendation 63. Section 64. Delivery of gold to Treasurer.- Same as subsection (n ) of section 11 of Federal Reserve Act. Section 65. Venue of actions generally.—Same as second paragraph of section 25 (b) of Federal Reserve Act. TITLE III- FEDERAL DEPOSIT INSURANCE ACT CHAPTER 1. SHORT TITLE AND DEFINITIONS Section 1. Short title.- Same as section 1 of Federal Deposit Insurance Act. Section 2. Definitions.— Subsections ( a ) , ( b ) , ( c ) , ( d ) , ( e ) , ( f ) , ( g ) , and (h) are the same as subsections ( a ) , (b ) , ( c) , ( d ) , ( e ) , ( h ) , ( i ) , ( j ) of section 3 of Federal Deposit Insurance Act. Subsection ( i ) revises subsection ( k ) of section 3 of Federal Deposit Insurance Act pursuant to recommendation 115H of advisory committee. Subsection (j ) is a revision of subsection ( 1 ) of section 3 of Federal Deposit Insurance Act as proposed in recommendations 89 and 90. Subsection ( k ) is a revision of subsection ( m ) of section 3 of Federal Deposit Insurance Act as proposed in recommendation 91 . Subsection ( 1 ) is a revision of subsection ( n ) of section 3 of Federal Deposit Insurance Act as proposed in recommendation 92. Subsection ( m ) is a revision of subsection ( o ) of section 3 of Federal Deposit Insurance Act as proposed in recommendations 93 and 115C . Subsection (n ) is the same as subsection ( p ) of section 3 of Federal Deposit Insurance Act. CHAPTER 2. CREATION OF CORPORATION AND POWERS Section 3. Creation of corporation.- Same as section 1 of Federal Deposit Insurance Act. Section 4. Insurance fund.-Revision of subsection ( a ) of section 11 of Federal Deposit Insurance Act as proposed in recommendation 105. Section 5. Corporate powers.--Same as section 9 of Federal Deposit Insurance Act, except incorporates amendments proposed in recommendations 100 and 101. CHAPTER 3. POWERS AND DUTIES OF ADMINISTRATOR Section 6. Management of corporation.- New provision based on recommendation 115H of advisory committee. Section 7. Advisory board.- New provision based on recommendation 115H of advisory committee. 462 STUDY OF BANKING LAWS Section 8. Administration.— Subsection ( a ) and ( b) are the same assubsections ( a ) and ( f ) of section 10 of Federal Deposit Insurance Act, except the word "Administrator " is substituted for "Board of Directors," which is done throughout the act. Subsection ( c ) amends subsection ( g ) of section 10 of Federal Deposit Insurance Act as proposed in recommendation 104, plus amendment of advisory committee. Section 9. Examinations and reports.- Same as subsections (b ) and ( e ) of section 10 of Federal Deposit Insurance Act. Section 10. Confidentiality of records.- New provision incorporating recommendation 115E, plus additional amendments. Section 11. Hearings.- Same as subsection ( c ) and ( d ) of section 10 of Federal Deposit Insurance Act, except includes recommendation 103. CHAPTER 4. ADMISSION TO INSURANCE Section 12. Continuance of insured status.- Same as subsection ( a ) of section 4 of Federal Deposit Insurance Act. Section 13. Member banks.- Same as subsection (b ) of section 4 of Federal Deposit Insurance Act. Section 14. Nonmember banks.- Same as section 5 of Federal Deposit Insurance Act. Section 15. Factors to be considered.- Same as section 6 of Federal Deposit Insurance Act. CHAPTER 5. ASSESSMENT Section 16. Assessment rates.-Same as subsection (a ) of section 7 of Federal Deposit Insurance Act, except for inclusion of recommendation 96. Section 17. Certified statement.- Same as subsections (b ) and ( c ) of section 7 of Federal Deposit Insurance Act. Section 18. Assessment credits.- Same as subsection ( d ) of section, except includes recommendation 97 in part. Section 19. Refund of assessments .- Same as subsection ( e ) of section 7 of Federal Deposit Insurance Act. Section 20. Penalties.- Same as subsections (g ) , ( f ) , and ( h ) of section 7 of Federal Deposit Insurance Act, plus recommendation 98. CHAPTER 6. SUPERVISION OF INSURED BANKS Section 21. Display of official sign.- Same as subsection ( a ) of section 18 of Federal Deposit Insurance Act. Section 22. Dividends.- Same as subsection (b ) of section 18 of Federal Deposit Insurance Act. Section 23. Mergers and consolidations. - Revision of subsection ( c ) of section 18 of Federal Deposit Insurance Act as proposed in recommendations 42, 85, and 114. Section 24. Branches.- Same as subsection ( d ) of section 18 of Federal De posit Insurance Act. Section 25. Idemnity insurance.-Same as subsection ( e ) of section 18 of Federal Deposit Insurance Act. Section 26. Payment of interest.- Revision of subsection ( g ) of section 18 of Federal Deposit Insurance Act based on recommendation 115F of advisory committee. Section 27. Shareholders' list.-New provision. Section 28. Trust funds.-Revision of subsection ( i ) of section 7 of Federal Deposit Insurance Act as proposed in recommendation 89. Section 29. Termination of insured status .- Revision of susbection ( a ) of section 8 of Federal Deposit Insurance Act as proposed in recommendation 99, plus additional amendments. Subsections (b ) , ( c ) , and ( d ) are the same as subsections ( b ) , ( c ) , and ( d ) of section 8 of Federal Deposit Insurance Act. CHAPTER 7. INABILITY OF BANKS TO PAY DEPOSITORS Section 30. Payment to depositors by corporation.- Subsections ( a ) and ( b ) are revisions of subsections ( b) and (f) of section 11 of Federal Deposit Insurance Act as proposed in recommendations 106 and 92. Subsections ( c ) and ( d ) are new provisions based on recommendation 106 . STUDY OF BANKING LAWS 463 Subsection (e) is the same as subsection ( g ) of section 11 of Federal Deposit Insurance Act. Subsections ( f) , ( g) , ( h) , and ( i ) are the same as subsections (b ) , ( c ) , ( d ) , and ( e) of section 12 of Federal Deposit Insurance Act, plus recommendation 110. Section 31. Corporation as receiver of insured banks.- Subsections (a ) , (b ) , and (d ) are the same as subsections ( c ) , ( d ) , and ( e ) of section 11 of Federal Deposit Insurance Act plus recommendation 107. Subsection ( c ) is the same as subsection ( a ) of section 12 of Federal Deposit Insurance Act. Subsection (e ) is a new provision as proposed in recommendation 109. Section 32. Organization of a new national bank.- Same as subsections ( h) to (1) , inclusive, of section 11 of Federal Deposit Insurance Act plus recommendation 108. Section 33. Loans and purchases of assets.-Same as subsections ( c ) , (d ) , and (e) plus recommendation 111. CHAPTER 8. CORPORATE FUNDS AND OBLIGATIONS Section 34. Borrowing authority.- Same as section 14 of Federal Deposit Insurance Act. Section 35. Investment of funds.- Same as subsections (a ) and (b) of section 13 of Federal Deposit Insurance Act. Section 36. Obligations of corporation.- Same as sections 15 and 16 of Federal Deposit Insurance Act. CHAPTER 9. MISCELLANEOUS Section 37. Annual report.-Same as subsection (a ) of section 17 of Federal Deposit Insurance Act. Section 38. Annual audit.—Revision of subsections ( b) , ( c ) , and ( d ) of section 17 as proposed in recommendation 113. Section 39. Civil-service benefits.- New provision as proposed in recommendation 112. Section 40. Penalties.- Subsection ( a ) is the same as subsection ( f) of section 18. Subsection (b ) is the same as subsection (h ) of section 18. Subsection ( c ) is the same as section 19 of Federal Deposit Insurance Act. Subsection (d) is a new provision based on recommendation 115B. Section 41. Nondiscriminatory provisions.-Same as section 20 of Federal Deposit Insurance Act. Section 42. Aboltion of board of directors.-New provision based on recommendation 115H. Section 43. Effective date.- New provision. TITLE IV- FEDERAL HOME LOAN BANK ACT Section 1. Short title.-Same as section 1 of the Federal Home Loan Bank Act. Section 2. Definitions.- Revision of section 2 of Federal Home Loan Bank Act as proposed in recommendation 117. Section 3. Federal home loan bank districts .- Revision of section 3 of Federal Home Loan Bank Act as proposed in recommendation 118 . Section 4. Eligibility of members .- Subsection ( a ) amends subsection ( a ) of section 4 of Federal Home Loan Bank Act as proposed in recommendation 119. Subsection (b ) amends subsection ( b ) of section 4 of Federal Home Loan Bank Act as proposed in recommendation 120. Subsection ( c ) same as subsection ( c ) of section 4 of Federal Home Loan Bank Act. Subsection ( d ) is a new provision. Section 5. Limitation on interest rate.-Same as section 5 of Federal Home Loan Bank Act. Section 5A. Liquidity requirement.- Same as section 5A of Federal Home Loan Bank Act. Section 6. Capital of Federal home loan banks.- Revision of section 6 of Federal Home Loank Bank Act as proposed in recommendation 122. Section 7. Management of banks.- Subsections ( a ) through ( h ) of section 7 of Federal Home Loan Bank Act are revised as proposed in recommendation 123. Subsections ( i ) and ( j ) are same as present law. Section 8. Examination and studies by board.- Same as section 8 of Federal Home Loan Bank Act. 464 STUDY OF BANKING LAWS Section 8A. Federal savings and loan advisory council.— Section 8A of Federal Home Loan Bank Act revised as proposed in recommendation 124. Section 9. Eligibility to secure advances.- Same as section 9 of Federal Home Loan Bank Act. Section 10. Advances to members.—Revision of section 10 of Federal Home Loan Bank Act as proposed in recommendation 125. Section 10A. Advances to nonmembers.- Same as section 10b of Federal Home Loan Bank Act (see recommendation 126 for elimination of section 10a of Federal Home Loan Bank Act) . Section 11. General powers and duties of banks.- Subsections ( a ) , ( b ) , and (c) of section 11 of Federal Home Loan Bank Act amended as proposed in recommendation 127. Subsections ( d ) and ( e ) are the same as present law. Subsection (f) is amended as proposed in recommendation 128. Subsection (g ) is amended as proposed in recommendation 129. Subsections (h ) , ( i ) , and ( j ) are the same as present law. Section 12. Incorporation of banks and corporate powers.-Amends section 12 of Federal Home Loan Bank Act in recommendations 130 and 131. Section 13. Exemption from taxation.-Amends section 13 of Federal Home Loan Bank Act as proposed in recommendation 132. Section 14. Depositories and financial agents.-Same as section 14 of Federal Home Loan Bank Act. Section 15. Obligations of banks .—Amends section 15 of Federal Home Loan Bank Act as proposed in recommendation 133. Section 16. Reserves and dividends.- Amends section 16 of Federal Home Loan Bank Act as proposed in recommendation 134. Section 17. Federal Home Loan Bank Board.—Amends section 17 of Federal Home Loan Bank Act as proposed in recommendation 135, except for proposal in (2 ) thereof to delegate authority. Section 18. Assessment on banks.-Amends section 18 of Federal Home Loan Bank Act as proposed in recommendation 136. Section 19. Officers and employees.- Subsection ( a ) is the same as section 19 of Federal Home Loan Bank Act. Subsection (b ) is a new provision relating to conflicts of interest. Section 20. Examinations and reports.—Amends section 20 of Federal Home Loan Bank Act as proposed in recommendation 137. Section 21. Reports and records of other agencies.-Amends section 22 of Federal Home Loan Bank Act as proposed in recommendation 138. Section 22. Forms of stock, debentures and bonds.-Same as section 23 of Federal Home Loan Bank Act. Section 23. Eligibility for membership under act.- Same as section 24 of Federal Home Loan Bank Act. Section 24. Succession of Federal home loan banks.-Same as section 25 of Federal Home Loan Bank Act. Section 25. Liquidation or reorganization of banks.- Amends section 26 of Federal Home Loan Bank Act as proposed in recommendation 139. Section 26. Eligibility for stock subscription.- Same as section 27 of Federal Home Loan Bank Act. Section 27. Effect of partial invalidity of act.- Same as section 28 of Federal Home Loan Bank Act. Section 28. Territorial applicability of act.-Amends section 29 of Federal Home Loan Bank Act as proposed in recommendation 140. Section 29. Right to amend or repeal.- Same as section 30 of Federal Home Loan Bank Act. TITLE V- FEDERAL SAVINGS AND LOAN ASSOCIATION ACT Section 1. Short title.-Changes title of act from "Home Owners' Loan Art of 1933" to "Federal Savings and Loan Association Act." Section 2. Definitions.-Amends section 2 of Home Owners' Loan Act as proposed in recommendation 142. Section 3. Repeat of direct loan provisions of Federal Home Loan Bank Act.- Same as section 3 of Home Owners' Loan Act. Section 4. Regulation of interest rates.- New provision as proposed in recommendation 143. Section 5. Federal savings and loan associations .- Subsections (a ) , ( b ) , (c) , ( d ) ( 1 ) , and ( d ) ( 2 ) are the same as the comparable provisions of the present law. STUDY OF BANKING LAWS 465 Subsection (d ) ( 3) is a new provision based on advisory committee recommendation 144. Subsections ( e ) and ( f) are the same as subsections ( e ) and ( f ) of section 5 of Home Owners' Loan Act. Subsection (g ) is the same as subsection (h ) of section 5 of Home Owners' Loan Act. Subsections (h ) , ( i ) , and ( j ) are the same as subsection ( i ) of section 5 of Home Owners ' Loan Act, except as amended pursuant to recommendation 146. Subsection (k ) is the same as subsection (h ) of section 5 of Home Owners' Loan Act. Section 6. Federal savings and loan branches.-New provision based in part on advisory committee recommendation 166C. Section 7. Restriction on associations, directors, and officers.- Subsections ( a) and ( b) are new provisions based on advisory committee recommendation 166G and are similar to section 22 ( d ) of the Federal Reserve Act. Subsection ( c ) is a new provision based on advisory committee recommendation 166G and is similar to section 22 (e ) of the Federal Reserve Act. Subsection (d ) is a new provision based on advisory committee recommendation 166H and is similar to 22 ( f) of the Federal Reserve Act. Subsection (e ) is a new provision based on advisory committee recommendation 166F and should be compared with section 22 ( g ) of the Federal Reserve Act. Section 8. Territorial applicability of act.- Revision of section 7 of Home Owners' Loan Act as proposed in recommendation 148. Section 9. Separability provision.- Same as section 9 of Home Owners' Loan Act. TITLE VI- FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION ACT INSURANCE OF SAVINGS AND LOAN ACCOUNTS Section 401. Short title.- New provision. Section 402. Definitions.- Revision of section 401 of title IV of the National Housing Act ( Housing Act ) as proposed in recommendations 150, 151, and 152 and advisory committee recommendation 166B. Section 403. Creation of Federal Savings and Loan Corporation Act.- Revision of section 402 of Housing Act as proposed in recommendations 153, 154, 155, and 156. Section 404. Insurance of accounts and eligibility provisions.— Revision of section 403 by amending subsection ( c ) as proposed in recommendation 159 and by adding new subsections ( e ) and ( f) as proposed in recommendation 158 ( 1 ). Section 405. Premiums on insurance.—Amends section 404 of Housing Act as proposed in recommendations 160 and 161. ( See also sec. 805 of committee print bill in regard to recommendation 161. ) Section 406. Payment of insurance.- Amends section 405 of Housing Act as proposed in recommendation 161 and including a provision similar to that proposed in recommendation 92 as contained in advisory committee recommendation 166K. Section 407. Liquidation of insured institutions.- Amends section 406 of Housing Act as proposed in recommendation 162 as modified by advisory committee. Section 408. Termination of insured status.-Amends section 407 of Housing Act as proposed in advisory committee recommendation 163. Section 409. Regulation of holding companies.- New provision based on advisory committee recommendation 166A. TITLE VII- FEDERAL CREDIT UNION ACT Section 1. Short title.- Same as section 1 of Federal Credit Union Act. Section 2. Definitions.- Revision of section 2 of Federal Credit Union Act with no substantive changes. Section 3. Creation of bureau.- New provision. Section 4. Federal credit organization.- Same as section 3 of Federal Credit Union Act. Section 5. Approval of organization certificate.- Same as section 4 of Federal Credit Union Act. Section 6. Fees.-Same as section 5 of Federal Credit Union Act. 466 STUDY OF BANKING LAWS Section 7. Reports and examinations.- New subsection ( b) added to section 6 of Federal Credit Union Act as proposed in advisory committee recommendation 190. Section 8. Powers.- Same as section 7 of Federal Credit Union Act. Section 9. Bylaws.-Amends section 8 as proposed in recommendation 167. Section 10. Membership .- Same as section 9 of Federal Credit Union Act. Section 11. Members' meetings.- Same as section 10 of Federal Credit Union Act. Section 12. Management.- Same as section 11 ( a ) of Federal Credit Union Act. Section 13. Officers.- Amends section 11 ( b ) of Federal Credit Union Act as proposed in recommendation 169. Section 14. Directors.-Amends section 11 ( c ) by striking the words "recommend the declaration of dividends" (see sec. 18 of committee print bill ) and incorporates recommendation 170. Section 15. Credit committee.- Amends section 11 ( d ) of Federal Credit Union Act as proposed in recommendation 171 as modified by advistory committee. Section 16. Supervisory committee .- Same as 11 ( e ) of Federal Credit Union Act. Section 17. Reserves.- Same as section 12 of Federal Credit Union Act. Section 18. Dividends.—Amends section 13 as proposed by advisory committee recommendation 180. Section 19. Expulsion and withdrawal.- Same as section 14 of Federal Credit Union Act. Section 20. Minors.- Same as section 15 of Federal Credit Union Act. Section 21. Certain powers of director.- Same as section 16 of Federal Credit Union Act, except new subsection ( i ) added relating to conflicts of interest. Section 22. Fiscal agents and depositories.-Same as section 17 of Federal Credit Union Act. Section 23. Taxation.- Same as section 18 of Federal Credit Union Act. Section 24. Partial invalidity ; right to amend.- Same as section 20 of Federal Credit Union Act. Section 25. Space in Federal buildings.-Amends section 21 of Federal Credit Union Act as proposed in recommendation 173 and modified by advisory committee. Section 26. Territorial applicability of act .-Amends section 22 of Federal Credit Union Act as proposed in advisory committee recommendation 181. TITLE VIII-MISCELLANEOUS AMENDMENTS Section 801. Repealing provision.- This section repeals all the present statutes relating specifically to national banks. These statutes, except for obsolete provisions, are reenacted in title I of the committee print bill. Section 802. Federal intermediate credit banks.- Amends Federal Farm Loan Act as proposed in recommendation 38. Section 893. Amendments to Criminal Code.- Adds new provisions to Criminal Code including recommendations 43, 164, 165, 166 , and 174. Section 804. First and Second Liberty Bond Acts.-Amends the First and Second Liberty Bond Acts as proposed in recommendation 79. Section 805. Savings clause.- Subsection ( a ) is a savings provision for national bank notes . Subsection (b ) is a savings provision for loans under section 13 (b ) of the Federal Reserve Act. Subsection (c ) is the same as the proviso clause in section 26 of the Federal Reserve Act. Subsection (d ) , see recommendation 161 . Section 806. Separability provision.- New provision . Section 807. Right to amend.- New provision. Senator ROBERTSON. Now, gentlemen of the committee, our first witness today is the very fine and able chairman of our advisory committee, Mr. Kenton R. Cravens, president of the Mercantile Trust Co., of St. Louis . Mr. Cravens and the members of his advisory committee have done a splendid job, and I am sure that is appreciated by all of the members of our committee. I am happy that Mr. Cravens has brought with STUDY OF BANKING LAWS 467 him today the chairmen of four of his subcommittees. He will make the initial statement and I assume it would be better for us to let him make it without interruption, and then there can be questions, and after that he can present his subcommittee chairmen to emphasize and buttress any particular point he thinks ought to be reinforced. Mr. Cravens. STATEMENT OF KENTON R. CRAVENS, CHAIRMAN ; ACCOMPANIED BY EVERETT D. REESE, SUBCOMMITTEE ON NATIONAL BANKS ; REESE H. HARRIS, JR., SUBCOMMITTEE ON FEDERAL DEPOSIT INSURANCE CORPORATION ; HENRY A. BUBB, SUBCOMMITTEE ON SAVINGS AND LOAN ASSOCIATIONS ; WILLIAM W. PRATT, SUBCOMMITTEE ON FEDERAL CREDIT UNIONS, ADVISORY COMMITTEE FOR THE STUDY OF FEDERAL STATUTES CONCERNING FINANCIAL INSTITUTIONS AND CREDIT Mr. CRAVENS . Mr. Chairman and members of the committee, as Senator Robertson has stated , I do have with me today 4 of our 5 subcommittee chairmen, Mr. Everett D. Reese, chairman of our Subcommittee on National Banks ; Mr. Reese Harris, Jr., Subcommittee on the Federal Deposit Insurance Corporation ; Mr. Henry A. Bubb, Subcommittee on Savings and Loan Associations, to my right ; and Mr. William W. Pratt, chairman of the Subcommittee on Federal Credit Unions, to my left. I am sorry to report that my vice chairman , C. Francis Cocke, has still not recuperated sufficiently to be here on his own power, and we regret his absence. Unfortunately Mr. John J. McCloy, chairman of the Subcommittee on the Federal Reserve Act, was not able to be here. On behalf of each of the members of the advisory committee, I desire to thank the Senate Banking and Currency Committee for the unique opportunity which has been accorded us to serve in this important undertaking. Each of our members, our secretary and our counsel has given freely of his time and energies in the pursuit of our duties. I trust that our report adequately reflects the unselfish, conscientious, and objective manner in which they approached the many problems which they considered . As indicated in my letter of transmittal, our committee unanimously agreed to our report, except as to three recommendations noted therein. At the outset I should apologize for the length of this statement, but it is a long bill and I think we should put in the record all of the comments we have with respect to the various sections. Senator ROBERTSON. Let me say this is not going to be a precedent for all of the witnesses, but I just want to point out that we have had the benefit of Mr. Cravens' services now for going on 2 months, and we not only have not paid him anything, but he has paid for all traveling expenses. I think under the circumstances, therefore, he would certainly be entitled to tell us what he has found out for us in that period. Mr. CRAVENS. If you are following my statement you will find that I do depart from it in many places and omit in some places. The statement is broken up into five parts : Part I : Instances where recommendations of the advisory committee have been followed in matters of more or less technical nature. 468 STUDY OF BANKING LAWS Unless questions arise, I will not discuss these but will place in the record a list of such recommendations by their numbers and will follow them by reference to the pages of the bill at which they have been implemented. Needless to say, our committee was pleased to see that they were adopted. Senator ROBERTSON. If you will permit the chairman to interrupt you there, he will say that without objection your entire statement and all of the exhibits will go into the record at the end of your remarks. You may proceed to give us orally what you have to say. Mr. CRAVENS. Thank you, Mr. Chairman. Senator ROBERTSON . You may proceed . Mr. CRAVENS . Part II. Instances where recommendations of the advisory committee have been followed on matters which I believe warrant discussion in some detail. Part III : Instances where the committee print does not follow recommendations of the advisory committee. These I will discuss separately. Part IV : Instances where the bill includes matters which are new in that the advisory committee has not considered them. As to these I am not in a position to speak for the advisory committee. Thus I would like to have the benefit of testimony of others, then give the advisory committee an opportunity to consider these new matters and thereafter, if such be your pleasure, appear before you again and at that time report the advisory committee's views on these new matters and discuss any other points which may have been raised by the intervening testimony. Or I might say we could just submit a statement to that effect. Part V are those instances where recommendations made by the advisory committee have not been incorporated in the bill , we assume because jurisdiction over them lies elsewhere. RECOMMENDATION 2 -APPOINTMENT OF TWO ADDITIONAL DEPUTY COMPTROLLERS The bill at page 2, section 5 , provides for an increase in the number of Deputy Comptrollers from 3 to 5. In the light of the testimony which Comptroller Gidney gave before this committee on November 9, 1956, the advisory committee favors this change in the law. RECOMMENDATION 45E- EMPLOYEE STOCK OPTIONS ; RECOMMENDATION 45D ISSUANCE OF PREFERRED STOCK OR DEBT OBLIGATIONS BY BANKS I have purposely put these recommendations together because they go a long way in answering the urgent need of banking ; namely, the need for better management and more capital funds. Frankly, banks are at a serious disadvantage competing for qualified executive personnel because they are not permitted to use the strong inducement provided by employee stock- option plans. This situation must be remedied if we are to improve the caliber of management in the Nation's banking system. At present there is no statutory authority by which national banks are permitted to establish such programs. Equally important as good management is adequate capital. Since under the present law a national bank may issue preferred stock only as an emergency measure, the statutes are meaningless. Furthermore, STUDY OF BANKING LAWS 469 under present law a national bank cannot issue debt obligations as a means of acquiring additional capital. Therefore, limiting national banks access to capital by way of common stock only is unrealistic and a great deterrent to the banking system's efforts to raise the capital funds it needs . Preferred stock or subordinated debenture issues might well offer a better and more feasible means of acquiring additional capital. Then, too, the redemption features of such securities provide a flexible means of adjusting the requirements of the banks to the needs of the times. If the Nation's banking systems are going to supply the needs of our present dynamic and full economy, the national banking system must provide leadership on these constructive measures. RECOMMENDATION 13- UNEARNED DIVIDENDS At page 11 of the bill , section 22 implements this recommendation . The present law is changed to authorize quarterly declaration of dividends as well as semiannual and annual declarations. Section 22 (b) provides that the approval of the Comptroller of the Currency shall be required if the total of all dividends declared in any calendar year exceeds the net profits of that year combined with its retained net profits of the preceding 2 years less any required transfers to surplus. We believe that these changes are constructive. RECOMMENDATION 17 -SHAREHOLDERS ' LISTS At page 12 of the bill, 12 United States Code, section 62 is revised based on this recommendation . The bill, however, does not follow the recommendation of the Comptroller which the advisory committee approved, but continues the present law to the effect that the statutory right of inspection by a shareholder of a national bank is not qualified by a requirement of showing proper purpose. The committee fails to understand the necessity for granting to a shareholder of a national bank a broader right of access to a stockholder's list than is enjoyed by shareholders of corporations generally. Thus section 23 (a) of the bill and the corresponding sections which I will mention should be amended to conform to the Advisory Committee's recommendation. It should be noted that the substance of section 23 (a ) is repeated at page 94 of the bill as section 23 (i ) relating to State member banks of the Federal Reserve System and at page 164 as section 27 of the Federal Deposit Insurance Act. While no recommendations were made as to this, either by the supervisory agencies or by the advisory committee, these sections have been inserted apparently on the basis of uniformity. Further at page 12, section 23 (b) requires that a national bank shall notify the Comptroller immediately of any single transaction involving "the purchase or sale of 10 percentum or more of the outstanding shares" of the association . This language is repeated as to State member banks at page 94 and as to insured banks at page 164. This is an entirely new provision. While we take no particular exception to the principle of reporting stock transfers , we question the language which has been used as it leaves the situation in a twilight zone. If the idea is adopted it should be limited to a 470 STUDY OF BANKING LAWS transaction as reflected by the stock transfer records of the particular banking institution. May I say at that point, Mr. Chairman, that this would put the president or the management of a bank in a very precarious position. You might be at a social event, or walking down the street, and hear all kinds of gossip as to who had bought a large block of your stock, and you would not know whether it was or was not true ; but this bill would require you to report that to the Comptroller. It just will not work. It has to be a matter certainly limited to the transfer records of the bank itself. Senator ROBERTSON. Mr. Cravens, one of the ideas of these hearings is to get the advice of experts—and I am not one of them-on how to make the bill better. Mr. CRAVENS. I think the bill would be better if it were limited to the transfer records of the particular bank. RECOMMENDATION 15 -CUMULATIVE VOTING IN ELECTION OF DIRECTORS At page 13 of the bill section 26 (c) implements this recommendation. This language is similar, if not identical, to S. 256, which passed the Senate of the 84th Congress and was reported favorably by the House Banking and Currency Committee. I believe there was so much said at that time that I will pass any comments on it other than it is good and should be included in this bill as it has been. RECOMMENDATION 21-REMOVED OFFICER OR DIRECTOR PROHIBITED FROM VOTING STOCK At page 15 of the bill section 29 revises 12 United States Code, section 77, as it relates to the removal of officers or directors of national banks. The bill includes a comparable provision relating to officers and directors of State member banks at page 101 and further at page 207 includes a comparable or similar provision relating to officers and directors of Federal savings and loan associations. All of this material is new and was not the subject of any recommendation. I feel , however, that the changes which have been made do meet with the approval of the advisory committee. I note particu larly the fact that the procedures are tied in with the Administrative Procedures Act and that the review by the courts shall be upon the weight of the evidence. This is a very sound change. RECOMMENDATION 6 - CONTRIBUTIONS BY NATIONAL BANKS At page 18 of the bill, section 31 ( a ) ( 8 ) implements this recom mendation by authorizing national banks to make contributions irrespective of State law to nonprofit educational institutions and to nonprofit civic organizations. În his original recommendation the Comptroller did not recommend the use of the word "nonprofit" in the case of civic organizations. The advisory committee approved of the Comptroller's recommendation. Now the bill limits the contributions to nonprofit civic organizations. Speaking personally, I feel that it would be better if the word were not used in the bill in this particular instance as the purpose is the controlling factor and is well defined. In order words, it is not what kind of a corporation-profit or non- STUDY OF BANKING LAWS 471 profit but what is the purpose of the corporation that should be the rule and the governing factor. RECOMMENDATION 60- STOCK ACQUISITIONS IN CONNECTION WITH ABSORPTIONS At pages 20 and 93 of the bill section 32 ( b ) , relating to national banks, and section 23 ( d ) , relating to State member banks, implement this recommendation. While both the Board of Governors and the advisory committee suggested that permission might be granted to "purchase and hold temporarily" stock of another bank, the bill discards the word "temporarily" and fixes the period of holding at a maximum of 90 days. We concede that "temporarily" is not as definite as is 90 days, but we wonder if there is real need of being so definite here where the approval of the appropriate supervisory authority has to be obtained in advance. In some instances 60 days' notice must be given for stockholders' meetings. Thus 90 days may be too limited a period. It would seem that a period of 6 months would not be excessive in this situation. RECOMMENDATION 34- TRUST POWERS The Comptroller recommended that the authority to license and regulate the exercise of trust powers by national banks historically repos-. ing in the Board of Governors of the Federal Reserve be transferred to him. At page 20 of the bill section 33 implements this recommendation which was approved by the advisory committee. At the earlier hearings Governor Robertson interposed no objection to this action but suggested that, if it be adopted , the Board's regulatory authority over common trust funds likewise be transferred to the Comptroller. The bill does not make this additional change and the advisory committee agrees that it should not be made. RECOMMENDATION 24-EXCEPTION TO 10 PERCENT LOAN LIMIT ON OBLIGATIONS CONCERNING DAIRY CATTLE At page 25 of the bill section 34 ( b) ( 7) ( B) implements this recommendation so that the loan limit with respect to obligations arising out of the sale of dairy cattle is increased to 25 percent with the result that the same limitations as are applicable to livestock will be applicable to dairy cattle. The advisory committee could not see why that was not the case originally . RECOMMENDATION 23 ( 1 ) -EXCEPTION TO 10 PERCENT LOAN LIMIT ONOBLIGATIONS CONCERNING INSURABLE PERISHABLE READILY MARKETABLE STAPLES UNDER REFRIGERATION At page 25 of the bill section 34 ( b) ( 6 ) ( B ) implements this recommendation and increases to 25 percent of capital and surplus the applicable loan limit as relates to such staples except where the obligations are "secured by the identical staples for more than 6 months. " As a practical matter we can see trouble ahead through the use of the word "identical." Doesn't the language mean that the 6-month period can be increased by the bank obtaining substitution of collateral in a minimum percentage ? In any event, I suggest that this language be checked . STUDY OF BANKING LAWS 472 RECOMMENDATION 23 (2 ) LOAN LIMIT ON INSTALLMENT CONSUMER PAPER At page 27 of the bill section 34 (b) ( 12 ) implements the recommendation which the advisory committee made on this subject. Here the recommendation of the Comptroller has been supplemented by a proviso to the effect that the 10 percent limitation (as regards the maker ) shall apply rather than the 25 percent limitation (as regards the endorser) where, after evaluation of the responsibility of each maker has been made, an officer of the bank, designated for such purpose by its board of directors, certifies that in acquiring such paper from the particular seller the acquiring bank is relying primarily upon the obligations of the makers for payment of the paper. Senator ROBERTSON. May I interrupt you there ? I said I am not going to ask you any questions and I am not going to ask any questions ; but yesterday I heard a fine sermon on faith and the description of the difference between the definition of faith , Paul's famous definition, which was, "the evidence of things unseen ; the substance of things hoped for," and the faith of the centurion . He was a Roman in the Jewish community and was asking a Jew to heal his suffering. That was the picture. Now you are discussing a technical thing. Instead of giving us a definition, could you give us a picture of it? Mr. CRAVENS . Yes. We will start with the easiest kind of an example. Let us say an automobile dealer selling automobiles on time payments. At the present time under the law if he uses a conditional sales contract in certain States, which is nonnegotiable, the buyer has no limitation on the amount of paper that they purchase. If he uses a chattel mortgage, which is negotiable, they may be limited. That is one point. The second point is that if the purchasing bank buys that paper with recourse we say that if they rely entirely on the endorser, the dealer's guaranty, then they should be subject to some limitation. But we also say that if they investigate the credit of each of the people that buy each automobile and are satisfied as to the credit standing of that particular buyer, then they should not be limited as to the amount of paper they buy from that dealer, notwithstanding the fact that they buy it with recourse. In other words, we say if you investigate the buyer of that car then loan limitation should be applied to him. If you do not investigate and buy it on the guaranty of the dealer selling you the paper, then the loan limit should apply to the guarantor . Does that clear it? Senator ROBERTSON. That helps to eliminate that question. RECOMMENDATION 35 - LIMITATION ON REAL ESTATE LOANS Mr. CRAVENS . This recommendation was divided into four parts plus an additional recommendation of the advisory committee. Each has been followed in the bill, viz : Recommendation 35 (2) is implemented at page 28 by section 36 (a ) , which section at page 29 also incorporates the committee's additional suggestion. Recommendation 35 (2) would permit national banks STUDY OF BANKING LAWS 473 to make loans on leaseholds having at least 10 years to run beyond the maturity of the loan. We think that is ample time to provide safety. At page 29 the maximum aggregate of real-estate loans which may be made by a national bank is limited by a third alternative, i. e. , 20 percent of demand deposits. I might mention there, presently their limit is 60 percent of their savings. This gives them an alternative provision which makes it more flexible. The advisory committee favors these additions to the statute. Recommendation 35 (1 ) : This is implemented in accordance with the advisory committee's recommendation by section 36 ( c ) , which appears at page 30 of the bill . Recommendation 35 ( 4 ) : At page 30 of the bill section 36 ( e ) implements this recommendation . This recommendation would permit national banks to make loans to manufacturing and industrial businesses which are secured by liens on the plant real estate where the loans are for the purpose of furnishing working capital, without such loans being considered as real -estate loans. These loans are really business loans and represent ordinary business financing, and should not be treated as real - estate loans subject to the provisions of the law relating to real -estate loans of national banks. To meet industrial needs, national banks are making such loans today, but are forced to make them on an unsecured basis. While the bank may expect repayment of such loans through liquidation of inventory or receivables, or through the operations and earnings expected to be derived from the additional facilities so financed, nevertheless, they should not be denied the benefit of the additional collateral which could be provided by mortgage on the company's plant real estate taken as a precaution against contingencies. In other words, they should not be forced to loan unsecured simply because they want some additional collateral. Recommendation 35 (3 ) : This is implemented by section 36 ( f) at page 31 of the bill where it is provided that national banks may make loans to finance construction of buildings upon the security of purchase contracts entered into under the Public Buildings Purchase Contract Act of 1954 and the Post Office Department Property Act of 1954 without regard to the limitations in regard to real estate loans. With these forgoing changes made in the real estate loan section of the National Bank Act, such will represent a vast improvement over our present law. RECOMMENDATION 45B- INCREASE IN DEBT LIMIT OF A NATIONAL BANK This and recommendation 22 have been implemented at page 31 of the bill by section 37, which revises 12 United States Code, section 82, to increase the debt limit of a national bank from 100 percent of its capital to 100 percent of capital and surplus and renders the section inapplicable to capital funds obtained through the issuance of capital notes or debentures outstanding under section 21 , set forth on page 10 of the bill. Incidentally, those would be subordinate debentures and should be exempt. 474 STUDY OF BANKING LAWS The Advisory Committee believes that these are constructive changes in the law. RECOMMENDATION 9 - BRANCHES RETAINED AFTER MERGER, ETC. At page 32 of the bill section 39 ( b) implements this recommendation as to which the Advisory Committee in its report stated at page 3 thus : This recommendation would permit a national bank continuing on merger or consolidation with another bank under a resultant national-bank charter to operate the branches the national bank theretofore lawfully operated without obtaining new approval from the Comptroller. The committee understands the proposition to be one of merely eliminating unnecessary paperwork in such cases as compared with broadening the power of national banks to have and operate branches. On the basis of such understanding being correct, this recommendation is approved . It seems to us that the implementing language goes on further than our understanding. RECOMMENDATIONS 11 AND 115C- SCHOOL SAVINGS PROGRAMS At pages 34 and 149 of the bill section 39 ( f) of the National Bank Act and section 2 (m) of the Federal Deposit Insurance Act define "branches" so as not to include school-savings programs. The Advisory Committee approved of these changes and is glad to not that such programs are confined to schoolslocated in the trade area of the bank and within the State in which the bank is situated. RECOMMENDATION 45C- LOANS AND INVESTMENT ON BANK BUILDINGS Heretofore both National and State member banks have been limited to 100 percent of their capital as regards the amount they may have invested in bank premises or in an affiliate holding the bank premises. At pages 35 and 94 of the bill section 43 and section 23 ( j ) change the maximum to 100 percent of capital or 50 percent of combined capital and surplus, whichever is greater. For example, many banks may have $100,000 capital and $1 million surplus. In that particular case it is a great hardship on the bank having that. You force them to transfer from their surplus to their capital accoun. If we take whichever is greater, that is 100 percent of capital or 50 percent of combined capital and surplus, we think it is infinitely more fair. The purpose of the change is to give relief to the bank which has a large surplus and a small capital. In giving this relief, however, the bank which has made its future projections based on a larger capital and a lesser surplus should not be prejudiced. Thus the Advisory Committee favors these provisions. RECOMMENDATION 36-DEPOSITS IN CORPORATIONS NOT SUPERVISED BY ANY STATE BANKING AUTHORITY Here the Advisory Committee approved a recommendation which the Comptroller made in regard to amending 12 United States Code, section 378, so as to require that a corpration receiving deposits shall be subject to examination under the banking laws. This recommenda- STUDY OF BANKING LAWS 475 tion has been implemented at page 36 by section 44 ( a ) ( 2 ) ( A) , wherein new language appears. It appears to us that the new language of the bill does not go as far as the Comptroller suggested that the change go. If the Comptroller believes that the new language is adequate, certainly we would recommend no change. RECOMMENDATION 45F-NATIONAL BANKS WRITING INSURANCE At page 37 of the bill section 45 implements this recommendation which is that 12 United States Code, section 92 , be revised so as to permit National banks located in towns of 5,000 or more to write insurance if State banks in such towns are permitted to do so by State law. Section 45 includes paragraph (b ) which is new and was not the subject of a specific recommendation ; and paragraph ( c ) includes a grandfather clause. Both of these additions were considered and are within the area of the recommendation. The purpose of these changes is to place National banks on a parity with State banks in these particulars. RECOMMENDATION 5- RESTRICT STATE AUTHORITIES FROM SUBJECTING NATIONAL BANKS TO LICENSING, ETC. At page 41 of the bill section 51 implements this recommendation to the end that whatever doubt has existed as to the right of a National bank to exercise its corporate powers without State or local interference is resolved . Most assuredly, the Advisory Committee favors the inclusion of the new provision in the statutes. RECOMMENDATION 28 - REPORTS TO COMPTROLLER At page 42 of the bill section 52 (c ) implements the recommendation, in principle, of our committee. Our recommendation , based on that of the Comptroller's, was to change from 5 to 10 days the time within which National banks must transmit required call reports to the Comptroller, as provided for in S. 2996, introduced by Senator Robertson in the 84th Congress. RECOMMENDATION 58- REPORTS FROM MEMBER BANKS At pages 42 and 92 of the bill will be found language which implements this recommendation of the Board of Governors which was discussed by the committee as to the authority of the Board of Governors to prescribe different forms of reports of condition, earnings, and dividends, and to require such reports on a sample basis. In addition the bill follows the recommendations of the Advisory Committee with respect to publication of earnings, expenses and dividends ; namely, that the Board should not be so authorized and accordingly the bill does not give the Board this requested authority. If the Board of Governors wishes to propose a reasonable classification of banks according to size and to recommend that the group of smaller banks shall not be required to furnish more than two reports in any year, the Advisory Committee would concur in that recommendation provided that a reasonable limitation is placed on the number and kinds of reports which the group of larger banks may be required to 84444-57- pt. 2-3 476 STUDY OF BANKING LAWS furnish in each year. This applies with equal force to section 52 of title 2 of the committee print which gives similar authority to the Comptroller of the Currency. If adopted , the same reports should be authorized and required by the Federal Deposit Insurance Corporation. In short, I think the Advisory Committee is opposed to these provisions as now written at pages 42 and 92. Note that I said " I think." Frankly, I am confused in this situation of implementing language. I don't know what it means, and as a result I think I will not talk any more about that. RECOMMENDATION 33-APPOINTMENT OF CONSERVATORS ; RECOMMENDATION 106 - LIABILITY OF FEDERAL DEPOSIT INSURANCE CORPORATION FOR INSURED DEPOSITS By recommendation 33 the Comptroller urged that the Bank Conservation Act be amended to authorize him to appoint a conservator for a national bank which has sustained substantial losses resulting from defalcations. The Advisory Committee approved and the recommendation has been implemented by section 64 ( j ) at page 64 of the bill. We note that section 64 ( d ) at page 61 of the bill does not read the same as does section 205 of the Bank Conservation Act, but understand that the reason therefor is the fact that the Federal Deposit Insurance Act has been changed to read as it does at page 168 of the bill, where section 30 (c ) implements recommendation 106, which was approved by the Advisory Committee. We believe that there still remains the problem of depositors whose deposits exceed the insured amount and suggest that payments to them on their noninsured balances should be made ratably as provided for other creditors. I have been advised that the Comptroller believes that this power exists without further change in the statute. If that be the case our suggestion becomes moot. I will now mention some of the more important changes in the Federal Reserve Act. RECOMMENDATION 54- PAYMENT OF RESERVE BANK EARNINGS TO THE TREASURY In keeping with this recommendation of the Board of Governors which was approved by the advisory committee, the bill at page 73 in section 7 of the Federal Reserve title provides that each Federal Reserve bank shall annually pay 90 percent of its net earnings to the Treasury as a franchise tax. This is the simplest method of clarifying the matter and its effect is to restore the situation as it existed prior to 1933 and the creation of the Federal Deposit Insurance Corporation in that it channels 90 percent of the net earnings of the Federal Reserve into the Treasury . RECOMMENDATION 51 - FEDERAL RESERVE BANK DIRECTORS RESIDENTS OF DISTRICT At page 86 of the bill section 17 ( a ) implements both the recommendation of the Board of Governors and that of the advisory committee. This section of the bill provides that every Federal Reserve STUDY OF BANKING LAWS 477 bank director shall be a resident of the district of the Federal Reserve bank on whose board he is serving, or shall reside within a 50- mile radius of such bank. Our committee preferred the pertinent qualification for appointment to, and continuation on, the board of directors of a Federal Reserve bank, be based on the principal place of business of the person appointed, and not the place of residence. Nevertheless, the " within 50-mile radius" qualification satisfies our committee's recommendation and the requirements for some metropolitan districts-New York City is a good example. RECOMMENDATION 81 - LOANS TO EXECUTIVE OFFICERS At page 99 of the bill section 28 ( e ) implements the recommendation which was made in regard to the matter of member banks making loans to their executive officers. The committee print adopts the recommendation made by the Board of Governors and that of the advisory committee except in one particular. The advisory committee felt that the statute itself should define "executive officer" rather than leaving this to the Board to cover by regulation. RECOMMENDATION 66 -SIMPLE MAJORITY FOR BOARD ACTIONS The Board of Governors recommended that the act be amended to provide that Board action might be taken upon the affirmative vote of a majority of a quorum of members. The advisory committee disapproved of this and recommended that the statute provide that the Board should act in all matters upon the affirmative vote of not less than a majority of the members of the Board in office at the particular time. The committee print bill follows this recommendation to the extent of placing in the law at the various places where particular votes are specified a new provision that the vote shall be by the affimative vote of a majority of the members of the Board in office. We urge that section 38 (d) at page 112 of the bill be amended to include a sentence providing that any action which the Board is authorized to take shall be taken by the affirmative vote of a majority of the members of the Board in office at the time. RECOMMENDATION 83A-AUDIT OF FEDERAL RESERVE ROARD ; RECOMMENDATION 85B-AUDIT OF FEDERAL RESERVE BANKS At page 113, section 38 ( h ) implements recommendation 85A where it provides that accounts of the Board of Governors shall be audited at least once a year by certified public accountants. Further, at page 116, section 39 (m ) provides that the Board shall have the adequacy of the procedures which it follows in examining the Federal Reserve banks reviewed by certified public accountants. These new provisions are based upon recommendations which the Board of Governors made and of which the advisory committee approves. They represents constructive legislation in the public interest. RECOMMENDATION 83- POWERS OF FOREIGN BRANCHES OF NATIONAL BANKS This recommendation of the Board of Governors in which the advisory committee concurred was that the powers of foreign branches of national banks should be enlarged upon as set out in S. 3922 of 478 STUDY OF BANKING LAWS Senator Robertson in the Eighty-fourth Congress. At page 125 of the bill section 45 ( f) implements this recommendation, and we are happy to see it included. RECOMMENDATION 85F-REPEAL OF SECTION 13B OF THE FEDERAL RESERVE ACT The advisory committee recommended that section 13B of the Federal Reserve Act be repealed on the grounds that it has been little used and that the Federal Reserve banks should not compete with commercial banks in the lending field . I should like to add, it is not the function of a central bank to lend. A supervisory agency and an agency responsible for the monetary and credit management should not be a lender under any circumstances. I now pass to title III of the bill, which relates to the Federal Deposit Insurance Corporation. RECOMMENDATION 115H- CHANGE IN ORGANIZATION OF FEDERAL DEPOSIT INSURANCE CORPORATION At pages 148, 151 , 152 , and 153 will be found language implementing recommendation 115H of the committee. These provisions vest the management of the Corporation in a single executive and administrator to be appointed by the President by and with the advice and consent of the Senate, and would create an Advisory Board of the Federal Deposit Insurance Corporation consisting ofthe Comptroller of the Currency, Chairman of the Board of Governors of the Federal Reserve System or his designee, and one person to be selected by the President who is a State official exercising functions relating to the supervision of State banks. We believe that this provision is highly desirable to promote greater efficiency and better management. The single executive would achieve better administration and such an advisory board would provide a means of assuring to the administrator the benefits now derived from the presence of the Comptroller of the Currency, and add the benefits of Federal Reserve Board and State supervisory participation, all so necessary in a situation so complex as that presented by our present banking structure. RECOMMENDATION 91 - INSURANCE OF INTEREST ON DEPOSITS At page 149 of the bill section 2 ( k) includes as an insured deposit "interest accrued to the date of the closing of the bank." This language implements recommendation 91 , which was approved by the advisory committee and is a constructive, and should I say equitable, change in the law. RECOMMENDATION 92 -TRANSFERRED DEPOSIT At page 149 of the bill section 2 ( 1 ) restores to the law the express assurance that a transferred deposit means a demand deposit in a new bank or other insured bank. The philosophy of this is that if the bank closes and the Federal Deposit Insurance Corporation does not have anyone to assume the liabilities of that bank, then the insured depositor gets cash up to STUDY OF BANKING LAWS 479 $10,000, even though he has a time or savings account. If the Federal Deposit Insurance Corporation is fortunate enough to get another bank to assume those liabilities, we think the depositor should have the benefit of a demand account in that new institution , which is exactly the same place he would have been, had the deposit not been transferred to another bank. It is equitable and fair and it should be noted that a comparable change is made at page 223 of the bill, pursuant to recommendation 166K, which has to do with the Federal Savings and Loan Insurance Corporation. RECOMMENDATION 97-ASSESSMENT CREDIT This recommendation in the form in which it was approved by the advisory committee has been implemented in section 18 at page 159 of the bill. Recommendation 97 ( e ) which was disapproved is not included in the bill. As section 18 is written it appears to reflect properly the thinking of our committee. Later I will comment on the failure of the bill at this point to implement recommendation 115G of the advisory committee. RECOMMENDATIONS 42 , 85, AND 114 - REGULATION OF MERGERS Each of the supervisory agencies recommended that section 18 ( c) of the Federal Deposit Insurance Act be amended as it was sought to be amended by S. 3911 of the 84th Congress and the advisory committee approved. As the record on S. 3911 before this committee is full and adequate, I will not repeat here. RECOMMENDATION 99 - PROCEDURE FOR TERMINATION OF INSURED STATUS At page 165 of the bill section 29 implements the Federal Deposit Insurance Corporation's recommendation in this regard as it was approved by the advisory committee. In addition, however, section 29 provides that the hearing on termination shall be held in accordance with the provisions of the Administrative Procedure Act and that review by the courts shall be upon the weight of the evidence. This was added as it has been in the statutes relating to the termination of insurance of accounts of Federal savings and loan associations. These provisions should in fairness be available to banks. RECOMMENDATION 112-CIVIL SERVICE RETIREMENT The advisory committee interposed no objection to this recommendation of the Federal Deposit Insurance Corporation provided that the cost was charged to the capital account of the Federal Deposit Insurance Corporation and not to "net assessment income." We are pleased to see that section 39 of the bill does just that. RECOMMENDATION 115B-AUTHORITY TO PRESCRIBE BY REGULATION EMPLOYMENTS THAT MAY INVOLVE CONFLICT OF INTEREST The Federal Deposit Insurance Corporation recommended that it be authorized to make regulations governing the employment of its 480 STUDY OF BANKING LAWS employees by insured banks in situations involving a possible conflict of interest. The advisory committee approved this recommendation , noting, however, that the Comptroller of the Currency through the years apparently has had no difficulty with this problem even though he has not had the benefit of a statute on this point. At page 180 of the bill section 40 (d) implements this recommendation providing that it shall not be lawful for any employee or former employee of the Federal Deposit Insurance Corporation to accept employment in any insured bank except pursuant to regulations prescribed by the Federal Deposit Insurance Corporation. The section further provides penalties upon conviction of any violation of the section. Comparable provisions relating to the Office of the Comptroller, the Federal Reserve Board , the Federal Home Loan Bank Board, and the Bureau of Federal Credit Unions have been inserted at other points in the committee print in order to achieve uniformity. We do not feel that any exception can be taken to this. We note, however, that at pages 248 and 249 of the bill there appear provisions which seem to be in direct conflict with the sections of the bill which I have just referred to. As the advisory committee has not considered this new material, I am not in a position to state its views. Speaking personally, however, I am constrained to think that the provisions at pages 248 and 249 of the bill are much too broad, and should be removed from the bill . Senator ROBERTSON. May I interrupt there to say that I agree with you on that, and before you conclude your testimony I would be glad to have your recommendations on how it should be revised . Mr. CRAVENS. Thank you. I intend to comment more on this later, and following that I will be glad to give you my recommendations. RECOMMENDATION 115F- ABSORPTION OF EXCHANGE AS INDIRECT PAYMENT OF INTEREST The Board of Governors of the Federal Reserve System by their recommendation 77 suggested that the words "directly or indirectly by any device whatsoever" be removed from section 19 of the Federal Reserve Act and that it be made clear that the term "interest" should include only cash payments made or credits given by a bank for the account or benefit of a depositor and further that appropriate amendments be made to make certain that the same limitations as to the payment of interest should apply both to member and nonmember insured banks either by an explicit statement in the law as to both types of banks as to whether absorption of exchange charges shall be deemed a payment of interest or by a provision authorizing either the Board of Governors or the Federal Deposit Insurance Corporation to define the term "interest" for both classes of banks. The Federal Deposit Insurance Corporation made no specific recommendation on this subject but in the testimony given by its representatives in November it was stated that there is unfairness when one bank can absorb and another cannot, depending upon whether or not it is a member of the Federal Reserve System. I think I should like to depart right there and maybe get this problem in a little better focus. We really have two problems here. One is what constitutes-I might say the first problem is whether or not we take the recommenda- STUDY OF BANKING LAWS 481 tion of the Federal Reserve Board and limit what constitutes interest on demand deposits to cash or credit , or whether we include it indirect by any device whatsoever. The second problem is the absorption of exchange. The Federal Deposit Insurance Corporation position has been that absorption of exchange did not constitute payment of interest on deposits of the member banks Sentor ROBERTSON. Have you found any law in the Federal Deposit Insurance Corporation Act that authorized them to pass on what is and what is not interest ? Mr. CRAVENS. Well, not being a lawyer, I have not. My own counsel has some grave doubts about that too. I would like to say this, though, with respect to the Federal Reserve that I am not happy to see a Federal agency make the reservation it did simply to make its job easier. They frankly admitted they would like to have it cash or credit because that was easy to define. Senator ROBERTSON. Mr. Cravens, as we know, this committee went into the problems of this bill on the absorption of exchange. I am informed that a thousand banks out of some 14,000 do not pay an exchange charge, and some have just a small exchange charge, and some have up to one-eighth of a percent, I am told. A number of them surround a bank, for instance, like a member bank in Wilson, N. C. , which makes it very tough. I have already mentioned the difference between a definition and a picture. Can you give us a picture of this absorption of exchange ? Mr. CRAVENS. I think I will complete my written testimony on this, so that will put it all on the table, and then I will give you some examples. The advisory committee at page 30, et seq., of its report suggested that the Federal Deposit Insurance Act be amended to read the same as the Federal Reserve Act with respect to the payment of interest on demand deposits. The reasons for this recommendation were that our committee thinks that the present lack of uniformity on this subject is deplorable ; that uniformity should be achieved as we believe the Congress originally intended ; that the direct or indirect payment of interest on demand deposits should be unlawful both as to nonmember insured banks as well as member banks ; that the ruling as to the absorption of exchange constituting a prohibited payment of interest should be the rule. Since the date of advisory committee's report legal questions have arisen as to whether or not the implementation of our committee's recommendation will, as a matter of law, produce the result which our committee intended to achieved. In the light of this fact and for the reasons stated at length in the advisory committee report, I feel that this issue should be met squarely, to the end that absorption of exchange shall be outlawed and shall be outlawed for all insured banks alike, whether or not they are members of the Federal Reserve System. Thus, I urge that the committee print bill be amended as follows : At page 163 of the bill strike out the first sentence of section 26 and substitute the following : No insured bank, whether or not it is a member of the Federal Reserve System, shall, directly or indirectly, by any device whatsoever, pay any interest on any deposit payable on demand except as now or hereafter may be permitted by law or regulation of the Board of Governors of the Federal Reserve System in the case of a member bank of the Federal Reserve System. 482 STUDY OF BANKING LAWS Senator ROBERTSON. That is pretty clear. Mr. CRAVENS . The result of this suggested change would clearly be and I hope it is clear-that all insured banks, non-members as well as members, would be controlled by the regulations of the Board of Governors issued pursuant to section 41 at pages 117-118 of the bill. The Board consistently since September 1943 has ruled that absorption of exchange is an unlawful payment of interest. In addition to the foregoing amendment, another might be made at page 118 of the bill. On that page the period at the end of section 41 (a) might be changed to a comma and the following added : And provided further, That within the meaning of the provisions of this section the absorption of exchange shall be deemed to be a payment of interest. . I urge that even though this last amendment is not made, that section 26 on page 163 be changed to read as I have suggested. If the only way to achieve uniformity is by the Congress forcing one agency to agree with another, then such action certainly should be taken here in order to eliminate the terrible inequity which has existed far too long . The problem arises because we have quite a number of banks throughout the country that do not operate on a par clearance basis. Here is a simple illustration : When a check is drawn on a no-par bank payable to a third party, when the item is cleared on the no-par drawee bank, that bank makes a charge for clearance. We will say that the check is for $100 and the no-par drawee bank remits $99 and retains $1 as a charge. Naturally, the payee of that check is thus going to lose $ 1 . The payee deposits the check with his own bank. That collecting bank then clears it on the no-par bank. If the payee's bank of deposit could absorb that dollar's exchange, it would be rendering its customer a great service and might induce him to carry larger balances ; but by so doing it would actually be paying him $1 interest on his demand deposit, and this it may not do if it is a member bank. So we have the situation where a nonmember bank may absorb that $1 and in effect pay interest to its customer on a demand deposit, but we have right across the street a member bank that cannot do it. Therefore, the nonmember bank says to member bank's customer, "Bank with me and I will absorb the exchange." Therefore the nonmember bank gets the business. I think that is as simply as I can explain it. It is just deplorable that we have for so many years had a situation which permits banks here doing one thing and over here they are not permitted to do it. Do you have any questions to ask on the absorption of exchange ? Senator ROBERTSON. I think you have made that clear. Mr. CRAVENS . Then yet us turn to the Federal Home Loan Bank Act and the Federal savings and loan associations, Mr. Bubb. Recommendations 118 through 140, except recommendation 121 , have all been incorporated in the revision of the Federal Home Loan Bank Act as it appears from pages 181 through 202 of the bill. All of these are recommendations of the Federal Home Loan Bank Board which the advisory committee deemed to have merit and thus approved them. We have assumed that that Board will check the implementing language more closely than have I. At page 203 of the bill section 501 of the Home Owners Loan Act is amended to provide for a Federal Savings and Loan Asso- STUDY OF BANKING LAWS 483 ciation Act. While this was not the subject of a particular recommendation, I am pleased to see that this has occurred . I note that recommendation 144 as made by the advisory committee at page 40 of its report has been implemented at page 207 of the bill by section 5 ( d ) ( 3 ) , which is modeled after title 12 United States Code, section 77, as it is revised at page 15 of the bill as relates to national banks and at page 101 as it relates to State member banks. This provides uniformity and is in keeping with the thoughts of the advisory committee. RECOMMENDATION 166C- BRANCHES OF FEDERAL SAVINGS AND LOAN ASSOCIATIONS At page 211 of the bill section 6 pertains to branches of Federal savings and loan associations, and as we understand the situation it follows the language of H. B. 972, as passed by the Senate in the 84th Congress. Recommendations 166F, G, and H : These recommendations of the Advisory Committee related to all insured savings and loan associations, and to all noninsured savings and loan associations, which are members of the Federal Home Loan Bank. First I will take recommendation 166F. To eliminate the amount which any such association might loan to any of its officers or directors. Recommendation 166G prohibits any such association from making or paying any greater distribution or dividend to any of its officers, directors, or employees than is received by its accountholders generally at any time within 1 year of the date of that payment. Recommendation 166H makes directors of such associations liable for damages resulting from the violation of certain laws relating to such associations. At pages 212 and 213 of the bill these recommendations have been implemented, but only as it relates to federally chartered savings and loan associations. This is all right as far as it goes, but it does not go as far as we suggested . We believe it should be implemented as we suggested, even though it would require incorporating comparable provisions to nonmember insured banks. I would like to stop here for just a minute. It is true that our committee did not consider the matter of subjecting nonmember insured banks to similar provisions, but we believe that it is so important and the provisions are so sound that they should be carried over to nonmember banks as well as member banks, and they should be carried over to all savings and loan associations, whether or not their accounts are insured by FSLIC. Mr. Bubb may want to comment on this later, and I realize that this is new material as it relates to the bankers, but what I have said, at least is my personal position. RECOMMENDATION 158 ( 1 ) -REGULATION OF INSURED INSTITUTIONS At page 221 of the bill section 404 ( e ) implements this recommendation by providing that except with prior approval of the Federal Deposit Insurance Corporation no insured savings and loan association shall be a party to a merger or consolidation or purchase assets or accounts from other associations. This is something comparable to 484 STUDY OF BANKING LAWS section 23 of the Federal Deposit Insurance Act as it appears at page 162 of the bill. Our committee feels that these provisions are in the public interest. RECOMMENDATION 166A- HOLDING COMPANIES At page 227 of the bill section 409 implements the recommendation which our committee made in regard to having holding company legislation relating to savings and loan associations. It is our understanding that the language employed is that which was used in the bill which Representative Spence, of Kentucky, introduced on this subject in the 84th Congress. Our committee did not consider this language, but it strongly endorses the principle. Now I will turn to Federal credit unions. Title VII of the bill recasts the Federal Credit Union Act beginning at page 229 of the bill. All of the recommendations which were made as to Federal credit unions which were approved by the Advisory Committee have been implemented by the bill. We believe that as a result the practices and procedures of these worthy organizations will be vastly improved. I believe that is an understatement. We have made many fine improvements in this legislation that will be beneficial to the credit unions, and I am sure beneficial to their members. I note particularly that recommendation 190 in regard to audits is implemented by section 7 (b) at page 231 of the bill. This provides that credit unions with assets of $50,000 or more shall have an annual audit by outside auditors approved by the Director of Federal credit unions and that unions with assets of less than $50,000 shall be audited annually by the Bureau of Credit Unions. At page 235 of the bill section 15 increases the size of unsecured loans which may be made from $400 to $500, and also provides that the Director may impose by regulation maximum loan limits for all Federal credit unions or for any one or more classes provided the same is within the statutory limits. This last provision will provide a greatly needed safety factor in the operations of such credit unions. At page 241 of the bill section 25 of the Credit Union Act implements recommendation 173 of the Advisory Committee and amends section 21 of the old act so that a credit unionthe membership of which is composed exclusively of persons who are either presently Federal employees or are retired Federal employees and members of their familiesshall be eligible applicants for the allotment of space in Federal buildings. I won't comment on the other changes in the Federal Credit Union Act, but I will simply say again that I think the changes are good and very helpful changes in the law. I want to come to those matters now which have not been implemented in the committee print bill, which were recommendations of the Advisory Committee. RECOMMENDATION 52 -SERVICE ON RESERVE BANK BOARD OF FEDERAL ADVISORY COUNCIL It is actually "and" service on the Reserve Bank Board and also on the Council. STUDY OF BANKING LAWS 485 At pages 74 and 85 of the bill will be found provisions which relate to the subject of this recommendation. Section 7 (a ) at page 85 provides, among other things, that Federal Reserve bank directors, other than the Chairman, shall be prohibited from serving more than 2 full consecutive terms of 3 years each without an intervening period of not less than 3 years, and section 8 (a ) at page 74 provides that members of the Feedral Advisory Council shall be prohibited from serving more than 6 consecutive terms of 1 year each without a similar intervening period . It is the committee's opinion that advantages of preserving and promoting the autonomy of the Federal Reserve banks outweigh the possible benefits from rotation and that the present system has been beneficial and should be retained. I think I ought to note again that Professor Chandler dissented on this recommendation. RECOMMENDATION 79- RESERVES AGAINST DEPOSIT OF PUBLIC MONEYS At page 120 of the bill will be found language which implements this recommendation of the Board of Governors, the first part of which our committee approved, and the second part disapproved. The second part, as provided for in section 42 ( f) at page 120 of the bill provides that member banks shall maintain the same reserves against public funds as against other deposits. Our committee does not recommend-and I want to get that clearstandby authority with respect to waiving reserves against public deposits in case of an emergency-that authority can be readily provided in such case-but it based its recommendation primarily on the principle of giving the Board of Governors the broadest authority possible for the discharge of its monetary and credit control responsibilities. Recommendation 115 : The Federal Deposit Insurance Corporation recommended that sections 217 and 218 of the Criminal Code be amended to permit member banks to make loans to examiners and assistant examiners of the Federal Deposit Insurance Corporation when the loans were made in accordance with the Federal Deposit Insurance Corporation regulations. The advisory commitee approved this suggestion. The bill does not implement this recommendation. To the contrary, the bill at pages 248 and 249 makes it a crime for any member bank or any insured nonmember bank to make a loan to examiners who have, or within 2 years preceding the making of the loan have had, any duties in connection with the lending bank. I will refer to this subject later on in more detail. Now we go to recommendation 115G. RECOMMENDATION 115G- INCREASE IN ASSESSMENT CREDIT ; RECOMMENDATION 166K- WITH REFERENCE TO THE FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION Recommendation 115G of the committee was that a study be undertaken promptly and expeditiously to determine a reasoned formula for computing the proper premium cost to the insured banks for the risk involved, in the light of the present size of the Federal Deposit Insurance Corporation Deposit Insurance Fund supplemented by annual increases from income and assessments ; and that meanwhile, the 486 STUDY OF BANKING LAWS Congress amend section 7 (d ) of the Federal Deposit Insurance Act so as to provide that 1 year from the date of enactment of the act the annual net assessment income shall be credited pro rata to the insured banks. Committee recommendation 166K was intended to treat the Federal Savings and Loan Insurance Corporation on a comparable basis. These two important recommendations are not included in the bill yet; as I am sure that this committee will want to consider them, I bring them to your attention. To place the problem in the proper perspective it is first necessary to establish a common, proper concept of the purpose of the Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation. Our committee concluded that the only possible purpose these insurance corporations could serve was to insure depositors against losses resulting from the day-to-day institutional failures occasioned by mismanagement, inadequate capital, local disaster, defalcation, and many other similar institutional casualties. It is also quite apparent that it is completely unrealistic to believe that these corporations could possibly insure depositors and account holders against losses occurring on a major scale incident to economic or other disaster, any more than the private insurance industry could insure losses incident to an all-out atomic war. No insurance company, private or public, could provide any real protection against universal economic disaster, and it would be immoral to mislead the public that it could. If this is a proper concept of the purpose of these insurance corporations, then the Federal Deposit Insurance Fund seems to be adequate at this time. Such fund now exceeds $1.7 billion, which is equal to 1.41 percent of insured deposits. In the 22 years that the Federal Deposit Insurance Corporation has been in existence it has disbursed for working-capital purposes in the aggregate of less than $290 million in connection with receivership and deposit- assumption cases. More particularly, of this amount actual losses during the entire period amounted to only $ 19 million , and estimated possible future losses on cases that are still active amount to only $9 million . Thus, total actual or contingent losses of $28 million during the entire period are substantially less than the $39 million of income from investments accruing to the fund in the year 1955 alone. Furthermore, the fund was increased by more than $56 million in the year 1955 as a result of assessments. While this record seems to be impressive, it is by no means conclusive because of the lack of comprehensive and actuarial information . It is a bare, startling fact that, inconceivable as it may seem, no study has been made which would provide an actuarial basis for determining the underwriting liabilities of the Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation. Let me qualify that by saving at least our committee could find none, nor was any made available to it. It is essential that such a study be made. Our committee feels that such a study is feasible and this bill to amend and revise the statutes governing financial institutions and credit would be sorely lacking if it did not provide for such a study. Our recommendation would, in effect, force the proper agencies to make such a study and give them 1 year in which to do it. Results of such a study would clearly point STUDY OF BANKING LAWS 487 out the problems and give the Congress the kind of information it needs to provide insurance protection to the Nation's savers without misleading them and without creating too heavy a burden on the Nation's banks and savings institutions. We recommend that the present assessment rate continue during the period of this study, but that if the study is not completed by the end of the time provided for, and a more scientific assessment rate is not established, then further accumulations should be dispensed with until such scientific assessment rate is established. Probably the most important aspect of the committee's recommendation with respect to these two insurance corporations is that the study would afford a Monetary and Financial Commission , should it be established, a place to start in reviewing the overall insured deposits program. May I add, let us not wait for all of the time necessary for such a commission to act. Let us incorporate these changes in this bill, and force this study immediately. I am sure I speak for every member of our Committee in strongly urging the Senate Banking and Currency Committee to consider these recommendations favorably. RECOMMENDATION 166D-PROHIBITED PRACTICE The advisory committee recommended making it unlawful for any institution organized under the laws of either the United States or a State which is not authorized to engage in the business of receiving deposits to represent or hold itself out in any manner that it is a bank. The committee print bill does not implement this recommendation because, as we understand it, within the time available it was impossible to work out proper implementing language. I do have some implementing language, and with your permission , I will place it in the record, Mr. Chairman. Senator ROBERTSON. It may be so inserted. (The document referred to follows :) MEMO IN REGARD TO RECOMMENDATION 166D See page 36 of the committee print where title 12 United States Code, section 378, is amended in accordance with recommendation 36. Here the draftsmen failed to implement Advisory Committee recommendation 166D. In order to implement this recommendation it is suggested that section 44 of the committee print be amended as follows : 1. In subsection (b ) strike the designation " (b ) " and substitute in lieu thereof " ( c) ." 2. Then insert a new subsection " (b ) " reading as follows : "(b) From and after the effective date of this Act it shall be unlawful for any institution organized under the laws of the United States in any manner to represent by its name, advertisements , communications or otherwise that it is a bank unless the law under which such institution is organized expressly authorizes it to engage in the business of receiving deposits and of making loans and discounts, or if not authorized to engage in such business, expressly authorizes the use of the word 'bank' in its corporate or business name." RECOMMENDATION 195 -MONETARY AND FINANCIAL INSTITUTIONS COMMISSION Mr. CRAVENS . This recommendation was perhaps the most important one made by our committee. It was that the 85th Congress enact 4.88 STUDY OF BANKING LAWS without delay legislation providing for the establishment of a Commission for the purpose of making an objective study and appraisal of the use of monetary controls to stabilize the Nation's economy and the impact of such controls upon the American system of free enterprise, and of the adequacy and responsibility of all financial institutions as custodians of the Nation's savings, to provide, individually and collectively under existing laws, the State and national financial needs for the continuing growth of our dynamic economy, giving appropriate consideration to deposit and savings insurance programs, the essentiality of Government lending and investing, and the tax burden on debtors, creditors, and equity owners. May I say at the outset that this is not a matter that should necessarily be brought before Congress by incorporating it in the bill to amend and revise statutes governing financial institutions and credit. Accordingly, we considered that it was appropriate to omit this particular recommendation from the bill. As a matter of fact, it is preferable to have it incorporated in a separate bill in order to expedite the consideration of the recommendation. The urgent need for such a study can hardly be questioned, both from the standpoint of the great many years since we have had one and also because of the tremendous changes in our economy during the intervening period. As our Chairman today mentioned , the last such study was made by the National Monetary Commission in 1908 and it lead to the forma tion of the Federal Reserve System in 1913. The major economic and social changes which have occurred since 1908 have substantially altered the functions, types, and relationship of financial institutions to public need and the economy. Notwithstanding the new demands occasioned by these changes, all we have had is piecemeal legislation to meet the day-to- day needs of the economy. We are indeed pleased to see the introduction of S. 599 to establish a National Monetary and Financial Commission , and we strongly urge the study and consideration of this bill. We favor, however, an amendment to the bill broadening the composition of the Commission to include adequate representation of the Congress as we originally recommended. The legislative branch should be represented by not less than 4 and not more than 6 members of the Banking and Currency Committees of the House of Representatives and the Senate, consisting of the chairmen and the ranking members. Basically our committee felt the scope of such a Commission's functions should be stated in the broadest terms in order to avoid disputes in the initial stages over controversial issues, and the Commission after an exploratory period would be in a better position to define its areas of study. Nevertheless, section 3 of S. 599 seems to be conclusive and adequate, but if I properly interpret the views of the members of our committee, I would have to take strong exception to section 3 ( f) (3 ) . Certainly our committee wants no legislation that in the remotest way would prejudice the independence of the Federal Reserve System. This particular section might possibly-I don't say it would be, but it might possibly be interpreted as a mandate by Congress for the Commission to question the System's independence of structure and power. Personally I believe that section 3 ( f) ( 3 ) adds very little and that it might possibly be misinterpreted. Thus I feel that it should be de- STUDY OF BANKING LAWS 489 lated from S. 599. I do not think it is too important, but it might well be deleted. Senator ROBERTSON. May I ask if in your opinion there is anything in the Capehart resolution that would appear to be inimical to the banking system between the Federal banks and State banks ? Mr. CRAVENS . No. Definitely not. Senator ROBERTSON. That is not involved ? Mr. CRAVENS . No. We now turn to the measures which are not specifically covered by the report of the advisory committee. See, for example, the last sentence of section 35 ( a ) at page 27 of the bill. There it is provided in the section dealing with interest which may be charged by a national bank that the purchase of evidence of indebtedness from the owner shall not be deemed to be a loan or discount except to the extent that "they" may be construed as loans or discounts under the laws of the State in which the bank is located . I am informed that the purpose of this provision is to legislate away the holding of the old case of National Bank v. Johnson ( 104 U. S. 271 ) . This has not been considered by the advisory committee. Speaking solely for myself, I believe that this is a fair provision for national banks if my understanding of its purpose is correct. For example, in my home State the supreme court of Missouri has held that where paper is purchased from the payee or other holder at a discount, usury is not present whatever amount the purchaser pays, as it is a purchase and not a loan even though the holder endorses with recourse. In any event, I suggest that the language should be improved upon to make clear just what the purpose is. I do have some implementing language in this case, and I will offer it for the record. Senator ROBERTSON. Without objection, it will be received . (The document referred to follows :) Page 27 of bill, strike the last sentence in section 35 ( a ) and substitute the following : "The purchase of obligations or evidences of indebtedness from the actual owner thereof shall not, for the purposes of this section, be deemed a loan or discount if such purchase would not, under the law of the State in which the purchasing bank is located , be deemed a loan or extension of credit subject to the interest or usury statutes of such State." Mr. CRAVENS. In recommendation 44 the Comptroller suggested the need for a statute providing that reports of examinations of national banks, and so forth, shall be deemed confidential and privileged against disclosure to unauthorized persons except with the consent of the Comptroller. Recommendation 115E of the Federal Deposit Insurance Corporation was comparable. Both were approved by our committee. Section 50 at page 41 of the bill implements the former and section 10 at page 153 of the bill the latter. I think a comparable provision should be inserted for the Federal Reserve Board. I mention these sections at this point because each adds a "Provided, however," clause to the effect that the privileged documents shall be made available to the committees of the Congress upon request. The advisory committee report at page 30 states that our committee by its approval did not intend to take a position for or against disclosure by the executive branch to the legislative branch . You see, we are diplomatic at times. 490 STUDY OF BANKING LAWS Senator ROBERTSON. You remember Senator Douglas expressed very definite views at our previous hearing on this subject. Mr. CRAVENS. Could I urge you, Mr. Chairman, if you do retain that provision, that you limit it to executive sessions? Is that not proper ? Senator ROBERTSON. It would be well worth considering. Mr. CRAVENS. At page 183 of the bill section 4 ( d ) of title IV makes it unlawful for any uninsured member of the Federal home loan bank to advertise or represent that it is connected with the Home Loan Bank System except as may be authorized by regulation. While the advisory committee made no formal recommendation as to this, it was discussed informally and I feel certain that I properly sense the feeling of our committee when I express approval of its having been inserted in the committee print bill. Would you say that is correct, Mr. Bubb? Mr. BUBB. Yes. Mr. CRAVENS. In my discussion of recommendation 155B I alluded briefly to the criminal provisions which appear at pages 248 and 249 of the bill . As I have stated , these are new provisions which were not considered by the advisory committee ; thus my remarks represent only my personal views. It seems to me that these provisions at pages 248 and 249 as they relate to employees of the supervisory agencies becoming employees of any institution which they may have examined is much too broach , as I have already stated, and if enacted will produce results of as serious a nature as are the results which the provisions were designed to prevent occurring. One of the big problems of banking today is the matter of obtaining qualified personnel. Without elaborating on the basic proposition, I want to say that the provisions of the bill I am referring to will for all practical purposes cut off one of the best sources of supply of qualified personnel for the banking system, namely, the employees of the supervisory agencies. This of itself is not in the public interest, because for each instance which these provisions are designed to prevent occurring there are dozen of instances of honorable relationships which have arisen between banking institutions and former employees of the supervisory agencies. A great many leaders in banking today are products of the examining agencies. There is another harmful aspect which I think merits your consideration. Means should be found and employed to strengthen the quality of bank supervision, not weaken it. I feel that these provisions will inevitably make it more difficult for the agencies themselves to obtain the services of younger qualified personnel and conceivably can result in the rapid decimation of their present complements. I therefore earnestly suggest that your committee find some way of achieving the purpose you have in mind without exposing both the banking system and its supervisors to the hazards I have mentioned. I have not said enough about it actually. We suggested in recommendation 166 I that section 217 be made applicable to all members of the Federal Home Loan Bank System. We did not, however, recommend that it be extended to cover the stockholders owning 10 percent or more of the stock. Then we take particular exception to subsection (ii ) because it refers to employment, which I have already commented upon, and because it has been extended to all officers and all employees, which goes way beyond the present Criminal Code. STUDY OF BANKING LAWS 491 Third, that while it undoubtedly was poorly expressed, all we meant to suggest by recommendation 166 I was that the rules applicable in the case of all banks should be made applicable in the case of all savings and loan, including including now the relaxation of the rules as we recommend by our recommendation 115. In summary, sections 217 and 218 of the Criminal Code as set out in the committee print do not reflect our committee's recommendation. Those sections have no place in the bill and ought to be eliminated. You asked me a little earlier if I had any specific recommendations. I do. First I would recommend that you eliminate all reference to employment in sections 217 and 218. All references. I have heard that the supervisory agencies are anxious to amend the committee print bill to provide a 2 -year limitation of the agencies over people employed . I think the bill is perfectly adequate as it now stands, that they may so regulate under the bill, but if they wish that 2-year limitation as something to hang their hat on, I would certainly have no objection to it. Now as to lending. Senator ROBERTSON. Let me see if I am clear on this. If we eliminate those two sections, do you feel there would still be left in the bill sufficient language to prevent a repetition of the Elmwood Bank case, where, as you remember from our previous hearings in Chicago, Senator Fulbright did not like what happened , and Senator Douglas was very critical about what happened ? Mr. CRAVENS. If you eliminate all reference to employment you still retain the other provisions in section 217 and section 218. If you do not broaden it and go beyond examiners and assistant examiners, you might miss the General Counsel of the Federal Deposit Insurance Corporation, for example, or a few people like that. But the minute you try to broaden it you get it into you create injustices all the way across the line. I think with the changes I have suggested you would still have adequate power to cover the Elmwood situation, or almost any situation except one like I just happened to mention. That probably would not be covered, would it , Mr. Rogers ? Mr. ROGERS. No. Senator ROBERTSON. I understand you take out these two sections, but you do have some language to put in ? Mr. CRAVENS. Yes. I still have some more recommendations. Senator ROBERTSON. Our counsel , Mr. Rogers. Mr. ROGERS. To clarify it, would the provision we have under each title applying to each agency and their employees in the front part of the bill, be adequate to cover the situation ? Mr. CRAVENS. Completely adequate. Mr. ROGERS. So your recommendation would be to eliminate refer ences to employment in sections 217 and 218 of the Criminal Code and let the other provisions stand as they are, except that you would go along with a 2-year limitation on the previous section ? Mr. CRAVENS. That is right. With one more suggestion. Mr. ROGERS. All right. Mr. CRAVENS. And that is that you do not change the present language in the Criminal Code with respect to the coverage. In other 84444-57- pt. 2- 492 STUDY OF BANKING LAWS words, do not use this new language going all the way down to employees, but limit it to examining personnel. Mr. ROGERS. As I understand you, when you eliminate any reference to employment that would take care of that situation ? Mr. CRAVENS. Yes ; but I want to talk a little bit on the lending now. We intended in our recommendation 166 I, of course, to broaden the scope of the prohibition on lending, but we did not intend to broaden the applications clear down to the office boy. The way it is now written no one could borrow any money from anyone, because you covered every lending agency and every employee of anybody in the supervisory staff, and you covered it both as to State and National banks, insured and noninsured. So I would suggest you strike that part of it. Keep the lending prohibition, but limit it to examiners and assistant examiners. Put in all you want about gifts and gratuities. That is fine. Tie it down as tight as you want to. But leave the lending prohibition limited at least to assistant examiners and examiners. I have one other suggestion with respect to section (d) ( 2 ) of section 610. I think that entire section should be eliminated. Mr. ROGERS. That relates to political contributions ? Mr. CRAVENS. That is right. Mr. ROGERS . Would you like to explain that ? Mr. CRAVENS. Under section (d ) (2 ) , as I understand it- I may misinterpret it, but as I understand it, under section (d) (2 ) at the last general election I could not have made a contribution personally to President Eisenhower's campaign, or to anyone else's campaign, simply because at that same time in Missouri there was being elected a State treasurer. Have I interpreted that properly, Mr. Rogers ? Mr. ROGERS. I think it could be interpreted that way. Yes. Mr. CRAVENS. If that be true, is it not grossly unfair to me as a banker not to let me exercise my constitutional rights ? You would be in the same category, Mr. Bubb, and everyone here who is connected with the leading business would Senator ROBERTSON. Let us get this situation a little clearer. State what the present law is with reference to bank making contributions. Mr. CRAVENS . Well, national bank corporations are prohibited by Federal law from making contributions in the case of Federal elections, and State member banks are prohibited certainly in Missouri by Missouri law. I would like to ask Mr. Neill, counsel for this Advisory Committee if that is not a correct statement. Mr. NEILL. It is. Section 610 of the Criminal Code relates to national banks. The present Federal Criminal Codes does not apply to State-chartered banks. They are covered by the laws of the States of their incorporation . Mr. CRAVENS. I would not object to section ( d ) ( 1 ) , Mr. Chairman. That would go a long way toward tightening up the situation, but section (d ) (2) is just grossly unfair. Senator ROBERTSON. Thank you . I think you have explained that. Senator BRICKER. Are not all corporations in most States prohibited from making political contributions ? Mr. CRAVENS . That is my understanding. Senator ROBERTSON. But you do not want it to apply to a banker just because he is a banker. Mr. CRAVENS. That is right. STUDY OF BANKING LAWS 493 Senator ROBERTSON. When the president of any other corporation can contribute whatever the law permits anybody to contribute. Mr. CRAVENS. Any more than I would want the members of a labor union to be denied their constitutional right. Anyhow, prior to concluding, I will mention two recommendations which were made by the Advisory Committee which have not been implemented by the committee print-and properly so-but which our committee hopes that your committee-the Senate Banking and Currency Committee-will pass along with your favorable recommendation for action by the appropriate committees of Congress. First there is the matter of postal savings. Our committee believes that following the recommendations of the Comptroller General and the Hoover Commission, the Postal Savings System should be liquidated in an orderly fashion forthwith. It has outlived its original purpose and private enterprise provides adequate facilities for the savings of our people. Second, all banks, State-chartered as well as national , should by law be permitted to establish adequate and realistic bad debt reserves under statutory formula. Reserves permitted by present Treasury regulations are inadequate on the basis of past experience and penalize prudent management. This inadequacy is even more pronounced if the banking system is to meet the huge and increasing demands for credit in a dynamic economy and protect the depositors. Our present economy requires the extension of many types of credit never before provided primarily by the banking system. As a result, the banking system must provide enormous amounts of consumer, mortgage, capital, and term credit, which types of credit carry risks not present in banking in the historical sense. Accordingly, a new concept of the adequacy of reserves for losses for eligible loans outstanding in the banking system must be forthcoming. Consideration of the risks and the inadequacy of capital in the banking system forcibly demonstrates that any reserves less than 5 percent of eligible loans outstanding is wholly inadequate and unrealistic. The banking system should therefore be permitted to accumulate reserves in excess of this amount. Thus, the Advisory Committee recommends that commercial banks be permitted under the Internal Revenue Code to add to reserves for bad debts in any taxable year up to a percentage of not less than onehalf of 1 percent and not more than 1 percent of eligible loans, provided that no addition under the formula to such reserves in any taxable year shall cause the aggregate thereof to exceed a percentage of not less than 5 percent and not more than 10 percent of the eligible loans. So again I urge your committee favorably to recommend this recommendation to the appropriate committees. Senator ROBERTSON. The chairman wishes to comment that he has officially transmitted to the chairman of the Ways and Means Committee of the House of Representatives and the chairman of the Finance Committee of the Senate that recommendation since it was outside of the jurisdiction of the Banking and Currency Committee. The chairman of the House Tax Committee, where the bill must originate, has acknowledged receipt of the recommendation and has promised to bring it to the attention of his committee. He also said that 494 STUDY OF BANKING LAWS if, as and when the full Banking and Currency Committee endorsed this type of provision we should please advise him. I have asked Chairman Fulbright of the full committee to bring it to the attention of the Banking and Currency Committee at its first regular meeting because I felt sure that the Banking and Currency Committee would gladly endorse this tax provision. Personally, I think it is only fair and it will help in some ways to equalize competition . I do not think it will cost the Treasury enough money to affect the balancing of the budget, for instance. In other words, I think it is a good recommendation and we are hoping that the tax committees of the House and Senate will so consider it. Mr. CRAVENS. Thank you. I am delighted to hear that you are going to consider it. I would be remiss if I did not make one more comment before concluding, Mr. Chairman . There have been many kind remarks about the work of the 27-man committee, but I have heard none with respect to the outstanding job your counsel Mr. Donald Rogers and your staff have done in the preparation of this bill. It has been outstanding and I want the record to show that we think it is a tremendous job. We also want to record our appreciation for the cooperation which all of your staff has accorded us. Now I would be glad to answer any questions, if you have them, with respect to this bill. Senator ROBERTSON. I want to say you have given us a splendid analysis of what we are trying to do and what we have done up to this point. I think everybody interested in this legislation will appreciate the comments that you have made on what is in there and what was left out that you think should be in there. Are there any questions ? Senator BRICKER. One question in connection with the tax situation in regard to bank management, and the new system of banking and the reserves that should be allowed. Would you explain a little more fully this statement : ** the banking system must provide enormous amounts of consumer, mortgage, capital, and term credit, which types of credit carry risks not present in banking in the historical sense. Which of those categories and in what way do they carry additional risks that are not present in the historical sense of banking ? Mr. CRAVENS. I will try to answer your question and then I would like to ask Mr. Everett Reese, or any of the other members of my committee, to add their comments. What I meant by that statement-and I answer first because I wrote it was that historically when the present laws were written banking generally was confined to short-term credit- 90-day credit. That was about the only type of loans the banks made. Our economy has changed and we have expanded our industrial capacity to such lengths that we have had to provide funds for every kind of purpose. For example, we are called upon to finance the purchases of the consumers up to 3 to 5 years for automobiles and everything known to man, on the time-payment plan, which the banks never did in the twenties. Business now borrows large sums of its capital from the banks on a term basis of 5, 10, and 15 years-partly due to our tax laws. They can deduct the interest as an expense, but if they sell stock they cannot deduct it at the same time. STUDY OF BANKING LAWS 495 All the way down the line we have banks entering into very hazardous lending which was not conceived when these tax laws were written. I say if we want the banking system to continue to provide the credit that our economy needs then the Congress should provide some means to build a reserve to protect them . I think it is important that the credit do be provided and I want the banks to have the courage to lend . If we give them adequate reserves they will have the courage to lend . Senator BRICKER. Assuming it is desirable to continue that type of credit- and I so believe-has experience demonstrated that there is greater risk in the new types of credit-the consumer, mortgage, capital, and term credit-than in the short-term credit formerly given to business ? Mr. CRAVENS. Most assuredly. Mr. Reese, would you like to comment on that ? Mr. REESE. The banks have been expanding their services to serve more people in more ways, which is a wonderful thing for all of the people of the country. Senator BRICKER. I know that, and I am for it. Mr. REESE. And so there have been new ways of lending to people to take care of their credit needs, and extending the time. Whenever you project anything into the future there is more risk involved in it. On the other hand we have been doing these things in a time of great prosperity, for the last 20 years. We do not know what the experience will be. Senator BRICKER. That is why I asked you if your experience justified it. Mr. REESE. Up to date there have been practically no losses in the banking business during that period of time. Maybe we are so good and so right that there will not be any losses, but at the same time we do not know, because we have been operating in this period of high prosperity. Mr. CRAVENS. May I interrupt ? In your State of Ohio, Mr. Reese and Senator Bricker, it just came to my attention that a certain manufacturing company has now gone into bankruptcy and a certain New York bank has a $1,750,000 loan to it that I doubt it will ever collect. It was a term loan. Sure we have losses and have them every day, and we know we are going to get more, particularly if we have a change a little excessive in our economic climate. Senator BRICKER. Your experience then and your anticipation of losses are such as in your judgment to call for an increase in the reserves ? Mr. CRAVENS. Most decidedly. Senator BRICKER. That was what I was getting at. I do not think the experience overall of the last 10 years, for instance , would show greater losses in these particular fields. Mr. CRAVENS. That is correct. Senator BRICKER. Greater than in the ordinary banking fields. Mr. CRAVENS . I think that is correct. Mr. REESE. If we had a proper system of reserves it would put the bankers in the frame of mind that they would adequately serve the credit needs as they develop and come along. In the field of small business we would be sure the banker is going to serve those needs he has been, but he must be kept flexible enough and have the confi- 496 STUDY OF BANKING LAWS dence to go ahead in serving the credit needs of the people with real vision. Senator BRICKER. I think that is right. Senator ROBERTSON. Any further questions ? Does any member of Mr. Craven's staff or the subcommittee chairmen wish to make any statements ? Mr. HARRIS. Thank you, Senator. I would like to emphasize too the points which the chairman made so adequately on the matter of absorption of exchange. I have, and the members of the committee, all had many letters from bankers protesting this situation . I think it is significant that we have had none supporting it. On the matter of Federal Deposit Insurance Corporation assessments Senator BRICKER. None supporting the change? Mr. HARRIS . None supporting the present situation which results in the discrimination. All letters have urged that the change which the Advisory Committee recommended be made in order to remove the discrimination which presently exists. Senator BRICKER. I see. Mr. HARRIS. On the matter of Federal Deposit Insurance Corporation assessments, it may be thought to be a difficult task to determine a reasonable basis for computing this assessment, but I would like to point out recently the private insurance industry undertook a $50 million risk in the operation of atomic- power plants where they have absolutely no past experience to proceed on. This organization has had 25 years almost, and it ought to be able to do something. Senator ROBERTSON. Mr. Pratt. Mr. PRATT. I have no further material comments to make to Mr. Cravens' comments. I think we have here gone into the bill. There are however a few minor changes in wording that the Bureau of Federal Credit Unions will convey to your committee on the section on expenses for the credit committee and dividends. I would like to support the views expressed by Mr. Cravens. Senator ROBERTSON. You remember King Solomon said in Ecclesiastes, "In that war there is no discharge." He dratfed men for war and they had to serve a reasonable length of time and then he let them go. He drafted men to build his temple and let them go. But when he referred to the war of life he said, "In that war there is no discharge." You are in for the duration and can only get out when you die. So, I do not think I shall let this fine advisory committee go. I want you to keep in touch with the hearings. You know our plan. After we hear all of the private agencies and the individuals we shall try to wrap it up with the wisdom of the Federal agencies. Then I want you gentlemen to take another look at it and we will sit down and let our hair down, as Fred Vinson used to say, and see what goes into the final bill. Mr. PRATT. Thank you. Just one comment in connection with sections 217 and 218. Even if it were advisable to set up some limitation on these loans we felt this went so far in that capacity that no Federal employee in any one of these institutions could even belong to and borrow from a credit union organized in his own group. It went so far, in addition to employment, that I think it should be, as Mr. STUDY OF BANKING LAWS 497 Cravens said, removed . And the other section in the Federal part, regulating employment, is adequate. Senator ROBERTSON. Any further comment ? Mr. BUBB. I would like to add this, Senator Robertson and Senator Bricker. I want to second what Mr. Cravens had to say about your work and that of the other Senators on this committee and particularly the capable contribution of your staff and general counsel. We too are most appreciative of that. Another thing I think has some out of this. Sometimes competing businesses seem to have some differences and when they are aired , if they could sit down around a table like we have done in this group, the difficulties would fade away in the twilight. If there is anything this group has done it has shown the public at last that the savings-and-loan business and the banking business can sit down and work out their problems in peace and harmony. I think if for no other reason, in being on the Cravens committee and in meeting with the men I have met with such as Ev Reese, and Reese Harris and Bill Pratt and John McCloy and others, particularly on our executive committee, we ironed out many problems that could not have been handled otherwise. There are a few minor things I wish to address myself to but I understand I am to testify Thursday morning and I do not want to take up your time twice on them. Senator ROBERTSON. I understand we will have the pleasure of seeing you on Thursday. Mr. BUBB. Yes. Senator ROBERTSON. And we will look forward to it. Mr. BUBB. I am not in disagreement except on minor language changes on some of the matters where lawyers enter into it. I will take up different matters then. However, as long as this is part of the advisory committee and Mr. Cravens referred to section 5 (d) (2) on page 206 of the act, I would like to say something on that. We agreed on the committee that the Board- which means the Federal Home Loan Bank Board-should not proceed under paragraph 2 if they could proceed under paragraph 1 , and that was left out of the print . It sounds minor but frankly it is not minor. Also, under subsection 3 of that same part where we use the words "after having been warned" in the desist clause, we feel that should be "warned in writing." That sounds technical but I believe it is not and it would be a good thing for both parties just to add that. Do you agree with me on that? Mr. CRAVENS. Yes ; I do. Mr. BUBB. Those are the only subjects I want to bring up today. I want to tell you again, Ken Cravens, and you and your staff, we appreciate very much having had this opportunity. Senator ROBERTSON. Mr. Reese has been very helpful in the preliminary studies and in the questions he asked in the November hearings. Did you have any comment to make this morning ? Mr. REESE. Thank you, Senator Robertson. I think Mr. Cravens so adequately and so well covered this that there is nothing I could add. I want to thank you for the privilege of serving on this group, and I hope it will make a fine contribution to the future of banking. I certainly appreciate the fine cooperation between the savings and loan and the banks and credit unions and other agencies involved. 498 STUDY OF BANKING LAWS (Mr. Cravens' prepared statement follows :) STATEMENT OF KENTON R. CRAVENS, CHAIRMAN OF THE ADVISORY COMMITTEE FOR THE STUDY OF FEDERAL STATUTES CONCERNING FINANCIAL INSTITUTIONS AND CREDIT Mr. Chairman and members of the committee, I appear before you in my capacity as chairman of your advisory committee to testify in regard to the committee print bill known as the Financial Institutions Act of 1957. Seated with me are the following chairmen of subcommittees of the advisory committee : Mr. Everett D. Reese, of the Subcommittee on National Banks ; Mr. Reese H. Harris, Jr., of the Subcommittee on Federal Deposit Insurance Corporation ; Mr. Henry A. Bubb, of the Subcommittee on Savings and Loan Associations ; Mr. William W. Pratt, of the Subcommittee on Federal Credit Unions. Unfortunately, neither Mr. C. Francis Cocke, vice chairman of the Advisory Committee ; nor Mr. John J. McCloy, Chairman of the Subcommittee on the Federal Reserve Act, is able to be in attendance today. On behalf of each of the members of the advisory committee, I desire to thank the Senate Banking and Currency Committee for the unique opportunity which has been accorded us to serve in this important undertaking. Each of our members, our secretary, Mr. James Saxon, and our counsel, Robert Neill, has given freely of his time and energies in the pursuit of our duties. I trust that our report adequately reflects the unselfish, conscientious, and objective manner in which they approached the many problems which they considered . As indicated in my letter of transmittal, our committee unanimously agreed to our report except as to three recommendations noted therein. For the convenience of your committee I believe that it would be better if my testimony were to follow the bill page by page. Even so, my testimony will be broken up into five parts as follows : Part I : Instances where recommendations of the advisory committee have been followed in matters of more or less technical nature. Unless questions arise, I will not discuss these but will place in the record a list of such recommendations by their numbers and will follow them by reference to the pages of the bill at which they have been implemented. Needless to say our committee was pleased to see that they were adopted . Part II : Instances where recommendations of the advisory committee have been followed on matters which I believe warrant discussion in some detail. Part III : Instances where the committee print does not follow recommendations of the advisory committee. These I will discuss separately. Part IV : Instances where the bill includes matters which are new in that the Advisory Committee has not considered them. As to these I am not in position to speak for the Advisory Committee. Thus I would like to have the benefit of testimony of others, then give the Advisory Committee an opportunity to consider these new matters and thereafter, if such be your pleasure, appear before you again and at that time report the Advisory Committee's views on these new matters and discuss any other points which may have been raised by the intervening testimony. Part V : Lastly, I will mention the instances where recommendations made by the Advisory Committee have not been incorporated in the bill, we assume because jurisdiction over them lies elsewhere. Following this outline, I offer for the record schedule 1 to be attached to my testimony. This schedule lists the recommendations which fall in the first category. In the second category I refer particularly to the following recommendations which have been incorporaed in the bill and in the order in which they appear in the committee print. Recommendation 2-Appointment of 2 additional deputy comptrollers The bill at page 2, section 5, provides for an increase in the number of Deputy Comptrollers from 3 to 5. In the light of the testimony which Comptroller Gidney gave before this committee on November 9, 1956, the Advisory Committee favors this change in the law. Recommendation 45E-Employee stock options ; recommendation 45D-Issuance of preferred stock or debt obligations by banks I have purposely put these recommendations together because they go a long way in answering the urgent need of banking ; namely, the need for better management and more capital funds. On pages 8 and 18 and on 9 and 10 of the STUDY OF BANKING LAWS 499 bill will be found language implementing recommendations 45 E and 45D, respectively. I refer to sections 8 and 31 ( a ) ( 9 ) and 20 and 21 respectively. Frankly, banks are at a serious disadvantage competing for qualified executive personnel because they are not permitted to use the strong inducement provided by employee stock option plans. This situation must be remedied if we are to improve the caliber of management in the Nation's banking system. At present there is no statutory authority by which national banks are permitted to establish such programs. Equally important as good management is adequate capital. Since under the present law a national bank may issue preferred stock only as an emergency measure the statutes are meaningless. Furthermore, under present law a national bank cannot issue debt obligations as a means of acquiring additional capital. Therefore, limiting national banks ' access to capital by way of common stock only is unrealistic and a great deterrent to the banking system's efforts to raise the capital funds it needs. Preferred stock or subordinated debentures issues might well offer a better and more feasible means of acquiring additional capital. Then too, the redemption features of such securities provide a flexible means of adjusting the requirements of the banks to the needs of the times. If the Nation's banking systems are going to supply the needs of our present dynamic and full economy, the national banking system must provide leadership on these constructive measures. Recommendation 13- Unearned dividends At page 11 of the bill, section 22 implements this recommendation. The present law is changed to authorize quarterly declaration of dividends as well as semiannual and annual declarations . Section 22 (b) provides that the approval of the Comptroller of the Currency shall be required if the total of all dividends declared in any calendar year exceeds the net profits of that year combined with its retained net profits of the preceding 2 years less any required transfers to surplus . As the Advisory Committee stated in its report, it believes that these changes are constructive. Recommendation 17- Shareholders' lists At page 12 of the bill, 12 United States Code, section 62 is revised based on this recommendation. The bill, however, does not follow the recommendation of the Comptroller which the Advisory Committee approved, but continues the present law to the effect that the statutory right of inspection by a shareholder of a national bank is not qualified by a requirement of showing proper purpose. The committee fails to understand the necessity for granting to a shareholder of a national bank a broader right of access to a stockholder's list than is enjoyed by shareholders of corporations generally. Thus section 23 ( a ) of the bill and the corresponding sections which I will mention should be amended to conform to the Advisory Committee's recommendation. It should be noted that the substance of section 23 ( a ) is repeated at page 94 of the bill as section 23 ( i ) relating to state member banks of the Federal Reserve System and at page 164 as section 27 of the Federal Deposit Insurance Act. While no recommendations were made as to this, either by the supervisory agencies or by the Advisory Committee, these sections have been inserted apparently on the basis of uniformity. For the moment I merely note their presence. Further at page 12, section 23 ( b ) requires that a national bank shall notify the Comptroller immediately of any single transaction involving "the purchase for sale of 10 percentum or more of the outstanding shares" of the association. This language is repeated as to State member banks at page 94 and as to insured banks at page 164. This is an entirely new provision . While we take no particular exception to the principle of reporting stock transfers, we question the language which has been used as it leaves the situation in a twilight zone. If the idea is adopted it should be limited to a transaction as reflected by the stock transfer records of the particular banking institution . Recommendation 15- Cumulative voting in election of directors At page 13 of the bill section 26 ( c ) implements this recommendation . This language is identical, to S. 256 which passed the Senate of the 84th Congress and was reported favorably by the House Banking and Currency Committee. While undoubtedly sound in theory, mandatory cumulative voting in practice works to the detriment of good bank management. The responsibilities of the members of the boards of directors of banks are such that any serious discord or friction might shake the confidence of its stockholders or depositors as well as the public. This is particularly true in small communities. There have been situa- 500 STUDY OF BANKING LAWS tions where a minor stockholder, elected a director, has conducted himself in a manner which obstructed the orderly conduct of the business of the board of directors or which resulted in divulging to outsiders confidential information about the business of the bank, its borrowing customers, and its depositors. Therefore, the committee believes that a permissive provision as provided by the committee print is more preferable to the existing mandatory provision. Recommendation 21—Removed officer or director prohibited from voting stock At page 15 of the bill section 29 revises 12 United States Code section 77 as it relates to the removal of officers or directors of national banks. The bill includes a comparable provision relating to officers and directors of State member banks at page 101 and further at page 207 includes a comparable provision relating to officers and directors of Federal savings and loan associations. See section 29 at page 101 and section 5 ( d ) ( 3 ) at page 207. (The material found at p. 207 of the bill implements recommendation No. 144. ) All of this material is new and was not the subject of any recommendation. I feel, however, that the changes which have been made do meet with the approval of the advisory committee. I note particularly the fact that the procedures are tied in with the Administrative Procedures Act and that the review by the courts shall be upon the weight of the evidence. This is a very sound change. Recommendation 6-Contributions by the national banks At page 18 of the bill, section 31 ( a ) ( 8 ) implements this recommendation by authorizing national banks to make contributions irrespective of State law to nonprofit educational institutions and to "nonprofit" civic organizations. In his original recommendation the Comptroller did not recommend the use of the word "nonprofit" in the case of civic organizations. The advisory committee approved of the Comptroller's recommendation. Now the bill limits the contributions to "nonprofit" civic organizations. Speaking personally, I feel that it would be better if the word were not used in the bill in this instance as the purpose is the controlling factor and is well defined. Recommendation 60—Stock acquisitions in connection with absorptions At pages 20 and 93 of the bill section 32 ( b ) relating to national banks and section 23 (d ) relating to State member banks implement this recommendation. While both the board of governors and the advisory committee suggested that permission might be granted to "purchase and hold temporarily" stock of another bank, the bill discards the word "temporarily" and fixes the period of holding at a maximum of 90 days. We concede that "temporarily" is not as definite as is 90 days, but we wonder if there is real need of being so definite here where the approval of the appropriate supervisory authority has to be obtained in advance. In some instances 60 days' notice must be given for stockholders' meetings. Thus 90 days may be too limited a period . It would seem that a period of 6 months would not be excessive in this situation. Recommendation 34- Trust powers The Comptroller recommended that the authority to license and regulate the exercise of trust powers by national banks historically reposing in the Board of Governors of the Federal Reserve be transferred to him . At page 20 of the bill section 33 implements this recommendation which was approved by the advisory committee. At the earlier hearings Governor Robertson interposed no objection to this action but suggested that if it be adopted that the Board's regulatory authority over common trust funds likewise be transferred to the Comptroller. The bill does not make this additional change and the advisory committee agrees that it should not be made. (See note at bottom of page 9 of the advisory committee report. ) Recommendation 24-Exception to 10 percent loan limit on obligations concerning dairy cattle At page 25 of the bill section 34 (b ) ( 7 ) ( B ) implements this recommendation so that the loan limit with respect to obligations arising out of the sale of dairy cattle is increased to 25 percent with the result that the same limitations as are applicable to livestock will be applicable to dairy cattle. The advisory committee saw no reason for the existing difference. Recommendation 23 ( 1 ) —Exception to 10 percent loan limit on obligations concerning insurable perishable readily marketable staples under refrigeration At page 25 of the bill section 34 (b ) ( 6 ) ( B ) implements this recommendation and increases to 25 percent of capital and surplus the applicable loan limit STUDY OF BANKING LAWS 501 as relates to such staples except where the obligations are "secured by the identical staples for more than 6 months." As a practical matter we can see trouble ahead through the use of the word "identical." Doesn't the language mean that the 6-month period can be increased by the bank obtaining substitution of collateral in a minimum percentage? While I have not checked every page of the bill, I think I am correct when I say that only on page 25 of the bill will be found the phrase "and/or." With due respect to the draftsmen, I wonder if this phrase cannot and should not be eliminated, not only in section 34 ( b ) ( 6 ) ( B ) , but also in the next to last line of the preceding paragraph, where it appears as part of present law? In any event I suggest that this language be checked. Recommendation 23 ( 2 ) —Loan limit on installment consumer paper At page 27 of the bill section 34 (b ) ( 12 ) implements the recommendation which the advisory committee made on this subject. Here the recommendation of the Comptroller has been supplemented by a proviso to the effect that the 10 percent limitation ( as regards the maker ) shall apply rather than the 25 percent limitation (as regards the endorser ) where, after evaluation of the responsibility of each maker has been made, an officer of the bank, designated for such purpose by its board of directors, certifies that in acquiring such paper from the particular seller the acquiring bank is relying primarily upon the obligations of the makers for payment of the paper. Certainly there is no valid reason to distinguish between nonnegotiable paper and negotiable paper with respect to loan limitations, and this provision cures this. If the acquiring bank is relying primarily upon the responsibility of the endorser or guarantor, then a reasonable limitation should apply, but when the acquiring bank is looking to the maker, the transaction should be looked upon as a loan to the maker rather than a loan to the endorser. This is an important and much needed revision in the national bank act. Note lastly that the word "appreciable" in the third to last line should be "applicable." Recommendation 35—Limitation on real-estate loans This recommendation was divided into four parts plus an additional recommendation of the advisory committee. Each has been followed in the bill, viz : Recommendation 35 ( 2 ) is implemented at page 28 by section 36 ( a ) , which section at page 29 also incorporates the committee's additional suggestion. Recommendation 35 (2 ) would permit national banks to make loans on leaseholds having at least 10 years to run beyond the maturity of the loan. At page 29 of the maximum aggregate of real-estate loans which may be made by a national bank is limited by a third alternative, i . e. , 20 percent of demand deposits. The advisory committee favors these additions to the statute. Recommendation 35 ( 1 ) .— This is implemented in accordance with the advisory committee's recommendation by section 36 ( c ) which appears at page 30 of the bill. Recommendation 35 (4 ) .- At page 30 of the bill section 36 ( e ) implements this recommendation. This recommendation would permit national banks to make loans to manufacturing and industrial businesses which are secured by liens on the plant real estate where the loans are for the purpose of furnishing working capital, without such loans being considered as real-estate loans. These loans are really business loans and represent ordinary business financing and should not be treated as real-estate loans subject to the provisions of the law relating to real-estate loans of national banks. To meet industrial needs national banks are making such loans today, but are forced to make them on an unsecured basis. While the bank may expect repayment of such loans through liquidation of inventory or receivables, or through the operations and earnings expected to be derived from the additional facilities so financed, nevertheless , they should not be denied the benefit of the additional collateral which could be provided by mortgage on the company's plant real estate taken as precaution against contingencies . Recommendation 35 ( 3 ) .— This is implemented by section 36f at page 31 of the bill where it is provided that national banks may make loans to finance construction of buildings upon the security of purchase contracts entered into under the Public Buildings Purchase Contract Act of 1954 and the Post Office Department Property Act of 1954 without regard to the limitations in regard to real-estate loans. With the foregoing changes made in the real-estate loan section of the National Bank Act, such will represent a vast improvement over present law. 502 STUDY OF BANKING LAWS Recommendation 45B-Increase in debt limit of a national bank This and recommendation 22 have been implemented at page 31 of the bill by section 37 which revises title 12, United States Code, section 82 to increase the debt limit of a national bank from 100 percent of its capital to 100 percent of capital and surplus and renders the section inapplicable to capital funds obtained through the issuance of capital notes or debentures outstanding under section 21 set forth on page 10 of the bill. The advisory committee believes that these are constructive changes in the law. Recommendation 9-Branches retained after merger, etc. At page 32 of the bill section 39 (b ) implements this recommendation as to which the advisory committee in its report stated at page 3 thus : "This recommendation would permit a national bank continuing on merger or consolidation with another bank under a resultant national bank charter to operate the branches the national bank theretofore lawfully operated without obtaining new approval from the Comptroller. The committee understands the proposition to be one of merely eliminating unnecessary paperwork in such cases as compared with broadening the power of national banks to have and operate branches. On the basis of such understanding being correct, this recommendation is approved." It seems to us that the implementing language goes no further than our understanding. Recommendations 11 and 115C —School savings programs At pages 34 and 149 of the bill section 39 (f ) of the National Bank Act and section 2 (m ) of the Federal Deposit Insurance Act define "branches" so as not to include school-savings programs. The advisory committee approved of these changes and is glad to note that such programs are confined to schools "located in the trade area of the bank and within the State in which the bank is situated." Recommendation 450-Loans and investment on bank buildings Heretofore both National and State member banks have been limited to 100 percent of their capital as regards the amount they may have invested in bank premises or in an affiliate holding the bank premises. At pages 35 and 94 of the bill section 43 and section 23 ( j ) change the maximum to 100 percent of capital or 50 percent of combined capital and surplus whichever is greater. The purpose of the change is to give relief to the bank which has a large surplus and a small capital. In giving this relief, however, the bank which has made its future projections based on a larger capital and a lesser surplus should not be prejudiced . Thus the advisory committee favors these provisions. Recommendation 36--Deposits in corporations not supervised by any State banking authority Here the advisory committee approved a recommendation which the Comptroller made in regard to amending 12 United States Code section 378 so as to require that a corporation receiving deposits shall be subject to examination under the banking laws. This recommendation has been implemented at page 36 by section 44 ( a ) ( 2 ) ( A ) wherein new language appears. It appears to us that the new language of the bill does not go as far as the Comptroller suggested that the change go. If the Comptroller believes that the new language is adequate, we would suggest no change in the committee print. Recommendation 45F-National banks writing insurance At page 37 of the bill section 45 implements this recommendation which is that 12 United States Code section 92 be revised so as to permit national banks located in towns of 5,000 or more to write insurance if State banks in such towns are permitted to do so by State law. Section 45 includes paragraph ( b ) which is new and was not the subject of a specific recommendation ; and paragraph ( c ) includes a grandfather clause. Both of these additions were considered and are within the area of the recommendation. The purpose of these changes is to place national banks on a parity with State banks in these particulars. Recommendation 5- Restrict State authorities from subjecting national banks to licensing, etc. At page 41 of the bill section 51 implements this recommendation to the end that whatever doubt has existed as to the right of a national bank to exercise STUDY OF BANKING LAWS 503 its corporate powers without State or local interference is resolved. The advisory committee favors the inclusion of this new provision in the statutes. Recommendation 28-Reports to comptroller At page 42 of the bill section 52 ( c ) implements the recommendation, in principle, of our committee. Our recommendation, based on that of the comptroller's, was to change from 5 to 10 days the time within which national banks must transmit required call reports to the Comptroller, as provided for in S. 2996 introduced by Senator Robertson in the 84th Congress. Recommendation 58-Reports from member banks At pages 42 and 92 of the bill will be found language which implements this recommendation of the Board of Governors which was disapproved by the committee as to the authority of the Board of Governors to prescribe different forms of reports of condition, earnings, and dividends ; and to require such reports on a sample basis. In addition , the bill follows the recommendations of the advisory committee with respect to publication of earnings, expenses, and dividends, namely, that the Board should not be so authorized and accordingly the bill does not give the Board this requested authority. If the Board of Governors wishes to propose a reasonable classification of banks according to size and to recommend that the group of smaller banks shall not be required to furnish more than two reports in any year, the advisory committee would concur in that recommendation provided that a reasonable limitation is placed on the number and kinds of reports which the group of larger banks may be required to furnish in each year. This applies with equal force to section 52 of title 2 of the committee print which gives similar authority to the Comptroller of the Currency. If adopted, the same reports should be authorized and required by the Federal Deposit Insurance Corporation. In short, I think that the advisory committee is opposed to these provisions as now written at pages 42 and 92. I find the implementing language confusing. In short, I would say that the present authority be continued, or the bill be written with appropriate safeguard to the smaller banks as to a reasonable limitation on the number and kinds of reports which the larger banks may be required to furnish each year. Recommendation 33-Appointment of conservators ; recommendation 106—Liability of FDIC for insured deposits By recommendation 33 the Comptroller urged that the Bank Conservation Act be amended to authorize him to appoint a conservator for a national bank which has sustained substantial losses resulting from defalcations. The advisory committee approved and the recommendation has been implemented by section 64 (j) at page 64 of the bill. We note that section 64 (d ) at page 61 of the bill does not read the same as does section 205 of the Bank Conservation Act but understand that the reason therefor is the fact that the Federal Deposit Insurance Act has been changed to read as it does at page 168 of the bill where section 30 ( c) implements recommendation 106, which was approved by the advisory committee. We believe that there still remains the problem of depositors whose deposits exceeds the insured amount and suggests that payments to them on their noninsured balances should be ratably as provided for other corporations. Thus the language of section 63 ( d ) should receive further consideration. I will now mention some of the more important changes in the Federal Reserve Act. Recommendation 54-Payment of Reserve bank earnings to the Treasury In keeping with this recommendation of the Board of Governors which was approved by the advisory committee, the bill at page 73 in section 7 of the Federal Reserve title provides that each Federal Reserve bank shall annually pay 90 percent of its net earnings to the Treasury as a franchise tax. This is the simplest method of clarifying the situation and its effect is to restore the situation as it existed prior to 1933 and the creation of FDIC in that it channels 90 percent of the net earnings into the Treasury. Recommendation 51-Federal Reserve bank directors residents of district At page 86 of the bill, section 17 ( a ) implements both the recommendation of the Board of Governors and that of the advisory committee. This section of the bill provides that every Federal Reserve bank director shall be a resident of the district of the Federal Reserve bank on whose board he is serving, or shall reside within a 50-mile radius of such bank. Our committee preferred the pertinent qualifications for appointment to, and continuation on, the board of directors of 504 STUDY OF BANKING LAWS a Federal Reserve bank, be based on the principa] place of business of the person appointed, and not the place of residence. Nevertheless, the "within 50 mile radius" qualification satisfies our committee's recommendation and the requirements for some metropolitan districts. Recommendation 81- Loans to executive officers At page 99 of the bill, section 28 ( e ) implements the recommendation which was made in regard to the matter of member banks making loans to their executive officers. The committee print adopts the recommendation made by the Board of Governors and that of the advisory committee except in one particular. The advisory committee felt that the statute itself should define "executive officer" rather than leaving this to the Board to cover by regulation. In order to advise you of our position and with your permission I quote briefly from page 22 of the advisory committee report, viz : "(b) The statute itself should define executive officers and as including only (i ) the principal executive officers, ( ii ) the officers who are heads or acting heads of departments, divisions, or branches, and ( iii ) any officer who, under the operating procedures or rules of the particular bank, has individual authority to make loans in excess of $5,000. "The Board of Governors, in regulation O has defined an executive officer to mean ' every officer of a member bank who participates in or has authority to participate in the operating management of the bank or any branch thereof otherwise than in the capacity of a director of the bank, regardless of whether he has an official title or whether his title contains a designation of assistant and regardless of whether he is serving without salary or other compensation' (sec. 1 (b ) , regulation O ) . "Obviously this definition includes substantially every officer of a bank and many nonofficers whether or not such persons have any authority or function whatever in reference to the making of loans. The committee feels that the statute should contain the definition which it has suggested." Recommendation 66- Simple majority for Board actions The Board of Governors recommended that the act be amended to provide that Board action might be taken upon the affirmative vote of a majority of a quorum of members. The advisory committee disapproved of this and recommended that the statute provide that the Board should act in all matters upon the affirmative vote of not less than a majority of the members of the Board in office at the particular time. The committee print bill follows this recommendation to the extent of placing in the law at the various places where particular votes are specified a new provision that the vote shall be by the affirmative vote of a majority of the members of the Board in office . ( See, for example, p. 114, sec. 39 (b) , p. 115, sec. 39 ( 1 ) . ) We believe that section 38 ( d) at page 112 of the bill should be amended to include a sentence providing that any action which the Board is authorized to take shall be taken by the affirmative vote of a majority of the members of the Board in office at the time. We suggest this particular place in the bill as it appears to us to be the logical place and it is the place at which the Board suggested that its recommendation be inserted, i. e., section 38 ( d ) is 12 United States Code, section 244. Recommendation 85A-Audit of Federal Reserve Board ; Recommendation 85B— Audit of Federal Reserve banks At page 113, section 38 ( h ) implements recommendation 85A where it provides that accounts of the Board of Governors shall be audited at least once a year by certified public accountants. Further, at page 116, section 39 ( m ) provides that the Board shall have the adequacy of the procedures which it follows in examining the Federal Reserve banks reviewed by certified public accountants . These new provisions are based upon recommendations which the Board of Governors made and of which the advisory committee approves. They represent constructive legislation in the public interest. Recommendation 83-Powers of foreign branches of national banks This recommendation of the Board of Governors in which the advisory committee concurred was that the powers of foreign branches of national banks should be enlarged upon as set out in S. 3922 of Senator Robertson in the 84th Congress. At page 125 of the bill section 45 ( f) implements this recommendation, we are happy to see. STUDY OF BANKING LAWS 505 Recommendation 85F-Repeal of section 13B of the Federal Reserve Act The advisory committee recommended that section 13B of the Federal Reserve Act be repealed on the grounds that it has been little used and that the power is not compatible with central banking functions. We are pleased to see that this recommendation of the advisory committee has been adopted. I now pass to title III of the bill which relates to the Federal Deposit Insurance Corporation. Recommendation 115H-Change in organization of Federal Deposit Insurance Corporation At pages 148, 151 , 152 and 153, will be found language implementing recommendation 115H of the committee. These provisions vest the management of the Corporation in a single executive and administrator to be appointed by the President by and with the advice and consent of the Senate, and would create an Advisory Board of the Federal Deposit Insurance Corporation consisting of the Comptroller of the Currency, Chairman of the Board of Governors of the Federal Reserve System or his designee, and one person to be selected by the President who is a State official exercising functions relating to the supervision of State banks. We believe that this provision is highly desirable to promote greater efficiency and better management. The single executive would achieve better administration and such an Advisory Board would provide a means of assuring to the Administrator the benefits now derived from the presence of the Comptroller of the Currency, and add the benefits of Federal Reserve Board and State supervisory participation, all so necessary in a situation so complex as that presented by our present banking structure. Recommendation 91 -Insurance of interest on deposits At page 149 of the bill section 2 ( k ) includes as an insured deposit "interest accrued to the date of the closing of the bank." This language implements recommendation 91 which was approved by the advisory committee and is a constructive change in the law. Recommendation 92 - Transferred deposit At page 149 of the bill section 2 ( 1 ) restores to the law the express assurance that a transferred deposit means a demand deposit in a new bank or other insured bank. It properly implements the Federal Deposit Insurance Corporation recommendation which was approved by the advisory committee. It should be noted that a comparable change is made at page 223 of the bill pursuant to recommendation 166K of our committee. Recommendation 97-Assessment credit This recommendation in the form in which it was approved by the advisory committee has been implemented in section 18 at page 159 of the bill. Recommendation 97 ( e ) which was disapproved is not included in the bill. As section 18 is written it appears to reflect properly the thinking of our committee. Later I will comment on the failure of the bill at this point to implement recommendation 115G of the advisory committee. Recommendations 42, 85 and 114-Regulation of mergers Each of the supervisory agencies recommended that section 18 (c ) of the Federal Deposit Insurance Act ( 12 U. S. C. sec. 1828c ) be amended as it was sought to be amended by S. 3911 of the 84th Congress and the advisory committee approved. At page 162 of the bill section 23 implements these recommendations in the language of S. 3911 which was passed by the Senate. The committee feels that this is constructive legislation and urges that it be retained in the bill. Recommendation 99--Procedure for termination of insured status At page 165 of the bill section 29 implements the Federal Deposit Insurance Corporation's recommendation in this regard as it was approved by the advisory committee. In addition , however, section 29 provides that the hearing on termination shall be held in accordance with the provisions of the Administrative Procedure Act and that review by the courts shall be upon the weight of the evidence . This was added as it has been included in the statutes relating to the termination of insurance of accounts of Federal savings and loan associations. ( See, for example, sec. 408 at p. 225 of the bill. ) These provisions should in fairness be available to banks. 506 STUDY OF BANKING LAWS At page 168 of the bill section 30 ( c ) implements recommendation 106 to which reference has been made heretofore. Recommendation 109 is implemented at page 171 of the bill by section 31 ( e) which reads as was suggested at page 28 of the advisory committee report. Recommendation 113 is implemented at page 177 of the bill where section 38 ( a) changes the fiscal year of the Corporation to the calendar year and thereby makes it conform to the Corporation's system of accounting. Recommendation 112- Civil service retirement The advisory committee interposed no objection to this recommendation of Federal Deposit Insurance Corporation provided that the cost was charged to the capital account of Federal Deposit Insurance Corporation and not to "net assessment income." We are pleased to see that section 39 of the bill as it appears at page 179 specifically so provides. Recommendation 115B—Authority to prescribe by regulation employments that may involve conflict of interest The Federal Deposit Insurance Corporation recommended that it be authorized to make regulations governing the employment of its employees by insured banks in situations involving a possible conflict of interest. The advisory committee approved this recommendation, noting, however, that the Comptroller of the Currency through the years apparently has had no difficulty with this problem even though he has not had the benefit of a statute on the point. At page 180 of the bill section 40 ( d ) implements this recommendation providing that it shall not be lawful for any employee or former employee of Federal Deposit Insurance Corporation to accept employment in any insured bank except pursuant to regulations prescribed by the Federal Deposit Insurance Corporation. The section further provides penalties upon conviction of any violation of the section. At page 3 of the bill will be found section 8 ( b ) which is a comparable provision relating to employees or former employees of the office of the Comptroller. Also at page 113, section 38 ( i ) contains a comparable provision with respect to employees or former employees of the Board of Governors or of any Federal Reserve bank. Likewise at page 200 section 19 (b) makes the same provision with respect to employees or former employees of the Federal home-loan bank and at page 240 section 21 ( i ) makes the same provision for any employees or former employees of the Bureau of Federal Credit Unions. We assume that these comparable provisions have been inserted as they have in order to achieve uniformity. We do not feel that any exception can be taken to this. We note, however, that at pages 248-249 of the bill, 18 United States Code section 217 is amended by adding thereto a provision which to me seems to be in direct conflict with the sections of the bill which I have referred to. As the advisory committee has not considered this new material, I am not in position to state its views. Speaking personally, however, I am constrained to think that the provisions at pages 248-249 of the bill are much too broad and should be removed from the bill. For the information of the committee, during the past few weeks I have had my attention directed to page 248 of the bill perhaps more than to any other of its provisions. Recommendation 115F-Absorption of exchange as indirect payment of interest The Board of Governors of the Federal Reserve System by their recommendation 77 suggested that the words "directly or indirectly by any device whatsoever" be removed from section 19 of the Federal Reserve Act and that it be made clear that the term "interest" should include only cash payments made or credits given by a bank for the account or benefit of a depositor and further that appropriate amendments be made to make certain that the same limitations as to the payment of interest should apply both to member and nonmember insured banks either by an explicit statement in the law as to both types of banks as to whether absorption of exchange charges shall be deemed a payment of interest or by a provision authorizing either the Board of Governors or the FDIC to define the term "interest" for both classes of banks . The FDIC made no specific recommendation on this subject but in the testimony given by its representatives in November it was stated that there is unfairness when one bank can absorb and another cannot depending upon whether or not it is a member of the Federal Reserve System. (See record, pp. 292–293 . ) The advisory committee at page 30 et seq. of its report suggested that the Federal Deposit Insurance Act be amedned to read the same as the Federal Reserve Act with respect to the payment of interest on demand deposits. The reasons for this recommendation were that our committee thinks that the present STUDY OF BANKING LAWS 1 507 lack of uniformity on this subject is deplorable ; that uniformity should be achieved as we believe the Congress originally intended ; that the direct or indirect payment of interest on demand deposits should be unlawful both as to nonmember insured banks as well as member banks ; that the ruling as to the absorption of exchange constituting a prohibited payment of interest should be the rule. Since the date of the advisory committee's report legal questions have arisen as to whether or not the implementation of our committee's recommendation will, as a matter of law, produce the result which our committee intended to achieve. In the light of this fact and for the reasons stated at length in the advisory committee report, I feel that this issue should be met squarely, to the end that absorption of exchange shall be outlawed and shall be outlawed for all insured banks alike, whether or not they are members of the Federal Reserve System. Thus, I urge that the committee print bill be amended as follows : At page 163 of the bill strike out the first sentence of section 26 and substitute the following : "No insured bank, whether or not it is a member of the Federal Reserve System, shall, directly or indirectly, by any device whatsoever, pay any interest on any deposit payable on demand except as now or hereafter may be permitted by law or regulation of the Board of Governors of the Federal Reserve System in the case of a member bank of the Federal Reserve System." The result of this suggested change would clearly be that all insured banks, nonmembers as well as members, would be controlled by the regulations of the Board of Governors issued pursuant to section 41 at pages 117-118 of the bill. The Board consistently since September 1943 has ruled that absorption of exchange is an unlawful payment of interest. (See 1943 Federal Reserve Bulletin, page 817. ) In addition to the foregoing amendment, another might be made at page 118 of the bill. On that page the period at the end of section 41 ( a ) might be changed to a comma and the following added : "And provided further, That within the meaning of the provisions of this section the absorption of exchange shall be deemed to be a payment of interest." I urge that even though this last amendment is not made, that section 26 on page 163 be changed to read as I have suggested. If the only way to achieve uniformity is by the Congress forcing one agency to agree with another, then such action certainly should be taken here in order to eliminate the terrible inequity which has existed far too long. I now want to mention a few of the important changes as relate to the Federal Home Loan Bank Act and Federal saving and loan associations. Recommendations 118 through 140 , except recommendation 121 , have all been incorporated in the revision of the Federal Home Loan Bank Act as it appears from pages 181 through 202 of the bill. All of these are recommendations of the Federal Home Loan Bank Board which the advisory committee deemed to have merit and thus approved them. We have assumed that that Board will check the implementing language more closely than have I. At page 203 of the bill, section 501 of the Home Owners Loan Act is amended to provide for a Federal Savings and Loan Association Act. While this was not the subject of a particular recommendation , I am pleased to see that this has occurred. I note that recommendation 144 as made by the advisory committee at page 40 of its report has been implemented at page 207 of the bill by section 5 ( d ) ( 3 ) which is modeled after 12 Unted States Code, section 77, as it is revised at page 15 of the bill as relates to national banks and at page 101 as it relates to State member banks. This is in keeping with the thoughts of the advisory committee. Recommendation 166C-Branches of Federal savings and loan associations At page 211 of the bill, section 6 pertains to branches of Federal savings and loan associations and as we understand the situation it follows the language of H. R. 972 as passed by the Senate in the 84th Congress. Recommendations 166F, 166G, 166H I will comment on these in my oral testimony. Recommendation 158 ( 1 ) Regulation of insured institutions At page 221 of the bill, section 404 ( e ) implements this recommendation by providing that except with prior approval of FSLIC no insured savings and loan association shall be a party to a merger or consolidation or purchase assets or 84444-57-pt. 2——— 5 508 STUDY OF BANKING LAWS accounts from other associations. This is something comparable to section 23 of the Federal Deposit Insurance Act as it appears at page 162 of the bill. Our committee feels that these provisions are in the public interest. Recommendation 166A-Holding companies At page 227 of the bill, section 409 implements the recommendation which our committee made in regard to having holding company legislation relating to savings and loan associations. It is our understanding that the language employed is that which was used in the bill which Representative Spence, of Kentucky, introduced on this subject in the 84th Congress. While our committee did not consider this language, it strongly endorses the principle. Title VII of the bill recasts the Federal Credit Union Act beginning at page 229 of the bill. All of the recommendations which were made as to Federal credit unions which were approved by the advisory committee have been implemented by the bill. We believe that as a result the practices and procedures of these worthy organizations will be vastly improved. I note particularly that recommendation 190 in regard to audits is implemented by section 7 (b) at page 231 of the bill. This provides that credit unions with assets of $50,000 or more shall have an annunal audit by outside auditors approved by the Director of Federal Credit Unions and that unions with assets of less than $50,000 shall be audited annually by the Bureau of Credit Unions. At page 235 of the bill, section 15 increases the size of unsecured loans which may be made from $400 to $500 and also provides that the Director may impose by regulation maximum loan limits for all credit unions or for any one or more classes provided the same is within the statutory limits. This last provision will provide a greatly needed safety factor in the operations of credit unions. At page 241 of the bill section 25 of the Credit Union Act implements recommendation 173 of the advisory committee and amends section 21 of the old act so that a credit union "the membership of which is composed exclusively of persons who are either presently Federal employees or are retired Federal employees and members of their families" shall be eligible applicants for the allotment of space in Federal buildings. In title VIII of the bill, which starts at page 242, various recommendations are implemented. I note, for example, that at page 251 , section 803 ( f) amends 18 United States Code, section 709, in conformity with S. 2891 of the 84th Congress as was suggested by the Comptroller in his recommendation 43 which was approved by our committee. I now desire to speak briefly concerning the recommendations which were made by the advisory committee which have not been implemented in the committee print bill. Recommendation 52 - Service on Reserve Bank Board or Federal Advisory Council At pages 74 and 85 of the bill will be found provisions which relate to the subject of this recommendation . Section 7 ( a ) at page 85 provides, among other things, that Federal Reserve bank directors, other than the chairman , shall be prohibited from serving more than 2 full consecutive terms of 3 years, each without an intervening period of not less than 3 years, and section 8 ( a ) at page 74 provides that members of the Federal Advisory Council shall be prohibited from serving more than 6 consecutive terms of 1 year each without an intervening period of at least 3 years. It is the committee's opinion that advantages of preserving and promoting the autonomy of the Federal Reserve banks outweigh the possible benefits from rotation , that the present system has been beneficial and should be retained. Our report notes Professor Chandler's dissent on this recommendation. Recommendation 79. -Reserves against deposit of public moneys At page 120 of the bill will be found language which implements this recommendation of the Board of Governors , the first part of which our committee approved and the second part disapproved . The second part, as provided for in section 42 ( f ) at page 120 of the bill provides that member banks shall maintain the same reserves against public funds as against other deposits. Our committee does not recommend standby authority with respect to waiving reserves against public deposits in case of an emergency-authority can be readily provided in such case-but it based its recommendation primarily on the principle of giving the Board of Governors the broadest authority possible for the discharge of its monetary and credit control responsibilities. STUDY OF BANKING LAWS 509 Recommendation 115G- Increase in assessment credit ; Recommendation 166K— With reference to the Federal Savings and Loan Insurance Corporation Recommendation 115G of the committee was that a study be undertaken promptly and expeditiously to determine a reasoned formula for computing the proper premium cost to the insured banks for the risk involved, in the light of the present size of the FDIC deposit insurance fund supplemented by annual increases from income and assessments ; and that, meanwhile, the Congress amend section 7 (d ) of the Federal Deposit Insurance Act so as to provide that 1 year from the date of enactment of the act the annual net assessment income shall be credited pro rata to the insured banks. Committee recommendation 166K was intended to treat the Federal Savings and Loan Insurance Corporation on a comparable basis, and accordingly the committee recommended that a similar change be made as regards FSLIC insurance, subject to the following : "Further accumulations by FSLIC should be suspended pending the outcome of the study if the relationship which FSLIC's fund bears to its insurance liability is at least equal to that of FDIC." These two important recommendations are not included in the bill ; yet, as I am sure that this committee will want to consider them, I bring them to your attention. To place the problem in the proper perspective it is first necessary to establish a common, proper concept of the purpose of the FDIC and the FSLIC. Our committee concluded that the only possible purpose these insurance corporations could serve was to insure depositors against losses resulting from the day-to-day institutional failures occasioned by mismanagement, inadequate capital , local disaster, defalcation, and similar institutional casualties. It is also quite apparent that it is completely unrealistic to believe that these corporations could possibly insure depositors and account holders against losses occurring on a major scale incident to economic or other disaster, any more than the private insurance industry could insure losses incident to an all-out atomic war. No insurance company, private or public, could provide any real protection against universal economic disaster, and it would be immoral to mislead the public that it could. If this is a proper concept of the purpose of these insurance corporations, then the FDIC deposit insurance fund seems to be adequate at this time. Such fund now exceeds $1.7 billion , which is equal to 1.41 percent of insured deposits . In the 22 years that the FDIC has been in existence it has disbursed for workingcapital purposes in the aggregate less than $200 million in connection with receivership and deposit-assumption cases. More particularly, of this amount actual losses during the entire period amounted to only $19 million and estimated possible future losses on cases that are still active amount to only $9 million. Thus, total actual or contingent losses of $28 million during the entire period are substantially less than the $39 million of income from investments accruing to the fund in the year 1955 alone. Furthermore, the fund was increased by more than $56 million in the year 1955 as a result of assessments. While this record seems to be impressive, it is by no means conclusive because of the lack of comprehensive and acturial information. It is a bare, startling fact that, inconceivable as it may seem, no study has been made which would provide an actuarial basis for determining the underwriting liabilities of the FDIC and the FSLIC. At least, our committee could find none, nor was any made available to it. It is essential that such a study be made. Our committee feels that such a study is feasible and this bill to amend and revise the statutes governing financial institutions and credit would be lacking if it did not provide for such a study. Our recommendation would, in effect, force the proper agencies to make such a study and give them 1 year in which to do it. Results of such a study would clearly point out the problems and give the Congress the kind of information it needs to provide insurance protection to the Nation's savers without misleading them and without creating too heavy a burden on the Nation's banks and savings institutions. We recommend that the present assessment rate continue during the period of this study, but that if the study is not completed by the end of the time provided for, and a more scientific assessment rate is not established, then further accumulations should be dispensed with until such scientific assessment rate is established. Probably the most important aspect of the committee's recommendation with respect to these two insurance corporations is that the study would afford a 510 STUDY OF BANKING LAWS monetary and financial commission, should it be established, a place to start in reviewing the overall insured deposits program. I am sure I speak for every member of our committee in strongly urging the Senate Banking and Currency Committee to consider these recommendations favorably. Recommendation 166D- Prohibited practice The advisory committee recommended making it unlawful for any institution organized under the laws of either the United States or a State which is not authorized to engage in the business of receiving deposits to represent or hold itself out in any manner that it is a bank. The committee print bill does not implement this recommendation because, as we understand it, within the time available it was impossible to work out proper implementing language. It would appear that the relevant language might be placed in the committee print bill as a further amendment to title 12, United States Code, section 378 at page 36 of the bill. I intend to suggest implementing language. Recommendation 195- Monetary and Financial Institutions Commission This recommendation was perhaps the most important one made by our committee. It was that the 85th Congress enact without delay legislation providing for the establishment of a commission for the purpose of making an objective study and appraisal of the use of monetary controls to stabilize the Nation's economy and the impact of such controls upon the American system of free enterprise, and of the adequacy and responsibility of all financial institutions as custodians of the Nation's savings, to provide, individually and collectively under existing laws, the State and National financial needs for the continuing growth of our dynamic economy, giving appropriate consideration to deposit and savings insurance programs, the essentiality of Government lending and investing, and the tax burden on debtors, creditors, and equity owners. May I say at the outset that this is not a matter that should necessarily be brought before Congress by incorporating it in the bill to amend and revise statutes governing financial institutions and credit. Accordingly, we considered that it was appropriate to omit this particular recommendation from the bill. As a matter of fact, it is preferable to have it incorporated in a separate bill in order to expedite the consideration of the recommendation . The urgent need for such a study can hardly be questioned, both from the standpoint of the great many years since we have had one and also because of the tremendous changes in our economy during the intervening period. The last such study was made by the National Monetary Commission in 1908 and it lead to the formation of the Federal Reserve System in 1913. The major economic and social changes which have occurred since 1908 have substantially altered the functions, types, and relationship of financial institutions to public need and the economy. Notwithstanding the new demands occasioned by these changes, all we have had is piecemeal legislation to meet the day-to-day needs of the economy. We are indeed pleased to see the introduction of S. 599 to establish a National Monetary and Financial Commission, and we strongly urge the study and consideration of this bill. We favor, however, an amendment to the bill broadening the composition of the Commission to include adequate representation of the Congress as we originally recommended. The legislative branch should be represented by not less than 4 and not more than 6 members of the Banking and Currency Committees of the House of Representatives and the Senate, consisting of the chairmen and the ranking members. Basically our committee felt the scope of such a Commission's functions should be stated in the broadest terms in order to avoid disputes in the initial stages over controversial issues and the Commission after an exploratory period would be in a better position to define its areas of study. Nevertheless, section 3 of S. 599 seems to be conclusive and adequate, but if I properly interpret the views of the members of our committee, I would have to take strong exception to section 3 ( f ) ( 3 ) . Certainly our committee would want no legislation that in the remotest way would prejudice the independence of the Federal Reserve System. This particular section might possibly be interpreted as a mandate by Congress for the Commission to question the System's independence of structure and power. Personally I believe that section 3 ( f ) ( 3 ) adds very little and that it might possibly be misinterpreted . Thus I feel that it should be deleted from S. 599. In conclusion, our committee recommendation 195 squarely supports the principle of S. 599 and we urge its speedy enactment. STUDY OF BANKING LAWS 511 Next I will briefly discuss matters included in the committee print bill which were not specifically covered by the report of the Advisory Committee. See for example, the last sentence of section 35 ( a ) at page 27 of the bill. There it is provided in the section dealing with interest which may be charged by a national bank, that the purchase of evidence of indebtedness from the owner shall not be deemed to be a loan or discount except to the extent that "they" may be construed as loans or discounts under the laws of the State in which the bank is located . I am informed that the purpose of this provision is to legislate away the holding of the old case of National Bank v. Johnson (104 U. S. 271 ) . This has not been considered by the Advisory Committee. Speaking solely for myself, I believe that this is a fair provision for national banks if my understanding of its purpose is correct. For example, in my home State the Supreme Court of Missouri has held that where paper is purchased from the payee or other holder at a discount, usury is not present whatever amount the purchaser pays, as it is a purchase not a loan even though the holder endorses with recourse. (See Webster v. Sterling Finance, 195 S. W. 2d 509, 1. c. 514, Mo. Sup. 1946. ) In any event, I suggest that the language be changed as suggested in the amendment which I will submit. In recommendation 44 the Comptroller suggested the need for a statute providing that reports of examinations of national banks, etc., shall be deemed confidential and privileged against disclosure to unauthorized persons except with the consent of the Comptroller. Recommendation 115E of the FDIC was comparable. Both were approved by our committee. Section 50 at page 41 of the bill implements the former and section 10 at page 153 of the bill the latter. I believe that a comparable provision should be inserted relating to the Federal Reserve Board. I mention these sections at this point because each adds a provided however clause to the effect that the privileged documents shall be made available to the committees of the Congress upon request. The Advisory Committee report at page 30 states that our committee by its approval did not intend to take a position for or against disclosure by the executive branch to the legislative branch. At page 183 of the bill, section 4 ( d ) of title IV makes it unlawful for any uninsured member of the Federal Home Loan Bank to advertise or represent that it is connected with the Home Loan Bank System except as may be authorized by regulation. While the advisory committee made no formal recommendation as to this, it was discussed informally and I feel certain that I properly sense the feeling of our committee when I express approval of its having been inserted in the committee print bill. In my discussion of recommendation 115b I alluded briefly to the criminal provisions which appear at pages 248 and 249 of the bill. As I have stated, these are new provisions which were not considered by the advisory committee, thus my remarks represent only my personal views. It seems to me that these provisions at pages 248 and 249 as they relate to employees of the supervisory agencies becoming employees of any institution which they may have examined is much too broad and if enacted will produce results of as serious a nature as are the results which the provisions were designed to prevent occurring. One of the big problems of banking today is the matter of obtaining qualified personnel. Without elaborating on the basic proposition, I want to say that the provisions of the bill I am referring to will for all practical purposes cut off one of the best sources of supply of qualified personnel for the banking system-the employees of the supervisory agencies. This of itself is not in the public interest, because for each instance which the provisions are designed to prevent occurring there are dozens of instances of honorable relationships which have arisen between banking institutions and former employees of the supervisory agencies. A great many leaders in banking are products of the examining agencies. There is another harmful aspect which I think merits your consideration. Means should be found and employed to strengthen the quality of bank supervision, not weaken it. I feel that these provisions will inevitably make it more difficult for the agencies themselves to obtain the services of younger qualified personnel and conceivably can result in the rapid decimation of their present complements. I therefore earnestly suggest that your committee find some way of achieving the purpose you have in mind without exposing both the banking system and its supervisors to the hazards I have mentioned. Prior to concluding, I will mention two recommendations which were made by the advisory committee which have not been implemented by the committee print- and properly so-but which our committee hopes that your committee will 512 STUDY OF BANKING LAWS pass along with your favorable recommendation for action by the appropriate committees of the Congress. First, there is the matter of postal savings. Our committee believes that following the recommendations of the Comptroller General and the Hoover Commission, the Postal Savings System should be liquidated in an orderly fashion forthwith. It has outlived its original purpose and private enterprise provides adequate facilities for the savings of our people. Second, all banks, State-chartered as well as National, should by law be permitted to establish adequate and realistic bad-debt reserves under statutory formula. Reserves permitted by present Treasury regulations are inadequate on the basis of past experience and penalize prudent management. This inadequacy is even more pronounced if the banking system is to meet the huge and increasing demands for credit in a dynamic economy and protect the depositors. Our present economy requires the extension of many types of credit never before provided primarily by the banking system. As a result, the banking system must provide enormous amounts of consumer, mortgage, capital, and term credit, which types carry risks not present in banking in the historical sense. Accordingly, a new concept of the adequacy of reserves for losses for eligible loans outstanding in the banking system must be forthcoming. Consideration of the risks and the inadequacy of capital in the banking system forcibly demonstrates that any reserve less than 5 percent of eligible loans outstanding is wholly inadequate and unrealistic. The banking system should therefore be permitted to accumulate reserves in excess of this amount. Thus, the advisory committee recommends that commercial banks be permitted under the Internal Revenue Code to add to reserves for bad debts in any taxable year up to a percentage of not less than one-half of 1 percent and not more than 1 percent of eligible loans, provided that no addition under the formula to such reserves in any taxable year shall cause the aggregate thereof to exceed a percentage of not less than 5 percent and not more than 10 percent of the eligible loans. In conclusion the advisory committee again thanks you for this opportunity to be of service and trusts that its work has been of assistance to you. SCHEDULE 1 ATTACHED TO STATEMENT OF KENTON R. CRAVENS Here follows list of recommendations (by their numbers ) which were approved by the report of the advisory committee and which are implemented in the committee print of bill cited as "Financial Institutions Act of 1957," which recom- 513 STUDY OF BANKING LAWS mendations are referred to in part I of testimony given by Kenton R. Cravens on January 28, 1957, viz : [Column A denotes number of recommendation; column B denotes page of bill where found] A A 239 3. 4. 8. 12. 14.. 18. 19. 20. 22 27 30 31. 32 38. 39 46. 47. 48 49 50 53. 57. 59 61. 62 63. 64. 65. 68 70. 71. 73. 74. 75 76. 78 80 82 84. B 18, 19 43 et seq. 5,6 243 243 243 13 31 69 54 55 56 247 246 70 88 102 70, 85 88 89 134 111 111 146 71 111 80 84 145 120 117 99 123 101 85C. 85D. 85E 86 . 87 88 89 90. 91 92. 93 96. 98 100. 101 102. 104. 105. 106. 107. 108 109 110. 111. 115D. 117. 118. 119. 120. 122. 123 124. 125 126. 127 128. 129. 130. 131. 132. B A 84 148 148 148 148 148 148 149 149 157 160 150 150 154 152 150 168 170 171 171 169 174 169 181 182 182 183 184 186 189 190 192 192 193 193 195 195 196 133. 134. 135. 136. 137 138. 139 140 142 143. 146. 148. 150. 151. 152. 153 154. 155. 156. 157. 158. 159. 160. 161. 162. 164. 165. 166. 166B. 166H. 1661. 166J 167 169. 170 . 174. 175. 180. 181. B 196 197 197 199 200 200 202 202 203 203 209 214 214 215 215 216 216 216 218 218 221 221 222 222 223 250 250 251 215 213 247 250 233 234 234 251 229 236 242 Senator ROBERTSON. For the benefit of the press and also of the witnesses, the Chair wishes to announce the program for this week. Tomorrow we will hear the American Bankers Association and we will have some very fine representatives, including the president of that association, Mr. Erle Cocke, of Atlanta, Ga.; Mr. Lee P. Miller, of Louisville, Ky.; Mr. Gibbs Lyons, of Stamford, Conn.; Mr. D. Emmert Brumbaugh, of Claysburg, Pa.; and Mr. Paul A. Warner, of Oberlin, Ohio. On Wednesday, January 30, we will hear from Mr. Ben DuBois, Sauk Centre, Minn., representing the Independent Bankers Associa tion ; from Mr. William A. Lyon, New York, N. Y., representing the National Association of Mutual Savings Banks ; and from Mr. J. A. Baker, Washington , D. C. , representing the National Farmers Union. On Thursday, January 31 , we will hear from Mr. Sam M. Fleming, Nashville, Tenn., representing the Association of Reserve City Bankers; from Mr. Charles R. Howell , Trenton, N. J. , representing the National Association of State Bank Supervisors ; and from Mr. Henry A. Bubb, of Topeka, Kans., as we previously indicated, representing the United States Savings & Loan League. 514 STUDY OF BANKING LAWS On Friday, February 1 , we will hear from Mr. James W. Grant and David R. Weinberg, representing the Credit Union National Association ; from Mr. Henry H. Heimann , New York, N. Y. , representing the National Association of Credit Men ; from Mr. Donald E. Durick, Fort Wayne, Ind., representing the American Industrial Bankers Association ; and from Mr. A. D. Shackelford, Wilson, N. C. We also have witnesses scheduled for the 2 following weeks, but they will be announced later. I have a number of letters sent in to the committee, and without objection they will be made a part of the record. (The letters referred to are as follows :) THE FIRST NATIONAL BANK, LaJara, Colo . , January 11, 1957. Hon. GORDON ALLOTT, United States Senate Chambers, Washington, D. C. DEAR SENATOR ALLOTT : At present a national bank is permitted to borrow on its note obligation from a correspondent bank the amount of its capital stock without consideration given to its surplus and reserves and undivided profits. In our particular case, as you can see from the December 31 , 1956, statement attached, this would mean only $50,000, or about one-seventh of the total shareholder investment of $351,500. The current bulletin of A. S. Pratt & Sons, Inc. , 815 15th Street, Washington, D. C., with the slogan " Serving bankers since 1867" states under proposed law revisions under recommendation of the advisory committee : "Increase in debt limit of a national bank.-The committee proposes that the present limitation be increased to 100 percent of capital and surplus." The new banking code under consideration by the Colorado Legislature endorsed by the Colorado Bankers Association provides that Colorado banks operating under State charter shall be limited to "two times its capital and surplus" and, further, "or in such larger amount as the banking board approves." Under these circumstances, may I not kindly ask you to give this measure full support and to lend your influence with such Senate committee as may have it in charge? Thanking you kindly and with personal wishes, I am Very truly yours, O. A. GARRIS, President. THE FIRST NATIONAL BANK OF COLORADO SPRINGS, Colorado Springs, Colo. , January 16, 1957. HON. JOHN CARROLL, SENATOR, Senate Office Building, Washington, D. C. DEAR SENATOR : This bank is greatly disturbed at the consequences should certain provisions of a bill to amend the statutes governing financial institutions and credit be enacted. The particular provision objected to concerns prohibitions and penalties levied in connection with bank examiners accepting employment in banks. The various bank supervisory agencies have for years been a training ground for bankers . Many of the heads of leading banks of the country have been bank examiners. As such an examiner, I can visualize the consequences of the rash legislation contained in the proposed amendments to section 803 ( a ) section 217 of title 18, United States Code, now before the Congress. The first effect of enactment of this legislation will be mass resignation of examiner personnel and a later effect will be an inability to enlist examiner personnel in the future. I trust your action in connection with this proposed legislation will be toward its rejection. Sincerely, J. F. ANGELL, Vice President. STUDY OF BANKING LAWS 515 THE FIRST NATIONAL BANK OF COLORADO SPRINGS, Colorado Springs, Colo. , January 17, 1957. HON. JOHN CARROLL, Senate Office Building, Washington, D. C. DEAR SENATOR : We call your attention to the bill to amend and revise the statutes governing financial institutions and credit. Under amendments to the Criminal Code we believe this new bill as written will be a strong deterrent to enlisting qualified men to serve as bank examiners and others entering the Government financial field. Where one's freedom of motion of employment is restricted , such as this bill does, we believe it immediately sets up a barrier of employment. You are aware of the general difficulty that now exists in the recruitment and development of qualified bank examiners by the Treasury Department, and this bill we feel will definitely further handicap their progress. Thanking you for your consideration in this matter, and with my very kindest regards. Sincerely, H. CHASE STONE, President. THE EXCHANGE NATIONAL BANK OF COLORADO SPRINGS, COLO., Colorado Springs, Colo., January 17, 1957. Senator JOHN CARROLL , Senate Office Building, Washington, D. C. DEAR SENATOR CARROLL : It is my understanding that you now have, or will soon have, before you a bill to amend section 803 (a ) section 217 of title 18 of the United States Code governing financial institutions and credit. I would like to express my very firm opinion that present legislation on this matter has appeared to be quite adequate, with few violations. The amendment if passed, I am inclined to believe, would discourage good men from entering the Federal services named in the amendment and could easily be the means of present good, able, and conscientious servants terminating their employment in those divisions. One point specifically is that part making it unlawful to "employ or make an offer of employment to any officer or employee of the Comptroller of the Currency, etc. within a period of 2 years." Many good men go from the Federal services into banks. Many men go into the Federal service as a foundation for experience to qualify them for banking. If such a person cannot talk about a position within 2 years after he leaves the service, it might well be that he would not enter the Federal service for that very reason. I believe it is true that the Comptroller's office is having a hard time getting and keeping outstanding young men. The proposed amendment could very well aggravate that situation. Most sincerely, JASPER ACKERMAN , President. THE FULLERTON NATIONAL BANK, Fullerton, Nebr., January 21, 1957. SENATE BANKING AND CURRENCY COMMITTEE, Washington, D. C. SIR : The text of the committee print bill has been reviewed by the writer and as a whole I believe the committee is to be commended for their sound views and proposals. There are some proposals, however, in which I do not concur and I am presenting my views and comments for your consideration : TITLE 1 , NATIONAL BANK ACT Section 22 (b ) My objections to this proposed section are : 1. Further intrusion upon the rights of proprietorship, with increasing bureaucratic power and control of private enterprise. 2. The legislation is admittedly for the control of a very nominal number of banks and could easily unduly penalize the smaller banking institutions who have built up a large capital account. Present legislation covering removal of officers because of "unsafe and unsound practices" would seem to be adequate to provide control of the cases which were presented at the hearings. 3. In my opinion, this legislation would tend to discourage the retention of profits in the capital account and would be conducive to the reduction of earnings by excessive salaries, fees, etc.—at the expense of the shareholders. 516 STUDY OF BANKING LAWS 4. In States where branch banking is permitted it would further enhance their expansion potential, as individuals would not be interested in the purchase of banking institutions with large capital accounts, if both the seller and the purchaser were prevented from making capital adjustments. 5. This section would, in my opinion, further lessen the attractiveness of investing in bank capital stock, when other industries would probably be more attractive and their operations under less governmental control. 6. It is my opinion that under the provisions of this section it would be more desirable to operate under a nonmember State charter and result in a decrease in national banks. 7. It would seem that this section would also create unfair competition of operations under a national charter as compared to that of a nonmember State bank, particularly with respect to stock ownership. It was brought out in the hearings that banking institutions have paid dividends in excess of earnings for the current year and that such were paid from undivided profits. It is difficult to understand where there is anything wrong in making such payments from profits which have been accumulated during periods of more prosperity. Such savings of profits are often for use in less prosperous times. It seems to me that in biblical times surpluses were saved in lush periods for relief in times of famine. Section 52 Do not concur in the requirement that the Comptroller of the Currency may require the publication of the report of payment of dividends. Some banks publicize such information but in smaller communities such a report might not be understood and have unfavorable public reaction. TITLE III, FEDERAL DEPOSIT INSURANCE ACT Section 301- chapter 3, section 6 In my opinion, the provisions of this section would invest too much power in one individual and tend to make the office dictatorial. Certainly the views of 3 men should be better than that of 1 individual ; also, the proposed Advisory Board would not be invested with any power. This recommendation does not seem consistent with the Federal Deposit Insurance Corporation's policies with respect to banks. They have been very critical of the one-man dominated banking institutions, and yet they recommend such powers over the majority of the banks in the United States. It would seem therefore that if a one-man operation is not good for banks it would be increasingly detrimental to the formulation of policies and operations, and supervision, of an agency as large and influential as the Federal Deposit Insurance Corporation ; also, other governmental agencies in the financial field are governed by a Board . The Federal Reserve bank is governed by a Board and the advisory committee, to your committee, rejected recommendation 66 with respect to simple majority for all Board actions. It is my further opinion that the minority party should be represented in the formulation of policies , operations, and supervisory authority, of a corporation which directly or indirectly affects almost every individual in this United States. It is my belief that the number of directors should be increased from 3 to 5 members, instead of investing such great power in 1 individual. Section 29 It is my opinion that the portion of this section which recites : "such shorter periods of time as the Comptroller of the Currency or State authority, or Board of Governors of the Federal Reserve System" is entirely out of line with justice. This again puts too much power in one individual or Board and could easily create an injustice. It is my belief that any accused should have ample time to prepare and present a defense under this proposed law, or any other law, and I do not see where such a time is provided - unless I have wrongly interpreted this part of the section. It is my opinion that a fair period of time would be 60 days. The text of the committee print bill was presented to our entire Board of Directors and they were in full concurrence with the views and comments as expressed above. Respectfully submitted. C. H. HOSLFB, President. STUDY OF BANKING LAWS 517 THE INDIAN RIVER CITRUS BANK, Vero Beach, Fla., January 21, 1957. Hon. GEORGE SMATHERS , United States Senator, Washington, D. C. DEAR SENATOR : I enclose for your information excerpts from the Robertson bill to revise the Federal banking laws. Particularly I want to call to your attention the changes as they relate to the employment of examiners by banks. With all due respect to the person or persons who are responsible for this bill, I believe that the changes would be very detrimental to the banking system. Again, I repeat, I am referring only to the section regarding the employment of examiners. I speak from experience when I make these comments as I was associated very pleasantly with the Federal Deposit Insurance Corporation as an assistant examiner and later as an examiner for a period of about 10 years. I do not believe that the position would have been nearly as attractive to me if I had known I would have to be governed by the drastic measures contained in this proposed Robertson bill. I believe I am correct when I say that the Federal supervisory agencies recognize that they run a training school for future bankers. I further believe I am correct when I say that they are very happy to conduct such a program for they feel that the returns come back to them by way of better management and fewer problem banks. Unfortunately the newspapers played up the banking case in Illinois and I believe there were times when they were ill-advised as to the actual facts in the case. Please give every consideration to having the employment feature of the bill struck out for certainly it can do nothing but create a very difficult situation for supervisory agencies for the hiring of new personnel. Yours very truly, L. S. TILLER, Executive Vice President. A BILL TO AMEND AND REVISE THE STATUTES GOVERNING FINANCIAL INSTITUTIONS AND CREDIT ( Excerpts ) AMENDMENTS TO CRIMINAL CODE SEC. 803. (a ) Section 217 of title 18 of the United States Code is amended to read as follows : "SEC. 217. Whoever, being an officer, director or employee of a bank which is a member of the Federal Reserve System or the deposits of which are insured by the Federal Deposit Insurance Corporation , or of any land bank, national farm loan association or other institution subject to examination by a farm credit examiner, or of any savings and loan, building and loan, or homestead association, cooperative bank or other institution the accounts of which are insured by the Federal Savings and Loan Insurance Corporation, or of a Federal credit union, or being a stockholder of such a bank, corporation, association or institution holding directly or indirectly 10 per centum or more of the stock thereof" (i) gives or grants any gratuity or gift to any examiner or assistant examiner who examines or has authority to examine such bank, corporation, association, or institution, or to any other officer or employee of any Federal or State agency having supervisory authority over such bank, corporation, association, or institution , or "(ii ) makes or grants any loan to, or employs or makes an offer of employment to, any examiner or assistant examiner or to any other officer or employee of any Federal or State agency having supervisory authority over such bank, corporation, association, or institution who is examining or is employed or performing duties in connection with such bank, corporation, association or institution or who in the two years preceding the making or granting of the loan or the employment or offer of employment examined or was employed or performed duties in connection with such bank, corporation, association or institution , or "(iii ) in a case not falling under ( ii ) above makes or grants any loan to or employs or makes an offer of employment to, any officer or employee 518 STUDY OF BANKING LAWS of the Comptroller of the Currency, of the Board of Governors of the Federal Reserve Bank, of the Federal Deposit Insurance Corporation, of the Farm Credit Administration, or of the Federal Home Loan Bank Board or of the Bureau of Federal Credit Unions, unless the written approval of the governing body ( in the case of an agency having a board of directors or comparable body ) or the principal official ( in the case of an agency having a single administrator ) of the agency in which the officer or employee is appointed or employed has first been obtained, shall be fined not more than $5,000 or imprisoned not more than one year, or both, and may be fined a further sum equal to the money so loaned or gratuity given or granted. "The provisions of this section shall apply to all public examiners and assistant examiners who examine, and other officers and employees of public agencies which supervise, member banks of the Federal Reserve System or insured banks, or from land banks or national farm loan associations , or insured savings and loan associations, whether appointed by the Comptroller of the Currency, by the Board of Governors of the Federal Reserve System, by a Federal Reserve agent, by a Federal Reserve bank, by the Federal Home Loan Bank Board , by the Farm Credit Administration, or by the Federal Savings and Loan Insurance Corporation, or by the Bureau of Federal Credit Unions, or appointed or elected under the laws of any State ; but shall not apply to private examiners or assistant examiners employed only by a clearinghouse association or by the directors of a bank." (b) Section 218 of title 18 of the United States Code is amended to read as follows : "SEC. 218. Whoever, being a member, officer, or employee of the Board of Governors of the Federal Reserve System, of the Comptroller of the Currency, of the Federal Deposit Insurance Corporation, of the Federal Home Loan Bank Board, or of the Farm Credit Administration, or the Bureau of Federal Credit Unions" (i) accepts any gratuity or gift from any bank, corporation, association, or other institution over which the agency employing such member, officer, or employee has supervising authority, or from any officer, director, or employee, or stockholder holding directly or indirectly 10 per centum or more of the stock of such institution, or "(ii ) applies for or receives a loan, or accepts or agrees to accept an offer of employment, from any bank, corporation, association, or other institution which he is examining or in connection with which he is employed or is performing duties, or in the two years preceding the application or acceptance of the loan or the acceptance or agreement to accept the offer of employment has examined or has been employed or performed duties, or from any officer, director, or employee, or stockholder holding directly or indirectly 10 per centum or more of the stock of such institution, or " (iii ) in a case not falling under ( ii ) above, applies for or receives a loan, or accepts or agrees to accept an offer of employment, from any bank, corporation, association, or other institution which the agency employing him has authority to supervise, or from any officer, director, or employee, or stockholder holding directly or indirectly 10 per centum or more of the stock of such institution, without first having obtained the written approval of the governing body ( in the case of an agency having a board of directors or comparable body) or the principal officer (in the case of an agency having a single administrator ) of the agency in which he is appointed or employed, shall be fined not more than $5,000 or imprisoned not more than one year, or both ; and may be fined a further sum equal to the money so loaned or gratuity given. " THE FIRST NATIONAL BANK OF STEVENS POINT, WIS., January 24, 1957. Hon. ALEXANDER WILEY, The United States Senate, Washington, D. C. MY DEAR SENATOR : The unnumbered Senate bill introduced by Senator Robertson, entitled "Financial Institutions Act of 1957," which is set for a hearing before the Banking and Currency Committee on January 28, 1957, has several features that would be detrimental to banking and to the supervisory authorities. I specifically refer to the amendment to section 217 of title 18 and section 218 of title 18 of the United States Code, wherein any officer of a financial institu- STUDY OF BANKING LAWS 519 tion would be subject to a fine or imprisonment if he granted a loan to any examiner or any officer of a supervisory agency or offered employment to any examiner, officer, or employee of a Federal or State supervisory agency. And any examiner, officer, or employee of a Federal or State supervisory agency would be subject to a fine and imprisonment if he accepted a loan from a financial institution or accepted an offer of employment from any financial institution in the 2 years preceding the approval or acceptance of the loan or offer of employment. The most objectionable part of the amendment pertains to the offer of employment to an examiner, officer, or employee of an agency. Supervisory authorities are continually seeking young men to enter the service of an agency with the hope that they will make it their career. However, most men enter the service in order to gain the experience and banking background necessary to obtain a position in the banking field . Banks are continually looking for men with such backgrounds, and if this amendment were passed it is my opinion that it would be extremely difficult to obtain men to go into service as any examiner seeking a position in a bank would have to resign from the service and wait 2 years before accepting employment. I know that the salaries paid to men in the service are not sufficient to keep them or their families for 2 years while waiting to obtain employment. There are a number of bank executives in our State at the present time who were former examiners and who would not hold their present position had it not been for their experience and background as an examiner. I speak from experience as I was an examiner with the Federal Deposit Insurance Corporation for 14 years prior to my return to the banking business. I sincerely hope you will use every effort to defeat this portion of the act. With best regards, I am, Sincerely yours, JOSEPH R. HARTZ , President. THE FIRST NATIONAL BANK, Pueblo, Colo., January 24, 1957. Hon. GORDON ALLOTT, United States Senate, Washington, D. C. DEAR SIR : It has come to my attention that there is now a bill before Congress to amend certain sections of the United States Code. I specifically refer to section 803 to amend sections 217 and 218 of title 18, United States Code, in reference primarily to examiners and assistant examiners of the various Federal agencies supervising lending institutions. As a former examiner for the Federal Deposit Insurance Corporation , I would like to go on record in opposition to the proposed amendments, as I believe that the amendments would be to the ultimate disadvantage of the Federal supervisory authorities, as well as to the lending institutions covered by the amendments. As you know, sections 217 and 218, Title 18, United States Code, are rather comprehensive and limiting in their present form and as such it would appear to me that they are adequate. The proposed amendments concerning an offer of employment to an examiner or assistant examiner being classed as a criminal violation appear to be without constructive foundation and with several serious detriments. It is presently difficult for the supervisory authorities to attract capable men to serve as examiners and assistant examiners. If the new amendments are passed into law it would, in my opinion, be much more difficult to attract competent men into this field . It might also result in the resignation of many capable examiners and assistant examiners in that the passage of the amendments would be interpreted by the men to mean that for practical purposes they are tied to their present jobs without the opportunity as freemen to make employment changes when they could, in their opinion, better themselves. As a former examiner, it is difficult to understand what possible benefit is expected to accrue by forbidding a lending institution under criminal penalty to consider the employment of experienced examiners or assistant examiners who supposedly have been conservatively trained in lending activities by the United States Government. Instead of forcibly retaining examiners and assistant examiners in the Government services, I fear such action may have the opposite effect. In the past the various Federal agencies supervising lending institutions have taken the position that the valuable experience gained while a member of the 520 STUDY OF BANKING LAWS examining force would be beneficial to lending institutions as a whole should some of their members decide to leave the force and become employed by a bank or other lending institution . In short, although the agencies prefer not to lose trained men, they feel that the banking profession as a whole will ultimately benefit making the job of the examining agency less difficult in the long run. Your cooperation and careful consideration of the possible results of such legislation before action is taken will be greatly appreciated by the undersigned. With kindest personal regards. Very truly yours , D. W. CALDWELL, Vice President. Senator ROBERTSON. The committee will now stand in recess until 10 a. m. tomorrow morning. (Whereupon, at 12:15 p. m. , the committee recessed until 10 a. m. the following day, Tuesday, January 29, 1957. ) STUDY OF BANKING LAWS (Financial Institutions Act of 1957) TUESDAY , JANUARY 29, 1957 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, SUBCOMMITTEE ON BANKING, Washington, D. C. The subcommittee met, pursuant to recess, in room 301 , Senate Office Building, at 10:05 a. m., Senator A. Willis Robertson (chairman of the subcommittee ) presiding. Present : Senators Robertson, Frear, Clark, Bricker, and Bennett. Senator ROBERTSON. The subcommittee will be in order. The chairman of this subcommittee did not appreciate what a big organization the American Bankers Association was until a few years ago, when it was his privilege to speak at one of their annual meetings in Atlantic City. He was on the morning program and a Cabinet officer was ahead of him, and 2 or 3 other experts ahead of him, so they did not reach him on the program until nearly noon. Before he started speaking there seemed to be a great exodus from the hall, and he remarked to the man next to him, "My goodness, everybody is leaving." He said , "Oh, no. There will be some 4,000 left to hear you." I said, "In Virginia that is considered a very satisfactory audience." We are pleased to have with us this morning the representatives of such a fine group of bankers. They extend from Maine to Florida and from Virginia to California. I am particularly glad to see heading the group a friend from Atlanta, Ga., an outstanding banker and civic leader, one of the real leaders of the South, who was at your Los Angeles convention this year elected president of this great organization. That is Mr. Erle Cocke. He informs me, however, that he would like one of our Kentucky neighbors to start the testimony. Mr. COCKE. That is right, sir. Senator ROBERTSON. We feel very kindly toward Kentucky, because after all, the county I live in, Rockbridge County, was cut from Augusta County. Before that Augusta County ran to the Mississippi River and Kentucky was a part of it. We are proud of Kentucky and glad to have Mr. Miller as our first witness. We will be glad to hear from you. 521 522 STUDY OF BANKING LAWS STATEMENT OF ERLE COCKE, PRESIDENT ; ACCOMPANIED BY LEE P. MILLER, CHAIRMAN OF THE COMMITTEE ON FEDERAL LEGISLATION ; GIBBS LYONS, PAST PRESIDENT OF THE NATIONAL BANK DIVISION ; FRANK L. KING ; D. EMMERT BRUMBAUGH, CHAIRMAN OF THE COMMITTEE ON FEDERAL DEPOSIT INSURANCE ; AND PAUL A. WARNER, CHAIRMAN OF THE COMMITTEE ON FEDERAL LEGISLATION OF THE SAVINGS AND MORTGAGE DIVISION, AMERICAN BANKERS ASSOCIATION Mr. MILLER. Good morning, Mr. Chairman. My name is Lee P. Miller. I am president of the Citizens Fidelity Bank & Trust Co. , of Louisville, Ky. I appear here today as chairman of the committee on Federal legislation of the American Bankers Association . I should like to say at the outset that the American Bankers Association recognizes the monumental task undertaken by Senator Robertson and the members of your committee in the preparation of this Financial Institutions Act of 1957- we would like to call it the Robertson Act, if you do not mind--and desire to compliment the committee on its accomplishment. We have four witnesses whom I should like to introduce, each of whom will present in brief form our association's position on different provisions of the bill. I shall also introduce the president of the American Bankers Association , who will make a short closing statement. Before introducing the witnesses, Iwould like to call the attention of the committee to a recommendation which we submitted previously relative to bank bad-debt reserves. Although recognizing that our recommendation covers a subject which could not appropriately be included in the bill before you, we believe that it is germane to consideration of any legislative program involving the banking system of this country. Provision for adequate bank reserves out of current earnings to meet future loan losses contributes to the safety of depositors' funds and the availability of credit so necessary to provide employment and business activity in periods of economic recession . For these reasons all banks should be encouraged to establish and maintain such reserves. We believe our proposal will accomplish this objective. We propose that the Internal Revenue Code be amended to adopt an industrywide basis for reserves for bad debts of banks under which an annual addition to reserves of a percentage of total eligible loans would be permitted as a current deduction from income each year until the accumulated reserve reaches a limit also calculated as a percentage of total loans outstanding. The maximum amount so allowed should be adequate to absorb the losses that past experience demonstrates may be sustained in a period of economic recession . The proposal should not result in any ultimate loss of tax revenue as it amounts to a deferment of tax since all bad debt losses on loans must be charged to the reserve. We hope that this committee may give consideration to the merits of our proposal and will refer it with favorable recommendations to the House Committee on Ways and Means and the Senate Committee on Finance. Senator ROBERTSON. Let me interrupt to say that I have requested Chairman Fulbright, as I mentioned yesterday, to bring it before STUDY OF BANKING LAWS 523 our committee. I am sure we will endorse it and submit our recommendation to the tax committees of the Congress. Mr. MILLER. Thank you. Senator ROBERTSON. It would be in line for the American Bankers Association to submit its recommendations both to the tax committees of the Congress and to the Secretary of the Treasury. Mr. COCKE. Thank you, sir. Mr. MILLER. We hope we may be able to do that. However, one phase of the matter I should like to call attention to is the American Bankers Association made this survey of all the banks of the country to determine how many were using this bad debt reserve. We found that about 50 percent of the banks in the country were not on a reserve basis, and that that 50 percent happened to be primarily the smaller banks, as, in effect, 90 percent of the total banking resources are in the hands of the banks that are on the reserve method. The method up to this point has been a 20-year moving average, and later in 1954 it was amended, so that you could freeze the 20 years to get your experience on any consecutive 20-year period, beginning in 1928. The smaller banks on this survey took the position that the method was so complex that they just did not care to worry with it and had no records of what their losses were, and so on and so forth. So we think it would be a very helpful thing, particularly for the smaller banks of the country, which did most of the closing back in the thirties, to get them on a reserve method, as well as the larger banks. It is with that objective in mind that we have proposed this indusstrywide basis on a simple percentage per annum would be permitted to be deducted as a reserve for bad debts. The result of that survey I thought might be interesting to you to hear about, Senator. Mr. Chairman, I should like now to introduce our witnesses : Mr. Gibbs Lyons, who will testify regarding the National Bank Act ; Mr. Frank L. King, whose testimony will relate to the Federal Reserve Act ; Mr. D. Emmert Brumbaugh, who will testify concerning the Federal Deposit Insurance Act ; Mr. Paul A. Warner, who will deal with provisions relating to the Federal Home Loan Bank System ; and Mr. Erle Cocke, president of the American Bankers Association, who will present a general statement at the conclusion of our testimony. Our first witness, Mr. Gibbs Lyons, of Connecticut. Senator ROBERTSON. The committee will be glad to hear all of these witnesses, but the chairman must call your attention to the fact that the Senate meets today at 12 o'clock and we will have to recess today at that time. Therefore the witnesses will bear that in mind in giving their testimony. I would assume we can finish your testimony, though, in that time. Mr. MILLER. We will be well within that time limit , sir. Senator ROBERTSON. You may proceed. Mr. LYONS. Mr. Chairman and members of the Senate Banking and Currency Committee, my name is Gibbs Lyons. I am president of the First- Stamford National Bank & Trust Co. of Stamford, Conn., and immediate past president of the national bank division of the American Bankers Association. 84444-57-pt. 2- -6 524 STUDY OF BANKING LAWS The American Bankers Association believes that title I of the Robertson bill amending and reenacting the National Bank Act is an excellent and much needed legislative proposal. In my statement I shall discuss those changes in the law contained in the National Bank Act which are of particular interest to our association. Most of these changes are desirable and are supported by the American Bankers Association. I shall explain our reasons for belief that a few are inadvisable and also suggest some addtional amendments which we consider to be desirable. SECTION 8. CONFLICTS OF INTEREST PROHIBITED ( P. 3 ) We are in agreement with the purpose of section 8 of the bill which prohibits conflicts of interest. We think it is desirable for the Comptroller of the Currency to have regulatory authority to disapprove the employment of his office personnel by banks under his supervision. However, we suggest that the regulatory authority to supervise former employees should be limited to a period of not more than 2 years after termination of employment with the Comptroller's Office. Senator ROBERTSON. I may interrupt to say that on yesterday I indicated I felt that the provision in the tentative bill was too harsh and I would recommend to the subcommittee when we draft the official bill that we soften that up and revise it. We will be glad to hear your views. Mr. LYONS. Thank you. This regulatory authority over the employment by banks of persons in the Office of the Comptroller of Currency and comparable authority in section 38 (i ) of the Federal Reserve Act, section 40 ( d ) of the Federal Deposit Insurance Act, section 19 (b) of the Federal Home Loan Bank Act, and section 21 of the Federal Credit Union Act, afford the needed protection against possible abuses arising out of the employment of supervisory employees by the supervised financial institutions. SECTION 803 OF TITLE VIII ( P. 247 ) It is our view, therefore, that the additional provisions relating to the employment of supervisory personnel in section 803 of title VIII amending sections 217 and 218 of the Criminal Code are unnecessary. We urge that all such provisions in those sections be eliminated in the best interests of the public, of the banks and other financial institutions, and of the supervisory agencies. In view of your statement as to your recommendation, I will not read the rest of that section, but I would like to add a paragraph to my written testimony, and I shall leave a copy of it with the reporter. Senator ROBERTSON. All that you have here in your written statement will, without objection, appear in the official record. Mr. LYONS. Thank you, sir. I will read it. In connection with section 803 , the American Bankers Association also believes that the prohibition against loans is too restrictive. The present proposed language of sections 217 and 218 of the Criminal Code would seem to prevent any employees of one of the supervisory agencies from obtaining a loan from a federally supervised or insured financial institution, at least without obtaining the written approval of the agency in which he is employed. We recommend that the pro- STUDY OF BANKING LAWS 525 hibition against loans be limited to a financial institution which the office of the employee has the primary responsibility for examining. Senator FREAR. That would then permit the auditors or agents of the State banks to borrow from a member bank? Mr. LYONS. Generally speaking, I would say that the agency that would seem most restricted is the Federal Deposit Insurance Corporation. Under our suggestion a Federal Deposit Insurance Corporation examiner would be permitted to borrow from a national bank, because the Federal Deposit Insurance Corporation has not the primary responsibility for the examination of national banks. Senator FREAR. Yes. That normally is a member bank, is it not, with one exception ? Mr. LYONS . Yes. Mr. KING. With one exception. Mr. LYONS. Excuse me. SECTIONS 20 AND 21. PREFERRED STOCK . CAPITAL NOTES AND DEBENTURES (PP. 9 AND 10 ) The American Bankers Association approves the authority to issue preferred stocks on a nonemergency basis with the approval of the Comptroller of the Currency contained in section 20 and also the authority on the same basis to issue capital notes and debentures incorporated in section 21. National banks should have greater flexibility in meeting their capital requirements. At certain times it may be preferable to obtain capital by other means than by increasing common stock. These sections would permit capital expansion by means of preferred stock or capital notes and debentures if warranted . SECTION 22 ( B ) . EXCESSIVE DIVIDENDS ( P. 11 ) The Comptroller has reported that under the present law there is a risk that a self- serving bank ownership could deplete a bank of an unduly large part of its capital funds by an excessive dividend or dividends. The American Bankers Association agrees that this is a danger which should be guarded against, but in a manner which does not interfere with or complicate the declaration of normal and usual dividends. We believe that the protection of capital funds is assured by this section. It would require the Comptroller's approval before directors of national banks may declare and pay to stockholders cash dividends which exceed the current year's net profits plus the retained net profits of the 2 preceding years. We, therefore, recommend favorable action on section 22 (b) SECTION 23. SHAREHOLDERS ' LIST ( P. 12 ) The American Bankers Association favors the elimination from the present law of the right of creditors to inspect the list of shareholders of a national bank as provided in section 23 (a ) of the Robertson bill. The abandonment of the principle of double liability and the fact that individual shareholders are no longer personally liable for obligations in the event of a bank failure make this provision unnecessary. 526 STUDY OF BANKING LAWS Our association recommends one modification of this section to provide that the list of shareholders of a bank may be inspected by shareholders only for a proper purpose not inimical to the interests of the bank. The absolute right of inspection is both unnecessary and a source of abuse. In some instances individual stockholders have obtained and used the shareholders' list to promote private business interests not related to the bank. Section 23 (b ) adds a new provision requiring a report to the Comptroller of any purchase or sale of 10 percent or more of outstanding shares. Although we are not clear whether this provision will be effective in accomplishing the purpose intended, we have no objection in principle. We do suggest, however, that the report be made within 10 days rather than immediately and that it be limited to purchases and sales of voting stock recorded on the books of the bank, so that the reporting obligation will be manageable. We recommend that the same changes be made in the comparable provisions of section 23 (i ) of the Federal Reserve Act ( p . 95 ) and section 27 of the Federal Deposit Insurance Act (p . 164 ) . Mr. ROGERS. May I ask a question ? Mr. LYONS . Yes. Mr. ROGERS. Mr. Lyons, on your recommendation to report within 10 days, when would the 10 days start running ? Mr. LYONS . From the recorded transfer on the books of the bank. Mr. ROGERS . Thank you. Mr. LYONS. Section 26 ( c) on the question of cumulative voting of shareholders : ELECTION OF DIRECTORS ( P. 13 ) The American Bankers Association supports this section which would permit cumulative voting of shares of stock for the election of directors of national banking associations when authorized in the articles of association of the bank. In view of the favorable action by the Senate on S. 256, I shall not read the rest of the detail on that subject. Senator ROBERTSON. I may point out that the Senate bill received a large majority of the votes when it was voted on, but it was brought up under the suspension of the rules, so it required a two-thirds majority. It just failed of getting the two-thirds majority, or else that would now be the law. Mr. LYONS. Yes, sir. Senator ROBERTSON. You may proceed. Mr. LYONS. Thank you, sir. SECTION 31. CORPORATE POWERS ( P. 18 ) The American Bankers Association favors the enactment of section 31 (a ) ( 8 ) . This section clarifies the authority of national banks to make contributions. Existing law provides that national banks may make contributions to "charitable, philanthropic, or benevolent instrumentalities. " The Comptroller has ruled that this statute permits contributions to nonprofit educational institutions. Since this result is clearly desirable, but the interpretation is not completely free from doubt, legislative confirmation would be helpful. STUDY OF BANKING LAWS 527 It has been ruled, however, that contributions to chambers of commerce or local industrial development organizations for the purpose of civic improvement are not permitted. We approve the proposal that such contributions should be permitted. National banks as well as State-chartered banks have an interest in the industrial betterment of the communities in which they are located. They should be able, if they so desire, to contribute to programs designed to make the local community more enterprising and prosperous. The American Bankers Association is in favor of section 31 (a) (9), which authorizes a national bank to grant options to purchase, and to issue and sell shares of its common stock to its officers and employees. The requirement for approval of both the Comptroller and two-thirds of the shares of the bank adequately protects the interests of existing shareholders. Stock option and stock purchase plans are designed to attract and retain personnel. They also give employed personnel an added incentive to produce. Banks have had difficulty in competing with industry for managerial personnel. Industry and business have been giving increased attention to stock option and stock purchase plans because of today's highly competitive labor market. In those States where State banks may adopt such plans, there has been considerable interest in stock option and stock purchase plans. National banks without similar authority are at a disadvantage. Mr. ROGERS. May I interrupt there ? Mr. LYONS. Yes, sir. Mr. ROGERS. Mr. Lyons, in reference to the contributions to chambers of commerce or local industrial development organizations, yesterday the advisory committee recommended that the word "nonprofit" be deleted. Mr. LYONS. I noticed that and I see no objection to their recommendation in that regard. The purpose of the contribution is the controlling factor, I should think, whether it is to a nonprofit corporation or one that was organized for profit. Mr. COCKE. There are cases that could be desirable . Senator BENNETT. Could you give me an example of a profitmaking corporation to which you would want to contribute ? Mr. LYONS. At the moment I cannot. Senator BENNETT. I could not think of any yesterday, so I am wondering if we are not straining at a gnat here, because business generally cannot make a contribution to another corporation if it wishes a tax deduction. The fact that the recipient of the contribution is nonprofit is usually the controlling factor. So I have been puzzled about it. If anybody can give me an example, I would appreciate it. Mr. KING. May I give an example of that, Mr. Lyons and gentlemen? We had in Los Angeles a parking corporation , which was organized for badly needed parking in the downtown area. A certain amount was contributed and then the banks, among others, were asked for contributions to support the additional capital required. Banks did contribute to that. That was a profitmaking organization, but the banks felt that in order to get it started it was worth a contribution on the part of the banks. 528 STUDY OF BANKING LAWS Senator BENNETT. Well, just to argue with you for a second, the banks did it because they assumed it would have a specific value to their depositors and thus might improve their business relationships. So it was done on a different basis than the basis on which you would contribute to the community chest, or some community funds. Mr. KING. That is true, but this was done for the benefit of the public, and really not for the customer relationships of that particular corporation. Senator BENNETT. I think you might be opening a door if you permit the banks to contribute to profitmaking corporations. It is hard to know where to draw any line. But I think the matter has been sufficiently discussed, Mr. Chairman. Mr. LYONS. Thank you. SECTION 32. DEALING IN SECURITIES ( P. 20 ) This section contains authority for a national bank, with the approval of the Comptroller, to acquire, for a period of 90 days, stock in another bank as a step in a proposed merger or consolidation . As the Federal Reserve Board has stated in recommendation 60 relating to State member banks, such action is sometimes desirable as one step in the takeover process. The American Bankers Association approves the inclusion of this authority for both national banks and State member banks. SECTION 33. TRUST POWERS ( P. 20 ) We believe that the proposal in section 33 carrying out advisory committee recommendation 34 to transfer from the Federal Reserve Board to the Comptroller of the Currency the power to grant national banks the right to act in fiduciary capacities but leaving with the Board the authority over common trust funds of both National and State member banks, is appropriate. The regulation , supervision , and examination of national banks is the responsibility of the Comptroller of the Currency. This includes supervision and examination of trust departments. Through the performance of his regular responsibilities the Comptroller has available the information needed to decide which national banks should be permitted to operate trust departments. We would like to add that the Federal Reserve Board has performed its function with regard to trust powers in a fine manner and that this change is supported only as a more logical allocation of responsibilities. SECTION 34. MAXIMUM LOAN LIMITATIONS ( P. 25 ) The American Bankers Association favors the changes made in section 34 with respect to the exceptions to applicable loan limitations. Both subsections (b) ( 6 ) ( B ) and (b) ( 7) ( B) would afford additional desirable credit facilities for agricultural purposes . Under present law national banks are permitted to acquire obligations secured by shipping documents or warehouse receipts evidencing title to insured, refrigerated , or frozen readily marketable staples up to 10 percent of capital and surplus. In view of the great improvements made by frozen- food processors in methods of processing, freezing, shipping, and storing such foods, the association favors the pro- STUDY OF BANKING LAWS 529 vision of this section to permit national banks to make loans for this purpose up to 25 percent of capital and surplus. The association also approves section 34 (b ) ( 7 ) ( B ) to permit national banks to make loans up to 25 percent of capital and surplus to dealers in dairy cattle when the obligations arise out of the sale of dairy cattle and bear a full recourse endorsement or unconditional guaranty of the dairy cattle dealer. Subsection 34 ( b ) ( 12 ) provides that installment consumer paper which bears a full recourse endorsement or unconditional guaranty of the endorser may be acquired up to 25 percent of capital and surplus. However, the limitation of 10 percent of capital and surplus as to the maker will be the only limitation if the bank has evaluated and is relying primarily on the responsibility of the maker and a certification to that effect is retained in the records. This is a desirable amendment to clarify the status of consumer installment paper. SECTION 36. REAL-ESTATE LOANS ( P. 28 ) Section 36, title I of the Robertson bill, makes six important improvements to the present Federal law affecting real-estate loans of national banking associations. 1. Under existing law real-estate loans are limited to combined capital and surplus or 60 percent of time and savings deposits, whichever is greater. These limitations are unduly restrictive on the amount of permissible real- estate loans, particularly in some areas of the country where , because of local conditions, time and savings deposits are very low. Therefore, we believe that some additional alternative aggregate limitation is desirable. The additional alternative of 20 percent of demand deposits contained in the bill is helpful, but we think that 20 percent of all deposits would be preferable. We suggest that this alternative be so changed. 2. The revision as to leaseholds permits a national banking association to make a loan where a building is situated on leased property and there is the assurance that the real estate itself is leased for a time which will permit the orderly liquidation of the mortgage indebtedness. Ample time is provided if the lease runs for a period of time 10 years beyond the maturity of the loan. This is a more realistic approach than the time limits contained in existing laws. 3. The authority to make construction loans on industrial or commercial buildings for 18 months where there is a valid and binding agreement entered into by a financially responsible lender to advance the full amount of the bank's loan upon the completion of the buildings will also assist national banks to meet legitimate credit needs arising under modern commercial and business practices. The Federal laws already provide for national banking associations to make construction loans for 9 months on residential and farm buildings. It is equally important that there be some arrangements whereby construction on commercial and industrial properties can be financed until such time as the definitive financing is consummated. Because of the size of the commercial buildings more time is needed and 18 months is considered to be more reasonable. The bank is protected in that upon completion of the building the construction loan will be liquidated by the proceeds of the permanent mortgage. Similar arrangements are permissible under the laws of many of the States and, therefore, this 530 STUDY OF BANKING LAWS amendment would put the national banking associations on a comparable basis with State-chartered banks in such States. 4. This section would also increase the aggregate amount of construction loans which a national banking association can hold from 50 percent of its actually paid -in and unimpaired capital to 100 percent of such capital plus 100 percent of its unimpaired surplus funds. The present limitation has been found to be too restrictive under the existing authorization to make construction loans on residential and farm buildings. This difficulty will be made more serious by the new authority for 18 -month construction loans on industrial and commercial buildings. We recommend that the increase in the limitation provided in this paragraph be approved. 5. We believe it is reasonable to consider loans to industrial and manufacturing business where payment is expected from the operations of the business to be excluded from the limitations on real-estate loans even though a mortgage on the industrial or manufacturing plant is taken as additional security. In such situations the real estate usually has a relatively small intrinsic value apart from the operation of the manufacturing or industrial enterprise. The real estate does not constitute the primary security for the loan. Moreover, many State-chartered banks can take a blanket mortgage on real estate and machinery and equipment in connection with such industrial loans without the loans being subect to the strict limitations on real estate loans . This change will, therefore, tend to make national banks competitive with the State-chartered banks. 6. We also believe it is reasonable to except from the limitations on real- estate loans, loans financing the construction of buildings under the Public Buildings Purchase Act of 1954 and under the Post Office Department Property Act of 1954. We recommend, therefore, that favorable action be taken on all the amendments contained in this section , changing only the alternative aggregate limitation to 20 percent of all deposits. SECTION 37. LIMIT ON BANK'S INDEBTEDNESS ( P. 31 ) This section would increase the aggregate permissible amount of a bank's indebtedness from 100 percent of capital to 100 percent of capital and unimpaired surplus. This is a helpful amendment which the American Bankers Association supports. Experience has demonstrated that the present limitation is too restrictive. For example, it prevents banks in a seasonal period of high-credit demands from obtaining sufficient funds from their correspondent banks to meet temporary local needs. This is often true in farm areas where there is a substantial need for credit to finance the marketing of crops . SECTION 38. HOLDING OF REAL ESTATE ( P. 32 ) We approve section 38. Under present law, if a bank invests in bank premises more than its capital stock, it must have the permission of the Comptroller of the Currency. This places banks with a small amount of capital stock and a large surplus at a disadvantage when compared with banks with a large amount of capital and a small surplus. Under the amendment, if the bank's surplus exceeds its capital, it can invest in bank premises 50 percent of its combined capital and surplus without securing the permission of the Comp- STUDY OF BANKING LAWS 531 troller. This will permit banks freedom to invest in bank premises an amount which is more in keeping with the total capital investment in the bank. SECTION 44. ENGAGING IN THE SECURITIES BUSINESS ( P. 36 ) The American Bankers Association recommends the addition of a new paragraph to section 44 of title I of the draft bill to provide that it shall be unlawful for any institution organized under the laws of the United States to represent that it is a banking institution unless the law under which it is organized expressly authorizes it to engage in the business of receiving deposits or expressly authorizes the use of the word "bank" in its corporate or business name. The purpose and function of banks have been clearly defined in laws and regulations. In recent years careless advertising and other practices by some nonbank institutions have tended to confuse public understanding. While these practices have not attained general usage, their continuance and spread could result in a loss of public confidence in both the banking system and in other financial institutions. I might say at that point we have examined the language of Chairman Cravens and his suggested change in this paragraph (b) , and we recommend the adoption of the language he submitted. SECTION 45. ACTING AS INSURANCE AGENT OR BROKER ( P. 37 ) Section 45 permits national banks to act as an insurance agent or real-estate broker to the same extent as local State banks . At the present time national banks may act as such an agent or broker only in towns of less than 5,000 . In many States the State banks are not so limited and it is reasonable to provide that national banks should have the same powers in those States. The section also permits banks originally acting as agents or brokers in towns of less than 5,000 to continue so to act if the town later exceeds 5,000. We recommend favorable consideration of this section. SECTION 50 , CONFIDENTIALITY OF EXAMINATION REPORTS ( P. 41 ) In order to remove any doubt as to the confidential nature of examination reports and to discourage future attempts at disclosure, the confidential and privileged nature of the reports should be made statutory as provided in section 50 of the National Bank Act and in section 10 of the Federal Deposit Insurance Act. In the interests of uniformity, we believe a similar provision should be in the Federal Reserve Act. The courts generally have recognized that reports of examinations by national bank, Federal Reserve and FDIC examiners are confidential documents privileged against disclosure except with the consent of the Comptroller of the Currency, the Federal Reserve Board or the Federal Deposit Insurance Corporation Board of Directors. This is sound because the information is given to or obtained by the examiner in confidence and its disclosure would often adversely affect the operations of the bank and the interests of its customers. In recent years there has been an increase in the number of instances wherein litigants sought through subpena or other means to compel 532 STUDY OF BANKING LAWS disclosure of these confidential documents. Generally, the litigant has been motivated by a desire to ascertain whether the examiner's report contains criticisms of the management of the bank which might serve the litigant's purpose. This is an obvious violation of the purpose for which examination reports are prepared. SECTION 51. STATE EXAMINATION OR LICENSE PROHIBITED ( P. 41 ) Section 51 carries out a recommendation of the Comptroller of the Currency relating to the exemption of national banks from State licensing and examination in connection with carrying on its authorized banking business. The Comptroller takes the position that this provision is merely declaratory of existing law since he maintains that any attempted State restrictions or limitations on national banks are clearly unconstitutional. Nevertheless, the question is a recurring one which has sometimes required negotiation with State authorities. Senator BRICKER. There was some trouble in Andrew Jackson's time on that question. Mr. LYONS . Yes, sir. The American Bankers Association approves this section of the bill, because the clarification obtained by its enactment should remove any doubts as to the Comptroller's interpretation and minimize the possibility of these difficulties and disagreements from arising in the future. We are pleased to note that the draft bill does not include the Comptroller's Recommendation No. 45. This would have authorized the Comptroller to permit one national bank to acquire another national bank in the same county if it were in precarious financial condition and continue the absorbed bank as a branch, even though State law would not permit the establishment of such a branch. This would have been, in our opinion , a serious breach in the principle of equality between State and national banks with respect to the establishment of branches. In conclusion , let me repeat that title I, the National Bank Act, of the Robertson bill is an excellent bill for which the committee is to be commended. I trust that our suggestions for amendments will not serve to obscure our firm belief in the merits of this legislation. We urge its favorable consideration with the few changes we have suggested. Senator ROBERTSON . We appreciate your endorsement of title I of the bill, subject to the changes that you have suggested. Are there any questions? If not, we will be glad, Mr. Miller, to hear your next witness. Mr. MILLER. Mr. Frank L. King is the next witness, Senator. Senator ROBERTSON. Mr. King is recognized . Mr. KING. My name is Frank L. King. I am president of the California Bank, Los Angeles, Calif. My bank is a State member bank of the Federal Reserve System. I am appearing today on behalf of the American Bankers Association to discuss the provisions of title II of the Robertson committee print bill which contains a recodification of the Federal Reserve Act. We approve generally the provisions of the Federal Reserve Act as set forth in title II of the bill. We believe that it provides a sim- STUDY OF BANKING LAWS 533 plified and more workable statute with changes which give recognition to present-day conditions affecting the Federal Reserve System. We are pleased with the decision of the Banking and Currency Committee not to follow certain recommendations made by the Board of Governors of the Federal Reserve System ; specifically, the recommendations of the Board of Governors to subject dividends on Federal Reserve bank stock issued before the effective date of the Public Debt Act of 1942 to Federal income taxation and to provide authority for the revocation of the exercise of trust powers by national banks. We opposed these recommendations in the supplemental statement submitted to your committee on November 28 , 1956, and we are glad to see that they are not included in the bill. We likewise approve the omission from the recodification of the Federal Reserve Act of the authority now contained in section 13 (b) of the act for the Board to make working capital loans to industrial and commercial enterprises. The repeal of this provision is in accord with recommendation 85F of the advisory committee and was also recommended by the American Bankers Association in its supplemental statement . There are two provisions of the act, however, on which we have specific proposals for changes. These are as follows : First, reports by State member banks and national banks . We believe that section 23 ( b ) of the Federal Reserve Act, on page 92 of the committee print, relative to reports by State member banks , should be clarified to make clear that in requiring the publication of reports, the Board may not require the publication of reports of earnings or dividends, and in requiring the publication of reports of condition, such publication shall be required from all State member banks on the same date. We believe that similar clarifying changes should be made in the National Bank Act, section 52, on page 41 of the committee print, relating to reports by national banks." Earnings and dividend reports should be considered a confidential matter between the supervisory authorities and the individual bank and it should be made certain that the publication of such reports is not authorized. We believe also that a bank could be adversely affected if it were required to publish its report of condition on a date other than that required for the publication of reports by other banks. It would be clearer if the act specifically states that the publication of reports of condition by all banks shall be on the same date, and we so recommend. We feel that the adoption of the sampling technique, under which the Board or the Comptroller, as the case may be, would have the power to prescribe different forms for reports from various groups of State member banks or national banks, according to their size, location, or other reasonable classification, could be effective, and would serve to cut down the work of some banks, particularly the smaller banks. Mr. ROGERS. Could I ask you a few questions on that part, Mr. King ? Mr. KING. Yes. Mr. ROGERS. You see, the law now provides exactly the same as the first three sentences of that section. I wonder if what you are proposing is a change in the present law rather than a change in our proposed bill . 534 STUDY OF BANKING LAWS Mr. KING. Our particular concern is that the earnings and dividends report could be published . We think that that might harm the bank and not be in the interests of the public. We think if a small bank in a town were required to report publicly its condition, and a bank that may be larger, or may be smaller, may not be required to report on the same date, that it might be harmful. Mr. ROGERS. I must reiterate that it is exactly the same. At the present time the Federal Reserve Board requires reports on condition and payment of dividends, and it has authority to publish them. That is exactly what we carried over here. We apply that to national banks also. The language is new as to national banks but as to member banks it is exactly the same. The only new thing we have added , and which you apparently do not question, is the provision for reports on a sample basis. Mr. KING. We think even reports on a sample basis, if they were required to be published for the smaller banks all at one time, and if the larger banks were not to be published on the same date, or vice versa, that we would recommend against that. We do not objectwe think there are advantages in having different kinds of reports and maybe a more simplified report for smaller banks, provided they are not published. Mr. ROGERS . I would appreciate it if you would have your lawyer look over that section. Mr. KING. I will ask him to perform that assignment. Mr. ROGERS. Check it again and give us some language on it. Mr. KING. We will be very glad to do that, Mr. Rogers. Secondly, in connection with Title II : Service on Federal Reserve Bank Boards and Federal Advisory Council, we recommend the elimination of the limitation on the tenure in office of members of the boards of directors of the Federal Reserve banks to 2 consecutive terms of 3 years each, provided in section 17 ( a ) , on page 85 of the committee print, of the Federal Reserve Act, and the elimination of the limitation on the tenure in office of members of the Federal Advisory Council to 6 full consecutive terms of 1 year each, provided in section 8 of the act, on page 74 of the committee print . It is believed that any advantage that might be gained by requiring a degree of rotation in the directorates of the Reserve banks is outweighed by the need for preserving the freedom of choice as to the individuals who should serve as directors and the right to continue in office those who are best qualified . The individual Federal Reserve banks now may place limitations on the tenure in office of their directors. We believe the autonomy of the banks in this respect should be preserved and that the tenure in office of their directors should not be arbitrarily limited by statute. It is likewise deemed desirable that the autonomy of the Federal Reserve banks be preserved in the selection of individuals to serve as members of the Federal Advisory Council . That completes my testimony, Mr. Chairman . Senator ROBERTSON. We thank you, sir. Are there any further questions ? Senator BENNETT. May I ask one question, Mr. Chairman ? Senator ROBERTSON. Certainly, Senator Bennett. Senator BENNETT. Have there been outstanding examples where this privilege of maintaining tenure has been abused ? STUDY OF BANKING LAWS 535 Mr. KING. I think some districts have different customs. I know in the 12th district, in which I reside, that we have a rule which everybody agrees to that the member of the Federal Advisory Counciland I happen to be a member of that at the moment- is limited to 3 years. When I was appointed the first year I was told that, and that is customary there. In the past we have had longer tenure of office in the directorate, and I think that is not strictly observed in the 12th district. I think perhaps in some of the other districts, for instance I believe the seventh district has had a member of the Federal Reserve Advisory Council until recently, who happened to be chairman for many years, Mr. Ned Brown, who served more than the 3 years-a good many more than 3 years. So I think it varies from district to district. Senator BENNETT. I am curious. Do you know why this proposal was included in the bill ? Is there any history which would suggest that it is necessary? Mr. KING. Well , I do not know of any history. I do know that when the Reserve Board submitted their recommendations to this committee, each member of the Federal Advisory Council of 12 unanimously recommended against the matter. The Board did not tell me, and I do not believe they told the Council, why they recommended it. Senator BENNETT. Usually when a recommendation of this kind comes up there may be behind it an example of an abuse of the unlimited privilege, and I am just wondering whether there was any history in this case. Mr. KING. I do not know of any. Senator ROBERTSON. The chairman will say to his distinguished colleague, while we did not go into great detail at the hearings in November, it was naturally assumed when the Federal Reserve Board asked for this change they had a good and sufficient reason for wanting the change to be made. So we put it in the tentative bill. Senator BENNETT. So there must be some history. Senator ROBERTSON. When the Federal Reserve Board testifies, we can ask about the history. Senator BENNETT. Fine. Senator ROBERTSON. Thank you . Who will be your next witness, Mr. Miller ? Mr. MILLER. Mr. Chairman, our next witness is Mr. D. Emmert Brumbaugh. Mr. Brumbaugh. Mr. BRUMBAUGH. My name is D. Emmert Brumbaugh. I am president of the First National Bank, Claysburg, Pa.-a bank with resources of $6 million. For many years I have been directly interested in matters of bank regulation and supervision, particularly as they relate to State banks. I served for 4 years as commissioner of banking of the State of Pennsylvania, and while in that capacity also served as chairman of the Federal legislative committee and president of the National Association of Supervisors of State Banks. I am appearing today as chairman of the committee on Federal deposit insurance of the American Bankers Association to present its testimony on title III of the Robertson bill, dealing with the Federal Deposit Insurance Corporation. Sections 6 and 7 of the bill (pp . 151-152 ) provide for a change in the management of the Corporation from the present board of three directors to a single Administrator, and for the creation of an Advi- 536 STUDY OF BANKING LAWS sory Board composed of the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, and a State officer exercising functions relating to the supervising of State banks. Other sections of the bill also take account of this proposed change. If the statute is amended to vest the management of the Corporation in a single Administrator, we believe that a Board of some nature should be established which would have general authority with respect to policies and operations of the Corporation and to which the Administrator would be accountable. We believe further that consideration might be given to the establishment of a bipartisan Board of five members to be appointed by the President subject to confirmation by the Senate, which Board should be constituted with proper authority over the Corporation's policies and operations. Mr. ROGERS . May I ask a question there ? Mr. BRUMBAUGH . Yes, sir. Mr. ROGERS . The effect of your recommendation would be to expand the present 3-man board to a 5-man board and eliminate the Comptroller of the Currency. Is that it in a nutshell ? Mr. BRUMBAUGH. That was not our thought at all . The thought of the American Banker's Association was that a Board of this type might be a lot more desirable than to have a Board constituted of the three named members before. Of course, we would have no objection to the Comptroller of the Currency being on that Board as far as the American Bankers Association is concerned. Mr. ROGERS . Would you consider having a representative of the Federal Reserve Board on that group ? Mr. BRUMBAUGH. We would have no objection to that. Mr. ROGERS. Should there be a representative of the State supervisory authorities ? Mr. BRUMBAUGH. That is right. We think there should be. This Board should be made up of men of that type, and holding those responsible positions in a bipartisan Board with authority to have some say-so to the management rather than have a manager who would have no one that would have any control over him. Mr. ROGERS . Under the bill as it now stands the Administrator would have complete policymaking authority. Mr. BRUMBAUGH. That is right. Mr. ROGERS. Your thought is to vest in the Administrator just the management functions, and have this Board make the policy for the Administrator. Is that correct ? Mr. BRUMBAUGH. That is correct. Senator FREAR. May I ask a question ? Senator ROBERTSON . Yes, Senator Frear. Senator FREAR. Would this contemplated or suggested five-member Board be a full-time Board ? Mr. BRUMBAUGH . This Board would be a full-time Board. The other Board of three would be subject to call. This is a full -time Board. Mr. ROGERS. In the present bill the Advisory Board is just subject to call. Senator FREAR. The Advisory Board is subject to call . Mr. BRUMBAUGH. That is right. Senator FREAR. But the present Board is certainly full time . STUDY OF BANKING LAWS 537 Mr. BRUMBAUGH. Yes. Senator FREAR. One, the Comptroller of the Currency, is certainly full time, and the other two members are on a salary and work full time and do form the policy of the Federal Deposit Insurance Corporation. They also execute that policy. As I understand it, this Administrator, as far as your recommendations are concerned, as suggested by our counsel, the Administrator will carry out the policies as laid down by this five-man Board ? Mr. BRUMBAUGH. That is correct, as to the three-man Board. Senator FREAR. Thank you . Senator BRICKER. Then you distinguish entirely between the Advisory Board and the Board of Management which you recommend ? Mr. BRUMBAUGH. That is correct. Senator BRICKER. Do you envision that Board of five which you recommend would be constantly in session, giving full time to the affairs of the Insurance Corporation ? Mr. BRUMBAUGH. That is correct. Yes. Senator BRICKER. If that were true then you would not want to exempt the Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve. Mr. BRUMBAUGH. We do not exempt them. We said we have no objection to them being appointed by the President. Senator BRICKER. But they cannot give full time. Mr. BRUMBAUGH. And we have not been thinking of them as members of that Board, but nevertheless we have no objection to them. Senator BRICKER. If they were members of the Board you would not have the kind of Board you envision here in your recommendation. Mr. BRUMBAUGH. That is correct. Senator ROBERTSON. The chairman would like to point out if the Federal Deposit Insurance Corporation as constituted carries out the study recommended by our advisory committee yesterday, and tries to find out what is the basis of the liability they are going to assume and how much it is going to amount to with respect to assessments , the board will have in the first year plenty for all of them to do. Mr. BRUMBAUGH . That is right. Senator ROBERTSON. Are there any other questions ? Mr. BRUMBAUGH . Section 9 (b) , page 153, relates to submission and publication of reports of condition by insured State nonmember banks. We propose an amendment to provide that any publication so required be on the same date for all such banks. This will make it consistent with our recommendations with respect to reports of condition by national and State member banks. Section 10, page 153, provides that Corporation records pertaining to any insured bank may not be disclosed without prior consent of the Corporation . This provision corresponds to section 50 of title I as relates to national banks. As stated in our testimony with respect to the national bank provision, we favor this protection of confidential records. Section 16 (b) , page 157 , provides that any insured bank need not maintain records pertaining to its assessment computation for a period . in excess of 5 years. We favor this provision because we believe that 5 years is a reasonable period for the Corporation to verify the correctness of assessment computations. The insured banks should be free thereafter to dispose 538 STUDY OF BANKING LAWS of detailed records which would serve no other purpose than verification. Section 18, page 159 , sets forth the basis for determination of assessment credits to insured banks. The bill retains the existing provision that 40 percent of the Corporation's "net assessment income" be transferred each year to the deposit insurance fund and that the balance be credited pro rata to the insured banks. We favor an amendment to change from 40 percent to 20 percent the portion of "net assessment income" to be transferred to the fund. This would enable the Corporation, under prevailing conditions, to cover its expenses and losses and make an annual addition to the fund of about $70 million . The Corporation would receive about $40 million from investment income and $30 million from the 20 percent of "net assessment income. " This $70 million annual addition to the fund is equal to 32 times the net insurance losses sustained by the Corporation in its entire history. Testifying in 1950 on the Deposit Insurance Act, which set up the present basis of assessment credits, the association recommended that when the surplus reached $ 1.5 billion, provision should be made for adjustment ofthe percentage of "net assessment income" to be credited to the banks. That point was reached in 1954. The fund has since continued to grow, currently at a rate of about $ 100 million annually, and now approximates $ 13 billion. We reiterate the view expressed in 1950 thatthe deposit insurance fund should not be permitted to grow indefinitely at more than a nominal rate. The first line of defense for the protection of bank deposits is the capital investment in our banks. A moderation of assessments will help to build up capital funds. We feel that the strength of our banks indeed of the deposit insurance fund itself- is better served by adding more funds to bank capital, which can help to make the Federal Deposit Insurance Corporation assistance unnecessary. Section 23, page 162, provides that there must be prior written consent by the appropriate Federal bank supervisory agency to any proposed merger, consolidation, or assumption transaction between insured banks . The association supports this section of the bill which contains the substance of the Fulbright - Capehart bill, S. 3911 , 84th Congress , approved by the United States Senate in 1956. We supported S. 3911 . In the statement to the Senate Banking and Currency Committee on November 7, 1956, we recommended inclusion of this provision. We believe that the authority over bank mergers is properly within the jurisdiction of the bank supervisory agencies and that the law should be specific to that effect. Section 29 ( a ) , page 165, provides for a shortening to 20 days of the existing 120- day period now permitted for the correction of unsafe or unsound practices by an insured bank, in cases where it is determined that the insurance risk is unduly jeopardized. It is further provided that any hearing subsequent to the 30-day notice of intention to terminate the insurance status of a bank shall be held in accordance with the Administrative Procedure Act, and that the review by the court shall be upon the weight of the evidence. STUDY OF BANKING LAWS 539 We believe that this amendment to existing law would strengthen the power of the Corporation to act promptly and decisively in the public interest. Section 30 ( b) , page 168, prescribes that payment of deposits of a closed insured bank shall be made by the Corporation either by cash or by a transferred deposit payable on demand in a new bank or another insured bank. We believe that this provision should be amended to eliminate the phrase "payable on demand " and to provide instead that the transferred deposit be payable on the same basis as called for in the original arrangement between the closed bank and the depositor. We do not consider it either practical or appropriate to change the status of any class of accounts, as for example savings deposits or time certificates of deposit, to the demand category. Section 2 (1 ) , page 149, should accordingly also be amended to eliminate the word "demand" from the definition of "transferred deposit." That is the end of my testimony. Thank you . Senator ROBERTSON. Are there any questions ? We thank you. May we have your next witness, Mr. Miller ? Mr. MILLER. Our next witness is Mr. Paul A. Warner, Mr. Chairman. Senator ROBERTSON. We will be glad to hear you , Mr. Warner. Mr. WARNER. Mr. Chairman and members of the committee, I am to testify with respect to the Federal Home Loan Bank System. My name is Paul A. Warner. I am president of the Oberlin Savings Bank Co., Oberlin, Ohio, which is a small commercial bank. We have slightly over $5 million of deposits, roughly half of which are savings deposits. Some years ago, I served as savings and loan supervisor for the State of Ohio, and subsequently as chief examiner of the Federal Home Loan Bank Board. I appear today as chairman of the committee on Federal legislation of the savings and mortgage division of the American Bankers Association . Speaking as a country banker, and from legislative experience in the State of Ohio, while I was superintendent of the savings and loan association there, I commend your committee for the fine work it has done. The first thing I want to take up is something that is not in the committee print of the bill, but it is called to attention by the hearings where it was brought up, and that is with respect to title IV, the Federal Home Loan Bank Act. Near the close of the hearings before this committee on November 10, 1956, Everett Reese, president of the Park National Bank, Newark, Ohio, and a member of the Advisory Committee, made the following observation : Senator Robertson, I would just like to say the banks and savings and loan associations have been competing with each other for many years, and they will continue to do so . It seems to me this creates a great opportunity for these two industries or professions to begin to do constructive thinking, to have a recognition of the qualities of the other and an understanding that each of us is going to continue to function and to develop a greater respect for each other in the different industries and not begin to hash over and regurgitate things that have happened in the last 50 years. It seems to me this study gives us a great opportunity to try to do some things immediately in line with Senator Robertson's suggestion that we stay within the field where that can be done. Of course, there will be competition. There will be overlapping. But as near as we can, we must try to do constructive things in the banking business and 84444-57-pt. 2- -7 540 STUDY OF BANKING LAWS try to get constructive legislation in both fields so that we have a clear line of demarcation. The word "bank" means something to people in the United States and it means to a great extent a commercial bank. We have in the Federal Home Loan Bank Board the word "bank" right in the name of the central institution . We used the word "bank," and it is probably a misnomer right at the start. Immediately following this statement, Albert Robertson and Ira Dixon, chairman and member, respectively, of the Federal Home Loan Bank Board, stated that they agreed with Mr. Reese. The next statement was made by Mr. Bubb, chairman of the savings and loan subcommittee of the Advisory Committee and president of the Capital Federal Savings & Loan Association, Topeka, Kans. Mr. Bubb stated : I think we can bring about very easily what Mr. Reese has in mind, what comes out of this committee hearing and the Senators' interest, together with the fact that we have a Home Loan Bank Board of which we can all be very proud- I don't think they care whether the name "bank" is in it or not. We can all come out under your line of reasoning, Mr. Reese. I know we will all be very happy, and I will certainly do my part, for one. In view of the unanimity of opinion expressed by these men— and in line with the idea that you accomplish things by doing things with people and not to them-we strongly urge the change in the name of the Board to the "Federal Home Loan Board," a change which we deem fundamentally important. It would follow that individual associations would be members of the "Federal Home Loan System." This would be parallel to the terminology used in the Federal Reserve Act and avoid a great deal of confusion. Mr. ROGERS . Mr. Warner? Mr. WARNER. Yes, sir. Mr. ROGERS . Have you considered what you would call the Federal home-loan banks-the regional banks ? Mr. WARNER. There would be no objection to calling the regional banks, "regional banks." Mr. COCKE. "Regional units" has been suggested. Mr. ROGERS . Pardon me. Mr. COCKE. Federal home-loan regional unit. Mr. WARNER. The difficulty arises out of a number of things. One is that the Federal savings and loan associations are Federal instrumentalities under the way it is set up now. There is a great deal of confusion in the public's mind and often in the minds of the operators of these institutions. I have one very fine and unstanding competitor who constantly refers to his institution as a bank, and he does it 5 or 6 times in 3 minutes when you are talking to him. Also I have a niece who worked in one of the building and loan associations in Columbus and she always says "the bank." It is quite natural that that should come about because of this confusion which arises. Maybe it is semantics, but it is awfully confusing. Mr. ROGERS. Do you not think this proposal would only be the very beginning if you want to change that situation ? Is not the answer to it really education campaigns by the American Bankers Association ? Mr. WARNER. I think when we are working together here we had better stay a working group rather than to start out trying to start something that may be construed as being "anti," because essentially we are not against an industry that has done a good job. Mr. ROGERS. Thank you. STUDY OF BANKING LAWS 541 Mr. WARNER. Title V, Federal Savings and Loan Association Act : SECTION 5. FEDERAL SAVINGS AND LOAN ASSOCIATIONS Paragraph (g) of this section, page 209, reads in part as follows : and all shares of such associations shall be exempt both as to their value and the income therefrom from all taxation *** now or hereafter imposed by the United States ; * * * Although this provision is the same as in the present law, its reenactment as a part of this recodification could have the effect of repealing the provisions of the Public Debt Act of 1942 which subject dividends on the shares of Federal savings and loan associations issued after the effective date of that act to Federal income taxes. Therefore, appropriate language should be included in paragraph ( g ) of section 5 to make it clear that the provisions of the Public Debt Act of 1942 continue in effect. SECTION 6. FEDERAL SAVINGS AND LOAN BRANCHES The committee print of the omnibus bill, page 211, includes the language of S. 972, as passed by the Senate in the last session . Inasmuch as there is at the present time no statutory provision for branches of Federal savings and loan associations, we would rather see this provision enacted than no provision at all. However, we believe it would be in the public interest for Congress to espouse the principle of a dual savings and loan industry just as Congress has espoused the dual banking system of national and Statechartered banks. Nearly a century of administration of national banks and the much longer experience of balancing States ' rights and Federal prerogatives, have proved eminently successful. Under this principle a national bank has the same branch powers as a State- chartered back. By the same token, we believe, Federal savings and loan associations should have the same branch powers as Statechartered savings and loan associations. In some States the savings and loan branch powers are greater than the powers of commercial banks ; in some States the powers are the same; and, in other States the branch powers are less. It certainly is not proper to give Federal savings and loan associations the most favored treatment with respect to branch powers of Statechartered savings and loan associations, mutual savings banks and commercial banks, particularly where by law or practice the State has established different branch requirements for the different types of financial institutions organized under its laws. We, therefore, recommend that the States rights principle be observed by giving to Federal savings and loan associations the same branch powers as are given to State- chartered savings and loan associations in each State. SECTION 7. RESTRICTIONS ON ASSOCIATIONS, DIRECTORS , AND OFFICERS The law prohibits Federal savings and loan associations from accepting deposits. Therefore, the word "deposits" should be deleted from paragraph (c ) of section 7, page 213, which reads as follows : No Federal savings and loan association shall pay to any director, officer, attorney, or employee a greater rate of return on the shares, deposits, or other 542 STUDY OF BANKING LAWS accounts of such director, officer, attorney, or employee than that paid to other holders of similar accounts with such association. With the deletion of the word "deposits" we could approve this section. Title VI, Federal Savings and Loan Insurance Corporation Act : SECTION 406. PAYMENT OF INSURANCE This section, page 223, provides that in the event of a default by any insured institution, the Federal Savings and Loan Insurance Corporation could make payment either in cash or "by making available to each insured member a transferred account payable on demand in another institution . " The American Bankers Association believes that where a transferred account is made available in another institution it should be in the same type of account as in the defaulted institution. This is consistent with our recommendation concerning payment of insurance by the Federal Deposit Insurance Corporation. The words "payable on demand" should be deleted from this section. That is the end of my testimony, sir. Senator ROBERTSON. We appreciate very much your endorsement of our proposal to codify the banking laws, and we are very happy to have both of your fine Ohio Senators on this committee. Are there any questions ? Senator BRICKER. No, except to say Paul Warner is a great favorite of the State of Ohio, and I well remember him at the time I was the attorney general of the State. Senator ROBERTSON. I am sure he was because as I say this American Bankers Association is a great association and he would not have been picked if he had not been good. Mr. MILLER. Mr. Chairman, our concluding statement will be made by the president of our association, Mr. Erle Cocke. Senator ROBERTSON. We will be glad to hear from him. Senator FREAR. May I just ask one question of Mr. Brumbaugh , Mr. Chairman ? Senator ROBERTSON . Yes, sir. Senator FREAR. When were you bank supervisor of the State of Pennsylvania ? Mr. BRUMBAUGH. 1947 to 1951. Senator ROBERTSON. Mr. Cocke. Mr. COCKE. I want to express the appreciation of the American Bankers Association for the opportunity afforded by the committee to present the testimony which you have heard this morning. Our presentation will fulfill its purpose if it proves helpful to the committee in your further consideration of the proposed legislation . This bill is a landmark in our Nation's financial history. It will rank in importance, upon passage, with such fundamental improvements as the National Bank Act and the Federal Reserve Act. Because it seeks to make our banks more useful to the public by modernizing the laws governing them and thus providing them with greater flexibility, we stand firmly and squarely behind the objectives of this committee print of the bill. As you have observed in the testimony presented this morning, we are in agreement with almost all of the proposals contained therein . Still, as you gentlemen are greatly aware, on any piece of " omnibus” STUDY OF BANKING LAWS 543 legislation, perfect agreement never can be achieved. The legislative process itself is naturally a process of compromise. We have found it necessary, therefore, not to agree with a few provisions of this committee print. We believe that whenever particular provisions appear to interfere with the historical intent of the Congress to guard the soundness of the banking system in the public interest, it is our duty-as representatives of the banking industry-to make our position clear. It was the wise intent of the authors of this bill , furthermore, to confine its scope to a largely technical recodification of the financial laws. Since financial legislation covers so wide and detailed an area, it would not have been possible, in a relatively short time, to develop a thorough discussion of views regarding broad questions of financial policy on which there might be broad and important differences of opinion. This effort to recodify and modernize existing statutes will make a positive contribution to a smoother functioning of our financial system and we, therefore, urge its speedy enactment. Nevertheless, it is evident from the record already presented to the committee by various groups that more remains to be done beyond the scope of this bill. The financial system in recent decades has become very complex. The development of various institutions, the use of Government credit in different ways, and the evolution of the concept of monetary management are just three examples among many factors in recent years which have reshaped our financial system and which suggest the desirability of a reexamination or study of public policies with respect to financial institutions. We believe that an objective study by a qualified commission would help to develop a clearer understanding of the system and, therefore, we would favor the creation of such a commission to cover the ground not contained in this, the Robertson bill, as we know it. Let me again emphasize, however, that the American Bankers Association heartily and enthusiastically supports the committee print under consideration , with the amendments proposed by us, and hopes that the Congress will see fit to enact it without waiting for the findings of a longer-range study commission, if one should be established. Mr. Chairman , again we want to thank you and say that if any further questions develop in the minds of any members of this committee we will attempt to give you our thinking to the best of our ability. It is a privilege to have been before you. Senator ROBERTSON. We thank you, Mr. Cocke. Your name is a very ancient and honored one in Virginia. I would like to flatter Virginians by saying that I hope you are kin to some of them. Mr. COCKE. Well, the rich part of the family lives in Virginia. Senator ROBERTSON. I read a little preview of what we are trying to do here, in the January 18 issue of my friend David Lawrence's fine magazine, U. S. News & World Report . He said : The plan is to rewrite and modernize the country's banking laws. Offered by Senator A. Willis Robertson, Democrat, of Virginia, the effort is presented in what is expected to be one of the biggest and most controversial bills of this session of Congress. That may be true, but it certainly gratified me and other members of this subcommittee who want to put this thing through to know that 544 STUDY OF BANKING LAWS we have behind us in this effort an organization like the American Bankers Association . Mr. COCKE. We are at your service, sir. Senator BENNETT. May I ask another question or two of Mr. Warner particularly ? Mr. WARNER. Certainly, Senator. Senator BENNETT. I was interested particularly in the fact that you included in your testimony this statement of Mr. Reese, and you are interested in removing the word "bank" from the name of the Federal Home Loan Bank Board. Are we to assume that the American Bankers Association is anxious to maintain the identity of these two loaning systems and at the same time anxious to eliminate overlapping, or what they might consider to be unfair competition ? I am going to ask you a general question. You have suggested one very minor approach to what might be a complete separation of these two systems -the elimination of the word "bank" from the name of the Board. I am facing a problem in my own State in which a bank is advertising that it will accept not deposits, but investments from people who are members of a savings association . It projected an ad in 2 parallel columns saying, in effect, "We can get you 3 percent interest on money deposited in our bank and we will accept money for a building and loan association and get you 32 percent. " The two are published parallel to each other. Would you be interested in legislation which would make that kind of a thing impossible and which would separate the operation of the two systems in the mind of the public to that extent ? I have another instance in my own State where a building and loan association operates in the banking room of a bank so that when a person comes into that room he may go to one window as a bank depositor, or another window as a member of a Federal-or at any rate a savings and loan association . I do not know whether it is Federal. It is raising a great question in my mind as to the extent to which we should go in this legislation to separate these two systems of savings. Does anybody have any comment on that ? Mr. WARNER. Well, Senator Bennett, I have had a little experience along that line. When I was a State bank examiner in Ohio ; that is, before I was the superintendent of loan associations for the State, I had assigned to me as one of my duties the examination of the banks which were affiliated, in the manner that you speak, with the building and loan associations. It was very confusing because there were a good many things that could and did happen as a result of those close affiliations and those confusing circumstances. I believe that it is a good thing to have them clearly defined . It is good for both institutions. One of the reasons why it is good is that, for instance, as supervisor of the building and loan associations I had many people come into my office-this was in 1933 and 1934, and you know the situation where everything was frozen up-and they wanted to know, "Why it is that the legal authorities permitted me to be deceived in this manner ? I thought that I was diversifying my investment." And they were crying about things that, to a great extent, I thought they should have known about. On the other hand, when we examined the advertisements in the newspapers in the city of Dayton, we found " deposits" and "shares" STUDY OF BANKING LAWS 545 used without any regard to which they were. They used "interest" and "dividends" in their advertisement without any regard to what they were. So how could the public help being confused. And believe me, they were confused. I think it is a good thing to have both industries kept in such a position that they are not confused. There are other reasons for that--and I will use the city of Dayton again as an illustration . We have building and loan associations which paid 6 percent interest on deposits-our associations in Ohioand some of them will accept deposits. We had other large and good building and loan associations which paid dividends on shares in that city. They attracted money from other associations from over the State who were only, perhaps, paying 4 percent, and they got a large concentration of money. Then they went on notice in 1930 and they proved a burden in taking care of the fellow who thought what he had was a savings account to take care of him in an emergency. That burden was thrown on to the banks. Then the city correspondents of the banks, and city banks who had, to a large extent, the advising of national accounts, said, "Look, that situation in Dayton is getting bad. You had better pull your deposit out of there before it gets worse." And it did get worse and they did pull their deposits out. Then we had more frozen assets in the building and loan system there than we had in the banks to take care of it. Much more. It was just a situation that was really terrible. Senator BENNETT. That was related to a situation that was terrible wherever people made deposits or purchased shares. Mr. WARNER. That is true. Senator BENNETT. But I am interested in terms of this bill, and I would be grateful- probably you would not want to make a statement on it at this time-but I would be personally grateful to have a statement from the American Bankers Association on the extent to which these two systems should be separated. This current situation is an interesting twist in my State because it is the banker who has moved into the building and loan field and is apparently willing to accept building and loan deposits, or contributions, or payments for investment through his teller banking wicket. Senator ROBERTSON. If the Senator will yield there. You referred to an advertisement in your State that would "give you 3 percent in our bank or 312 percent in our savings and loan"? Senator BENNETT. That is right. Parallel, in the same ad in the same paper. Senator ROBERTSON. Are those advertisements published by a bank holding company ? Senator BENNETT. Yes. Senator ROBERTSON. The Senator from Utah was a patron of the bill last year known as the Bank Holding Company Act of 1956. Senator BENNETT. That is right. Senator ROBERTSON. After a little effort and a little delay we got it enacted into law and put the supervision under the Federal Reserve Board. The coauthor of that bill, the acting chairman of this investigation, has called on the Federal Reserve Board to investigate what this bank holding company is doing out there and report to us. 546 STUDY OF BANKING LAWS Senator BENNETT. I realize this is a specific and single instance, but I also realize there may be a question here that should be gone into while we are working on this general problem of the recodification of the banking laws. Mr. WARNER. May I say it would be very helpful to spell out, if possible, in this bill just what each of these institutions is, so that it can be explained to the public. It is very difficult under existing conditions. Senator ROBERTSON . Off the record. (Discussion off the record. ) Senator ROBERTSON. Gentlemen, we want to thank you for your appearance here and thank you for the cooperation you have given us. And, as I call to your attention the estimate that this might be a controversial bill, we hope to have your continued cooperation until we get it through the Senate. Mr. COCKE. We are subject to your call. Senator ROBERTSON. The next witness tomorrow will be a representative of the Independent Bankers Association, another fine banking group . The committee will stand in recess until 10 a. m. tomorrow. (Whereupon, at 11:35 a . m., the subcommittee recessed until 10 a. m. the following day, Wednesday, January 30, 1957.) ་ ་ ས་ STUDY OF BANKING LAWS (Financial Institutions Act of 1957 ) WEDNESDAY, JANUARY 30, 1957 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, SUBCOMMITTEE ON BANKING, Washington, D. C. The subcommittee met, pursuant to recess , in room 301 , Senate Office Building, at 10:05 a . m., Senator A. Willis Robertson ( chairman of the subcommittee) presiding. Present : Senators Robertson, Frear, Bricker, and Bennett. Senator ROBERTSON. The subcommittee will please come to order. The first witness today is Mr. Ben DuBois, who will testify on behalf of the Independent Bankers Association. The Chair is pleased to recognize Mr. DuBois at this time. STATEMENT OF BEN DUBOIS, SECRETARY, INDEPENDENT BANKERS ASSOCIATION Mr. DuBois. Mr. Chairman , it will be necessary to use the committee print in following my testimony, and I assume that the committee members have it before them. Senator ROBERTSON . That is correct. Mr. DUBOIS. As the chairman stated , my name is Ben DuBois. I am secretary of the Independent Bankers Association , and our office is in Sauk Centre, Minn. The executive council of the association recently had a meeting for the purpose of making a study of the proposed legislation that is being formulated by your committee. We believe that this banking study being carried on by your committee is timely and of great importance. You, Mr. Chairman , your committee, your staff, and the advisory committee that was appointed have all done an excellent job. In general, we are in favor of the legislation proposed in the committee print. With few exceptions, the membership of our association is composed of the Nation's small banks. We have as members a few large banks-banks that believe in our old system of independent banking. We do not, however, have any members in the billion dollar class. The association, therefore, is obligated to its grassroot membership to oppose any proposals that might be detrimental to either independent banking or to the dual system of banking. Of late, it seems to many of us that the three Federal supervisory agencies have become friendly to what we might call system banking-big organizations with many branches or subsidiaries. 547 548 STUDY OF BANKING LAWS We think the record shows that the Comptroller of the Currency is quick to grant branch-banking permits and slow to curtail bank mergers. The workable relationship that formerly existed between the Comptroller's Office and the supervisors of State banks has undergone a change. The Comptroller appears to have encroached upon the prerogatives of State supervisors. He has construed State statutes in a way that gives national banks permission to branch, a change from the procedure of the past . Where a State supervisor has prohibited a State institution from merging with a national bank, the Comptroller has been quick to permit the State institutions to nationalize. At the present time, two States, New York and Massachusetts, are attempting to secure stopgap legislation that would prevent mergers. In Massachusetts, legislation is proposed with support of both the Governor and the commissioner of banks that would prevent mergers of national or trust banks across county lines without State approval. Since I wrote this, Mr. Chairman, the State of Massachusetts did pass legislation that stopped the First National Bank of Boston and the Granite National Bank of Quincy from merging . It was a night session . I understand that the legislation was passed after midnight. Mr. ROGERS. Mr. DuBois, I think New York yesterday passed the other bill. Mr. DuBois. Well , I am a little behind. Thank you. In New York State, legislation is proposed, supported by the Governor and the superintendent of banks, that would stop the proposed holding company of the First National City Bank of New York from stepping across bank district lines and securing in Westchester County what is now a State bank but with the aid of the Comptroller to be changed into a national bank. As Mr. Rogers said, the laws in New York and Massachusetts have passed. Bankers in Pennsylvania are in a tumult due to conflicts between the Comptroller's office and the State banking department. Those who want a change in our banking system, those who feel that great financial empires should be established, those who desire monopoly in banking find it more practical to proceed by piecemeal legislation , knowing that if they asked directly for what they really want, what they hope to ultimately secure, their ambitions would meet with failure. This country has been well served by its unique American system of banking-a diffused ownership of banks, management by people of the community, responsive to the needs of the community, part and parcel of the community and directed by a sovereign board of directors . We firmly believe our old system of banking is much preferable to any multiple system of banking where large numbers of banks or offices are under the control and direction of a distant head office. Without protective legislation, our old system of banking will gradually be taken over by some form of monopolistic banking. This, we believe, would be extremely detrimental to the well-being of our people and would foster an undemocratic economy that might seriously affect our political democracy. With what we have just said as a background to our banking philosophy, we would like to proceed to suggest some changes in the committee print. STUDY OF BANKING LAWS 549 On page 4 of the committee print, chapter 3, section 12, we quote : Associations for carrying on the business of banking under this title may be formed by any number of natural persons, not less in any case than five. This language was contained in the National Bank Act as passed in 1863. In that act, each national bank was to be a unit bank, a community bank, owned and operated by people of the community. We would not want the statement we quoted to be changed, but we desire to call your attention to the fact that the spirit, at least, of the original National Bank Act has been seriously violated. It has been the practice for a bank holding companying seeking a national bank charter to get five natural persons to make application for a charter and the charter is usually granted . The Comptroller of the Currency knows that these five individuals are requesting the charter for the holding company and that the holding company will own practically all of the stock of the bank. In some instances there may be strings on the stock of the applicants. We understand the Comptroller is loath to charter a national bank if control is in 1 or 2 individuals. Why should a corporation have advantage over individuals ? At the time the National Bank Act was passed, the sponsors of this legislation remembered well the First and Second Bank of the United States, how the Second Bank became a central bank with branches and became abusive of its power. The framers of this legislation wanted to produce a system of diffused banking, each national bank independent and operating under its sovereign board of directors within the law and framework of regulations. In 1911 , Frederick W. Lehmann, the then Solicitor General of the United States, prepared an opinion that stopped a national bank in New York City from forming an investment corporation. Unfortunately, this opinion was buried in the Comptroller's office. We do not hold Mr. Gidney responsible for this burial. Senator Carter Glass unearthed this opinion in 1932. He referred to it as having been suppressed at the time it was rendered and ordered it printed in the 1932 Congressional Record . If this opinion had not been suppressed, it is doubtful if the trend toward banking monopoly would be as pronounced as it is today. Page 15 , section 28, "Oath of Directors," we quote : * and that he is the owner in good faith, and in his own right, of the number of shares of stock required by this act, subscribed by him, or standing in his name on the books of the association, and that the same is not hypothecated, or in any way pledged, as security for any loan or debt. We believe this statement is intended to convey the fact that the qualifying shares are fully owned by the directors and that the Comptroller of the Currency should see to it that these qualifying shares are not covered by any option agreement. We would like to see this language changed to read as follows : After the word "hypothecated," there should be added : in any manner whatsoever, and that no agreement exists between the director and any person or corporation limiting his right to sell or dispose of such stock and said qualifying shares of stock be in his possession . For the record, we are handing you a reprint from the Independent Banker of an article by Emil E. Placek, our State director in Nebraska, containing an option agreement that has been used and probably is still used by one of the bank holding companies. We 550 STUDY OF BANKING LAWS believe that the last phrase of our proposed change that the stock must be in the possession of the director-is pertinent, (The article referred to follows :) LEGALITY OF CHAIN BANK STOCK OPTION DEALS CHALLENGED By Emil E. Placek, chairman of the board, First National Bank, Wahoo, Nebr. (EDITOR'S NOTE.-Challenged in this provocative article by Mr. Placek is the legality of stock option agreements signed by directors of holding company banks. He urges independent bankers to back the Burdick bill requiring that at least two-thirds of the outstanding shares of stock in a bank be owned by natural persons. Mr. Placek is Nebraska director of the Independent Bankers Association. ) The National Banking Act was passed in 1863 and created the office of the Comptroller of the Currency. The act authorized the organization of a local national bank by any number of natural persons, but not less than five in number, to engage in the business of banking in any State or Territory. No bank so organized could issue or circulate currency unless it was secured by Government securities. Banks created by the National Banking Act were designed to be local institutions and independent of each other, but under the control and supervision of the Government. The United States Compiled Statutes of 1901 , section 5133, provide for the formation of national banking associations by natural persons and specifies that articles of organization were to be signed by the persons uniting to form the association. If only "natural persons" can organize a national bank, the logical presumption is that only natural persons can operate a bank. Section 5134 of the 1901 compilation provides necessary requisites of organization such as name of bank, place of business, location, name and place of residence of each stockholder and number of shares held by each. Section 5140 specifically provides that every director must own, in his own right, at least 10 shares of the capital stock of the association . Without such ownership, he cannot be a director. The director, too, must take an oath that the stock is not hypothecated in any manner whatsoever. FALSE SWEARING CHARGED My contention is that a director in a bank owned and controlled by a bank holding company, to whom stock is issued under an option agreement, is guilty of perjury when he swears his stock is not hypothecated in anyway. Bank holding companies were organized to evade and circumvent the National Banking Act and the laws of the various States which prohibit branch banking. A bank holding company buys all of the stock of a bank and then issues qualifying shares to dummy directors with an option agreement giving the holding company the right to repurchase the stock. Such stock must immediately be endorsed by the dummy director and be delivered to a bank owned and controlled by the holding company. There the stock is held in escrow, so the dummy director never has possession of the stock certificate. If the holding company chooses to exercise its option to purchase, it may do so simply by mailing or delivering to the bank having the stock in escrow a notice of intent to purchase, accompanied by payment of the purchase price. The stockholder, or dummy director, is not even notified, except that his services are no longer required. For his stock he receives only the amount originally paid in. He gets none of the accumulated profits earned during the period of his employment. He does not even get the money he paid in until he surrenders his copy of the option agreement. If the stockholder dies while the stock still is held in escrow, the stock does not become part of his estate. The holding company exercises its option and returns the purchase price to the estate. OPINION BURIED On November 6, 1911 , Frederick W. Lehmann , in his capacity as Solicitor General of the United States, delivered an exhaustive opinion and held that holding companies are illegal. For some unknown reason, the opinion was STUDY OF BANKING LAWS 551 pigeonholed. Finally, after 20 years, the opinion was ordered printed in the Congressional Record at the request of Senator Carter Glass of Virginia. Since Congress recently passed legislation regulating bankholding companies, it may be necessary to pass further legislation requiring that at least two-thirds of the outstanding shares of stock in a bank shall be owned by natural persons. Such a bill has been introduced in the House by Representative Burdick of North Dakota. The bill is H. R. 7056. It is up to the independent banks of the Nation to press for passage of such a bill. The only other alternative is to bring an action charging that directors in banks owned by a holding company are not qualified directors, because they do not own the stock in their own right under the option agreement they are required to sign. The proper procedure would be for the Comptroller of the Currency to have the Department of Justice bring such an action. The Comptroller and the Attorney General take the position , however, that the question was settled in the Federal case of Transamerica Corporation v. Parrington, et al. In this case, the stockholder had possession of the stock, which is not true in the option agreements being signed now. Furthermore, the case was not appealed to the United States Supreme Court, which should pass on the whole matter. After reading the Transamerica v. Parrington case, I am firmly convinced it was a friendly suit, and for that reason there was no appeal. (EDITOR'S NOTE.- Reproduced below is a copy facsimile of the agreement cited by Mr. Placek in his article. The copy was obtained from the office of J. L. McLean, director of banking, Lincoln, Nebr., where it is a public record. The italic, for emphasis, was supplied by Mr. Placek. ) day of THIS AGREEMENT, made and entered into this 19 , by and between NORTHWEST BANCORPORATION ( hereinafter called the "Company") , party of the first part, and . (hereinafter called the "Shareholder" ) party of the second part, WITNESSETH THAT : WHEREAS the Company is the owner of a substantial amount of the common (hereinafter stock in called the "Bank" ) and has this day agreed to sell and assign to the Shareholder certain shares of said stock ( Said shares hereby so sold being hereinafter sometimes called "Shares of Stock" ) , for the consideration hereinafter set forth, and WHEREAS as an inducement to the Company to sell said Shares of Stock to the Shareholder and as a part of the consideration for the sale thereof to him, the Shareholder is willing to make the agreements and promises hereinafter contained, NOW, THEREFORE, in consideration of the premises and other good and valuable considerations, the receipt and sufficiency whereof are hereby acknowledged , IT IS AGREED by and between the parties hereto as follows : 1. The Company does hereby sell and assign to the Shareholder -------- shares of the common stock of the Bank and contemporaneously herewith has delivered to the Shareholder stock certificate No. issued by said Bank for said Shares of Stock. 2. The Shareholder does hereby purchase said Shares of Stock and contemporaneously herewith has paid to the Company as the purchase price thereof the sum of Dollars ($ -). 3. (A) The Shareholder does hereby give and grant unto the Company an absolute option to repurchase said Shares of Stock, together with any and all Additional Shares ( as hereinafter defined ) and together with all rights appertaining to said Shares of Stock and Additional Shares, whether in the nature of subscription rights or otherwise, for a purchase price to be determined in accordance with the provisions of subparagraph (B) of this paragraph 3. The term "Additional Shares" as used in this Agreement shall include all shares purchased by the Shareholder pursuant to preemptive rights arising by reason of his ownership of the original Shares of Stock hereby sold and of any Additional Shares and all shares received by the Shareholder as stock dividends from time to time upon said Shares of Stock and upon any Additional Shares, it being the intention of the parties hereto that said option shall cover and include all shares in the Bank owned by the Shareholder from time to time in any manner derived from the 552 STUDY OF BANKING LAWS original Shares of Stock hereby sold and representing the proportionate interest in the Bank which on the date hereof is represented by said original Shares of Stock. ( B ) The aggregate purchase price for the original Shares of Stock and all Additional Shares, however acquired by the Shareholder, to be paid upon the exercise of said option by the Company shall be the sum of ( a ) $__ being the amount paid by the Shareholder for the original Shares of Stock, and (b) the issue or subscription price paid by the Shareholder for the additional Shares, if any, which he shall have purchased pursuant to preemptive rights arising by reason of his ownership of the original Shares of Stock or of any Additional Shares and shall then own. (C) Said option may be exercised by the Company upon or within six (6) months after (a) the date upon which the Shareholder shall for any reason cease to be a director of the Bank, (b) the Shareholders of the Bank shall have voted to authorize the consolidation or merger of the Bank with any other financial institution, the assumption by any other financial institution of the deposit liabilities of the Bank, or the voluntary liquidation of the Bank, or (c) the date upon which the holdings of the Company in the common stock of the Bank shall be reduced by sale or otherwise to an amount representing less than 51 percent of the outstanding common shares of the Bank. The Shareholder may at any time make written request that the Company exercise said option and the Company may upon or within thirty (30 ) days after the receipt by it of such written request exercise the same but, unless theretofore exercised by the Company, said option shall terminate and become null and void thirty (30 ) days after receipt by the Company of such written request. Any exercise of this option may be made by the Company by mailing or delivering to Northwestern National Bank of Minneapolis , Minneapolis 2, Minnesota, a notice of the Company's intention to exercise the same accompanied by the payment of the amount of the purchase price determined in accordance with the provisions of sub-paragraph (B ) . (D ) The Shares of Stock and any Additional Shares shall be registered in the name of the Shareholder upon the stock books of the Bank and at all times prior to the exercise of this option the Shareholder shall have, enjoy and exercise with respect thereto all the rights, privileges , powers and duties of a shareholder of the Bank, subject only to the terms of this agreement. (E ) The Shareholder agrees that so long as the option in this paragraph 3 granted shall continue in force and effect he will not sell or assign to anyone other than the Company, or pledge, hypothecate, or otherwise dispose of the Shares of Stock or Additional Shares and that he will continuously remain the owner thereof in his own right. In order to prevent possible loss of the Shares of Stock or Additional Shares, the certificates representing the Shares of Stock hereby sold shall be endorsed in blank by the Shareholder and delivered to Northwestern National Bank of Minneapolis for safe keeping and all certificates representing Additional Shares shall forthwith upon issuance be likewise so endorsed and delivered for safe keeping. Said Northwestern National Bank of Minneapolis is hereby directed to hold and safely keep said certificates and upon the exercise of said option by the Company as provided in subparagraph ( C ) above, to deliver said certificates to the Company and to deliver to the Shareholder upon surrender by him of his copy of this agreement, the purchase price received by Northwestern National Bank of Minneapolis. 4. The Shareholder agrees that any preemptive rights to purchase shares of the Bank to which the Shareholder may from time to time become entitled by reason of his ownership of the original Shares of Stock or of any Additional Shares shall, if not exercised by the Shareholder, be assigned by the Shareholder to the Company. 5. This agreement constitutes the only agreement between the Company and the Shareholder with respect to any of the Shares of Stock or Additional Shares and supersedes any and all prior agreements or obligations of either party to the other, howsoever arising or expressed, with respect to such stock, the dividends thereon , or any other rights derived therefrom. 6. This agreement shall inure to the beenfits of and be binding upon the parties hereto and their respective heirs, personal representatives, successors and assigns. 7. This agreement has been signed in triplicate, one copy thereof to be delivered to Northwestern National Bank of Minneapolis and one copy to each of the parties hereto. STUDY OF BANKING LAWS 553 IN WITNESS WHEREOF the Company has caused this instrument to be executed by its proper officers thereunto duly authorized and the Shareholder has hereunto set his hand, all as of the day and year first above written. NORTHWEST BANCORPORATION. By Vice President. and Assistant Secretary. Shareholder. Northwestern National Bank of Minneapolis hereby acknowledges receipt of for Certificate No. Shares of Common Stock of which it agrees to hold in accordance with the provisions of the foregoing agreement 19____. Dated NORTHWESTERN NATIONAL BANK OF MINNEAPOLIS. By An Authorized Official. Mr. DUBOIS . The option agreement might be discontinued and in lieu thereof the holding company could require the director to hand over and assign to the corporation his stock in the bank of which he is a director. The holding company might hold this stock until the director ceases to be a director and then have the transfer made in the stock register of the bank to a new director. The qualifying shares of a director should be in his possession, a strong indication of true ownership . We are sure there is no question in the minds of any of the committee but that a director should absolutely own his qualifying shares. Section 39 , "Branch offices," paragraph (c ) , page 33, line 10 of that paragraph : We would like to suggest a change in the wording of the last part of the sentence. Here is our suggested substitution : * and subject to all the restrictions imposed by the law of the State on State-chartered commercial banks. In the committee print, the verbiage is a bit loose, and the Comptroller of the Currency will give it a liberal interpretation in permitting a national bank to branch. Mr. ROGERS. Mr. DuBois, may I ask you a question at that point ? Mr. DUBOIS. Yes, sir. Mr. ROGERS. The language in the bill is the languageMr. DuBois. That language is in the statute now. Mr. ROGERS. Yes ; that is right. I wanted to make that clear for the record. We did not change it in the bill. Mr. DUBOIS . Yes. Section 39, "Branch offices," page 34, paragraph (f) : At the end of that paragraph, we believe these words should be added : ** if not contrary to the laws of the State concerned. Page 54, chapter 9, section 58 , paragraph ( a ) , on the sixth line of the paragraph, put a period after " stock" and delete— unless an emergency exists and the Comptroller of the Currency specifically waives such requirement for shareholder approval. It is hard at times to properly appraise emergency. It gives the Comptroller discretionary power, something that we fear. In small banks the supervisory authorities have for all practical purposes more power than was ever written into the book. 554 STUDY OF BANKING LAWS Title II, Federal Reserve Act, page 93, section 23, paragraph ( d) , starting with the words "provided, however," we believe the paragraph that follows should be stricken . This wording constitutes a scheme to make mergers easier. The wave of mergers in this country is appalling and should not be aided and abetted but must be curtailed. Chapter 9, " Regulation of Bank Holding Companies," page 140, section 54 : There should be an addition to paragraph (d ) on line 7 after the word "operations." Place a semicolon, strike out the balance of the paragraph, and then this language : *** any bank holding company or any subsidiary thereof to acquire, directly or indirectly, any voting shares of, interest in, or all or substantially all of the assets of any additional bank, except (1 ) within geographic limitations that would apply to the establishment of branches of banks under the statute law of such State, or ( ii ) unless such acquisition is at the time authorized by the statute law of such State by language specifically granting such authority affirmatively, and not merely by implication. The recommendation we are making was contained in the House version of holding company legislation, H. R. 6227, passed by a vote of 371 to 24. If this proposed addition had been contained in the Bank Holding Company act of 1956, the Federal Reserve Board would not be in the sweatbox it is. New York State would not have found it necessary to pass stopgap legislation . This intrastate clause would have saved the Federal Reserve Board from the embarrassing position it now finds itself in. If the application of the First National City Bank is approved, and I do not think the Board will approve it , it will start a chain reaction that might change our whole banking system. Right there I would just like to make a statement. I do not think the Federal Reserve Board should be in a position where it could change the whole banking system. If there is to be a change in the banking system, it should be done by the Congress of the United States. If the Board turns down this application, one of the biggest banks in the country will be offended . The discretionary authority that the Board now has under the act will torment it as long as this discretionary authority lasts. Legislation delegating discretionary authority should be as limited as possible. Title III, Federal Deposit Insurance Act, section 18, "Assessment Credits," page 159 : Our association agrees with the recommendation of the American Bankers Association to prorate back to the banks 80 percent of the assessment, rather than 60 percent. Then, following, the rest of the language contained in that section. Section 23, "Mergers and Consolidations," page 162 : The Independent Bankers Association prefers legislation that would place the administration of antimerger legislation in the Department of Justice. We do not believe that the three supervisory agencies really desire any antimerger legislation . We do not believe that they have used the tools that they now already have to stop mergers. Section 26, "Payment of Interest ": For years there has been disagreement between the Federal Reserve Board and the Federal Deposit Insurance Corporation as to what constituted interest on demand deposits. Now these two agencies seem to be of the same mind . We doubt if there is much absorption of exchange. We wonder if this is an indirect way of forcing par clearance. We do not care to argue the issue involved, but we do believe that eventually State legis- STUDY OF BANKING LAWS 555 lation will bring about par clearance and then this matter of absorption will be out of the picture. Mr. ROGERS. Mr. DuBois, would you clarify your position on that ? Are you opposed to the provision we have in here to provide for a uniform interpretation on this question of absorption of exchange ? Mr. DuBois. I would like to say that I do not believe it is very pertinent legislation , that it is coming about anyhow. I think there is only one section of the country where there is any absorption to amount to anything, and that is in the Southeastern States. In the section of the country I come from, in Minnesota , we have more nonpar banks than any other State. I think we have 408. But the correspondent banks are all member banks, and, as far as I know, there is not a nickel's worth of absorption . So, it is what I would call minor. It does not amount to very much. Mr. ROGERS. I think that is true in your State of Minnesota . Mr. DuBois. It is just the SoutheasternMr. ROGERS. It involves perhaps 2,000 banks, which includes their branches. Mr. DuBois. There are only about 1,600 or 1,700 nonpar banks in the country. Mr. ROGERS . About 2,000 altogether-banks and branches. Mr. DuBois. Is that right ? Thanks for the information. Of course, when I think of banks I think of an independent bank, sir, and not a branch. Section 29, "Termination of Insured Status," page 165 : The Illinois debacle gives some grounds for an argument that the Administrator of the FDIC in his discretion can shorten the period in which bad practices in a bank must be eliminated. We doubt the wisdom of shortening the period to less than 120 days. As we have before stated, supervisory authorities have more power than is contained in the statute, and 20 days would be too short a period for most banks to remedy a bad situation. I thank you, Mr. Chairman. Senator ROBERTSON. Are there any questions? If not, we thank you very much for your testimony. The next witness will be Mr. William A. Lyon, of the National Association of Mutual Savings Banks. I believe Mr. Lyon has with him another witness. STATEMENT OF WILLIAM A. LYON ; ACCOMPANIED BY MORRIS CRAWFORD, BANKS NATIONAL ASSOCIATION OF MUTUAL SAVINGS Mr. LYON. With your permission, Mr. Chairman, I would like to have Mr. Morris Crawford, vice president of the Bowery Savings Bank of New York, sit with me. He is a member of the legislative committee of our national association. Senator ROBERTSON. The committee will be glad to extend that privilege and to hear from both of you. Mr. CRAWFORD. Thank you . Senator ROBERTSON. You may proceed . Mr. LYON. My name is William A. Lyon. I am chairman of the executive committee of the Dry Dock Savings Bank, New York City. I am appearing on behalf of the National Association of Mutual 84444-57 - pt. 2-8 556 STUDY OF BANKING LAWS Savings Banks, a trade association made up of 527 mutual savings banks located in 17 States. The largest number of these savings banks and the preponderance of their deposits are concentrated on the east coast of the United States. They are particularly strong and numerous in the States of New York, Massachusetts, Connecticut, New Jersey, and Pennsylvania. As of December 31 , 1956 , these mutual savings banksSenator BRICKER. I think we only have three in Ohio ; is that right ? Mr. LYONS. Yes. Senator BRICKER. One big one and two small ones. Mr. LYON. Yes. You have a very big one in Cleveland, Senator. Senator BRICKER. Thank you. Mr. LYON. As of the end of last year these mutual savings banks had $33,382 million in assets and $30,030 million in deposits belonging to approximately 21 million depositors. All of these savings banks are mutual institutions without stock or other proprietary interests. With your permission, I should like to address myself to the following specific provisions of the tentative bill entitled "Financial Institutions Act of 1957. " The first provision I would like to speak on is the form of organization of the Federal Deposit Insurance Corporation. The advisory committee has proposed, and the new bill includes, a change in the form of organization of the Federal Deposit Insurance Corporation. It is proposed that the Board of three which now directs the Corporation's affairs be replaced with a single administrator. Here we believe that the bill goes beyond technical statutory changes and gets into substantive changes of great importance. The change from a board of shared responsibility to a single administrator is a step that would be taken against the trend of supervisory agency development since around the time of the banking holiday. It is the older established agencies, such as the Comptroller of the Currency, that go in for a single administrator, and the Comptroller, it might be recalled , has Treasury officials immediately available, down the hall, for consultation and advice. The Federal Home Loan Bank Board, which is one of the newer agencies in the supervisory field, has three members. The Federal Reserve Board has seven members. The trend in the States over the last 25 years has been toward the creating of banking boards, not merely to advise but also to share responsibility with the supervisory authority. The Federal Deposit Insurance Corporation has spent all of its days in a rising price level and, more recently, in a time of extraor dinary prosperity. It is yet to go through a period of declining business which would create greater stresses for insured banks than they have had to face in the years that the Corporation has been in existence. Of course, we all hope that any troubles that may develop for banking will be little troubles. It would be a great mistake, however, to assume that banking will never again know times of genuine strain. If those times ever come again, a single administrator might have to deal with more problems than any one person should be expected to handle efficiently and wisely. It would not take much of a setback in business to keep a three-man board pretty busy. It is readily agreed that the Comptroller of the Currency should no longer sit on the Board of the FDIC. Before cutting the Board N STUDY OF BANKING LAWS 557 back to the direction of a single man, however, the prudent course would be to wait to see how the Corporation made out after business and banking had faced declining trends in activity and prices for a time. Senator ROBERTSON. If you would not object to a question at that point? Mr. LYON. Not at all. Senator ROBERTSON. We would like to know your definite recommendation, whether you favor a 3-man board without the Comptroller, a 3-man board with the Comptroller ex officio as under the existing law, or a 5-man board without the Comptroller as recommended to us yesterday by ABA. Mr. LYON. The first of your alternatives, Senator-a 3-man board without the Comptroller. Senator ROBERTSON. A three-man Board without the Comptroller ? Mr. LYON. Yes. I doubt the need has yet been demonstrated for a larger board than three. I think that it provides some power and means of consultation among the members of the Board . And five , with the present duties of the Corporation, might be an excessive number. Senator ROBERTSON. Mr. Brumbaugh suggested it would be agreeable if we had a five-man board : the Comptroller and the Chairman of the Federal Reserve Board ex officio members, and some State examining official- rather, an ex officio member to be selected from that group . That would leave only two men to be selected solely from the standpoint of who is best qualified to administer FDIC. You wouldn't favor that change? Mr. LYON. We would not favor that, Senator. Senator ROBERTSON. You would definitely favor a three-man board, but let them all be full-time employees and hove no ex officio member ? Mr. LYON. That is right. Senator ROBERTSON. Thank you. Senator BRICKER. What would you recommend for the tenure ? Mr. LYON. I think the term should extend over the term of an administration. I think on the order of the Comptroller of the Currency, whose term is 5 years, I believe. I think it should at least. extend a year beyond the 4-year term . Senator ROBERTSON. Any other further questions on this one point ? Senator FREAR. Senator Bricker just brought up a question in my mind. I thought the term would be 4 years. But would you or your association favor staggering terms ? Mr. LYON. I think that is useful, too. It provides for some continuity in experience that is, in times when the going is rough, extremely valuable. To expect a whole new board to start off from scratch and try to familiarize itself with the problems of the Corporation when the sailing is not exactly smooth is expecting too much. Senator FREAR. Thanks. Senator ROBERTSON. You may proceed. Mr. LYON. The second point has to do with the investment power of Federal savings and loan associations, page 204, paragraph (c) . Near the end of the paragraph it is provided that these associations may make investments "insured as provided in the Servicemen's Readjustment Act of 1944." It would appear that there should be inserted the words " or guaranteed" after the word " insured ." This 558 STUDY OF BANKING LAWS would supply an apparently inadvertent omission on the part of the drafters of the bill. Senator ROBERTSON. I will ask Mr. Rogers if that is correct. Mr. ROGERS. I cannot give you an offhand answer to that. I will check it. Mr. LYON. Mr. Crawford points out that was in the law as it now stands before your draft appeared. Senator ROBERTSON. And it was not carried on ? Mr. LYON. That is right. Mr. CRAWFORD. No ; the omission was carried forward, I believe. Mr. ROGERS . The present law has an omission in it. Mr. CRAWFORD. I believe, sir, that this omission was in the original law. It was not a fault of the draftsman of this particular bill . We are merely pointing it out because it does appear to be an omission that should not exist, since theseSenator ROBERTSON. I am glad to have that testimony, because I got a letter yesterday from one of the outstanding banking lawyers of New York, a member of what is probably the largest, certainly the most prominent, law firm of that city, in which he said he thought we had done a very good job. He pointed out that we had used an adjective when we should have used an adverb in one place, a typographical error that we had already caught. He pointed out that in referring to the new setup of FDIC we had in one place referred to the Board when it should have been the Administrator, but we had already caught that. And then he said that we had eliminated in the National Banking Act a reference to Treasury notes and had not used the same language in the Federal Reserve Act. Our reply to that was that if that was a fault it was a fault of the Federal Reserve Board because the Comptroller had recommended that the words be eliminated from this statute, the Federal Reserve Board had not made the recommendation , and so the drafters just followed the recommendation of both agencies. Personally, the chairman thinks that the lawyer in New York was correct-that the same language should be applied to both. It is an obsolete provision, in other words, but we think the Federal Reserve Board just overlooked it. Mr. LYON. Yes. Senator ROBERTSON. But I thought it was a right good tribute to the work of the Federal agencies, our advisory committee, and our staff that we have put together a 253-page bill and one of the best lawyers in New York, probably as good as any of the oldtime "Philadelphia lawyers," who are supposed to be the best, could find only those three errors in it. This error that you refer to now was the error of those who first drafed this and not those who carried it forward. Mr. LYON. I am glad Mr. Crawford made that clear, Mr. Chairman . Senator ROBERTSON . You may proceed. Mr. LYON. The third point has to do with branches of Federal savings and loan associations outside of the State of the head office. This provision appears on page 211 of the bill. This provision of the new bill permits the retention of branches. when there is a consolidation or merger of State or Federal savings and loan associations, but there is no restriction prohibiting the merger or consolidation of such associations located in different States. STUDY OF BANKING LAWS 559 The tentative bill does provide that no branches of any Federal savings and loan associations shall be established outside the State in which the home office is located, but this prohibition does not cover the situation where two savings and loans located in different States are merging. In order to prevent cross- State establishment of savings and loan branches, it is urged that the language near the bottom of page 211 be amended to read : No branch of any Federal savings and loan association shall hereafter be established or operated outside the State in which its home office is located. The next point concerns Federal savings and loan branch powers generally, page 211, paragraph ( c) . The savings banks have long believed that Congress should itself decide what branch powers Federal savings and loan associations should have instead of, by keeping silent, creating a vacuum which the Federal Home Loan Bank Board would feel obligated to fill by regulation. Some savings and loan branch bills would be more desirable than others, but it may fairly be said that most any bill would be better than no bill at all. The proposed bill is, in our opinion, clear of any criticism when it grants to Federal savings and loans the same branch powers in any State that the State-chartered savings and loans have. A case may be made for granting them also the branch powers that mutual savings banks have, though, strictly speaking, savings and Joan associations are not banks of deposit and a true analogy with savings banks does not exist . It is when the bill goes beyond this point and extends to Federal savings and loans in addition the branch powers available in any State to the State-chartered banks and trust companies that its workability and its fairness to the States become more open to question. Senator ROBERTSON. You recall that the Senate passed a provision about branches at the last session. Mr. LYON. Yes. Senator ROBERTSON. And that is the reason we decided to put the same language in that bill. Senator FREAR. That was an amendment accepted on the floor, Mr. Chairman. Mr. ROGERS. To your bill. Senator FREAR. Yes. Senator ROBERTSON. But anyway we passedSenator FREAR. It did not come out of the committee. Senator ROBERTSON. No , but the Senate passed it. Senator FREAR. Yes. Senator ROBERTSON. But it got tied up in the House committee. They never acted on it. Senator FREAR. Yes. Senator ROBERTSON. Of course, we realize the provision does not go as far as the savings and loan associations want. They want, when a savings and loan association is in a bank holding company State, to have all the branch provisions that the bank holding company has. That would enable them to go into some cross - State lines. Mr. LYON. Yes. Senator ROBERTSON. You may proceed. Mr. LYON. We praised the action of the committee on the bill last year over what the Senate itself did. 560 STUDY OF BANKING LAWS Branch powers, under the dual banking system, are applied with the greatest equity and logic when the powers are directly related to those of the same type of institution and are not derived indirectly from the branch powers of another type. This is so because the derived powers, by their very nature, trample on the safeguards that a good many States have set up in their branch laws. Banks and trust companies in New York State and Connecticut, to take two examples, are not permitted to establish branches by application in communities other than their head office communities where the other communities have their own independently operated institutions. The laws ofthese States and various other States have placed this limit to branch powers for the very good reason that they wish to give local institutions, which are usually of a smaller size, endurable competitive conditions. There is no better way to thin out the ranks of the small independent institutions, locally owned and operated, than to give supervisory agencies and institutions complete freedom to roam at will in authorizing and opening up branches. The great weakness that has been shown to exist in the branch provisions of the National Bank Act is with the derived powers. The National Bank Act says that the national banks can have not merely the branch privileges extended to banks and trust companies under State laws but also the branch powers granted by the States to savings banks. The Comptroller of the Currency has taken the position that the limitations under the direct grant of branching power do not extend over into the derived powers. For that reason he holds that he would be able to use the savings bank parallel to permit branches, in contravention of State policy, even in those communities where head offices of local commercial banks exist . I do not believe that Congress intended that the Comptroller should have this power. It scarcely seems fair or desirable that a State should be unable to permit savings banking to come to a community which has its own commercial banks, but lack a savings bank, without laying that community open to invasion by national banks from other cities and towns. If the Congress wishes to reduce the number of competitive units in commercial banking rapidly and to concentrate banking power in fewer and fewer hands, it could not have chosen a better way to do it than with the derived- power provision in the 1927 amendment. If and when Congress takes up again for serious consideration the whole large issue of branch powers under the dual-banking system, I feel sure that it will have to conclude that State policy designed to protect local institutions should be respected and the Comptroller should be required to abide by the branching patterns which the States believe to be suitable. For this reason we think that a branch bill which said merely that Federal savings and loans may have the same branch powers as State savings and loans would be the best bill of all. We repeat, however, that it is most earnestly to be hoped that the Congress will no longer leave Federal branching to the unstable foundations of agency regulations and interpretations but will rest it clearly and firmly in the statutes. The fifth point has to do with payment of insurance by Federal Savings and Loan Insurance Corporation. In section 406 , page 223 of the proposed bill, it is provided that in the event of a default by any insured savings and loan association , the FSLIC shall pay each insured account either by cash or by making STUDY OF BANKING LAWS 561 available a transferred account payable on demand in a new insured institution in the same community or in another insured institution. The proposal to create a new class of shares for savings and loan associations, payable unconditionally on demand, is, we believe, more than a technical amendment to the laws. As the committee is aware, a savings and loan which invokes its rights to withhold full payment on shares for a time is not considered to be in default. The provision that transferred accounts would be payable on demand, however, would create a new and specially privileged type of share. Such a proposal would go a long way toward removing one of the distinctions between banks of deposit and savings and loan associations. There is good reason to believe that the public would be better served if the lines of distinction between different types of financial institutions were more clearly drawn instead of being blurred, as the proposal in section 406 would result in. In any case, before any such proposal is seriously considered for inclusion in the statutes, it should be studied with the kind of care and with the eye toward the complete banking picture that a monetary commission could give it. Mr. ROGERS. Mr. Lyon, are you aware that we put a like provision in the Federal Deposit Insurance Corporation Act? Mr. LYON. Yes. Mr. ROGERS Is that satisfactory there ? Mr. LYON. Yes. I think that is a desirable amendment to make. I believe that restores the Federal Deposit Insurance Act to the form in which it existed prior to 1950. I think that it is only reasonable that a transferred deposit which is not transferred with the precise consent of a depositor to another institution should be immediately available to transfer to some other institution at the depositor's option. I think that is fair. Mr. ROGERS. Why does not the same philosophy apply to this case ? Mr. LYON. Because in any going Federal savings and loan association the unconditional right of immediate withdrawal of shares does not exist. This would create for the first time that unconditional right. And it would prejudice the interests of the other shareholders in a savings and loan association. Those transferred shares which went to another association would, if withdrawn immediately or presented for withdrawal, use up the liquid resources that were available to all the customers of the association that were doing business with it before the transfer took place. Mr. ROGERS. Well, in a bank your time deposits would be in the same situation , where you are supposed to give 30 days' notice. Mr. LYON. Yes . Mr. ROGERS. If they are transferred, then they are payable on demand under the new provision. Mr. LYON. Yes ; but there is in a commercial bank always the right to withdraw on demand, and that is not an unconditional right of a savings and loan association. Mr. ROGERS. Well, there can be a 30 -day period. They can require it. Mr. LYON. There can be a period that can extend for a long while before an association is considered to be in default. 562 STUDY OF BANKING LAWS Mr. ROGERS. No ; I am referring to a bank. They can require in their contract with a depositor a 30-day waiting period, or a 60-day or a 90- day. Mr. LYON. Yes ; that is true , Mr. Rogers. The fact is that that power has not been invoked in many years. And I would say for practical purposes it must be assumed not to exist as a reliance for banks of deposit with demand deposits. Mr. ROGERS . I would agree with you more if you would be opposed to both changes. Senator FREAR. Do you know of any bank that is enforcing the 30day withdrawal of time deposits ? Mr. LYONS. No ; I do not . I do not remember in theSenator FREAR. Was there not established also, primarily, the fact that the bank would not have to pay the time depositor the interest on that 30-day period ? Mr. LYON. I do not know about that , Senator, but I do know that in an earlier era in banking 50 or more years ago it was not uncommon for a notice of withdrawal privilege to be invoked . But since the establishing of the Federal Reserve that power I would say had not in any instance known to me ever been resorted to. It becomes impossible to use a power to require notice of withdrawal for time deposits and savings deposits while you continue to pay out your demand deposits. That would be prejudicial to the savings depositor and is, for practical purposes, not available as a result . Mr. ROGERS. In reality, do not savings and loans pay on demand ? Mr. LYON. Well, they do ; yes ; that is correct. Now they do. But it is no statutory privilege of the shareholder to require payment on demand. Senator FREAR. I do not want to get into debate with the counsel for this committee. However, going back to a statement you made a little earlier in your testimony when questioned, that in case of default of a Federal savings and loan association that this proposed legislation would give to the FSLIC the authority to transfer those funds to another organization, presumably another Federal savings and loan association, it also could be that it would have some prejudice in the defaulted shareholders ' organization going into the new one whereby they would have a right that the shareholders of the institution to which they were transferred did not have also . Mr. LYON. That is precisely the point, Senator. Of course, too , if you pursue this thing to the end, it would become of interest to any large shareholders in an institution that was getting on the ragged edge to see it go over the edge, because then their shares would have the right of transfer to a going institution and be unconditionally payable on demand under this bill. The next point that we would like to bring up for your consideration has to do with amendments to the Criminal Code, on pages 247 to 249. It is highly desirable that the bill not go any further than necessary in its effort to prevent conflicts of interest between supervisory personnel and the institutions under supervision of Federal or State agencies. No one will contend for a moment that the moral position of the supervisory agencies should be undermined by permitting institutions with disciplinary problems pending before an agency to hire agency STUDY OF BANKING LAWS 563 personnel to represent them in the proceedings. Banking supervision, including examiners, has enjoyed a splendid reputation for the high ethical standards on which its dealings with banking institutions have been conducted . The lapses have been rare. The honor and fidelity of the supervisory staffs have been models in Government service. Most of the supervisory personnel is not even bonded . The traditions of the service are so high and firmly set that it has not been considered necessary by a great many, perhaps a majority, of the supervisory agencies to obtain surety bonds covering their examiners and their staffs. The cases that are known of any shadow of unethical conduct falling on supervisory staffs are so few as to be insignificant. In view of this record, legislative bodies are justified in proceeding with great caution in adopting laws which would make the already difficult problem of recruiting and retaining examining personnel harder to live with. Years ago the task of hiring examiners of suitable ability and experience was manageable. In recent years the comparison between the pay of examining personnel and the pay of banking staffs has become steadily more unfavorable for the former. The usual practice is to find additions to the examining staffs from bank clerks and junior officers. Some of the most able young examiners have taken, in effect, leaves of absence as bank employees so that their careers might be broadened and deepened by at least a few years' experience as examiners. These intended from the start to go back to banking. This free flow of bank clerks into supervisory agencies and back into banking has been good for both supervision and banking. It would be most regrettable if a dead end should in effect be placed in the way of a bank examining career by encumbering the examiner's return to banking with a mass of redtape and statutory restriction. We do not believe that there is any problem here which cannot safely be left to the agencies' regulatory power. Senator ROBERTSON. Do we understand then that you endorse the recommendation made to us by ABA yesterday that the criminal provisions with respect to future employment in banks and the lending provision be completely eliminated from the bill? Mr. LYON. Be completely eliminated and the right to control that by regulation would still remain. Senator ROBERTSON. Yes. Mr. LYON. Yes. I speak-excuse me. Mr. ROGERS . I wanted to make this clear. As I understood it, you would go along with a provision such as in title I which provides for each agency by regulation to control the situation ? Mr. LYON. That is right. Mr. ROGERS . At the present time the law does not so state, and some agencies do not have any regulations. Mr. LYON. If it did so state, I think that would be completelySenator BRICKER. Why would you think the regulatory agencies could properly handle that, when you would not put it in the statute ? Mr. LYON. I think, Senator, that it becomes an impossible thing for a statute to be so worded that it can contemplate any of many situations that may arise. An examiner, for example, may have completed, as 1 of a group of 20 or 30, an examination of an institution and to have been in such a minor capacity in the examination and to be of such limited influence, shall 564 STUDY OF BANKING LAWS we say, in the supervisory agency, that the hiring of him, by that institution which he had reecntly been part of the examining staff of, would be a matter of absolutely no importance. And I think there, if the supervisory agency could inquire into the facts and establish that there was nothing out of the ordinary in this request for permission to accept employment , it should be within the power of that agency to give him— Senator BRICKER. But that power and authority ought to be granted in the law, even though you leave it to the supervising agency. It ought to be pretty well prescribed by the law. Mr. LYON. Granted to the agency to issue the regulation . I speak on that subject with a great deal of feeling, I may say. I spent some years in the banking department of New York State, I was for some years the superintendent of banks of New York State, and I understand firsthand the seriousness of the problem that the supervisory agencies have in recruiting and maintaining staffs of adequate quality and adequate numbers. Senator BRICKER. I agree with all that, but what I am getting at is whether or not that authority should be left to the supervising agency or whether it should be prescribed by law, although it not be a strict statutory prohibition or anything of that kind. If it could be determined by the regulatory agency, why could it not be determined by the Congress in the statute, even though it not be a strict requirement ? Mr. LYON. Senator, I find it not possible to say that nobody could come up with a combination of words that would permit respect for prohibition of conflict of interest and the opening up of reasonable inflow and outflow of personnel in banking and supervision and back again . But I think it would test the ability of the most skillful drafters of legislation to draw up a bill that would not set rules that would go too far in preventing this irregularity which everyone is interested in preventing . I think that if the statute said that the power is left to the supervisory agencies to issue regulations prohibiting conflicts of interest that would express the policy of the Congress and put the agencies on notice that they must be more than ordinarily careful to prevent such conflicts. I feel that it would accomplish every purpose that you have in mind. Senator BRICKER. I hesitate, with the responsibility that we have here, to say to you as a supervising administrator that you could do something for one man that you would not do for another, if there were any way that the law could be definite on the subject. In other words, you might favor one examiner and say to another one, "No, yours transgresses the conflict of interest, while the first one does not." If there were any way of being definite about it in the law, I would like to see it done rather than leaving it up to the supervising agency to favor one that he likes and maybe penalize one that he does not who has been working under him. That is the only thing I fear, and I have seen a lot of favoritism in the administration of law. Mr. LYON. I would just like to say again that I believe it would be desirable for the committee not to use the test of recency of examination of an institution, of participation in an examination of an institution, as the main test. STUDY OF BANKING LAWS 565 Senator BRICKER. In other words, the degree of authority in supervision ought to be a determining factor ? Mr. LYON. Oh, by all means that should be taken into account. And that, I would submit, could be left only to the discretion and judgment of the agency. After all, SenatorSenator BRICKER. You have got to lodge authority some place. Mr. LYON. Yes. Yes. And the agencies should be exceedingly vigilant about it too. Senator BRICKER. The trouble is we too often emphasize the indiscretions to the detriment of those who are perfectly honest and straightforward, who would handle either of the jobs, in the regulatory authority or in the bank, with perfect honesty and integrity. Mr. LYON. Senator, do not the lawyers say that bad cases make bad law? Senator BRICKER. I think that is right. Mr. LYON. I think it would be good to be on guard against that in a matter of this importance. The seventh and last point that we would like to make has to do with a comprehensive study of the banking laws. It is noted that the bill does not include the recommendation of the advisory committee that a Monetary and Financial Institutions Commission be appointed . In the memorandum which savings banking filed with the committee on December 13, 1956, the recommendation was made that a sweeping and exhaustive study be made of the Federal laws relating to banking and credit. We in our association still believe that such a study should be authorized forthwith by the Congress. Senator ROBERTSON. I may ask there, Who should make the study ? Whom do you favor making it? Mr. LYON. Senator, my belief is that you would get a better study if the commission were composed both of Members of Congress and public representatives. Senator ROBERTSON. That is the recommendation of our advisory committee. Mr. LYON. Yes. Senator ROBERTSON. There are a lot of political issues that have got to be solved there. Mr. LYON. Very decidedly. Senator ROBERTSON. I would personally prefer for them to be handled by someone who does not have to answer politically to any constituency. Mr. LYON. I think you are completely correct. Senator ROBERTSON. And there is another thing. The majority might come up with proposals that Members of Congress did not approve of. Would they not be more or less committed to such a finding if they were a member of such a commission and be less free to criticize it? Mr. LYON. It would save valuable time, it seems to me, for the public members, lacking the knowledge of the congressional questions that they do, to have as members of the committee the responsible Members of Congress having to do with banking and currency matters. But I do believe at the same time, Senator, that public members in an advisory capacity are much less effective than they are as full-fledged members of the committee where they can take part in the- 566 STUDY OF BANKING LAWS Senator ROBERTSON. We have had a lot of commission reports in recent years. Some people think we have referred too many problems to agencies of that kind. Some of them have been independent of Congress, and some have had congressional members on them. But, after all, the report of any commission does not rise above the status of a report until Congress takes it up and decides whether or not to legislate on the subject. Mr. LYON. That is correct. Senator ROBERTSON. So the final decision has to be with Congress in any event. Mr. LYON. Quite correct. Senator ROBERTSON. But you would preferMr. LYON. I would combine them. Senator ROBERTSON. To combine them ? Mr. LYON. Yes. Our country is greatly in need of a study by experts, objectively carried out, which would consider, among other things, the adequacy of our banking and financial structure and the allocation of responsibilities in it. There has never been a time when greater competition existed between the different types of financial institutions, including commercial banks, savings banks, and savings and loans. The role that each type should play has not been clearly marked out. It is high time that we knew whether savings banking, for example, had anything unique and of value to offer to our economy. Savings banking has a different effect on the country's economy from what commercial banking has. It attracts the savings of the people and invests those savings, not in short-term loans and investments, in the manner of commercial banks, but in the long-term capital market- in the financing of homeownership, in mortgages on commercial properties, and in the long-term obligations of the public-utility companies, railroads, industrial companies, turnpikes, States, and municipalities, and so forth . In the last few years a number of commercial banks have decided that they were part of the thrift machinery themselves. They have been going out more and more aggressively to draw in the public's savings. Commercial banking does not, however, as a general thing, employ the savings that it attracts from the public in long-term investments. It uses these savings in the customary commercial banking fashionthat is to say, to extend short-term credit to business and industry and to finance purchases of consumer goods by the public. When commercial banking gets its hands on a dollar of savings, it uses only a few cents of that dollar to close the gap between the demand for longterm capital and the supply. It is no secret that some of the commercial banks, both large and small, which have savings departments make no mortgage loans at all. The use of savings, the very stuff and fiber of the long-term capital market, to make short- term loans, including personal loans and loans to finance purchases of consumer goods, can hardly be regarded as the best use of our national resources. We believe that the time is at hand when we should turn our best legislative and public minds to work of appraising the component parts of our financial and banking structure, and to decide whether the manner in which we have built that structure is the best for the public. STUDY OF BANKING LAWS 567 I wish to thank the committee for permitting me to express the views of the savings banks on these subjects. Senator ROBERTSON. Mr. Lyon, since you have demonstrated a commendable grasp of banking and credit matters, we would welcome an expression of your views on the subject of the absorption of exchange. Mr. LYON. Senator, in my State, my part of the country, I have not come across this problem. There are no nonpar banks up through New York and through New England. That, as has been said, is largely a southern and a middlewestern problem. I myself believe that there is some good to be got from uniformity of practice on this subject . I would say that it would be quite harmful though to the nonpar banks to change their status on exchange overnight. If you will look at the figures in any of the compendiums of commercial banking statistics of how nonpar banks conduct their operations, you will see that this matter of collecting exchange is a major reliance for income. They have by far the largest cash reserves, cash resources, of any commercial banks in the country. You cannot say to them overnight, "You must change ; you must look elsewhere for your source of income and not look any longer to exchange. You must, in other words, become makers of loans and investors in securities exclusively as the par banks do." That, I submitSenator ROBERTSON. If I may interrupt, in drafting the tentative bill we took the position that we just could not say categorically to some 4,000 banks including the branches, "You must be a par bank ; you cannot be a nonpar bank." Mr. LYON. Yes. Senator ROBERTSON. All we did in our tentative bill was not to give to the FDIC- and we do not think it has it anyway and we did not give it to them-the right to pass on what is and what is not interest. We merely wrote into the FDIC section the same definition of interest that has been in the Federal Reserve, thinking that if FDIC did undertake to make a ruling on this subject it would have to be in conformity with the ruling of the Federal Reserve Board. But on yesterday you may remember we had the recommendation of the advisory committee that we should definitely write into this final bill a provision that no bank should absorb exchange. Mr. LYON. I think if you were working with a clean sheet of paper and there were not these longstanding differences in this matter you could come up with the ideal solution so much more easily. I would think that it would be better for trade and commerce and for banking in the country if the trend were toward par collection rather than preserving indefinitely the present divided practice. Senator ROBERTSON. Certainly we would not want anybody, if we gave them a hundred dollar bill, to say that one-tenth of 1 percent comes off for the trouble of changing it for you. You'd like checks to be handled on the same basis as currency ? Mr. LYON. No question about it . But, Senator, if the decision is to move toward uniformity and achieving of complete par status, I submit that the progress should be gradual and not overnight. You cannot tell banks not accustomed to lending money on the scale that others do, "Tomorrow morning you must have a good and experienced 568 STUDY OF BANKING LAWS loan man and you must find sources of loan demand that you can accommodate to replace the income that you have lost." Senator ROBERTSON. I was under the impression that the approach that I decided to put in the tentative bill was a gradual approach. Mr. LYON. If that is the case, Senator- and I have not made a close study of that part of the bill- it seems to meSenator ROBERTSON. In fact, we will have one witness here, on Friday, from North Carolina, if he comes who says it is too gradual. Mr. LYON. Well, that is fine. Senator BENNETT. You mean that any approach is too gradual or too fast? Senator ROBERTSON. He wants it spelled out . He wants it spelled out in the bill that nobody can absorb it, Senator. Mr. LYON. Well, you would cause some serious dislocations in that event. You can merely look at the statistics, without going to talk to a single banker, and see that that would be so. Senator ROBERTSON. Are there any further questions of this witness ? We have got to hurry along. Any further testimony from this gentleman ? Mr. LYON. Thank you very much for both of us. Senator ROBERTSON. Thank you both. The next witness is Mr. Baker, who will speak for National Farmers Union. We are glad to have you, Mr. Baker. You may proceed. STATEMENT OF J. A. BAKER, COORDINATOR OF LEGISLATIVE SERVICES, NATIONAL FARMERS UNION Mr. BAKER. Mr. Chairman , for the record I am J. A. Baker, coordinator of legislative services, National Farmers Union. We appreciate this opportunity to present our views concerning the recodification of Federal laws regulating the private and semiprivate nonfarm financial institutions of our privately and publicly managed free enterprise system. There is, of course, nothing in the proposed Financial Institutions Act of 1957 that will help materially to raise farm family income toward the position of a fair parity in our economy that it should occupy. Nor is there anything in the proposed bill that will immediately improve the chronically weak bargaining power and disadvantaged position of family- farm operators in the commodity and money markets of the Nation. Nevertheless, if enactment of the proposed legislation should operate to make our publicly controlled private financial institutions more effectively responsive to our constitutional democratic political institutions, more observably honest in their financial manipulations and more fully competitive in rates and efficient in management costs, these gains would be of great general importance and interest to farm people even if it did nothing directly and immediately to improve the current depressed economic lot of farm people. No known improvements in the Nations credit system can improve the financial aid of farmers unless the legal and institutional conditions surrounding the production and pricing of farm supplies and of farm products are such that farmers can make enough income above STUDY OF BANKING LAWS 569 conservation needs and living costs to repay such loans as they are able to obtain from financial institutions. Moreover, we do not believe that the publicly controlled private financial institutions of the Nation can, whatever laws you may improve and adopt, ever become fully adequate to serve farmers ' credit needs in the absence of expansion and revitalization of the Farmers' Home Administration to transform that agency into a fully adequate Federal yardstick family farm credit agency. However, adequate provision to care for the needs of credit adapted to family farm needs is not the central purpose of your hearing today. Therefore I shall merely point out to you that the credit needs of the 22 million people on farms are, measured in human terms, about 13 percent of the subject matter of your hearings. The 22 million people on farms are more than 50 times the approximately 400,000 children and wives and husbands of families who depend on banking for a livelihood . The family incomes of the latter greatly exceed the family incomes of the former. And the basic underlying reason for that condition is that bankers possess, under Federal and State law, and farmers do not, the right and power to withhold what other people want and need but cannot have unless the fixed price is paid. Without taking your time at this point to discuss either the need to greatly strengthen the Farmers Home Administration or to explain out deep disagreement with the existing hard-money policy, I request that you place the attached legislative analysis memorandum on yardstick family farm credit in the record of your hearings at this point in my statement. Senator ROBERTSON. Without objection, that will be done. (The statement referred to follows :) YARDSTICK FAMILY FARM CREDIT LEGISLATION (Legislative Analysis Memorandum No. 56-17, Revision No. 1, August 30, 1956 ) Alone among the farm organizations, Farmers Union invited the attention of the 84th Congress to the credit problems of family farmers. Our efforts resulted in significant improvements in the credit programs provided by Farmers' Home Administration and succeeded in blocking the destruction of the yardstick 5-percent interest rate set up in existing law. Its repeal was repeatedly recommended and demanded by the Eisenhower administration. LEGISLATIVE DEVELOPMENTS IN 84TH CONGRESS Improved yardstick family farm credit legislation ( H. R. 11544 ) was adopted by Congress. Farmers Union made a big push to obtain enactment of legislation that would rehabilitate the Farmers' Home Administration and reestablish it as a comprehensive fully effective yardstick family farm credit agency. The Eisenhower administration fought our efforts, putting their main emphasis on eliminating the 5-percent interest rate yardstick in existing law. Under existing law, a farm family that cannot obtain adequate needed credit from usual commercial and cooperative sources at not more than 5-percent interest is eligible to receive a loan from Farmers' Home Administration. Farmers Union urged this yardstick rate be dropped to 3 percent. Eisenhower recommended that the "5 percent" be changed to "a reasonable rate." Administration witnesses testified in both House and Senate that the words "reasonable rate" would be interpreted to mean the "prevailing rate in the local community, 6 percent, 8 percent, 12 percent, whatever it is." Adoption of such language would have completely destroyed the yardstick feature of the Farmers' Home Administration and the laws it seeks to administer. A yardstick family farm credit bill ( S. 3790 ) more nearly adequate to the current needs than H. R. 11544 was introduced in the Senate on May 7, 1956, by 570 STUDY OF BANKING LAWS Humphrey, George, Hennings, Kerr, Clements, Lehman , Mansfield, Morse, Murray, Neely, Neuberger, Scott, and Sparkman. Companion bill in House was introduced by Polk, Metcalf, and Knutson. H. R. 11544 as enacted by Congress reflects Farmers Union recommendations as somewhat watered down by Eisenhower administration recommendations. Farm Bureau did not appear at the hearings on this important subject. The net result is to have obtained some quite significant improvements in the way of yardstick farm credit. Major among these are full authority for Farmers' Home Administration to make loans to refinance existing indebtedness, somewhat larger appropriations or authorizations for various types of loans, direction to the executive branch to tailor repayment schedule to fit characteristics of such needed credit as frozen-out prune orchards and the like, and specific mandatory expansion of real estate loan authority to include existing as well as prospective farmowners. Applicants to be eligible would not have to show that more than half of their income came from farming. FARMERS UNION RECOMMENDATIONS There is a developing farm credit crisis out in the country. We are in another of those eras that have come twice in the past 50 years when the Nation will and must make a major reform in its farm credit policy. Growing awareness in the period 1908-14 of the basic disadvantage of farmers in the Nation's money and capital markets led to the establishment of the Federal land bank system. Later, the total failure of the then existing farm credit institutions to cope with the 1921-33 farm depression led to the complete reform and improvement of national farm credit policy and institutions in 1933-34. NEED NEW CONCEPT OF YARDSTICK FARM CREDIT Now in 1956, we seem to be in the middle of another era of broadening farm credit concepts, an awareness brought on by the apparent inability of the now existing institutions and policies to cope with the problems of the growing farm depression and recurrent droughts, dust storms, floods, and falling farm income. National Farmers Union continues to urge enactment of a comprehensive "yardstick" family farm credit bill, incorporating the good features of the bills that have been referred and expanding and extending the excellent features of existing Federal "yardstick" family farm credit laws. EXISTING LAW Existing legislation covering direct and insured general family farm credit loans is incorporated mainly in the Bankhead-Jones Farm Tenant Act, as amended ; the Water Facilities Act, as amended ; Public Law 38 (emergency loans ) , as amended ; and Public Law 727 ( emergency credit ) , as amended. RECOMMENDED AMENDMENTS TO WATER FACILITIES SOIL CONSERVATION LOAN ACT The Water Facilities and Soil Conservation Loan Act of August 28, 1937, as amended ( 16 U. S. C. 590r-x ) , needs to be improved and modernized. This act has provided very much needed loan facilities during its nearly 10 years of operations. Its scope was broadened several years ago to cover the entire United States. It authorizes the Secretary of Agriculture to make direct and insured loans to farmers and stockmen and reclamation, irrigation and grazing associations for soil and water resource improvement and conservation purposes. However, with increased costs of such measures, the loan limitations have gotten out of date. We recommend raising the limitation on indebtedness of drainage, irrigation, and grazing associations and other corporations and agencies, as provided in section 8 from $250,000 to 1 million. We also urge that the maximum rate of interest chargeable under this program be set at 3 percent per annum. If this should require Federal subsidy in a period of a general hard-money policy, we feel the difference is justified both by the generally deflated condition of the farm economy and by the general public welfare benefits derived from increased soil and water conservation on the farms of the Nation. STUDY OF BANKING LAWS 571 RECOMMENDED AMENDMENTS TO DISASTER LOAN ACT OF 1949 , AS AMENDED Public Law 38 of the 81st Congress, as amended , is the act of April 6, 1949 , as amended ( 12 U. S. C. 1148a ) . This act makes provision for 3 percent interest on production disaster, economic disaster, and special livestock loans. We recommend striking out both termination dates so the programs can be continued, where needed, beyond July 14, 1957, the termination date in existing law. We continue to urge removal of the words "for $2,500 or more" from the language of the act since this provision was repealed by Congress in Public Law 175 within a month of its original passage. We find the idea of a minimum loan as repugnant now as did the Congress in 1953. This language should be cleared up. We also urge the following amendments to this act : Provision should be made in subsection 2 ( c ) to authorize the expenditure of the proceeds of these special livestock loans to repay existing indebtedness. The repayment period should be made "10 years" instead of "3." The existing congressional limitation of not more than 3 percent per annum interest on these special livestock loans should be made explicit in the language of subsection 2 (c ) , as it is in subsections 2 ( a ) and 2 ( b ) . This would mean deletion of the fourth and fifth sentences of this subsection. RECOMMENDED AMENDMENTS TO EMERGENCY LOAN Act of august 31 , 1954 This is the Emergency Loan Act of August 31, 1954. Except for the new legislation, it would expire on June 30, 1957. The new law extends it to June 30, 1959. We recommended the following amendments to this Act : 1. Remove the prohibition against the refinancing of existing indebtedness in section 1. 2. Eliminate the termination date in section 1 and thus establish a permanent authorization for the program. 3. Eliminate the requirement for proclamation of emergency area in section 1. 4. Eliminate the size of loan limitation in section 2. 5. Eliminate the limitation on amount of total indebtedness in section 2. In our considered judgment, there are a great many individual emergency situations outside of areas of widespread emergency. Moreover, when a fully adequate family farmer is in an emergency situation a loan no larger than $15,000 is often not enough to get him out of his trouble and enable him to get into a position to overcome his temporary emergency financial difficulty. AMENDMENT TO BANKHEAD-JONES FARM TENANT ACT, AS AMENDED Suggested extension and expansion of the Bankhead-Jones Farm Tenant Act, as amended consist of suggested additional titles, and suggested amendments to titles I, II, and IV. RECOMMENDED FAMILY FARM DEVELOPMENT ACT A crash program to eliminate farm and rural poverty in the United States is provided for in H. R. 4300 introduced by Mr. Wright Patman. We strongly urged that Mr. Patman's bill, in its entirety, be included in the comprehensive new law as a new title to the Bankhead-Jones Farm Tenant Act. This new title was not adopted. RECOMMENDED TITLE V ECONOMIC EMERGENCY REFINANCING LOANS We pointed out the need for a new title to provide a specific program of constructive rehabilitation credit to farmers , ranchers and farm-related small businesses in rural areas who are heavily indebted as the result of the farm depression that is no fault of their own . This new title was not adopted but several of its provisions were incorporated in the new law. H. R. 11544 COMPARED WITH FARMERS UNION RECOMMENDATIONS AND ADMINISTRATION POSITIONS Using Farmers Union recommendations as a measuring stick of relative adequacy, the following paragraphs set forth the major provisions and omissions of H. R. 11544 as adopted by Congress and compares them with the positions taken by the Eisenhower administration on the proposed legislation . 84444-57- pt. 29 572 STUDY OF BANKING LAWS Farm ownership and real estate loans.-H. R. 11544 adopts Farmers Union proposal to authorize insured as well as direct loans for purpose of making "improvements needed to adjust farming operations to changing conditions. " Adopts Farmers Union proposal to make existing farm owners clearly eligible for such loans, and to allow such loans to be made to farm owners and tenants who have had to seek outside sources of income to augment dwindling farm income (which must still be a "substantial portion" of the family income rather than "major portion" as in existing law) . Does not adopt Farmers Union recommendation to reduce interest rates on loans and eligibility requirements from 5 to 3 percent. Nor does bill eliminate the 5 percent limitation as recommended by the administration. H. R. 11544 does not change the limitation in existing law that units financed must be of smaller value than "average value of efficient family-type farm units *** in the county." Both Farmers Union and the administration urged elimination of this limitation. Bill does not raise the authorized annual appropriation from $50 million to $150 million as recommended by Farmers Union ; nor is amount appropriated for insured-loan revolving fund raised as recommended by Farmers Union. However, limitation on outstanding indebtedness in any one fiscal year on insured loans is raised as Farmers Union recommended. Elimination of 10 percent equity requirement as recommended by Farmers Union is not included in H. R. 11544, except for refinancing loans. Administration recommended keeping equity requirement for all loans. Payment by borrower of special fees and mortgage insurance premiums are not eliminated as recommended by Farmers Union. "Until June 30, 1959, " direct and insured FHA real estate or farm ownership loans may be made or insured , as recommended by Farmers Union, " for refinancing secured and unsecured indebtedness of eligible farmers on farms of not larger than family size who are presently unable to meet the terms of their outstanding indebtedness and are unable to refinance such debts" through private commercial channels "at rates and terms which they could reasonably be expected to fulfill." This is done in H. R. 11544 by means of a new section 17 added to title I of the Bankhead- Jones Farm Tenant Act rather than as a new title V as proposed by Farmers Union , but with following exceptions it does provide the real estate refinancing lending authority recommended by Farmers Union. Farmers Union proposed that, in addition to individual farmers, the following also be made eligible for refinancing loans : "farm partnerships, grazing associations, irrigation companies, and the owners of farm-related small businesses in rural areas ;" these were omitted in H. R. 11544. Refinancing loans secured by farm real estate, under H. R. 11544, can be made up to the amount certified by the county committee to be the "value of the real estate" plus the "reasonable value of the applicant's livestock and farm equipment ;" this is in substantial agreement with Farmers Union recommendation, if administered according to intent of the House. (Farmers Union has suggested a limitation of not less than $50,000 per farm. ) Eisenhower administration has steadfastly opposed the provision of authority for refinancing of existing indebtedness as an approved purpose of any type of FHA loan. Operating loans (production and subsistence and rehabilitation loans ) .- Existing law sets 5 percent maximum interest rate for loans and eligibility. Farmers Union recommended cutting rate to 3 percent. Eisenhower administration recommended eliminating maximum. H. R. 11544 leaves 5 percent as the maximum rate chargeable. Accepts Farmers Union proposal to allow borrowers to substantially augment from outside sources their dwindling farm income without losing eligibility for these loans. Raises maximum size of initial loan from then-existing $7,000 to $20,000 rather than to $25,000 recommended by Farmers Union ; maximum allowable total outstanding indebtedness is raised from $10,000 to $20,000 rather than to $40,000 as recommended by Farmers Union. Farmers Union recommended elimination of 7-year repayment maximum: H. R. 11544 continues this provision but softens it by extending the 7-year period to "7 years plus number of years the area in which the borrower is located has been designated as a disaster area by the President," for such existing borrowers as may now be located in such a disaster area or who in the past had been a recipient of a disaster loan. STUDY OF BANKING LAWS 573 Recommendations by Farmers Union to simplify and improve efficiency of administration of uncollectible accounts are incorporated in H. R. 11544. Authority for making refinancing loans secured by chattel mortgages as recommended by Farmers Union is included in H. R. 11544 as a new section 51, to title II of the Bankhead-Jones Farm Tenant Act, rather than as a new title V as recommended by Farmers Union. However, Secretary of Agriculture is authorized to make use of "operating loans" funds for "the refinancing of existing indebtedness." Such loans would be limited to $20,000 per borrower rather than $50,000 per borrower as recommended by Farmers Union. The loans would be at 5 percent interest rather than 3 percent, and the maximum repayment period would be 7 years rather than 15 years as recommended by Farmers Union. Such loans would be available only to farmers and stockinen ; Farmers Union recommended that farm partnerships, grazing associations, irrigation districts, and "farm-related small businesses" also be made eligible to obtain these refinancing loans. Bill does not provide that such loans could be made to assist "eligible farmers and stockmen to purchase stock in irrigation companies or grazing associations." In fact such loans appear to be expressly forbidden by language elsewhere in the bill. The Eisenhower administration opposed authorizing loans of any kind for refinancing of existing indebtedness. OTHER SPECIFIC OMISSIONS OF H. R. 11544 H. R. 11544 as passed by the Congress includes no change in Water Facilities and Soil Conservation Loan Act. No changes were made in disaster loan act, except to include in the report of the House Agriculture Committee Farmers Union recommendation to direct the Secretary of Agriculture to make orchard disaster loans ( such as for Oregon prune orchard freeze ) with reasonable repayment terms. Farmers Union-recommended farm-loan and technical-assistance programs to assist low-income farm families to develop "economically adequate full-time and part-time" farms are, with exception of extremely long-term farm forestry loans, incorporated in the title I and title II revisions of the Bankhead-Jones Farm Tenant Act that are included in H. R. 11544. Maximum interest rates on. such loans is set at 5 percent in the bill rather than the 3 percent recommended by Famers Union and the "no maximum" recommended by Eisenhower administration. H. R. 11544 has no provisions for aid to low-income farmers respecting employment services for off-farm employment, no provisions for additional vocational education services, and no provisions for industrial dispersion to low-income farming areas. However, provision for these latter were incorporated in a separate bill which passed the Senate and favorably reported by the House Banking and Currency Committee. Unfortunately, this bill died when House floor consideration was blocked by Executive Branch pressure. This bill would have designated ruralredevelopment areas as a section of a general depressed areas redevelopment program for both urban and rural areas of chronic unemployment and underdevelopment. Economic disaster loans.--Farmers Union recommended that authority for this type of loan be made permanent legislation. H. R. 11544 extends the program through June 30, 1959. Interest rate is continued at 3 percent as recommended by Farmers Union. However, H. R. 11544 does not eliminate need for area to be "designated" before loans can be made ; does not eliminate maximum size of $15,000 and maximum indebtedness of $20,000 as Farmers Union had recommended. H. R. 11544 increases from $15 million to $65 million the total amount of such loans that may be made. Farmers Union recommended no maximum limitation. H. R. 11544 does not permit such loans to be made for refinancing of existing indebtedness ; Farmers Union had recommended that such be permitted. VOLUNTARY FARM-DEBT ADJUSTMENT H. R. 11544 includes Farmers Union recommendation for increased emphasis to Secretary of Agriculture to reactivate the voluntary farm-debt adjustment program that was so helpful to debt- ridden farmers in their attempts to climb out of the farm depression that started in 1920 and hit bottom in 1932. Eisenhower recommendations did not mention farm-debt adjustment as a needed activity... 574 STUDY OF BANKING LAWS REESTABLISHMENT OF FULLY EFFECTIVE VARIABLE REPAYMENT PLANS H. R. 11544 does not authorize reestablishment of authority for utilization of a fully effective variable repayment plan , without regard to previous excess payments. Farmers Union recommended that the Secretary be authorized to adjust repayments on all types of FHA loans to the new earnings and ability of the borrower to repay from year to year. Existing law, left unchanged by H. R. 11544, allows such variable repayment adjustments only in cases where the borrower has gotten ahead of schedule in previous years. OPPOSITION ARGUMENTS Following is the official executive branch recommendation opposing enactment of S. 3790 which would greatly improve the "Yardstick" family farm credit program of Farmers Home Administration. JULY 3, 1956. Ilon. ALLEN J. ELLENDER, Chairman, Committee on Agriculture and Forestry, United States Senate. DEAR SENATOR ELLENDER : This is in reply to your request of May 9 for a report on S. 3790, a bill to strengthen the Nation by providing auxiliary credit resources required to preserve the family-size farm, providing additional credit for farm enlargement and development, refinancing of existing indebtedness, expansion, and simplification of farm ownership and operations credit programs by amendment of the Bankhead -Jones Farm Tenant Act, and extension and simplification of emergency and disaster farm credit by amendment of the Acts of April 6, 1949, as amended, and of August 31 , 1954, and for other purposes. The Department recommends that the bill not be passed . The bill would amend the Bankhead-Jones Farm Tenant Act, the Water Facilities Act of 1937, Public Law 38, and Public Law 727. In addition , it would add two new titles to the Bankhead-Jones Farm Tenant Act ; namely, title V, "Rural Adjustment Credit," and Title VI, "Family Farm Developing Act." The Departn:ent recognizes that some changes are needed in its existing credit authorities and is in agreement with some of the objectives of the bill, particularly those which would extend and improve the credit services available to farmers under Titles I and II of the Bankhead-Jones Farm Tenant Act. The specific recommendations of the Department have been submitted to the Congress and are embodied in S. 3429 and S. 3559. One of the reasons enactment of S. 3790 is not recommended is that this bill would change substantially the character of the credit services of the Department and make it directly competitive with private and cooperative lenders. This position would be in sharp contrast to the present status of the Department in the farm credit field ; namely, as a supplementary source of credit to be used only when applicants cannot obtain loans from other creditors at reasonable rates and terms. More specifically, the bill would provide that applicants who could not obtain credit for real estate and operating purposes from other sources at rates of not more than 4 percent would be eligible for loans under the Bankhead-Jones Farm Tenant Act. Since the going rate of farm loans, particularly operating loans, is more than 4 percent, most farmers who need credit could establish their eligibility for assistance under the Bankhead-Jones Farm Tenant Act. Increasing the loan limits on title II loans to $40,000, eliminating the 7-year continuous indebtedness period , as well as authorizing chattel and realestate loans up to $50,000 under title V of the proposed bill, would permit loans to farmers and stockmen whose operations are substantially larger than family size. At present, loans under the Bankhead-Jones Farm Tenant Act can be made only to farmers whose operations are not larger than family size. The minimum 3-percent interest rate for insured loans specified in S. 3790 would make the insured loan authorities practically inoperative in the current money market. Our experience has been that at present a 3-percent interest rate is not sufficiently attractive to lenders to assure an adequate supply of funds for insured farm ownership and soil and water conservation loans. This provision, unless compensated for by increased direct appropriations, would curtail rather than expand the credit facilities available to farmers. The bill proposes a number of lending authorities which are not directly related to extension of credit to bona fide farmers. Title V, for example, authorizes loans to "farm-related small businesses." This type of credit program should be administered by an agency other than the Department of Agriculture. Title VI includes loan authorities with respect to both farm and nonfarm STUDY OF BANKING LAWS 575 aspects of a comprehensive rural development program. Since the BankheadJones Farm Tenant Act is primarily a credit statute, this Department is of the opinion that the portions of title VI that pertain to phases of a comprehensive rural development program other than credit to farmers are not germane to the Bankhead-Jones Farm Tenant Act. The bill , if enacted , would establish additional lending authorities under the various titles which would differ in only minor respects . These small differences with respect to eligibility, loan purposes, and terms of loans would be difficult to explain to farmers and would unnecessarily complicate the administration of the Department's credit services. Furthermore, there would be considerable duplication of lending authorities under the various titles for chattel and realestate purposes. The Bureau of the Budget advises that there is no objection to the submission of this report. Sincerely yours, TRUE D. MORSE, Acting Secretary. CONCLUSION Relating to the need for a comprehensive "yardstick" family farm credit agency, James G. Patton told the Senate Agriculture Committee on June 7, 1955 : "The credit needs of family farming are tremendous and growing. Credit should be available at the times needed and its terms and conditions should be adopted to characteristics of farming as a combined business and way of life. "Much of the credit needs of family farming can be met by loans obtained from private individuals and such credit institutions as banks and insurance companies. Farmers themselves can meet other needs cooperatively through the institutions of the farm credit system. Together, it should be expected that these sources should supply the great bulk of the credit needs of agriculture. However, inasmuch as all of these must obtain their funds from commercial money markets and conduct their operations along traditionally conservative financial lines, they find themselves unable to perform the entire farm credit job. Such institutions find it difficult to pioneer in the meeting of newly recognized or newly emerging farm credit problems. They are not set up to use their credit resources in meeting the high risk needs of severe disasters and emergencies, economic or natural. They cannot afford to participate in credit operations when a relative high intensity of technical assistance and loan servicing are required to render loaning activities essentially sound from a strictly financial viewpoint. Moreover, all of these private individual corporate and cooperative institutions have a marked tendency in the absence of outside stimulation to become traditional, custom-bound, and increasingly restrictive in their credit policies. "There is nothing morally wrong about this nor even economically unsound. It just means that the best interests of family farmers require a separate supplemental and yardstick credit operation. This can best and most efficiently be supplied to the Nation by the Federal Government. Such an agency should have the legal authority and sufficient funds to meet all of the family farm credit needs not filled on reasonable terms by private cooperative and other corporate lending agencies. "This is a problem not strictly of young farmers, nor of low-income farm families, nor of disaster situations. It is a need that extends across the board. Such an agency would stand ready to meet any legitimate farm credit need not met by existing private agencies on reasonable terms. The agency would make both direct governmental loans and would insure loans of private lending agencies." BIBLIOGRAPHY 1. S. 3790, Family Farm Credit Act, introduced by Senator Humphrey and other Senators. 2. House Report No. 2260, Farm Loan Programs. 3. Acts of Congress administered by Farmers' Home Administration, compilation. . Mr. BAKER. Farm people are concerned not only with their own income and credit prospects and opportunities. We know that farm people cannot prosper in a nation with a weak financial structure nor one primarily dominated by bankers alone. We are, also, interested in keeping opportunity open and encouraging to small-business men 576 STUDY OF BANKING LAWS in rural and urban areas, in making adequate consumer credit available at reasonable rates to wage and salary employees of private and public institutions, and in providing the social and credit capital investments required to maintain a constantly and rapidly expanding national economy . Andrew Jackson's successful fight to gain control of the banking system for the common people is a part of our organization's tradition and of the Nation's heritage. It seems appropriate that the draft bill before your committee should bear the name of a Senator from the same State as Carter Glass, of Virginia, the author and protagonist who brought about the adoption of the great financial reforms embodied in the original Federal Reserve Act. We urge that you conduct your deliberations and make your decisions in the great traditions of Andrew Jackson and Carter Glass. And I know that all or most of your members agree with us that the financial institutions of this Nation exist to serve the people of our Nation and not the other way around. We are convinced that the national welfare depends upon control over the financial institutions of the Nation by democratic political processes as directly as is consistent with efficient and effective management and administration and not official encouragement of cooptation of that function by semipublic boards of bankers' representatives. This has been a continuous and significant fight throughout the history of America. I have full confidence in this committee and the Senate to make sure that whatever amendments they make to existing Federal laws regulating our financial institutions will move in the direction of greater control by and service to the people as a whole rather than giving primary attention to the power drives of those who by control of great wealth could in the absence of Federal regulation demand and obtain their Shakespearean "pound of flesh." Other than this general statement , we do not wish to direct any statement toward most of the specific provisions of the proposed bill, except those relating to the Federal Credit Union Act . Farmers Union is very much interested and concerned about the welfare of credit unions. Many farmers are members of credit unions. Moreover, credit unions were organized and do operate to provide additional bargaining power in the money markets for little people of all walks of life who, like farmers, find themselves in a grievously disadvantaged bargaining position in respect to those who control large accumulations of wealth and credit. The individual farmer or consumer is almost completely without bargaining power if he must go, almost literally, with hat in hand and knock on the front door of Wall Street to obtain a needed loan. Credit unions allow such litttle people with but small amounts of accumulated wealth of their own to put their financial resources into a joint pool and combine their strength to the mutual protection of themselves. Most credit unions have been successful in their efforts ; and some have become financial institutions of considerable size and strength. We are told that the big- money interests have now withdrawn their objections to the small-loan business of credit unions but are beginning to view with alarm the growing ability of credit unions to make STUDY OF BANKING LAWS 577 loans, for example, of sufficient size to a family farmer to finance his land purchase and equipment . Remembering that many economically adequate family farms in many areas of the Nation involve a capital investment of as much as $150,000 to $270,000, I suggest the need to maintain as in existing law the definite legal authority of credit unions to make individual loans up to 10 percent of the unimpaired capital and surplus. We do not fear that loan committees of credit unions, being made up as they are of members of the institution and not subject to control of management but elected by members directly, will squander assets nor make unwise large loans. Nor do we believe that credit unions will be able or willing to make so many large loans that they will become a legitimate threat to the financial integrity, nor even a sizable competitive force against the other large financial institutions of the Nation. As a matter of fact, existing law now provides the same limitation on the size of single individual loans for credit unions as for the institutions that come under the Federal Bank Act . We believe that continuation of this provision of existing law is vital to continued service and significance of credit unions, which now have some 10 million members in the United States and about $3 billion of assets. Credit unions are still growing as little people make increasing provision to protect their interests in ther own credit resources. There are farmer credit unions, and labor credit unions, church membership credit unions and community credit unions. This type of local economic self-protection needs to be encouraged and permitted to grow. It should not be knocked in the head at its growing edge, the right to make larger loans within the safe limits of net worth where such loans are required to further the aims for which credit unions were originally organized. We, therefore, strongly urge that your committe delete from the proposed bill the provisions that will eliminate from existing law the legal right of credit unions to make individual loans up to a maximum size of 10 percent of unimpaired capital and surplus. Senator ROBERTSON. We have been glad to hear your views and we authorized you to put in the record your memorandum of August 30 called Legislative Analysis, Memorandum No. 56-17, Revision No. 1 . Mr. BAKER. Thank you, sir. Senator ROBERTSON. The chairman has made just a hasty examination of the various things covered by that memorandum but he has reached the impression that all of them or practically all of them are outside the jurisdiction of this committee. Mr. BAKER. That is correct, sir. Senator ROBERTSON. You want to show the whole credit structure in which your organization is interested ? Mr. BAKER. That is correct ; yes, sir. Senator ROBERTSON. Any questions ? Senator BENNETT. No questions. Senator ROBERTSON . If not, we thank you . The committee now stands in recess until 10 o'clock tomorrow. (Whereupon, at 11:20 a. m. , the subcommittee recessed until 10 a . m. the following day, Thursday, January 31 , 1957. ) 1 " STUDY OF BANKING LAWS (Financial Institutions Act of 1957) THURSDAY, JANUARY 31, 1957 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, SUBCOMMITTEE ON BANKING, Washington, D. C. The subcommittee met, pursuant to recess, in room 301 , Senate Office Building, at 10:05 a. m., Senator A. Willis Robertson (chairman of the subcommittee ) presiding. Present : Senators Robertson , Frear, Clark, Bricker, and Bush . Senator ROBERTSON . The committee will come to order. The first witness today will be Mr. Sam M. Fleming of Nashville, Tenn., representing the Association of Reserve City Bankers. The committee will be glad to hear Mr. Fleming. STATEMENT OF SAM M. FLEMING, APPEARING ON BEHALF OF THE ASSOCIATION OF RESERVE CITY BANKERS Mr. FLEMING. Thank you , Senator. Shall I proceed, Senator ? Senator ROBERTSON. You may proceed. Mr. FLEMING. Mr. Chairman and members of the committee, my name is Sam M. Fleming. I am president of the Third National Bank in Nashville, Tenn. I am also a member of the committee on Federal relationship of the Association of Reserve City Bankers. I have been asked by the president of the association, James D. Robinson, Jr., chairman of the board of the First National Bank of Atlanta, to represent the association before this committee today. The Association of Reserve City Bankers is an organization of senior executive officers of banks located in Reserve or central Reserve cities which do a correspondent banking business. The Association was founded in 1912 to promote the general interest of banking with particular reference to the banking business located in Reserve and central Reserve cities. It has a present membership of 400 . These hearings are being held to consider the tentative bill entitled the "Financial Institutions Act of 1957." Essentially, this bill is the result of the recognition by the members of this committee of the need for a technical revision of the Federal laws affecting financial institutions. As Senators Fulbright and Robertson have pointed out in statements made from time to time in connection with the study which preceded this bill, there has been no major overhaul or revision of the Federal laws relating to our private financial institutions since the passage of the acts of the early thirties. Generally, in the area of banking, legislation enacted in the intervening period has taken the form of isolated amendments. The result 579 580 STUDY OF BANKING LAWS has been a continuing patch job on existing laws. Over the years many of the provisions of existing law have become obsolete or unnecessary. Other provisions have been found to be technically or substantively inadequate to meet the requirements imposed on banking by the changing needs and patterns of the business, industrial, and agricultural community. Additional or amended authority is needed in certain areas to facilitate the service our financial institutions render to their communities. In our opinion the design of this bill is to be commended. In effect, if enacted, it would rearrange and recodify the Federal laws relating to our primary private financial institutions. Each title of the bill largely embraces the provisions of law applicable to the type of financial institution affected . Thus, title I, the National Bank Act, largely contains the body of laws affecting national banks. By thus bringing these laws together in one title the task of the supervisory authority, the banker and lawyer should be greatly facilitated . In the existing laws there are many instances of overlapping and duplicate provisions, the elimination of which will be a practical and worthwhile result. A further benefit of the enactment of the bill is apparent in the organization and arrangement of the provisions of Title I. Many of the provisions of existing law affecting the powers and duties of national banks are scattered through title 12 of the United States Code. By comparison, these provisions are brought together and logically arranged under chapter 6 of title I of this bill. This would obviously facilitate quick access to a particular provision. Another practical advantage of this bill derives from the elimination of obsolete or unnecessary provisions of existing law, which now serve only to clutter up the statute. Title I of this bill, for example, eliminates from existing law provisions applicable to national banks which have expired by their own terms ; provisions relating to the circulation of notes by national banks, which provisions have long not been in use and are not likely to be used in the future ; and provisions relating to governmental institutions which have been dissolved. Similarly, title II of this bill, the Federal Reserve Act, reflects the elimination of many obsolete provisions now found in the existing Federal Reserve Act relating, for example, to the organization of Federal Reserve banks. Many other such examples could be cited to show how the existing law would be improved by the elimination of obsolete, unnecessary, overlapping, or duplicate provisions contained in it. This bill, if enacted, would make many technical changes in existing law. Under title 12 , United States Code, section 24, for example, it is not clear that a national bank may make contributions to educational and civic improvement organizations. Under this bill a national bank is expressly authorized to make such contributions. Further, under present law, contributions by a national bank may not be made to funds or instrumentalities to which a State bank located in the same State is expressly prohibited from contributing under the law of that State. Under this bill the authority of a national bank to make authorized contributions would not be dependent on the law of the State in which it is located. Thus, this provision makes a technical as well as a minor substantive change in existinglaw. F STUDY OF BANKING LAWS 581 Similarly, under present law a national bank continuing to operate after merger or consolidation with another national bank or State bank must again secure the approval of the Comptroller of the Currency to operate branches it lawfully had in operation immediately prior to the merger or consolidation , establishment and operation of which branches had already been approved by the Comptroller of the Currency. This new bill dispenses with this burdensome and technical requirement. There are many other such technical changes in this bill. Amended authority is provided in this bill with respect to certain lending authority of national banks. Thus, for example, this bill would amend exception 6 of section 5200 of the Revised Statutes to permit a national bank to lend one obligor not more than 25 percent of its capital and surplus against insurable, perishable, readily mar ketable staples under refrigeration for a period not exceeding 6 months. Under present law, readily marketable staples must be nonperishable in order to qualify as security under exception 6 of the above- cited provision . A national bank will also be permitted under this bill to acquire to a limit of 25 percent of capital and surplus obligations from dealers of dairy cattle arising out of the sale of dairy cattle which bear a full recourse endorsement or unconditional guarantee of the dealer. Section 84 of title 12 of existing law poses unnecessary and undesirable obstacles to the financing of business, industry or agriculture, and I shall speak specifically of several of these later on in this statement. There are many provisions of title I of this bill which would tighten existing law affecting national banks. By way of illustration, the present law with respect to the declaration and payment of dividends by a national bank would be amended under this bill to require the specific approval of the Comptroller of the Currency where the total of all dividends declared in any calendar year by a national bank exceeds its total net profits for that year plus its retained net profits of the preceding 2 calendar years. The requirement of present law that the stock of a national bank must be 50 percent paid in before such a bank is authorized to commence business is amended to require 100 percent payment. Under present law negotiable recourse installment paper may be acquired by a national bank without limitation. Under this bill a limitation of 25 percent of capital and surplus is imposed on the amount of such paper a national bank may acquire from one customer unless the bank certifies in writing that it is relying on the maker rather than the endorser of such paper. Under present law shareholder approval is not required with respect to a bulk sale of the assets of a national bank preliminary to voting the bank into voluntary liquidation. Under this bill approval by a twothirds vote of the shareholders would be required to authorize such a sale unless, in the case of an emergency, the Comptroller specifically waives this requirement. There are, Mr. Chairman , certain provisions of this bill which I should like particularly to emphasize. Section 23 of title III of the bill, the Federal Deposit Insurance Act, provides that no insured bank shall enter into any merger, consolidation or assumption transaction with any other bank, without the prior written consent of the Comptroller of the Currency if the resulting bank is a national bank, of the Board of Governors of the Federal Reserve System if the 582 STUDY OF BANKING LAWS resulting bank is a State member bank, or of the Federal Deposit Insurance Corporation if the resulting bank is a nonmember insured bank. This recommendation would require the Comptroller of the Currency, the Board of Governors, or the Federal Deposit Insurance Corporation, as the case may be, in granting or withholding consent, to consider the competitive or monopolistic aspects of any proposed merger, consolidation , or assumption transaction, which they are not now by existing statute required to do. Senator ROBERTSON. Will you yield there for a suggestion ? Mr. FLEMING. Yes, sir. Senator ROBERTSON. Before I comment on that statement, I want to say in effect that it is very helpful to all bankers and financial institutions, and to Member of Congress, to know that an organization like the one for which you speak has made a very careful examination of the provisions of this bill now coming before us. You mentioned items in the bill which have your approval. You have approved this provision for a new law on bank mergers and have pointed out at the present time there is no State law and there is no Federal law which requires consideration to be given to the competitive situation and possible monopolistic situation. Mr. FLEMING. That is correct, sir. Senator ROBERTSON. This bill supplies that defect. Mr. FLEMING. That is correct , sir. Senator ROBERTSON. You know, of course, that the language in the bill is the exact language of the Fulbright bill that the Senate passed last year, but which did not get through the House. Are you aware of the fact that every State has an antimonopoly law dealing with the merger of State banks ? Mr. FLEMING. No, sir. I was not aware of that. Senator ROBERTSON . I understand that is correct. I have heard some little criticism voiced -I do not remember it last year, but I have heard it voiced this year-that we are not giving due consideration to State authorities when we let the Federal Deposit Insurance Corporation do this . The FDIC jurisdiction over a nonmember bank because of a Supreme Court decision that if a bank voluntarily takes out Federal insurance it submits itself to Federal control. That is something we in the South have always said, that is, that you cannot get Federal aid without Federal control , and in the case of schools or other institutions it is going to come sooner or later. As an illustration of that principle, when the State banks got their deposits insured first for $5,000 and then for $ 100,000, the Supreme Court said "The Federal Government has got you now." Some State bank authorities think we have gone too far in letting a Federal agency like the Federal Deposit Insurance Corporation pass on the merger of State banks. I wish to call attention to the fact that before the application of two State banks to merge can ever get to the Federal agency, it must get past its own State authority, and there is such State authority in every State. They have to approve the application first. For that reason I feel that the fears voiced to me recently and which may be voiced again to me that we have not given due consideration to the States in this merger provision, are not justified . In any event, I would not know how to pass a Federal law giving a Federal official the power to do something, and giving a State official STUDY OF BANKING LAWS 583 the power to nullify what he is going to do. One or the other has to have the authority. There is no provision under our Constitution that they can act jointly or that the Federal Government can pass a law and then say that it shall be administered by some State official. I just wanted to bring that out in connection with this. Of course, we are pleased to have the endorsement of the reserve city bankers of this and other provisions. You may proceed. Mr. FLEMING. I think that is a very appropriate statement, Senator Robertson. The enactment of this proposal , previously incorporated in S. 3911 , passed by the Senate but not by the House of Representatives in the 84th Congress, would enable the bank supervisory authorities to deal more effectively with merger, consolidation, and assumption transactions. It would place in the bank supervisory authorities final authority to pass on the competitive and other aspects of any such transactions. Banking is a supervised and regulated industry and in our opinion the respective bank supervisory authorities are best qualified by virtue of their intimate knowledge and long experience with banks under their supervisory jurisdiction to pass with finality on both the banking and competitive aspects of any such transactions. No logical reason is seen why authority over such transactions engaged in by banks should be vested in any Government agency other than the banking supervisory authorities . Further, the designation of another Government agency, foreign to the banking business, to exercise a major area of control over the banking business would result in a divisive, harmful, and burdensome regulation of the banking business which would not contribute to the public interest, the health of the banking business, or sound regulation. I believe, Mr. Chairman, that that is in accord with the statement you have just made. Senator ROBERTSON. Thank you. Senator BUSH. You are discussing a situation which is not in this bill. No other agency than those mentioned is to be consulted in the matter of a merger ; is it? Mr. FLEMING. The point is Senator BUSH. You are discussing a bill which we had last year which would give the Department of Justice a position in this. Mr. FLEMING. Only indirectly. I believe the point here is that the supervisory authorities must consider the competitive feature, Senator Bush, as well as the practical feature of any merger. At the present time the law does not require or even indicate that they should consider anything in respect to competition . We feel that the supervisory authorities should have it spelled out that they should consider the competitive angle as well as the practical angle. Senator BUSH. Does this bill specifically require them to do that ? Mr. FLEMING. Yes, sir. Senator BUSH. It does ? Mr. FLEMING. It does. Senator BUSH. That does away, really, with the argument in favor of the Department of Justice getting into this, which was up before this committee last year ; is that not right ? 584 STUDY OF BANKING LAWS Senator ROBERTSON. That is correct. We preferred the approach of the banking agencies to handle this, to the Celler proposal, which passed the House and came over to us, that this should be referred to the Department of Justice. Senator BUSH. This bill would require 2 out of these 3 Federal agencies to approve of the merger, provided that the merger involved insured banks. Mr. FLEMING. If it involved the merger of a State bank with a national bank, it might to a certain extent , Senator. If it involved the merger of a national bank with another national bank it would not. Senator BUSH. If it involved two national banks, both insured, it would involve the Federal Reserve Board and the Federal Deposit Insurance Corporation. Senator ROBERTSON . No. Only the Comptroller of the Currency. Senator BUSH. Is that right? Senator ROBERTSON. Yes. The Federal Reserve Board gets the member banks, the State member banks, and the Comptroller gets the national banks. Senator BUSH. The Federal Reserve Board comes in where you cross a State line. Where you have a National and State bank merging; is that right ? Senator ROBERTSON. If just State banks are involved, as I said before, the State agency has to act first or the Federal agency will not even consider it. Senator BUSH. If you have two State banks merging and they are both members of the Federal Reserve System, then the Federal Reserve comes in ; do they not? Senator ROBERTSON. That is right ; if they are members. Senator BUSH . And so does the Federal Deposit Insurance Corporation if those banks are insured. Mr. FLEMING. Maybe I could answer that question a little bit better if I would read again the one statement I made in that connection earlier. May I? Senator BUSH. What page are you on? Mr. FLEMING. At the top of page 6. * the Federal Deposit Insurance Act, provides that no insured bank shall enter into any merger, consolidation, or assumption transaction with any other bank, without the prior written consent of the Comptroller of the Currency if the resulting bank is a national bank, of the Board of Governors of the Federal Reserve System if the resulting bank is a State member bank, or of the Federal Deposit Insurance Corporation if the resulting bank is a nonmember insured bank. Senator BUSH. My question still remains. Should it not read "and of the Federal Deposit Insurance Corporation if the resulting bank is insured" ? Mr. FLEMING. I think only when you cross lines that would apply. As long as a merger stays within the category of either the Federal Deposit Insurance Corporation or the Comptroller of the Currency or the Board of Governors of the Federal Reserve System it would not be necessary to have over one of the supervisors approve it. Senator ROBERTSON. The Chair would like to point out that the emphasis is put on the word "resulting." That determines jurisdiction . If it is a national bank the jurisdiction is in the Comptroller of the Currency. If it is a member bank but not national there is jurisdiction in the Federal Reserve Board. If it is a State bank and STUDY OF BANKING LAWS 585 a nonmember bank, jurisdiction is with the Federal Deposit Insurance Corporation, and they get that only because of the insurance. Senator BUSH. I am still not clear on where the Federal Deposit Insurance Corporation is excluded. Senator ROBERTSON . On nonmember State banks. Senator BUSH. Nonmember ? Senator ROBERTSON . Nonmember State banks. If there are 2 or more State banks that are going to merge into 1 State bank. They all started out State banks and are going to wind up State banks, but they are all insured. Senator BUSH. So they are not under the jurisdiction of the Comptroller. Senator ROBERTSON. That is right. Senator BUSH. And not under the jurisdiction of the Federal Reserve. Senator ROBERTSON. That is right. But they are under the jurisdiction of the Federal Deposit Insurance Corporation , but that jurisdiction does not come to the Federal Government until the proposed merger has first been approved by State authorities. Mr. FLEMING. That is correct. Senator BUSH. But if they are insured ? Senator ROBERTSON. Then we have jurisdiction. Senator BUSH. The Federal Deposit Insurance Corporation has jurisdiction ? Senator ROBERTSON . That is right. Senator BUSH. Here is the point I am really getting at. Are there any of these mergers under this proposed legislation which are going to require the approval of two Federal agencies ? Mr. FLEMING. Could I answer that ? Senator ROBERTSON. You can answer that, yes. There may be a few instances where it could be possible. Mr. FLEMING. If you had a State bank that was a member of the Federal Reserve System that was to merge with a nonmember bank that was a State bank, then you might have to have the approval of both the Federal Reserve Board and the Federal Deposit Insurance Corporation. Senator BUSH. Is that so ? Because it says, "If the resulting bank * * * ” The jurisdiction is determined by what the resulting bank is. Is that not true? Senator ROBERTSON. The jurisdiction is determined by what the resulting bank will be. Senator BUSH. Under that understanding I still ask--and if the witness is not sure I will be glad to ask the chairmanSenator ROBERTSON. I will let my counsel speak. Senator BUSH. Is it likely a case will come up under this bill where two Federal agencies have to examine and approve the merger? Senator ROBERTSON. I will let our counsel, Mr. Don Rogers, give us his opinion on that. Mr. ROGERS. When you look at the end result I do not think it would be possible to have two Federal agencies. Senator CLARK. I cannot hear you. Mr. ROGERS. I do not think it is possible to have 2 Federal agencies passing on it, because you look at the end result and only one of the 3 has jurisdiction in the bill. There is a provision that all of these-- 586 STUDY OF BANKING LAWS on the competitive factors all 3 agencies will consult with one another, so that they have a uniform pattern of approval ; but it is certainly not contemplated that 2 agencies would have to pass upon it. Senator BUSH. I do not wish to delay the gentleman any further, but I think it ought to be examined because it still is not clear to me that there cannot be two agencies having jurisdiction in this merger. Senator ROBERTSON . We will look into it further. Senator BUSH. I would like to have it made very clear as to whether or not there is a possibility under this bill for that. Then I would want to be convinced it is necessary to have two agencies of the Federal Government approving a merger. Senator ROBERTSON. This bill, as we pointed out, contains the exact language of the bill that this committee approved last year, and the Senate passed. We think when final action is taken there will be only one Federal agency that has jurisdiction to act but, as our counsel has mentioned, it is possible that all agencies will be consulted. Senator BUSH. That is desirable. Senator ROBERTSON. That is right. Then if you look, as we believe, at the end result of what the bank will be after the merger has been accomplished, then that determines who has jurisdiction ; and we think under the provisions of the law as we propose it, it is exclusive. Senator BUSH. It still appears from the gentleman's testimony that in the end result when you have a bank and you say what is it going to be, it may well be a member bank and a member of the Federal Deposit Insurance Corporation. Therefore, under this language it would appear to me they both might have jurisdiction over the merger, and that is what I want to find out. Mr. ROGERS. No. On a member bank it would always be the Federal Reserve Board. Senator BUSH . Yes. Senator ROBERTSON . If it is going to stay a member bank. Senator BUSH. This language says : or of the Federal Deposit Insurance Corporation if the resulting bank is a nonmember insured bank. If it is both a member bank and an insured bank, which has jurisdiction ? Mr. ROGERS . The Federal Reserve Board. Senator BUSH. Is that clear in the law ? Mr. ROGERS . It is. Senator BUSH. It is ? Mr. ROGERS . Yes. Senator BUSH. And the Federal Deposit Insurance Corporation is excluded ? Mr. ROGERS . Yes. Senator BUSH. If that is the case, it is all right. Senator ROBERTSON . The biggest merger we had in recent years was Chase and Manhattan- Chase a national bank and Manhattan a State bank. Chase gave up its national charter and merged with the State bank and became a State bank after it was merged . If that had happened under our law the Federal Deposit Insurance Corporation would have had to pass on it after the State of New York had approved the merger. Senator BUSH. But the Federal Reserve would not have? STUDY OF BANKING LAWS 587 Senator ROBERTSON. Nobody except the Federal Deposit Insurance Corporation in that instance. Senator BUSH. Why was the Federal Reserve excluded in that case? Senator ROBERTSON. Because the Federal Reserve never had jurisdiction . If it was a national bank it would have been the Comptroller. He lost his jurisdiction when they gave up their charter. Senator BUSH. But the resulting bank is a member of the Federal Reserve System . Senator ROBERTSON. That may be true. Yes ; it is true. It is a member of the System. Senator BUSH. Then why does the Federal Reserve not have jurisdiction over that merger under this law ? Senator ROBERTSON. Because the way this law is framed- our counsel says, yes. If this is a member bank, that is the end result . The Federal Reserve System does have jurisdiction over it. Senator BUSH. And how is the Federal Deposit Insurance Corporation excluded then ? Senator ROBERTSON. Because it only has jurisdiction of nonmember banks. If the end result is a nonmember bank and that is what it is going to be after it is merged, then the Federal Deposit Insurance Corporation and nobody else has jurisdiction there. Senator BUSH. It has to be a nonmember State bank in order for the Federal Deposit Insurance Corporation to have jurisdiction ? Senator ROBERTSON. That is correct. Senator BUSH. Is that right ? Senator ROBERTSON . That is correct. Senator BUSH. And only under those circumstances ? Senator ROBERTSON . That is right. Mr. FLEMING. I think, Senator Bush, if I might make one other statement, Mr. ChairmanSenator ROBERTSON. All right. Mr. FLEMING. I believe in line with what Mr. Rogers just said, it is quite clear that the supervisory authority over the resulting bank is the authority that must have and make the final decision- the resulting bank. That means there are three agencies that would have the authority of approving the merger, depending upon what the resulting bank is goingto be. Let us just give three illustrations on that. If the resulting bank is going to be a national bank, then the Comptroller of the Currency would have the final decision. If the resulting bank is going to be a State member bank, that means , a State bank which is a member of the Federal Reserve System, then the Board of Governors of the Federal Reserve System would have the authority. But if the resulting bank is going to be a nonmember insured bank, then the Federal Deposit Insurance Corporation would have the final authority. However, as Senator Robertson and Mr. Rogers both pointed outSenator BUSH. A nonmember insured State bank ? Mr. FLEMING. That is right. A nonmember insured State bank only. But, as Senator Robertson and Mr. Rogers both pointed out, there is bound to be a great deal of consultation between the various supervisory authorities before the merger comes to that final point. 84444-57- pt. 2—10 588 STUDY OF BANKING LAWS Senator BUSH. All right. I do not want to delay it any further. Thank you . Mr. FLEMING. May I proceed ? Senator CLARK . Could I ask one question ? Senator ROBERTSON. Senator Clark. Senator CLARK. Mr. Fleming, I would like you to turn to page 7 of your statement, if you will. You are still commenting there, as I take it, on section 23 of title III, and I would like to ask you just exactly what you mean by that first full sentence, which reads : Further, the designation of another Government agency, foreign to the banking business, to exercise a major area of control over the banking business would result in a divisive, harmful, and burdensome regulation of the banking business which would not contribute to the public interest, the health of the banking business, or sound regulation. Did you have the Attorney General of the United States in mind in that sentence ? Mr. FLEMING. We had the Justice Department in mind, sir, because that body had been discussed before when the bill was brought before the Senate. We feel that banking is a specialized and regulated business, and any matters of this importance can best be passed on by the particular supervisory authority that is intimately in touch with the day-to-day operations of banking. Senator CLARK. What is your position , then , with respect to the provision in section 23 which calls for the rendering of an opinion by the Attorney General on the request of the appropriate agency with respect to whether a proposed merger would violate the Sherman Act or the Clayton Act, as well as the provisions of this section ? Mr. FLEMING. We feel when there was included in this bill the provision that the Comptroller of the Currency, or the Federal Reserve Board, or the Federal Deposit Insurance Corporation , must consider the competitive angle, that we have to a great extent precluded the necessity of such an opinion. Senator CLARK. I understand your position. I am not at all sure I agree with you. Mr. FLEMING. May I proceed, Mr. Chairman ? Senator ROBERTSON. You may proceed. Mr. FLEMING. Sections 8 and 17 of title II of the tentative bill, the Federal Reserve Act, would limit the terms of service of members of the Federal Advisory Council of the Board of Governors of the Federal Reserve System and of the directors of the Federal Reserve banks. Section 8 provides that a member of the Federal Advisory Council who has served 6 full consecutive terms of 1 year each shall not be eligible to serve again in such capacity, until after an intervening period of not less than 3 years. Section 17 of the tentative bill provides that a director of a Federal Reserve bank who has served 2 full consecutive terms of 3 years each. shall not be eligible to serve again in such capacity until after an intervening period of not less than 3 years (except that a director designated as chairman may serve 3 full consecutive 3-year terms without such an intervening period) . There are no such limitations in present law with respect to the terms of service of directors of the Federal Reserve banks or members of the Federal Advisory Council. These provisions of the tentative bill follow the recommendations made to the Senate Banking and Currency Committee by the Board of STUDY OF BANKING LAWS 589 Governors. These recommendations of the Board of Governors were carefully considered by the advisory committee to the Senate Banking and Currency Committee. The advisory committee disapproved these recommendations of the Board of Governors on the groundthat the advantages of preserving and promoting the autonomy of the Federal Reserve banks outweigh the possible benefits from rotation and the present system has been beneficial. We are in agreement with the recommendation of the advisory committee and see no strong reason for thus limiting the terms of office of directors of the Federal Reserve banks or members of the Federal Advisory Council. Classes A and B directors are elected by the member banks in each Federal Reserve district, and the directors of each Federal Reserve bank annually select one member of the Federal Advisory Council from that Federal Reserve district. Thus, both in the case of the election of these directors and in the selection of Federal Advisory Council members, the power of appointment effectively resides in the member banks of each district. We believe it is important to retain this degree of autonomy of each Federal Reserve district without any such restraint as would be imposed by the provisions of the bill now in question. If the Congress nonetheless deems it advisable to impose any limitation on terms of service of Reserve bank directors and of Federal Advisory Council members, we suggest that any such limitation should apply only in respect to the terms of Reserve Bank directors or Federal Advisory Council members appointed or elected subsequent to the enactment of this act. Another provision of this bill which we should like to underscore is the authority granted to national banks under sections 20 and 21 of title I to issue and have outstanding preferred stock, capital notes, and debentures. Under present law, a national bank may issue preferred stock under section 301 of the Emergency Banking Act of 1933 ( 12 U. S. C. 51a) , but as this and related provisions are presently worded the use thereof at least suggests that the issuance is by way of an emergency. Further, under present law a national bank cannot issue debt obligations as a means of acquiring additional capital. The restrictions of present law on the acquisition of additional capital by banks are not in our judgment reasonable. There are times, such as at present , when banks should have access to additional capital without total reliance on common stock. In some circumstances, preferred stock or debenture issues would offer a better and more feasible means of acquiring additional capital. Expansion of capital by this means is also advantageous for the reason that capital represented by such securities can be contracted by redemption or payment at any time that the additional capital represented by such securities is not needed in the business. The use of such securities, therefore, provides a flexible means of adjusting the capital requirements of banks to the needs of the times. Senator BUSH. May I go back for just a moment to the second paragraph ? Do I understand then, is it your feeling that there should not be any inhibitions on the part of the banks desiring more capital to use, let us say, preferred stock as a medium of financing? Mr. FLEMING. That is correct. 590 STUDY OF BANKING LAWS Senator BUSH. In other words, you do not approve of the present psychology, if it is that, that it is only to be used in the event of an emergency, perhaps to bolster up a tottering bank, but should be considered as a perfectly legitimate and respectable way to get new money? Mr. FLEMING. That is correct, Senator Bush. As you will recall, there was a lot of preferred stock sold to the Reconstruction Finance Corporation back in the thirties under the Emergency Act. I think the public pretty generally feels that would be a sign of weakness today the way the law is now worded. Senator BUSH. How are you going to change that point of view? Mr. FLEMING. It's a matter of psychology, which is awfully hard to analyze and determine. But we feel if this new bill would say that banks are permitted to sell preferred stock or debentures as well as common stock, it would not be long before some of the larger banks of the country would be availing themselves of that privilege, and it would be a matter of education with the public. But if some of the larger banks take the lead on it, others could easily follow along. Senator BUSH. Debentures in that event would be subordinated ? Mr. FLEMING. Yes, indeed. Otherwise they could not be considered as capital. Senator BUSH . This is a new idea as far as I am concerned. I have not heard this seriously proposed by responsible bankers before. Has it been a matter that has been under discussion among the Reserve city bankers ? Mr. FLEMING. Yes, it has, Senator Bush, because all the banks have grown so rapidly in deposit totals and in loan totals that naturally they want to keep their capital ratios in line, and the only means they have to do that now is to go out and sell common stock. Very often that dilutes the equity of the existing stockholders. Senator BUSH. It always does. Mr. FLEMING. Yes. Senator BUSH. Is it true the banks have been having difficulty in recent years in selling common stock ? Mr. FLEMING. Yes, sir ; in small communities. In some of the larger cities I would say no, but the small bank often has a very difficult time in selling stock and also has a difficult time in selling it at a fair price. Senator BUSH. Do you think encouragement of the sale of other securities, such as debentures or preferred stock, would be of real assistance to the smaller banks who have had this difficulty ? Mr. FLEMING. I think it could conceivably be of major assistance , particularly to the smaller banks, in increasing their capital funds. It would be much easier for a small bank, as I see it, to sell a subordinated debenture carrying a fixed rate of interest than additional common stock in the small community in which it is operating. Senator BUSH. Thank you . Mr. FLEMING. Should I proceed , Mr. Chairman ? Senator ROBERTSON . You may. Mr. FLEMING. I also call to your attention section 36 ( e ) of this bill, which would authorize national banks to make working capital loans to established industrial and commercial enterprises where the bank will primarily look to the earnings of the business for repayment, rather than to real estate which may be taken as a protection security. STUDY OF BANKING LAWS 591 Since with respect to such loans the lender looks primarily to the overall net worth and earnings of the borrower, such loans represent ordinary business financing and should be treated as commercial loans and not as real-estate loans subject to the restrictions and limitations of section 24 of the Federal Reserve Act. Under present law national banks also find themselves at a competitive disadvantage with respect to those State banks located in States, the laws of which are much less stringent in this respect. There appears to be no logical reason why national banks should be prevented from obtaining real estate as collateral security without having to comply with the technical restrictions of section 24. Section 36 ( a ) of title I of the tentative bill would amend existing law (sec. 24, Federal Reserve Act) , with respect to the aggregate limitation on real-estate loans by a national bank, by adding to the existing alternative limitations on such loans of 100 percent of capital and surplus or 60 percent of time and savings, whichever is greater, an additional alternative of 20 percent of demand deposits. We believe that the limitations under existing law are unnecessarily restrictive with respect to national banks which have a relatively low proportion of time and savings deposits. This problem is met particularly in communities where the competition for savings is such that national banks cannot acquire savings at reasonable interest rates in a sufficient amount to permit them to meet the normal demand of their customers for real- estate financing. We accordingly endorse this amendment to existing law, but suggest for the purpose of this amendment that the term "demand deposits " not include public or interbank demand deposits. Section 36 (c) of title I would amend existing law to enable national banks to make loans with maturities not exceeding 18 months to finance the construction of industrial or commercial buildings if there is a valid and binding agreement by a financially responsible lender to advance the full amount of the bank's loan on completion of the construction, without such loans being regarded as real estate loans. Authority for construction loans on industrial and commercial properties is essential, if the need for such loans is to be met and if national banks are to be able to compete with State banks in such financing. The limitation of 100 percent of capital and surplus on the aggregate of construction loans for residential, farm, industrial, and commercial construction seems to be reasonable and sufficient. Section 26 of title I of the tentative bill amends existing law to make cumulative voting by shareholders in the election of directors of a national bank permissive, rather than mandatory. Similar legislation in the form of S. 256 was passed by the Senate during the 84th Congress and favorably reported by the House Banking and Currency Committee, but not finally enacted. Mandatory cumulative voting may be sound in theory but has not in practice worked well in many instances, with the result that necessary cohesion and unity in direction and management is disrupted and confidence impaired. Also there always exists the danger of competitors or undesirable elements forcing representation on a bank's board of directors in order to obtain confidential information relating to operations or loan practices. In our opinion, the amendment as proposed is sound and most desirable. 592 STUDY OF BANKING LAWS There is a further provision of the bill which we consider to have a great importance for the future of the banking business, and that is the authority under section 31 (a) ( 9 ) of title I of the bill, which would authorize national banks to establish stock option plans for their employees. It should be noted that this provision expressly requires approval of the terms and conditions of any such plan by a two-thirds vote of the shareholders and by the Comptroller of the Currency. Under present law, national banks are not permitted to establish stock option programs for their employees. The banking industry has for some time faced an acute problem of management development. The efforts of the banking industry to solve this problem have met serious obstacles, resulting in part from its inability to offer incentives such as the great bulk of American industry has been and is increasingly offering to present and potential management. Consequently, under existing circumstances, the banking industry is unable to compete with business and industry generally in management development. Management development programs are no less essential to the banking industry than to other commerce and industry in the country, and if banking is to grow and prosper along with the rest of commerce and industry it must in this respect be placed in a reasonably competitive position with such other commerce and industry. There are several provisions of this bill bearing on the same subject. which I should like to raise before this committee. These provisions are section 8 of title I ( identical with sec. 38 ( i ) of title II , sec . 40 (d) of title III, and sec. 19 (b ) of title IV) , and section 803 of title VIII. Section 8 (b) of title I, and the corresponding provisions of titles II, III , and IV, makes it a criminal offense for any employee or any former employee of the Office of the Comptroller of the Currency to accept employment in any national or district bank except pursuant to regulations prescribed by the Comptroller. The problem we see in this provision is its application to former employees of the Office of the Comptroller of the Currency. As the provision now stands, it would apply to all former employees of the Comptroller's Office without regard to the length of time which has elapsed from the time a particular employee terminated his service with the Comptroller's Office. Such a proposed application to former employees, in our opinion, requires careful consideration as to its administration and enforcement. Mr. ROGERS. May I interrupt there ? Mr. FLEMING. Yes, sir. Mr. ROGERS. Under that provision the bill provides that the supervisory agency by regulation shall prohibit. There was a thought in there that the supervising agency would set the time limitation. Mr. FLEMING. But it is not mandatory. It is left entirely to his own decision. Mr. ROGERS . That is correct. Would you recommend a definite time limitation be placed in there ? Mr. FLEMING. I believe the Comptroller has suggested a period of 2 years, which would certainly seem reasonable to us. Mr. ROGERS . Thank you . Senator ROBERTSON. You may proceed. Mr. FLEMING. Section 803 of title VIII of the bill amends sections 217 and 218 of title 18 of United States Code. So far as this provision STUDY OF BANKING LAWS 593 relates to the employment of officials or employees of the bank supervisory agencies by banks supervised by such agencies, we question the need for it. Our present thinking is that section 8 of title I , and the corresponding provisions of titles II, III , and IV applicable respectively to the Board of Governors, the Federal Deposit Insurance Corporation, and the Home Loan Bank Board, appropriately amended with respect to its application to former employees, would provide adequate authority to prevent or deal with any conflict of interest arising out of such employment of bank supervisory personnel. In addition, it appears to us that the meaning and application of these amendments made by section 803 to present sections 217 and 218 of title 18 United States Code are not clear and this seeming defect is serious in a penal statute. Finally, we are concerned as to the effect of these amendments to present sections 217 and 218 on the capacity of the supervisory authorities to acquire and maintain adequate and qualified examining staffs in the light of this provision. In our opinion, such a provision deserves and requires the careful consideration which we are sure it will receive from this committee. At present there is a conflict in ruling between the Board of Governors for member banks, and the Federal Deposit Insurance Corporation for nonmember insured banks on whether absorption of exchange is the indirect payment of interest on demand deposits and hence prohibited by law. The ability of one class of banks to absorb exchange for customers, at considerable cost to themselves , has resulted in some instances in the building up of deposits through the unnatural and unhealthy circuitous routing of checks for collection. This system circumvents the most expedient method of collecting checks and places banks which are members of the Federal Reserve System at a competitive disadvantage with nonmember banks. It is not believed Congress ever intended such a situation to develop and should take appropriate action to correct this inequity. A practicable means of doing so was suggested by Mr. Kenton Cravens in his testimony on January 28 in behalf of the Advisory Committee. This association included among the recommendations it made to this committee, in connection with the study that preceded this bill, a proposed amendment to existing law to authorize national banks and State member banks to engage in the underwriting of revenue bonds. Under present law such banks are prohibited from doing so. State and municipal authorities have in recent years been placing increasing reliance on such bonds to meet their financing needs. Banks have been substantial purchasers of these bonds for their own investment portfolios . It seems illogical to permit banks on the one hand to acquire such bonds for investment purposes and on the other hand to prohibit them from underwriting and dealing in the same bonds. Elimination of the present restriction would create a broader market and, therefore, increase competition with probable lower financing costs to the issuing bodies. Mr. Chairman, we think the time has come to reexamine the requirements of present law with respect to assessments paid by banks to the Federal Deposit Insurance Corporation. The deposit insurance fund now exceeds $ 1,700 million, equal to 1.46 percent of insured deposits. Increase in the fund from assessment income after expenses and losses for 1955 was approximately $66 million. In addi- 594 STUDY OF BANKING LAWS tion, the deposit insurance fund has been increasing substantially each year from accrual income on investments, which amounted to over $40 million for the year 1956. Meanwhile, losses suffered by the Corporation have been minimal, amounting to only $19 million over the 22-year existence of the Corporation, or an average of less than $1 million per year. In the light of these considerations, we are of the opinion that Congress should seriously consider the question whether it is necessary to continue assessing the banking system in order that the fund continue the present rate of growth. In our judgment the present deposit insurance fund, increased annually by income from investments, is adequate to meet losses arising from causes other than those incident to major national disaster, and we do not conceive that the Corporation was intended to, or indeed ever could, insure losses arising from such causes. It may be that our conception of the insurance liability of the Corporation is erroneous, but if it is, then we believe it is the Congress who should declare for the guidance of the Corporation and the insured banks, what the proper scope of the Corporation's liability should be. As the law now stands, it is left , we think wrongly, to the Corporation itself to determine this most basic principle of the Corporation's creation and operation . We infer from the testimony of officials of the Federal Deposit Insurance Corporation (hearings, p. 298 ) that the existing policy of the Corporation appears to be based on the adequacy of the insurance reserve to total deposits rather than insured deposits. In this connection, Mr. Royal Coburn, counsel to the Federal Deposit Insurance Corporation , testified during the above- cited hearings : There has never been anyone in Congress or anybody else that I can see- and I come as a newcomer in this field- I do not see that there has been any attempt to get a proper relationship. Whether it should be 75 percent, or 1 percent, or 2 percent, or 5 percent-nobody seems to have given that any serious consideration. Frankly, my own point of view just personally is- it should be 1 percent and the present formula should be continued to operate until it does get to 1 percent, and then if it reaches that point, then I think Congress should take a look to see whether or not some adjustment should be made to maintain it at about that ratio. Mr. Coburn's comments, as you will note , are based on a relationship of the Corporation's reserve to total deposits, and this, we contend, is an assumption in nowise supported by the statute or other congressional declaration . To the contrary, we believe that the concept of the statute as shown by the requirements of the law with respect to the types and maximum limits of deposits insured , is that the Corporation's reserve, or deposit insurance fund , should be related to insured deposits, and not to total deposit volume . It is significant that only 116 billion or less than 55 percent of the 212 billion bank deposit totals are insured by the Federal Deposit Insurance Corporation . For the foregoing reasons, we recommend that Congress consider amending the present law to refund pro rata to insured banks the entire assessment income of the Corporation after making allowance for all expenses and known losses , so long as the accumulated reserve is not less than 1 percent of insured deposits. We do not think that the amount which would be refunded to insured banks pursuant to our recommendation would in anywise impair the capacity of the Corporation to discharge its responsibility under law, as we conceive it. On STUDY OF BANKING LAWS 595 the other hand, such a refund would be of substantial benefit to the banking system by reducing the present strain on bank resources resulting from Federal Deposit Insurance Corporation assessments and in increasing the capacity of the banking system to meet its responsibilities to its depositors. . Finally, I should like to discuss briefly the question of an adequate and realistic bad debt reserve against loan losses by commercial banks. While this matter is not within the jurisdiction of this committee, the importance of the matter to the commercial banking industry is such as to bring it within the sphere of this committee's interest. Under present regulations of the Treasury issued pursuant to section 166 (c ) of the Internal Revenue Code of 1954, the bad debt reserve a bank is permitted to establish is based on that bank's past loan experience. This historical basis for computation of the allowable bad-debt reserve is inadequate on the basis of past experience, is widely variable and tends to penalize prudent management. This inadequacy is even more pronounced when considered in the light of the huge and constantly increasing demands that are being made on the banking system in an economy as dynamic as is ours. Moreover, the reliability of past experience as a guide to adequate present loan- loss reserves may be further questioned in the light of the wellknown fact that the commercial banking system now extends in substantial amounts many types of credit not heretofore handled . These newer types of credit often carry risks againsts which historical experience can provide no guide. Bad- debt reserves currently accumulated and permitted to be accumulated are, in our opinion, totally inadequate in terms of possible needs. Commercial banks should be permitted to set up loan-loss reserves based on a realistic percentage of loans outstanding, such percentage to be uniformly applicable to all commercial banks and to be determined with particular regard to the current risk exposure of the commercial banking industry. It is our considered judgment that the present law should be amended to permit commercial banks to establish bad-debt reserves against possible loan losses up to a maximum amount of 10 percent of outstanding loans, such reserves to be accumulated at an annual rate not exceeding 1 percent of such loans. By so doing, the banking system would be greatly strengthened, and there would be built into the system a stabilizing factor that would prove of incalculable value in a period of recession or depression . It would also tend to reduce the dependence of the banking system on the Federal Deposit Insurance Corporation. In conclusion, gentlemen, the Financial Institutions Act of 1957, if enacted, would in our opinion constitute a marked improvement over existing law as a matter of technical substantive and organizational content. There are, of course, specific provisions in this bill with which we, and I am sure others, may differ in whole or in part on one or another ground. In general, however, it is an excellent bill and obviously the product of a prodigious amount of study, time, and work. We should hope that this committee, out of its long experience, would be able to resolve any differences that may be reflected before this committee during these hearings, so that the prospects of passage of the overall bill would not be imperiled . As I stated at the beginning of my appearance, this tentative bill reflects the recog- 596 STUDY OF BANKING LAWS nition by the members of this committee of the need for just such a revision of the present laws affecting financial institutions as this bill embraces. In our opinion, this committee deserves and has the commendation of the financial community because the proposed revision now has been brought to the stage of public hearings. I have greatly appreciated the privilege of appearing before you. Senator ROBERTSON. Mr. Fleming, you have given us a fine statement and the committee, of course, appreciates the commendation given us in your last paragraph. The chairman has noted that as you went through your prepared statement you endorsed many of the essential provisions of the tentative bill. You felt we should back off a little bit on the criminal provisions of sections 217 and 218, which the chairman is going to recommend we do. We cannot change anything until we write the formal bill. You think we should reduce assessments, that is, the Federal Deposit Insurance Corporation assessments, but the Chair cannot take it on himself with no information on which to go, and there has not been a survey as to what it should be or what it is expected to cover. The chances are this committee will direct a survey as a basis for it. Then, of course, we note that you think commercial banks should be authorized to deal in revenue bonds. Mr. FLEMING. Yes, sir. Senator ROBERTSON. We thank you very much. Are there any questions? (No response . ) Senator ROBERTSON. If not, again we thank you. The next witness--and we have to hurry because perhaps we have impinged upon the remaining program, although we hope we can finish them all-the next witness is a representative of the National Association of Supervisors of State Banks, Mr. Charles R. Howell, of New Jersey, who will be recognized and who will be assisted by a constituent from Virginia, Mr. Ritchie. STATEMENT OF CHARLES R. HOWELL, CHAIRMAN OF THE LEGISLATIVE COMMITTEE ; ACCOMPANIED BY LOGAN R. RITCHIE, PRESIDENT, NATIONAL ASSOCIATION OF SUPERVISORS OF STATE BANKS Mr. HOWELL. Mr. Chairman and Senators, my name is Charles R. Howell. I am commissioner of banking and insurance for the State of New Jersey. I am speaking today in my capacity of chairman of the legislative committee of the National Association of Supervisors of State Banks. I have a fairly brief oral statement and also an accompanying statement delineating the amendments to accomplish what we propose. Senator ROBERTSON. Before you go further, I think it would be very well for this record to show that there are more State banks than there are national banks that constitute what we call the dual banking system. Would you indicate approximately how many State banks and how many national banks there are ? STUDY OF BANKING LAWS 597 Mr. HOWELL. I do not have those figures handy, but I think your statement is correct, Senator . I know in our own State there are a few more national banks, but the assets of the State banks are higher by a small proportion than the assets of the national banks. Senator ROBERTSON. The statistics are changing all the time and it is difficult for the chairman to carry them in his memory. Mr. HOWELL. Yes, sir. Senator ROBERTSON. But as I recall it, there are something over 5,000 State banks and something over 5,000 national banks. Mr. HOWELL. I think that is roughly about what it is, Senator. Senator ROBERTSON. You may proceed . Mr. HOWELL. As has been explained, I have with me the president of our association , Mr. Logan Ritchie, the commissioner of banking for the State of Virginia. There are several provisions of the committee print introduced by Senator Robertson which our association feels should be altered in the interest of preservation of the dual banking system and the proper rights of the States in the banking and allied fields with which this proposed act deals. There may be a number of provisions in the bill on which individual members of our association would like to be heard, but I am going to testify only on those positions on which our association through its general meetings, its executive committee meetings, or its legislative committee has taken a stand. In title I, chapter 7, paragraph 51 , we feel that language should be added which would preserve the police power of the States in licensing in a very limited way institutions engaged in various forms of consumer finance. Proposed language to accomplish this as well as other changes recommended is contained in the supplemental sheet which I have supplied to the committee. I might say many States in their consumer finance acts do require all banks, including national banks, to be licensed. I know there is some controversy over whether it is proper for the States to license in any way a national bank, but it has worked very well in the past and it is considered necessary in the general police powers of the States to police their statutes concerning consumer finance. Particularly they have the power to investigate and examine, in a very limited way, even national banks to see that their State statutes on those things are being observed. So we think some additional language making that exception should be added to that provision . Mr. ROGERS . May I interrupt, Mr. Howell ? Mr. HOWELL. Yes. Mr. ROGERS. I believe that was the purpose of the Comptroller's recommendation. It was that very situation. Mr. HOWELL. I think it undoubtedly was, but we feel there is still a need for our having that power under certain circumstances. Mr. ROGERS . Thank you. Mr. HOWELL. Under title II, chapter 9, paragraph 54, we suggest changes in the bank holding company provisions to give the Comptroller of the Currency or the appropriate State authority, as the case may be, a veto on bank holding company applications and also to provide that their approval shall only be overridden by the Board after a public hearing. 598 STUDY OF BANKING LAWS Senator ROBERTSON. You suggested that before, last year, and it was in the House bill. Mr. HOWELL. Yes , sir. Senator ROBERTSON. That was the most controversial thing that we had to go up against. The sum and substance of it was that each State would make the final decision on the bank holding company. The Congress was supposed to pass the act and the Federal Reserve Board was supposed to administer it. Mr. HOWELL. Yes. Senator ROBERTSON. And yet you insist on the dual banking system , but the partnership under that arrangement would have been all State and no Federal power. Mr. HOWELL. The creation and operation of bank holding companies has such a tremendous impact on the pattern of banking within a State that I would say in the final analysis a State should be able either to prohibit or to regulate bank holding companies within its State. Senator ROBERTSON. As we pointed out in the discussion on the Senate floor, there will not be many new bank holding companies formed for several reasons. First, it takes a great deal of capital, and that is not available. Second, it takes a number of small banks that are willing to sell, and that is not likely to appear. Mr. HOWELL. I think you are right, Senator. Senator ROBERTSON. Third, we have a much stronger law than we ever had before for them to get approval to get started again. Mr. HOWELL . I think that is true. Senator ROBERTSON. I am glad to say we do not have any in Virginia and I do not anticipate-and I would be glad to have Mr. Ritchie bear me out that we are likely to have any under the new law. Mr. HOWELL. I do not believe we have any in New Jersey, but at present we do not have a law prohibiting them, although we have introduced a bill. Senator ROBERTSON. I understand they have a law in New York to stop the formation of one bank holding company up there. I do not know whether it stopped it, but it was intended to stop it. You may proceed. Mr. HOWELL. In other words, we suggest changes in the bank holding company provisions to give the Comptroller of the Currency or the appropriate State authority, as the case may be, a veto on bank holding company applications and also to provide that their approval shall only be overridden by the Board after a public hearing. We suggest amending paragraph 58 to make more explicit the powers reserved to the States to deal with bank holding companies. The language as it is may be all right, but this will make it more certain. The creation and operations of bank holding companies can so drastically affect and disturb the pattern of banking in the various States that it should be a matter for State control regardless of whether holding companies are composed of State or national banks, or both. Senator BUSH. May I interrupt to ask one question ? Mr. HOWELL. Yes. Senator BUSH. In that last paragraph you read you said it should be a matter for State control. Mr. HOWELL. Yes, sir. STUDY OF BANKING LAWS 599 Senator BUSH. As it is now, does not the State banking department have supervision, and can it not prevent and cannot State law prevent a holding company within its own State now ? Mr. HOWELL. We believe the States, where they have acts controlling them or prohibiting them, that that would be valid , but we want to make absolutely certain. Senator BRICKER. It has never been decided , has it ? Mr. HOWELL. Not completely , in my opinion. Senator BUSH. I wonder what you think should be done, because my impression is the States now have the authority you want them to have. Mr. HOWELL. I am pretty sure they have, Senator, but there are some questions that are being tested here and there, and I think if we can tighten it up to the point where there would be no doubt about it, that would be desirable. Senator ROBERTSON. We deliberately put in a reservation so the States, if they did not want a bank holding company, can pass a State law, and that ends it. Any State can pass that law under our bill. Mr. HOWELL. I think that is what the law actually provides, but if there is any doubt about it I would like to tighten it up a little bit . Senator ROBERTSON. You may proceed. Mr. HOWELL. Title III- Federal Deposit Insurance Act : It has been the observation of the legislative committee that the operation of the Federal Deposit Insurance Corporation under a Board of Directors has been marked by ever-increasing efficiency and usefulness. The committee deprecates, therefore, the proposal to abolish the Board and set up in its place a single administrator. Senator BRICKER. Do you think the Comptroller ought to be a third member of that Board? Mr. HOWELL. No. I was coming to that. The Board, in the opinion of the committee, should be retained in its present form and with its present powers, except that the Comptroller of the Currency should no longer be a Director. The fact that he supervises the national banking system, which is often in competition with the State banking system, makes it inappropriate for him to sit on a board which has supervisory powers over State- insured banks. He should be replaced on the Board of the Federal Deposit Insurance Corporation by a banker who will not be involved in this conflict of interests. We therefore support continuance of the Board in contrast to a single administrator if the change is made eliminating the Comptroller as one of the members. Senator FREAR. Is this proposed to correct anything that you think happened on the part of the Comptroller of the Currency in the past ? Mr. HOWELL. I do not think it is based on any single or specific occasion, or that it is directed against our very fine present Comptroller. It just does seem inconsistent for them to have that necessary representation on there when the States do not have it. Mr. ROGERS. Mr. Howell, what is the general practice in the States, as to the State bank supervisors ? Is it generally a single administrator, or a board ? Mr. HOWELL. I was afraid you were going to ask me that. It is almost always a single administrator, but with many States having advisory boards with different degrees of power, and some having virtually no power, and some having considerable power. 600 STUDY OF BANKING LAWS I think one distinction there would be you might say that the State supervisor was dealing just with his own children, and therefore the danger of being prejudiced in favor of one or the other actually does not exist. In most cases it works out pretty well. But actually in experience we think that the three-member Board of the Federal Deposit Insurance Corporation has been good , especially if the Comptroller is not a member of it. Mr. ROGERS. Thank you. Mr. HOWELL. Under paragraph 23, which deals with mergers and consolidations, we suggest some changes. I might say our association has gone all over the lot on this and tried to come up with a proper answer. It is not easy. Last year when I testified before the O'Mahoney subcommittee of the Judiciary Committee our position was that the Fulbright bill of last year was not at all satisfactory, because it seemed to exclude completely even any duty to consult State supervisors in determining this ; but in general this is our present feeling, which we have considered at some length and believe it might be a proper solution. The national association considers the present situation where the State supervisor alone has power to approve or disapprove a merger or consolidation resulting in a State bank to be satisfactory. It reeognizes, however, the strength of the demand within the Congress and without, for some Federal regulation of mergers and consolidations. In view of this demand, it recommends that the Federal body in which such authority should be vested on a parity with that of the States themselves be the Federal Reserve Board for all Statechartered insured banks, whether member or nonmember. The equal authority of the State supervisors should be recognized explicitly in the language of this section. Since, if action on mergers or consolidations of State banks is to be taken by the Board as well as by the appropriate State supervisor. it is only fair that the Board also act on mergers or consolidations resulting in national banks. It would place State banks at a disadvantage if their mergers had to be approved by both the State authority and the Board while mergers of national banks could be effected with the sole approval of the Comptroller. Unless the consent of the Board is required for national-bank mergers as well as Statebank mergers, there will be a strong inducement for State banks to convert to national charters to the detriment of the dual banking system. Senator BUSH. Cannot the State require by law just what you want done here ? Mr. HOWELL. No. I think it is pretty clear we would have the power to deny a merger where the resulting bank would go under the State charter, but if we approve it then under your proposal it would go to either one of them ; that is, either the Comptroller or the Federal Reserve or the Federal Deposit Insurance Corporation, and they could negate our action, which may, in the final analysis, be right. Senator ROBERTSON. You are recommending a matter which we gave serious consideration to last year. I think it was generally agreed that most people would like to have the Federal Reserve Board pass on all of these mergers, but by doing that we turn that possibly into an appellate court. They said they did not have the time to take on all of these and suggested we divide it up. They said, " Give us part STUDY OF BANKING LAWS 601 of it and give the Comptroller a part and give the Federal Deposit Insurance Corporation a part. We do not have the personnel and the time just to become an appellate court, so to speak, on the question of bank mergers." Otherwise, I think you have made a mighty good suggestion. Personally, I would like to see it amended , but they just told us they could not do it. Mr. HOWELL. I do not know what the figures would be, but they would be apt to get most of the important ones anyway, because they would get all of the national banks, and all of the member State banks, which would include most of the important banks - not all, but most of them. The Federal Reserve Board is a fairly large board and composed of quite a representative body of citizens. They probably have more in the way of economists and staff in research personnel than the Federal Deposit Insurance Corporation does. It seems to me that they probably would be the logical ones to have the final say on it. Mr. ROGERS. Under your proposal you would leave out the Federal Deposit Insurance Corporation entirely ? Mr. HOWELL. That is right. Mr. ROGERS . So we would have no uniform Federal program as to all insured banks. We would have it as to national banks and member banks, but not as to insured banks ? Mr. HOWELL. No. The insured nonmember banks would be the responsibility of the State authority first and then the Federal Reserve Board. Mr. ROGERS. Also I see you include here language raising a constitutional problem . Mr. HOWELL. What part is that ? Mr. ROGERS. As to whether the Federal Government can direct any State authority to consider anything in passing on mergers. Mr. HOWELL. Well, that might be a point. I agree. I am not a constitutional lawyer. Senator ROBERTSON. You may proceed. Mr. HOWELL. Title V- Federal Savings and Loan Act. While the association greatly prefers the provisions of the original version of S. 972 of the 84th Congress, it would accept paragraph 6 (e ) as written in preference to no legislation at all. Senator BUSH. Just what does that mean ? I am sorry , but I do not have that in front of me. Mr. HOWELL. Simply it means when S. 972 was passed by the Senate it added that, let us say, the Federal savings and loan associations should have the same branch powers as not only any State- chartered savings and loan and mutual savings banks, but also the most liberal of any, including commercial banks and trust companies. Senator BUSH. All thrift-gathering institutions would be on the same basis within a State ? Mr. HOWELL. Yes. That was the argument. Senator BUSH. You favored that ? Mr. HOWELL. Yes. As a matter of fact, in New Jersey it would not create any problem, but there are other States where commercial banks have quite more liberal branch provisions than savings and loan and mutual savings banks. 602 it. STUDY OF BANKING LAWS Senator BUSH. I just wanted to identify the problem. I understand Thank you . Mr. HOWELL. We propose the deletion of all reference to State banks and trust companies, which would restrict branches of Federal savings and loan associations to the same pattern as State-chartered savings and loans and mutual savings banks. It does, however, consider the adoption in this session of Congress of specific regulations governing the branch powers of Federal savings and loan associations to be of utmost importance. TITLE VIII- MISCELLANEOUS AMENDMENTS Amendments to Criminal Code, section 217 (p. 247 ) and section 218 (p. 249) : The national association considers too severe the proposed restrictions on examiner and supervisory personnel, both Federal and State, in relation to employments by banks. It fears that the examiner and other supervisory positions would be made so unattractive that its members would find it only more difficult than at present to recruit new well qualified employees. It suggests, therefore, that the penalties imposed on banking institutions for the employment or offering employment to examiners and other supervisory personnel be omitted from the bill. It also suggests that the State bank supervisors, as well as Federal supervisory authorities, be recognized as having authority to pass regulations dealing with the acceptance of employment in banking institutions by their examiners and other supervisory personnel . I have one other brief statement, or proposal , or suggestion, that I would like to give strictly in my personal capacity rather than speaking for the national association. There is one further matter which I would like to bring to the committee's attention. This suggestion is made personally and as commissioner of banking and insurance for the State of New Jersey. This suggestion has not been discussed with my colleagues in the National Association of Supervisors of State Banks. I urge that the committee explore the desirability and feasibility of authorizing the Federal Reserve Board and the Federal Deposit Insurance Corporation to enter into reciprocal agreements with the State-bank supervisors with the view toward eliminating the need for duplication of examinations of State member banks and nonmember insured banks. Presently these banks are examined yearly in our State both by the State examiners and the appropriate Federal examiners. In the interest of economy and avoidance of duplication, it might be possible to work out an alternating schedule under which the State supervisor would agree to accept the Federal Reserve or Federal Deposit Insurance Corporation examiner's report one year and have the State examiner's report accepted by the Federal agency the next year. It should not be mandatory, but only permissive, but would enable real savings to be made in cases where the efficiency and standards of State departmental examinations were considered adequate by the Federal Reserve, or Federal Deposit Insurance Corporation authorities. I believe it would be a forward step in preserving and strengthening the dual banking system and in promoting proper governmental economy. Senator BUSH. Mr. Howell, what you are proposing then is to reduce this examination process from 2 examinations a year to 1 ? Mr. HOWELL. That is right. It would mean actually in practice in New Jersey we go in at the same time as the Federal Deposit Insurance STUDY OF BANKING LAWS 603 Corporation, or the Federal Reserve, and we do exactly the same things. It is a complete duplication of effort. We think we have a good examining staff and I am sure the Federal authorities believe they have, and we agree. However, I think as a practical solution if they examine one year and we the next and exchange reports, that the banks would be quite well controlled and supervised and a certain amount of economy would result. Senator FREAR. It is practiced in some States now ; is it not ? Mr. HOWELL. It is practiced only to the extent that they exchange reports, but they do not skip their examination and trust the State. Senator FREAR. They send a few men in when the State is doing the examination. Mr. HOWELL. I guess that sometimes happens. Yes . Senator CLARK. Mr. Howell, in New Jersey do you have the problem of the need for bank mergers in order to give sufficient capital surplus to enable the merged bank to deal with their industrial clients who require loans larger than the small and unmerged banks are able to make ? Mr. HOWELL. Senator, I would say we at least purportedly have that problem, and I believe there is some validity to it. A number of our larger banks have complained to me about the inability to compete, particularly with the New York banks, and to some extent the Philadelphia banks, in handling large industrial loans. Senator CLARK. Is that not really an inducement to mergers ? Mr. HOWELL. It has the effect and it promoted in this instance their desire to form a holding company, which I resisted and hope I can continue to resist. But I knowit is a problem . Senator CLARK. Is not one of the results of that perfectly natural move to diminish the number of banks in a given community, so that there is always the possibility of a tendency toward a monopoly in banks. Is that not so ? Mr. HOWELL. I think it is a real danger and a pattern which has to be watched closely and resisted where it gets to the point where it is. Senator CLARK. Would you be in accord with the statement made by Mr. Fleming a little earlier that that problem should be handled entirely by experts in the banking field? As I understand him, he does not want the Attorney General to get into this picture in connection with his normal enforcement of the antitrust statutes. Mr. HOWELL. As I suggested earlier, we have had an awfully hard time trying to discover what is the full and proper solution to this. Last year we thought that it would be more desirable, perhaps , to have the Justice Department, as proposed in the original Celler bill last year, to have the final power ; although logically I think the banking supervisory agencies know more about the banking factors and actually, to a large extent, the competitive factors which are involved, than the Department of Justice, perhaps. I think even if we do it the way it is proposed here, that the general powers of the Sherman Act might still prevail if there is a merger that the Justice Department felt had to be dealt with. Senator CLARK. The thing that would concern me is the possibility-and I make it only a possibility-that the overall philosophy of some of the regulatory agencies in the banking field would not be as zealous in connection with the enforcement of the antitrust statutes as the Attorney General's Department might be. 84444-57-pt. 2—11 604 STUDY OF BANKING LAWS Mr. HOWELL. Many people fell that way. However, I earnestly believe that especially since the problem has become so acute and widespread and is developing so much, that the supervising authorities would pay pretty close attention to the reduction of competition and the monopolistic aspects of it. Senator CLARK. Mr. Chairman, we are getting fewer and fewer banks in Philadelphia all the time. That may be a good idea. I am not sure. But I think it is something the committee ought to consider. Senator ROBERTSON. I am sure we will look into it. Thank you very much, gentlemen. Without objection, the amendments which you recommend will be made a part of the record at this point. (The amendments referred to follow :) AMENDMENTS RECOMMENDED BY CHARLES R. HOWELL, NATIONAL ASSOCIATION OF SUPERVISORS OF STATE BANKS, TO PROPOSED FINANCIAL INSTITUTIONS ACT OF 1957, JANUARY 31 , 1957 (Underlined material is new. Matter in brackets would be omitted if suggested amendments are adopted ) TITLE I, NATIONAL BANK ACT CHAPTER 7. NATIONAL BANK EXAMINATIONS AND Reports § 51. (Page 41 ) STATE EXAMINATION OR LICENSE PROHIBITED. "No national banking association shall be subjected to examination by, or be required to pay any license or assessment fee, or penalty to, any State, political subdivision of any State, or any officer, agency or instrumentality of any State or political subdivision thereof under the requirements of any State or local law, in connection with or as an incident to such association's authority to carry on any share of the business which by law it has the right and power to conduct. No person, copartnership, association, or corporation shall be prohibited from borrowing from or discounting or negotiating promissory notes, drafts, bills of exchange, conditional sales contracts, installment consumer paper, or any other evidences of debt or otherwise dealing with a national banking association because of the fact that such association has not been licensed pursuant to any State or local law [.], excepting, however, any business for the conduct of which a State or National bank may be required by State law to obtain a license and to be subject to the investigation and examination of its records, documents, and papers pertaining to such business by a State officer, agency, or instrumentality in the necessary and proper exercise of the police power of the State requiring such license, investigation, and examination." TITLE II, FEDERAL RESERVE ACT CHAPTER 9. REGULATION OF BANK HOLDING COMPANIES § 54. ACQUISITION OF BANK SHARES OR ASSETS * "(b) (Page 139) Upon receiving from a company any application for approval under this section, the Board shall give notice to the Comptroller of the Currency, if the applicant company or any bank the voting shares or assets of which are sought to be acquired is a national banking association or a district bank, or to the appropriate supervisory authority of the interested State, if the applicant company or any bank the voting shares or assets of which are sought to be acquired is a State bank, and shall allow thirty days within which the views and recommendations of the Comptroller of the Currency or the State supervisory authority, as the case may be, may be submitted. If the Comptroller of the Currency or the State supervisory authority so notified by the Board disapproves the application in writing within said thirty days, the Board shall deny the application and shall forthwith give written notice of that fact to the STUDY OF BANKING LAWS 605 applicant. If the Comptroller of the Currency or the State supervisory authority approves the application in writing within said thirty days, the Board shall forthwith give written notice of that fact to the applicant unless it disapproves in which event [within three days after giving such notice to the applicant] the Board shall notify in writing the applicant and the [dis] approving authority of the date for commencement of a hearing by it on such application. Any such hearing shall be commenced not less than 10 nor more than 30 days after the Board has given written notice to the applicant of the action of the [dis]approving authority. The length of any such hearing shall be determined by the Board, but it shall afford all interested parties a reasonable opportunity to testify at such hearing. At the conclusion thereof, the Board shall by order grant or deny the application on the basis of the record made at such hearing. "(c) In determining whether or not to approve any acquisition or merger or consolidation under this section, the Comptroller of the Currency or the appropriate State authority, as the case may be, and the Board shall take into consideration the following factors : ( 1 ) the financial history and condition of the company or companies and the banks concerned ; ( 2 ) their prospects ; ( 3) the character of their management ; ( 4 ) the convenience, needs, and welfare of the communities and the area concerned ; and ( 5 ) whether or not the effect of such acquisition or merger or consolidation would be to expand the size or extent of the bank holding company system involved beyond limits consistent with adequate and sound banking, the public interest, and the preservation of competition in the field of banking." § 58. ( Page 145 ) RESERVATION of Rights to States. "The enactment by the Congress of this chapter shall not be construed as preventing any State from exercising such powers and jurisdiction , including the power to prohibit the formation or operation of bank holding companies, which it now has or may hereafter have with respect to banks, bank holding companies, and subsidiaries thereof." TITLE III, FEDERAL DEPOSIT INSURANCE ACT CHAPTER 6. SUPERVISION OF INSURED BANKS § 23. (Page 162 ) MERGERS AND CONSOLIDATIONS. "Without prior written consent by the Corporation, no insured bank shall ( 1 ) merge or consolidate with any noninsured bank or institution or ( 2 ) assume liability to pay any deposits made in, or similar liabilities of, any noninsured bank or institution or (3 ) transfer assets to any noninsured bank or institution in consideration of the assumption of liabilities for any portion of the deposits made in such insured bank. No insured bank shall convert into an insured State bank if its capital stock or its surplus will be less than the capital stock or surplus, respectively, of the converting bank at the time of the shareholders' meeting approving such conversion, without prior written consent by the Comptroller of the Currency and by the Board of Governors of the Federal Reserve System if the resulting bank is to be a district bank, or by the Board of Governors of the Federal Reserve System and the appropriate State supervisory authority if the resulting bank is to be a State member bank (except a district bank) or a nonmember insured bank [, or by the Corporation if the resulting bank is to be a State nonmember insured bank ( except a district bank) ]. No insured bank shall merge or consolidate with any other insured bank or, either directly or indirectly, acquire the assets of, or assume liability to pay any deposits made in and other insured bank without the prior written consent ( i ) of the Comptroller of the Currency and of the Board of Governors of the Federal Reserve System if the acquiring, assuming, or resulting bank is to be a national bank or a district bank, or ( ii ) of the appropriate State Supervisor and of the Board of Governors of the Federal Reserve System if the acquiring, assuming, or resulting bank is to be a State member bank ( except a district bank ) , or a State nonmember insured bank, or ( iii ) of the Corporation if the acquiring, assuming, or resulting bank is to be a nonmember insured bank ( execpt a district bank ) .] In granting or withholding consent under this subsection , the Comptroller, the Board, or the [ Corporation] appropriate State supervisory authority, as the case may be, shall consider the following factors : [enumerated in section 15 of this Act.] (1) the financial history and condition of the company or companies and the banks concerned ; ( 2 ) their prospects ; (3 ) the character of their management; (4) the convenience, needs, and welfare of the communities and the area concerned ; and (5 ) whether or not the effect of such merger, consolidation, acqui- 606 STUDY OF BANKING LAWS sition of assets, or assumption of liabilities would be to expand the size or extent of the bank involved beyond limits consistent with adequate and sound banking, the public interest, and the preservation of competition in the field of banking. In the case of a merger, consolidation, acquisition of assets, or assumption of liabilities, the appropriate agency shall also take into consideration whether the effect thereof may be to lessen competition unduly or tend unduly to create a monopoly, and, in the interests of uniform standards, it shall not take action as to any such transaction without first seeking the views of each of the other two banking agencies referred to herein with respect to such question ; and in such a case the appropriate agency may also request the opinion of the Attorney General with respect to such question. No insured State nonmember bank (except a district bank ) shall, without the prior consent of the Corporation reduce the amount or retire any part of its common or preferred capital stock, or retire any part of its capital notes or debentures." CHAPTER 3. POWERS AND DUTIES OF ADMINISTRATOR ( Pages 151–155 ) CHAPTER 9. MISCELLANEOUS 8 42. (Page 181 ) ABOLITION OF BOARD OF DIRECTORS. It has been the observation of this National Association that the operation of the Federal Deposit Insurance Corporation under a Board of Directors has been marked by ever increasing efficiency and usefulness. It deprecates, therefore, the proposal to abolish the Board and to set up in its place a single administrator. The Board, in the opinion of this Association, should be retained in its present form and with its present powers except that the Comptroller of the Currency should no longer be a director. The fact that he supervises the National banking system which is often in competition with the State banking system makes it inappropriate for him to sit on a board which has supervisory powers over State insured banks. He should be replaced on the Board of the Federal Deposit Insurance Corporation by a banker who will not be involved in this conflict of interests. TITLE V, FEDERAL SAVINGS AND LOAN ASSOCIATION ACT § 6. (Page 211 ) FEDERAL SAVINGS AND LOAN BRANCHES. * "(c) An association may, with the approval of the Board, establish and operate new branches within the State in which the home office of such associa tion is situated, if such establishment and operation are [ ( i ) ] at the time expressly authorized to State savings and loan associations or mutual savings banks, or (ii ) , after June 30, 1959, expressly authorized to State banks or trust companies by law of the State in question, ] or, in the absence of any such law, if such establishment and operation are at the time in conformity with the practice within the State with respect to branches of State savings and loan associations or mutual savings banks [or, after June 30, 1959, in conformity with the practice within the State with respect to branches of State banks or trust companies] except that no approval of the State authority having supervision over State savings and loan associations or mutual savings banks [or banks and trust companies] shall be required , and such new branches shall be subject to the least onerous restrictions with respect to number and location as may be imposed by the law of the State or the practice therein with respect to branches of State savings and loan associations[ ] and mutual savings banks. [, or State banks and trust companies. ] No branch of any Federal savings and loan association shall be established outside the State in which its home office is located. The Board shall , before approving or disapproving an application of a Federal savings and loan association to establish and operate a branch, give consideration to the same requirements as are set forth in this subsection with respect to the granting of charters of Federal Savings and loan associations." TITLE VIII , MISCELLANEOUS AMENDMENTS AMENDMENTS TO CRIMINAL CODE SEC. 217. (Page 247. ) SEC. 218. (Page 249. ) The National Association considers too severe the proposed restrictions on examiner and supervisory personnel, both Federal and State, in relation to STUDY OF BANKING LAWS 607 employment by banks. It fears that the examiner and other supervisory positions would be made so unattractive that its members would find it even more difficult than at present to recruit new, well qualified employees. It suggests, therefore, that the penalties imposed on banking institutions for employing or offering employment to examiners and other supervisory personnel be omitted from the bill. It also suggests that the State Bank Supervisors, as well as Federal Supervisory Authorities, be recognized as having authority to pass regulations dealing with the acceptance of employment in banking institutions by their examiners and other supervisory personnel. Senator ROBERTSON. The next agency we have is the United States Savings and Loan League, and Mr. Henry A. Bubb is the witness for them . The Chair will observe that Mr. Bubb has a statement and some exhibits that go with it. Without objection, the exhibits will be accepted for the record and will be inserted at the end of Mr. Bubb's statement. You may proceed , Mr. Bubb. STATEMENT OF HENRY A. BUBB, CHAIRMAN, LEGISLATIVE COMMITTEE ; ACCOMPANIED BY STEPHEN SLIPHER, VICE PRESIDENT ; AND T. BERT KING, WASHINGTON COUNSEL, UNITED STATES SAVINGS AND LOAN LEAGUE Mr. BUBB. Thank you, Senator Robertson and gentlemen. It almost seems like old-home-week for me to come back here because I have been here so often lately. I have Mr. Slipher and Mr. King of our Washington office with us. It is a little embarrassing for me to read the first paragraph, but, in order to acquaint some of the other Senators who might not know of my activity in this recodification , I will say that my name is Henry A. Bubb and I appear here today as chairman of the legislative committee of the United States Savings and Loan League. By way of further introduction, I am past president of the league, chairman of the Federal Home Loan Bank of Topeka , president of the Capitol Federal Savings & Loan Association of Topeka, director of the Merchants National Bank, and it was my privilege to serve as a member of the Cravens advisory comittee on recodification. However, I appear here today solely in my capacity as spokesman for the United States League. In general, we believe that this bill goes a long way toward accomplishing the basic objective of codifying and clarifying the statutes dealing with savings and loan associations and we commend all of those who have participated in the work. To make my statement as brief as possible, I will omit references to the mere technical changes in the bill and I will also omit reference to those items in which the league concurs and supports. In this statement I will comment on our several specific suggestions which, in most cases, are implemented by language included in addendum A which I submit to you here this morning as a supplement to my statement. Several other entirely technical and minor suggestions as to phraseology have been noted by our attorneys and I have placed these in addendum B. TITLE IV, FEDERAL HOME LOAN BANK ACT The only change proposed in the Board's present limited authority to supervise, examine, and regulate uninsured bank member institu- 608 STUDY OF BANKING LAWS tions is the proposal in section 4 ( d ) , page 183, to prohibit the use of Federal Home Loan Bank emblems and insignia except in the office of the association or as authorized by the Board . We approve this provision, but would like to record our hope and expectation that in adopting regulations the Board will take the commonsense approach of permitting these institutions to continue to use the emblem on their letterhead, financial statement and other customary purely local advertising. So long as there is no danger of the representation being construed as meaning insurance of accounts, no one objects to reasonable use of the bank emblem. Section 5, page 184, of the Federal Home Loan Bank Act and section 4, page 203, of the Federal Savings and Loan Association Act deal with interest and charges. The intent of the proposed revision was to clarify the right of Federal associations to make property improvement loans on a discount basis as other lenders do and as is permitted under the FHA title I program without conflicting with State usury laws. Our attorneys believe that the proposed language is not entirely workable and have drafted language (addendum A, items 1 and 3) which we think will accomplish the objective in a more satisfactory manner. In section 13, page 196, there was apparently an oversight in that as drafted it would have the effect of repealing the Public Debt Act of 1941 affecting Federal home loan bank obligations and therefore we suggest the insertion of the words "income taxes" before the word "surtaxes" to correct this error. With this addition these obligations would continue to be subject to income tax. We recommend that section 19 ( b ) , page 200, be amended to provide some reasonable time limit , such as 2 years. As now written, persons who worked for the Board 20 years ago would still be required to get permission of the Board before accepting employment and we attach a suggested draft (addendum A, item 2) . TITLE V, FEDERAL SAVINGS AND LOAN ASSOCIATION ACT As previously indicated, we have suggested language with respect to section 4 ( addendum A, item 3 ) . With respect to section 5 ( d ) ( 2 ) , our people suggest the addition of one sentence as follows : No supervisory representative in charge, conservator or receiver shall be appointed for a solvent and nonimpaired institution if the alleged wrongdoing can be corrected as provided in this section , or otherwise by law, without the seizure of private property. The purpose of this amendment is so that there will be no seizure of private property until other methods have been used. This has the unanimous concurrence of the Cravens committee, as evidenced by the testimony before this committee Monday. We are submitted a redraft for section 5 ( d) (3 ) , which we believe accomplishes the objective intended more effectively and with greater clarity (addendum A, item 4 ) . With respect to section 5 (i ) and (j ) , page 209, we recommend the insertion of the word "mutual" before the words " savings and loan type" in the second line of the subsection and deletion of provision (4 ) on page 210, and the renumbering of provision 5 as No. 4, and the deletion of subsection (j ) . The purpose of this amendment is to make STUDY OF BANKING LAWS 609 it clear that a Federal association can convert to a State mutual only and to make it clear that they cannot convert to any other type institution. Section 6, page 211, with respect to Federal savings and loan branches, of course, constitutes a major substantive addition rather than a revision or recodification . We would prefer that the matter be handled in separate legislation as it has been in the past. We again point out, as we have in previous testimony, that Federal savings and loan associations have fewer branches per home office than any other major financial institutions in the country. There would be some major hardships and inequities under this provision , as for instance in the States of Minnesota and Florida where associations would be prohibited from having branches, although chain and group banking accomplishes the same as branch banking for the commercial banks. If this committee feels that there should be legislation , we would recommend a section directing the Federal Home Loan Bank Board to establish by regulation the conditions under which branches may be established and operated. We have long agreed with our banking friends that it is appropriate that there be some published standards which will enable all concerned to know the ground rules for the establishment of branches. We do believe that it is necessary to leave the Board considerable leeway because of the complexities of determining what is the State pattern in a number of instances. If this did not work out to the satisfaction of the Congress, legislation could be passed at a later date. Senator BUSH. Do I gather from that you are opposed to the bill we have had up here in the last two Congresses, which gives branching privileges to these organizations in connection with the State law for all thrift gathering institutions ? Mr. BUBB. Let me answer it this way, Senator Bush : We are for liberalizing it where it would also include chain banking and chain ownership. Senator BUSH. You mean you think the Federal Government should pass a law which would override the State law? Mr. BUBB. No. Not at all. You are not overriding the State law. As I pointed out, in the States of Florida and Minnesota particularly the banks have branches through chain and group banking, which we cannot have. I might say this : Of course, we would rather have a bill directing the Federal Home Loan Bank Board to set up regulations, but if that is not the wish of this committee the bill that was introduced with that one addition would be very satisfactory to us, and I think it would be perfectly fair to both sides concerned. Mr. ROGERS. That would write into law the present practice. Mr. BUBB. That's right. Senator ROBERTSON. You may proceed . TITLE VI, FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION ACT Mr. BUBB. With respect to section 403 (e) , page 217, we recommend the insertion of the words " income taxes" before the word " surtaxes" in the third line. This is to eliminate the repeal of the Public Debt Act of 1941 affecting these obligations. With respect to section 404 (c) , page 221 , we recommend the insertion "by regulation " after the word " impose" in the fifth line from the 610 STUDY OF BANKING LAWS bottom and the deletion of the last sentence. This is to make it clear that conditions are to be prescribed by regulation and will be applicable to all alike. The last sentence is to be stricken because we do not know what contracts have been made and what conditions have been made. We do not believe in blanket approval of an "unknown quantity." With respect to section 404 (e) and ( f) , page 221 , the league recommends some spelling out in the statute of the rules for mergers, purchases, et cetera, rather than leaving complete discretion in the hands of the Insurance Corporation. In addendum A, item 5, we have suggested language which would retain in the Insurance Corporation the complete authority over major mergers and mergers which involve extension of lending area, but would exempt minor transactions in the local area. With respect to section 406 ( b ) , page 223, our people are satisfied with the committee print language as it is. If any changes are made, we trust that you will continue the policy of this committee and the Congress of preserving parity of treatment as between the insured accounts of savers of savings and loan associations and banks. TITLE VIII, CRIMINAL CODE AMENDMENTS We agree with the testimony of Mr. Cravens to this committee on Monday concerning the various matters considered under title VIII of the bill. I would just like to add one thing, if I may, Senator Robertson. We also agree with previous comments before this committee that some action should be taken to prevent the joint operation and advertising of savings and loan associations and banks such as Senator Bennett has discussed , which just happened in Utah. Senator ROBERTSON. We appreciate very much your statement and the suggestions concerning changes in the tentative bill, most of which are regarded more or less minor. The Chair frankly says, and would say, that last summer, when he started this study, he was very much afraid that the commercial banks would want too many restrictions on their competitors, the savings and loan companies, and that the savings and loan operation would not want enough. He was pleasantly surprised . We worked out a compromise that apparently for the most part is acceptable to all parties concerned, and to the Chair that was a very encouraging thing. Are there any further questions ? We thank you then, Mr. Bubb. Mr. BUBB. I would like to say again-I have said it as a member of the Cravens committee, and I want to say it now for the United States League that we appreciate very much, Senator Robertson, your bringing about this recodification program and giving us an opportunity to work with the bankers. We appreciate all of the work that Mr. Rogers and the rest of the staff have done, and we think that a lot has been accomplished and are very appreciative of it. Senator ROBERTSON . Thank you. Without objection, at this point in the record your exhibits will be entered. STUDY OF BANKING LAWS 611 (The documents referred to follow :) UNITED STATES SAVINGS AND LOAN LEAGUE ADDENDUM A. RECOMMENDED REVISIONS SPECIFICALLY REFERRED TO IN STATEMENT OF HENRY A. BUBB I. For consideration in lieu of section 5 of Federal Home Loan Bank Act SEC. 5. (a ) No institution shall be admitted to or retained in membership or granted the privileges of nonmember borrowers if the interest and any other charges for the use of the money charged on loans made by it shall exceed the rate per annum authorized or permitted on loans of a similar character by the laws of the State where its home office is located, or if such law prescribes no limit on such interest rates, then not to exceed 8 per centum per annum : Provided, That upon installation loans repayable in not to exceed five years, such rate may be charged on a discount or gross charge basis for the period of the loan. (b) In addition to interest and any amounts charged for the use of the money, such associations may require the borrower to pay to others or to the association for the account of them or for its own account, if it renders such services, reasonable compensation to cover the cost of taking and processing loan applications and making loans for its full protection, and such charges shall not be deemed to be interest. (c) In the event a Federal savings and loan association charges more interest than is authorized by this section, the borrower shall be entitled to a cancellation of his obligation and cancellation and return of any security therefor upon a tender of his unpaid balance and shall be relieved of any interest after the date of such tender. In the event a Federal savings and loan association makes service charges in excess of the amount authorized by this section, or requires the same to be paid to others, it shall be subject for a period of two years to suit for the recovery of the excess so charged. In the event any other member institution or nonmember borrower makes interest or service charges in excess of the amount specified in this section, such institution if a member shall be removed from such membership, or if a nonmember, shall be ineligible for membership and ineligible as a nonmember borrower. II. Page 200 "19 (b) It shall not be lawful for any member of a Federal home loan bank to employ an employee of the Board or a former employee of the Board who has left its service within two years except pursuant to regulations made by the Board or with the express written approval of the Board, and it shall be unlawful for any such employee or former employee to accept employment in violation of this subsection. Any violation of this subsection shall be punished by a fine of not more $10,000 or imprisonment of not more than five years, or both." III. Federal Savings and Loan Association Act (page 203) SEC. 4. ( a ) The interest and any other charges for the use of the money charged by a Federal savings and loan association on loans made by it shall not exceed the rate per annum authorized or permitted on loans of a similar character by the laws of the State where its home office is located or, if such law prescribes no limit on such interest rates, then not to exceed 8 per centum per annum : Provided, That upon installment loans repayable in not to exceed five years such rate may be charged on a discount or gross charge basis for the period of the loan. (b) In addition to interest and any amounts charged for the use of the money, a Federal savings and loan association is authorized to require the borrower to pay service charges to others or to the association for the account of them or for its own account, if it renders such services, reasonable compensation to cover the cost of taking and processing loan applications and making loans for its full protection and such service charges shall not be deemed to be interest. (c) In the event a Federal savings and loan association charges more interest than is authorized by this section , the borrower shall be entitled to a cancellation of his obligation and cancellation and return of any security therefor upon a tender of his unpaid balance and shall be relieved of any interest after the date of such tender. In the event a Federal savings and loan association makes service charges in excess of the amount authorized by this section, or requires the same to be paid to others, it shall be subject for a period of two years to suit for the recovery of the excess so charged. 612 STUDY OF BANKING LAWS IV. Page 207 With respect to section 5, subsection ( d ) ( 3 ) , rewrite to read as follows : "(3 ) Whenever any director or officer of a Federal savings and loan association has violated or is violating any law relating to such association or has engaged or is engaged in unsafe and unsound practices in conducting the business of such association , after having been warned in writing by the Board to discontinue such violations of law or such practices, the Board may cause notice to be served upon such director or officer in writing to appear at a hearing before such Board or any member thereof or any person designated by the Board and show cause why he should not be removed from office. A copy of such notice shall be sent to each director of the association affected by registered mail and shall specify the violation of law and the unsafe and unsound practices alleged. The hearing shall be held in accordance with the provisions of the Administrative Procedure Act and shall be subject to review as therein provided and the review by the court shall be upon the weight of the evidence. If the Board finds that the accused director or officer after being warned in writing by the Board to discontinue such violations of the law or such practices, has violated or is violating any law relating to such association or has engaged in or is engaging in unsafe or unsound practices in conducting the business of such association , the Board may order that such director or officer be removed from office. A copy of such order shall be served upon such director or officer. A copy of such order shall also be served upon the association of which he is a director or officer, whereupon in the event he does not appeal, such director or officer shall cease to be a director or officer of such an association . Such order and the findings of fact upon which it is based shall not be made public or disclosed to anyone except the director or officer involved and the directors of the association involved, otherwise than in connection with proceedings for a violation of this section. Any such director or officer removed from office by final order as herein provided who thereafter participates in any manner in the management of such association shall be fined not more than $5,000, or imprisoned for not more than five years, or both." Comment. This leaves out "in the opinion of the Board" and "in the discretion of the Board" to make the appeal effective so that the trial will be on the facts. It provides for the notice to be in writing. It provides for removal only for violations after the warning in writing. It makes the removal effective only after the final order, that is when he fails to appeal or appeals and loses. All of this is to clarify. It is believed that the original draft is intended as above. V. Page 221 With respect to section 404 ( e ) , rewrite to read as follows : "(e) No insured institution shall merge or consolidate with another institution or purchase or sell assets in bulk except the purchase or sale of mortgages in the market at market prices except with the approval of the Corporation if such transaction would increase the assets of an insured institution by virtue of such merger, consolidation, or purchase of assets by more than 25 per centum , or would have the effect of extending the lending area of an insured institution. " ADDENDUM B. TECHNICAL REVISIONS SUGGESTED BY UNITED STATES SAVINGS AND LOAN LEAGUE 1. Section 2 ( 6 ) ( page 182 ) , change to read as follows : "The term ' home mortgage' means a mortgage upon real estate, in fee simple, or on a leasehold under lease for a period to run or which is renewable for a period of at least ten years beyond the maturity of the mortgage upon which there is located a dwelling for not more than four families, and shall include in addition to first mortgages such classes of first liens as are commonly given to secure advances on real estate by institutions authorized by this Act to become members, under the law of the State in which the real estate is located, together with the credit instruments, if any, secured thereby." 2. Strike out section 10A (p. 192 ) , Advances to nonmembers. This section has not been used. 3. With respect to section 16 ( p. 197 ) , Reserves and dividends, strike out the third sentence so that an increase in membership or an increase in mortgage holdings which increases the capital stock would not necessitate discontinuance of dividends. STUDY OF BANKING LAWS 613 Amend the last sentence to read : "The reserves of each Federal Home Loan Bank shall be invested in such securities as may be prescribed by the Board." This modification will supply needed flexibility and latitude in the investment of reserves, to the end that they may be used for the benefit of members and not at all times be locked up in Government obligations. 4. With respect to section 401 (b ) ( p. 214 ) , Federal Savings and Loan Insurance Corporation Act, rewrite the last sentence to read as follows : "In any State, district, Territory, or possession having a community property law whether the money in the account or accounts is community property or not a withdrawable account or accounts in the name of a married person and an account or accounts in the name of his or her spouse and an account or accounts in the name of the two of them in community shall each be insured in an amount not to exceed $ 10,000 for the aggregate funds in the name of the married person, $10,000 for the aggregate funds in the name of the spouse, and $10,000 for the aggregate funds in the name of the two of them in community." Comment. The sole purpose of this is to make it clear that in community property States the husband can have $ 10,000 of insurance coverage, the wife $10,000 of insurance coverage and the two of them $10,000 of insurance coverage as such person may have in common law States. 5. With respect to section 403 ( j ) ( p . 219 ) , strike out "a member or of" in the second line and the words "the member or" in the second line on page 220. Comment. The sole purpose of this is to make it clear that we are dealing with insured associations only. This is evidently to correct an error. 6. With respect to section 17 ( p. 197 ) , some objection has been made by our people to the fact that you can not tell from the fact of this Act that the Federal Home Loan Bank Board is a bipartisan board and how many members of the Board there are. It has been suggested that this be redrafted to state the character of the Board in the Act rather than by reference. Senator ROBERTSON. We have here another representative of a savings and loan organization, Mr. Lawrence F. Speckman, of Louisville, Ky. I understand he does not wish to testify, but just wishes to offer a statement for the record . STATEMENT OF LAWRENCE F. SPECKMAN, PRESIDENT, LINCOLN BUILDING & LOAN ASSOCIATION, LOUISVILLE, KY. Mr. SPECKMAN. Mr. Chairman , my name is Lawrence F. Speckman and I am from Louisville, Ky., president of the Lincoln Building & Loan Association. That institution has over 20,000 stockholders and $22 million paid in. We are an uninsured institution. I came here to Washington to attend a conference of the United States league with the hope that they would adopt this amendment which I want to make and offer to subsection (d ) of section 4 in regard to the Federal Home Loan Bank Act. I do not wish to argue the point, but only want to offer this and submit the statement later on , if it is your pleasure. Senator ROBERTSON . You may proceed . Mr. SPECKMAN. That subsection (d) of section 4 of title IV of the Federal Home Loan Bank Act be eliminated and in its place the following be substituted : No member of a Federal home-loan bank whose accounts are not insured by the Federal Savings and Loan Corporation shall advertise or represent in any manner to so state , imply or convey the impression that those accounts are insured by said corporation. Any such member institution found violating this section by the Federal Home Loan Bank Board shall be removed from membership in the Federal Home Loan Bank. I wish to offer that and I will type it and send it in to the committee along with my statement, if that is satisfactory, Mr. Chairman. 614 STUDY OF BANKING LAWS Senator ROBERTSON. How much time do you want to submit your statement ? Mr. SPECKMAN. How much time would you give me? Senator ROBERTSON. Would a week be enough ? Mr. SPECKMAN. A week would be plenty. Senator ROBERTSON. Then you may have a week. Mr. SPECKMAN. Thank you, sir? Whom will I address it to ? To you, Mr. Chairman ? Senator ROBERTSON. No. You will address it to the clerk, Senate Banking and Currency Committee, Washington, D. C. (The statement referred to follows :) STATEMENT OF LAWRENCE F. SPECKMAN, PRESIDENT AND GENERAL COUNSEL OF LINCOLN BUILDING & LOAN ASSOCIATION OF LOUISVILLE, KY. My name is Lawrence F. Speckman. I am president and general counsel of the Lincoln Building & Loan Association of Louisville, Ky., chartered by and under the supervision of the Commonwealth of Kentucky, an uninsured member of the Federal Home Loan Bank of Cincinnati, Ohio, and also a member of the United States Savings and Loan League. I am also a past president of the Kentucky League of Local Building Associations, and currently a member of the legislative committee of said association. The Lincoln Building & Loan Association has been a member of the United States Savings and Loan League since shortly after it obtained its charter to operate as a State building and loan association under the supervision of the State of Kentucky on March 11, 1914, and also a member of the Federal Home Loan Bank, Cincinnati, Ohio, since September 22, 1932. The Lincoln Building & Loan Association was organized with an authorized capital of $ 100,000 and went through the depression of the 1930's with a record of not missing a dividend or suffering a loss to any stockholder since its organization . It now has more than 20,230 members with total assets of $22,344,640.40 as of December 26, 1956. It has reserves in excess of 7.7 percent of its paid-in capital liability. It holds at the present time 3,281 shares of stock valued at $328,100 in the Federal Home Loan Bank of Cincinnati, Ohio. Its current dues for membership in the United States Savings and Loan League is $909.53 per year. I did not expect to appear before your committee unless the legislative committee of the United States Savings and Loan League failed to support our contention that subsection ( d ) of section 4 of title IV of the proposed Financial Institutions Act of 1957, named the Federal Home Loan Bank Act, should be modified or substituted . As the legislative committee through its chairman, Mr. Henry A. Bubb, who appeared before the committee on January 31 , 1957 , as the spokesman for the United States Savings and Loan League did not support our contention, it became necessary for me to appear before the committee, representing the Lincoln Building & Loan Association, to oppose the enactment of the proposed law by the Congress on several grounds ; that it would be unfair to us and others similarly situated , discriminatory, and a delegation of discretionary authority. I am filing herewith as exhibits, or an addendum to my statement, samples of advertising material which we are now and have been using for some time, which we would be prohibited from using if subsection ( d ) of section 4 as written on page 183 of the committee print would become the law of the Congress. The exhibits consist of a letterhead, a condensed statement of the financial condition of the Lincoln Building & Loan Association as of the close of business on December 26, 1956, and other materials, with an imprint of the insignia of membership in the Federal home loan bank and also membership in the United States Savings and Loan League. It has been our custom to advertise the fact on all of our letterheads, financial statements, and in local newspapers that we are members of the Federal Home Loan Bank System and the United States Savings and Loan League. These two membership emblems are printed on all of our advertising matter jointly. If the act becomes law as written in the committee print it would be unlawful for us "to advertise or represent in any way, off the premises on which we are situated, our main office or any branch office or agency thereof, that we are a member of a Federal home loan bank or we are otherwise associated with the STUDY OF BANKING LAWS 615 Federal Home Loan Bank System or to use for advertising display or publicity purposes any insignia, emblem or indicia designed to identify us as a member of the Federal Home Loan Bank System, except as the Board may expressly authorize by regulation referring to this subsection." It will be noted that if we should so offend the Federal Home Loan Bank Board, we would be subject to a penalty of $1,000 which the Board may recover for its use. The chairman of the legislative committee of the United States Savings and Loan League in his statement on page 3 thereof, approving the proposed act, expressed a "hope and expectation that in adopting regulations the Board would take the commonsense approach of permitting these institutions to continue to use the emblem on their letterhead, financial statement, and other purely local advertising. So long as there is no danger of the representation being construed as meaning insurance of accounts, no one objects to reasonable use of the bank emblem." It is understandable that the chairman of the legislative committee of the United States Savings and Loan League, who is chairman of the Federal Home Loan Bank of Topeka and president of the Capitol Federal Savings & Loan Association of Topeka, would oppose a change in the wording of the section which we have found very objectionable to us, for the simple reason that he is president of a Federal association and presumably on that account, being insured, would take a position which would prohibit the use of the Federal home loan bank emblem and insignia except to those who are not only members of the Federal home loan bank, but are insured by the Federal Savings and Loan Association Insurance Corporation. We do not blame him for his position but we do protest before this committee that such a prohibition against the use of the advertising emblem is unfair to those who are also members of the Federal home loan bank, although uninsured. At the close of the hearing of the committee on January 31, 1957, I was granted by the chairman, Senator Robertson, the privilege of making a statement and offered the following : That subsection ( d ) of section 4 of title IV of the Federal Home Loan Bank Act as it appears in the committee print on page 183 be eliminated and in its place the following be substituted : "No member of a Federal home loan bank whose accounts are not insured by the Federal Savings and Loan Corporation shall advertise or represent in any manner to so state, imply or convey the impression that its accounts are insured by said corporation. "Any such member institution found violating this section by the Federal Home Loan Bank Board shall be removed by the Board from membership in the Federal home loan bank." We want the committee to understand that we do not defend any uninsured institution, member of the Federal home loan bank, who attempts by any form of advertising to represent that it is insured. Such form of advertising or representation should be dealt with severely, and we share with the legislative committee of the United States Savings and Loan League a condemnation of such practices. The only difference between us that I can see is that we think that the offense should be clearly identified and the offenders dealt with accordingly, in a manner befitting the offense. The league approves the prohibition of the use of the emblem and insignia as an advertising medium, except in the office of the association or as authorized by the Board , but leaving it up to the Board to adopt regulations that would take a commonsense approach , and exempting certain institutions who continue to use the emblem on their letterheads, financial statements, and other customary purely local advertising from the prohibition provided in the act. Such a provision would place the institutions wholly at the mercy of the Board without any directives as to its powers except to recover the $1,000 for its use, without the power to exclude such a member from membership in the Federal Home Loan Bank System. In other words, it would have the effect of enforcing the prohibition by regulation of the Board instead of by the law of the United States. We quote with approval the advice of Mr. Ben Dubois in his statement made before this committee on January 30, 1957, as secretary of the Independent Bankers Association, page 5 : "Legislation delegating discretionary authority should be as limited as possible." Under the proposed act, a member could violate the provisions of the act and pay the $1,000 penalty and still continue as a member and violate again, whereas under the substitute we propose, while it permits the use of the emblem or insignia in advertising as it is now conducted by practically all of the 800 uninsured 616 STUDY OF BANKING LAWS members of the Federal Home Loan Bank System, it would deter any advertise.ment or representation in any manner which would imply or convey the impression that its accounts are insured by the Federal Savings and Loan Corporation. Expulsion from membership in the Federal Home Loan Bank System would have more of a deterring effect than the payment of a $1,000 fine. I think it is safe to assume that any member who so falsely betrays his membership in the Federal Home Loan Bank System deserves a penalty of expulsion from membership, not a $1,000 fine and continuing membership. On examination of the Federal Home Loan Act I find that members of the Federal home loan bank are punished only by expulsion, as we now advocate in the substitute. Only nonmembers are punished through the Federal Criminal Code. Personally we know of no instance of false representation having been made by any institution, but have been told by those who are proposing this prohibition that several associations who are uninsured members of the Federal Home Loan Bank System have advertised in such a manner as to convey the impression that they are insured by reason of being a member of the Federal Home Loan Bank System. It seems to us, who are innocent of such conduct, that the Board itself does have inherent power to prevent those acts by seeking an injunction in a court of equity, without having the Congress to adopt a law which would prevent honest-to-goodness members of the Federal Home Loan Bank System publishing and declaring to the world that they are members of that System. If there is need of a law to bar impersonation or false representation by its members, it should be by due process and not by regulation. THE PROPOSED ACT IS DISCRIMINATORY Let us for the purpose of argument assume that there are 800 uninsured members of the Federal Home Loan Bank System in the United States, and that 10 of them are guilty of the act complained of. If the proposed act becomes a law or regulation it would result in 790 innocent members of the bank being prohibited from advertising the fact that they are members of the Federal Home Loan Bank System, except in their local communities, although the insured members are permitted to display the emblem and advertise it without any limit whatsoever. Both insured and uninsured members of the Federal Home Loan Bank System have in all other respects the same rights and are under the same liabilities, except that the uninsured members are not chartered by the Federal Government or insured by the Federal Savings and Loan Corporation. As far as their rights are concerned they have the same right of borrowing power and ownership of stock. As their size increases they automatically are required under the rules of the Federal Home Loan Bank System to increase their capital stock holdings. The Federal Home Loan Bank System was created by act of Congress in 1932 and was largely patterned after the provisions of the Federal Reserve System , the purpose of which was to provide a means by which its members could by the purchase of stock in the bank provide a reserve of liquidity available to the member institutions in the event of a stringency in finance, which stringency would prevent commercial banks from advancing their funds to the building and loan institutions. It provides an independent agency or reserve system which would be available to its member institutions in the case of an emergency. It will be seen, therefore, that membership in the Federal Home Loan Bank System is a valuable source of supply to the institutions when the institutions need financial help. Fortunately, up to this moment, it has not been necessary for any institution within our knowledge to use its reserves so built up in the treasury of the Federal Home Loan Bank System. On the contrary, they have used the bank as a means of deposit for surplus funds and have proven their loyalty to the Bank System by so doing. It seems that a Federal Home Loan Bank Board should not be put in a position where it must discriminate between its members, not because of acts they have committed offensive to the System, but that may be offensive to some of the members of the System. It must be remembered that we are all bound together by the same tie, and what affects one member affects us all. No association can live to itself, because its acts reflect upon the whole membership of the bank and on the whole industry , irrespective of whether they belong to the bank or not. It is most surprising to those of us who are members of the United States Savings and Loan League to have it take the position that it has before this committee, by its approval of an act of discrimination ; and if the act is a proposal of the Federal Home Loan Bank Board it proves that it is in sympathy with the STUDY OF BANKING LAWS 617 act of discrimination which is evidenced by the wording of the act, and therefore they should not be vested with a power of discrimination . THE TREND TO FORESAKE THE TRUE PURPOSES OF THE ORGANIZATION AND FUNCTIONS OF A SAVINGS AND LOAN OR BUILDING AND LOAN ASSOCIATION Last year at its convention in Philadelphia, Pa., the United States League celebrated the 125th anniversary of the founding of the savings and loan or building and loan associations in the United States. The principles undergirding the movement until recently have been : 1. The realization of a local community need of decent housing by the citizens of the community. 2. The pooling of their savings into a mutual fund to be used to supply the need. 3. The sharing of the profits equally among those contributing to the fund. It has been therefore a purely mutual cooperative private enterprise. Through a strict observance of those principles above enumerated, the movement has grown in proportion to the growth in population and wealth of the people of the United States, until it has been recognized that "The American Home is the safeguard of American liberties." Secretary H. L. Cellarius of the United States League in his 1930 annual report listed the following : 49 States . Number of associations___ 12, 342 12, 111, 209 Membership--. Assets___ $8, 695, 154, 220 The savings and Loan Fact Book published by the United States Savings and Loan League in 1956, pages 40 and 41 , reports as follows : States--48 Territories___ 4 Number of associations_ 6, 048 State___ 4,365 Federal . 1,683 Assets_ $37, 800, 000, 000 Of the above, 4,307 are members of the Federal home loan bank as of December 31, 1955, divided as follows : Federal charter 1, 683 1, 861 State charter, insured_. 763 State charter, uninsured_. Total_ 4,307 During the decade ending with 1955, savings and loan associations made the largest gain in savings (336 percent of any type of thrift institution with the exception of credit unions (500 percent ) . In third place were mutual funds (291 percent ) ; and in fourth place mutual savings banks ( 84 percent ) . A large part of this increase is due to favorable economic conditions such as a booming national income, although aggressive advertising of the Federal insurance feature has contributed in a large measure to the increase. In the battle for the community's savings the insured, as well as the uninsured institution, must of necessity use every honorable and ethical means to secure the savings of the people. The insured institution rests its security upon its contribution to a fund in the Federal Savings and Loan Corporation or a State guaranty fund, the uninsured upon a sound and safe management and the building of its own reserves for that rainy day which may or may not come, practicing in its own policy those attributes it encourages its stockholders to practice. We, who are not insured , deplore the trend not only of the banks but also of the savings and loan associations to grow to be the largest in the community, therefore placing the emphasis on bigness rather than safety. A steady normal growth is much more to be desired than a phenomenal growth. We limit our mortgage lending to encourage home building and home ownership, and limit it to the local community of the State in which we live, not crossing State lines . In the conduct of our institution we keep in mind always the above principles, and although we are an uninsured State association we feel absolutely secure, 618 STUDY OF BANKING LAWS and merit the confidence which we have earned of those who place their savings in our care. We do not ask and have never used any Federal help in the way of FHA or GI loans. We make only conventional mortgage loans on the direct reduction plan bearing 6 percent interest, although we do have an FHA Home Improvement Loan Department for the convenience of our stockholders. Based on long experience, we firmly believe that the State uninsured savings and loan or building and loan association dependent wholly on the honesty and integrity of its management is the best demonstration of what a group of free citizens in a free republic may accomplish to teach thrift, inspire faith in our fellow countrymen, and thus encourage home ownership instead of public housing tenancy. It is a shining example of free private enterprise. We submit that if the act as proposed becomes a law of the Congress we shall be compelled to withdraw our membership in the Federal home loan bank as well as in the United States League. For the above reasons we submit that our substitute, or any other wording you may deem necessary to implement the objectives we have attempted to enumerate herein, should be enacted into law by the Congress, rather than the proposed act. We thank you for your indulgence. (The attachments to Mr. Speckman's statement will be found in the files of the committee. ) Mr. SPECKMAN. Thank you very much. Senator ROBERTSON. Thank you very much. The committee will stand in recess. (Whereupon, at 11:45 a. m. the subcommittee recessed until 10 a . m. the following day, Friday, February 1 , 1957. ) STUDY OF BANKING LAWS (Financial Institutions Act of 1957) FRIDAY, FEBRUARY 1, 1957 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, SUBCOMMITTEE ON BANKING, Washington, D. C. The subcommittee met, pursuant to recess in room 301 , Senate Office Building, at 10:05 a . m., Senator A. Willis Robertson (chairman of the subcommittee) presiding. Present : Senators Robertson and Clark. Senator ROBERTSON. The committee will please be in order. The first witness today will be Mr. James W. Grant, representing the Credit Union National Association . You may proceed. STATEMENT OF JAMES W. GRANT ; ACCOMPANIED BY DAVID R. WEINBERG, REPRESENTING THE CREDIT UNION NATIONAL ASSOCIATION Mr. GRANT. Mr. Chairman, our association has prepared a statement which I believe has been passed out to the members of the committee. It pretty much states our position and the changes which have been suggested by the advisory group in the Federal Credit Union Act. Mr. Weinberg of our national association is here with me and we would be very happy to be interrogated and answer any questions which the Chair or members of the committee might see fit to put to us. Senator ROBERTSON. Without objection your statement may be incorporated in the record. Mr. GRANT. Thank you. (The prepared statement of the Credit Union National Association follows :) STATEMENT OF THE CREDIT UNION NATIONAL ASSOCIATION, INC. TITLE VII- FEDERAL CREDIT UNION ACT SEC. 1. Short title.- Same as section 1 of Federal Credit Union Act ( F. C. U. Act ) . SEC. 2. Definitions .-The revision of section 2 of the F. C. U. Act is supported. SEC. 3. Creation of bureau.-Insertion of the new provision herein is supported. SEC. 4. Federal credit union organization. - Same as section 3 of F. C. U. Act. SEC. 5. Approval of organization certificate.- Same as section 4 of F. C. U. Act. SEC. 6. Fees.- Same as section 5 of F. C. U. Act. SEC. 7. Reports, examinations , and audits .- It appears that the two references to "section 5" in the last sentence of subsection ( a ) should properly be to " sec619 84444-57- pt. 2-12 620 STUDY OF BANKING LAWS tion 6." We are opposed to the provisions in subsection (b) for the following reasons : 1. In our opinion, the Bureau of Federal Credit Unions is presently maintaining close, effective supervision and is performing thorough, comprehensive examinations of the credit unions under its jurisdiction. 2. The Credit Union National Association supports the bureau's policies in this connection. 3. The Bureau of Federal Credit Unions and the credit-union movement are cooperating in a study of methods and techniques for improving internal control and supervisory committee audits, and definite action is being initiated to achieve this goal. As an integral part of this program, the bureau recently prepared and issued a comprehensive supervisory committee manual which enlarges upon and explains with clarity and in considerable detail the purpose, theory, and process of audit and is primarily designed to enhance the quality of audit performance. An internal control checklist contained in this publication should prove of considerable value as a further guide to the committee. A supplement to the accounting manual, also recently issued by the bureau, contains additional information designed to assist in the institution and maintenance of effective internal control. 4. In conjunction with this endeavor, the Credit Union National Association and the various State leagues and chapters are conducting training classes and publishing materials which are now reaching supervisory committee members and other credit-union leaders and officials on a National, State and local level. 5. Among the proposed additions to section 14 in this committee print bill is authorization for the directors to provide for compensation of necessary clerical and auditing assistance requested by the supervisory committee. Utilization of such assistance will result in assigned portions of the audit being performed by skilled professionals under the direction and control of the committee. 6. As a result of the present joint studies and endeavors, appropriate revision of the section of the act specifically dealing with the duties and responsibilities of the supervisory committee may be proposed. 7. Since the credit-union movement and the bureau are in the process of making a complete and careful study of the entire subject and are in the midst of instituting concrete action based upon their findings, it is suggested that the proposed addition to the act set forth in subsection ( b ) is premature. We therefore respectfully request that the entire subsection be deleted. SEC. 8. Powers.- Same as section 7 of FCU Act. SEC. 9. Bylaws.-The amendment to section 8 of the FCU Act is supported. SEC. 10. Membership. - Same as section 9 of FCU Act. SEC. 11. Members' meetings.-Same as section 10 of FCU Act. SEC. 12. Management.- Same as section 11 ( a ) of FCU Act. Advisory committee recommendation 168 indicates that it is the feeling of the committee that the treasurer be prohibited from serving on the supervisory committee. We urge that consideration be given to incorporating such exclusion in this section. SEC. 13. Officers.-The amendment to section 11 ( b ) of FCU Act is supported. SEC. 14. Directors.- The amendment to section 11 ( c ) of the FCU Act and incorporation of advisory committee recommendation 170 are supported. SEC. 15. Credit committee.-The amendments to section 11 ( d ) of the FCU Act are supported . However, in order properly to define the scope of activity of the loan officer, for whom compensation is authorized in proposed section 14, it is suggested that the following be added after the last word in the second sentence : ", or by any loan officers appointed by the committee. No loan officer may approve a loan in excess of the unsecured limit unless such excess is fully secured by unpledged shares." SEC. 16. Supervisory committee.- Same as section 11 ( e ) of FCU Act. SEC. 17. Reserves.- Same as section 12 of FCU Act. SEC. 18. Dividends.-The amendments to section 13 as proposed by advisory committee recommendation 180 do not appear to be accurately reflected in the wording of the proposed section . It is respectfully suggested that a section worded somewhat as follows be substituted therefor : "Annually or semiannually, as the bylaws may provide and after compliance with reserve requirements, the board of directors may declare a dividend to be paid from the remaining net earnings. Such dividends shall be paid on all paid-up shares outstanding at the end of the dividend period . Shares which become fully paid up during the dividend period shall be entitled to a propor- STUDY OF BANKING LAWS 621 tional part of said dividend provided that said shares shall be outstanding at the close of the period for which the dividend is declared. Dividend credit for the month may be accrued on shares paid in and which become fully paid during the first 5 days of the month ." SEC. 19. Expulsion and withdrawal.- Same as section 14 of FCU Act. SEC. 20. Minors.- Same as section 15 of FCU Act. SEC. 21. Certain powers of director.- We have no position regarding new subsection ( i ) relating to conflicts of interest. However, we are of the opinion that if the proposal is adopted, the restriction imposed therein upon former employees should be limited to a 2-year period from the date of termination of employment. SEC. 22. Fiscal agents and depositories.- Same as section 17 of FCU Act. SEC. 23. Taxation.- Same as section 18 of FCU Act. SEC. 24. Partial invalidity ; right to amend.- Same as section 20 of FCU Act. SEC. 25. Space in Federal buildings.-The amendment to section 21 of FCU Act is supported. SEC. 26. Territorial applicability of act.-The amendment to section 22 of FCU Act is supported . However, it is suggested that the Panama Canal Zone, which is in the current act and is neither a possession nor territory, be specifically included in the proposed section. TITLE VIII- MISCELLANEOUS AMENDMENTS Amendments to Criminal Code SEC. 803. ( a ) Section 217 of title 18 of the United States Code. We do not support the portions of the proposed amendment dealing with offers of employment. It is suggested that adoption of these portions of the amendment may result in unduly restricting the opportunity of credit unions to attempt to obtain skilled, qualified help in a reasonably specialized field. We are of the opinion that the incorporation of proposed section 21 ( i ) in the FCU Act would establish sufficient control and prevent possible abuses since employment could not actually be accepted in any Federal credit union by the affected employees except pursuant to regulations prescribed by the director of the bureau. It is further suggested that the language of the proposed amendment may be too broad in that the restrictions contained therein apparently also apply to clerical and other employees who are not directly or indirectly involved in the supervision and/or examination of Federal credit unions. The loan restrictions contained in subsection ( iii ) also appear to be unduly restrictive. (b) Section 218 of title 18 of the United States Code.- We do not support adoption of the portions of the proposed amendment dealing with acceptance or agreement to accept offers of employment since we are of the opinion that incorporation of proposed section 21 ( i ) in the Federal Credit Union Act would establish an effective means of controlling such activity. It is further suggested that the language of the proposed amendment may be too broad in that the restrictions contained therein apparently also apply to clerical and other employees not directly involved in the supervision and/or examination of Federal credit unions. The loan restrictions contained in subsection ( iii ) also appear to be unduly restrictive. (h ) Subsection (g ) of section 2113 of title 18 of the United States Code.The amendment is supported. Senator ROBERTSON. Do you wish to highlight any part of your statement on which you care to place emphasis ? Mr. GRANT. Not in any particular fashion, sir. As I said, I think it states very clearly and concisely our position on the act. The one particular point which is contained on the first page of this statement, under section 7- I will not go into the reading of it or anything of that type but I just want to emphasize our position verbally in opposition to the suggestion that the Federal credit unions be subjected to an additional examination by outside agencies of certified public accountants. We in the national association have long felt the need of better supervisory reports and we have taken, as this statement will indicate, 622 STUDY OF BANKING LAWS steps during the years to provide for better supervisory work. Many of our credit unions at the present time are engaging the services of accountants in their own sphere of membership or outside to perform the type of supervisory work which will give them the type of report which is indicated here by the recommendation. Senator ROBERTSON. I understand then that you support the major provisions of the bill with respect to Federal credit unions but you offer some changes ? Mr. GRANT. Yes, sir. That is true. Senator ROBERTSON. I notice you offer a change on page 4 of your prepared statement wherein you say that you do not think the language of the bill on dividends is quite accurate, and you suggest a different wording there. Mr. GRANT. That is true. Yes, sir. Senator ROBERTSON. When the committee writes up the technical bill we will be glad to bear in mind the suggestions you made, and we appreciate your appearance. Mr. GRANT. Thank you very much. (The following was subsequently received for the record :) REVISED STATEMENT OF CREDIT UNION NATIONAL ASSOCIATION , INC. , ON PROPOSED SECTION 15 OF SENATE COMMITTEE PRINT BILL ENTITLED "FINANCIAL INSTITUTIONS ACT OF 1957" The Credit Union National Association, Inc., hereby reverses its position with respect to the change in proposed section 15 of the Federal Credit Union Act as indicated in its statement on the Senate committee print bill entitled “Financial Institutions Act of 1957" which authorizes the Director of the Bureau of Federal Credit Unions to establish by regulation lower loan limits than those currently in effect. When the Congress originally adopted the Federal Credit Union Act in 1934, it very wisely prescribed a reasonable limit on both loans made without security (signature loans ) and on those larger loans which required collateral. Since that time, credit unions have functioned within these limits although a normal growth in the size of the average loan granted has occurred. This has been due in large measure to our improved standard of living and increased cost of goods and services which has resulted in a diminution in actual purchasing power of the dollar. Further, as credit unions developed, the close association of the members in a common bond provided a firm basis upon which to extend increased credit. In the more than 22-year period since the law has been in effect, millions of individual loans have been granted with an insignificant and enviable loss record. This fact is borne out by the testimony of the Director of the Bureau before this committee to the effect that the loss experience of Federal credit unions is only 0.15 percent of the money loaned . No evidence has been presented to indicate that a change in the current loan limit is warranted on the basis of excessive losses. Credit unions are designed to serve broad and diverse segments of our population with varying economic needs and capabilities. For example, organizations of professional people are helping members buy equipment essential to setting up or expanding practices. Although a relatively higher loan might be required, the member's current and potential income makes such loan sound and desirable. The need of the farmer for substantial, short-term credit in order to finance crops is also being met. Other groups are being served by comparatively smaller loans for longer periods of time. Such variations make essential the retention of flexibility and self-determination in the law. Although instances of extension of excessive credit may have occurred, they have been few and isolated . No evidence has been presented to indicate that such loans have resulted in losses which have impaired the value of members' shareholdings or have forced the liquidation of credit unions. It would, therefore, appear to be evident that boards of directors and credit committees have generally met their responsibility in this connection in an effective manner. STUDY OF BANKING LAWS 623 Generally, as credit unions have grown, these bodies have by self-regulation established lower loan limits than allowed by law. It is respectfully suggested that the advisability of authorizing the Director of the Bureau to establish by regulation lower loan limits for all credit unions or for one or more classes of credit unions than those currently prescribed by law be subjected to a searching reevaluation. The net effect of such provision would be to centralize in one person a discretionary power which is of vital importance to each individual credit union and does not lend itself to general or blanket administration. Further, it would seriously infringe upon the responsibility of the board of directors and the credit committee to determine practical loan limits within their own credit union based upon their knowledge of the needs and capacities of the membership. This could result in depriving the members of maximum utilization of the credit facilities made available as a result of funds accumulated through cooperative thrift. It is urged that this flexibility is essential and would inevitably be lost under administrative directives and regulations. Based upon the above factors, we are of the firm conviction that empowering the Director of the Bureau of Federal Credit Unions to establish lesser loan limits than those currently provided for in the law is unnecessary and unwarranted. It is therefore respectfully requested that such provision be deleted from proposed section 15. Senator ROBERTSON. The next witness is the National Association of Credit Men. I understand Mr. Robert L. Roper will speak for them. STATEMENT OF ROBERT L. ROPER, LEGISLATIVE DIRECTOR, NATIONAL ASSOCIATION OF CREDIT MEN Mr. ROPER. Mr. Chairman, distinguished gentlemen, I am Robert Lee Roper, legislative director of the National Association of Credit Men, New York City. I am here to present the statement of Mr. Henry H. Heimann, executive vice president of our organization, with regard to that part of section 26 , title III, of the Financial Institutions Act of 1957 which proposes to extend certain of the interest provisions of the Federal Reserve Act to the Federal Deposit Insurance Act. First, may I say that Mr. Heimann has asked that I convey his most sincere regrets to the distinguished members of this committee that he cannot personally appear to present the views of our organization's membership. He would certainly want to do this and would do so if it were not for a family illness problem of the most pressing urgency which takes him to the Midwest. He does wish to thank this committee for letting us submit the views of our organization and its membership at this time. Our organization and our members have always held this particular committee in the highest esteem and have cooperated with it on many occasions. We want to do everything in our power to give you gentlemen our fullest cooperation always. The following statement which I shall read if the committee so desires is our observation only on that part of title III, section 26, appearing at page 163 of the committee print which reads as follows : No insured bank shall, directly or indirectly, by any device whatsoever, pay any interest on any deposit which is payable on demand and for such purpose the Administrator may define the term "demand deposits" ; but such exceptions from this prohibition shall be made as are now or may hereafter be prescribed with respect to deposits payable on demand in member banks by the Federal Reserve Act, as amended, or by regulation of the Board of Governors of the Federal Reserve System . This provision as we understand it would in effect prohibit the absorption of exchange by nonmember banks who are insured under 624 STUDY OF BANKING LAWS the Federal Deposit Insurance Corporation. We are, of course, fully aware that this would in no way prohibit the charging of exchange, nor would it prohibit the nonpar payments of bank checks. We also understand that the enactment of this provision would in no way affect the 500 or so nonmember banks who are not presently insured under the Federal Deposit Insurance Corporation. We do emphatically applaud the fact that the enactment of this provision would at long last bring to an end through an act of Congress the confusion which has arisen over the years from diverse rulings of different agencies as to what constitutes an unlawful payment of interest. We further applaud the fact that the enactment of this provision would in effect give congressional sanction to one uniform definition of interest, a sanction which we respectfully submit has long been needed. Despite the fact that much of the following statement may seem an argument for par clearance of bank checks and therefore seemingly irrelevant to the basic question now under consideration as to whether or not exchange absorption should be deemed an unlawful payment of interest, we hold that there is indeed now, as there has always been , a direct relationship between these two questions, and that in making our position on the one clear we must perforce bring forth our arguments for the other. The relationship of these two questions we believe you will find is developed in the course of our presentation. Mr. Chairman, is it the desire of the committee that I read the statement of Mr. Heimann. Senator ROBERTSON . The committee would be just as willing for you to insert that full statement in the record and then you summarize it for us . Mr. ROPER. Yes. Senator ROBERTSON. Because as you know we have already had considerable testimony on this very issue. Mr. ROPER. Yes. Senator ROBERTSON. Naturally we will be glad to have your viewpoint, but it will not involve anything that is new to us in arguments pro and con. Mr. ROPER. Yes. Senator ROBERTSON. Without objection the full statement of Mr. Heimann can be inserted in the record and then you can summarize it for us. (The prepared statement of Henry H. Heimann follows :) STATEMENT OF HENRY H. HEIMANN, EXECUTIVE VICE PRESIDENT, NATIONAL ASSOCIATION OF CREDIT MEN I am executive vice president of the National Association of Credit Men. Our home officeis in New York with direct branch offices in Chicago and St. Louis. Our local offices of affiliated units are 144 in number and are located throughout the country. I herewith respectfully submit the views of our organization and the majority of its members with respect to that part of title III, section 26, payment of interest of the Financial Institutions Act of 1957 , which would, in effect, extend the exchange-absorption provisions of the Federal Reserve Act to the Federal Deposit Insurance Corporation Act as respecting nonmember insured banks. Our organization, composed of more than 35,000 credit executives in industrial, commercial, and financial concerns of all sizes- large, medium, and small-and operating in all lines of business, has always been keenly aware of the need for sound banking law as essential to the economic health of the Nation. For the more than 60 years of its existence its members have taken keen interest in STUDY OF BANKING LAWS 625 the promotion of sound banking legislation. Our members were very active in the promotion of the Federal Reserve Act, a work which the late Hon. Carter H. Glass so generously acknowledged. It has been the particular interest of our members that bank checks be cleared and payable at par and that check recipients, wherever they may reside, shall be able at all times to receive full payment for the goods they sell and the services they render. Our organization and our members urged the inclusion of the par payment provisions in the Federal Reserve Act at the time it was originally enacted. Also, through the years we have sought, by educational means, to persuade the nonpar banks that it is to their long-range advantage to adopt a policy of honoring their depositors' checks to out-of-town payees for the full face amount at which their depositors indicate they wish their checks to be paid. That we have been, to some measure, successful in this program is borne out by the fact that there are now 10 fewer nonpar States than there were in 1943. Seven of the ten have become par clearing entirely by voluntary action. In a few areas, however, our members have felt obliged to seek remedy through appeal to their State legislatures. Largely at the behest of our members in those States, therefore, par clearance legislation was enacted in Iowa in 1943 , in Nebraska in 1945 and in Wisconsin in 1949. In Nebraska the constitutionality of its par clearance legislation was upheld in 1947 by the State Supreme Court in Placek v. Edstrom (Saunders Co. ) ( 32141 17 S. C. J. 79, 148 Neb. 79 ) . The particular interest of the credit community in par clearance is based on the fact that credit plays a major role in the commerce of our Nation. It may indeed be called the very lifeblood of commerce and industry. It is our national currency. It has been our constant aim, therefore, that everything possible be done to keep credit channels open. It is our firm conviction that wherever barriers exist against the free flow of credit, business is impeded at least to that extent in its service to the public. Exchange charges on bank checks are such barriers. Years ago bank checks were not generally acceptable. Modern transportation and communications did not exist. Marked variations existed between States and between regions in the supply and demand for money. To cover the costs of transference, deduction of a part of the face amount of any check became common banking practice. Many bankers discovered that such deductions also added substantial revenue. For example, prior to the establishment of the Federal Reserve System, many banks found it to their advantage to route checks from one out-of-the-way point to another. Thus in many instances one check would be routed through a half dozen banks or more, with each bank gaining its advantage before the check was finally cleared . Circuitous routing of checks in those days permitted many banks to show favorable balance sheets by reason of the number of checks outstanding which were not reflected in the total deposits shown on their statements. In earlier days the argument was put forth that the currency needs of banks were increased by their out-of-city payments and that this involved a measure of expense. It is significant that at no time was an exchange charge levied by a central city bank on its checks to cover such expense. It should not have been done, but if this expense of clearing out- of-city checks had been a factor, then it would have been consistent for the central city banks to levy a charge on their own checks. Obviously, they did not feel this to be warranted. Today, however, with the clearing facilities of the Federal Reserve System open to all par banks, State and National, member and nonmember, an efficient method for check clearances has been established. Not only are check clearances to any part of the country greatly speeded but the expenses to the banks involved are substantially reduced. The increased facility of check collection through the Federal Reserve has contributed in no small measure to the increased use of bank checks as a standard medium of currency. It is no exaggeration to say that today by far the greatest proportion of business is handled by check. Even at the consumer level, each year finds more and more people paying their monthly heat, rent and light bills, and even their grocer's bill, by bank check. As such, bank checks may now, more than ever, be considered the basic currency of the land . Nevertheless, there are some 2,000 banks, banking offices and branches which still follow the old practice of discounting these checks. In effect, they are discounting the national currency. Their reason for continuing this custom, as we understand it, is basically that to do away with this income to which they have been accustomed would affect their earnings. We appreciate this view. Certainly no group recognizes better 626 STUDY OF BANKING LAWS than the credit men that sound banking requires adequate levels of bank earnings. The bankers are entitled to and should have reasonable returns on their capital investment. We fully subscribe to that fundamental premise because we are interested in having the soundest possible banking system. However, a point frequently overlooked in their argument is their assumption that no alternative income sources could readily be substituted for the exchange charge. This is a fallacious assumption . Experience with par clearance confirms our view. When par clearance legislation was being sought in Nebraska, for example, some 2 years after the Iowa act, a comparative statement of earnings and expenses of the Iowa banks for the years before and after the enactment of the par clearance statute in that State was submitted by the superintendent of banks in Iowa. In an accompanying letter he said not only that "no Iowa bank was forced out of business on account of the passage of the Iowa par check bill," but added : "Iowa banks have quite generally adopted service charges, which income has more than offset the loss of exchange from the antiquated method of charging on checks received in the mail. Thus, each account in the bank pays its own way and the responsibility for the activity is borne by the owner of the account. I have heard of no complaint by an Iowa bank of the loss of income from charging exchange on incoming items." Such favorable experience has also been reported from the other States whose banks have become all par clearing. The Iowa bank superintendent's statement was submitted in 1944 during World War II, when interest rates were artificially low. They now have reached much more favorable levels from the banking standpoint. Interest rates today make loans an excellent source to expand bank revenues. At the same time such loans would permit concentration of needed funds in the development of local communities rather than in the balances of exchange-absorbing correspondent banks located in other areas. Alternative sources of revenue today would include, first of all, compensating service charges to depositors. These are truly competitive, as they are in effect the price of a bank's services to its customers. This cannot be said of exchange charges. A payee whose checks from customers are discounted certainly has no control as to what bank his customer uses. A second alternative source is interest on loans ; a third, the bank's returns on its own investments. The fact that the vast majority of the Nation's banks- including large banks and small banks, city banks and country banks- find service charges to depositors, interest on loans and returns on investments to be ample source of revenue, should be argument enough that elimination of exchange charges would not impede future operations, despite the claims of some exchange-charging banks. Furthermore, there are banks which both collect exchange on checks and levy a service charge against their depositors . By this charge they collect twice for the same check-once from the depositor and once again from the payee. The equity of service charges as against exchange charges should have consideration at this point. Any person or businessman who receives a check should get 100 cents on the dollar. A check payee accepts a check through a desire to accommodate his customer. A depositor, in writing a check for a certain amount, expresses his intent that the payee receive the amount designated on the face of the check in full settlement of that depositor's obligation to the payee. The costs of handling the depositor's check are, or should be, considered a part of the bank's normal overhead expense ; if they are not, then the bank should be compensated for them by the one it serves-its own customer who is the depositor. The check payee is not served by the depositor's bank, but is merely accommodating his customer by accepting the latter's bank check in full settlement of the customer's obligation. If the bank does not pay in full a depositor's check, the depositor's obligation is not fully settled , though he did in fact write a check for the full amount. It is a rather startling and revealing fact that in the vast majority of instances depositors using nonpar banking facilities are totally unaware that their banks are failing to honor the full amounts of their checks and that those who receive their checks are receiving less than face value. If the fact were more widely known, we are confident that most would seriously object. Some of our members have expressed a desire for an amendment to the National Banking Act, or other legislation , making it compulsory for banks to state publicly if they are par or not. If, as nonpar spokesmen profess , these banks have nothing to hide or apologize for in discounting their customers' checks, the exchange-charging banks should not be reluctant to let the customers know. We feel that such a "Pure Food and Drugs " Act of banking, by putting the right label on the right container, as it were, would in a very short time halt STUDY OF BANKING LAWS 627 check-discounting practices, and the pressure would be from these banks' own depositors. Exchange charges may be described as hidden charges in every sense of that phrase- concealed as they are from the eyes of the banks' own depositors . The proposed provision, now under discussion by this committee, to amend the Federal Deposit Insurance Act with regard to payment of interest would not directly make illegal the nonpar payments of bank checks, nor would it directly prohibit the charging of exchange, but it would , by forcing into the open, those hidden exchange charges which are now absorbed by correspondent banks, cause the customers of these banks to understand these discounting practices and enable them to object to them. With absorption prohibited, however, most check discounting banks would no doubt immediately see the wisdom of ceasing exchange charging operations altogether. Another fact not commonly known is that, despite maximum exchange charge limits of one-tenth or one-eighth of 1 percent, set by statute in some States and determined by general agreement in others, these charges are not so nominal as appears on the surface. Rates charged by nonpar paying banks frequently vary and the intermediate correspondent banks in many cases add further charges, so that the amount of exchange and collection charges paid by our members reach totals which are a real burden on commerce. We have been advised of charges amounting to as much as $2.04 on a check of $340.10, $24 on a check of $15,000, $68 on a check of $17,000, and $70 on a check of $35,000 . These run well above the original exchange charge rate of $ 1 or $ 1.25 per $ 1,000. Total costs to business and the public at large from such charges are estimated to be millions of dollars each year, despite the fact there are now only about 2,000 exchange-charging bank outlets out of a total of well over 20,000 banking offices. Furthermore, the costs to the public are not to be measured only in terms of the direct monetary costs of exchange charges alone. These charges must often be met by out-of-town hospitals, schools, churches, and charitable organizations just the same as any business. They receive less than their well-intentioned contributor indicates on his check. The depositor pays in full, but the organization gets less while the depositor's bank benefits by the difference. Exchange charges also affect the public in terms of their day-to-day necessities and cost of living. While many of the larger businesses and corporations are able to keep substantial compensating balances with the exchange-absorbing banks, this is not generally true of smaller businesses in the nonpar areas. The grocer, plumber, dry-goods dealer, and other small merchants and tradesmen in these communities, in accepting a check drawn on an out-of-town bank, must often be content with payment for less than the true value of their goods and services. The small-business man faced with such exchange charges is often helpless to do anything about them. He usually does not have the resources or the competitive position to enable him to risk losing an account by refusing his customer's checks. Yet he must meet these extra costs. They are therefore necessarily reflected in the bill to the customer, along with overhead and other business expenses. Once again the exchange-charging bank gains, while the public pays. It has been suggested that the elimination of exchange absorption by insured banks, as contemplated by the provision under discussion, might be detrimental to small banks. In the aggregate, exchange charges are absorbed only where compensating balances are maintained . In the case of interbank balances, the larger banks which hold these balances recoup the cost of such absorption by investing the funds left with them by their small bank correspondents. In the case of business depositors, only the larger firms and usually those with a nationwide distribution can afford to maintain the large balances necessary to compensate for exchange charges on their customers' checks. It is revealing, also, that well-managed small banks, even in areas where the nonpar banks are concentrated, serve their communities well , make a fair return on their investment, and cash checks drawn on themselves at par, whether presented over the counter or through the mails. The thought also has been advanced that such a provision as proposed carries a threat to our Nation's traditional dual-banking system. Most of the State banks, as well as all National banks, now pay their checks at par, and make efficient use of the par-collection facilities of the Federal Reserve banks, without discrimination of any sort between the State and National banking systems. For this reason, we feel, the dual-banking system is not jeopardized and the argument has no validity. There has been the assertion, too, that elimination of exchange absorption would threaten the individual unit bank operation, as opposed to branch, chain, 628 STUDY OF BANKING LAWS and group banking operations. It is wholly fallacious to assume that those banks which are now nonpar could not exist if their exchange-charging operations were to be abruptly terminated, and that branch, group, or chain banks are poised ready to step into their community and take over when this former source of revenue is eliminated. Alternate sources of revenue, as we have pointed out, are now abundantly available. That such small unit banks can prosper without the exchange absorption privilege has been proved time and again by the many who do expand on a par-paying basis of operations. Our organization and the members it represents heartily concur with those who deplore the existing lack of uniformity in our present banking regulations as to what does and what does not constitute an unlawful payment of interest. The proposed amendment would bring to an end once and for all the conflict in ruling. By putting all insured banks, whether or not members of the Federal Reserve System , on a uniformly competitive basis , the provision would in itself be a vastly significant milestone in sound banking legislation, with farflung benefits not only to the entire banking community but to all business and to the public. We in business, and particularly in the credit profession, have traditionally regarded as interest any compensation for the use of someone else's funds, whether those funds are in the form of outright cash or of credit. The fact that exchange-absorbing banks insist that large compensating balances be kept with them on deposit by their nonpar paying correspondents, in return for the privilege they accord them of having these charges absorbed , makes exchange absorption a payment of interest on demand deposits, from whatever angle you view it. In summation may we say that when any bank pays on its depositors' checks less than the amount written, commerce is impeded, the Nation's currency is debased, and the sound business concept of "fair payment for service rendered" is impaired. Business and the public pay the cost, while the advantage accrues to only the few. We, therefore, suggest that favorable consideration, with recommendation for adoption, be given title III, section 26, payment of interest, of the Financial Institutions Act of 1957. Mr. ROPER. Thank you. I would like to highlight the parts of the statement in which Mr. Heimann saysSenator ROBERTSON. You might first tell us in your own language why creditmen are interested in this provision . Mr. ROPER. Yes. For many years now creditmen have been affected by deductions on the checks which they receive from customers. In many instances, of course, these deductions are absorbed by correspondent banks, and in those cases they are not directly affected by these deductions. However, the fact that absorption is allowed on the part of nonmember banks promotes the condition whereby exchange charges are made on checks. Senator CLARK. Mr. Roper, could you tell us what States still engage in that system of deductions ? Mr. ROPER. There are 19 States in which there are now nonpar banks. Senator CLARK . Are they geographically grouped together or are they scattered ? Mr. ROPER. Mostly in the South and Central Northwest. Senator CLARK. Thank you. Senator ROBERTSON. Your organization is a national organization ; is it not ? Mr. ROPER. That is right. We have 144 offices throughout the United States with 35,000 members. Before I go further and before I answer further questions I want to say I am not a lawyer and neither am I a banker, nor have I ever had any banking or legal experience. Our purpose in submitting the presentation is to convey to the distinguished gentlemen of this committee the nonbank and nonlegal point of view of our members who are preponderantly lay executives in private commerce and industry, and who are charged with the re- STUDY OF BANKING LAWS 629 sponsibility in their own concerns of managing and administering their concerns' credit and collection policies. We did in 1938 pass a resolution which was in effect a statement of policy of our organization and we have since abided by it fully. If I may, I will read that now : The association fully recognizes the right of banks to charge their customers for services rendered to them. It recognizes and is sympathetic with the problems faced by many smaller banks throughout the country as a result of decreased revenue from the normal sources of banking income. It realizes that the practice of making exchange charges for clearing checks from a distant point has been adopted by a great many of the smaller banks as a means of obtaining additional needed revenue. While it believes that exchange charges are also being made by many banks which do not need the extra revenue thus obtained, the association does recognize that the complete and immediate cessation of making exchange charges by many smaller banks throughout the country would be detrimental to them. The association, however, does not regard the practice of clearing checks at less than par by making an exchange deduction from the face value of the checks as a legitimate method of obtaining revenue by banks. It believes that this practice is an unsound banking practice because its result is to impose the charge not upon the customer of the bank which clears the check and for whom the service was rendered, but upon the payee who sold merchandise to that customer and who was, therefore, entitled to full payment of the agreed price for that merchandise. The association is aware of the argument that while a bank is obligated to clear checks in their full amount at the location of the bank, clearance for remittance to a distanct point may result in an additional expense to the bank. It realizes that banks should be compensated for service expenses but contends that the compensation should be paid by the banks' customer, the buyer of the merchandise. It recognizes also that the collection system of the Federal Reserve System was developed to obviate the losses and delays which formerly characterized many check clearances, and favors the use of that system with the consequent par clearance of checks as an aid to business and financial stability. Senator ROBERTSON. Then nearly 19 years ago your organization, a national organization representing the credit men in all the States, said it was not fair to them to get a check which would not pay off what it said on the face of it. Mr. ROPER. That is correct. Senator ROBERTSON. And that they should not be called upon to make that type of contribution to the success of certain small banks. Mr. ROPER. That is right. Senator ROBERTSON. Has that been your consistent position ever since? Mr. ROPER. That is right. Senator ROBERTSON. While you would really prefer a mandatory par clearance law, considering the difficulties of getting one enacted you do endorse the pending proposal that we have a uniform definition of what is interest, which would automatically preclude the absorption of exchange? Mr. ROPER. We feel that the enactment of this provision will bring many of the exchange charges which are now hidden from the depositor, in effect, by the absorption device, out into the open, and that many of the depositors who are unaware of having their checks discounted by their own banks will become aware of it and will be able to object to their own banks. Senator ROBERTSON. You believe also that the competition will take care of the situation ? Mr. ROPER. That is right. The enactment of this provision will bring those hidden charges out into the open . Therefore, we favor it. 630 STUDY OF BANKING LAWS Senator ROBERTSON. I am not sure it is correct but I have been told we have only one nonpar bank in Virginia. Mr. ROPER. That is correct. Senator ROBERTSON. That is correct then ? Mr. ROPER. Yes, sir. Also there are only 2 in Kansas, and only 2, I believe, in Illinois. Senator CLARK. Are those all small banks ? Mr. ROPER. There are some large banks and there are some large banking chains even, in certain States, which are nonpar. Many of our members who do extensive business in the Southern States or in the upper Midwest have reported considerable amounts that they have had to spend in exchange charges alone. One member with whom I was talking only a little more than a week ago said that his firm paid $8,000 in exchange charges over just the past year. Another firm it has been reported to us has had exchange charges of $75,000 over the past year. Senator CLARK. Are those banks of which you speak, member banks ? Mr. ROPER. The exchange charges would be only from nonmember banks. Senator CLARK. But from insured banks ? Mr. ROPER. There is no delineation there as to insured and noninsured. We do not have records on that, but I assume many of them are insured . Senator CLARK. Probably most of them are ; are they not ? Mr. ROPER. Most of them. Yes . Senator ROBERTSON. I think your testimony has been interesting and helpful. Various State agencies have expressed to their Senators their interest in this provision. We think it could be a considerable item in doing business if 1 man had to pay $75,000 in 1 year. That is not any small charge. We thank you very much. Mr. ROPER. Thank you very much, Mr. Chairman . Senator ROBERTSON . Mr. Donald E. Durick, Fort Wayne, Ind., was scheduled to appear representing the American Industrial Bankers Association. We have received a letter from him with a statement which he submits and without objection it will be made a part of the record. (The statement of Mr. Durick follows :) STATEMENT OF DONALD E. DURICK, FORT WAYNE, IND., EXECUTIVE SECRETARY, AMERICAN INDUSTRIAL BANKERS ASSOCIATION Mr. Chairman, my name is Donald E. Durlick, executive secretary of American Industrial Bankers Association. We maintain our national headquarters at Fort Wayne, Ind . I have been with that organization for the past 3½ years and maintained the position of executive secretary in June 1956. Due to conditions beyond my control, I find it impossible to appear, personally, before your committee in regards to the Financial Institutions Act of 1957. Our understanding is that this bill does not include in its scope industrial banks, Morris Plan banks and industrial banking companies, all of which we are primarily concerned. In various States , such as Colorado, New York, North Carolina, Massachusetts. and Michigan, the statutes provide for the organization and supervision of "banks," "savings banks," and "trust companies" as defined ; but, in addition, provide, also, for the organization and supervision of "industrial banks" or "banking companies ." STUDY OF BANKING LAWS 631 As far as the hearings are concerned, we are primarily interested with title III of the act which amends and revises the statutes governing the Federal Deposit Insurance Corporation. Most of the industrial banks and industrial banking companies affiliated with our association accept public money which is not insured. The total of these savings, which are termed "deposits," "savings," "thrift accounts," "certificates of investment," "thrift notes," and "installment investment certificates," are in excess of $225 million. Although this amount is small compared with other banking institutions which accept public money, we definitely feel that these companies should have the opportunity of offering to their depositors Federal insurance on their savings. We respectfully suggest that an amendment be inserted in title III, chapter I, section 301, section 2 ( a ) of this bill which would read as follows : "2 (a ) The term 'bank' means any bank, banking association, trust company, savings bank, industrial bank, industrial banking company, Morris Plan company or other banking institution, which is engaged in the business of receiving deposits, other than trust funds as herein defined, and which is incorporated under the laws of any State, any Territory of the United States, Puerto Rico, Guam, or the Virgin Islands, or which is operating under the Code of Law for the District of Columbia ( except a national bank ) , and includes any unincorporated bank the deposits of which are insured on the effective date of this amendment, and the word ' State' means any State of the United States, the District of Columbia, any Territory of the United States, Puerto Rico, Guam, or the Virgin Islands." If this is not deemed advisable, we believe that consideration should be given to the inclusion of a section in the Financial Institutions Act of 1957 , which would include these institutions. Senator ROBERTSON. The next witness scheduled was Mr. A. D. Shackelford of Wilson, N. C., but he sends a letter saying that his interest is in this question of absorption of exchange and he is satisfied to submit his written statement for the record. Without objection we will file in the record at this time Mr. Shackelford's statement. (The statement of Mr. Shackelford follows :) STATEMENT OF A. D. SHACKELFORD, PRESIDENT, NATIONAL BANK OF WILSON, WILSON, N. C. Mr. Chairman and members of the committee, I appreciate the opportunity to appear before you as a country banker deeply interested in legislation to eliminate the competitive advantage enjoyed by insured nonmember banks over member banks through absorption of exchange. According to the June 30, 1956, edition of Polk's Bank Directory, North Carolina has 47 national banks with 59 branches. The State banks and trust companies number 167 with 270 branches. Only 6 State banks are members of the Federal Reserve System-one of which operates 12 out of city branches. In the immediate area of Wilson are 3 banks with 56 branches, over 45 of these branches being on a nonpar basis. In a few cities and towns these banks are forced to pay their checks at par because of par banks being located in these cities and towns . Obviously, we are in a position to experience the full effects of the competitive advantage afforded insured nonmember banks through the absorption of exchange. During the year 1956 the exchange charged by nonpar banks on checks deposited by our customers amounted to $13,012.06 . This represents the amount of bait our competitors were in a position to offer our customers through absorption of exchange if they would transfer their accounts to the nonmember banks. This is tempting "bait" for a concern handling a sizable amount of checks drawn on nonpar points . Since 1943 the member banks of North Carolina and a few other States have been faced with this unfair competition, because the Board of Governors of the Federal Reserve System has taken the position that absorption of exchange charges by member banks involves a payment of interest, whereas the Federal Deposit Insurance Corporation has taken the position that the absorption of such charges by insured nonmember banks does not constitute a payment of interest. Surely it was not the intent of Congress to place member banks at a disadvantage competitively with insured nonmember banks. Yet this has occurred because 632 STUDY OF BANKING LAWS of the conflicting rules by the two agencies respecting the absorption of exchange. Officials of both agenies are in agreement that this condition should be corrected. In the November hearings before your committee (p. 169 ) Mr. J. L. Robertson, member, Board of Governors, Federal Reserve Board, stated : "The Board believes that this lack of uniformity should be corrected, either by an express statement in the law that absorption of exchange is, or is not, to be considered a payment of interest for both member and nonmember insured banks." At the same hearings in November (pp. 292-293 ) Mr. Royal R. Coburn, General Counsel, Federal Deposit Insurance Corporation, in reply to questioning by Mr. Kenton R. Cravens, chairman of the advisory committee, stated : "The matter was presented to Congress some 10 years ago and it was our position then that if it was to be deemed to be the payment of interest, that is, the absorption of exchange, Congress should expressly so provide. We feel that Congress should so expressly provide. There is no doubt that there is unfairness when one bank can absorb it and another bank cannot, depending on whether or not it is a member of the Federal Reserve System. But we think that that is a matter which should be decided by Congress, and should not be done indirectly under present law." Probably it was presumptious on my part but when I requested permission to appear before this committee it was my intention to make the following recommendations : (1 ) That title II, Federal Reserve Act, section 41B of the committee print bill, on page 118, be amended in the portion preceding the first colon to read "No member bank shall, directly or indirectly, by any device whatsoever, including absorption of exchange, pay any interest on any deposit which is payable on demand." (2 ) That the first sentence of title III , Federal Deposit Insurance Act, section 26 of the committee print bill, on page 163, be amended to read "No insured bank shall, directly or indirectly, by any device whatsoever, including absorption of exchange, pay any interest on any deposit which is payable on demand and for such purpose the Administrator may define the term ' demand deposits' but such exceptions from this prohibition shall be made as are now or may hereafter be prescribed with respect to deposits payable on demand in member banks by the Federal Reserve Act, as amended, or by regulation of the Board of Governors of the Federal Reserve System." I am not a lawyer and possibly this recommendation will not stand up in the suggested form under lawmaking procedure, but if it could be adopted, it would put member and insured nonmember banks on a uniform basis so far as absorp tion of exchange is concerned. Last Monday, Mr. Kenton R. Cravens, chairman of the advisory committee, made recommendation No. 115F for the committee respecting absorption of exchange as an indirect payment of interest. This recommendation removes the possibility of varying interpretations and places both member and insured nonmember banks, as Congress no doubt originally intended, on a uniform basis. I strongly urge you to adopt his recommendation. Senator ROBERTSON. We will continue these hearings next week and during that period we will hear from the National Savings and Loan League, the United States Chamber of Commerce, the Robert Morris Associates, and we will have a number of individuals. The following week we will start on the Federal agencies . The Federal agencies, when they testified before us in November, had to qualify their testimony by saying, "It has not been cleared by the Budget Bureau." I instructed them that when they came before us this year we wanted specific language on the changes that they recommend and we want them to say, "It has been cleared by the Budget Bureau. " I have also sent all of the agencies a letter saying that interesting testimony has been given to us not only on what the agencies recommended but some new items , and that I hoped when they testified they would be reasonably familiar with all of the testimony that had preceded that testimony and would give us the benefit of their advice. We wanted their advice not only on those proposals which they had made and which had been considered by our splendid Advisory Com- STUDY OF BANKING LAWS 633 mittee and incorporated into the tentative bill, but also on these other helpful suggestions that have come to us. Apparently we cannot conclude these hearings until Monday of the week after that. That would be the 18th of February. I have been informed by the chairman of this committee that there are a number of other pressing matters awaiting committee attention. The chairman has very kindly and graciously given us priority, right-of-way, but we cannot hold that indefinitely. So, the chairman of the subcommittee is forced to announce that he sees no chance to continue these hearings beyond the scheduled date. All those who have previously asked to be heard will be heard. They have had plenty of time to submit their requests. We cannot continue beyond the 18th of February. However, if anything has been developed here on which any group or any individual feels that we need further enlightenment if it is appropriate, of course, we will consider a memorandum that they may file to be incorporated in the record. If there are no further witnesses today the committee will stand in recess until 10 a. m. next Monday. (Whereupon, at 10 : 30 a. m. , the subcommittee recessed until 10 a. m., Monday, February 4, 1957.) STUDY OF BANKING LAWS (Financial Institutions Act of 1957) MONDAY , FEBRUARY 4, 1957 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, SUBCOMMITTEE ON BANKING , Washington, D. C. The subcommittee met, pursuant to recess, in room 301 , Senate Office Building, at 10:05 a. m., Senator A. Willis Robertson ( chairman of the subcommittee ) presiding. Present : Senators Robertson , Frear, Bennett, and Bush. Senator ROBERTSON. The subcommittee will please come to order. The Chair wishes to announce that the Senate meets at 12 o'clock and we do not have permission to be in session while the Senate is in session, so we will have to adjourn at that time. We have eight witnesses scheduled to be heard, and all of them have equal rights. Some of them have come a long distance. I just want to say to all of these witnesses that we will be very happy to put in the record everything that you have prepared, but if you could condense your statements so that each witness would not take over 10 or 12 minutes, that would enable all of the witnesses to be heard and not force some of them, perhaps, to come back and impinge upon the schedule, which is a tight one, that we have for tomorrow. The first witness is Mr. Walter E. Cosgriff , president of the Continental Bank & Trust Co. of Salt Lake City, Utah. We will be glad to hear you, Mr. Cosgriff. STATEMENT OF WALTER E. COSGRIFF, PRESIDENT, CONTINENTAL BANK & TRUST CO., SALT LAKE CITY, UTAH Mr. COSGRIFF. My name is Walter E. Cosgriff. I am president of the Continental Bank & Trust Co. of Salt Lake City, Utah. I am also president of the Bank of Las Vegas, Las Vegas, Nev., and chairman of the board of directors of the Colorado Commercial & Savings Bank, Colorado Springs, Colo. I have been a full -time salaried officer of the Continental Bank & Trust Co. for almost 22 years. In addition, I am an officer, director or majority stockholder in several other banks in the Intermountain country, and during my banking career I have engaged in substantial banking operations all the way from Goodland, Kans., to Long Beach, Calif. My banking connections have included both National and State banks, members and nonmembers of the Federal Reserve System, banks that were members 635 84444-57- pt. 2--13 636 STUDY OF BANKING LAWS of the Federal Deposit Insurance Corporation and some that were not. Some of you may recall that I served on the Board of Directors of the late but not lamented Reconstruction Finance Corporation during portions of 1950 and 1951 . Some of you may also have heard that my principal bank, the Continental Bank & Trust Co. , is now engaged in an unprecedented contest with the Board of Governors of the Federal Reserve System, seeking to determine whether the Federal Reserve Board has the power to require a State member bank to increase its capital structure to an amount which the Board may consider to be adequate. Later on in my testimony I expect to discuss this question in more detail. First of all, let me say that I am completely in accord with the basic objectives of this committee in seeking to revise and codify the banking laws of the United States, to bring them up to date, to eliminate obsolete and overlapping provisions and to improve them where improvement is warranted . Certainly I feel no reasonable banker can quarrel with these objectives. There are, nevertheless, certain provisions in the bill, as now proposed, which seem to me are in need of correction and clarification . It is some of these that I wish to discuss this morning. One of the most time-honored principles of American banking has been that it is in effect a dual system. For about a century , both the National and State Governments have chartered and supervised bank operations. So far as I know, there is no serious quarrel with this dual arrangement. I do not know of any responsible authority who has suggested that State banks be abolished and that control of all banking be taken over by the Federal Government. Nevertheless , State banks which are members of the Federal Reserve System and the Federal Deposit Insurance Corporation are more and more coming under almost exclusive Federal control, leaving little or no authority to the States which created them . I do not believe it is the intention of Congress that Federal agencies should preempt control of State banks. Some time ago , when certain directors of the Federal Deposit Insurance Corporation came before the Senate Banking and Currency Committee for confirmation of their appointments this question was raised. The directors were requested to write letters which in substance and effect indicated that the State banking authorities had primary responsibility for the supervision of State banks. Assuming then that this action represented the will of the Congress that State banking authorities have basic control over the banks they charter, I believe it can be shown that many provisions of this proposed bill are at cross-purposes with this policy. Of course, paramount in my mind at this time is my own bank's battle with the Federal Reserve Board over capital adequacy. This battle was started by the Federal Reserve unilaterally without consultation with or participation by the Utah State Banking Commissioner . It is this sort of arbitrary action , without any statutory authority, that is destroying our dual system, and this bill as drafted leaves the situation wide open . Sections 22 and 23 of title II of the proposed bill are apparently derived from the present section 9 of the Federal Reserve Act, slightly rearranged. With that as a premise , it should be pointed out that STUDY OF BANKING LAWS 637 there are some loosely worded provisions in the present law which the Board of Governors has seized upon to expand its powers beyond those which Congress intended . For example, the first paragraph of section 9 of the present Federal Reserve Act (sec. 22 ( a ) of the proposed bill ) , relating to admission of State-chartered banks into the Federal Reserve System, provides : The Board of Governors of the Federal Reserve System subject to the provisions of this Act and to such conditions as it may prescribe pursuant thereto, may permit the applying bank to become a stockholder of such Federal Reserve Bank. These limitations on the conditions which the Board may impose were added by the Congress in 1927. These changes in the law were made necessary when a full examination into the activities of the Board indicated that the Board was arrogating to itself, by the imposition of conditions, powers far beyond those intended by Congress. Senator ROBERTSON. May I interrupt ? Mr. COSGRIFF. Yes, sir. Senator ROBERTSON. I call your attention to the fact that we did not make any changes in the existing law as quoted. We did not change it. It is the existing law. Mr. COSGRIFF. That is true, Senator. Senator ROBERTSON. That is right. We did not go into this overall policy question of the powers of the Federal Reserve Board. That is one of the things to be studied by the Monetary Commission, if, as, and when it is established. We are trying to do mostly a technical job, that is, to eliminate obsolete sections and codify all of the provisions, and in some instances streamline them where there can be a reasonable area of agreement . We cannot expect everybody to agree with everything in a 250-page bill, but we did not go into that point you mentioned right there, and certainly we have not done anything in this bill that in any way impinges upon the future of a dual banking system, with the Federal banks on one side and the State banks on the other. Neither have we challenged or tried to nullify the decisions of the Supreme Court, which have held that State member banks of the Federal Reserve System are subject to Federal law, and all insured banks are subject to Federal law, because the Federal Government has to guarantee up to $10,000. That is approximately one-half of the assets of over $200 billion, and that is quite a little undertaking on the part of the Federal Government. It has been brought out in the testimony here that if we had just a little touch of deflation- not a real depression-nobody could anticipate what the demands on the Federal Deposit Insurance Corporation's reserve fund would be. We are going to ask them to make a study. They want us to cut down on the assessment and charge the banks less, but we do not know the facts. It has been pointed out if we had a depression no one could tell what the liability is or could be, because there is no clear conception as to what the Government has set out to do here. Would it try to take care of everybody in the event of atomic war, for example ? We do not know. We are leaving those larger problems. That is what you are discussing here when you say the Federal Reserve Board has too much power and as a State member bank it 638 STUDY OF BANKING LAWS has moved in on you and you do not like it and want something done about it. With all due deference, it is a little beyond the province of this study. Mr. COSGRIFF. Senator, I might suggest if you pass the thing in this way it has been explained to me you will automatically resolve this question in this way. Senator ROBERTSON. Again I repeat, we have not confirmed or denied anything when we merely put into the code a repetition of existing law. We are just carrying it forward. Mr. COSGRIFF. Senator, I am told if you put in a repetition of existing law and there is an administrative interpretation of that law, then by repassing the legislation in the new bill you automatically pass the administrative interpretation . Senator ROBERTSON. That is an assumption that the Chair does not agree with. Those in favor of it could argue it. Those opposed to it could argue the contrary. The Chair does not take any position. He does not agree with you. Mr. COSGRIFF. So that would not be your intention ? Senator ROBERTSON. It would not be the intention of the Chair. The Chair does not know anything about the interpretation that you are talking about, so how could he confirm it ? You may proceed. Mr. COSGRIFF . Senator George Wharton Pepper, of Pennsylvania, said of the situation in 1925 : There was no intent of Congress when the Federal Reserve Act was passed to create in the Federal Reserve Board a body to prescribe any kind of conditions it pleased as conditions precedent to admissibility to the Federal Reserve System, but rather to confer upon the Federal Reserve Board authority to make regulations, pursuant to the act, fixing the terms upon which banks might become members of the Federal Reserve System. The next year Senator Carter Glass, the father of the Federal Reserve Act, stated in a hearing before this committee that the Federal Reserve Board "has usurped the legislative functions of Congress." As I have stated, the views of these Senators prevailed and legislation was adopted in 1927 restricting the conditions to be imposed by the Board to those expressly authorized by the Federal Reserve Act. But the aggressiveness of the Board has not changed in the 30 years since Congress last spoke, and that limitation has not deterred the Board from trying to keep its omnipotence in pace with its omniscience. Without any statutory authority at all, the Board required a small California bank to agree that it would withdraw from membership in the Federal Reserve System if any interest in the bank, no matter how small nor how obtained, was acquired by certain other banking interests. The bank took the matter to court and won a sufficient victory so that the Board never attempted to enforce the provision on which it had previously insisted . Congress has resolved the fundamental issue in that case by enacting the Bank Holding Company Act of 1956 . In another field, the Board has imposed conditions of membership relating to capital adequacy without the benefit of a grant of such power by the Congress . The Board claims as its authority the very section of the statute under discussion , which was amended to limit conditions of membership. Although the Board has been imposing STUDY OF BANKING LAWS 639 this condition since the 1930's, no bank has called its hand until this year when the Board demanded of my bank that it increase its capital by $ 12 million. Later, after we resisted, it raised the ante to 2.9 million, almost 100 percent of our present capital account. now faced with an administrative hearing brought by the Board as judge and prosecutor to determine how much it is going to insist we increase our capital or, on failure to do so, be expelled from the Federal Reserve System. It is a sad commentary on the courage or lack of it of some members of the banking profession in that we are the first bank to actively resist such demands by the Board, although students on the subject have questioned its authority to make or enforce such demands. My point is this : The present act does not authorize the Board to impose, as a condition of continued membership, that a State member bank increase its capital at the demand of the Board . Nevertheless, the Board asserts that it does have such power. If requiring a State member bank to increase its capital to avoid what the Board calls "capital inadequacy" is a legitimate function of the Board, Congress should say so, with appropriate standards to guide both banks and the Board, and not leave it to the unbridled and arbitrary discretion of the Board. It is questionable, however, whether this should be a legitimate function of the Board. There are three classes of banks subject to Federal control in some degree-national banks under the supervision of the Comptroller of the Currency, nonmember insured banks under the Federal Deposit Insurance Corporation, and State member banks under the Federal Reserve. Neither the Comptroller nor the Federal Deposit Insurance Corporation has or asserts the power to make a bank under its supervision increase its capital. They both have, as does the Board of Governors of the Federal Reserve System, a substantial arsenal of powers to insure the soundness of banks under their control. If capital inadequacy is the result of unsafe and unsound practices or management policies, it is far better to cure the cause than try to pour in more capital which, in turn , will become "inadequate" if the causes continue. Perhaps the issue can better be understood by examining the function of bank capital and what is meant by the supervisory authorities when they speak of inadequate capital. Capital in a bank performs a function not much different from that in most businesses. As do most businesses today, a bank operates on borrowed money. In the case of industry, the borrowings are from banks and other sources of accumulated money, such as insurance companies, or borrowings are in the form of the sale of the company's bonds or other securities. In the case of a bank, its borrowings are in the form of its deposits. Just as in industry, the bank invests its borrowings in income-producing assets. In the case of a bank, it is in the form of loans to industry, farmers, small businesses, and to ordinary consumers. With respect to its deposits or borrowings , a bank's capital serves as a cushion to insure the ability of the bank to meet its deposit liabilities ifthe reserves that a bank is required to have by State and Federal regulations are exhausted . As no two banks are alike, it is difficult to prescribe any general rule as to how large this capital cushion should be. It must depend primarily on the nature of the bank's 640 STUDY OF BANKING LAWS assets and the skill and experience of its management. But my friends at the Federal Reserve have found a searching appraisal of both physical and human assets too difficult. They resort to such formulas as arithmetical ratios of loans and other assets to capital and then compare individual bank ratios with national averages. Since the Feue . al Reserve Act gives the Board no power to inquire into such matters, let alone setting standards to guide it, the Board sets its own criteria. In so doing it has not only failed to see that national averages and arbitrary ratios are meaningless when applied to individual banks, but has overlooked the possibility that capital plays any part in the operation of a bank other than as an ultimate protection to the depositors. It cannot be denied that depositors are entitled to protection- to protection against all losses that might reasonably be anticipated in the light of the bank's assets and its management skill and experience. The responsibility of providing such protection and insuring its adequacy rests even more on the bank's officers and directors than it does on bank examiners and other regulatory authorities. But the officers and directors of a bank have other responsibilities as well. They have to look to the welfare of the stockholders whose investment forms the capital ; they must be sure that the bank is able to provide adequate service and facilities for its borrowers ; and they must see that the employees are honest and efficient and are fairly compensated. If overemphasis is put on the amount of capital, if the determination of the amount of capital required for a sound banking operation is looked at with the blinders of only one viewpoint, a proper balance will not be achieved. In this connection it might be mentioned that the troubles with some Illinois banks and bank failures in the country in recent years were due primarily to embezzlements, not to bad loans. A prime cause of embezzlement is failure to compensate employees adequately. It also should be recognized that bad loans themselves are ordinarily due to lack of qualified personnel. Unless a banking career can be made attractive financially, such qualified personnel cannot be obtained. Another aspect of the imbalance is the return on investment. If there is an overemphasis on the amount of capital, the bank would not be able to earn a reasonable return on the shareholders' investment , leaving them the alternatives of liquidating the bank or selling out to a larger organization . This problem is well pointed out by Prof. Roland Robinson, formerly of Northwestern University, and now with the Federal Reserve System. In his book on the management of bank funds, he gives the example of a bank with a 5-percent ratio of capital to assets. If its capital were increased to a national average of, say, 6.6 percent, this would be equal to a 32-percent increase in the capital account, only a 1.6-percent increase in the total assets, and would dilute earnings almost one- fourth . With respect to the problem of dealing with capital adequacy, I should like in summary to make these points : 1. The primary responsibility for capital adequacy should be placed on the officers and directors of the bank. They are the ones most familiar with the assets and the requirements of the bank. They are the ones who most realistically can achieve the balance needed between protection to depositors and the rights of the owner - stockholders. STUDY OF BANKING LAWS 641 2. If it is desired to give some power over capital adequacy to Federal regulatory authorities, these requirements should be met : (a ) Such a grant of power should be express, with adequate criteria or standards to guide not only the regulatory authorities but also the bankers in the operation of their own institutions. These standards should include ( 1 ) an appraisal of all the bank's assets at their true market value, whether carried on the books or not ; ( 2 ) the bank's past loan loss experience and its reserves for future losses ; (3) the experience and competence of its management ; (4 ) its past and prospective earnings record ; ( 5 ) the needs of the area served ; and ( 6 ) the nature and amount of its deposits and other liabilities. Without such standards, each bank is subject to the unbridled whims and theories of the regulatory authorities. (b ) Any additional capital requirements should be limited so as to preserve a proper balance among the interests of depositors , stockholder-owners, borrowers, and employees. (c) Since we are talking about State banks which are members of the Federal Reserve System, the primary responsibility for action with respect to capital adequacy should be placed upon the State authorities, who are better acquainted with the needs of the area served and are in a better position to appraise the individual bank's assets and requirements. It is my belief the Federal Reserve Board should not be able to proceed without the consent or participation of the State authority concerned . (d) Provision should be made for a fair hearing, either public or private, at the bank's request, and for a court review to insure against arbitrary administrative proceedings. Another matter to which I should like to direct the attention of the committee is the matter of payment of alleged " unearned" dividends. The matter of dividend payments by banks has long been a subject of controversy. The position of most of the supervisory authorities seems to be that the stockholders of banks are not entitled to any dividends and should be willing to forego them merely for the "honor" of owning bank stock. In the report of your Advisory Committee submitted in December 1956 , the following sentence appears on page 4 : Stockholders in banks have had to be content with a smaller dividend return on their invested capital than have the stockholders of other major segments of American business and industry. In spite of the committee's recognition of this fact, the proposed bill does nothing to alleviate the situation . In fact, the bill would make the situation worse by maintaining and fostering the overcapitalization of banks. By an overcapitalized bank I mean one in which the net investment of the stockholders has risen to such a point in relation to the bank's earning assets that it is no longer possible to earn a fair return on that investment. When this situation exists, sooner or later the stockholders are strongly tempted to liquidate the bank and invest their money in some other business where the returns are greater. Stockholders who want to abandon banking can, as recent events indicate, do so in many other forms. They can merge with other banks, or sell to a branch banking organization which then liquidates the independent bank and puts a branch of the larger organization in its place, or they can sell to a bank holding company. Overcapitalized banks are the natural prey of branch banking organizations and bank holding companies. 642 STUDY OF BANKING LAWS Any effort to limit dividends along the lines of the provisions of this bill will greatly accentuate the trend already too prevalent of independent bankers to sell their institutions to branch banks or holding companies. If any limitation on the payments of dividends is desirable, other than those that exist at the present time, I respectfully suggest the possibility of using some formula which ties dividends to the same standards as I have suggested for determining capital adequacy. Then those banks which saved their money in prior years or who, for some other reason, accumulated capital funds far above their present needs would not be penalized. I am now referring to unearned dividends under section 23 (a ) of title II on page 91 , and sections 17 and 22 of title I on pages 7 and 11 of the bill. I would like to point out certain ambiguities remain. That section incorporates without change the provision of the present law that State member banks shall be required to comply with the provisions of law imposed on national banks which relate to the withdrawal or impairment of their capital stock and which relate to the payment of unearned dividends. The provision of law imposed on national banks on such subjects are sections 17 and 22 of title I of the proposed bill. Section 17 provides that an association whose stock shall become impaired shall within 3 months after receiving notice thereof from the Comptroller of the Currency make up the deficiency by assessment on its stockholders. This reference with respect to State banks is, of course, nonsense . It certainly is not intended that the Comptroller have any responsibility or authority over State banks. No reasonable person would question the obligation or duty of a supervisory authority to correct impairment, but I suggest that the bill be drawn to place the responsibility over State member banks where it belongs, that is, with the State supervisory authorities in conjunction with the Board of Governors. Similar inconsistency is contained in the reference to State member banks with respect to unearned dividends. Section 23 (a ) of title II and section 22 of title I give control over such dividends to the Comptroller. It is suggested that any reference to payment of unearned dividends by State member banks be expressly dealt with under the authority of the State supervisory authority and the Federal Reserve Board and not by reference to the Comptroller. Senator ROBERTSON. I believe we merely continue existing law. Mr. COSGRIFF. Not in this case, Senator. Senator ROBERTSON. Oh, yes ; we did. A good many of the bankers are finding out for the first time what the laws are that they have been operating under. We have had one letter, as I pointed out before, from a savings and loan association , complaining that small States had no chance to elect directors of the board, and he thought the law was very wrong that I put in there. I merely call attention to the fact that we are only continuing the law we had all along. This provision you say is ambiguous is the present law, and we just carried it forward into this bill. However, the Chair will be glad to instruct the staff to make a special study of your suggestion that it is ambiguous and that is should be changed along the lines you are now suggesting. You may proceed. STUDY OF BANKING LAWS 643 Mr. COSGRIFF . When I started reading this, Senator, I was dumfounded at it too, because the thing seems to me to be very clear that it refers right back to the Comptroller. At my own expense I had two of what I considered to be very good lawyers working on the question independently, and they came right back to this same answer. Senator ROBERTSON. Well, some very good lawyers are going to learn something they did not know before. Mr. COSGRIFF. I think that is possibly so, but certainly it would be very helpful to clear that situation up if that is not what is intended. Senator ROBERTSON. I think you are not arguing the language, but you are arguing the interpretation of the language. Mr. COSGRIFF. I was surprised, and I would think anybody else would be too, to look at this and see how strong and clear it seems to be. Yet, of course, we know that so far the Comptroller has not done that. Senator ROBERTSON. You do not agree with the interpretation. Senator BENNETT. When was this law Mr. Cosgriff is discussing put on the statute book ? Mr. ROGERS. I would have to check it. It is part of the old revised statutes, so it goes back before that. Senator ROBERTSON. Before 1933 ? You may proceed . Mr. COSGRIFF. Another matter to which I should like to call the committee's attention is sections 23 ( b ) of title I , 23 ( i ) of title II , and 27 of title III. These sections provide, among other things, that the president or cashier shall notify the Comptroller, the Federal Reserve Board , or the Federal Deposit Insurance Corporation, as the case may be, immediately of any single transaction involving the purchase or sale of 10 percent or more of the outstanding shares of such bank. Senator ROBERTSON. That is a new provision put in there because there was some finagling done in stock handlings at several Chicago banks and we wanted to safeguard against that situation in the future. Mr. COSGRIFF. As far as it goes at the present time, this obligation would not seem to be objectionable since, obviously, none of the three authorities has any power to prevent such sale or transfer. I suggest, however, that these provisions are merely an entering wedge or "foot in the door" operation to eventually bring all pledges and sales of bank stock under jurisdiction of the Federal agencies involved. Followed to its logical conclusion, it would mean that no one in the United States could buy or sell any considerable proportion of stock in a bank without the approval of the Federal authorities. Needless to say, such a law would give the Federal authorities almost unlimited power over who could participate in the banking business, would leave the State governments without any control in the matter, and would be an unlimited weapon for enforcing the will of the Federal supervisory authorities on the management or stockholders of any bank. Senator ROBERTSON . I may interrupt to say that the chairman would be so opposed to any such action that he would take that as following that to its illogical conclusion . You may call it a logical conclusion, but from the chairman's standpoint he would call it following this proposal to an illogical conclusion. Mr. COSGRIEF. I might say I am very happy to bring that out, because I am just afraid if it goes through in this form 5 years from now 644 STUDY OF BANKING LAWS I am going to be back here fighting against the provision we are talking about. Senator ROBERTSON . If this chairman is here 5 years from now you will not have to be fighting him. Mr. COSGRIFF. I certainly do not think this is the intention of the Congress, and I feel then that these sections are, at best, useless and, at worst, a wedge to bring about such a situation. I do not feel that the supervisory authorities or anyone else can make out a case for these sections on any other basis. I once again submit that in this matter, as in many others, the States will be completely bypassed . In each section of the bill dealing with the three Federal supervisory agencies are provisions with respect to branches of banks under their jurisdiction. On their home grounds each of these various classes of banks is in competition with the other. It would seem that, to preserve the dual system of banking to which I have referred, the provisions of the act with respect to the right to establish or acquire branches should be uniform. The present bill would seem to my mind to grant discriminatory privileges to national banks over State banks which are either members of the Federal Reserve System or whose deposits are insured by the Federal Deposit Insurance Corporation. I suggest that these provisions as to branches be looked at as a whole in order to prevent discrimination . In conclusion , let me state that I have assumed that in rewriting existing banking legislation and adding new provisions, it is not the intent of Congress to destroy the rights of States to supervise the banks which they charter. Neither have I assumed that it is the purpose of Congress to create conditions which will drive the independent banker out of business, force him to sell or liquidate his institution, or turn over control to holding companies or to large chain banking organizations. I am sure that every one of you is familiar with the tremendous wave of bank sales, liquidations, mergers, and consolidations which has occurred during recent years and which led Congress to enact the Bank Holding Company Act of 1956. That act may, of course, slow down the trend but certainly will not of itself halt it altogether. If any vestige of the independent banking system is to be preserved, it can only be done by creating a climate which makes independent banking more attractive. In other words, by forcing the independent banker to put up more capital, restricting his dividends, imposing more Federal regulation , etc., you are encouraging him to go out of business and invest his time and money in something else. No case on the basis of the failure or trouble with banks generally can be made which justifies, in my opinion, increasing Federal regulation at this time. Efforts to prevent bank mergers, liquidations, and consolidations by passing laws against them, in my opinion, treats the symptom rather than the disease. Only by making independent banking more attractive can independent banks be preserved. I wish to thank the committee for listening to me this morning. Senator ROBERTSON. Are there any further questions ? Senator BENNETT. I think the chairman has brought out the questions involved . Thank you. Senator ROBERTSON. Thank you, Senator, and we thank you, Mr. Cosgriff. STUDY OF BANKING LAWS 645 The next witness is the National Savings & Loan League , Mr. James E. Bent of Hartford, Conn. , and W. Franklin Morrison, Washington, D. C. STATEMENTS OF JAMES E. BENT, CHAIRMAN, FEDERAL HOME LOAN BANK SYSTEM COMMITTEE ; ACCOMPANIED BY W. FRANKLIN MORRISON, CHAIRMAN, FEDERAL LEGISLATION COMMITTEE ; AND HAROLD P. BRAMAN, EXECUTIVE MANAGER, NATIONAL SAVINGS & LOAN LEAGUE Mr. BENT. It is a pleasure to be here, Senator. Senator ROBERTSON. Gentlemen , do you have a consolidated statement ? Mr. BENT. Yes, I do, Senator, and rather than speak myself, in the interests of brevity and in the interests of time I have put this in writing in order to make it as brief as possible. Senator ROBERTSON. It will be acceptable to the committee and you may put in the record what you see fit . You may proceed with your statement. Mr. BENT. My name is James E. Bent. I am president and managing officer of the Hartford Federal Savings & Loan Association , Hartford, Conn. I might also add that I am a member of the Federal Savings and Loan Advisory Council created pursuant to section 8 (a) of the Federal Home Loan Bank Act, an elected director of the Federal Home Loan Bank of Boston, and chairman of the National Savings & Loan League's Federal Home Loan Bank System committee, in which capacity I am appearing today. I have no other banking connections. I have with me Mr. Frank Morrison, executive manager of the First Federal Savings & Loan Association here in Washington and chairman of the Federal legislation committee of the National Savings & Loan League. I also have with me Mr. Harold P. Braman, the league's executive manager. Needless to say, Mr. Chairman and members of the committee, I am most appreciative of the opportunity to appear once again before the Senate Banking and Currency Committee. Over the years we have felt that this committee always considers and carefully weighs the arguments we present against its objective of legislating in the public interest. We could not ask for more. By and large, we feel that this bill is a good one . Its basic objective, as we understand, is to clarify and bring together for the first time all the laws relating to financial institutions. With this objective we heartily agree. This type of codification is of great benefit to lawyers and laymen alike. Federal Savings and Loan Branches ( Title V, Sec. 6, p. 211 ) Section 6 of the proposed Federal Savings and Loan Association Act restricts the establishment of branches by Federal savings and loan associations. Unlike other amendments contained in this codification, this section embodies substantive changes in basic law of very great significance to our business. This question is not new to this committee. Hearings were held in the 82d, 83d, and 84th Congresses. On each of these occasions the banking supervisors and spokesmen for certain commercial bank- 646 STUDY OF BANKING LAWS ing interests and mutual savings banks have, in our judgment, skirted and camouflaged the true motives behind the position which they take. What they are really after is elimination of competition offered by savings and loan associations. Spokesmen for the American Bankers Association have repeatedly stated that their No. 1 competitive problem is the savings and loan associations. That may be the case, but it is a problem the American people cannot do without. Non-savings-and-loan members of the financial fraternity say they want equality of competition between State and federally chartered savings and loan associations. If we may translate this, what they actually have in mind is the procurement of a competitive advantage for themselves. The same people also plead the cause of States' right-a subject which offers an emotional appeal for the enactment of this type of legislation. This section should not be considered by the Congress as affecting States rights. The "rights" of the Federal and State Governments are derived solely from the Constitution of the United States. The courts have long ago determined, in the national banking cases, and later in cases affecting Federal savings and loan associations, that the Federal Government has the right to charter and regulate financial institutions in the national interest and to grant the branches and other facilities they need to serve the public. The States have similar complete powers within their own jurisdiction . It is settled national policy that both the Federal Government and the States may create and maintain systems of financial institutions, and they shall operate side by side in competition in the public interest. There is no legal or constitutional issue with respect to States rights involved in this section ofthe bill. This States rights issue was concisely analyzed and discussed by a former member of this committee on June 23 , 1955. If the Chair permits, I would like to insert in the record at this point that portion of his comments relating to the States rights issue. It will run only about two pages . Senator ROBERTSON. Without objection, you may insert that, although it is not the general practice of the committee to insert in the current record testimony that has been previously given before some other congressional committee, because that is a duplication of printing. Mr. BENT. It is merely in the light of explaining the statement, Senator. Senator ROBERTSON. It is a brief statement, so we will let it go, but we do not pick up from 1925 or 1933 some voluminous testimony and reprint it here. (The document referred to follows :) STATES RIGHTS ARGUMENT REFUTED BY SENATOR MORSE IN CONGRESSIONAL RECORD, 84TH CONGRESS, 1ST SESSION, THURSDAY, JUNE 23 , 1955 Mr. MORSE * I respectfully submit that in the position taken by the majority of the committee there is an unwarranted basic assumption that must be dealt with before we can discuss the merits of S. 972 in the form in which it came from the committee. My reference is to the assumption that the doctrine of States rights STUDY OF BANKING LAWS 647 makes it imperative that we pass the bill as recommended by the majority of the committee. I cannot imagine a more loose and inaccurate application of the States rights doctrine. I digress for a moment to say that the inaccurate application of broad legal concepts is never justified , and can be very dangerous. It is dangerous for many reasons, but mainly because it establishes a precedent and the possibility of compounded error. I believe my observation to be particularly true in the case of the doctrine of States rights. The doctrine has been used increasingly of late to thwart legitimate policy goals in instances wherein it had no application. When I say that I speak advisedly and with the thought in mind that I have often defended States rights on the floor of the Senate, and I will do so again when the occasion for me to do so arises on sound legal questions. I wish to stress that there is no room ever for an argument about States rights in connection with legislation unless a constitutional issue is involved . Yet in debate on the floor of the Senate we hear, I do not know how many times a month, that someone is opposed to proposed legislation because he believes it violates the principle of States rights. It has become an emotional sanction in political debate in America. No one can possibly argue accurately on the doctrine of States rights unless one argues on constitutional grounds. The political argument advanced by some persons that they do not want the Federal Government to do something as a matter of Federal legislative policy is one thing, and let us face it on the question of whether it should be established as public policy by way of Federal legislation ; but let us not continue to muddy the waters of debate whenever it is proposed that the Federal Government exercise its right by suggesting the emotional sanction and saying it interferes with States rights. That is exactly what the majority of the committee did in its report on the pending bill. Not one word is found in the majority report dealing with constitutional grounds, because the majority of the committee could not make such an argument on constitutional grounds. Therefore, I repeat that the only time the States rights argument has any justifiable defense on the floor of the Senate is when someone wants to argue that a proposal by way of Federal legislation is unconstitutional because of interference with States rights. If States rights were really at issue here, and if this were truly a case in which the Federal Government was transgressing in an area in which it had no jurisdiction , I would suggest that the majority should have reported a bill completely removing the Federal Government from this field on the ground that Federal operations were unconstitutional. That is the only ground on which the majority could advance a legal argument which would be sound , if it could back it up with constitutional doctrine. But the majority did not do that in its report. Why? Because there is no question at all about the constitutionality of legislation which involves the Federal Government in this field . Therefore, in this instance there is no basis for the argument about States rights. The majority knows that this program is not unconstitutional. It knows that Congress has long considered providing adequate thrift and home-financing facilities as a proper function of the Federal Government. I cite the Federal Housing Administration, the Home Owners' Loan Corporation, the insurance of bank deposits, and I could add many other examples to the list, all of which have been sustained by the courts of the land as involving a constitutional exercise of power by the Federal Government. What the majority meant to say, but did not, in its report, was that we have a political policy question here. I am willing to meet them on the political policy question, Mr. President, but I do not like to have them use as a political sanction, as an emotional appeal, the States rights doctrine when no legal question of States rights can possibly be involved in the legislation. The policy question is this : Should the Federal Government exercise its constitutional powers to encourage savings and thrift or should it give deference to States policies in this area. I cannot overstress the fact that Federal operations , simply because they may affect affairs within a State, are not unconstitutional and are not interfering with States rights. That is the law handed down by the Supreme Court time and time again. When two policies are in conflict, the issue then is which will we choose. The answer must be that we will choose the one best supported by the facts of the case we are trying to decide. 648 STUDY OF BANKING LAWS Branch banking rests on this commonsense observation. I happen to be one, Mr. President, who believes it is good public policy to encourage savings. In fact, I would that the American people were saving more and more rather than what I am afraid is true, that the little people are saving less and less. There are many reasons why the little people are saving less and less, but I think branch savings facilities close to their home communities will at least help to interest them in saving more. The hearings and the success history of the savings and loan associations also demonstrate that the associations are a vital force in our society. The facts therefore dictate that our policy should be one favoring branch privileges for Federal savings and loan associations. Now, Mr. President, a word about restricting competition. Another policy consideration which this legislation raises is whether or not the Congress should enact legislation which will restrict competition. Many of those who testfied in favor of the bill were in large part representatives of commercial institutions . A wire that I received from one of my constituents hit this matter of competition squarely on the head when he wrote : "Howard T. Hardie, of Pennsylvania, vice president of the Bankers Association, recently states : "Savings and loan associations are the No. 1 problem of the ABA." What we have to face is that commercial banks are seeking to gain ascendancy in this field by congressional legislation. Some of them have found the competition too stiff. When the majority states that the Federal Government is sanctioning unfair competition by allowing branch operations to Federal savings and loan associations it only speaks of half the case. All through its report the majority has attempted to put State savings and loan associations and State mutual banks up as the standard against which we must judge Federal savings and loan associations. They have refused to bring in the other category of savings institutions and use them as the standard. I refer, of course, to the fact that many States which do not allow branch privileges to savings and loan associations and mutual banks to allow these privileges to commercial banks . One of the very reasons that we have Federal savings and loan association legislation is that commercial banking houses used their political influence to stop the development of savings and loan associations and mutual banking on the State level. In those instances where they could not stop this development they struck hard at a very important aspect of it, and that is the privilege to establish branches. The majority of the committee may well say that it does not intend to "unduly restrict or inhibit the growth and development of the splendid Federal-chartered thrift gathering institutions." I say that this is not a realistic appraisal of the situation and the majority knows that when it points ou, as I have already quoted, that there are certainly occasions where branch privileges are very important. The majority adds another line of reasoning to its defense of this bill when they say : "The institutions are mutual in nature and owned by the persons that use their facilities. The institutions should not lose their local nature, but should be encouraged to make every effort to retain their local ownership, local management, and participation." My answer to this argument implying possible monoply is, quoting the minority report : "Federal savings and loan associations are limited in their lending to a radius of 50 miles from their home office. They cannot become a giant monopoly or dominate the financial field in any community or area. They are mutuals owned by the persons who use their facilities ( as the majority has said ) and when a mutual institution takes in branches the investors in the branches are equal owners along with the regional group." In fact, rather than permitting monoply, the branching operations of Federal Savings and Loan Associations widens the area of service and spreads out the power. Again, the facts dictate that we should do what we can to protect the right of the Federal home loan and building associations to engage in branching operations. I close, Mr. President, by making clear that my vote for the amendment and my vote for the bill as amended on the floor of the Senate, whereas I voted against the bill in committee, is because I think the amendment establishes a sound public policy . The amendment completely eliminates the States' rights argument. STUDY OF BANKING LAWS 649 The amendment cannot be reconciled with the States' rights argument on the basis of which the majority, for the most part, premised its case. I am delighted that the Senator from Illinois [ Mr. DOUGLAS ] was so successful in his parliamentary persuasion in a series of conferences off the floor of the Senate in getting the leadership of the majority of the committee to go along with an amendment, the principle of which will constitute the main purpose of the bill. I congratulate the Senate from Illinois, and I think we have made some substantial progress in the Senate in protecting small investors in what I think is their clear right to have branch privileges accorded to our building and loan associations. Mr. BENT. I do hope this committee will have an opportunity to examine this statement by Senator Morse prior to reporting this bill. The third argument frequently advanced as justification for legislation to restrict branch offices is related to the prevention of monopoly or the prevention of the concentration of banking power. Measured by bank standards our Federal savings and loan associations are small business, but mighty in their service to the public. The savings and loan business is one of the few major industries or businesses in the country where no one unit represents as much as 1 percent of the total business. For comparison, the 10 largest commercial banks have approximately 20 percent of all commercial bank assets and the 10 largest savings banks have approximately 24 percent of all savings bank assets in the country. I would like to call attention to the fact that the Savings & Loan Association as of December 31 , 1956, had 393 branches , while the Bank of America alone opened in January its 600th branch in the State of California. It is our understanding that this committee and this Congress feels an urgent necessity to do something about small business and about housing. I am sure that this committee agrees with the frequently advanced proposition that if ever there was a time when we need to save, it is today-particularly where such savings are channeled into the housing market. This legislation, unwittingly perhaps , strikes a major blow at all these objectives. About all we can do within our limited powers is to gather savings and invest them in the financing of the American home. These functions are absolutely essential to the national welfare. Unlike other institutions with funds to invest, we do not follow the money market around. If we have money to invest, we put it in homes regardless of how attractive other investments may be. This policy has resulted in our being the chief source of home mortgage funds. Each and every individual is constantly confronted with the temptation to spend rather than save. Access to convenient facilities, with constant urging to use them, are important factors in determining his decision to save. No financial institution wants branches just for the fun of having them. They are opened only because the public requires such services. Savings and loan associations seek branches, when deemed necessary, only for the purpose of extending convenient facilities to families who wish to save and finance homes. It is in the national interest that the maximum amount of private savings be gathered to provide homes. No restrictive or discriminatory legislation should be thrown in the way of the Federal savings and loan associations in their efforts to expand savings and home ownership. 650 STUDY OF BANKING LAWS The great rank and file of savings and loan members are working people. The average savings account is small. The majority of members who come to our offices are women. It is difficult for them to leave their homes in the residential suburbs to conduct these small transactions downtown . Such trips involve considerable time and expense, and no small degree of risk in fighting their way through city traffic and parking. If they cannot conveniently reach us, then our associations must carry our services to them in the outlying shopping areas, just as the banks, merchants , post offices, doctors, and other business concerns are doing. Will anyone claim it is contrary to the national or State interest for us to do that ? Let me emphasize to this committee that we do not come here and suggest a hands- off policy with respect to the authority of the Federal Home Loan Bank Board to permit Federal associations to establish branches. Senator ROBERTSON . We are glad to understand you do not, because that is what you have always favored. Mr. BENT. Thank you . Senator ROBERTSON. Naturally you do not come here to criticize what you have always advocated. You want them to be free. Mr. BENT. That is right. Senator ROBERTSON. As I understand your testimony, you give high praise to this bill, except where it affects you, and you want all of that to be taken out and be left just as you are. Is that correct ? Is that your position ? Mr. BENT. We oppose the branch provision. Senator ROBERTSON. You do not want any restriction and you claim that all of this complaint of the commercial banks that you get a better rate and you are competing for savings because you can pay a higher rate of interest, and you are not under the same restrictions that they are and that they are suffering from this serious competition, is just a lot of moonshine and imagination. You say under those circumstances no restrictions whatever should be placed upon you either with branch banking or any other activities, unless the Federal Home Loan Bank Board, which is made up of directors of your own organizations, is it notMr. BENT. The Federal Home Loan Bank Board is the one that controls the branches. Senator ROBERTSON. That is right. Unless they should set up some limitation on you. That is your position . You just want to be let alone. Mr. BENT. Sir, the Board does establish very rigid rules. Senator ROBERTSON. Let me ask you this question : The Chair has been trying to learn a little something of this disagreement. He is just an average layman. It has become quite noticeable in recent weeks that there is a disagreement between the commercial banks and your organization on the subject of competition. If a man puts his savings in one of your associations, is he a depositor or is he a shareholder ? Mr. BENT. He is a shareholder. Senator ROBERTSON. He is a shareholder. He is not a depositor ? Mr. BENT. That is right. Senator ROBERTSON. As a shareholder then he cannot get his money out unless you agree to let him ? Is that right ? Mr. BENT. That is right. STUDY OF BANKING LAWS 651 Senator ROBERTSON. Whereas, if he deposits in a checking account bank he can get it out at any time. If he deposits in a savings account he can get it out according to the regulations on notice of 30, 60 or 90 days, or whatever the regulation is on a savings account ; but at that time he gets paid. But with you he cannot get his money until you say, "We will let you have it ." Mr. BENT. We have to establish facilities to give him the money. There are regulatory controls for shareholders. Senator ROBERTSON. I am glad to get that cleared up for the record. Mr. BENT. What we are trying to point out is, there are competitive factors. Senator ROBERTSON. I knew you were competent and could give me the correct answer. I thought that was the answer. Of course , some of the banks claim that it has been represented by some of your associations, and I do not know this, that you can put money in any time you want to and get it out any time you want to, and in the meantime, "We will pay you more than the banks will." But you do not claim that? Mr. BENT. We do not, sir. I know of no savings and loan association that represents itself to be a demand institution . The practice has been they have been able to withdraw funds from savings and loan associations at will because of the practice and the ability of the institutions to maintain a liquidity of position in order for their members to be able to do so ; but we have never claimed to be commercial banks or demand deposit institutions. We want to be known as savings and loan associations. Senator ROBERTSON. We have some very able men representing your viewpoint on the advisory committee. I was very much pleased that a compromise could be reached between those representatives and the representatives of the commercial banks on a little minor changealthough you say it is a major one, but the Chair thinks it is only a minor change and all it does is say you have to be under the same law that national banks and State banks are with reference to branches unless you can get the legislature to apply some special law for your benefit on branches. But you do not want that. The Chair though we had reached a very pleasing compromise which he thought your association would endorse, but he understands you are here opposing it. Mr. BENT. Thank you, Senator. I wish to make this statement with respect to your committee : I think, and I feel personally that the service rendered to the banking fraternity and the savings and loan industry in particular by your advisory committee was excellent, and they were very effective in their findings. Our criticism is not directed to that committee a all. I think it was fine, but we do have certain factors, as you understand , in the field , and we are objecting strenuously only to the branch section. Senator BENNETT. Were members of your National Savings and Loan League represented on the advisory committee ? Mr. BENT. No, they were not. Mr. MORRISON. Yes. I was on it. Mr. BENT. I am sorry. Mr. Morrison was on that committee. We did have two savings and loan members on it. Mr. Morrison was our representative. 84444-57- pt. 2- -14 652 STUDY OF BANKING LAWS Mr. ROGERS. The Advisory Committee recommended just that there be legislation on the subject . They did not go into the details of what the legislation should be. Senator ROBERTSON. The Chair also points out Mr. Ben Wooten was deliberately put there at the request of his Arkansas friends, because of his previous connection with this type of legislation and his current interest in it, both as a commercial and as a savings and loan banker today in Texas. Mr. BENT, Mr. Wooten has a very keen interest in savings and loan. Senator ROBERTSON . And he gave your viewpoint adequate representation. You may proceed. Mr. BENT. Thank you , sir. The branching authority of institutions chartered by the Federal Government under acts passed by Congress should be a subject of continuing interest to this committee. We do respectfully- and I might say urgently and strongly- request that you do not abdicate this prerogative by turning it over to 48 different jurisdictions. Our system was established because experience demonstrated that the provision for a sound system for thrift and home financing institutions could not be left entirely to the States. It would be strange logic, indeed, for this committee, legislating in the public interest, to delegate what we assert is a legitimate and proper and necessary Federal function to the myriad patterns of State control, when the needs of the people are the same in all the States. Such a chaotic plan discourages thrift when and where most needed and will certainly reduce home financing capital of the Nation at a time when it is needed most. Senator BENNETT. Are you proposing then that the States' rights to charter savings and loan associations should be taken away from them under this legislation ? Mr. BENT. No, sir. We propose just the opposite . We do want, however, to eliminate the States from interfering with the establishment of the branching facilities of the Federal savings and loan associations. Not State-chartered . They may do as they please there. Senator BENNETT. The language you just read is a little strong. You say : It would be strange logic, indeed, for this committee, legislating in the public interest, to delegate what we assert is a legitimate and proper and necessary Federal function to the myriad patterns of State control, when the needs of the people are the same in all States. Such a chaotic plan discourages thrift *** It seems to me you are going right to the heart of the whole thing and I would read into your testimony the idea that you want all State control of this function eliminated. Mr. BENT. No. We would. I will admit we would like to have the State legislatures of each State review the situation and establish a proper basis, but we do not want to have the Federal law passed which would say we must conform to a State, because we have some very bad situations. Probably the worst is in Alabama , where you have regulations applying to various cities. Senator BENNETT. Are you still talking about branching ? Mr. BENT. I am. STUDY OF BANKING LAWS 653 Senator BENNETT. And you think the present situation "reduces home financing capital" —and I will go further and read from your statement-"is a chaotic plan which discourages thrift"? Mr. BENT. Yes , I do. Senator BENNETT. Lack of branching is a chaotic plan ? Mr. BENT. NO. The lack of ability to serve the people of the Nation on a systematic basis, and to be able to go out and reach them and render services to them, creates quite a chaotic condition in our field. In other words, in most States and many States we can establish branches to go to the people. I could , if I had the time, cite individual States where this restriction prohibits the ability to go into areas where they are badly needed . We have other situations, and I will cite the specific case of Alabama , where they have a State law which permits branching in cities of- I do not know the population figure but let us say 100,000 they may have branches ; 150,000 they may not have, and 200,000 they may have. If that is not chaotic I do not know anything that is. In the State of Massachusetts they have a situation which is limiting the branch facilities for savings and loan associations or cooperative banks, as it is known in that State, where the same restrictions do not apply to commercial banking facilities. You probably know yourself, in New York State they are having quite a wrangle about trying to get equality and parity for savings banks, which savings and loan would like to follow. Senator BENNETT. That is all. Senator ROBERTSON. You may proceed. Conflicts of interest ( title IV, sec. 19 ( b) , p. 200) Mr. BENT. During the initial hearings on the agency recommendations, the Federal Deposit Insurance Corporation spokesmen, as I recall, suggested an amendment making it unlawful for any employee or former employee of the Corporation to accept employment with any insured bank except pursuant to regulations prescribed by the Corporation. This suggestion was incorporated into the committee print bill so as to cover employees of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Federal Home Loan Bank Board. We believe that the objectives of this language may be achieved equally well without resort to this broad delegation of continuing authority for these Federal agencies to impose conditions upon an individual's future choice and condition of employment. If the conditions imposed on Government service are too rigid, it will impair the procurement of the best talent for these positions. For this reason we suggest that such authority be limited to the first 1 or 2 years subsequent to the date on which the employee severed his connection with the agency . We also direct the committee's attention to section 217 (ii ) of title 18 of the United States Code as amended by this bill. This section imposes criminal penalties upon any officer or employee of an insured financial institution who employs or makes an offer of employment to these agency people without written approval. You will note that this section contains a 2-year limitation. 654 STUDY OF BANKING LAWS Restrictions on associations, directors, and officers ( title V. sec. 7 ( e ) , p. 213) The next amendment we suggest is to section 7 (e ) (p. 213 ) of the proposed Federal Savings and Loan Act, which relates to home loans by an association to its executive officers. Under existing law and regulations promulgated by the Board, a Federal association may make loans of the security of a first lien on a home owned and occupied by a director , officer, or employee of the association or by an attorney serving the association . Detailed regulations prescribe conditions of the loan such as loan -to-value ratio and appraisal procedure. There is no dollar limitation, however, other than that imposed on members in general. Let me say that we concur fully in the motives behind this language. We do not believe an officer of these institutions should be able to obtain financing of the home in which he intends to live on more favorable terms than the general public. At the same time we do not believe this limitation is either equitable or necessary. We do not believe a loan secured by a first mortgage on a person's home can be placed in the same category as personal, unsecured loans. The boards of directors of Federal savings and loan associations have a very definite responsibility to scrutinize carefully loan applications submitted by executive officers. Federal examiners , you can be sure, also pay special attention to such loans. We suggest, therefore, that section 7 (e ) be amended to permit an executive officer to obtain a home mortgage loan upon the dwelling which he owns and occupies without dollar limitation other than the limitation set under section 5 . Senator ROBERTSON. May I interrupt there ? Mr. BENT. Yes. Senator ROBERTSON. Do you admit that there were instances under the FHA when there was what was called mortgaging out ? Mr. BENT. I beg your pardon? Senator ROBERTSON. Do you know what mortgaging out means ? Mr. BENT. Yes, sir. Senator ROBERTSON. What does it mean ? Mr. BENT. It means you are trying to finance the entire cost of the property. Senator ROBERTSON. Overassessed is what it means, does it not ? Mr. BENT. Yes, sir. Senator ROBERTSON. Could it not happen if a man had to sell a $20,000 house and the safe limit would be $ 15,000, then could he not get a $25,000 appraisal so that he gets $20,000, which pays for the entire works? Could that happen if he were on the inside ? Mr. BENT. Sir, it could happen, but if it did happen it would place the directors of that institution in jeopardy of criminal action , which could happen in any institution. Senator ROBERTSON. Will you not admit that we have had plenty of instances of overappraisal ? We were just trying to put a little restraint on the temptation here. Mr. BENT. I understand your motives, sir, and they are very fine. Senator ROBERTSON . All right. Mr. ROGERS. Could I ask you a question, Mr. Bent ? Mr. BENT. Yes, sir, Mr. Rogers. STUDY OF BANKING LAWS 655 Mr. ROGERS . You refer to the limitations under section 5. Is that the $35,000 you referred to ? Mr. BENT. Yes, sir. And it has been a varying amount. We see no reason why a director of an institution should not have the general rights of the public in general. No more , but we feel he is entitled to the same benefits . Mr. ROGERS. The purpose of this provision was to bring savings and loans into parity with the banks. We liberalized the bank provisions in here to permit bank officers to borrow up to $5,000. Mr. BENT That is right. We understand and recognize the necessity of your reviewing that sort of thing, but we feel there is a very definite difference between a savings and loan bank and a commercial bank, in that we have only one type of investment, which is rigidly controlled through the operations of the association. Definitely every loan is examined by the Federal examiners each year, and it has better control than probably an unsecured loan of smaller amounts. Senator ROBERTSON. But there is not any difference in the amount of insurance that each gets. Each gets their individual accounts insured up to $10,000. Mr. BENT. That is correct. Senator ROBERTSON. Then each could become a potential liability in times of depression and default on mortgages, for instance. You may proceed . Mr. BENT. Thank you. This amendment in no way detracts from the Board's existing authority and that granted by this section to regulate carefully this type of lending . Equality of treatment, FSLIC-FDIC ( title III, sec. 30 ( b ) title IV, sec. 406 (b) (2) (2) ; The language of the committee print embodies a recommendation of the Advisory Committee relating to payment of insurance by the two Federal insurance corporations. One or two witnesses have recommended that this section of the bill be changed. We think the language of the committee print is quite satisfactory. If changes could be made, however, we urge the committee to give equal treatment to all insured accounts. GENERAL COMMENTS We feel that the occasion is appropriate for a brief statement of the basic position of the National Savings & Loan League with respect to issues which always underlie any consideration of our banking and credit structure. In the first place, we strongly favor the continuation of the dual system of State and federally chartered savings and loan associations. Whenever Federal legislation is being considered which is going to operate directly on associations chartered by a State, such legislation must of necessity be tied in with Federal insurance of accounts or membership in the Federal Home Loan Bank System. When the Insurance Corporation insures, it naturally and very wisely is concerned about the safety and soundness of the institution . We think that concern, however, should be limited to the safety and soundness if the dual system is to be preserved. In other words, we would urge this 656 STUDY OF BANKING LAWS committee to examine carefully whether the insurance concept is being used to regulate conduct in no way connected with the safety of the institution . The strength of our system must in the final analysis lie with management itself. No amount of regulation or supervision is going to guarantee that all institutions will be run in the businesslike way that enlightened management and the supervisory agencies would prefer. Come what may, you are going to have some bad apples. We do not object to supervision or regulation or legislation setting up ground rules designed to achieve the kind of system that the Congress, the public, and industry want. We would add just one word of caution, however. In our desire to achieve this goal, an overzealousness that leads to the imposition of too many intricate rules and a continuous broadening of supervisory inquiry beyond the field of safety can eventually reach a point of diminishing returns. The savings and loan business is more closely regulated than any other corporate entity, financial or otherwise. Regulations governing the system exceed 100 pages of fine print. The Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation are doing a very fine and effective job under existing laws and regulations. Losses by the Insurance Corporation have been practically nil. A workable and practicable solution must be established to permit conversions between State and federally chartered associations and stock and mutual associations. The Federal Government has for over 20 years fostered conversions from State to Federal charters. A few years ago, the statute was amended to permit Federal associations to convert to State charters . About 10 of our States permit the chartering and operation of stock type savings and loan associations. Good faith if nothing more would require the Federal Government to permit conversion from a Federal association to a State stock association in those States where the latter are permitted to operate, but on a fair and equitable basis to everyone concerned. We do not object to the imposition of reasonable agency discretion on matters of licenses, applications, and like, but we do feel that where agency action involves removal of a vested right or interest, that agency determination should then be on a basis of legal rules or a judicial determination , rather than on a basis of agency discretion. In conclusion, I would like to make this suggestion to the committee : We do not wish to add to the expense of printing the record of this hearing, but believe consideration might be given to printing as an appendix to this hearing the rules and regulations governing Federal savings and loan associations, and the rules and regulations governing insured associations. These demonstrate the fact not generally realized that our business is well and thoroughly regulated and supervised . In addition , it would be useful to print the conditions imposed in a typical application for insurance case to show the care that is now being exercised. In addition, it would be useful for the committee to receive and study a summary record of a typical branch application , together with the detail necessary to prosecute this application through hearing to completion. Although these transactions involve only a part of the work of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation, they STUDY OF BANKING LAWS 657 do show conclusively the fine work that is being done under the present statutes. Thank you for your attention. Senator ROBERTSON. We thank you. Are there any further questions? Senator BUSH. Yes, Mr. Chairman. Senator ROBERTSON. As a reminder, the committee has available to it all of these rules and regulations, and we would not want to put two or three hundred pages of them into this record, as it will be voluminous enough anyway . Senator BUSH. I want to ask Mr. Bent 2 or 3 questions. You speak on page 10 of your statement of the rules and regulations governing Federal savings and loan associations, and the rules and regulations governing insured associations. What does that mean ? Mr. BENT. That would be members of the Federal Home Loan Bank, and they might not be chartered by the Federal Government ; but we do have State members and probably it is much more than half of the savings and loan industry that are such members. Senator BUSH. With insurance by the Federal Government ? Mr. BENT. Mr. Braman says there are about 1,700 of each. Senator ROBERTSON . So that the Federal insurance organization that insures Federal savings and loan institutions also insures the State institutions ? Mr. BENT. That is right. Mr. BRAMAN. Some of them. Mr. BENT. Not all . I want to make that point. Senator BUSH. Under what circumstances can you make a loan from the bank, that is, from the Federal Home Loan Bank? Mr. BENT. Our institution borrowing from the Federal Home Loan Bank? Senator BUSH. Yes. What privileges do you have as a member to borrow ? Under what circumstances are you privileged to borrow? Mr. BENT. Under the rules and regulations of the Federal Savings and Loan System any institution is permitted under rules established by the various banks to borrow up to a maximum of 50 percent of their share capital. Senator Bus . Under any circumstances ? Mr. BENT. No , sir. That is permitted by law. That is the maximum permitted by law under ground rules established by each bank, and the limitations are set. In the Boston area, with which we are familiar, we establish lines of credit from the bank to any member institution. That had recently been established as 35 percent of their share capital, of which only 15 percent could have been used for making advances to members for mortgage loans. Since credit restrictions have been established as of a year ago in August, that was reduced to 5 percent, and in recent months with some easing it has been increased to 12 percent. So effectively, Senator Bush, the lending of the bank for mortgage business in the New England area is limited to 12 percent of the share capital ofthe member. Senator BUSH. And that limitation is placed by Washington ? Mr. BENT. No, sir. It is established by the board of directors of each regional bank, but is in conformance with credit restrictions. 658 STUDY OF BANKING LAWS established by the Board in Washington . The Board suggested the 12-percent limitation. Senator BUSH. What happens to all of the rest of that borrowing power you have ? Mr. BENT. It is held as a reserve for emergency purposes for the withdrawal of funds in the case of need in any one particular area. Senator BUSH. The reason why I raised this question is, one hears frequently from some of your competition in other fields the criticism that you have a borrowing power that they do not have. Mr. BENT. That is right, but they could have it, you know. Senator BUSH. In what way? Mr. BENT. Well, any savings bank, for instance, has the privilege of becoming a member of the Federal Home Loan Bank System. A few of them do. We have had 1 or 2 in Connecticut. The Manchester Bank has, and I think they have since resigned and have actually borrowed from the bank. The manager of that institution is the ex-banking commissioner of the State. Senator BUSH. So any savings bank could avail itself of the power you have? Mr. BENT. And insurance companies may become members of the Home Loan Bank System . Senator BUSH. You mean any insurance company ? Mr. BENT. That is right. Senator BUSH. A life-insurance company? Mr. BENT. Under the laws, the savings and loan associations, the mutual savings banks and insurance companies may be members of the Federal Home Loan Bank and join the Insurance Corporation. Is that true ? Mr. BRAMAN. No. Just members of the bank. Senator BUSH. Members of the Federal Home Loan Bank? Mr. BRAMAN. Have the privileges of that system . Senator BUSH. Do any insurance companies avail themselves of that ? Mr. BENT. There are a few, but I do not know who they are. We do not have any in Connecticut. Senator BUSH. We do not have Connecticut insurance companies who are? Mr. BENT. A few savings banks, but no insurance companies in Connecticut. Senator BUSH. I have no other questions. Senator ROBERTSON . We thank you. Mr. BENT. Thank you, Mr. Chairman. Senator ROBERTSON. We have listed five witnesses to represent a great national organization called the United States Chamber of Commerce. I hope the witnesses will coordinate their testimony with a view to getting what they want into the record in the limitation of the next 55 minutes, because we can be in session only that long. Our first witness will please give his name and title to the reporter and may introduce his associates. STUDY OF BANKING LAWS 659 STATEMENT OF WILLIAM A. MCDONNELL, CHAIRMAN, FINANCE COMMITTEE ; ACCOMPANIED BY NORFLEET TURNER, NATIONAL BANK AND COMPTROLLER OF THE CURRENCY SUBCOMMITTEE ; BURNHAM YATES, CHAIRMAN, FEDERAL RESERVE SUBCOMMITTEE ; AND GEORGE BLISS, CHAIRMAN, HOME LOAN BANK ACT AND THE FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION SUBCOMMITTEE, ON BEHALF OF THE UNITED STATES CHAMBER OF COMMERCE Mr. MCDONNELL. Mr. Chairman and gentlemen of the committee and Mr. Rogers, I am William A. McDonnell, chairman of the board of the First National Bank of St. Louis, Mo. My appearance today is as chairman of the finance committee of the Chamber of Commerce of the United States. I have with me Mr. Yates, Mr. Turner and Mr. Bliss, my associates, whom I will introduce to you later. The finance committee has been studying the many recommendations made to you and the members of the Senate Banking and Currency Committee by the various Government agencies and the Citizens Advisory Committee appointed by you. As a result of our deliberations and study we would like to present our findings and recommendations. It is my desire to state very briefly the steps which the chamber has taken looking toward the improved functioning of the American financial system. On the original announcement of the study, the national chamber's finance committee was in session here in Washington. The committee was fully appraised of the study's scope and immediately established five subcommittees along major lines of the study. These subcommittees have been manned by oustanding businessmen and bankers from throughout the Nation, from both large and small institutions. They have worked diligently and carefully on the proposed changes in the laws. With your permission I should like to introduce at the close of my remarks the chairmen of these subcommittees, who will discuss in detail the major aspects of the Financial Institutions Act of 1957. The interest of the national chamber in matters pertaining to the commercial banking system, as well as other financial institutions , is of long standing. One of the national chamber's earliest membership referenda was upon the question of the establishment of the Federal Reserve System. As a result of that referendum the support of the business community was shown clearly to be back of the then pending Glass- Owen bill. The record will show that the business community took this position at a time when banking support of the measure was by no means unanimous. Since the passage of the Federal Reserve Act, numerous features of the banking system have been the subject of public reports by the national chamber, and recommendations for improvement of banking laws and practices have had our strong support. No one, least of all business leaders, can afford to take an attitude. of indifference toward money and the monetary system. Although the subject involves matters of a technical nature , this should not mean that the study of banking and financial institution laws should be left exclusively to the financial managers. While bankers are specialists 660 STUDY OF BANKING LAWS in the management of money, the consequences of their decisions are of great importance for all business and for all citizens as consumers and workers. I am in the commerical banking business myself, but in the capacity in which I appear before you today I speak for American businesmen, and the recommendations which my colleagues and I shall make have the approval of the board of directors of the national chamber, who represent the entire or at least a fair cross section of the entire-business community. We should like to commend the work you are doing here to update the laws regulating financial institutions. By and large, we have seen it proper to endorse most of the changes and recommendations contained in the proposed Financial Institutions Act of 1957. There are, however, some few areas of disagreement. While we understand that the purpose of this particular study is simply to recodify existing banking laws, the national chamber would like to express the hope it would be followed by a study of the financial and monetary institutions of this Nation. There should be a comprehensive and objective review of the Nation's monetary policy and financial institutions to appraise the nature, performance, and adequacy of existing financial institutions. Whether existing financial institutions and monetary policies are adequate to meet the needs of our expanding and demanding economy should be a consideration of the commission. The national chamber urges that the President be requested to establish a nonpartisan citizens' commission to conduct the study. The national chamber further recommends the orderly and early liquidation of the Postal Savings System. This has long outlived its useful purpose and now is an undue burden on the taxpayers. Although it was not deemed proper to include in the current study recommendations for change in the existing Treasury regulations for the establishment of adequate and realistic bad debt reservesSenator ROBERTSON. May I interrupt ? We were in full sympathy with that proposal , but the reason why it could not be included in our study is we do not have jurisdiction over tax laws. Mr. MCDONNELL. Yes, sir. Senator ROBERTSON. That is the reason. Our advisory committee said we favored it, but we will recommend it to the tax committees, and the Chair respectfully suggests that he would like to see the chamber of commerce, in addition to mentioning it to us, tell the tax committees of the House and Senate that you favor it, and tell the Secretary of the Treasury you favor it. Mr. MCDONNELL. I can assure you, sir, that will be done. Senator ROBERTSON. Thank you. Mr. MCDONNELL. Although it was not deemed proper to include in the current study recommendations for change in the existing Treasury regulations for the establishment of adequate and realistic bad debt reserves, it is the national chamber's recommendation that this be referred to the proper congressional committees for early consideration with a view toward establishing an equitable reserve formula based on today's risks and inadequacy of capital in the banking system . The committees on taxation and finance of the national chamber both urge enactment of a flat industrywide reserve of not less than 5 percent of eligible loans outstanding. We also think that the Federal STUDY OF BANKING LAWS 661 rules and regulations covering the establishment of branches should be the same for Federal savings and loan associations as they are for commercial institutions. Our position is that title V, section 6 (c) , as written in the act, meets with our approval . The following members of the finance committee will now discuss in detail the provisions of the proposed act : First we have Mr. Norfleet Turner, Memphis, Tenn. , on the matters pertaining to the national banking system . Senator ROBERTSON. We will be glad to hear from Mr. Norfleet Turner. Mr. TURNER. My name is Norfleet Turner, and I am president of the First National Bank of Memphis. As chairman of the national bank and comptroller of the currency subcommittee of the national chamber, I should like to emphasize we firmly believe that American banking as an essential segment of free enterprise requires the widest play of the initiative, resourcefulness, and intelligence of the management of individual banks and freedom from excessive regimentation. The national chamber is dedicated to the principles of a dual banking system which provides checks and balances consistent with effective supervision. In line with these beliefs we have the following recommendations as pertains to the Financial Institutions Act of 1957: 1. With reference to the amendment of section 217 of title 18 of the United States Code, page 247, the chamber believes that section . 8 of the National Bank Act, titled "Conflicts of Interest Prohibited," page 3 of the committee print, provides adequate legislation to cover the employment or offer of employment to any employee of the Comptroller's office. The chamber favors the provisions of section 217 against gratuities and the granting of loans to supervisory staff members, but to impose a restriction preventing a bank offering or an examiner accepting employment for a period of 2 years following any association with the Comptroller's Office, would work an insurmountable hardship on the Comptroller, and to a degree on national banks. The recruitment of able, efficient, capable examiners has always been an acute problem for the Comptroller, but his past experiences will pale into insignificance when compared to the problems which will be encountered in trying to obtain competent men if this provision is enacted into law. Senator BUSH. Will the gentleman pause while I ask the Chair a question ? Mr. TURNER. Yes, sir. Senator BUSH. Did the Comptroller himself testify on this point? I did not attend that day. Senator ROBERTSON. Do you mean last November ? Senator BUSH. Whenever he appeared. Yes. Senator ROBERTSON. The Comptroller will appear as one of the last witnesses to conclude these hearings with the official position, which will contain his position on everything in this bill, after we hear from the Federal agencies. The Comptroller has not stated any official position yet. He gave some preliminary statement. Senator BUSH. Have any of the Government witnesses testified on this point which Mr. Turner is discussing? 662 STUDY OF BANKING LAWS Mr. ROGERS . No. Senator BUSH. All right. Mr. TURNER. Many of the fine personnel serving in the Comptroller's Office are hopeful that the experience gained in examining banks will lead ultimately to their association with a good banking institution. Bankers themselves have recognized the value of such training, and have not hesitated to recommend it to young men who seek eventual executive responsibilities in the banking field. Some of the Nation's leading bankers prepared themselves for their present careers through training as examiners. Suppose an examiner has served 10 or 15 years with the Department and suddenly his health becomes such that he no longer can travel. His usefulness to the Department may be gone and he is legally barred for 2 years from turning to the field of endeavor for which he is best fitted. Under the present policy of the Comptroller all examiners must agree not to accept employment with a bank for a period of 2 years after leaving the Department, without the approval of the Comptroller. We know of no instances where there have been any abuses under that policy, and it does allow the Comptroller to prevent an injustice of the kind described . To deny to the banking profession access to this field of highly trained executives or potential executives would be harmful, but the national banks would suffer a great deal more through a lowering of the standards of national bank examinations, which would be inevitable if a member of the force knew he was "locked in" and, from a practical standpoint, could never pursue the profession for which he is best qualified . The chamber fears that the doubt now raised by the injection of this portion of the amendment will have an adverse effect on the recruitment section of the Comptroller's office until it is known that all concerned favor the deletion of this particular portion of this amendment. The chamber, therefore, recommends the deletion in subsection ( ii ) of section 217, page 248, of the words, "or employs or makes an offer of employment to," and in subsection (iii ) of the words, "or employs or makes an offer of employment to," with the feeling that section 8 of the National Bank Act on page 3 of the committee print fully covers the situation desired to be corrected. We suggest, however, that some time limitation be contained in section 8 (b) unless it is intended that this will be covered in the regulations to be prescribed by the Comptroller. Senator BUSH. May I interrupt again ? Senator ROBERTSON. The Senator may. Senator BUSH. I am not familiar with all of these references, so I would like to ask you a direct question. Do you favor placing any limitation on employment of the former employees of the Comptroller's oflice, and, if so, what ? Mr. TURNER. Senator, I believe that the present practice of the Comptroller's office that it must have his permission has adequately served so far, and I believe it will in the future. Senator Bus . In other words, you do not favor any long-term waiting period of a year or two fixed by law, but you believe it should remain as it is ? Mr. TURNER. Yes, sir. Senator BUSH. Thank you. STUDY OF BANKING LAWS 663 Mr. ROGERS. That conflicts with your prepared statement here. You say that you recommend section 8 ( b) be enacted. Mr. TURNER. Section 8 (b ) provides, as I recall it, Mr. Rogers, that it shall be that the Comptroller may authorize, as he does now. Mr. ROGERS. That is right. You do favor writing into law the present practice. Mr. TURNER. Yes. I beg your pardon, Senator. Senator BUSH. We are all correct. I am just asking what he thought about the principle . Senator ROBERTSON . We are in agreement, I think. Senator BUSH. We are all set . Senator ROBERTSON. You may proceed. Mr. TURNER. 2. The national chamber approves section 23 of the Federal Deposit Insurance Act, mergers and consolidations, page 162 of the committee print. Our interest in this proposed legislation has primarily to do with that section giving authority to the three supervisory agencies, the Comptroller of the Currency, the Federal Reserve Board, and the Federal Deposit Insurance Corporation , to approve of bank mergers and consolidations. Competition is a very important influence in our American way of life and should not be thwarted ; nevertheless, it must never be the prime consideration in evaluating the merits of a merger or consolidation of banking institutions. Mergers and consolidations, per se, rarely result in a lessening of competition, but to the contrary, oftentimes stimulate it. In a particular community a much more important factor than competition might be the preservation of a banking institution . For example, there may be 4 or 5 good banks, highly competitive, and suddenly one finds itself in a weakened condition , but still solvent. The merger with one of the stronger banks might or might not tend to lessen competition, but if this factor alone were considered, and the merger or consolidation denied, the result might be the final liquidation of the bank to the detriment of depositors, stockholders , and the public generally. 3. The national chamber offers no objection to the issuance by banks of preferred stock, but there are dangerous implications in the issuance of capital notes and debentures authorized under section 21, page 10 of the committee print. The proposed law provides that the issuance of such obligations shall be approved by the Comptroller, but we believe that somewhere in the act should be a specific provision that his approval must be granted only when in his opinion this form of temporary capital is necessary in an emergency situation . The proposed law might place the Comptroller of the Currency in the awkward position of insisting that a bank acquire additional capital only to have it choose the issuance of notes or debentures rather than common stock. In all probability, many banks would elect this means of complying with the Comptroller's requirement. We would approve passage of this act with a provision that debentures would be authorized only in emergency cases. Mr. ROGERS. This is the first testimony we have had on this particular point. I wonder if you might go into a little detail on these dangerous implications. Are you afraid of diluting the value of the common stock, or exactly what do you have in mind? 664 STUDY OF BANKING LAWS Mr. TURNER. NO, Mr. Rogers. I feel a debenture form of capital can be only a temporary form. In issuance of debentures it must be provided that they can be naid back at some time, so it is a temporary form of capital in the opinion of those of us who have studied it, and passage of this proposed act without some reference to emergency cases might lead the Comptroller to the point where he tells the bank, "We would like you to issue more capital," and the bank says, "Under the law I have the right to issue these debentures," and the Comptroller would be in the awkward position of saying you have to issue more capital, but can't issue debentures. We feel debentures do not represent the type of capital which should be in banks over the long pull. Senator ROBERTSON. The Chair intends to look into that because he does not like the word " debenture," anway. It purports to be a mortgage but it is not. Mr. TURNER. It is a debt and not an equity. Senator ROBERTSON . No. If you are going to give something that is worth something to the man that lends something, then give a lien on the property. Otherwise you can finance it through your preferred stocks. The bill authorizes preferred stocks if you want to issue it. They have that under the RFC, but it has not been used much. We put it in here. Senator BUSH. In many growing businesses the device of the convertible debenture has been used over many years, as you gentlemen know. Would you also rule that out here ? Mr. TURNER. Senator, I do not believe that occurred to us in our study, that is, convertible debentures. I do not believe I am prepared to answer that question. Senator BUSH. It seems to me they have some merit even in a bankfinancing operation. I do not know. I have not thought about it much either, but your statement suggested that inquiry. I think it would be interesting to hear from this organization on that point, Mr. Chairman. It is a good device for growing institutions. Mr. MCDONNELL. May I say, Mr. Chairman, that our committee would be glad to make a study of that particular point and file a statemention on it for your benefit. ( The following was received with reference to the above :) ADDITIONAL STATEMENT ON CONVERTIBLE PREFERRED STOCK AND CONVERTIBLE DEBENTURES ON BEHALF OF THE CHAMBER OF COMMERCE OF THE UNITED STATES Sound banks have traditionally been able to raise necessary capital to keep pace with the growing demands of the economy through the issuance of common stocks. In the past year alone nearly $200 million of new national bank stock was sold through the common method. Larger banks could more easily market convertible preferred stock and convertible debentures than the average American banking institution , whereas medium-sized and small banks might be administratively overburdened by the mechanics of convertible offerings. A bank must have prestige, sound management, and a record of good earnings in order to sell its capital issues readily under the present common stock method. Even banks enjoying this position might attempt to raise capital through the convertible method if only because it is a relatively easy though unusual, way to tap new sources of investment funds . Bank stock today is a high-grade security, understood by all buyers, not affected with varying terms, free from special features. The moment bank stock becomes convertible preferred or a convertible debenture it tends to confuse prospective stockowners. For this reason it has proved better in the past to STUDY OF BANKING LAWS 665 have one class of stock ; we have not, however, opposed the issuance of straight preferred stock by banks. In considering the convertible feature of bank stock it must be determined at what price the stock is to be converted and whether it is to be converted at the time of issuance or at some later date. Actually, if conversion is utilized, the sale becomes one of common stock. If conversion is scheduled for a long time ahead a bank might conceivably hold down its common dividends and pile up values. Then, should the preferred be convertible at a value fixed at issuance, whereas the intrinsic value may have doubled between date of issuance and date of conversion ? Answers to these questions call for a high degree of technical knowledge. There may be times when the common stock market is not in too good shape and a bank may want to use the convertible preferred or convertible debenture method of raising capital. We feel, however, that the disadvantages of this procedure outweighs its advantages. Common stock in the banking industry stays and grows and becomes a greater protection, whereas convertible preferred would be retired under a specified schedule. A certain amount of permanence in the local community is provided through the ownership of common stock. The issuance of convertible preferred or convertible debentures, which are either retired or redeemed , does not create this element of permanence. These considerations force us to oppose bank use of these types of securities except in cases of emergency. Senator ROBERTSON. You will have to do it with reasonable dispatch because we want to get these hearings printed within 2 days after the last witness testifies. Mr. TURNER. When will that be ? Senator ROBERTSON. The week after next. We conclude testimony on the 18th of this month. Mr. MCDONNELL. We shall endeavor to have something in by that time. Senator BUSH. One more question. There was no objection raised here to the preferred stock device. I see that is specifically stated here. Mr. TURNER. Yes. 4. The liberalization of present laws pertaining to real estate loans as provided under section 36 , page 28 of the committee print, is urgently needed . The present law is antiquated in the light of modern industrial development, with its shopping centers, new plants, firm commitments from responsible lenders to take permanent loans, and with its resulting problem of providing working capital loans under term-loan agreements. Furthermore, the present restriction on the total amount of construction loans a bank may legally make is unrealistic in view of other safeguards and present-day construction costs. 5. Concerning the restriction of States from subjecting national banks to examinations and licensing as proposed under section 51 , page 41 , of the committee print, we urge enactment of this legislation. 6. The procedure for the election of directors, provided in section 26, page 13, of the committee print, has the approval of the national chamber. Our interest is confined primarily to paragraph (c ) , making cumulative voting optional with national banks. Instances are rare indeed where the privilege of cumulative voting has been used constructively; to the contrary, those availing themselves of the privilege have in most instances done so at the expense of harmony and cooperation in the board of directors and with the management of the bank. Senator ROBERTSON. The Chair would like to interrupt there to underscore that testimony. The Chair was a patron of the bill that 666 STUDY OF BANKING LAWS passed the Senate-in fact, the bill got a majority vote in the Houseto make cumulative voting permissive rather than compulsory. The testimony is that few instances have been known where it is used constructively, but plenty of them where it has been used destructively. Mr. MCDONNELL. That is right. Senator ROBERTSON. You may proceed. Mr. TURNER. Cumulative voting may be necessary for the protection of minority stockholders in many corporations, but banking is unique in that its management, the soundness of its operation, and the quality of its assets are under constant supervision and periodic examination by supervisory authorities. Any grievance a minority stockholder might have would doubtless be investigated by one or more of the supervisory agencies and, if it had merit, ample law is provided to bring about its correction . Senator BUSH. May I ask one brief question ? Senator ROBERTSON. You may. Senator BUSH. I would like to suggest to Mr. McDonnell that in making this supplementary statement on the question of convertible debentures, they also give their views as to the use of convertible preferred stock. You did not mention the convertible device at all. (See p . 664. ) Mr. MCDONNELL. Yes. Senator BUSH. You included preferred stock, but as long as you are going to study it from the debenture standpoint , I would like to have your views on the conversion of preferred stock. Mr. MCDONNELL. We shall be glad to do so. I would now like to introduce Mr. Burnham Yates, of Lincoln, Nebr. Senator ROBERTSON . Before he testifies, I want to thank those who have already testified and those who are going to testify for the help to the gentlemen of this committee that a group of experienced bankers and businessmen of Missouri, Tennessee, Nebraska, New York, and Alabama are giving us in this study, because the substance of their testimony after a careful study of what we propose is that on the whole, "We are endorsing what you are doing. There are a few minor changes we want to suggest to you. " To the chairman that is very gratifying and very helpful. You may proceed. Mr. YATES. Thank you, sir. My name is Burnham Yates, president of the First National Bank of Lincoln, Lincoln , Nebr. May I reiterate what you just said ? Our wish is to commend the committee and the Advisory Committee for the efforts they have put forth which will lead to recodification of these laws. On the whole we think that the job is a very fine one. My purpose is to talk about some of the suggested changes having to do with the Federal Reserve Act. Recommendation 51 has to do with the location of the directors of the Federal Reserve banks. This recommendation would require such directors to be residents of the Federal Reserve district on whose bank board they are serving. The national chamber recognizes the intent of this recommendation, but feels that the principal place of STUDY OF BANKING LAWS 667 business should determine membership on the board, rather than residence. There can be cases where an individual would have a legal home residence other than his place of business, and which would cut across Federal Reserve districts, and which might prohibit him from serving on a board in that area where his major interest lies. Mr. ROGERS. Do you know of any cases that would fall outside of the 50-mile liberalization in that provision ? Mr. YATES. Specifically, no. It has been mentioned before in 1 or 2 instances there are a few individuals who have established legal residence in Florida, although they are important in the business world, for example, in New York City, possibly for personal tax reasons. It is a minor point. Recommendation 52 on pages 74 and 85 of the act : The recommendation would limit service of Federal Reserve Bank directors ( other than the Chairman ) to 2 consecutive terms of 3 years each, and the tenure of service of members of the Federal Advisory Council to 6 consecutive 1 -year terms. We realize the point here. The national chamber recommends that the limitations on the tenure in office of members of the board of directors of the Federal Reserve banks be 3 consecutive 3-year terms and that the limitation on tenure of office for members of the Federal Advisory Council be limited to 9 consecutive 1 -year terms. We feel the additional 3-year period might be very helpful, but still provide a broader representation which you gentlemen desire. Recommendation 54 on page 73 of the bill : Payment of Reserve bank earnings to the Treasury. The national chamber agrees with the Advisory Committee in stating that the franchise tax is probably the simplest method of clarifying the situation , but feels that a statutory directive of transfer of any specified percentage of bank earnings might at some time become an onerous and undesirable provision. We favor, instead, legislation authorizing the Federal Reserve Bank Board to transfer annually to the United States Treasury such portion of net earnings as the Board deems appropriate. Recommendation 58 on pages 48 and 92 of the bill relative to reports by State member banks should be rewritten to make clear that in requiring the publication of reports, the Board shall not require the publication of reports of dividends or earnings and, in requiring publication of reports of condition , such publication shall be required from all State member banks on the same date. The national chamber feels that these reports are of a confidential nature and this confidence should be respected, and damage can be done to particular banks if such publication were required. Mr. ROGERS. May I ask a question on that last point ? Mr. YATES. Yes, sir. Mr. ROGERS . What we have done in this section on the Federal Reserve member banks is reenact into the law the present law, except for one sentence which deals with reports on a sample basis. I wonder, is your objection to the present law rather than to the bill ? Mr. YATES. The phrase has to do with payment of dividends. That is the only thing, Mr. Rogers. As long as that is not construed as earnings. Mr. ROGERS. But that is in the present law. 84444-57-pt. 2—15 668 STUDY OF BANKING LAWS Mr. YATES. Yes, sir. Mr. ROGERS. In your report on payment of dividends do you usually report your earnings in the same report ? Mr. YATES. No, sir. Mr. ROGERS . That is what I understood. Mr. YATES. That is right. It is just as a matter of clarification. I regret to state I am not an attorney, but if an attorney feels it is all right, I am sure it is satisfactory with us. Mr. ROGERS . We want the benefit of your testimony. Mr. YATES . Yes, sir. The national chamber has endorsed recommendation 60 of the Board of Governors which would permit State member banks, with approval of the Board of Governors, to hold temporarily stock of another bank as one step in the process of acquisition in connection with absorptions and also endorses the same proposal for national banks. We favor that and hope it will also be put in the law as regards national banks. We think it is a very good procedure and would like to see it in the law affecting national banks also. Mr. ROGERS . It is in the bill. Mr. YATES. I am sorry, sir. I am now aware of that. Recommendation 77 : This section refers to that portion of the Federal Reserve Act which prohibits the payment of interest on demand deposits "directly or indirectly, by any device whatsoever." There exists today a complete lack of uniformity between this rule and the interpretation given the matter by the Federal Deposit Insurance Corporation. We believe that Congress intended that rulings should be uniform , and that no interest in any form should be paid on demand deposits. Any interpretation other than a strict one can only lead to misconstruction and inequities as between banks operating under different supervisory authorities. We therefore urge the enactment of legislation which would require the Federal Deposit Insurance Corporation to adopt the present law. We are glad to see the section has been improved and the Federal Deposit Insurance Act in section 26 has been changed to conform. Recommendation 81 has to do with loans of member banks to executive officers. We approve entirely the recommendations which have been put in the bill -the recommendations of the Advisory Committee. In the main we feel a tremendous job has been done, and we thank you . Mr. MCDONNELL. The next statement that is in this printed folder was to have been made by Henry A. Coleman of Daytona Beach, Fla., concerning matters pertaining to the Federal Deposit Insurance Corporation. Mr. Coleman is in the hospital for an operation and we would ask simply to file that report. Senator ROBERTSON. Without objection, the complete statement of Mr. Coleman may be made a part of the record at this point. (The statement of Mr. Coleman follows :) STATEMENT OF HENRY A. COLEMAN, ON BEHALF OF THE UNITED STATES CHAMBER OF COMMERCE I shall discuss some of the major aspects of title III of the Financial Institutions Act of 1957 as it pertains to Federal deposit insurance. Let me first discuss sections 6 and 7 of the bill which provide for a change in the management of the Corporation from the present Board of three directors to a single Administrator and the creation of an Advisory Board of three members composed of the Comptroller of the Currency, the Chairman of the Federal STUDY OF BANKING LAWS 669 Reserve Board of Governors, and a designee of the State supervisors of banks. We are in agreement with this proposal and feel that a single administrative head would add greatly to the efficiency and smooth operation of the Corporation. It would add representation of the State banks to the Corporation, as well as the experience and abilities of the Federal Reserve Board Chairman. The national chamber believes that the Advisory Board should have general authority with respect to policies and operations of the Corporation and that the Administrator would be accountable to the Advisory Board. We favor the protection of confidential records as proposed in section 10 page 153 of the act, which provides that Corporation records pertaining to any insured bank may not be disclosed without prior consent of the Corporation. This provision corresponds to the section 50 of title I as it relates to national banks. We also favor section 16 (b ) on page 157 which provides that any insured bank need not maintain records pertaining to its assessment computation for a period in excess of 5 years. Certainly 5 years is adequate time for the Corporation to verify the correctness of assessment computations. Disposal of the records should be allowed by the insured bank after 5 years. Section 2 ( 1 ) on page 149 restores to the law the assurance that a transferred deposit means a demand deposit in a new bank or other insured bank. We should like to state that the national chamber strongly urges that the wording "payable on demand in an insured bank" be retained in the bill. Section 18 page 159 of the bill sets down the basis for determination of assessment credits to insured banks. The bill retains the existing provision that 40 percent of the Corporation's "net assessment income" be transferred each year to the deposit insurance fund and that the balance be credited pro rata to the insured banks. At the present time the fund of the Corporation has exceeded $1.7 billion, which is equal to 1.41 percent of insured deposits, and through its 22 years of its operation the FDIC has disbursed for working capital purposes less than $290 million in connection with receivership and deposit assumption cases. The insurance fund of the Corporation is to insure depositors against losses resulting from ordinary institutional failures occurring through mismanagement, local disaster, defalcation, and other similar types of casualties. It would be quite unrealistic to believe that the Corporation insurance fund could possibly insure all accounts against wide-scale major economic disasters. We believe that the idea that the Corporation can insure all accounts against major calamities should be dispelled . Further, we urge that a complete and thorough study be undertaken which would provide an accurate basis for determining the underwriting liabilities of the two Corporations, the FDIC and FSLIC. The need for such a businesslike study is apparent and should be undertaken as expeditiously as possible. Section 23 on page 162 provides that there must be prior written consent by the appropriate Federal supervisory agency to any proposed merger, consolidation, or assumption transaction between insured banks. The national chamber supports this legislation and urges its adoption. We believe that the authority over bank mergers correctly rests within the jurisdiction of the bank supervisory agencies and that the laws should so specifically state. We also concur in the change in the law which proposes to shorten to 20 days from 120 days the period now permitted for the correction of unsafe and unsound practices by an insured bank in cases of insurance risk. We believe that section 29 (a) on page 165 as it pertains to the notice period will strengthen the power of the Corporation to act promptly in the public interest. Mr. ROGERS. Mr. McDonnell, in that statement you endorse the proposal for a single Administrator for the Federal Deposit Insurance Corporation. Is that right ? Mr. MCDONNELL. Yes, sir, we do. Mr. ROGERS. It is a very important part of this bill . Mr. MCDONNELL. That is right, and we do. Mr. ROGERS. I wonder, would you be able to discuss that a little bit, as to your reasoning ? Mr. MCDONNELL. I will read that portion of his report here. It pertains to sections 6 and 7 of the bill, which provide for a change in 670 STUDY OF BANKING LAWS the management of the Corporation from the present Board of 3 directors to a single Administrator and the creation of an Advisory Board of 3 members composed of the Comptroller of the Currency, the Chairman of the Federal Reserve Board of Governors, and a designee ofthe State supervisors of banks. We are in agreement with this proposal and feel that a single administrative head would add greatly to the efficiency and smooth operation of the Corporation. It would add representation of the State banks to the Corporation as well as the experience and abilities of the Federal Reserve Board Chairman. The national chamber believes that the Advisory Board should have general authority with respect to policies and operations of the Corporation and that the Administrator would be accountable to the Advisory Board. That is our position . Do you care for any further clarification ? Senator BUSH. You say, 66*** a designee of the State supervisors of banks. " How are they going to designate somebody ? That seems to me like a very doubtful suggestion. That is no reflection on the supervisors, you understand. Mr. MCDONNELL. I understand. Senator BUSH. There are about 48 of them. Mr. MCDONNELL . I know that Mr. Rogers investigated the operation of the machinery before this was written this way. Mr. ROGERS. The provision of the bill concerned provides that the President is to choose from among those State supervisors. Senator BUSH. The President of the United States ? Mr. ROGERS . That is right. Senator BUSH. He is to do what ? Mr. ROGERS. To choose among the 48 bank commissioners. Senator BUSH. Oh, that is different. I understand that now . That is in the bill ? Mr. ROGERS . Yes , sir. Senator BUSH . I did not know that. Mr. MCDONNELL. Now, gentlemen, if we may proceed I would like to introduce Mr. George L. Bliss of New York City, who will identify himself and give his report. Senator ROBERTSON. We will be pleased to hear Mr. Bliss . Mr. BLISS. My name is George L. Bliss and I live in Mount Vernon, N. Y. I am president of the Century Federal Savings & Loan Association of New York City. As chairman of the chamber's subcommittee on the Federal Home Loan Bank Act, the proposed Federal Savings and Loan Association Act and the proposed Federal Savings and Loan Insurance Corporation Act, I should like to discuss briefly with you some of our recommendations as they relate to the proposed acts. With respect to section 7 ( f) on page 187, the national chamber recommends that the language be clarified to eliminate an inconsistency in providing that a "director may continue to act" in an office which has "become vacant. " That is just a technical item, Mr. Chairman, and we think the staff can have no great trouble in smoothing out that language. Mr. ROGERS. Mr. Bliss, do you agree with the thought? Mr. BLISS. Yes. The principle is all right, but we do not see how anybody can act in an office which has been declared vacant . STUDY OF BANKING LAWS 671 A significant change in section 8A of the Federal Home Loan Bank Act eliminates all reference to the "board of trustees of the Federal Savings and Loan Insurance Corporation," with respect to the duties of the Federal Savings and Loan Advisory Council. The national chamber believes it to be important that the separate corporate status of the Federal Savings and Loan Insurance Corporation be clearly maintained by restoring the present language of this section. Mr. ROGERS. Would you agree with me that the board of trustees is a fiction ? Mr. BLISS. Yes, but I will have something further to say on the same subject when we reach the Federal Savings and Loan Insurance Corporation Act. It is true the same persons serve in both capacities, but we regard it as quite important that they change hats and keep the corporate status of their two activities clear, separate and distinct, as a matter of principle. In subdivision 4 (b) of section 10 of the Federal Home Loan Bank Act, page 190, we recommend that the phrase, "with respect to which the home mortgage was given, as such real estate was appraised when the home mortgage was made" be restored, on the basis that the present statute is more practical and that the proposed change could be the possible source of future abuse. Mr. ROGERS. Is that a reference to section 4 (b) rather than section 4 (h) ? Mr. BLISS . It is subdivision 4 (b) . Yes, sir. Senator BUSH. You are not following the text we have here. Mr. BLISS . No, sir. Mr. McDDONNELL. He is amplifying it a little bit. Mr. BLISS . I am trying to clarify it. Senator BUSH. Yes. It would help me a little bit if you would say, if you can, if it is consistent with what you are doing, to quote the recommendation you are discussing as it appears in the text. You could say recommendation 125 or recommendation 135. Can you do that? Mr. BLISS . Yes, sir. Senator BUSH. Thank you. Mr. BLISS. The item I just spoke of related to subdivision 4 (b ) of section 10 relating to recommendation 125. Senator BUSH. Fine. Mr. BLISS . Also under recommendation 135 we recommend that section 17 (c) be redrafted for clarity. While the national chamber endorses the objectives sought of providing parity in these areasin the Federal Home Loan Bank Board , the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation-it believes that the powers and authority of each of these agencies or organizations should be clearly stated in their respective statutes rather than by cross reference. Senator ROBERTSON. The Chair interrunts to say that he has requested our drafting service, headed by Mr. Simms, to take this bill and take all of the testimony on the bill and go over the bill very carefully and help us to clarify the language of anything we want in there which we have not properly expressed. When we have finished with this, with your helpful suggestions and the suggestions we are getting from day to day, and through the work which will be con- 672 STUDY OF BANKING LAWS tinued by our own staff and the drafting staff, we hope to have a reasonably good bill ready for the Congress when we report one. Mr. ROGERS. I wonder if you can clarify that point ? Are you proposing to write into this act the provisions of the reorganization plan ? Mr. BLISS. No, sir. We are referring to section 17 (c ) which says that the Federal Home Loan Bank Board shall have certain powers and authority, similar to those now accorded to the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation. Should it be that those acts are amended sometime, it could only result in a confused situation as to what the powers of the Federal Home Loan Bank Board are. We think that the powers intended to be conveyed to the Federal Home Loan Bank Board, as a matter of draftsmanship, should be clearly set forth here rather than by cross- reference. With respect to subdivision (b) of section 19, which deals with the subsequent employment by members of the Federal Home Loan Bank System of former employees of the Federal Home Loan Bank Board, we believe this item should be deleted from the bill. The reasons are the same as those giver in earlier testimony by Mr. Norfleet Turner, when he recommended certain proposed amendments to section 217 of title 18 of the United States Code. The bill would amend section 20, which prescribes the qualifications for examiners employed by the Federal Home Loan Bank Board, by extending these qualifications to apply to examiners under the Federal Savings and Loan Association Act and under the Federal Savings and Loan Insurance Corporation Act. Again we recommend that such provisions be placed in these acts, so that they will be where anyone looking for them would expect to find them. Now as to the Federal savings and loan association portion of the act on page 213 : Under recommendation 166F, we recommend that section 7 (e ) , relating to loans to officers, be replaced with the provision commonly found in savings and loan association statutes, namely, that no officer or director of a Federal savings and loan association may be directly or indirectly obligated for a mortgage loan made by the association in which he is an officer or director, other than for a first mortgage loan on a residence occupied as his own personal home. The following statements pertain to the Federal Savings and Loan Insurance Corporation portion of the act. Recommendation 153 : We recommend that section 403 (a ) be restored to the language now contained in section 402 (a ) , except that the number of members of the Board of Trustees be changed from 5 to 3, in conformity with the fact, to the end that the separate corporate status of the Federal Savings and Loan Insurance Corporation may be clearly maintained-a point which we have made earlier in this statement. At page 219, in section 403 (j ) , the inclusion of the words "member or" might be construed to apply the provisions of this section to members of the Federal Home Loan Bank System. The national chamber believes the provisions of this section should relate only to institutions insured by the Federal Savings and Loan Insurance Corporation, and that the reference to members should be eliminated for clarity. STUDY OF BANKING LAWS 673 With respect to section 404 ( c) , which falls under recommendation 159, we recommend the deletion of the last two sentences- this is on page 221 - because the standards to be applied by the Federal Savings and Loan Insurance Corporation are not specified and, particularly, because the authority granted might result in denying insurance of accounts to solvent and well- managed institutions. Mr. ROGERS . Do you have any standard to suggest we put in there? Mr. BLISS. We think that the Insurance Corporation is doing pretty well right now without a specific statement, and the language which particularly concerns us is this. It says : In considering applications for such insurance the Corporation shall give consideration-- among other things tothe need for additional insured institutions in the community, and the effect of the granting of insurance upon existing insured institutions in the community Having in mind there are 6,000 savings and loan associations in the county, of which some 3,200 or 3,300 are now insured, this language could be possibly employed to deny insurance to an existing and longestablished, perfectly sound institution on the basis of some overall judgment as to the number of insured associations to be qualified in the community. We think that is a very hazardous and dangerous authority to give to the Corporation . Recommendation 158 : We recommend that subdivisions (e ) and (f) of section 404 ( c) , page 221 , be revised to list the standards or tests to which applications for mergers will be subjected. The national chamber does not believe there is any warrant for requiring approval by the Federal Savings and Loan Insurance Corporation in mergers where liabilities of the receiving association are increased by less than 25 percent ; nor that its approval should be required for the purchase or sale for cash of assets which are a legal investment for the insured association involved. Finally, under this heading, the national chamber approves the principle set forth in recommendation 166K of the Advisory Committee that the settlement provisions of the Federal Savings and Loan Insurance Corporation Act and the Federal Deposit Insurance Corporation Act be maintained on a parity basis. Thank you. Mr. MCDONNELL. Gentlemen, that concludes the witnesses representing the United States Chamber of Commerce. May I thank you for the courteous treatment you have given us. Senator FREAR. On behalf of the chairman , Mr. McDonnell , I assure you that the subcommittee is certainly very happy to have had you and your associates testify before the subcommittee, and very appreciative of the time and effort you have spent in preparing your testimony here today. We wish to thank you for subjecting yourself to questions by this group and also for your future assistance. It is nice to have you, and we appreciate your appearance . Mr. MCDONNELL. We thank you very much. Senator FREAR. The committee will stand in recess until 10 a. m. tomorrow. (Whereupon, at 11:45 a. m. the subcommittee recessed until 10 a. m. the following day, Tuesday, February 5, 1957. ) STUDY OF BANKING LAWS (Financial Institutions Act of 1957) TUESDAY, FEBRUARY 5, 1957 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, SUBCOMMITTEE ON BANKING, Washington, D. C. The subcommittee met, pursuant to recess, in room 301, Senate Office Building at 10 : 10 a. m. , Senator A. Willis Robertson (chairman of the subcommittee ) presiding. Present : Senators Robertson, Monroney, Clark, Bricker, Bennett, and Bush. Senator ROBERTSON. The subcommittee will come to order. Our first witness today is Mr. Wallace Ely, of Rochester, N. Y., representing Robert Morris Associates. We will be glad to hear from you. STATEMENT OF J. WALLACE ELY, PRESIDENT, ROBERT MORRIS ASSOCIATES Mr. ELY. I am Wallace Ely, executive vice president of the Security Trust Co., of Rochester. I appear here this morning as president of Robert Morris Associates. May I first thank the committee for their graciousness in letting us appear to make this presentation of our thinking on this important banking matter. I have a prepared statement which can be divided into two parts. The first part briefly summarizes the scope of the interests of the associates. I. THE NATURE AND PURPOSES OF ROBERT MORRIS ASSOCIATES Robert Morris Associates was conceived in June 1914 , became an unincorporated association, and was incorporated as a Pennsylvania nonprofit corporation on April 19, 1921. Its central office is located in the Philadelphia National Bank Building, Philadelphia 7, Pa. Senator ROBERTSON. I may ask you if this is named after the great Revolutionary figure ? Mr. ELY. Yes, sir, it is. Senator ROBERTSON. He was a great money man, but unfortunately he never paid Lighthorse Harry Lee the money that Lee lent him, and that broke the Lee family. Senator CLARK, I would like to file a comment on behalf of the Commonwealth of Pennsylvania. 675 676 STUDY OF BANKING LAWS Senator ROBERTSON. It is just a matter of opinion. He was a great patriot, but that is the way Robert E. Lee's family lost their colonial home down on the Rappahannock River. It was $60,000 that Lighthorse Harry Lee lent to Robert Morris and he never got it back, and that was real money in those days, you know. Senator CLARK. I am sure the Chairman will permit the record to show the pretty good taste of Robert Morris, as he had gone into it at great length, and he started this development in the State of Pennsylvania. Senator ROBERTSON. I thought this might be an indication to this very successful financial institution named after Robert Morris, since they have tax deductions for gifts for charitable and nonprofit purposes, to make a nice contribution toward the maintenance of the Lee home that was lost by the Lee family, and now recaptured by a lot of patriotic women, and which needs contributions to keep it going. Mr. ELY. Thank you, Senator. May I say I believe the record shows Robert Morris lost his fortune in the financing of the Revolution. Senator ROBERTSON. I do not question that. Mr. ELY. The reason why the associates have chosen his name is because we felt he was a great patriot who did great work for the Revolutionary Army and was a man who put his country and his service to it before himself. We hope we are putting banking before our individual selves . That is the quick background summary of the reason why we did choose his name. Senator ROBERTSON. I opened my comment by saying that he was a great hero and patriot, and I did not wish anything I said to be construed as an implication that he had done anything crooked when he did not repay it. It was just unfortunate from our standpoint. Mr. ELY. Yes, sir. I can see that. Senator CLARK. Mr. Ely, we are glad to know Robert Morris' fame has spread even to Rochester, N. Y. Mr. ELY. It has spread much further than that, Senator. Senator ROBERTSON. All right, sir. Without prejudice you may proceed. Mr. ELY. Thank you. Generally speaking, Robert Morris Associates is an organization of banks and certain related institutions which engage in the extension of credit and whose representatives in the associates are bank loan officers and credit men who are primarily or actively associated with credit work. The membership includes National and State banks and trust companies, savings banks, Federal Reserve banks, private banks and bankers, acceptance houses, commercial paper dealers and American agencies of foreign banks and trust companies located outside the United States. The organization is financed by annual dues based on a graduated schedule, according to the total resources of the respective members. The membership of the associates comprises over 800 banks, represented in the associates by over 2,500 senior loaning officers or managers of credit departments of the member banks. There are members located in all of the several States of the United States and alsd in Alaska, Hawaii, and Puerto Rico. The member banks have deposits totaling approximately 80 percent of the deposits of all the STUDY OF BANKING LAWS 677 banks that are members of the Federal Reserve System. Four hundred and sixty-nine national banks are members of the associates. Among the objectives or purposes of Robert Morris Associates are the following : 1. The promotion of friendship and understanding among bank loan officers and credit men. 2. The interchange and dissemination , among members, of information concerning business and economic conditions and trends ; business organization, management, functions, practices, characteristics, and problems ; and other aspects of national and international economic life bearing upon the extension of credit. 3. The interchange and dissemination , among members, of information concerning loan policies, administration, techniques, and devices ; legal developments affecting credit, statement analysis, credit analysis, and credit development administration practices and procedures. II. CONSIDERATION OF THE PROPOSED FINANCIAL INSTITUTIONS ACT OF 1957 Upon examination of the committee print bill it appears that Robert Morris Associates is particularly interested in sections 34, 35, and 36 of title I , National Bank Act. These sections I shall discuss briefly in the order named. SECTION 34- MAXIMUM LOAN LIMITATIONS New categories are proposed to be added to the list of loans which are now excepted from the limitation that a national bank may not lend to any 1 person more than 10 percent of the capital and 10 percent of the surplus of the bank. They are as follows : 1. Refrigerated and frozen foods ( subpar. (6) (b ) ) Under existing law, obligations secured by documents securing title covering readily marketable staples are exempt from the 10 percent limitation. However, to qualify readily marketable staples must be nonperishable. Under the proposed law, loans secured by refrigerated or frozen readily marketable staples are exempt provided they are fully insured, and the maximum loan to any 1 borrower does not exceed 25 prcent of the bank's capital and surplus and the maturity does not exceed 6 months. Comment : This appears highly desirable. The frozen food market has expanded tremendously in recent years. It is a relatively simple matter to determine market prices ; and the sources of outlet such as institutions, food chainstores, retailers, food brokers, wholesales , and retailers are numerous enough to enable ready liquidation. Storage and packing facilities have increased substantially and there is no reason why frozen foods should not receive the same treatment as other readily marketable staples. 2. Dairy cattle Under existing law loans secured by liens on range animals ( cattle, sheep, goats, horses, mules, etc. ) are exempt from the 10 percent provision. 678 STUDY OF BANKING LAWS The proposed change would add dairy cattle to the list, provided that any such loan to any 1 dealer shall not exceed 25 percent of the bank's capital and surplus. Such obligations must carry with them the dealer's responsibility . Comment : This change appears desirable. Certainly dairy cattle have values equivalent to other types of cattle. 3. Consumer installment-paper Under existing law, if a bank purchases nonnegotiable consumer installment paper from a dealer and the paper is purchased on a full recourse basis, the transaction is subject to the 10 percent limitation. Under the proposed law, obligations as endorser or guarantor of negotiable or nonnegotiable installment consumer paper carrying a full recourse endorsement or unconditional guaranty of the dealer shall be subject to a 25 percent instead of a 10 percent limitation ; provided, that if an officer of the bank certifies that the bank is relying primarily upon he maker or makers (rather than upon the endorsing dealer ) , for the payment of the obligation, then there shall be no limitation other than the limitation of 10 percent wih respect to each maker. Comments : The addition of nonnegotiable paper is desirable . A considerable amount of consumer installment paper is purchased not on a full recourse basis, but on a restrictive repurchaser basis under which the dealer's obligation is limited to repurchasing the repossessed goods. This type of dealer-obligation has been construed by the Comptroller to amount to a guaranty by the dealer, thus making the transaction subject to the loan limitations of this section. However, such a limited obligation of the dealer would not quality as a full recourse endorsement or unconditional guaranty and the bank would, therefore, be limited to 10 percent rather than 25 percent . These provisions should be expanded so as to include in the 25 percent limitation any dealer transaction which is subject to the general limitation provision of this section of the act, and the proviso clause should also be expanded so as to provide that it would cover all such dealer transactions . On page 27 of the committee print the word "appreciable" in line 13 of subparagraph (12) of section 34 should read "applicable . " Mr. ROGERS . Mr. Ely, may I ask you a question ? Mr. ELY. Yes, sir. Mr. ROGERS. At the present time on the restrictive paper you are describing here Mr. ELY. The repurchase paper. Mr. ROGERS . Yes. Does the 10 percent limitation apply at the present time ? Mr. ELY. Yes. The amount of the paper which any 1 dealer could agree to repurchase would be limited to the 10 percent . However , let me point out in most of these agreements the bank could purchase from the dealer unlimited amounts which were not covered by the repurchase . Do I make that clear ? Mr. ROGERS . No. I wish you would amplify it. Mr. ELY. The present practical operation under repurchase involves a contract relationship between the dealer and the bank wherein the bank agrees that in order for the dealer to be liable on any repossessed paper, the bank must repossess the car and present it to the dealer. STUDY OF BANKING LAWS 679 In some cases there are maximum limits indicated to which the dealer is liable. Therefore, depending upon the individual express terms of the agreement, the amount of paper which the bank may buy from that dealer may be far in excess of any limitation , and the dealer would only have to repurchase paper which was repossessed and re-present it. Mr. ROGERS. Would you say that that type of paper represents a large proportion of the total ? Mr. ELY. Yes. I think it is a widely practiced method of operating. Have I made that clear ? You did not look as though I had. I want to be sure I do. Mr. ROGERS. Yes. It is a very technical subject and I think we will want to ask the Comptroller when he comes up as to his feeling on it. Mr. ELY. Yes. The confusing thing about it is that as a practical matter it relieves the limitation completely from the bank, but as a technical matter I believe the limitation is still there. You could not agree with the dealer that he would repurchase in excess of 10 percent. Mr. ROGERS. Thank you. SECTION 35- MAXIMUM RATE OF INTEREST Mr. ELY. This section , relating to maximum rate of interest permissible, contains a new clause which provides that the purchase of obligations or evidences of indebtedness from the owner shall not be deemed a loan or discount so far as interest is concerned, except to the extent they may be so construed under the laws of the State where the bank is located. Comment : This makes it clear that in the purchase of obligations at less than par no usury can result unless by the law of the State where the bank is located. The purchase is not regarded as a loan or discount. This is obviously desirable and also equitable as the purchase, for example, of corporate bonds at less than par should never be regarded as a loan or discount, otherwise it would tend to make many obligations unsalable. SECTION 36- REAL ESTATE LOANS The old provision was in section 24 of the Federal Reserve Act, but as it applied only to national banks this provision is logically inserted in the new National Bank Act. CHANGES IN EXISTING LAW 1. Leasehold loans (subpar. (a) ) The existing law (sec . 24 of the Federal Reserve Act ) permits loans to be made on leasehold interests, but only (a ) if the lease is for a term not less than 99 years, which is renewable, or ( b ) if the lease has a period of 50 years to run from the date the loan is made or acquired by the bank. The new law authorizes loans on leaseholds if the lease has at least 10 years to run after the loan matures, or if the lease may be renewed so that it will not expire for at least 10 years after the maturity date of the loan. 678 STUDY OF BANKING LAWS The proposed change would add dairy cattle to the list, provided that any such loan to any 1 dealer shall not exceed 25 percent of the bank's capital and surplus. Such obligations must carry with them the dealer's responsibility . Comment : This change appears desirable. Certainly dairy cattle have values equivalent to other types of cattle . 3. Consumer installment-paper Under existing law, if a bank purchases nonnegotiable consumer installment paper from a dealer and the paper is purchased on a full recourse basis, the transaction is subject to the 10 percent limitation. Under the proposed law, obligations as endorser or guarantor of negotiable or nonnegotiable installment consumer paper carrying a full recourse endorsement or unconditional guaranty of the dealer shall be subject to a 25 percent instead of a 10 percent limitation ; provided, that if an officer of the bank certifies that the bank is relying primarily upon he maker or makers ( rather than upon the endorsing dealer) , for the payment of the obligation, then there shall be no limitation other than the limitation of 10 percent wih respect to each maker. Comments : The addition of nonnegotiable paper is desirable. A considerable amount of consumer installment paper is purchased not on a full recourse basis, but on a restrictive repurchaser basis under which the dealer's obligation is limited to repurchasing the repossessed goods. This type of dealer-obligation has been construed by the Comptroller to amount to a guaranty by the dealer, thus making the transaction subject to the loan limitations of this section. However, such a limited obligation of the dealer would not quality as a full recourse endorsement or unconditional guaranty and the bank would, therefore , be limited to 10 percent rather than 25 percent . These provisions should be expanded so as to include in the 25 percent limitation any dealer transaction which is subject to the general limitation provision of this section of the act, and the proviso clause should also be expanded so as to provide that it would cover all such dealer transac- tions. On page 27 of the committee print the word "appreciable " in line 13 of subparagraph ( 12 ) of section 34 should read "applicable .' Mr. ROGERS . Mr. Ely, may I ask you a question ? Mr. ELY. Yes, sir. Mr. ROGERS. At the present time on the restrictive paper you are describing hereMr. ELY. The repurchase paper. Mr. ROGERS. Yes. Does the 10 percent limitation apply at the present time ? Mr. ELY. Yes . The amount of the paper agree to repurchase would be limited to the me point out in most of these agreements from the dealer unlimited amounts which which any 1 dealer could 10 percent. However, let the bank could purchase were not covered by the repurchase. Do I make that clear ? Mr. ROGERS . No. I wish you would amplify it. Mr. ELY. The present practical operation under repurchase involves a contract relationship between the dealer and the bank wherein the bank agrees that in order for the dealer to be liable on any repossessed paper, the bank must repossess the car and present it to the dealer. STUDY OF BANKING LAWS indicated which the In some cases there are maximum limits indivito dualexpe de pe nd ing upon the is liable. Therefore, mayy hthe bank of the agreement, the amount of paper whic limitation ,reandthe that dealer may be far in excess of any was possesse wh pa re ic pe h pu r rc w o to ha ha on I uld se ly ve 681 nsibility >t intend eral law paperrepresent a Mr. ROGERS . Would you say that thattype of ith the operat large proportion of the total ? me pr wi Mr. ELY. Yes. I think it is a dely acticed thod of Have I made that clear ? You did not lookas thoughI had . I to be sure I do. g and thinkw su e indiMr. ROGERS . Yes. It is a very technical bject andI feelin gof ms want to ask the Comptrolle when he comes up as to his ɔ practical le . r th at as r ab co in >e a is ou it nf t using thing Mr. ELY. Yes . The ba matter it relieves the limitation completely from the nk, but as a ding. could200 of a technical matter I believe the limitation is still there. You ex per ce re ss of ›e of 10 agree with the dealer that he would purchase in Mr. ROGERS . Thank you . ting INTERE ST SECTION 35- MAXIMUM RATE OF hat interestperm cial Mr. ELY. This section , relating to maximum rate of purchase ofobliga in sible, contains a new clause which provides that the deemed tions or evidences of indebtedness from the owner shall not be extens ma loan or discount so far as interest is concerned, except to the wher e the they may be so construed under the laws of the State obligations ry Comment: This makes it clear that in the purchase of State is at less than par no usury can result unless by the law ofthe where the bank is located. The purchase is not regarded as a los f or discount. This is obviously desirable and also equitable shoul purchase, for example, of corporate bonds at less than par as thed never be regarded as a loan or discount, otherwise it would tend make many obligations unsalable. SECTION 36- REAL ESTATE LOANS The old provision was in section 24 of the Federal Reserve Act , but as it applied only to national banks this provision is logically inserted in the new National Bank Act. CHANGES IN EXISTING LAW 1. Leasehold loans (subpar. (a) ) The existing law ( sec. 24 of the Federal Reserve Act ) permits loans to be made on leasehold interests, but only (a) if the lease is for a term not less than 99 years, which is renewable, or (b) if the lease has a period of 50 years to run from the date the loan is made or acquired by the bank. The new law authorizes loans on leaseholds if the lease has at least 10 years to run after the loan matures, or if the lease may be renewed so that it will not expire for at least 10 years after the maturity date of the loan. 680 STUDY OF BANKING LAWS Comment : This change would liberalize the making of loans on leasehold interests and is more realistic under present- day business practices. 2. Total amount of real estate loans (subpar. ( a) ) Under the existing law the aggregate of real estate loans may not exceed an amount equal to the unimpaired paid-in capital of the bank plus its unimpaired surplus, or in excess of 60 percent of its time and savings deposits, whichever is greater. The proposed law adds a third alternative and permits loans up to 20 percent of the bank's demand deposits. Comment : This appears desirable. As mortgages are generally on an amortization basis the privision will not tend to tie up demand moneys for an unreasonable length of time. As demand deposits do not fluctuate too widely on a long-term basis, it would appear to constitute safe banking practice . 3. Industrial and commercial construction loans (subpar. (C) ) Under existing law national banks may not make loans of this type, construction loans being limited to farm and residential construction. Under the proposed law such loans may be made to finance the construction of industrial or commercial buildings, provided the maturity does not exceed 18 months and there is a valid agreement by a financially responsible lender to advance the full amount of the bank's loan upon completion of the construction. Comment: This appears desirable , as the experience of State banks in this field has been favorable. 4. Total amount of construction loans ( subpar. (C) ) Under existing law a national bank may not make construction loans in excess of 50 percent of its paid-in unimpaired capital. Under the proposed law, a bank may lend on construction loans up to 100 percent of the bank's paid-in and unimpaired capital plus 100 percent of its unimpaired surplus. Comment : It is submitted that the proposed increase in the permissive limit on the total amount of construction loans entails a degree of risk that suggests especial caution unless there is some additional protection, such as a requirement that a completion bond with a responsible corporate surety be furnished the bank. Mr. ROGERS. May I ask you a question at that point ? Mr. ELY. Yes, sir. Mr. ROGERS. Áre you concerned with the construction loans for industrial and commercial purposes, or home loans , orMr. ELY. I am speaking on the overall picture of the total amount of construction loans. Mr. ROGERS . We have a provision here on construction loans for commercial and industrial purposes. There has to be a valid and binding agreement entered into by the lender to advance the full amount upon the completion of the building. Mr. ELY. You are speaking of the take- out long-term lender ? Mr. ROGERS . Yes. Mr. ELY. The problem which we believe bears anxious scrutiny is the possibility that the property might not be completed within the time limit or according to specifications. Senator CLARK. And there would be no completion bond. STUDY OF BANKING LAWS 681 Mr. ELY. And if there were no completion bondSenator CLARK. Then the bank gets stuck. Mr. ELY. Then the lender would be relieved of his responsibility and the bank would still have the long-term loan that it did not intend to make. Senator CLARK. But that would be equally true under Federal law except that the restriction is more stringent . Mr. ELY. That is true, and this particular paragraph deals with the total amount that may be so involved in these types of loans. Senator CLARK . What restriction would you recommend ? Mr. ELY. Senator, that is a question we have thought long and hard upon and it is a hard one to answer because each bank is individual and each construction loan has its own individual problems. The limitation suggested , I believe, would be thoroughly proper in the case of a large bank that was experienced in this type of lending. I believe, however, that I would have some concern in the case of a smaller bank that had not had thorough experience in this type of lending. Senator CLARK . Would you favor any liberalization of existing law? Mr. ELY. Yes, I do. I think particularly in view of the fact that you are permitting construction loans to industrial and commercial concerns, you would have to think in terms of a liberalized provision in the law. Senator MONRONEY. Does that include the FHA and the VA commitments under that category, or do they take a special category ? Mr. ELY. No, sir. I think they would be in the same category because again, if they are not completed according to specifications and time limits you would have the long-term financier relieved of his responsibility. Senator MONRONEY. But generally you have a large number of individual housing units, at least in my part of the country, in which the commitment for the construction loan is backed up by 100 houses, you might say. Mr. ELY. Yes. Senator MONRONEY. Those houses represent a very small liability because the FHA or the VA have given a very definite commitment on those houses. If one happens to be bad it is an easy matter to service it and put it back into shape. However, my builders tell me that the stringency of credit very often makes it impossible to find a buyer for long- term financing, and they do not wish to be held up on the construction loan once they have found it. Since that loan is a Government- guaranteed loan and you know an insurance company is committeed to that loan as long as it meets the not-too-difficult specifications, it seems to me it should have some more latitude than it would if you were building a $ 10 million office building. Mr. ELY. Yes, sir. I do agree with that. Furthermore, in FHA construction loans that you inspect periodically, ordinarily if things are not going along properly you would have that information at -hand with the least possible danger to the financier. But it would be possible for the contractor to run out of funds before he had completed and delivered in accordance with the FHA inspections. 682 STUDY OF BANKING LAWS So there does remain a real risk, although I would agree that the risk is much sounder and much less in degree than in the case of a big apartment house or office building type of construction. Senator MONRONEY. Of course, the limitations in the act are cumulative. They include industrial plant construction loans and might run $20 million, and might include an office building, and then they get that all used up and you find this ever-increasing stringency on housing finance. I for one am getting very worried that you are going to stall completely the whole housing operation, which took so many years to get off dead center in the early thirties. I would like to see a Government-guaranteed loan where you have a commitment from a longterm buyer given some special treatment, so that it would not be on the same basis as the large-scale industrial construction commitment . Senator CLARK. What concerns you, Mr. Ely, is the lack of a completion bond, is it not ? If you had a completion bond you would not be so concerned, would you ? Mr. ELY. That is true, or if you had a really substantial contractor. There are so many individual factors that bear on the problem that it is very difficult to generalize. I share the Senator's concern about residential housing and the feeling that it should not be throttled, but should be provided for ; but some safeguards, perhaps relating the amount that could be expended on residential as distinct from commercial or industrial construction, would go part way toward answering our question. It seems to us that some protective measures should be incorporated to make sure that the contractors' ability to perform was assured , to tie in with provisions of a takeout lender because the takeout lender is only going to take out if the building is properly built and completed within the terms. Senator MONRONEY. But you do have a definite ironclad commitment that if the building meets inspection that this insurance company will take him out. Mr. ELY. That is correct. Senator MONRONEY. That is hard enough to get in today's money market. If they find that the local bank is already committed up to the limit then these fellows have to try to peddle these construction loans around in other States, and, of course, not being customers of the bank they are just told that there is no money available for them. Mr. ELY. Senator, I trust I made it clear we were in favor of increasing the limitation . I want you to get that point. Senator MONRONEY. I understood that, but I am wondering whether on the completely uninsured and large-scale projects, which I agree leaves the bank somewhat vulnerable providing the industrial plant might be built on the shifting sands, or some natural catastrophe happens to hold up for 6 months the completion of that construction . However, on the housing type of loan you have a diversification of the risk. In other words, if something should happen to that contractor it would not be a catastrophe that would happen in a large-scale office building or industrial plant. Someone else could even take over without leaving the bank very badly off. Mr. ELY. I think we are thinking along the same lines, Senator, that to some degree at least the risks are less in housing projects than STUDY OF BANKING LAWS 683 they are in the other types. Therefore, I think some type of limitation which would say that you could go to 100 percent of capital on housing projects under FHA, and the other 100 percent of surplus under residential or construction-type loans would be the sort of thing I had in mind ; or, you could do it by throwing in protective devices through a bonding company or some other kind of security or endorsements that are unrelated to the construction net worth. Some such protective provisions as that. Senator MONRONEY. That is all. Senator ROBERTSON. You may proceed. 5. Working capital loans (subpar. ( C) ) Mr. ELY. A new provision has been proposed which provides that loans to manufacturing and industrial businesses secured by a mortgage on the borrower's real estate shall not be considered "real - estate loans" within the meaning of the section if the bank looks for repayment out of the operations of the borrower's business, relying primarily on the borrower's general credit standing, forecast of operations with or without other security and the mortgage is taken as a precaution against contingencies . Comment : This is an excellent provision, as it enables a bank, which would in most cases make the loan in any event, to protect itself against future adverse changes in the borrower's position. It might well be broadened to include loans to other types of business, such as merchandising and commercial. 6. Public building construction loans A new provision is proposed which provides that loans made to finance the construction of buildings during a construction period not to exceed 36 months, upon the security of purchase contracts entered into pursuant to the Public Building Purchase Act of 1954 or the Post Office Department Property Act of 1954, shall not be subject to the provisions concerning real - estate loans. Comment : This offers an additional field for bank loaning activity and would appear desirable if used by banks conservatively. Senator ROBERTSON. Are there any further questions ? Senator MONRONEY. How long do those securities run ? Mr. ELY. Which securities ? Senator MONRONEY. On the Post Office and Public Buildings Purchase Act ? Mr. ELY. Not to be exceed 36 months, I believe . Senator MONRONEY. That would be the total limitation that would be involved. Senator ROBERTSON. We, thank you, especially for the general tenor of your remarks, which was favorable to the provisions of this bill . You think some of the lending provisions should be a little more liberal. Mr. ELY. You see, sir, I believe the only reservation that we had was with respect to the degree of liberalization on total construction loans. Otherwise everything we have said approves thoroughly of the bill. Senator ROBERTSON. Thank you. Mr. ELY. And I thank you very much, sir. Senator ROBERTSON . The next witness is Mr. John A. Adair from Kansas. 84444-57- pt. 2--16 684 STUDY OF BANKING LAWS STATEMENT OF JOHN A. ADAIR, PRESIDENT, EXCHANGE NATIONAL BANK OF ATCHISON, KANS. Mr. ADAIR. Senator, I appreciate your comments with regard to our not taking too much time. This is an awfully long speech that you see comprises 17 pages. Senator ROBERTSON. That takes about two and a half minutes a page. Mr. ADAIR. I will do the best I can. First I would like to say I am here as a private individual. Senator ROBERTSON. You have just the same right to be heard as if you represented a billion dollars. Mr. ADAIR. Yes, sir. Senator ROBERTSON. Your views might be better than some of the others . I cannot tell. Mr. ADAIR. I think there are certain unique characteristics of the testimony which I will give you. In the first place, I may allay your guessing for a moment and tell you, sir, that I am a Virginian of Virginia parentage. Senator ROBERTSON. The Chair will not hold that against you. Mr. ADAIR. I hope you will not hold that against me, sir. I have members of the family in business in Richmond , one of whom is Harry Augustine, whom you may know. Senator ROBERTSON. Oh, yes. Very well. Mr. ADAIR. President of the State Planters Bank. I want to say that especially because Mr. Augustine does not know what I am about to say, and I am certain he is a national banker and I certainly would not wish to have the Comptroller bring his house down upon him. Senator ROBERTSON. To paraphrase, I may not endorse what you are going to say, but I will defend your right to say it- if you do not take too long. Mr. ADAIR. Thank you, sir. I will speed up. I am going to go very quickly through a number of provisions in this situation and hope that you will not ask questions on it particularly. Senator ROBERTSON . We will refrain from asking you questions. Mr. ADAIR. Thank you. These relate to detailed provisions of the bill which I know you are interested in having specific comments on. Thereafter I would like to pass to the speech, if I may. Before that I would like to say first our bank is the first bank in the Federal Reserve district to be audited by certified public accountants. Secondly, I have had the experience of a defalcation in that bank from an employee . Thirdly, we have had the experience of having our audit kick out a $25,000 mess of fraudulent paper. I think in the light of that, if I overrun the time you will give me a chance to read that portion of my speech which deals with the necessity of stopping stealing in the banks, the greatest problem the banks face today, I think. There has been a failure to tackle and tangle with that problem in all of this legislation that is proposed. First I would like to go to the bill, and in the first place I think that there is a failure to provide for proper and adequate compensation of the Comptroller. The quality of the people we have in Government stems from insufficient inducements, and the only way in STUDY OF BANKING LAWS 685 which you are going to get the level of pay of the people down the line up to what it should be and attract the quality of people we are going to have to have is to start with the salary of the Comptroller. I think it has to be increased. I am going to move over to chapter 7 of the Federal Reserve Act. Senator ROBERTSON. I am not going to ask you a question, but just remind you of this fact : Our distinguished colleague from Oklahoma to my left helped to put through Congress a bill for uniform salaries. We do not have the control of the salaries of the Comptroller just because we have jurisdiction of national banks. That is controlled by another committee, so we did not go into that in this bill. Mr. ADAIR. I understand , but it has a direct bearing on the quality of the supervision and management we have. Point No. 2 is chapter 7 of the Federal Reserve Act. How in the world can you expect and I do not mean to reflect on the quality that prevails at the present time-but how in the world can you expect to get the quality of people you need on the Federal Reserve Board when you limit the salaries to $20,000 ? If you go on into the salaries of the members-the heads of boards of the individual banks, which I would like to put in the record here - there is an apparent and obvious need to provide better compensation. Here are the salaries of the presidents of the different Federal Reserve banks. I do not think that these are out of line, considering the responsibilities involved. Senator ROBERTSON. Again I am not going to ask you a question, but I do want to comment that there are some men more interested in honor than honorariums. Mr. ADAIR. But we cannot run a modern and one of the most important businesses in this country on the chance that they will have sufficient income to take care of honorary jobs. This is a businesslike business that we are running, and we had sure better provide the salary and income that is called for in this sort of occupation . Senator CLARK . I assume you would favor a substantial increase in the pay of Senators and Congressmen ? Mr. ADAIR. I absolutely would, and I will tell you one of the problems in our State of Kansas stems from the fact that we do not have a level of pay that attracts the type of business leaders that we have to have in this country. The salaries of presidents of the Federal Reserve banks are these : Boston, $30,000 ; New York, $60,000 ; Philadelphia, $30,000 ; Cleveland , $30,000 ; Richmond, $30,000 ; Atlanta, $30,000 ; Chicago, $40,000 ; St. Louis, $30,000 ; Minneapolis, $28,000. I think his job up there is just as important as the man at the Federal Reserve Bank in New York. Kansas City, $30,000 ; Dallas, $30,000 ; San Francisco, $35,000. Also I want to add I am here as a stockholder of a Federal Reserve bank of Kansas City. My wife and I own the controlling interest of this bank in Atchison, and the bank has a stock certificate which I dug out the other day and looked at for the first time, that represents an investment of $38,000 . But do you know what that stock cost us, gentlemen ? That stock involves the sterilization of $1 million in reserves. So that stock cost our bank $1,038,000, and I will cover that in my speech. It is worth it. Do not get me wrong. It is well worth it. 686 STUDY OF BANKING LAWS I am going to swing on over to the question of inflation. You gentlemen have had to put all sorts of emergency acts up here and you had better tie any statutory salary limit, whatever it is, to some costof- living index. I will add another thing. All through your legislation you gentlemen failed to change your bonding requirements. You have had inflation in this country and you talk about a $ 100,000 bond back in 1913 or in 1935. It is an entirely different figure today. That is purely technical, Mr. Rogers, and I do not mean to be critical. The same thing is true of criminal penalties. You have $1,000 criminal penalties that will encourage people, so we had better increase that figure. While I am on that point I would like to mention the fact that the treatment that the courts are giving these people who are stealing from these banks is a major concern to this Senate in connection with this legislation. We have got to go on beyond and actually not only see that we have penalties, but do whatever is necessary to see that the penalties are brought to bear. I do not think we can continue to allow stealing from banks and then have the courts say, "My gosh, look how easy you made it to steal. Why, that poor fellow is not paid enough." What about the bank examiners ? They should have higher pay. Take Ellenville. That thing had been going on since 1952 and it took a bright examiner to come in in 1956 and discover it had an odd smell. I do not know what kind of people had been going in there and examining that bank for those 4 years. I do not mean to be critical, as you will see when I get on. The important thing about salaries is it bears on the quality of bank examinations. If you do not start at the top and if we do not get a job done here you are not going to have the quality of people that can do the job. I will try to be quicker. In respect to the provisions of chapter 4, the National Banking Act, new types of capital , I think that is most desirable. I think that will have to be coupled , perhaps, with a new concept which will permit the return from corporations of some of the capital that is in there. There are a lot of people that have money in banks and it is a problem to get it out legally. We are all familiar with that. But we have a lot of excess dollar capital actually in a number of banks. I do think preferred stock and debentures on stock options will do much for your little country bank, which is a major concern of you gentlemen. but stock options are more important to the larger banks where you have marketable stock. It is a means of providing incentives to management where there is very little opportunity for stock ownership. Coming to section 22 , in connection with dividends, I think you have a problem here when you seek to limit the dividend policy of 15,000 banks in the country. I think I would suggest to you that you differentiate between dividends in cash and "kind," for example. There are a lot of hidden equities in banks in the form of other corporate entities. Would you prohibit the spinoff, for example, on a building corporation which would be a distribution in fact of brick and mortar? I think you differentiate between that and cash. I think you have or you may have legislation here that is designed to cure a couple of marauding situations. STUDY OF BANKING LAWS 687 The example that the Comptroller gave was one of where there had been a spinoff and apparently a substantial weakening of the bank's structure . Before you extend that to all banks, discretionary control of dividends, you should give it some further consideration . Incidentally, in that connection, when you learn that we, in the second year of the 5-year waiting period for tax- free spinoff, do not say, "That guy has an ax to grind." Actually , our whole financial plans are predicated on the completion of creation of a separate corporation, which was short circuited by the change in the Federal tax laws of 1954. The question of dividend limitations , I think, presents a lot of other problems, too. It is a question of definition. As to the powers and duties of national banks , the corporate powers under chapter 6, I think you need to redo this problem of insurance on the lives of officers, which has gotten into regulatory law. There is the question of other types of insurance. There is the question of ownership of stock which may not be covered as permitted by law. The question of ownership of oil payments. The ownership of realestate investments. Legally you might look over again the corporate powers that are involved in that section. I would like to move on to another section, section 35, on the maximum rate of interest. There are a lot of States in this country in which the national banks are functioning in violation of the law, actually. In the State of Kansas, as a matter of fact, the day we made our first installment loan in that State we were breaking the law and did not get it cured, or did not get it corrected, until 2 years ago . There may be a problem, and maybe it will stand some further investigation. You do not want a law requiring that banks not break laws when, as a matter of fact, they do. On the question of bank examinations, the reason and the purpose here for the elimination of examination, gentlemen , is because they have not the people to do the job. Frankly, if we get the quality of management I think we should have-the quality of supervisionwe would like to have that bank examiner around a little more frequently. That presumes he can do an effective job in helping a lot of little people in these districts that do not know this is going on. The only way to reach them is through the American banker, but I can assure you the typical banker's desk is stacked high with good intentions and letters and periodicals that he never gets around to reading. If you get around to changing the law he is operating under, frankly, he may not know it. I would like to recommend in that connection a system of regional meetings throughout the country. You may ask me, " Adair, what kind of man are you ? Do you like to appear at public meetings ?" I went to my first meeting on the Hoover report in St. Louis 6 months ago. A gentleman from Alabama was there, by the way. The reason why I went was the possibility of putting tolls on inlandwaterway shipping. We have a terrible problem in our country in providing industrialization and in the preservation of our natural resources in water. The thing that disturbed me when I went down there was the people sitting there on the other side. They were there well organized, and this involved some people who I think were I had better hesitate in saying these things things I am against, which is 688 STUDY OF BANKING LAWS public power and a lot of other centralization and concentration of control. The second thing that impressed me, Senator , and I hope you will be forbearing with me, was that I was given time to talk. So, having very strong feelings about this thing, I felt it might be my opportunity because I was afraid there might not be people down here to hear what I was going to say, but I knew I would be given an opportunity to talk, and also get it in the record. On the question of the confidentiality of examination reports, gentlemen, you had better provide that your certified public accountants have access to those reports, because they have an important responsibility in the protection of our banks. Secondly, I would like to invite your attention to the fact that there is a whole system of confidentiality that has developed within the bank- supervision system that includes material and information that is picked up from a wide variety of sources. Ninety-nine and ninetynine one-hundredths percent of this, I am sure, is good and true, and it is important to have. But there is also evidence that misinformation can get into those confidential reports that are made by the examiners. I was in the Navy for 4 years, gentlemen, and headed a department there. I think it was a very sound move that the Navy made when they permitted a naval officer to see his own fitness report. Somehow and by some means an individual who has been criticized should have an opportunity to be heard, and know what he is battling if there is criticism of him. That, gentlemen, is just a principle that we have got to have. I do not think it is abused. I will be perfectly frank. We were one of those 32 banks last year that presented a problem. Nothing is wrong with us, but we are an odd duck actually. We are odd in that something should have been wrong with us, but it was not. I really would be very interested in seeing some of the information that has gotten into our report, for example, only for the purpose of eliminating things that are technically wrong . I am going to swing over to the Federal Reserve section here, "Division of earnings ." In my opinion the earnings of the Federal Reserve banks have been derived from the member banks. There are $20 billion of reserve funds. I think those funds should be used to improve the banking system. As I am going to recommend in my speech, I think those funds should be available to pay for the cost of audits of our member banks by certified public accountants. Secondly, we are in dire need of research. The Federal Reserve banks all over are doing a swell job in their research departments. The study of the Federal Reserve bank, in Philadelphia, for example, relating to the ownership of banks, is tremendous. The work in agriculture is tremendous, but there is an unlimited opportunity for more research. A little bank cannot afford research, but research is the key to the future growth of our business in this country. That is the reason why I think the big banks are concerned with it and are perfectly willing to pay this money, which is really in the nature of patronage. We have a bankers' cooperative that is what the Federal Reserve bank is. I think the reason why the large banks are concerned about those earnings and are perfectly willing to see them go back to the Federal Government really is because they think STUDY OF BANKING LAWS 689 if we started distributing these funds back to the banks, the next thing you know you would have every nonmember bank in the country wanting interest or return on his deposits with correspondents, or every nonmember bank in this country flocking to membership in the Federal Reserve System. We cannot allow that to happen in this country. In that connection, I was shocked and surprised to find the Comptroller made a statement here some months ago that he thought it would be a good thing for all nonmember banks to ultimately join the Federal Reserve System. I should not quote him because I am sure he had some very good reasoning, and it probably did not embrace all of his thinking, but I want to go very strongly on record that I think it would be the first and greatest step toward nationalization of banks that we have ever had, if that happened. I do not know why the banking industry should be taxed by having that money that has been made on our reserves go back to the Federal Government for roads, and for all other purposes. I just do not think it is the right concept. On the question of the classes of directors , and I am now in chapter 4 on directors of Federal Reserve banks, class C , why should ownership of bank stock by a class C director preclude one's functioning as a director of such a bank? I just want to raise that question. I think the recognition of the fact that the Federal Reserve agent is strictly an administrative function is fine. I was disturbed for a while to see he had to have a quality of having to be tested. I think the expression was an experienced and tested banker. We need more of those gentlemen in the Federal Reserve banks, but he is not the gentleman apparently. On the question of removal of officers and directors, I think there needs to be a place of appeal from administrative decision before you get into the courts. I am not familiar with this Administrative Procedure Act, but we have a legal question right now, for example, with the Comptroller, which is purely technical . We are legal now, I think, but I believe this gentleman here, Mr. Stover, says the law is one thing, and our attorneys tell us something else. There should be some administrative review. We cannot go into the courts to determine that. Some place there should be a place for review. On the question of definition of affiliates, chapter 6, I believe that we need some further definition . This question of the stock ownership "in any other manner" leaves it entirely to administrative determination. For example the ownership of a company that is related to our bank-the control of it happens to be in my mother. My mother does not have any stock in the bank. Control of the bank is in my wife and I. The laws of attribution do not tie in my wife with my mother, but the Comptroller has an entirely different set of attributes over there . Income taxwise also . Mr. Rogers, am I using the word "attribution" correctly? Is that correct ? Mr. ROGERS. It is your testimony, sir. Mr. ADAIR. I have covered chapter 7, organization and powers of the Board of Governors and their pay. I would like to point to the fact that "no member of the Board of Governors of the Federal Reserve System shall be an officer or direc- 690 STUDY OF BANKING LAWS tor of any bank, banking institution, trust company, or Federal Reserve bank, or hold stock in any bank, banking institution, or trust company." I would like to ask why ? I think there is a need for seasoned bankers in this business. Again you are going to have to provide for higher pay. If truly the Federal Reserve banks and the Board are going to reflect some seasoned banking thinking on the banking problems, aside from the problems of controlling inflation and those other things, then I believe that we perhaps need some owner interest in banks vested in the members of that Board. Section 42, subsection ( f) , relating to bank reserves, provides that member banks shall maintain the same reserves against deposits of public moneys as they are required to maintain against other deposits. I think that is discriminatory against national banks in the State of Kansas, for example, because of the fact that public deposits are secured, and there is an exemption from the reserve requirement on those deposits. I do not think you wish to discriminate against national banks or State member banks. Those are the technical things. Senator, I would like to skip the first part of my prepared speech. Senator BENNETT. Mr. Chairman , I should like just to make clear on the record that the witness has used the 30 minutes that the Chair gave him and he has not gotten to his statement. Senator ROBERTSON. The witness seems to have a conception that he can first testify and then make a speech, but we do not divide the privileges up in that way. You can either testify or you can make a speech, but you cannot do both. We assumed you were going to testify and put your speech in the record . Please do not read us all of your speech after testifying for 30 minutes . Mr. ADAIR. I would not. Senator ROBERTSON. We want to be very fair and very courteous to you, and I may assure you that there is a larger number of the committee here today to hear you than any witness previously. Mr. ADAIR. I appreciate that. Could I catch my topic paragraphs and read to you the one thing on defalcations ? That is one thing I would like to do , if I may. Senator ROBERTSON. You may. Mr. ADAIR. First of all, I believe if the banking system becomes nationalized we have lost our freedom. Secondly, as a basic concept I invite your attention to the fact that the typical bank in this country is the bank with a million and a half dollars in deposits and five employees. He is serving the farmer, gentlemen, and not in a county seat town. He is a nonmember bank and he does not have another bank in town to compete with. He is one of the problems of the revolution going on in this country, in its population and agriculture and industry. He is a public utility. Thirdly, I would like to point out just as a concept that when this legislation was passed, gentlemen, you did not have Federal Government in the role that it is in today. The Federal Government and the Treasury Department was concerning himself with currency and money and a few things like that. Today the Treasury Department STUDY OF BANKING LAWS 691 is the most important debtor of our banks, and he is the most important competitor of the banks, seeking deposits. Then, lastly, he is responsible for our greatest expense . He collects a terrific income, over half of our earnings, or, in the case of the little banks, a third of the earnings. I have several recommendations to make. The recommendations are these : First, we must require at least annually unqualified audits by independent certified public accountants of all commercial banks which are members of the Federal Reserve System and Federal Deposit Insurance Corporation, to stop the terrific losses from embezzlement. That question has got to concern itself with a small bank as defined . The reason for heavy losses is money management. If you drop the price of interest on Government bond accounts you have your banks running in the red. Maybe this thing is going to go on forever. Senator Humphrey the other day said that a continuation of the inflation and a failure to reduce taxes would give us a depression that would curl your hair. Gentlemen, if you have a few more banks in this country fail from embezzlement and you begin to develop some further operating losses in these banks, and you will have a money panic in this crisis that will make history, gentlemen. Senator MONRONEY. For the purpose of the record, that was not Senator Humphrey, but Secretary Humphrey who said that . Mr. ADAIR. I stand corrected. Senator MONRONEY. I know Senator Humphrey would like to have it corrected too . Mr. ADAIR. Excuse me. I believe it is going to take further study really to tackle the job here of the small bank. It is going to take you into the income- tax problem, and many other features. Thirdly, I think positive banking and tax legislation must be enacted, which will encourage and facilitate the acquisition of ownership and control of the unit banks by private individuals active in the management of the banks and in the business life of the small towns and communities of this country. Legislation that would promote the regeneration of young bankers with the incentive for a private gain, which originally motivated the founders of the banks of this country, would be an epochal step forward in the economic and social history of this country, and perhaps the world. The reorganization of the Federal income tax laws as they pertain to individuals owning bank shares, and as they pertain to banks as corporations, must necessarily be accomplished. The best protective means a bank can have is to be owned and run by the banker that owns it. He will not be stealing from himself. Fourth, there must be an audit of the mission and management of the several Federal bank regulatory agencies and State supervisory bodies. The purpose would be to adopt a national policy to redefine the purpose of bank supervisory industry and revitalize and adequately compensate its management. Such a program would make certain that all of the best traditions and experience and much of the authority of the office of the Comptroller of the Currency would be preserved, yet, however, transferred to a quasi -public agency such as the Federal Deposit Insurance Corporation, cooperatively owned by the banks rather than continued as a bureau of the Treasury Department, which obviously has several conflicting interests with those of banks, namely, 692 STUDY OF BANKING LAWS as a borrower and debtor, as a lender and competitor for deposits, and as an income-tax collector. You streamline the Federal Deposit Insurance Corporation and the national law, but you just have not streamlined and unified and coordinated the supervision of these banks. If you are going to keep running it with two agencies, it is all right, but not logical. To achieve these objectives I recommend that the Banking and Currency Committee of the United States Senate assume the responsibility for the passage of enabling legislation which will result in the obtaining of appropriations designed to conduct( 1) A thorough inventory and study of our private banking system in all of its aspects, with particular reference to the problems of the continuity of future ownership and management of banks ; and (2) An inventory and study of all of the Federal and State bank regulatory and supervisory agencies to the end that their function will be adapted to the redefined set of requirements and needs of the banking industry to insure the preservation of our private banking system and privately owned financial institutions. It is recommended that maximum use be made of private research organizations , many of which are thoroughly experienced in economic and business research and are equipped and staffed to deal with classified or private business information. Until such time, all contemplated changes in existing legislation should be viewed as of an interim nature, and not be allowed to establish any ultimate congressional intent. One thing I want to read is on the problem of embezzlement. The problem of embezzlement is the No. 1 problem of banks and of the supervisory agents, yet I have been shocked to find that it has been completely ignored in the Study of Banking Laws which includes the recommendation of the agencies. Nineteen hundred and fifty- six was a banner year in the number and dollar amount of bank embezzlements. Three situations resulted in the failure of the bank. Between January 1 and December 5, 1956, according to the Bank Shareowners Advisory League, the total of all reported embezzlements equaled $8,856,000 ; 23 of these exceeded $ 100,000 ; 11 embezzlements exceeded $250,000 and accounted for an aggregate loss of $6,590,000. Here is where they were, and some of them are in your States : $595, 000 West Virginia. 500,000 Pennsylvania_. 608, 500 South Carolina___ 258,000 KansasThe Kansas one broke a bank and wrecked a little community. was a nonmember bank. Pennsylvania___ North Carolina_. Illinois . Texas---- It $300,000 826, 539 467, 228 400, 000 In Texas a bank was broken there. Virginia $300,000 Senator, you said yesterday a little restraint on temptations. I think that is a magnificent word. And checking up on people too, you should tack on to it. $ 934, 771 Illinois_ 1,400,000 New York. STUDY OF BANKING LAWS 693 The total of those large ones is $6,590,038 in losses. Senator MONRONEY . How much of that was tellers or other types of employees, and how much was officers ? Mr. ADAIR. I do not know, sir. Senator MONRONEY. Was not most of it officers and bank presidents ? Mr. ADAIR. I do not know. Senator MONRONEY. The stories I have read indicate it is the higher officers. The normal auditing procedures of the banks have caught up with most of the defalcations that are handled in a routine way. Mr. ADAIR. I want to put in the record the summary of all those in the year. Senator MONRONEY. I think it is good to get them all totaled together. (The figures referred to follow :) [American Banker, November 26, 1956 ] "HAPPY" EMBEZZLEMENT DIP Didn't LAST LONG, 1956 MAY TOP $6 MILLION, SURVEY INDICATES The "happy" downward turn embezzlement took last year did not last long. An American Banker survey for the year ended September 31, indicates 1956 will be worse than the whooping $5,800,000 for calendar 1954. Survey of our news sources actually turned up $6,062,000 for the 12-month period, or close to $5,600,000 for just the first 9 months of this year. Since there are always losses-some of them sizable that are kept out of the press, the total figure is really larger. American Bankers Association totals on embezzlements for first half 1956 nearly match its figures covering all of 1955. Its insurance protective committee chairman, Thomas P. Glavey, vice president of the Chase Manhattan Bank, New York, reported $3,700,000 taken in 35 losses of more than $10,000 was discovered in the 6-month period this year. That compares with $3,900,000 for all of 1955. By the end of June last year, only 25 losses of $10,000 or more were reported, for a total of $1,500,000. On the basis of losses so far, therefore, 1956 has a good chance of beating the 1955 record, a prospect that would set nobody cheering. After taking a tally of 1955, the ABA was "happy to report" this May that the figure "confirms the downward trend in embezzlements." This month, the ABA wasn't picking any trends. If anything the losses looked like they were going the other way. By comparison, the old-fashioned bank robber and burglar over the whole year ended August 31, looted banks for $1,544,000, the ABA said. Holdups dropped from 223 to 163 and burglaries from 57 to 28. EXCESS INSURANCE PAYS OFF The "bright side" of this year's embezzlement picture, Mr. Glavey reported, however, was that only 4 losses exceeded the amounts of fidelity insurance carried in the 1956 first half ; in all 1955 there were 6. What was new in this year's story, however, was that the idea of excess fidelity insurance, pioneered and developed by the Bank-Share Owners Advisory League, came through its baptism of fire. League member bank, the National Bank of South Carolina, Sumter, victim of a $608,000 embezzlement discovered last May, didn't lose a dollar. Four hundred and eight thousand dollars was paid out under terms of the league policy which covers losses up to $1 million no matter when the loss started. Losses under $10,000 are hard to gage. No agency reports them. An American Banker survey for the year through its correspondents brought out a total of $165,200. But it should be remembered, they are only the losses that are reported in the press. Of the smaller losses under $10,000, many are never reported, or they fall into teller shorts or the familiar "mysterious disappearance." It's this type of loss that insurance men claim has soared in the postwar years and "bled" the rate up. 694 STUDY OF BANKING LAWS Expensive to track down, since most are $50 or under, the insurance firms pay, but with increasing complaints. There has been serious talk in the industry, as a result, about trying to put in a $50 deductible clause. Though any such plan would have to buck the ABA, some of the industry hope to make it palatable by offering banks who take it a discount on their surety coverage. Others say they can't afford it-that it's either some such self-imposed deductible or a boost in rates that the bankers face. Reported by American Banker correspondents, the list of banks hit by embezzlements over the last four quarters follows : FOURTH QUARTER, 1955 $100,000-Bank of Ahoskie, Aulander, N. C. $93,780-Staten Island National Bank & Trust Co., Staten Island, N. Y. $85,601-Wichita Falls National Bank, Wichita Falls, Tex. $38,220-Commonwealth Trust Co., Pittsburgh, Pa. $37,000-Grace National Bank, New York, N. Y. $24,000-Bank of Bethesda, Washington, D. C. $22,000-First Pennsylvania Bank & Trust Co., Philadelphia, Pa. $14,941- Davis Square Branch, Middlesex County National Bank, Sommerville, Mass. Under $10,000 : $9,431- Bank of Fredricksburg, Richmond, Va. $8,076 Union Market National Bank, Watertown, Md. $6,700 -Fidelity National Bank & Trust Co. , Oklahoma City, Okla. $5,681 - Peoples First National Bank & Trust Co., Pittsburgh, Pa. $5,100- Mercantile Trust Co. , St. Louis, Mo. $5,000- National Bank of Burlington, Burlington, Iowa. $4,200 -Commonwealth Trust Co. , Pittsburgh, Pa. $3,500-Farmers State Bank, Brush, Colo. $3,200- Merchants Bank of Gallup, Gallup, La. $2,600-First National Bank of Goshen, Goshen, Ind. $2,000-Hudson Trust Co. , Hoboken, N. J. $1,725- National Bank of Fredricksburg, Richmond, Va. $1,642-Commercial Bank of Lexington, Lexington , N. C. $1,533- Second National Bank, Washington, D. C. $1,350-Calumet National Bank, Hammond, Ind. $1,167-Central Pennsylvania National Bank, Philadelphia, Pa. $1,000- Teutonia Bank, Milwaukee, Wis. $715-Whitney National Bank, New Orleans, La. $250 First National Bank of Tarpon Springs, Tarpon Springs, Fla. FIRST QUARTER, 1956 Over $10,000 : $595,000-Fairmont National Bank, Wheeling, W. Va. $500,000- Girard Trust Corn Exchange Bank, Philadelphia, Pa. $258,000- Smalon State Bank, Salina , Kans.- Failed. $171,000- Springfield Marine Bank, Springfield, Ill. $134,000-Commercial & Savings Bank, Santa Monica, Calif. $75,000-Joshua Monument National Bank, Twentynine Palms, Calif.Failed (excess over $678,000 originally reported ) . $31,709-Liberty Discount & Savings Bank, Carbondale, Pa. $22,374-Citizens State Bank, McPherson, Kans. $19,434- First National Bank, Greeley , Colo. $14,701 - First Citizens Bank & Trust Co. , Fayetteville , N. C. $14,000-Winchester Savings Bank, Boston, Mass . $12,479-Trade Bank & Trust Co. , New York, N. Y. $10,550- Industrial Bank of Commerce, Bronx, N. Y. STUDY OF BANKING LAWS 695 Under $10,000 : $9,762 Bank of Dah'gren, Dahlgren, Va. $7,300 Havre de Grace Bank & Trust Co., Baltimore, Md. $5,800 First Federal Savings & Loan Association of Shreveport, La. $5,050 Phillipsburg Trust Co. , Belvidere , N. J. $3,354-Broad Street Trust Co., Philadelphia, Pa. $2,000-Brotherhood State Bank, Kansas City, Kans. $ 1,500-El Paso National Bank, El Paso , Tex. $1,200 Mutual National Bank, Chicago, Ill. $1,193 Wilkes-Barre Deposit & Savings Bank, Wilkes-Barre, Pa. $574-Citizens National Bank ( Magnolia Center branch) , Riverside, Calif. $120-Bank of St. Helens, Louisville, Ky. $405 Dakota State Bank, Colman, S. Dak. SECOND QUARTER 1956 Over $10,000 : $608,000- National Bank of South Carolina, Sumter. $300,000-Girard Trust Corn Exchange Bank of Philadelphia, Pa. $120,000- Fort Worth National Bank, Fort Worth, Tex. $50,000-Peoples State Bank, Archbold, Ohio. $28,231- South Carolina National Bank, Georgetown, S. C. $25,000- Edgewater National Bank, Edgewater, N. J. $22,774- First National Bank of Philadelphia, Pa. $16,800- City Industrial & Savings Bank, Greensboro, N. C. $10,000-American Bank & Trust Co. , Racine, Wis. Under $10,000 : $9,412 King George County Bank, Richmond, Va. $9,000- Waren National Bank, Sheffield , Pa. $7,299 Bank of Silver Spring, Silver Spring, Md . $2,136 Security First National Bank, Los Angeles, Calif. $2,132- Hibernia National Bank ( Mid -City branch ) , New Orleans, La. $1,100- St. Johns National Bank, Grand Rapids, Mich. $ 30- Marine National Exchange Bank, Fort Worth , Tex. $800 Industrial State Bank, Kalamazoo, Mich. $701 - Howard Savings Institution , Newark, N. J. $690 First National Bank, Myrtle Beach , Fla. $319-Peoples Bank in Zebulon , Zebulon , N. C. $368 North Fort Worth State Bank, Fort Worth, Tex. $360-Mechanics National Bank, Concord , N. H. $140 First National Bank in Dallas, Dallas, Tex. THIRD QUARTER- 1956 Over $10,000 : $826,539- First-Citizens Bank & Trust Co., Kinston, N. C. $ 167,228- Lawndale National Bank, Chicago, Ill. $200,000- Farmers & Merchants Bank, Franklin, Va. $68,000-Germantown Bank, Germantown, Md. $50,000- Merchants & Farmers Bank, Franklin, Va. $74,000 - St. Joseph Bank & Trust Co., South Bend , Ind. $35,000-Palo Pinto County Bank, Fort Worth, Tex. $25,596-State & Savings Bank of Bridgeman, Bridgeman, Mich. $22,892- Farmers Bank of Elk Creek, Roanoke, Va. $21,000 First National Bank, Waynesburg, Pa. $20,575- Merchandise National Bank, Chicago, Ill. $20,000-Newton Savings Bank, Newton , Ill. $12 340- Santa Fe National Bank, Santa Fe, N. Mex. $10,000- First National Bank, Neenah, Wis. 696 STUDY OF BANKING LAWS Under $10,000 : $8,200- Bank of America, Los Angeles, Calif. $5,743 First National Bank, Niles, Mich. $3,030-Manchester Bank of St. Louis, St. Louis, Mo. $2,500-South Carolina National Bank, Charleston, S. C. $2,120-State Planters Bank of Commerce & Trusts, Richmond, Va. $1,500-International Bank of Tampa, Tampa, Fla. $750-Bank of Denver, Denver, Colo. $500- North Side Bank, Jennings, Mo. $488-Illinois National Bank, Springfield , Ill. $380-Littleton National Bank, Littleton, Colo. $350-Fort Lee Trust Co., Newark, N. J. $300-Corpus Christi National Bank, Corpus Christi, Tex. $145-Citizens & Southern National Bank, Macon, Ga. $31- State National Bank of Robstown, Robstown, Tex. P. S.- Have we missed any ?-Editor. Bank-Share Owners Advisory League, 33 South Clark Street, Chicago 3, IILwe welcome your membership and your inquiries. Mr. ADAIR. I would refer the committee to some statistics available on that. Mr. Saylor of the Federal Deposit Insurance Corporation has done a very thorough job in the past of analyzing and classifying the several types of defalcation , and my impression is one of the men to watch particularly is the top man. Senator CLARK. I think quite inadvertently you read Pennsylvania in the record twice , once for $500,000 and once for $300,000. I wonder if you wanted to do that ? Mr. ADAIR. Yes. $300,000 for Pennsylvania. I stand corrected. No. It is in there twice. There were two situations. That is why it was read twice. Senator CLARK . That means a total of $800,000 for Pennsylvania ? Mr. ADAIR. No. It means the total of those I believe that were in excess of $ 100,000 . No. I take that back. The total of those that aggregated in excess of $250,000 each. Senator CLARK. Perhaps you will clarify the record by having one figure for Pennsylvania where you have one figure for every other State ? Mr. ROGERS . There are two for Illinois. Mr. ADAIR. In Illinois there were two situations also . These are not figures for aggregate losses. The aggregate losses were nearly $9 billion. These cover $61 / 2 billion. Senator CLARK . Wait a minute. Million, not billion. Mr. ADAJR. Yes, sir. Inflation cannot make it that bad. I think it is significant that losses from January 1 , 1953, to December 5 , 1956, which is a 3-year period, aggregated $26 million, or an average annual loss of $6,546,000. Of course, I believe the essence of supervision is to keep and preserve the capital of the banks. I invite your attention to the fact that between January 1 , 1934, and 1956 , there were $ 143 million in losses. The average annual rate was the same $6,500,000 . It looks like it goes on statistically. A reprint of the American Banker dated November 26, 1956 , which carries a listing of the defalcations in the last quarter of 1955 and the first three quarters of 1956 is already in the record . This is a sickening and alarming picture, is it not ? The invisible economic losses which flow from defalcations in our commercial banks are tremendous, yet incalculable. These include lost income taxes, insurance losses, the burden of cost on the FBI and STUDY OF BANKING LAWS 697 State investigating agencies, the courts and to our penal institutions. Perhaps the worst loss is public confidence in our banks. The supervisory agencies always have an out, for printed on the bottom of each examination report of a national bank is this disclaimer. I quote : In making this review, it should be kept in mind that an examination is not the same as an audit, and this report should not be considered to be an audit. There is only one answer to the problem of embezzlement and defalcation . Give the audit function to private enterprise, our independent professional certified public accountants. Require an unqualified certificate, detailed definition of scope of each job, pay the accountant well, and I predict that they will get the job done at a savings to our industry and to Government . Neither the staff of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve, nor State supervisors, could be expected to perform this function for which they are not especially trained. Perhaps some legislators and certainly the public in general do not understand the difference between an examination by the bank examiners and an unqualified audit by an experienced firm of certified public accountants. Testimony can be put into the record on this matter, if the committee desires, by having testimony from a certified public accounting firm appear before the committee. The certified public accountant will insure the institution of good and uniform accounting, from which can be developed a better quality of figures, for the industry. These will assist bankers in the improvement of management techniques. An unqualified audit by a certified public accountant automatically includes tax accounting and a determination of tax liability, and corporate compliance with other law, such as usury, wage and hour and national security laws. These functions have not been properly performed by the supervisory agencies. The good certified public accountant who conducts an annual audit will, over a period of time, effect savings in taxes and reduction of operating expenses, from the institution of modern methods and systems, which will more than pay for the cost of his services. I am certain that comes within the purview of the objectives of this committee. The accountant's bill for audit should not be added to the banker's present costs of being regulated. The expenses are already burdensome. Here are the costs of an $11 -million bank in 1956 , with which I am familiar. Senator BENNETT. We have all of those figures before us in your statement. Can they not just be put in the record? Mr. ADAIR. I will, sir. Senator BENNETT. That will show it. Senator CLARK. Mr. Adair, I think we can assure you the members of this committee will give your testimony careful consideration, and perhaps we will get a chance to read it in a less hurried atmosphere. Mr. ADAIR. Thank you. That will be all then, and I wish to say I appreciate your forbearance. Senator ROBERTSON. You wish to have your prepared statement printed in full in the record ? Mr. ADAIR. Yes, sir. 698 STUDY OF BANKING LAWS Senator ROBERTSON. Without objection, that will be done, and if there are no other questions, we thank you. ( The prepared statement of Mr. Adair follows :) STATEMENT OF JOHN A. ADAIR, PRESIDENT, EXCHANGE NATIONAL BANK OF ATCHISON PREMISE It is my understanding that : The committee's study is limited to a consideration of legislation to ( a ) improve the basic structure of our financial system rather than ( b ) attempt to alter fundamental concepts. The objective therefore is a constructive discussion of the issues among individuals and among organizations in the financial field . In commencing this speech, I would like to invite the committee's attention to what I believe are fundamental concepts and premises. First : If our banking systems become nationalized the people will have lost their freedom. The liquid portion of the wealth of the people of this Republic, either as individuals or organized for business as proprietors, partners, or as corporations, in the form of demand or savings deposits in banks and perhaps life insurance cash values is the very essence of freedom and of our capitalistic system. Any limitation whatever on the pristine right of the owner of this capital to take it down and to do with it whatsoever he might would be a threat to our system . Unrestricted access to, and the right to use, this wealth is what we mean when we say that we have a "private ownership system." The institutions in which these funds are entrusted are truly the source and the stream itself of the country's, and increasingly the world's, " credit." Wealth in this form in these financial institutions is truly an important part of the free market of private ownership. Its judgment and functioning have permitted the growth of this magnificent capitalistic system of ours which ultimately I believe will free all men in this world. I do not mean to be too fundamental, or rather I should say elemental, but we must continuously remind ourselves that certainly two of the primary differences between our country, with its capitalistic private ownership system, and other countries is : (a ) Free education and a high incidence of high school and college educated people. (b) The remarkable availability to, and use of, credit by the individual members of our society. (c) This goes hand in hand with our unique free and privately owned financial and banking institutions. At this point, I wish to invite your attention to some facts about our banking structure. For by being ever mindful of the nature of these institutions we can best consider modifications of Federal laws which govern the environment in which they must continue to live and breathe or wither on the vine and die. I refer to withering or death for just as some founding father once said, "The power to tax is the power to destroy. " so today is it also true, "The power to regulate is the power to destroy." But more importantly I could add, "The power of constructive legislation may be the source of new life for our industry." There were 14,247 commercial banks as of June 30, 1956. The typical bank in the Nation is comparable to the typical Kansas bank, for which I have detailed statistical data. This bank is a State bank. It is not a member of the Federal Reserve System, but it is a member of the FDIC. The bank is not in a county seat town, and it is the only bank in town. Its average deposit structure is as follows : Amount Time deposits . Demand... Total deposits . Total capital, surplus and undivided . $265,000 1,282 000 1,547,000 110,000 Average number of accounts 226 1,092 Average balance per account $702 928 Operating profits before taxes were $20,700, net after taxes $15,400, dividends paid to stockholders $3,600, which represented a 3.3 percent return on invested STUDY OF BANKING LAWS 699 capital. This, gentlemen, is truly a picture of American small business, which will appeal particularly to Senator Sparkman of Alabama. The bank's staff is five people, 2 officers, and 3 employees. Total salaries are $20,000 an average of $4,500 per employee. It is a unique business entity ; a local retail business and yet a corporation. It pays the Federal Government 30 percent of net taxable income. Comparable units are usually in proprietorship or partnership form, and probably pay less tax. These country banks are of a public-utility nature ; each is vital to the proper economic functioning of its community. Their aggregate importance to the country as a whole is obvious. The rural banks are the farmers' source of credit, and in 1954 supplied over 84 percent of all farm-production loans made by banks, production credit associations, and the Farmer's Home Administration combined for any purpose. Certainly half of all farm equipment financed is financed by banks in contrast to dealers' and manufacturers ' outlets. The rural banks have the job of financing the future mechanization of American agriculture. The rural bank is the primary source of credit for our public bodies in Kansas, particularly the small units of government. By number, 90 percent of all business loans outstanding is to small business and "most of the Midwest's bank credit for small business is extended by small rural banks ." Much of the compensation of the officers of our typical commercial bank is derived from income which does not reflect itself in bank statements of earnings. Sources are commissions on insurance and farm sales, fees as executor or trustee. Except for income from these sources, thousands of these banks would have long since been liquidated. Second : The fundamental concept is that the Treasury Department of the United States is now the most important debtor of our banks, as well as an invincible competitor. Inevitably it must control the price it pays for money and keep rates low ; correspondingly its powers are such that it can and actually is slowly but surely sucking away our deposits. This was not the case when present laws up for review were put on the statute books. As late as 1935 when the total loans and investments of all commercial banks exceeded $30 billion, investments in Government securities amounted to less than $10 billion. This was a period of deflation when deposits and private demand for credit were low. Bank holdings of United States Governments are at a level around $55 billion at the end of 1956, while loans have climbed to over $90 billion and reflects an abnormal increase in loans occasioned by the high level of business activity and continued inflation of prices . It is only logical for this borrower to feel that his interests transcend the importance of the lender, and he is going to want to dictate his own terms notwithstanding the efforts of the Federal Reserve. President Eisenhower, in his budget message to the Congress, has told us that "substantially lower rates on Government debt is an objective of the administration, which must be achieved in time, when he said : "Substantial reductions in interest rates cannot be expected until there is a better balance between the present pressure of heavy credit demands and the supply of savings." But, gentlemen, if we keep on going as we are each year a few more banks will pop ( and don't you think that each one of these things doesn't have its influence on public confidence ) , deflation will surely set in, and money rates will decline, bank earnings will drop, and this will bring a liquidation of a lot of rural banks, and this brings me to four recommendations for constructive legislation . RECOMMENDATIONS First : We must require, at least annually, unqualified audits by independent certified public accountants of all commercial banks which are members of the Federal Reserve System and Federal Deposit Insurance Corporation, to stop the terrific losses from embezzlement. Second : Legislation must be passed which is designed to prevent our banks from entering a period of heavy operating losses- and I do not mean that the banking industry needs a peppercorn of subsidy. Such legislation must concern itself with the affairs and profitability of a large number, perhaps 10,000 or certainly 5,000, of the 14,000 banks in the country which have very serious problems of staying in business profitably and serving their rural communities in the uncertain years ahead. The problem, in other words, is "How best to keep our small banks profitable for bank stockholders" rather than "How to improve the laws under which regulatory agencies work to keep the banks safe for the depositors . " By the latter definition our concern is primarily with 32 84444-57- pt. 2—17 8 700 STUDY OF BANKING LAWS problem banks, according to testimony of Mr. Gidney, a few months ago, or the 7 bank cases handled by the FDIC in 1955, which were charged with unsafe or unsound banking practices or violations of law or regulation. This approach will take us nowhere. If we approach the problem capitalistically, expand the small banks' potential by eliminating the burden of Government competition and reduce their excessive tax load, the outlook for our many small banks can be profitable and favorable. Third : Positive banking and tax legislation must be enacted which will encourage and facilitate the acquisition of ownership and control of the unit banks by private individuals active in the management of the banks and in the business life of the small towns and communities of this country. Legislation that would promote the regeneration of young bankers with the incentive for a private gain, which originally motivated the founders of the banks of this country, would be an epochal step forward in the economic and social history of this country and perhaps the world. Reorganization of Federal income tax laws as they pertain to individuals owning bank shares and as they pertain to banks as corporations must necessarily be accomplished. Fourth : There must be an audit of the mission and management of the several Federal bank regulatory agencies and State supervisory bodies. The purpose would be to adopt a national policy to redefine the purpose of bank supervisory industry and revitalize and adequately compensate its management. Such a program would make certain that all of the best traditions and experience and much of the authority of the Office of the Comptroller of the Currency would be preserved, yet however transferred to a quasi-public agency such as the FDIC cooperatively owned by the banks rather than continued as a bureau of the Treasury Department which obviously has several conflicting interests with those of banks ; namely, as a borrower and debtor, as a lender and competitor for deposits, and as an income tax collector. Lastly, to achieve these objectives, I recommend that the Banking and Currency Committee of the United States Senate assume the responsibility for the passage of enabling legislation which will result in the obtaining of appropriations designed to conduct(1 ) A thorough inventory and study of our private banking system in all of its aspects, with particular reference to the problems of the continuity of future ownership and management of banks ; and (2 ) An inventory and study of all of the Federal and State bank regulatory and supervisory agencies to the end that their function will be adapted to the redefined set of requirements and needs of the banking industry to insure the preservation of our private banking system and privately owned financial institutions. It is recommended that maximum use be made of private research organizations , many of which are thoroughly experienced in economic and business research and are equipped and staffed to deal with classified or private business information. Until such time, all contemplated changes in existing legislation should be viewed as of an interim nature, and not be allowed to establish any ultimate congressional intent. First. The problem of embezzlement is the No. 1 problem of banks and of the supervisory agents, yet I have been shocked to find that it has been completely ignored in the Study of Banking Laws which includes the recommendation of the agencies. 1956 was a banner year in the number and dollar amount of bank embezzlements . Three situations ( * ) resulted in the failure of the bank. Between January 1 and December 5, 1956, according to the Bank Shareowners Advisory League, the total of all reported embezzlements equaled $8,856,000 : 23 embezzlements exceeded $100,000, 11 embezzlements exceeded $250,000, and accounted for an aggregate loss of $6,590,000 . They were : 1. West Virginia . $595,000 2. Pennsylvania.. 500,000 3. South Carolina_ 608,500 4. Kansas * _ 258,000 300,000 5. Pennsylvania . 6. North Carolina. 826, 539 7. Illinois . 467, 228 8. Texas* 400,000 9. Virginia_ 300, 000 10. Illinois_ 934, 771 11. New York* . 1, 400, 000 Total__ 6, 590, 038 701 STUDY OF BANKING LAWS Average annual loss $6,546, 000 6, 500,000 Losses from Jan. 1, 1953, to Dec. 5, 1956, $26,188,000 . Losses from Jan. 1, 1934, to 1956 ( estimated ) , $ 143,000,000_ A reprint of the American Banker dated November 26, 1956, which carries a listing of the defalcations in the last quarter of 1955 and the first three quarters of 1956 is provided for the record. This is a sickening and alarming picture, isn't it? The invisible economic losses which flow from defalcations in our commercial banks are tremendous, yet incalculable. These include lost income taxes, insurance losses, the burden of cost on the FBI and State investigative agencies, the courts, and to our penal institutions. Perhaps the worst loss is public confidence in our banks. The supervisory agencies always have an out, for printed on the bottom of each examination report of a national bank is this disclaimer, I quote : "In making this review, it should be kept in mind that an examination is not the same as an audit, and this report should not be considered to be an audit report. " There is only one answer to the problem of embezzlement and defalcation. Give the audit function to private enterprise, our independent professional certified public accountants . Require an unqualified certificate, detailed definition of scope of each job, pay the accountant well, and I predict that they will get the job done at a savings to our industry and to government. Neither the staff of the Comptroller of the Currency, the FDIC, the Federal Reserve , nor State supervisors could be expected to perform this function for which they are not especially trained . Now, perhaps some legislators and certainly the public in general do not understand the difference between an examination by the bank examiners and an "unqualified" audit by an experienced firm of C. P. A's. Testimony can be put into the record on this matter if the committee desires, by having testimony from a certified public accounting firm appear before the committee. The C. P. A. will insure the institution of good and uniform accounting, from which can be developed a better quality of figures for the industry. These will assist bankers in the improvement of management techniques. An unqualified audit by a C. P. A. automatically includes tax accounting and a determination of tax liability, and corporate compliance with other law, such as usury, wage and hour, and national security laws. These functions have not been properly performed by the supervisory agencies . Theg ood C. P. A. who conducts an annual audit will, over a period of time, effect savings in taxes and reduction of operating expenses, from the institution of modern methods and systems, which will more than pay for the cost of his services. The accountant's bill for audit should not be added to the banker's present costs of being regulated . The expenses are already burdensome. Here are the costs of an $11 million bank in 1956 : Direct cost : $4, 413 Cost of FDIC insurance (net of dividend ) . 933 Cost of bank examination__. 1, 427 Cost of fidelity bond ---3,500 Cost of audit by C. P. A.'s (percent of total ) 2,000 Cost of internal audit ( operating ) – Total direct cost (4.6 percent) Membership in Federal Reserve System ( $1,000,000 at 3 percent ) – 12, 273 30, 000 42, 273 Total expense of regulation____ The examination procedures of the bank agencies includes considerable audit work which, since it is inconclusive, represents a substantial misdirection of effort and in great measure a waste of money and time. The savings would defray a substantial portion of the cost of audits. Tax law might permit the cost of such audits to be a 100 percent credit against Federal income taxes. A credit for audit expense in the calculation of FDIC assessments of nonmember banks would be reasonable. Federal Reserve banks should absorb from profits the cost of member bank audits. The second major problem with which constructive legislation must concern itself is future bank profits. 702 STUDY OF BANKING LAWS A reduction of 1 percent of the average yield of marketable United States Government securities would cut in half (from $21,000 to $ 13,000 ) the net operating profit of the above referred to typical country bank, with $1,500,000 deposits, using its figures for the year 1955. A comparable decline in the bank's yield from loans would inevitably occur and this would reduce our typical bank's profit before taxes to $7,500. Yes, your banks in the conventional sense would commence to go broke from operating losses. The borrower, the Treasury Department, might provide a subsidy through some special issue of bonds, but no subsidized industry is free. In effect, the banking business and credit would become nationalized. A mortal blow would have been struck our capitalistic system . Should yields rise further, many banks would technically be broke. Under present conditions, the banks become subject to stringent control of the borrower through the exercise of administrative discretion of the regulatory agencies which in the case of national banks means an office of the borrower, our United States Treasury Department. I would never suggest that this office or other regulatory agencies might exercise it improperly ; certainly, however, it is a very strong medicine for a Government agency controlling finance to have around in a free enterprise country. As national bank regulations now stand, examiners may discriminate against the credit of State and municipalities by requiring the write-off of premiums or depreciation . They may impose an entirely different set of requirements in respect to Government securities. It is quite apparent that money management by our Federal Reserve Board has a whipsawing effect on bank profits and values, and may have produced a serious threat to the future of our entire commercial banking structure. This obviously was never the purpose of the planners and builders of our present banking system. Under these conditions, if we are to prevent the free market of credit from becoming further dominated and controlled by the United States Treasury, it must be discouraged from banking its own debt and from competing directly for the savings and demand deposits of the public by the sale of nonmarketable Government bonds. From the point of view of the banking system as a whole, what is the difference between the Post Office Department's sale of postal savings certificates and the Treasury Department's sales of series E, J, H and K bonds ? A thorough study should be made of the employment by the several United States Government and agency trust funds in their own and special United States or agency securities. This bootstrap operation which in 1940 involved only $7 billion of a total debt of $50 billion now involves $55 billion of a total debt of $278 billion. The only larger holder of Government debt as a class are individual investors, who own $67 billion . Another major factor which unless stopped will contribute perhaps most to the decline in bank profits and the death of small banks is the growth in State Government banking. In 1950 State governments had $8 billion or 13 percent of total time deposits invested in United States Government securities. In 1956 the figure was $16 billion or 20 percent of total time deposits. This will surely result in a necessity to build a replacement mechanism in the form of an expanded Small Business Administration, Farm Credit Administration agencies, Farmers' Home Administration, and other yet unborn instrumentalities of Government who do a job which could best be done by a healthy commercial banking industry comprised of unit privately owned banks. Constructive legislation in other areas will directly improve bank profits namely : (a ) Permit all banks to sell credit life insurance, mortgage insurance, and insurance on all mortgaged property. The criteria limiting this authority to banks should depend upon whether other competitive lending institutions are in the business. (b ) Return the earnings of the Federal Reserve Banks to its members. They are derived from the earnings on the $20 billion reserve balances of member banks. To siphon these profits off to the United States Treasury imposes an additional tax, on the banks of this country, and overlooks the essence of the relationship of this banking cooperative . Such a policy would be consistent with Federal policy in respect to the Federal land banks, Federal intermediate credit banks, and banks for cooperatives. (c ) Increased assessment rebates or patronage refunds to the non-Federal Reserve members of the Federal Deposit Insurance Corporation . An equalization of returns to Federal Reserve members and nonmembers must be effected STUDY OF BANKING LAWS 703 so that there will be no financial attraction developed which would kill our dual banking system by further increasing membership by existing banks in the Federal Reserve system. The third problem that must be tackled now involves both positive banking and tax legislation, and it stems from the lack of equity capital in the hands of the present generation of young and middle-aged bankers who have grown up during a period of inflation, high personal income taxes, and without the benefit of a good inheritance or the good fortune of having married wealth, particularly the only daughter of a banker who owned all or a lot of his bank. In fact, the law and regulation have both been designed to prevent many of the usual corporate, financial and tax avoidance techniques which necessarily are involved in equity acquisitions of modern corporate business. We saw in some of the recommendations of the agencies such as the proposal to control dividends and to control the investment of pension and profit-sharing plans a somewhat uncapitalistic understanding or interest in the terrific problem of helping the transfer of ownership and control of banks from the dead hands of the past to present bank management. Gentlemen, it isn't going to happen by itself. Either chain or branch banking will inherit the problems after there has been a liquidation of thousands of small banks, if you do not get out the watering pot of capitalism "profits" -and assist the ambitious yet seasoned banker or bankers in partnership to acquire their own business . There is equity capital available for a sound economic and potentially profitable bank property. The cost, of course, is a good chance for capital gain. Existing banking legislation has concerned itself with the dollar protection of capital, surplus, undivided profits, reserves, and fidelity insurance. In my opinion, the future of free private banking hinges more importantly on the adequacy of management capital. Second only in importance to audits for banks as a prescription for safety is the presence of the owner-management influence on a bank. A careful review should be made of existing tax laws in light of their effect on the continuity of owner-managers of our commercial banks. The industry if it is to be returned to health and vigor must be provided special tax benefits considerations, which would : Exempt dividend exemptions to ownership of bank shares. Encourage the development of pension and profit-sharing plans. Provide for special and rapid depreciation of new buildings and equipment, most of which actually is obsolete in the light of projected bank service needs. The corporate income-tax rate for banks with net incomes under $25,000 should be reduced. The encouragement of multiple corporate entities is a further sound means of isolating banks from risk and the unacceptable loads of income taxation. Increases in provision for bad debt reserves and new provisions for book losses in securities would appear to be reasonable. I am very much in favor of the provision in the bill providing for bank's issuance of preferred stock and debentures, particularly if these provisions are coupled with the firm conveyance of congressional intent that capital or preferred may be issued by a bank to facilitate a revitalization of bank owner management. A debenture subordinated to the claims of depositors, deferred as to principal payments, with such only payable from earnings, would have all of the advantages of preferred stock capital, yet enjoy the advantage of interest payments being deductible for Federal income tax purposes. The "sacred cow" of a bank now owning its stock, except building and safe deposit companies, should be changed and in this connection the hundreds of millions of dollars of hidden value in the banks in the form of such illegal assets should be given thorough airing, study, and review. In my opinion, this extends to the regulatory agencies on improper and undesirable discretionary control which is not provided for by legislation and was not the intent of Congress to convey. The purchase by a bank of its own stock from the estate of an active officer from the proceeds of an insurance contract on his life which the corporation legally may now buy is the type of transaction that it is folly for present banking law to prohibit. Fourth Gentlemen, the reorganization of the supervisory agencies is going to be a terrific problem because there is right now an acute shortage of bank examiners throughout the country. Only last week, the banking editor of the 704 STUDY OF BANKING LAWS New York Times, who is now New York State superintendent of banks, pointed out that a high percentage of the examining forces are above the retirement age. The topflight career people who came into the service during the depression period and now approaching retirement cannot be counted on to stay in the service for long, and need seasoned replacements. In both State and Federal Government, it is difficult to recruit younger men for the post because they do not believe that remuneration is adequate for the responsibilities and all of the inherently unpleasant and unattractiveness of the job as it is now done. As proof of this, the 1955 Annual Report of the Chairman of the FDIC revealed that agency's personnel turnover at 14.2 percent. This situation suggests that emergency salary increases be made in the salary scale for all employees of the agencies concerned from the top down. Concurrently and immediately, a detailed management audit under the direction of this committee or the President if necessary for reference to Congress. In passing on from a discussion of this problem we must pause and take cognizance of the fact that legislation with which you are concerned overlooks the problems of the most important regulatory bodies in the country, whose problems are yours, too . These are the bank supervising agencies of our 48 States. Our dual system will absorb even greater strength if the Federal agencies will set the pace in redefining their funetion and assist them to obtain the money and personnel needed to do the job. The principal of matching funds accumulated in the Federal Reserve banks or the FDIC derived from the bank's reserves or assessments should be utilized to assist the State supervisory departments. State legislatures who are committed to the principal of investing State funds in time deposits or in Government securities must be encouraged to allocate earnings from these funds for the use of the banking supervisory departments. Such earnings came from no other place than the banks. After research has been done on the problems of all of our banks and with facts at hand as to the capabilities of the supervisory agencies, the possibilities of unification can be determined. It is reasonable to assume that the Federal Reserve banks might handle all members including national banks, and that the Federal Deposit Insurance Corporation would be responsible for State nonmember banks. Only in a country like ours could we expect to accomplish a legislative overhaul and reorganization of bureaus and agencies of this magnitude, but we can and must for our capitalistic system is at stake. Senator ROBERTSON . The next witness is Mr. John F. Marten of Los Angeles, Calif. Mr. Marten, we will be glad to hear from you. STATEMENT OF JOHN F. MARTEN, PRESIDENT, GREAT WESTERN SAVINGS & LOAN ASSOCIATION, LOS ANGELES, CALIF. Mr. MARTEN. Mr. Chairman and members of the Senate Banking and Currency Committee and Mr. Counsel, my name is John F. Marten. My business address is 4401 Crenshaw Boulevard, Los Angeles, Calif. I have been in the savings and loan and related businesses for 21 years, except for Army service time, and am now president of the Great Western Savings & Loan Association and vice president of Great Western Financial Corp. I speak for both of these organizations before you today. All guarantee stock of Great Western Savings & Loan Association is owned by Great Western Financial Corp., as is nearly all guarantee stock of three other California savings and loan associations . Great Western Financial Corp. also owns 26 escrow companies, all operating within the State of California. None of these associations or other corporations owned by Great Western Financial Corp. has offices any place except within the State of California . While the Great Western Financial Corp. is incorporated under the laws of the State of Delaware, the four savings and loan associations and the STUDY OF BANKING LAWS 705 escrow companies are all incorporated under the laws of California. Senator BUSH. What is the definition of an escrow company ? Mr. MARTEN. Senator, they are somewhat peculiar to our southern California . They are companies that act as intermediaries to receive documents from a seller and money and incidental papers from a buyer, to act as a clearer for buyers, sellers, borrowers and lenders in real estate transactions. Senator BENNETT. They absorb some of the functions of a trust department in a bank. Mr. MARTEN. Yes, sir. Senator BUSH. Did that grow up in the savings and loan business as a sort of counterpart ? I mean, did they perform similar functions to those of the real estate department in a trust company ? Mr. MARTEN. Some of the functions, Senator. I might put it this way : To the best of my knowledge they only exist in the form we have them in in southern California. The title insurance companies have escrow departments, but they are not the major escrow handlers. Senator BusH. Does this savings and loan association, or does this escrow company, have its offices in a savings and loan association , or is it a separate entity? Mr. MARTEN. No, because they are separate corporations and they are not in savings and loan offices. Senator BUSH. They have their own offices ? Mr. MARTEN. Yes, sir. Senator BUSH. They operate as separate entities ? Mr. MARTEN. Yes, sir. Senator BUSH. Go ahead. Mr. MARTEN. I think it might be added that banks, savings and loan associations, without exception have escrow departments. Then in addition there are these independent escrow corporations such as we have. Senator ROBERTSON. You are a bank holding company, are you not ? Mr. MARTEN. We are a savings and loan holding company. Senator ROBERTSON . I mean a savings and loan holding company. Are you the only one in the United States ? Mr. MARTEN. To the best of my knowledge and belief, Great Western Financial Corp. is the only one owning stock in more than one savings and loan association. Senator ROBERTSON. So this section 409 to which you are going to address yourself in opposition affects you , but as far as you know at the present time it does not affect any other organization ? Mr. MARTEN. That is my understanding, Senator . Senator ROBERTSON. I may say at this point that we did not get this recommendation from any Federal agency, and we did not get it from our advisory committee. The language of section 409 is the exact language of the Spence bill of last year in the House. Chairman. Spence of the House Banking and Currency Committee thought that in view of the fact that we have taken action against bank holding companies, but not until after it had gotten to be almost out of hand, that it might be a good idea to be a little beforehand on a similar movement on savings and loan associations before they did get out of hand. So we inserted this provision in our bill for public comment and testimony. 706 STUDY OF BANKING LAWS We have not had any direct testimony on behalf of this legislation , but we have had an indirect endorsement in view of the fact that we have heard a number of witnesses representing savings and loan associations who did not complain. As you have pointed out, though , at the present time they were not bothered because it did not apply to them . You are coming because it does apply to you and you do not like it . Mr. MARTEN . Precisely. Senator ROBERTSON . You may proceed to testify. Senator BUSH. May I ask a question, Mr. Chairman, about this savings and loan association ? Senator ROBERTSON. Yes. Senator BUSH. Is that a corporation ? Mr. MARTEN. Yes, Senator, it is a California corporation. Senator BUSH. It is not a mutual operation like most of these associations in the East ? Mr. MARTEN. No, Senator, in California, like in 8 or 9 or 10 other States, we have State laws whereby all of the capital stock of the savings and loan associationsSenator BUSH. So the financial corporation of which you are an officer owns all of the stock of this Great Western Savings and Loan Association. Is that right, sir ? Mr. MARTEN. That is correct, Senator. Senator BUSH. Can you give me an idea as to the relationship between capital and liabilities to the depositors or shareholders ? What do you call them, the people that put their savings in your place ? Mr. MARTEN. We commonly refer to them as savers . They are actually investment certificate holders. Senator BUSH. What is the relationship between their interest in the association and the capital ? Mr. MARTEN. Let me be sure I understand you. Senator BUSH. Well, you have so much on your statement . The savers are represented by so much in the way of deposits, or contributions, or savings, you say. How many millions of dollars is that, and how much capital is there in the business ? Mr. MARTEN. Thank you. I undestand now. We at the present time, speaking just within Great Western Savings and Loan Association, have approximately $ 160 million of invested savings by the public, and the underlying capital is $100,000 . Senator BUSH. Is that a capital and surplus figure ? Mr. MARTEN. No. Surplus, undivided profits and reserves altogether would add up to in excess of $11 million at the present time. There is no paid- in surplus, however. Senator BUSH. That is all earned surplus left in the business ? Mr. MARTEN. That is correct. Senator BUSH. So you might say the total capital funds are in the order of $ 11 million ? Mr. MARTEN. I do not think you would really call those capital funds, Senator. Really, the only capital is the $ 100,000 put in originally. Senator BUSH. That belongs to the shareholders . Senator BENNETT. Are those reserves for the protection of the people who have saved money, or are they for the benefit of the capital shareholders ? STUDY OF BANKING LAWS 707 Mr. MARTEN. Those without giving the exact figures-in excess of 90 percent of the total reserve amount of $11 million is in our socalled Federal insurance reserve, which is absolutely frozen for protection of investors. Now, should there be liquidation then those reserves would accrue to the benefit of the stockholders rather than to the savings investors. Senator BUSH. They cannot be withdrawn by the stockholders for the purpose of dividends ? Mr. MARTEN. No, sir. Only out of current earnings or undivided profits accumulated prior to 1951. And when and if they are paid out in dividends they would be subjected to normal taxation presently at the 52 percent rate. Senator BUSH. How do stockholders ever expect to get at that money ? Mr. MARTEN. It is an accumulation of wealth within the framework of the association, Senator, that there is no intent I can honestly say in our case of getting at the money. Senator BUSH . I see. Senator BENNETT. Are you talking about the 90 percent or 10 percent. You said 90 percent was a reserve for the savings investors. Does that leave 10 percent which is available to the capital shareholders for dividends ? Mr. MARTEN. Yes. I am happy to answer that, Senator. When Great Western Financial Corp. acquired Great Western Savings and Loan Association , there were approximately $ 800,000 of undivided profits accumulated prior to 1951 which could be disbursed without taxation. Senator BENNETT. I don't care about taxation. We are interested only in the question of whether they are available to the stockholders for distribution. Mr. MARTEN. The only amount would be that $800,000, $400,000 of which has been disbursed. That could be paid to the parent company. So when I said 90 percent I was low. I should have said 95 or 96 percent. Senator BENNETT. You want us to understand then that your current income after you have set up your required reserves is not available for dividends for the stockholders ? Mr. MARTEN. Current income definitely could be paid to the stockholders in the form of dividends, but keep in mind, Senator, we are subject to the same insurance corporation- Federal Savings and Loan Insurance Corporation rules and regulations as everyone else . We must maintain our reserve ratios. Senator BENNETT. That is right. Mr. MARTEN. And while we are growing we cannot possibly disburse any large percentage without jeopardizing our reserve ratio. Senator BENNETT. But you are confining your dividend payments to the funds you found in the company when you bought it ? Mr. MARTEN. That has been the extent of it, and we are endeavoring through the long- range point of view, through escrow companies and other entities, to earn what is needed for dividends without touching anything that is accumulated in the savings and loan associations. Senator BENNETT. Thank you, sir. Senator BUSH. When you speak of dividends you speak of stock? Mr. MARTEN. In this instance, yes, Senator. 708 STUDY OF BANKING LAWS Senator BENNETT. Dividends to the controlling shareholders and not people who put money in. Senator MONRONEY. In other words, there is no mutual interest of the so-called savers . You pay them 3 percent, or whatever the rate is, and then you are through, except the guaranty of your savings which comes out of the amount deposited in the Federal Savings and Loan Corporation. Mr. MARTEN. That is correct. Senator BUSH. Did you in 1956 pay any dividends to the stockholders, namely, the Great Western Financial Corp. Mr. MARTEN. The parent corporation . Yes, sir. Senator BUSH. How much ? Mr. MARTEN. We paid $400,000 of this $ 800,000 I referred to as being in there to the parent company. Senator BRICKER. Who owns the parent company? Mr. MARTEN. In excess of 3,700 individual stockholders, large and small, throughout the country, Senator. I just happened to check ; 60.3 percent of them are in California and the rest are all over the country. Senator ROBERTSON. You may proceed with your prepared statement. Mr. MARTEN. Thank you, Senator. I am also on the executive committee of, and today speak for, the savings association investors' committee. This committee, national in scope, is comprised of individuals working together in the defense of a dual system and in protection of States rights in our savings and loan business. The executive committee includes representatives from Arizona, California, Colorado, Kansas, Ohio, and Texas. I am appearing only in opposition to Section 409 ; Regulation of Holding Companies, of title VI, Federal Savings and Loan Insurance Corporation Act. First, I want very much to state our appreciation of the task which this committee is undertaking. A recodification of the financial institutions statutes is an onerous task for this committee, but one of inestimable value to the public. While, thus , I appear in opposition to the inclusion in the recodification of those new provisions which are particularly harmful to our operations, I strongly support most of the other provisions of the Financial Institutions Act of 1957. We submit that legislation specifically affecting savings and loan holding companies should be preceded by a thorough study and analysis. Senator ROBERTSON. May I interrupt you to say, aside from section 409, to which you object, you think it is a pretty good bill ? Mr. MARTEN. Yes. I sincerely believe that it is, Senator. Senator ROBERTSON. Thank you. Mr. MARTEN. Bank holding company legislation is by no means a compelling precedent. Commercial banks are stock companies. Legislation, such as the Bank Holding Company Act, which regulates the holding of stock in commercial banks, is accordingly applicable to the entire commercial banking field. But 93 percent of savings and loans, regardless of whether they have common- stock affiliates , do not themselves issue nonwithdrawable stock. Mr. ROGERS . Is that 93 percent loaned on assets or number ? STUDY OF BANKING LAWS 709 Mr. MARTEN. That is by number, and there are approximately 6,000 savings and loan associations in the United States, and approximately 400 of them are capital-stock companies. Mr. ROGERS. Thank you. Mr. MARTEN. By the definition of paragraph ( g) of section 409 , these associations, constituting 93 percent of the industry, are exempted from the regulatory effect of section 409, even though they may have the control common with affiliated-stock operations. This is not submitted as an argument for broadening the legisla tion to include the rest of the industry, but rather as suggesting a lack of need for any legislation which exempts from the force of its regulation over 93 percent of the industry regulated . The fact that over half the industry, measured by assets, operates under Federal charter, and this proposed Federal statute applies only to certain State-chartered operations, and not at all to federally chartered , is also in direct contrast to the bank holding company legislation , which applies to national as well as State banks. Senator BENNETT. Is it not true that the federally chartered institutions may not be stock companies of the type that you operate ? Mr. MARTEN. They must necessarily be mutual . That is right, Senator. Senator BENNETT. Yes. Mr. MARTEN. One of the principal contentions behind the bank holding company legislation was the fact that banks either directly affect or influence the volume and velocity of currency. This monetary aspect of the bank holding company legislation may be regarded as justification for Federal legislation which interferes with the operation of State laws having to do with State banks. But savings and loan associations, while they create credit, in no sense can be considered to create money as such. This basis, for Federal legislation interfering with the operation of State laws having to do with State banks, does not justify Federal legislation interfering with the operation of State laws having to do with State savings and loan associations. We have no office outside California. All our loans are secured by California real estate. This proposed law applies to us. Nevertheless, it does not apply to the principal savings and loan operations which have offices in more than one State. Again, we feel that there is no need for regulation of this nature applicable to interstate operations. But if Federal legislation is not required to regulate interstate operations, it is certainly not needed to apply to primarily intrastate operations. Leaving my text for just a moment, we are now subject to the Department of Justice, Federal Trade Commission, and section 7 of the Clayton Antitrust Act ; also our State laws and regulations. Should further regulation be indicated, it would seem maybe more proper for it to be imposed by our State authorities. It has been stated that the purpose of the Financial Institutions Act of 1957 was not to invade States rights. It would appear in this instance regarding savings and loan holding companies that States rights are possibly being invaded. Further, we contend that we are not restricting competition in any way by reason of having our holding company operation. Mr. ROGERS . Mr. Marten ? 710 STUDY OF BANKING LAWS Mr. MARTEN . Yes. Mr. ROGERS. Would it be possible for your Great Western Financial Corp. to acquire savings and loan associations in other States ? Mr. MARTEN. Yes ; it would be possible for us to do that. There are further reasons why bank holding company regulation is not a precedent for savings and loan holding company legislation. The Chairman of the Board of Governors of the Federal Reserve System ( 84th Cong. , 1st sess. , U. S. Senate Banking and Currency Committee hearings, July 1955 ) listed control of monopoly and affiliates as the principal factors behind bank holding company legislation . These are equally two grounds on which savings and loan holding company legislation may be tested- monopoly and affiliates. The Chairman of the Board of Governors further expressed the opinion that such legislation should apply even where only one bank was involved (pp. 44-45) . However, the savings and loan holding company legislation which is now proposed attempts to exclude from the force of its regulation almost all of the savings and loan associations which have affiliates, and to limit its effect to less than 1 percent of the industry which is not dominant in any community in the country. Clearly, then, neither of those two bases for bank holding company legislation-monopoly and affiliates-supports the proposed savings and loan holding company legislation. But, we submit, there are strong affirmative reasons for much more thorough study before holding company legislation of this nature is enacted. Such study might well lead to the conclusion that this legislation is unnecessary . What is the record of performance of our operations which this proposal would shackle ? The combined assets of the savings and loan associations owned by Great Western Financial Corporation exceed $240 million . Our largest California competitor, a commercial banking institution operating under 1 charter, is 40 times our size. Our total assets are less than 5 percent of the total assets of savings and loan associations located in California , and less than 1 percent of those in the Nation . Nevertheless, we feel strongly that we are making a contribution to the welfare of our community totally disproportionate to our relative size. Senator ROBERTSON . Let us call this the Spence bill for a second, for identification . Mr. MARTEN . Yes , sir. Senator ROBERTSON. You are the only holding company of this kind. That bill does not let you expand , or does not take anything away from you. Mr. MARTEN . That is precisely correct . Senator ROBERTSON. Does that not put you in a favored position ? There could not be another like you and you are rendering fine service out in California, and there cannot be anybody who would bother you ifthat bill passes. Mr. MARTEN. We have given a lot of thought to that on our board of directors and really kicked it around. We are carrying on a little errand of mercy for the capital stock companies because we do not feel it is right to have that legislation . STUDY OF BANKING LAWS 711 Senator MONRONEY. The capital stock companies want to become branch banking institutions under a savings and loan charter. Mr. MARTEN. Could you restate that ? Senator MONRONEY. There are those capital stock companies in other States which have not gotten into branch banking and wish to become, under the guise of the savings and loan associations, branch banking institutions. Mr. MARTEN. No ; in my judgment, because as long as they are savings and loan associations they are subject to, and especially if they have insured accounts they have to stay strictly in savings and loan limits. Senator MONRONEY. But that can get under the savings and loan guaranty to where you could establish outside of the Bank Holding Act a whole bunch of savings and loan associations, could you not, and thereby defeat the whole purpose of the Bank Holding Act ? Mr. MARTEN. I really do not see how it could happen, Senator. Senator MONRONEY. Once they acquire enough reserves on their own to withdraw from the savings and loan insurance account, then they would be absolutely free to handle commercial and installment, or anything else, if their State charter permits. Mr. MARTEN. Yes, but again let me speak from extensive experience, that in the West generally any association that has tried to expand and to get savings without insured accounts has found it to be quite a problem. That is a big factor today and you do not get any savings in volume without it. Senator MONRONEY. If you have enough reserves you might be able to survive. It is not as important as it is in the commercial banking field . Mr. MARTEN. John Q. Public thinks it is awfully important. Senator MONRONEY . Let me ask you one more question. Under your California charter can you engage in almost any kind of banking activity ? Mr. MARTEN. No, sir. We are very strictly regulated-even more so than under the Insurance Corporation regulations as to being strictly in the savings and loan business as we know it in mutuals. Senator MONRONEY. And in real estate loans. Is that right ? You cannot have commercial loans ? Mr. MARTEN. No , sir ; and taking savings from the public and making loans only on residential properties. I think we can have 5 percent of our assets in other than home loans. Nineteen fifty-six was the first full year of our operation. Only one of our savings and loan affiliates- Great Western Savings & Loan Association-was with us the full year 1956. Nineteen fifty-six was a year of shortage of money for home financing, particularly for financing of low cost homes, and above all for financing of low-cost homes for minority groups . Nevertheless, during 1956, Great Western Savings & Loan Association translated more new savings into home financing, with one exception, than did any other single savings and loan association in the United States. We made over $72 million of loans in 1956 on homes. Contrary to the trend in the industry, we specialized in financing low-cost homes. And of every $8 we invested, $ 1 to a total of $8,600,000, was used to finance homes for minority groups . 712 STUDY OF BANKING LAWS Senator Bus . What do you mean by "minority groups" as you use that term here ? Mr. MARTEN. I mean, Senator, Negro, Mexican, Japanese, Chinese, Korean. We have quite a large mixed population in our part of the country and it is quite a problem to finance homes for them. We happen to be the specialist in that in our part of the country. Similar activity is indicated in 1957, and the bulk of our loan activity is in homes selling from $ 10,000 to $ 12,000. We are proud of this record . It is in keeping with the best traditions of American private enterprise to assume the risks involved in financing home ownership of the middle and lower income groups. More than 3,700 individual and organization investors, many small and some large, have put up the risk capital for the stock of the parent company. This risk capital in turn provides the funds for ownership of the guarantee stock which enables our savings and loans to finance home ownership without risk to our savings account holders, and with diversification of the risk among all 3,700 stockholders of the parent company, no one of whom might be willing to assume this risk alone. In our opinion , our corporate and financial structure have a direct relationship to this record of achievement in a field in which many of our competitors not so organized elect not to concentrate their efforts. I would like to add one sentence, that our parent company stands ready and able to raise capital when necessary for the assistance and support of the savings and loans, which is, let us say, a little plus that can be thrown in. Senator BUSH. May I ask one question on that ? Mr. MARTEN . Certainly. Senator BUSH. As to this risk capital, you say : This risk capital in turn provides the funds for ownership of the guarantee stock which enables our savings and loans to finance home ownership without risk to our savings account holdersIs that true ? Do you absolutely provide a nonrisk haven for those funds of your account-holders ? Mr. MARTEN. The statement is made with this thought in mind. Senator : That inasmuch as mutuals are excellent operations and doing a fine job, we contend with a capital stock type operation that that underlying capital creates an interest that these stockholders havea real personal interest and a financial interest that they are going to go a step further toward the protection of what is there, even than a mutual might. Senator BUSH. By your statement a little earlier you have a cushion of $ 10 million or something on that order on a $ 160 million deposit or savings. It is a nice margin of safety, but I wonder if you could say that it makes a riskless investment for the depositor ? Mr. MARTEN. Well, Senator, when we stop and analyze the records very carefully and cautiously as we are doing, I would like to agree with you 100 percent that even when you buy a Government bond there is still a certain amount of risk. There is a degree of risk. Senator BUSH. I do not think there is a dollar's risk in a Govern- ment bond. You know there is not because you will certainly get your money. So there is no risk there. But here I cannot see how you can say it is without risk when you do have a modest reserve. STUDY OF BANKING LAWS 713 Mr. MARTEN. I will go right along wtih you and say I think you are right and qualify that to say that the risk is less than common in most savings and loan associations. Senator BUSH. I just wanted to make sure. Senator BENNETT. Could I inject this question ? Is it not true all mutual associations also have the reserve required by the Government behind the investments of their savers ? Mr. MARTEN. Yes, they do , Senator. Senator BENNETT. So actually the only thing you add as contrasted with the mutual type is the $ 100,000 plus the accumulated earnings that you found in the business when you bought it? Mr. MARTEN. And the selfish interests of the owners to protect. Senator BENNETT. In terms of money you have less than $1 million additional actual hard cash that is not found, or would not be found in a similar setup if it were a mutual organization ? Mr. MARTEN . That is correct , Senator. Senator BENNETT. So in terms of added protection it is $ 1 million against $ 160 million, and what you are saying to us is that because there is a group of stockholders who have an investment in your company, that they have a greater incentive to see to it that the company does not go broke and ruin their stock ownership and that that , therefore, is something that the mutual company does not have? Mr. MARTEN. I should have let you write my text for me. Senator BENNETT. All right. Senator MONRONEY. Your holding company, the Great Western Financial Corp. , which is a Delaware corporation , could acquire, in any of the States permitting stock ownership of savings and loan associations, stocks in any of the existing building and loan associations in the States that permit nonmutual companies ? Mr. MARTEN . That is correct, Senator. Senator MONRONEY. So you could expand into at least 7 or 8 other States under the holding company operation of Great Western Financial Corp.? Mr. MARTEN . Yes, sir, we could. Senator MONRONEY. You are not limited in your Delaware charter to California ? Mr. MARTEN . We are not limited . Senator MONRONEY. So, consequently it is an interstate operation so far as the Great Western Financial Corp. is concerned ? Senator BENNETT. It is potentially interstate. Senator MONRONEY. Potentially interstate . Mr. MARTEN. Yes, sir. That is correct. Potentially. Senator MONRONEY. So the part of your testimony that deals with the noninterstate operation exists only insofar as the company has chosen that it should ? Mr. MARTEN. That is correct . Senator ROBERTSON. Do you have the ambition to be as large as Transamerica was before we put a little crimp in their operations last year? Mr. MARTEN . Senator, we do not. In fact I can say that I think it was approximately 10 days ago that a very attractive offer was made to us for an association also in California , and with past acquisitions, with the problems of organization and management and every- 714 STUDY OF BANKING LAWS thing else at the present time we were not even interested in what was a very fair price, we thought. Senator ROBERTSON. You may proceed. Mr. MARTEN. This subject is worthy of much study before restrictive legislation is passed. We want to cooperate in such a study. We enthusiastically support the enactment of the basic provisions of the Financial Institutions Act of 1957. But we feel that the inclusion, in this fine proposal, of the savings and loan holding company provisions is premature and that the provisions as now drafted are not in the public interest . Thank you, gentlemen. Senator ROBERTSON. Are there any further questions ? Thank you. This subcommittee will not be in session tomorrow. The housing subcommittee will be in session in this room tomorrow to consider, I understand, housing and maybe some other matters. Hearings before this subcommittee will be resumed at 10 o'clock on Thursday, February 7, 1957 , and will be continued on Friday, at which time we will have the testimony of private witnesses. We have had numerous requests for more appearances but unfortunately we could not grant them. We are operating sort of under a number of deadlines. The chairman of this committee graciously gave us priority but said, "You have to finish up in February. We cannot spend all of the session on just one bill . " The chairman of this subcommittee serves on 5 subcommittees of the Appropriations Committee, and those 5 handle about 95 percent of the budget. He is chairman of one subcommittee, and on the 20th of this month he has to start hearings on that, and that is a $3 billion bill in itself-Treasury and Post Office. So, on Monday of next week, we start with the Federal witnesses in a kind of wrap-up program, so to speak. They conclude their testimony on the following Monday, the 18th. Then it is our intention to have the hearings printed. The clerk of the full committee will furnish to every member of the committee a summary of what is in the bill. Then counsel of the subcommittee will furnish to the members a summary of what the acting chairman regards as the controversial provisions in the bill. On February 25th the full committee will meet to vote on what goes in the official bill that we will present to the Senate. Senator BUSH. Mr. Chairman , are you going to come to some point where you are going to have a markup session ? Senator ROBERTSON . That is the point. Senator BUSH. That is the 25th. Senator ROBERTSON. We finish testimony on the 18th. Then everybody gets the hearings and everybody then gets a synopsis and everybody gets an analysis of what we think are the controversial points. Then we are all supposed to be here on Monday the 25th and vote as we go down through the bill. Senator BUSH. Section by section. Senator ROBERTSON. Well, as we say, we will do what we call scientific reading of some- skipping over what is not objected to, and go to the heart of what the real vote is to be on, the controversial issues, although any member can make controversy out of anything he pleases, but we hope he will not make too many of them . STUDY OF BANKING LAWS 715 We hope to get this bill on the calendar by the end of this month. I read that a very distinguished Republican named Mr. Knowland said he hoped to have on the calendar by March 1 a bill known as civil rights. I have heard that there were several southern Senators who said that when that bill came up they wished to be heard. I think it would be well for this committee, if they wish to get action completed this session over on the House side, to get our bill on the calendar by the end of this month and then ask the leaders to give us a day or two before they start in on something else. We will get this bill through because by that time we will have all the trouble ironed out and everybody will be glad to vote "aye," and we will send it on over to the House side. That is the optimistic program of the chairman. Without objection, we will insert at this point in the record several letters and statements which have been sent to the committee. (The letters and statements referred to follow :) DES MOINES 9, January 26, 1957. Hon. THOS. E. MARTIN, United States Senate, Washington, D. C. Hon. B. B. HICKENLOOPER, United States Senate, Washington, D. C. MY DEAR SENATORS : It is our understanding that a bill has been submitted to Congress to do away with the present Federal Deposit Insurance Corporation Board of 3 members and to substitute 1 person for that Board. We hope that you will oppose any such move. Thanks. Yours very cordially and sincerely, IOWA BANKERS ASSOCIATION , BEN S. SUMMERWILL , Chairman, Federal Legislative Committee. H. C. HOUGHTON, Jr., President. FRANK WARNER, Secretary. THE ST. JOHNS NATIONAL BANK, St. Johns, Mich ., January 19, 1957. Representative ALVIN M. BENTLEY, House Office Building, Washington, D. C. DEAR REPRESENTATIVE BENTLEY : I note in various publications that recommendations are presently being prepared to revise and modernize the laws related to banking and credit institutions and that a tentative draft bill has been prepared . As I understand it, several of the provisions of the proposed bill would, first, allow the Comptroller and the Federal Reserve Board to require publication of dividend reports ; second, to transfer trust powers over national banks from the Federal Reserve Board to the Comptroller. I feel that these two provisions would be definitely detrimental to banking. The publication of dividend reports would serve no useful purpose but to create an unfriendly feeling in the bank's own community as many of our people believe that the banks, being so controlled by Government regulations already, are another Government service such as the post office. As you are well aware, we are a privately owned institution and a profit is as necessary in our business as it is in any other private business . We are much more closer controlled with regards to the use of our depositors' funds than are many union funds which, as we read in the paper, appear to be so grossly mishandled . As a stockholder in this organization, I feel that it is my own business as to what the earnings and dividends of this bank are . A detailed breakdown is furnished our stockholders as I am sure it is furnished in all other banking institutions. 84444-57- pt. 2--18 716 STUDY OF BANKING LAWS The second objection that I have is on the transfer of trust powers over national banks to the Comptroller. Approximately 5 years ago this bank was granted full trust powers on action taken by the Federal Reserve at our request because there was no organized trust company in this county, and we wished the service to be available to our customers. Our trust department is not a large department and it is more of a sevice function than a moneymaking proposition. However, we have had many requests from local citizens for this service. The opinion of national bank examiners expressed to me many times indicates that they are not in favor of small trust departments and one indicated to me that if it had been up to the Comptroller, he doubted very much that we would have been given full trust powers because of the department's size. The proposed transfer could mean the loss to smaller communities of trust services of local competent, responsible, financial institutions. In the present period of bank mergers, it would give larger banks an unfair advantage in offering services that their local, small banks could not provide because of Government regulation. I fully appreciate the fact that large trust companies are organized for this express purpose. However, in communities such as ours the administration of estates in some cases could go to unqualified people with results of confusion and much disatisfaction as far as errors are concerned . At the same time, what is today a small trust department can develop into a major banking service over a period of years . Anticipating what has transpired and what we read between the lines from examiners' comments, I would definitely be opposed to any action that would change the present situation in regards to the granting of trust powers for national banks. I would be very interested in your feelings on this subject. Respectfully, OWENS C. TEETERS , Cashier. THE LEAGUE OF TEXAS MUNICIPALITIES 1956 CONVENTION RESOLUTION OF BANKS' UNDERWRITING REVENUE BOND ISSUES Whereas there is needed Federal legislation which will permit national banks to underwrite and deal in nongeneral obligation or revenue bond type of public securities which are of such a quality that the banks could buy them for their own account ; and Whereas a very large percentage of the bonds of the cities of Texas which are now being issued and which will be issued in the future to provide necessary capital for many urgently needed public facilities and improvements are and will be of the nongeneral obligation and revenue type security ; and Whereas if national banks are authorized to underwrite and deal in nongeneral obligation or revenue type of municipal securities, very substantial benefits will be realized by our cities, in that the commercial banks of the country which engage in underwriting bonds issued by State and local governments have more than 30 percent of the banking capital of the Nation, which fact would make available a considerably wider market, lower interest rates, and a higher quality investment rating, in that commercial banks are subject to regulation by the State banking department, the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation ; and Whereas legislation to permit commercial bank participation in revenue bond underwriting and trading has had the approval of the United States Conference of Mayors, the American Public Power Association, representatives of the American Municipal Association, and the principle of this legislation has the approval of the legislative and administrative committees of the American Bankers Association ; Now, therefore, be it Resolved by the League of Texas Municipalities in convention assembled, That this league approve and endorse Federal legislation which will permit national banks to underwrite and deal in nongeneral obligation or revenue bond type of public securities which are of the quality that the banks could buy for their own account, and that our Senators and Representatives be respectfully urged to support such legislation ; and be it further STUDY OF BANKING LAWS 717 Resolved, That copies of this resolution be furnished the United States Senators and Members of the House of Representatives from Texas. Passed and approved at Lubbock, Tex., October 27, 1956. Approved : HAROLD R. DENIS , President. Attest : E. E. MCADAMS, Executive Director. STATEMENT OF JOHN E. MURRAY, COMMISSIONER OF FINANCE, FOND DU LAC, WIS. My name is John E. Murray, commissioner of the city of Fond du Lac, Wis., also finance officer of said city. I would like to thank the Senate Banking and Currency Committee for the opportunity to present this statement. Although the subject of my statement is not now included in the bill under consideration , I have been informed your committee welcomes the chance to consider additional subjects related to the credit and banking programs within the United States. My subject concerns the need to permit commercial banks to deal and trade in public revenue bonds. As finance officer of our city, it is my duty to arrange for the borrowing of money to finance various programs undertaken by our city. General obligation bonds floated by the city, which become a direct lien on the taxes raised by the city, have been well received and our city, having an excellent credit rating, has received bids from both banks and commercial bonding houses that have been below the average trend. However, floating revenue bonds to expand various facilities of our city, from which the bonds will be paid from the revenues produced, has met with good success. The utilization of the revenue bond device is no longer a new concept in local government. For the last 2 years we have been attempting to float revenue bonds in connection with water utility expansion, acquisition of additional offstreet parking areas, and other municipal improvements . Because of the size of our city ( 33,000 ) and because of the size of these issues , they have not been readily accepted through the normal channels. However, if our local commercial banks were allowed to underwrite such obligations, we have been assured that a much better and more attractive interest rate would be available to us. I can see that benefits can result to our State and local government because of commercial bank participation in this type of bond. First, it would broaden the market for revenue bonds and securities and thus reduce the cost of this type of public improvement. Second, it would also allow local banks to participate in local improvements watching the operation of those improvements as they progressed. Third, it would enable the banks to maintain departments capable of advising on local financing policies - advice which we, as local officials, are much in need of and must turn to local banks and bankers for sound advice. It has been suggested that bank capital is not needed in revenue-bond financing. In support of such suggestions, it is said that there is no known instance where the lack of available dealer capital has been responsible for the abandoning of a project by a governmental authority. However, I would like to point out to your honorable committee that only as recent as 2 months ago the city of Fond du Lac had to abandon, at least for the time being, a $315,000 revenue bond for additional off- street parking spaces because the bids we received for these bonds were in excess of the safe margin that was necessary from the income that our parking lots produced. Whereas I have been reliably informed by both local banks that had they been permitted to take this issue, they would have gladly done so. They would have subscribed to it, first, because it was for local improvement. Second, because the utility was well managed and, third, because they were satisfied with the interest rate we had to offer. I can conceivably see in the future, if municipal improvements are to continue along certain lines, that more and more we must turn to financing these improvements from revenues that are produced by the improvement. To list just a few of them that are possible in the not too far distant future : 1. Water expansion. 2. Parking lot expansion . 3. Sewer disposal expansion. 4. Highway improvement (based on gas tax ) . And with the great need of additional high schools for rural areas, and vocational schools for vocational training, it is conceivable that these improvements could possibly be financed, maybe not in whole, but in part by revenues from 718 STUDY OF BANKING LAWS State-Federal aids and many other sources. In communities such as ours that are predominantly agricultural, it would work a terrific hardship on the surrounding farming areas unless we in the metropolitan areas provided junior high schools and vocational schools to train those from the rural areas about our city. All of this , gentlemen, may be a little in the future. However, it is worth, I believe, some consideration. I wish to thank your honorable body for the opportunity of presenting this statement. NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS, New York, N. Y., February 1, 1957. DONALD ROGERS , Esq., Counsel, Senate Banking and Currency Committee, Senate Office Building, Washington , D. C. DEAR MR. ROGERS : Since Mr. William A. Lyon testified on behalf of this association last Wednesday, it has come to our attention that some ambiguity would probably result with respect to the tax status of income from Federal savings and loan shares by reenactment of the Home Owners' Loan Act of 1933, as amended, without a specific savings clause. We have had prepared a memorandum on this subject which is enclosed with this letter. Section 5 (g ) at page 208 of the Financial Institutions Act of 1957 would reenact 12 United States Code Annotated, section 1464 ( h ) , which gives tax exemption to the income from Federal savings and loan shares with respect to the normal tax. This exemption was removed by the enactment of section 4 of the Public Debt Act of 1941, as amended by section 6 of the Public Debt Act of 1942. If the Senate Banking and Currency Committee does not wish to reinstate the tax exemption of Federal savings and loan share income, it is recommended that a new subsection be added to section 805 of the Financial Institutions Act of 1957, at page 252, along the lines of the language contained in page 5 of the enclosed memorandum . An examination of the statement presented to the Subcommittee on Banking by the U. S. Savings and Loan League on January 31, 1957, indicates that no recognition was given to this problem by the league spokesman. It would be appreciated if the enclosed memorandum could be directed to the attention of the members of the Subcommittee on Banking during the current consideration of the tentative bill and be made part of the record of these hearings. I wish to thank you again for your many courtesies to Mr. Lyon and myself. Very truly yours, HARRY E. PROCTOR, Assistant General Counsel. MEMORANDUM RE TAXABILITY OF SHARES IN FEDERAL SAVINGS AND LOAN ASSOCIATIONS Question has arisen as to the effect of the proposed Robertson bill on the taxation of income from Federal savings and loan shares. In order to deal with this question, it is necessary to understand the history of the taxation of such income and its present status. As part of the Home Owners' Loan Act of 1933, the organization of Federal savings and loan associations was authorized . The associations themselves were given certain exemptions from all Federal taxes and in addition it was provided : "all shares of such associations shall be exempt both as to their value and the income therefrom from all taxation (except surtaxes, estate, inheritance, and gift taxes ) now or hereafter imposed by the United States * * *" (12 U. S. C. A. 1464 (h ) ) . Thus the income from such shares was exempt from the Federal normal tax on income. In 1941 it was decided that income on obligations of the United States should not be exempt from taxation . This intention was embodied in the Public Debt Act of 1941 (55 Stat. 7 ) , but through apparent inadvertence, the obligations of instrumentalities of the United States were not covered. By the Public Debt Act of 1942 (56 Stat. 189 ) , the 1941 act was amended to read : "SEC. 4. ( a ) Interest upon obligations, and dividends, earnings, or other income from shares, certificates, stock, or other evidences of ownership, and gain from the sale or other disposition of such obligations and evidences of STUDY OF BANKING LAWS 719 ownership issued on and after the effective date of the Public Debt Act of 1942 by the United States or any agency or instrumentality thereof shall not have any exemption, as such, and loss from the sale or other disposition of such obligations or evidences of ownership shall not have any special treatment, as such, under the Internal Revenue Code, or laws amendatory or supplementary thereto ***** Thus, income on Federal savings and loan shares issued after March 27, 1942, is fully subject to United States income tax. However, shares issued prior to that date continued to remain exempt from normal tax. The rules for determining the continuity of shares are somewhat complicated, see Regulations, section 1.103-2 ; however, basically the lowest balance since March 27, 1942, is the determining factor. Under the 1954 Internal Revenue Code, the normal tax is the first 3 percent of the total tax otherwise determined and the surtax is the remainder ( I. R. C. sec. 1 (c) . The effect of these laws on present income from a share in a Federal savings and loan association which can be traced back before March 28, 1942, is that such income is taxed at 3 percent less than other income. All income from other shares is fully taxable. A complete discussion and collection of relevant authorities on Federal taxation of this income is contained in CCH Federal Tax Service, paragraph 952. Senator Robertson's proposed bill has not been introduced , and the only available copy at this time is a committee print dated January 7, 1957. Section 501 of this bill would reenact the Home Owners ' Loan Act of 1933, as amended. As part of this reenactment, the language of section 1464 ( h ) quoted above, with changes not here material, would be reenacted ( sec. 5, ( g ) , p. 208 ) . Under familiar rules of statutory construction , this might be construed to supersede the Public Debt Act of 1942 and thus exempt from normal tax all income from Federal savings and loan association shares. "As is true with reference to revisions , a code will likewise operate as a repeal of preexisting law, where the former covers the entire subject matter of the latter and is clearly intended by the lawmakers to be a substitute for the old law. But besides that, a code will also repeal a previous law with which it is repugnant or irreconcilably inconsistent" (Crawford, Statutory Construction p. 674 ) . Of course the fact that the Public Debt Act of 1942 is not mentioned in the list of statutes repealed would be an argument against such interpretation, but some risk remains . If such interpretation of repeal were accepted, all such income would receive the 3 percent reduction in rate now applied only to preMarch 28, 1942, shares . It would probably be clear from the circumstances that Congress in adopting the Robertson bill would not intend to repeal the Public Debt Act of 1942. However, it might take litigation to establish this point, and it is not absolutely certain what the result of such litigation would be. The Robertson bill could easily be amended to avoid any possible substantive change in the law. One route would be to amend the language of section 5 (g) to apply only to shares issued before March 28, 1942. However, since the same change should also be made in section 13 on page 196 and since the Congress will probably be disposed to interfere as little as possible with existing statutory language, we would recommend the inclusion of a specific savings clause at the end of the bill. On the present draft, it appears that it would be appropriate to add a new subsection ( e ) to section 805 on page 252 reading as follows : "Nothing in title IV or title V of this Act shall be construed to exempt from taxation income made taxable by section 4 of the Public Debt Act of 1941 , as amended by section 6 of the Public Debt Act of 1942." This language would not, of course, remove the normal tax exemption applicable to pre-March 28, 1942, shares, but there may be considerable reluctance on the part of Congress to make the Public Debt Act of 1942 retroactive as part of the Robertson bill. That act affects obligations of instrumentalities of the United States other than shares of Federal savings and loan associations. If it proves impracticable to amend the Robertson bill as suggested above, it might be possible to have the committee report on the bill state that there is no intent to extend the exemption from normal tax to post-March 27, 1942 , shares, This would probably be effective in accomplishing the aim of the suggested amendment. 720 STUDY OF BANKING LAWS INVESTMENT BANKERS ASSOCIATION OF AMERICA, Washington, D. C. , February 1, 1957. Re Financial Institutions Act of 1957. Hon. A. WILLIS ROBERTSON, Chairman, Subcommittee on Banking, Senate Committee on Banking and Currency, Senate Office Building, Washington, D. C. DEAR SENATOR ROBERTSON : The Investment Bankers Association of America did not request an opportunity to present testimony at the current hearings before your subcommittee on the committee print of the proposed Financial Institutions Act of 1957 because we had no comments to submit regarding the contents of the committee print. However, articles in the press today state that a witness yesterday submitted to your subcommittee a recommendation that a section be added to the proposed act to authorize national and State member banks to underwrite revenue bonds. Since our association is opposed to the proposal to authorize banks to underwrite revenue bonds, we want officially to register in the record with your subcommittee our opposition to that proposal. Since the proposal to authorize banks to underwrite revenue bonds was submitted by the same organization at the earlier hearings by your subcommittee in November but was not included in the committee print, we assume that the subcommittee has definitely concluded not to include such a provision in the bill. Therefore, we see no need to take the time of the subcommittee to present detailed testimony in opposition to a proposal which they have already rejected . If the subcommittee should give further consideration to the proposal, we respectfully request the opportunity to present detailed testimony in opposition to that proposal. We respectfully request that this letter be included in the record of the hearings by your subcommittee on the proposed Financial Institutions Act of 1957. Respectfully yours, MURRAY HANSON. KANSAS CITY WHOLESALE CREDIT ASSOCIATION, Kansas City, Mo., January 30, 1957. Hon . FRANK CARLSON , Senate Office Building, Washington, D. C. DEAR SENATOR : This credit association consists of 560 credit and financial departments of manufacturers , wholesalers, banks , and insurance companies, and for several years we have been making an attempt to have all banks clear their customers' checks at par. But we have never been able to secure State legislation on this matter. The only troublesome point in Missouri is in the southeast portion , however, our members do business in States that make a practice of clipping various amounts when clearing checks for their depositors. We do not object to a bank charging their depositors for any service they render, but we do feel that when one of their depositors pay a manufacturer or jobber in the State of Missouri, this firm should receive 100 cents on a dollar, and not be penalized 10, 15, or 25 cents on each dollar. Our entire membership is strongly in favor of passage of ( title 3, sec. 26 ) payment of interest section of the Financial Institutions Act of 1957, and we urge your support on this legislation. It would be appreciated if you would pass a copy of this letter to the Banking Committee members. Sincerely yours, J. N. HAM. Senator ROBERTSON. The subcommittee will stand in recess until Thursday morning at 10 o'clock. (Whereupon, at 11:55 a. m., the subcommittee recessed until 10. a. m. , Thursday, February 7, 1957. ) STUDY OF BANKING LAWS (Financial Institutions Act of 1957) THURSDAY, FEBRUARY 7, 1957 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, SUBCOMMITTEE ON BANKING , Washington, D. C. The subcommittee met , pursuant to recess, in room 301, Senate Office Building, at 10:00 a . m., Senator A. Willis Robertson (chairman of the subcommittee ) , presiding. Present : Senators Robertson and Bennett. Senator ROBERTSON . The subcommittee will please come to order. The first witness today is Mr. Fred Walker of Arlington, Va. Mr. Walker, we are glad to have you with us, and you may proceed . STATEMENT OF FRED WALKER, DIRECTOR, FIRST NATIONAL BANK OF ARLINGTON, ARLINGTON, VA. Mr. WALKER. Thank you, Senator. Mr. Chairman, gentlemen of the committee, I am a merchant of Arlington, Va . I am Fred Walker. I was one of the founders of First National Bank of Arlington , Arlington, Va . , having represented the bank's organizing committee officially as its correspondent during its organization. I am now a director and have been so continuously since this bank was founded in 1951. I am one of its largest stockholders. I have been one of its largest stockholders from its inception . I appeal to this committee in respectful opposition to a proposal to eliminate cumulative voting of shares of stock in the election of directors of national banking associations, unless provided for in the articles of association . In the light of my careful study, observation and experience, I oppose this proposal for the following reasons : 1. A national bank no less than any other corporation is the property of all its stockholder owners. A 49 percent minority ownership is justly entitled to a voice in the management of their investment by the same token as the 51 percent majority ownership. 2. The voice of this 49 percent ownership on the board of directors of its bank is demanded by simple justice, equity and fair play. Furthermore, it is wise and prudent (a) to exercise scrutiny and firsthand knowledge through representation on the board of how their money and that of the depositors is being used, and (b) in order to provide an exchange of ideas through a friendly discussion forum for each to weigh and consider and out of which to forge a wiser policy than would a board all of one mind. 721 722 STUDY OF BANKING LAWS 3. Minority representation acts as a check and balance and does not permit complete one-man dictatorship of a board of directors. 4. Enactment of this proposal or recommendation removing or repealing the existing and widely used cumulative voting provision, which has proven its merit for almost a quarter century, and denying minority ownership a voice in the control of their investment would be a throwback to the horse- and-buggy era and would cause more discord, not less, as has been inferred by some proponents of this bill. It would cause more discord in the form of widespread, all-out proxy fights for complete control, because, if this proposal or recommendation is enacted, a 49 percent minority could have no voice whatsoever in the management, protection , and safeguarding of its investment without an all-out proxy fight. Such a proxy fight would itself tend to create far more discord or force the minority to resort to possibly harmful ligitation in order to protect its investment because enactment of such a proposal would remove the minority's only other alternative. 5. Moreover, the arguments advanced by some proponents of this proposal that minority representation on the board of directors will obstruct the orderly conduct of the business of the bank are as invalid and unsound as to argue that the greatest and best legislative body on earth-the Congress of the United States should contain no minority party members whatsoever lest there be discord and obstruction of its orderly processes. A one-party system monopoly can only result in one-man dictatorship on a bank board of directors as well as in a great legislative body. 6. A minority-elected director , contrary to what has been inferred, is no more likely to improperly disclose confidential information that might tend to be imprudent or detrimental to the best interests of the bank than would a majority-elected director. In fact, less so, because for one very important reason he would, by so doing, be doing injury to his own investment to a much greater degree than does the majority director elected by management to do its bidding and dependent for election and reelection solely to management . Let us take for a quick hypothetical illustration of the point a 5director national bank having a $1 million capital structure of 20,000 shares selling at $50 per share . Under the present cumulative voting dispensation , in order for a minority-elected director to be elected he must either own or be the personally chosen representative of and be held accountable for his good-management stewardship to the owners of $ 199,000 worth of stock in such a bank, in addition to the $ 1,000 stock ownership required of a director. It is hardly likely that such a minority-elector director, owning or held personally accountable to ownership of such an investment, would disclose confidential information that might tend to be imprudent or detrimental to the best interests of the bank. Whereas, in contrast, the management- elected puppet director need be personally accountable only to management who elected him, plus to a mere $1,000 of stock ownership required of a director. The former is owner chosen and elected and responsible to such owners whereas the latter would be management chosen and elected and responsible solely to management. 7. Enactment of the aforesaid proposal or recommendation eliminating mandatory cumulative voting would make possible the self- STUDY OF BANKING LAWS 723 perpetuation of entrenched management and their monopoly control, even though exercise of this control may no longer be serving the best interests of the bank, its stockholders, or the public. A dictatorship-controlled, "rubber stamp " board of directors is a board that does not properly fulfill a director's oath nor does it fulfill its responsibilities as directors. This self-perpetuation of control by the majority may be accomplished in the following ways : By management "bought" share proxies. This is done by management's utilizing the bank officers and other salaried personnel, on the bank's time, day after day, to solicit proxies for management's slate by phone, letter, and personal contact, even pressuring of borrower stockholders who are indebted to the bank, as well as bringing to bear the weight of the bank's power, prestige, and influence. By the hiring of proxy solicitation firms, law firms, and public relations firms to wage intensive proxy solicitation campaigns at the expense of the bank and therefore, let it be noted, at the expense of minority ownership, and, moreover, all proxies so gathered to be cast, not for the two director candidate slates but rather for the management slate exclusively. It is the duty of management to send notices of annual meetings and even with blank proxy forms attached for the shareowner to vote for his choice, but instead he is sent an already filled out proxy form with no blank for voting for other than management's proxy. In fact, only management's " proxycaster's" name is printed as an integral printed part of the management's own proxy form with no blank space left for any other. In the overwhelming majority of cases the stockholder returns management's already filled out proxy, largely because he is not usually conversant with such matters and obediently and unquestioningly signs the proxy form where the "X" appears as directed by the bank president and returns it. Whereupon, it is then cast for the reelection exclusively of majority management's directors. Moreover, unless the stockowner should happen to be sufficiently informed regarding the proper procedure and of his rights in such matters-a large percentage of otherwise intelligent shareholders are not so informed- or if he lives in a distant city or finds it impossible to attend in person to cast his shares, he then has the choice of the following alternatives ; namely, ( 1 ) not to vote his shares at all, which would redound to management's advantage, or (2 ) to go to the time, trouble , and expense to have printed or otherwise prepare another proxy form properly worded lest it be thrown out. Otherwise, he must endeavor to search out and find some other shareholder who must own stock in the same bank and who is going to attend in person, who is not an officer or employee of said bank, and who will agree to nominate and/or cast the proxy for a minority candidate of his own choosing who is properly qualified to become a director. There are only a few examples of the advantages accruing to such majority in power and further illustrates how difficult it is for management to be replaced or even strengthened, no matter how justified or desirable it may be in the best interests of the bank. Thus, management combats any efforts minority stockholders may make to replace any or all of an entrenched inefficient, moribund. or incompetent board of directors or those who may be found to have become inactive or who may not have sufficient vested interest of their 724 STUDY OF BANKING LAWS own to have the bank's welfare sufficiently at heart. Often they have exhausted their credit at other banks and desire to be on the board in order to use the bank as an instrument to further their own selfish personal financial gain, by borrowing further for highly speculative investments and enterprises for which other banks have refused to extend them credit, rather than to use it as an instrumentality or institution to serve the public banking convenience and necessity and as a trustee of the public's money and to contribute to the sound , wise, and prudent stewardship as fiduciary of the investment of the bank's stockholders and of depositors ' money on deposit. In many instances these entrenched directors may have only the minimum $1,000 investment in stock required of a director and be solely concerned with the power and prestige of a national bank directorship . 8. Enactment of this proposal or recommendation would discourage investment in national bank stock by eliminating the minority director or directors from a multitude of national bank boards from coast to coast. It would, furthermore, deprive the bank of the benefits of a vigilant minority that would act as a most effective check and balance and prevent majority board management, for example, from adopting a supercilious and contemptuous attitude toward conventional tried and proven sound loan policies, policies which are based upon a wealth of cumulative loan experience gained over the years by the banking business in this country, thus eschewing experience and substituting so- called "progressive liberalized " and unsound loan policies instead. Lester A. Pratt, an eminent and nationally recognized authority in the examining of State and national banks for 33 years and author of "Bank Frauds, Their Detection and Prevention," among other books, has frequently addressed State banking associations on the subject of bank frauds. During the past 3 or 4 years he has conducted the surveys of all the banks in the States of Iowa and Pennsylvania . The results of both these surveys were distributed to all insured banks by thhe FDIC. This eminent authority wrote an article appearing in a banking publication , "United States Investor" on April 3 , 1954, entitled "Bankers Never Die-They Just Lose Interest ," from which I quote in part as follows : Recently there has been a suggestion made that there should be a rotation of directors as well as a rotation in the executive management. We rotate maturities in investment-why not in management ? It is conceivable that a board, the individual members of which are not changed over a period of years, might avail themselves of their "oneness" and in the event of things going wrong withhold that fact from the stockholders ; whereas a periodic change in the membership of the board would render this form of reticence less probable * * * *** Unhappily, there have been some instances in the course of the past few years in which directors of banks have been guilty of conduct which would be difficult to denounce in language of sufficient emphasis *** A board which never changes except by death or by voluntary retirement becomes self-elective , with a tendency to intellectual stagnation and impairment of business vigor. If a director becomes incompetent or ineligible by reason of age or infirmity, or any other cause, it is not only the right but the duty of shareholders to replace him * * * Where the board has become moribund, the result is usually the creation of a "one man" bank. In such a situation the principal active officer, either president or cashier, steps into the picture to dominate the situation. In other instances it may be a director who owns a controlling stock interest. STUDY OF BANKING LAWS 725 Now "one man" banks are particularly susceptible to fatal consequences as past experience has demonstrated . By reason of having uncontrolled authority and inadequate supervision by the directors, a dishonest official has uncontrolled disposition of the bank's assets over such long periods of time that the abstractions attain considerable size before they are discovered . But it should not be inferred from this that these dominating officials are dishonest as a class. As a rule, they have rendered years of conscientious and faithful service in acquiring their position of control. But experience has shown that the most reliable of men, when exposed to the coincidence of extreme temptation and unopposed opportunity to misapply funds, may go astray, without any intention of ultimately defrauding the bank. The first step may be merely an unwise speculation with bank funds, with the object of ultimate profit to the bank rather than to the individual. Because of the risk element, the transaction is concealed from the directors. Possibly the board is so supine that no active concealment is necessary- until the speculation fails. But now there is a loss to be concealed, until restitution can be made from another "honest" speculation. Also the the bank examiner must be deceived . False entries are made. Our normally honest official has become a criminal ! To the moralist there will be some difficulty in determining whether the burden of guilt rests more heavily on the officer or on his careless board of directors. In many instances, the chief executive officer has attempted to inject new blood into the veins of the board members to revive the dying energy with new ideas ; such efforts while very laudable, are not usually successful for as the Good Book states "You cannot fill old bottles with new wine." As a result, there is stagnation on the part of both the administrative and executive management, which eventually results in a merger, voluntary liquidation or disaster of the worst consequence from dishonest acts. There are many cases where the directors have left everything in the hands of the chief executive and have awakened one morning to find their bank wrecked . But it does not usually end there. As a result of their negligence they may be charged with losses which may wipe out not only their stockholding but their personal fortunes. Enactment of the aforementioned recommendation or proposal would remove cumulative voting for directors which is the only method of voting that assures minority stockholder ownership any representation whatsoever on boards of directors, nor anyone representing their ownership to exercise scrutiny and firsthand knowledge of how their money and that of depositors is being used. Cumulative voting is necessary in order to protect economic democracy within the banking business structure of our Nation. Economic democracy no less than political democracy is the sound and wholesome American way, with its checks and balances and giving minority stockholders in American banking a voice and representation in that which is their own , no less than political stockholders must have a voice in the political government which governs them and their property. In the absence of economic democracy, dictatorship is certain to fill the vacuum just as in government where political democracy no longer prevails. This inevitably leads to revolt bringing in its wake turbulent dire consequences as certain as night follows day. Senator Lehman speaking as a former bank director as well as a legislator presented a forceful argument against abolishment of and conversely for mandatory cumulative voting when he said and I quote : Today bank boards are picked by the bank management, who select those who the management knows will be in complete accord with, and under the direction of, the management. The management will not put on a bank board anyone who it fears might differ with the philosophy or policies of the management. As has been pointed out, the proviso clause "unless provided for in the articles of association" is completely hollow and of no real significance, inasmuch as minority ownership could not be represented on the board of directors in the management of their investment without 726 STUDY OF BANKING LAWS consent of the majority management because it is self-evident that, if this inequitable and unjust proposal or recommendation should be enacted into law, then the majority management and majority alone, by reason of the fact that they are majority management, would have the sole power to exercise or not to exercise this option at their own pleasure. I have pointed out elsewhere herein how this may be done. Thus, entrenched majority would under this recommendation, if enacted, have the means at their disposal to perpetuate themselves in a monopoly dictatorship control. In control, let it be noted, not only of minority stock investment but of moneys and other assets deposited in national banks by the public. There is, moreover, a rather widespread misconception that the supervision properly exercised by Federal authorities over national banks through examinations made periodically by the Federal authorities alone is a sufficient safeguard that the bank will be prudently managed and safely and soundly operated . This is not so. Though it is wise and essential, so far as it goes, it does not and in fact cannot operate the bank or take the place of sound and prudent management and, of course, does not undertake to do so, under existing law. Lester Pratt, the eminent bank auditing authority, in the April 3, 1954, issue of the banking and investment publication , United States Investor says : Governmental examination of banks has for its principal purpose the appraisal of certain assets and to see whether they are complying with the law under which they operate. Consequently, the major emphasis is placed upon determining the financial condition of banks and not upon prevention of defalcations. This is evidenced by the ability of some embezzlers to cover shortages over fairly long periods, during which time several examinations may have been made, including those by directors . Often examinations by bank examiners cause shortages to be discovered, but discovery seldom occurs in the early stages of embezzlement. Most frequently, discovery by bank examiners results because the shortage has reached such proportions that the embezzler can control it no longer. To cite briefly just one other example : National bank examiners evaluate the soundness of a loan risk on the basis of documentary evidence of the borrower's claimed assets submitted and do not under existing law undertake to investigate to ascertain whether or not such assets claimed by the borrower applicant do in fact exist. That is the sole responsibility of bank management to make such an adequate audit. Thus it may be seen that such supervision as that properly exercised by Federal authorities alone is no assurance to a 49- percent minority stockholder ownership that its investment would be adequately safeguarded by a majority management in which this minority had no representation and no voice. Such would be the case if the proposal or recommendation to abolish existing mandatory cumulative voting should be enacted into law. Senator BENNETT. I wonder if you would not agree to put the rest of your statement into the record without reading it, Mr. Walker ? Mr. WALKER. If you like, sir. Senator BENNETT. It will have exactly the same force and effect. You can see that most of the members of the committee are absent and will not be able to hear you read it. Mr. WALKER. If you like, sir. STUDY OF BANKING LAWS 727 Senator BENNETT. I am very conscious of one situation we have had where a man came all the way from Utah to make a statement, and under the pressure of time he was forced to limit himself to 10 minutes and put most of his statement in the record. I would be grateful and feel a little better in relation to my own constituent if you could give us the privilege of reading the remainder of your statement. Mr. WALKER. I should be very glad to , sir. Senator BENNETT . Thank you. Senator ROBERTSON. Without objection, the witness' full statement will appear in the record as if he had delivered it in extenso. We thank you . Mr. WALKER. Thank you. (The balance of Mr. Walker's prepared statement follows :) I wish to take strong exception and to respectfully protest most vigorously to the change that has been recommended in existing banking law as proposed under item No. 21 entitled "Removed Director or Officer Voting Stock. " Any director or officer properly removed for wrongdoing should, of course, be properly punished by imprisonment, if justified, for his crime or wrongdoing in accordance with the crime committed, but he should be the one punished as in the case of any other crime ; his innocent wife and/or children should not be punished for a crime that they had no part in committing by taking away their property rights, thus, to an investment in bank stock in which they have usually helped to earn the money with which said stock was purchased. The "reasons" given for the recommendation are completely invalid ; furthermore, the mythical example, cited by the proponent of the foregoing recommendation , of such a hypothetical person owning more than 50 percent of the stock of the bank being able to manage the bank through those he might theoretically be able to elect to the directorate . Such a mythical and hypothetical instance seems so utterly unrealistic as to raise the question concerning the number of such instances anyone has ever known to occur, if indeed, any. The writer, in addition to his having a number of years' experience as a majority-elected national bank director, had read a large number of books, monographs, and periodicals on banking, but has never heard of a single such instance as the hypothetical one cited. In any event, furthermore, if no more valid reason for changing existing law in this matter than that put forth above exists, why was such a confiscation of property rights of stockholders as that recommended by this proponent not limited solely to such a shareholder owning more than 50 percent of a bank's outstanding shares of stock ownership, because certainly it is axiomatic that nothing less than a 51 -percent vote oftotal shares can control a bank ? No. The proponent of this recommended change in our banking law has not made a valid case for changing existing law in this respect and such a recommended change, if it should be enacted, would be an unjust and wholly unwarranted confiscation of the already too few vested property rights of the innocent wives and children of such a hypothetical criminal. To illustrate with an analogous figure of speech, why burn down a barn filled with priceless thoroughbred livestock on the mere hy- 728 STUDY OF BANKING LAWS pothesis that a field mouse might conceivably exist somewhere in the cavernous reaches of the barn. A criminal should pay by imprisonment for any wrongdoing justifying such imprisonment but his innocent wife and children should not be punished for someone else's crime. Subject: The crying need for adequate compulsory internal audits for insured banks and the need for followthrough and enforcement byFederal authorities The recent Illinois bank scandal, the New Jersey bank scandal, a number of very recent ones in small Maryland towns and numbers of others coast to coast have pinpointed such a need in order that the shareholding public's investment and the banking public's interests may be provided reasonable safeguards that such losses not become more and more widespread. (1 ) There should be more stringent requirements in banking law to this end, whereby the Federal supervisory agencies, especially in the case of national banks, have not only the power but the stringent responsibility placed upon them to insure that their examiners instructions and recommendations are more often complied with instead of simply ignored or accorded a contemptuous and supercilious disregard by management and with impunity. This is done not only in the matter of "classified" (i. e., unsound or improvident loans) but in other matters pertaining to bank operations as well. Instead of bank examiners relisting over and over, examination after examination, and year after year, the same old "classified " or improvident loans and the same old infractions, in all too many cases not corrected nor complied with by management , in addition to new ones. In short there should be more stringent requirements in the law for followthrough by the Federal examiners to insure that bank management comply and do so with reasonable promptness . ( 2 ) There should be not less than 2 compulsory internal audits of all FDIC-insured banks in each 12-month period. These internal audits should not be, as they now are in all too many cases, merely routine, cursory, and superficial, much too limited in scope and looked upon by management as a petty annoyance to be performed by management's handpicked committee of management-elected and management-dominated directors, only to meet the minimum letter of the law as it presently is. There should be provisions in the banking law setting forth not only that there shall be not less than two internal audits per year but that the detailed scope of the audit should be prescribed uniformly, such, for example, as set forth by the National Association of Bank Auditors and Comptrollers as the result of an exhaustive 1955 project of the research committee of this association with headquarters at 38 South Dearborn Street, Chicago. I have appended a copy of same herewith. ( See appendix. ) It should be further set forth in banking law that if the foregoing provisions are not complied with by management in such an adequate internal audit, then the law should have provisions for requiring the examiners of the supervisory agency to have such an adequate audit made and bill the bank for same. Only in this way is provided an STUDY OF BANKING LAWS 729 adequate deterrent to careless, extravagant, or fraudulent tendencies on the part of bank personnel or management. It is no adequate answer to take the attitude, as so many bank officials do, on losses resulting from such carelessness and laxity, that the bank is insured and that thereby such losses will be recouped by the insurance underwriting agency. It is axiomatic that the rest of the banking industry must ultimately pay for such carelessness, laxity, and indifference, in the form of increased insurance rates. Those banks and their owners which may be operated consistent with sound banking practice, prudence, and care should not be penalized indirectly, thus, by those which are not so operated . Governmental authorities' examination of FDIC -insured banks has for its principal purpose merely the appraisal of certain presumed or ostensible assets found in the banks' files by the governmental supervisory agencies' examiners and to ascertain whether the law, as it exists today and under which the bank presently operates, is being complied with. Consequently, the major emphasis is placed upon determining the solvency or financial condition of the banks and not, for example, upon the prevention of defalcations. This is evidenced by the ability of some embezzlers to cover up shortages over fairly long periods during which time several examinations may have been made, by both the governmental authorities and also by the directors. The latter, all too often , is done by a management-handpicked and management-elected committee of director "puppets" who are too often disinterested and dominated by bank management on whom these "puppet" directors are solely dependent for election and reelection year after year with management-bought proxies-bought, let it be noted, at the bank's expense and therefore at the shareholder-owning public's expense. A so-called audit by such a management- dominated committee is usually not worthy of the designation of an audit. It is usually cursory, superficial, and far too limited and inadequate in scope and barely such as to meet the minimum requirements of the letter of the inadequate provisions in this respect , of the banking law as it exists on the statute books today. Although often examinations by bank examiners cause shortages to be discovered, but discovery seldom occurs in the early stages of embezzlement, says Lester A. Pratt, one of this country's most eminent bank- auditing authorities , who goes on to sayMost frequently, discovery by bank examiners results only because the shortage has reached such proportions that the embezzler can control it no longer. Apropos also are the following pertinent comments on the aforementioned inadequate internal audits of insured banks as excerpted from May 2, 1955, issue of American Banker. This publication is in turn quoting an address entitled "Who Audits the Auditor," delivered by Herbert A. Wood, comptroller of the Mechanics National Bank of Worchester, Mass., at the 1955 eastern regional conference of the National Association of Bank Auditors and Comptrollers held at Scranton, Pa. This authority had the following to say on this subject, in part : One of the most difficult problems facing bank directors' examining committees, particularly if no outside examination is made except those performed 730 STUDY OF BANKING LAWS by the supervisory authorities, is that the development of the audit program is delegated to the auditing committee with little followup to see that this program is sufficient and that it is properly carried out. How many times have you heard the remark, "The auditor is only as good as the president of the bank wants him to be," or, "No one knows just what I do." This should not be so. All other departments of the bank are examined and their systems tested to see that their operations are properly carried out. How often is a review made with the auditor to determine ( 1 ) whether or not he is keeping up his schedules, ( 2 ) are his methods along proper audit channels, (3 ) could the auditor, by having so much control, be the very one to cause embarrassment to the bank. In other words, who audits the auditor? This responsibility is further delegated to the audit committee, whose duty it is to see that the audit functions are properly carried out. APPENDIX (Source : From Library of Board of Governors, Federal Reserve Bank, HG 1707 N32. Audit Program for the Smaller Bank, project of the research committee, the National Association of Bank Auditors and Comptrollers, 38 South Dearborn St., Chicago 3, IIL, copyright 1950. Ch. III, pp . 53 through 60, of the foregoing opus is entitled "Examination by Directors" ) The annual or semiannual bank examinations made by examining committees or by certified public accountants at the instance of the board of directors, should cover the following suggestions : Cash and cash items The cash should be counted and the total compared with the books of the bank. Cash items should be scrutinized. Any improper items, such as unposted checks held for the purpose of not showing overdrafts, and other items that cannot be readily converted into cash, should be reported. Bonds and other securities The bonds and other securities of the bank should be examined and in every instance those not on hand should be traced. The market value and the amount at which carried on the books in the aggregate, should be shown. Any stocks held by the bank should be listed, with a statement which shows the reason the securities were taken by the bank. Notes The notes should be checked and their total should be compared with the general ledger. It is advisable that there be direct verification of loans mailed to borrowers together with a stamped, self-addressed envelope to be returned to the chairman of the board. The validity, value, and security of each note, and of any collateral thereto, should be determined. Any loss ascertained or probable, in the judgment of the committee, should be noted. The liabilities of each of the larger borrowers, and loans to affiliated interests, should be aggregated and considered. The report should also show the general character of the loans ; whether well distributed as to occupation of borrower and type of security so that any unfavorable conditions in one institution do not distress the bank ; the general character of the collaterals ; whether corporations, in which officers or directors are interested, borrow to an undue extent ; and any large liabilities of the officers or directors. It should be shown whether all the paper claimed by the bank is its own property, including collaterals, is properly endorsed or assigned to it, and all mortgages recorded . Any loans exceeding the legal limit of the capital and surplus of the bank should be reported. ( Look out for " colorable" loans. ) The total lines should be checked against the minute book for proper authorization . The signatures of all notemakers and endorsers should be scrutinized ; any erasures and alterations or any indications of manipulation should be investigated and reported to the entire board. All overdue paper should be listed and instructions given as to definite action to be taken. Certificates of deposit The certificates of deposit and the cashier's checks should be verified by totaling those outstanding as shown by the register and by comparing with the general ledgers ; also by comparing the canceled certificates and checks with the register STUDY OF BANKING LAWS 731 and checking them against the stubs. Sequence of numbers of unissued items shoul be closely scrutinized . Report of conditions ( last call) The copy of the report of condition made to the supervisory authority at the last call should be compared with the bank's books at that date, particularly with reference to any excessive loans and directors' and officers' liabilities reported. Reconcilement of bank accounts The banks's latest reconcilements of accounts with correspondent banks should be compared with the bank's books, and a transcript of the bank's account from the date of the latest reconcilement to the date of the examination should be sent to the correspondent banks with a request for verification. Balances with nonmember banks in excess of the legal limit should be reported. Individual ledgers Individual ledger balances should be verified in such manner as the directors may deem advisable, by sending out reconcilements of certain accounts selected by the directors , or in some other suitable way. A trial balance of the ledger should be taken by some member of the committee, or at least by some person other than the clerk engaged on the ledger. The examining committee should inquire into the arrangement for the working affairs of the bank and ascertain whether any employee who keeps the individual ledger also receives deposits or balances pass books ; and whether the employees are properly bonded, and in whose custody the bonds are lodged ; also whether employees are rotated from time to time. Overdrafts Overdrafts should be totaled and considered ; the report should show any estimated losses. Profit and loss accounts. The committee should consider the "profit and loss" and "expense" accounts, with a view of determining whether the charges against those accounts are proper ; whether the earnings of the bank warrant the expense charges ; and whether the bank is making a legitimate profit. Borrowed money Any liability of the bank for borrowed money should be shown on the balance sheet, and the proper authority and the necessity for such borrowing ascertained. The total amount of the present liabilities of that nature should be reported to the board ; the amount should include money borrowed from other banks on certificates of deposit, if any. Securities in safekeeping The board of directors should include in their annual examination, the verification of "Securities left for safekeeping," by direct correspondence with the customers . Since verification can be made only if there is a proper record, it is essential that adequate records of safekeeping securities be kept. Savings accounts Verification during a directors' examination of savings account balances, either completely or by random selection of a representative number of accounts, is recommended preferably should be by direct correspondence with the depositors. Directors' report ( in general) The report of the directors or the examining committee should show that these points have been covered, and should recite any deficiencies discovered. The report should contain a complete statement of the total assets and liabilities of the bank with any additions or deductions that, in the judgment of the directors, should be made as a result of their investigation. A detailed statement of the loans which the directors estimate as worthless, doubtful, or insufficiently secured, should be included as should the reasons therefor, and, as nearly as possible, the real value. Carrying values of all assets should be discussed, with resultant recommendations. A statement of any matters which, in the opinion of the committee, affect in any way the bank's solvency, stability, or prosperity should be made. 84444-57 -pt. 2—19 732 STUDY OF BANKING LAWS A thorough, complete examination at least once a year, by a committee of the directors cannot fail to be of great benefit. The directors owe such examinations to the shareholders who have placed them in positions of trust. A complete report of each examination should be preserved in the files of the bank and should be made available to the bank examiner. GENERAL OUTLINE OF REPORT (Examining committee, banking department) 1. Letter of transmittal to board of directors. 2. Ownership and management schedule by name : (a ) Stockholders (b ) Directors (c) Committees of the board (d) Officers 3. Statement of condition ( condensed and comparative ) . 4. Statement of condition ( general ledger controls as of date of examination ) . 5. Comments on resources ( in order of general ledger accounts ) . 6. Schedules : (a) Attorneys accounts. (b) Claim accounts. ( c ) Direct and indirect liability of officers, directors, employees, and/or members of their families, and/or firms in which any of the foregoing have a vested interest. (d) Past due loans (e) Overdrafts (f) Investment securities ( par, book, market ) (g) Cash due from banks (h) Cash items ( i ) Furniture and fixtures ( classification) (j) Suspense account (k) Other resources 7. Cash and cash items ( schedule by tellers, by kinds of money held ) 8. Comments on liabilities ( in order of general ledger accounts ) 9. Statement of current earnings and expenses ( comparative ) 10. Branch office ( schedule of resources and liabilities serviced ) 11. Schedules : (a ) Investment securities. (b) Public funds. (c) Due to banks. 12. Examination of minute books ; stock ledgers and certificates. Senator ROBERTSON. The next witness is from North Carolina , Mr. Conrad York. STATEMENT OF W. C. YORK, DEPUTY COMMISSIONER, STATE OF NORTH CAROLINA INSURANCE DEPARTMENT Mr. YORK. Members of this honorable committee, Mr. Charles F. Gold asked me to express his deepest appreciation to you for granting us this time to appear here before you. He would have enjoyed it himself but he is being inaugurated today for another 4-year term , along with the Governor of our State. Senator ROBERTSON . We will be glad to hear you, and you may proceed. Mr. YORK. We have a prepared statement which we wish to go into the record. Under the captioned bill, the Federal Home Loan Bank Board would be given powers much broader than now exist under present law. In our opinion, certain sections enumerated and commented on below are an invasion of States ' rights and infringe on the authority STUDY OF BANKING LAWS 733 of States to regulate and supervise savings and loan institutions that said States have chartered. North Carolina has chartered and now supervises 148 savings and loan institutions, 102 of which have insurance of shares through the Federal Savings and Loan Insurance Corporation. All insured associations would be affected by this new proposed legislation. We solicit your careful consideration of the following quoted sections and comments thereafter. In the interest of brevity, I will leave out the part of the law that I have quoted and will only quote our comments. The first section has to do with the membership of the Federal Home Loan Bank. We think an association should be able to identify itself with the bank in ads, on its stationery or on the office window. Many institutions are proud of their membership in the bank and should be permitted to say so. Mr. ROGERS. Mr. York, that would permit the advertisement in the home office. It is aimed at nationwide advertising by a few associations who, through the use of the Home Loan Bank System insignia and saying they receive accounts up to $ 10,000 and under State Government supervision, mislead the public into thinking that they are insured . Mr. YORK. Does it say that in the bill or just— Mr. ROGERS . Pardon? Mr. YORK. Does that give the board the right to say whether it should be on the window anywhere? Mr. ROGERS. It says "off the premises on which is situated the home office." That is the only thing. Mr. YORK. It is our understanding they would have to remove that from their stationery. Mr. ROGERS. Well, not necessarily. That would be up to the board's regulation. Mr. YORK. That is right. Mr. ROGERS . We assume the board would be reasonable about this. Mr. YORK. We would like to have it spelled out to that extent if we could. Mr. ROGERS. How many uninsured associations do you have in North Carolina ? Mr. YORK. Forty- six, ten of which are just members. Others would like to be members but without insurance. However, the board will not take any other institutions as members without the insurance. Mr. ROGERS. That is correct. Do you have any restriction on their advertising ? Mr. YORK. Locally ? No , sir. Mr. ROGERS . By State law? Mr. YORK. By State law? Mr. ROGERS . Yes. Mr. YORK. Well, no, we have no restrictions as far as the Federal Home Loan Bank is concerned . We would have restrictions as far as State law is concerned how far they could advertise. Mr. ROGERS. Thank you. Mr. YORK. The second section has to do, of course, with the conversion of the Federal associations into State-chartered institutions, where a State- 734 STUDY OF BANKING LAWS shall constitute an agreement to be bound by all the requirements that the Federal Savings and Loan Insurance Corporation may legally impose under section 403 of title IV of the National Housing Act. We are in opposition to this because we feel it is an attempt by the Federal Savings and Loan Insurance Corporation to dictate the policies of a State corporation once it has been converted to a State institution. Senator ROBERTSON. May I interrupt to suggest that that is the provision of the present law? Mr. YORK. Provision of the present law ? According to whatever interpretation they wish to render ? It has always been heretofore, until the past year, that the State had a right to regulate its own corporation. Senator ROBERTSON. The pending bill does not change existing law. Mr. YORK. Does not change it ? Senator ROBERTSON. That is right. Mr. YORK. The Federal Savings and Loan Insurance Corporation Act. Part of the evidently new provision gives the Insurance Corporation the right to adopt and amend bylaws and to adopt, amend, and require the observance of such rules, regulations, and orders as may from time to time be deemed necessary for carrying out the provisions or purposes of this title or for the protection of its insurance risk. It is our opinion that the wording here is too broad, and it gives to the Corporation powers and rights which we think rightly belong to Congress. In other words, that the law should spell out what is desired and not leave such broad power in the hands of a governmental corporation. Rules and regulations could be drawn that would not infringe on State law. Section 404 (b ) , page 220 of the bill. Each applicant for such insurance shall also file with its application an agreement that during the period that the insurance is in force it will not make any loans beyond 50 miles from its principal office except with the approval of, and pursuant to regulations of, the Corporation. The provisions of this section should be the same as granted under section 5 ( c ) , page 204, which grants Federal associations : Except that not exceeding 20 per centum of the assets of such associations may be loaned on other improved real estate without regard to said $35,000 limitation, and without regard to said 50-mile limitSenator ROBERTSON. In other words, you are recommending a change in existing law ? The bill just states the existing law. Mr. YORK. No, no. We are recommendingSenator ROBERTSON. I think the bill states the existing law. Mr. YORK. We are recommending that the same provisions- which haven't been interpreted as such-be extended to an insured institution. Mr. ROGERS. Mr. York, what the Senator is trying to make clear for the record is that this provision, like the earlier one, is exactly the same as present law. The bill makes no change in it. You are recommending a change, but you are making a recommended change in the present law and not in the bill as such. Mr. YORK. That is right. Section 404 (c) : In considering applications for such insurance the Corporation shall give full consideration to all factors in connection with the financial condition and policies of applicants, the need for additional insured institutions in the com- STUDY OF BANKING LAWS 735 munity, and the effect of the granting of insurance upon existing insured institutions in the community, and shall have power to impose such conditions to insurance, which conditions may be conditions precedent or conditions subsequent, as it may be necessary or advisable in the public interest or for the protection of investors. Any such conditions heretofore imposed are hereby validated. It is our opinion that under present law Congress has sufficiently spelled out the basic requirements for insurance. The amendment would place in the hands of a corporation or a board legislative powers which should remain with Congress. In other words, Congress should not allow its functions to be usurped in this manner, and it is contrary to our ideas of separation of powers under the Federal and State constitutions . Also, it might possibly result in an infringement on States rights if the rule or regulation written by the Corporation either violates the State law or puts the Corporation in a position where it could underwrite the State's decision on need or necessity for an additional association . The power sought under this section would give the Insurance Corporation complete control to regulate competition and would grant control over savings and loan associations which no other corporation could obtain by legislation ; that is, the right to controlled competition or no competition. We recommend that line 16 through line 18 of this subsection be amended by striking out the words : The need for additional insured institutions in the community, and the effect of the granting of insurance upon existing insured institutions in the community. Senator ROBERTSON. May I ask a question there ? Mr. YORK. Yes , sir. Senator ROBERTSON. When you say "we" recommend, to whom do you refer? Mr. YORK. Mr. Gold. We have prepared a joint statement. Senator ROBERTSON . Please state his position . Mr. YORK. Commissioner of insurance, State of North Carolina. Senator ROBERTSON. Is that just a one-man board ? Mr. YORK. He is commissioner of insurance, and under the commissioner of insurance is the supervision of all savings and loan institutions in our State. Senator ROBERTSON. I mean is he the last authority? In Virginia we have a division of banks, but it is under what we call the State corporation commission . The official action has to be taken by the State corporation commission. Mr. YORK. No , he justSenator ROBERTSON. But the man you speak for now is the one that takes the last official action on banking in North Carolina? Mr. YORK. Not banking. The banking is under the banking commissioner and a bank board. The savings and loan business is not under the banking laws in our State. Senator ROBERTSON. Oh, you are just talking about savings and loan associations. Mr. YORK. That is right ; yes, sir. Senator ROBERTSON. I just wanted to know who the "we" was. Mr. YORK. It is a joint statement which was prepared by Mr. Gold and myself, with the backing, of courseSenator ROBERTSON. If you will excuse the inelegant English. Mr. YORK. Section 404 (e ) has to do, of course, with the mergers. 736 STUDY OF BANKING LAWS Except with the prior approval of the Corporation by regulations or otherwise, no insured institution shall ( 1 ) be a party to any merger or consolidation ; (2 ) purchase any assets from or sell any assets to any savings and loan, building and loan, or homestead association or cooperative bank, or any savings bank ; or (3 ) increase its accounts of an insurable type through or in connection with any purchase of any assets. This particular provision would bypass all State laws and give the Insurance Corporation complete authority for any type of merger. It is our opinion that where State-chartered associations are concerned, any requirement of approval by the Insurance Corporation would be an invasion into matters which should be determined by State law. Any regulation on these subjects should be concerned solely with the safety of the continuing or acquiring institution as tested by the adequacy of its reserves. We think this would be an improper delegation of power to a corporation or a governmental board and an usurpation of power properly residing in management. The miscellaneous section. This has to doMr. ROGERS. Mr. York, may I ask you a question about that last section ? Mr. YORK. Yes, sir. Mr. ROGERS . Under this proposal would not your office still have to pass upon each merger? Mr. YORK. Not according to the wording of the bill we would not. Mr. ROGERS. How do you get that interpretation ? Mr. YORK. It says "except with the prior approval of the Corporation. " It makes no reference to our departments at all, our State departments. Mr. ROGERS. Could a merger take place in North Carolina without first getting your approval ? Mr. YORK. State corporations ; no. But if this goes into effect, then we would have little or no say-so in it. That is our interpretation. Senator BENNETT. Would this not have the effect of requiring the joint approval both of you and of the Insurance Corporation ? Mr. YORK. The bill does not say so. Mr. ROGERS . Two savings and loans could never come to the Corporation without State approval ; that is right. Senator BENNETT. Without State approval. Mr. YORK. It does not say that in the present proposed bill, does it ? Mr. ROGERS . I think that is implied in all of it. Mr. YORK. Implied in all of it? Mr. ROGERS. Yes, sir. Senator BENNETT. We cannot legislate for the State of North Carolina . Mr. YORK. I know you cannot. Senator BENNETT. All we can legislate for is the Federal Government. And the fact that we make this proposal with respect to the Federal agency does not completely destroy your right to exercise your authority. It just imposes a second layer on the situation . Mr. YORK. Supposing two State associations wish to merge, could they do it without the permission of the Corporation under the present proposed setup ? Senator BENNETT. They could not approach the Corporation without your permission, without first having obtained your permission. If they came to the Corporation and , in answer to a question, had to STUDY OF BANKING LAWS 737 say, "We do not have permission of the commissioner of North Carolina," I am sure the Corporation would ipso facto have to refuse it. Mr. YORK. All right. If they have our permission and they ask the Corporation's permission and the Corporation says, "We will not give it," then what? Who has control ? Mr. ROGERS. That is the situation where it could be turned down as far as insurance goes. They would be no longer insured. Mr. YORK. In other words, they have the last say- so on whether they will join-————— Mr. ROGERS. That is right as far asSenator BENNETT. As far as insurance goes. Mr. ROGERS. That is right. Senator ROBERTSON . The committee has had the same issue before us with respect to insured State banks. Mr. YORK. Yes. Senator ROBERTSON. On the bank merger bill the committee has construed the language to mean that the States act first and the Federal agency does not act unless the State first approves the merger. The committee takes the same position with respect to the mergers of savings and loan associations. The State on a State institution acts first and, unless it approves, the Federal agency will not consider it. That is our interpretation of what this law means. Mr. YORK. But if they turn it down, of course, they would lose the insurance even though they merged. Is that right ? Senator BENNETT. That is right. But just to finish the concept, you do not have now the power to guarantee them their insurance. You only have the concern of approving their merger. Mr. ROGERS . Sure. Senator BENNETT. In any event, the responsibility for insurance rests with the Federal Government, even under the present situation. Mr. YORK. Yes. Under miscellaneous amendmentsWhoever being an officer, director, or employee of a bank which is a member of the Federal Reserve System or the deposits of which are insured by the Federal Deposit Insurance Corporation or of any savings and loan, building and loan, or homestead association, cooperative bank or other institution, the accounts of which are insured by the Federal Savings and Loan Insurance Corporation— (ii ) Makes or grants any loan to , or employs or makes an offer of employ. ment to, any examiner or assistant examinerand so forth . I will not finish the quotation of that because I am sure you are familiar with it. But we think this goes too far. We do not think any Federal agency should have power and authority to control and supervise State employees and make it possible to dictate their future employment if they change positions. We do not think that it is right to prevent any employee or individual from pursuing, seeking or accepting employment in his chosen field or profession, and that wherever the words " State agency" appear in this bill they should be deleted. The Federal Home Loan Bank Board has asked for this same control over their employees under section 19 (b) , page 200 , of the proposed bill, of title IV, Federal Home Loan Bank Act, of this same bill. 738 STUDY OF BANKING LAWS The enactment of this legislation would not cut down the number of defalcations in financial institutions or in any manner eliminate all dishonesty. This is a direct attack on the character, the moral standards, and the integrity of all the employees of both the State and Federal supervisory authorities and would be a handicap to these agencies in obtaining new employees. For years the greatest incentive our employees have had is to be able to go into these institutions as executives. In the interest of brevity I wish to have the rest of these remarks filed. Senator ROBERTSON. That may be done. (The balance of Mr. York's prepared statement follows :) CONCLUDING REMARKS The Federal Savings and Loan Insurance Corporation has assets of approximately $267,000,000 and the right to borrow up to $750,000,000 from the United States Treasury. This makes a total of $1,017,000,000 available for emergencies. The Corporation has insured accounts of approximately $34 billion. Thus you have $1 billion underwriting $34 billion or a potential reserve of approximately 3 percent. Is it because of this potential liability that the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corporation have asked for powers that will give them complete control over all insured State institutions ? The loss reserve liabilities of all State-chartered institutions in North Carolina amount to 7.5 percent of total share capital, and it is one of the greatest protections the Insurance Corporation has. These loss reserves would be first used before the Corporation would have any liability for losses in North Carolina . It is our contention that the Federal Home Loan Bank Board and the Insurance Corporation already have sufficient powers to amply protect potential losses without granting more powers. Since the liability of the Insurance Corporation is not affected until local loss reserves are exhausted , we oppose the granting of complete dictatorial powers to the Bank Board or the Insurance Corporation. The building and loan division of the North Carolina Insurance Department is the supervisory authority of North Carolina State-chartered associations. We have consistently required good management, sound operation, and that adequate reserves be set up by all State associations. We feel that the State supervisory record in this respect speaks for itself. It is when efforts are made by Federal agencies to further usurp States rights that we find it our duty to ask this committee to eliminate from this bill the objectionable provisions. Mr. YORK. I appreciate the opportunity to appear before you. Senator ROBERTSON. Any further questions ? If not , we thank you. Mr. Maurice S. Brody, director of the Denver National Bank, was scheduled to testify this morning, but he was unable to be here . His prepared statement will be made part of the record at this point. (The prepared statement of Mr. Brody follows :) STATEMENT OF MAURICE S. BRODY. DIRECTOR, DENVER NATIONAL BANK In both the 83d and 84th Congresses two unsuccessful attempts have been made to eliminate the principle of mandatory cumulative voting in the election of national bank directors. This attempted legislation was not accompanied by any objective, unbiased study as to the merits of this principle from the standpoint of the public interest. On the contrary, the attempt to change the present law carried all the earmarks of a special-interest group trying to put through legislation designed to serve its own purpose. STUDY OF BANKING LAWS 739 Accordingly, it becomes imperative for the Senate Banking and Currency Committee in making a study of our banking laws to fully explore the present method of voting in our national banks with a view of ascertaining in a careful, objective, and unbiased fashion whether the interests of the public, the bank's customers, the management, and the bank's public stockholders are all properly protected and safeguarded. The elimination of mandatory cumulative voting in the election of our national bank directors would uproot a basic concept of Federal corporate law deeply embedded in the public interest. In this process the present property rights of more than a half million persons would be stripped from them as they would be denied their present right to elect representatives on the directorates of national banks. Probably hundreds of independent bank directors throughout the country now acting as watchdogs in the national interest would consequently be liquidated. But more important than the disenfranchisement and destruction of the property rights of the above persons, a basic crack will have been made in our fundamental corporate bill of rights which is the essence of cumulative voting. The hundred-year struggle to secure minority representation in the conduct of our corporations will have been struck a mortal blow. The Federal Government will have set a precedent that the forces of reaction in the individual States will seize upon to repeal the corporate bill of rights ( mandatory cumulative voting) presently effective in 16 States of the Union. Furthermore, the loss of our corporate bill of rights, by removing the present legal barrier , will once more open wide the door to discrimination. The law will no longer be a protection. The group in control of each national bank can exclude stockholders from becoming directors for any reason including race, color, or religion. It is contrary to our present national conception of justice and certainly is not in keeping with the spirit of the times. It is a throwback to the days that we had hoped we had left behind forever. Finally, the present tight control of our national banks will be further extended to the point of monopoly control with very little prospect of bringing about a change of management should the necessity arise. In the case of the Bank of America National Trust and Savings Association, the practical aspect is that the 1 percent of the stock owned by the management will completely control. The public owning 99 percent of the stock will be locked out as they will not be able to name a single director. This, in effect monopoly control of our national banks, will further extend to other corporations since many trusts set up in the trust departments of these national banks hand over the voting control of nonbank corporations to these monopoly controlled national banks. The above reasons cited are deeply embedded in our American national interest and certainly are by no means offset by the desire of special interests who already being strongly entrenched in the management of our national banks are calling for monopoly control power at a time when the public interest clearly is in the direction of granting these vested interests less power rather than more. National banks, being by their nature semipublic institutions that gather together the liquid funds of the public for the purpose of safely lending and investing these funds for productive purposes, must of necessity be carefully regulated and supervised. It is my purpose in this statement to demonstrate to the committee that the checks and balance philosophy underlying our present national banking laws, which has served America so well during the last 23 years, rests squarely on the existence of independent national bank directors. And that these independent bank directors can exist only when public stockholders can avail themselves of the principle of mandatory cumulative voting in order to elect representative directors. Our national banking law revision in 1933 set up a supervisory system for our national banks built on the cornerstone of independent vigilant directors who are distinct and apart from the officers and management of the bank. This supervision setup can only be effective just so long as there are present on the board of directors of the bank, directors who are independent of the officers who run the bank. The supervision extends in three directions : 1. Supervision by directors internally on an all-year-round basis. 2. Supervision by an annual examination of the bank by a committee of directors totally separate from the officers of the bank. 740 STUDY OF BANKING LAWS 3. Supervision by an annual or semiannual examination made by the national bank examiner. It is obvious that unless the relationship between the directors and the officers is conducted on an arm's length basis that the likelihood of effective supervision of the acts of officers of the bank by the directors is rather remote. Directors in effect chosen by the management officers are not likely to exercise any degree of restraint or supervision over the activities of the officers. Supervision by directors internally on an all-year-round basis thereby becomes weak and ineffective. The required annual examination by law of the bank by a committee of directors separate from the officers of the bank soon founders on the same basic defect. Directors closely tied in with the management due to the fact that they are directors, not as a result of their stockholdings but just by virtue of the fact that the officers invited them to become directors, are unlikely to subject the bank to anything but a routine cursory examination prescribed by an officer. Finally, let us look at the examination by the national bank examiner. He comes once or possibly twice a year and spends a few days examining the bank. Unless he finds real flagrant violations he will content himself with indicating that certain loans are substandard while other loans will be criticized for one reason or another in the hope that when he returns a year later he will find that considerable improvement in these loans has taken place. Here is where the independent director tends to make effective the national bank examiner's criticism, for in the interval of 1 year the independent bank director can follow through where the bank examiner left off. Unless there are independent watchdog directors present to act in the interval, the national bank examiner will most likely return a year later to find the same old mistakes, aggravated by time, still on the books. Mandatory cumulative voting, by permitting the public stockholders to directly elect directors who are independent of the officers, provides the backbone to our present system of supervision . Their mere presence keeps officers on their toes and in line with sound banking practices. Their arm's length relationship with the management makes effective the present three-prong method of supervision of our national banks. Without independent directors the effective supervision of our national banks falls away like a house of cards. In view of the effective supervisory function played by the independent director elected by the public stockholders because mandatory cumulative voting is an integral part of our national banking laws, it is understandable why the managements of our national banks are straining every nerve and fiber to eliminate mandatory cumulative voting in the election of national bank directors . If management succeeds in destroying mandatory cumulative voting, they will in one fell swoop rid themselves of effective supervision and thereby place themselves once again back in the saddle that they occupied in the 1920's and the early thirties. To see the real significance of the necessity of maintaining the principle of mandatory cumulative voting in the election of our national bank directors, it must be clearly understood that there is a distinct line and cleavage between the management of a bank as represented by its president and executive officers, and the directors representing the owners of the bank. These two groups are separate and apart from each other with different duties and responsibilites. It is essential for the proper functioning of our national banks not to permit one group to destroy the duties and responsibilities of the other group nor for one group to usurp the functions of the other group. The banking management fraternity made up of presidents and other executive officers of banks by pressing vigorously for the elimination of mandatory cumulative voting through their banking associations such as the American Bankers Association and the Association of Reserve City Bankers would usurp the function of independent directors of the bank to supervise the activity of these executive officers. The power presently vested in the hands of the stockholders would consequently be arrogated by these management officials to themselves. This usurpation of functions is unsound public policy and would tend to destroy the system of checks and balance in our national banks. The recent failure of the Home National Bank of Ellenville, N. Y., clearly sets forth the necessity for a definite division between the duties and responsibilities of the management as contrasted with the duties and responsibilities of the directors. Here the Comptroller of the Currency was unable, by his external examinations, to protect the interests of the stockholders and the depositors of the bank. The present safeguard of mandatory cumulative voting could have STUDY OF BANKING LAWS 741 been used by the stockholders to elect vigilant directors who, by the maintenance of strict internal supervision, could have prevented the president from dissipating the funds of the bank. To tie the hands of the stockholders by destroying this right to protect their own interest as well as the interest of the depositors on the grounds that the Comptroller of the Currency is at present sufficiently protecting the interest of the stockholders was brought to a reductio ad absurdum by the fiasco of the Home National Bank in Ellenville, N. Y. No law can absolutely prevent bank failures nor can any law force directors to be sufficiently prudent in their discharge of their obligation to protect the investment of the stockholders and the funds of the depositors. All the law can do is to keep the door open so that the public stockholders have the right to elect representatives of their own choosing who will act as independent directors and thereby effectively supervise the activities of the officers of the bank. Our present mandatory cumulative voting law protects this right of the stockholders. Its elimination would destroy the precious safeguard of independent internal supervision which is a basic cornerstone of our present National Banking Act. The divergence of interest between the management and the public stockholders of our national banks is a fundamental principle which must be maintained . If mandatory cumulative voting is outlawed as some bank managers are pressing for, the bank presidents would become in effect their own bosses and will cease to be subject, particularly as time goes on, to effective internal supervision by the owners of our national banks. This is unsound public policy and should not be sanctioned by Congress. It must be realized that our present national banking law does not require bank managements to reveal the pertinent information concerning directors of banks which at present the Securities and Exchange Commission rules provide in the case of exchange listed corporations. The stockholders in voting for their directors of national banks do not know what stake the prospective director has in the bank-whether a candidate for director owns 100 shares of capital stock of the bank or 10,000 shares of capital stock of the bank-nor is the management required to reveal any other information which would enable the stockholders to intelligently pass on the adequacy of the candidate to become a director. The national bank stockholder in effect, therefore, by signing his annual proxy, blindly presents the management of the bank with a blank check which they can use in any way they wish. They can load the board of directors with directors beholden to the management. If, in addition to the present complete lack of information which is kept from the stockholder when he votes his proxy, he also has his present right to elect independent directors on the boards of banks taken from him, he then is completely and absolutely placed at the mercy of these bank officials. It is hard to imagine that under these circumstances, Congress would strip from a half million public stockholders their only present right to protect their investment-namely, the right of independent representation on the board of directors through the exercise of the mandatory cumulative voting principle presently available to the stockholders. Clearly the elimination of mandatory cumulative voting is contrary to the public interest and Congress in its wisdom should not permit a clear conflict of interest on the part of the bank managers to strike down the only remaining protection which public stockholders have to safeguard their own investment and that of the depositors of our national banks . The public interest should come first and Congress as the representative of the public interest should not permit the safeguard of mandatory cumulative voting to be destroyed regardless of the amount of pressure which the banking lobby will exert upon the representatives of the people. The above analysis should make clear why the banking management fraternity, apart from the public stockholders of our national banks, is putting up such a desperate fight to rid themselves of mandatory cumulative voting. Their pretext is that cumulative voting has lent itself to certain isolated cases of abuse. To this the answer is definite and specific. If the Federal Reserve Board does not presently have sufficient power to deal with these cases of abuse, its power should be broadened to permit the Board to handle this phase of banking. The Federal Reserve Board, being independent and nonpartisan , is well suited to regulate in the public interest. The 27-man advisory committee to the Senate Committee on Banking and Currency in reference to this overall bill stated clearly that in their opinion mandatory cumulative voting is sound in theory. This advisory committee, heavily loaded with men representing the bank management fraternity and 742 STUDY OF BANKING LAWS without a single representative of the half-million public stockholders on whose rights they were passing, reaffirmed the soundness of the principle of mandatory cumulative voting but were unhappy with its practice in operation in some cases. Clearly the remedy for a principle that is sound in theory but imperfect in practice is to retain the basic principle but to device means to improve its practice. The Financial Institutions Act of 1957 bill clearly proceeds to do just this. The Federal Reserve Board is given more power to remove directors considered unworthy. This is the proper method to handle cases which have interfered with the constructive and effective manner of working out the mandatory cumulative voting provision of our National Banking Act. To destroy and strip from our American system of corporate national banking law a basic principle that is sound just because its practice is imperfect is not in keeping with our American traditions of fair play and justice. If we refuse to remedy the practice of a principle that is sound but instead reject the sound principle that is inherent and basic to our corporate national laws, we raise the question of whether we are quarreling with the practice at all but really at heart want to destroy the sound principle of protecting the public stockholders from encroachment on their inherent rights to safeguard the funds of depositors and the investment of the public stockholders. It is sheer folly to burn down the house of mandatory cumulative voting, which permits the election of independent watchdog directors who clearly serve in the public interest, just because there happen to be a couple of mice in the basement. In summary, therefore, this is the case for the retention of mandatory cumulative voting as a basic fundamental democratic American principle inherent and vital to the integrity of our national banking system. Twenty-three years ago Congress in completely overhauling our national banking system established mandatory cumulative voting as a requisite principle in the election of our national bank directors. This principle has permitted the present one-half million public stockholders to have independent representation on the board of directors in our national banks. With the diffusion and widespread public ownership of bank stocks which has occurred during the last 23 years this principle is more important and necessary today than it was even 23 years ago. The soundness of this principle has been freely recognized by both friend and foe alike and has become deeply imbedded in our Federal and State corporate law as being basic to the sound public interest of our Nation. It has become established as an inherent property right of millions of public stockholders not only in our national banking system but also in one-third of the States of the Union. Mandatory cumulative voting has become the Nation's fundamental corporate bill of rights. Rights of the minority stockholders which the majority cannot take from them. The right of representation and a voice in the management of the corporations that they own. Repeal by the Federal Government would set a precedent that would harken the forces of reaction in 16 States of the Union and would set the wheels of progress turning backward. In addition, the loss of our Federal corporate bill of rights by removing the present legal barrier against discrimination will once more open wide the door to discrimination on the grounds of race, color, or religion. The group in control of any national bank can reject a candidate for directorship on these grounds. Furthermore, monopoly control will supersede our present majority control of our national banks. The practical operation of our corporate control laws will permit a tiny minority of stockholders acting through the officers of the bank to exercise monopoly control of our national banks. This should not be tolerated at a time when the public interest is clearly in the direction of granting these vested interests less power rather than more. Finally by undermining the independent internal supervision of our national banks a death blow will be struck at the checks and balance safeguards presently operating in our national banks through the instrumentality of independent watchdog directors elected under the mandatory cumulative voting principle the established safeguard of independent internal supervision that would have prevented the failure of the Home National Bank at Ellenville, N. Y. , at the hands of its bank president. The remedy for defects in the practical operation of mandatory cumulative voting can be easily achieved through extending the power of the Federal Reserve Board to remove unworthy directors. This the bill known as the Financial In- STUDY OF BANKING LAWS 743 stitutions Act of 1957 does. This is the sane and proper method to use in improving the practical operation of the sound democratic principle of mandatory cumulative voting which over the years has become deeply imbedded as the bill of rights in the fabric of our National and State corporate laws comparable to the Bill of Rights in our constitutional system of law. The ruthless outlawing of mandatory cumulative voting in our national banking system would set in motion reactionary forces in the Nation and the individual States which would challenge the corporate safeguards and property rights of millions of public stockholders. No political party in America can live to govern which espouses the selfish interest of the few by destroying the property rights of the many. Senator ROBERTSON. The committee will stand in recess until 10 o'clock tomorrow. (Whereupon, at 10 : 45 a . m ., the subcommittee recessed until 10 a . m., Friday, February 8 , 1957. ) STUDY OF BANKING LAWS ( Financial Institutions Act of 1957 ) FRIDAY, FEBRUARY 8, 1957 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, SUBCOMMITTEE ON BANKING, Washington, D. C. The subcommittee met, pursuant to recess, in room 301 , Senate Office Building, at 10:05 a. m. , Senator A. Willis Robertson (chairman of the subcommittee) presiding. Present : Senators Robertson, Monroney, and Bennett. Senator ROBERTSON . The subcommittee will please be in order. The first witness today is Mr. Seaborn J. Flournoy, of Norfolk, Va. We will be glad to hear you. STATEMENT OF SEABORN J. FLOURNOY, INVESTOR AND STOCKHOLDER, AMERICAN NATIONAL BANK, PORTSMOUTH, VA. Mr. FLOURNOY. My name is Seaborn J. Flournoy, of Portmouth, Va. I am a Ford dealer, having been a dealer for 28 years, a Ford tractor and implement dealer, an insurance agent, in the investment business, and one of the largest stockholders of the American National Bank of Portsmouth. My appearance here before this committee is to oppose the proposal contained in title I, chapter I , section 26 , subsection (C) of the committee print bill entitled "Financial Institutions Act of 1957." This proposal seeks to eliminate the cumulative voting of shares in the election of directors of national banking associations. My reasons for opposing this proposal are as follows : 1. It is contrary to the Constitution of the United States of America. The preamble states that its purpose is to "establish justice. " In what nation would the denial and abrogation of the rights of a 49.99- percent minority be defined as justice ? However, injustice rather than justice would almost certainly result in many instances from the passage of this proposal . Bank management is now permitted by law to withhold from its stockholders, who own the bank, any and all pertinent information such as salaries of officers, fees paid to directors, details of the bank's investment portfolio, number of shares held by officers and directors, proposed changes in number of directors, and all operational details because the law does not require a bank to publish inormation nor to make it available to its stockholders when seeking proxies for the annual meeting. Some banks voluntarily disclose some of this information , but most do not. The one in which I am most interested 745 746 STUDY OF BANKING LAWS never did until this year-and then only as a result of my severe criticism during 1956. Even so, the report submitted was very meager and it was not received by stockholders until 10 days after the annual meeting of stockholders and election of directors. And yet the law does require that other corporations which sell their securities to the general public, as do most banks, abide by the regulations of the Securities and Exchange Commission, and the Securities and Exchange Commission does require that such information shall be furnished each stockholder. Why should bank management be favored over other corporate management ? Is this justice? You Senators are here to reexamine legislation that undoubtedly needs revision. It is full of anachronisms. If it were not, you, sir, my Senator, the Honorable Willis Robertson, would not have offered the bill. But you gentlemen have been sitting here for a long time to make sure that those things in the present law that " establish justice" are not eliminated to satisfy the demands of a pressure group , however numerous, however well recommended , however powerful financially. I and other bank stockholders, who have dared criticize or oppose bank management. have not been generally successful in our efforts to date. But some of us will continue our fight and we would hate to see the only pathway now open to us, that is, the right of mandatory cumulative voting, barred and padlocked against us by the adoption of this proposal. Financial slavery, although not as degrading as political slavery, should be unconstitutional. My second reason is simple equity. I am not a lawyer, as many of you gentlemen are, but I have always heard that "equity is the administration of law according to its spirit and not according to the letter." I have not only heard it. I have read it in Mr. Webster's dictionary. Many people in this country are naive enough to believe that a corporation or banking association , since it is owned by a group of stockholders, is governed by the same rules as our Federal Government and subject to the same checks and balances. Perhaps they are in theory, but as you gentlemen know only too well, the ballot is as deadly as the bullet. Who ever heard of a Congressman running for election and just as the polling places were being opened on election day being told by the judges of election that the number of Congressmen to be elected had been reduced from 17 to 5 ? And, therefore, he would need one-fifth the total vote, or the vote from 3½ districts in the State, instead of one-seventeenth, or the vote from 1 district. No one. The law forbids such highhanded , dictatorial action . But I heard of what happened to a would -be national bank director in Portsmouth, Va . He held proxies for more shares of the bank's stock than the total shares owned by all of the bank's 17 directors, who was told at the annual meeting that only 5 directors would be elected . This change in the number of directors was passed by the voting of proxies obtained by the bank's management, at the expense of the bank's stockholders, without notice to the stockholders that any such action was planned . The reason given for the reduction was "that a stockholder who had criticized the bank's management is undertaking to have himself elected with others to the board. " I know, because I am the stockholder who criticized ; I am the stockholder who undertook to get elected to the board so that the 43 stockholders I represented might have some say in the management of the bank, rather than leaving it entirely STUDY OF BANKING LAWS 747 in the hands of the existing board. The latter had rather clearly demonstrated over the years that they were almost completely dominated by the bank's president. Don't you gentlemen agree that such action, although perfectly legal, was not an action that fits in with the definition of equity? Especially since upon organization the 5 remaining directors appointed the 10 living former directors as an advisory board and are paying them the same attendance fees they formerly received as directors, at an annual expense of $10,400 to the bank. The average annual profits of that bank after taxes for the last 10 years have been just $100,000. Now that I know the rules of the game, I will conduct my campaign for proxies in the open, as I did last year, until I have enough to get elected to a 5-man board ; and they won't be as hard to get as the 43 I got last year, unless the door is slammed in my face by the abolition of cumulative voting. My third reason is that the abolition of mandatory cumulative voting, rather than promoting harmony as alleged by the American Bankers Association, would actually have a tendency to harm many national banks by fostering bitter proxy battles over a period of years ; since only by controlling a majority of the stock could a shareholder obtain representation . To cite an example with which I am entirely familiar-my own case : Why do I want to be a director of the American National Bank? 1. Because the bank has need of some ideas which, although new to the management, have been the basis of the operating policies of almost all well-run banks. These ideas have been used and proven to be sound by all of the banks with which I am familiar. 2. Because the interests of the bank's stockholders have not been placed ahead of the interests of the executive officers and directors and I want to see that this is continually brought up at meetings until it is corrected. 3. Because most of the former directors were under the domination of the bank's president. 4. Because I know, and the stockholders who gave me their proxies sincerely believe, that my motives are entirely unselfish and directed only toward seeing that our city has a national bank that is as good for the city and its people as it is for its officers and directors. These are my motives. Now what am I- and others who want to serve their community for similar reasons ? If I get licked in about 3 or 4 annual stockholders ' meetings by the combined efforts of the bank officers, present and past directors, present advisory board and employees, what will be my reaction ? Will I quit ? I will not. Will I become bitter because my personal friends who have notes in the bank are afraid to give me their proxies ? Or because employees of the bank who know that I am right and the management is wrong, and have said so, are afraid to give me their proxies because of their jobs ? Or because of modest pensions paid at the pleasure of the board of directors, upon the recommendation of the president, to dear friends of mine, many mutual friends of mine and the pensioners, although agreeing with me 100 percent as to the desirability of nonmanagement representation on the board, feel that they must give their proxies to the management so that the pensions of their friends and mine will not be disturbed ? 84444-57- pt. 2-20 748 STUDY OF BANKING LAWS Although I am citing from a specific case, there are many hundreds of small national banks scattered throughout the entire United States of America in which smug, self- satisfied, unprogressive management could become just as well entrenched as it has in our bank in Portsmouth, and in only isolated cases can there be effective opposition . And without cumulative voting it is almost a hopeless task. Do not perpetuate dictatorship of bank management in many of the small towns and small cities of your States and mine. I know that most banks are well run, and I know also that management of those banks is rarely attacked ; but many banks are not run in the interests of the depositors and stockholders and such banks should not be protected by Federal law. They should be regulated by the Comptroller's Office , not pampered. At this point I should like to read from some graphs in my testimony before the Committee on Banking and Currency of the House of Representatives of the 84th Congress, 2d session, at the hearings on Senate bill 256. If each of you gentlemen will be good enough to turn to pages 119 through 124, you will see my testimony and 6 graphs. These graphs illustrate and prove beyond a shadow of doubt that— the first graph shows the local bank representations as to percentage of growth or loss of resources from December 31 , 1945 , to December 31 , 1955. The American National Bank shows a loss of 9.42 percent in resources in that 10-year period in a defense area where all other business prospered and grew mightily. The other banks increased in their resources and the increases ran from 26.07 percent to 49.54 percent, with the exception of 1 small State bank, which only grew 6.37 percent. I might add the president of that bank is a brother of the president of the American National Bank, and they seem to think alike. The next graph shows the dollar earnings of these banks for the years ending December 31, 1946, and December 31 , 1955. The American National Bank's earnings actually declined in that period from $111,000 to $ 109,000 , whereas the other banks grew anywhere from 30 to 100 percent in earnings. The next graph, C, shows that this bank averaged for 10 years past earnings that are a far smaller percentage of its capital funds than any of the other banks in the area. It has averaged 812 percent, and the other banks vary from 9.99 percent up to as high as 11.77 percent. Graph D is next. This one they don't like at all. It shows the salary of the bank's president at $229.11 per $1,000 earned by the bank in 1955, that is, our bank, as compared with the other bank presidents in the area, whose salaries ranged from $115.34 to $40.74 per $1,000 earned by their banks. Graph E shows the comparison in resources and earnings between our bank and the bank directly across the street in Portsmouth, Va. It is not favorable. At the end of 1945 was 212 times as large as the other bank, but the other bank made 57 percent as much money. At the end of 1955 the other bank was 57 percent as large as our bank, but made more money by $30,000 . Graph F shows the comparison in resources and earnings between our bank and the bank in the area which was nearest in size to our bank. It is not favorable either. Ten years ago this other bank had resources of $ 18,600,000 against our bank of $27,900,000, but its earn- STUDY OF BANKING LAWS 749 ings 10 years ago were $3,000 more than those of our bank. At the end of 1955 this bank had become a $27,400,000 bank, while ours had declined to $25,300,000 ; and whereas our earnings went down to $ 109,000, the other bank's earnings had increased above $200,000. So much for the graphs shown. They may suggest questions which some of you gentlemen might care to ask me. In reading through the testimony you will find other facts which those of you who are close to business and banking will find to be almost unbelievable. May I say that I find the entire situation fantastic , but I have not distorted a fact in either my graphs or my statement. Gentlemen, let us be practical and factual about this matter. Proponents of this particular phase of the proposed legislation have been bankers or those closely associated with bank management. They have spoken and written at great length about the dangers of mandatory cumulative voting, but never have I read such nebulous statements. Throughout only one thing is clear- who wants protection ? Bank management wants protection. From whom does bank management want protection ? It wants protection from stockholders-vicious characters with the basest of motives who have dared to criticize them in some cases. Management has asserted with a perfectly straight face that you should believe that any minority opinion is, per se, contrary to the best interests of a bank ; is uninformed, unqualified, and irresponsible ; is prompted by personal profit motives ; is loose mouthed about the confidential information so essential in banking ; is a source of discord and friction ; and is a nuisance generally. I am reminded of the story of the teen-aged girls who were discussing their problem parents, and one young lady said that her principal worry was, "How did my mother find out all about the things she tells me I must not do ?" Gentlemen, these witnesses may have been testifying as to the motives they would have and the general course of their conduct if they were not the management, but they have no right to assume that I, or others, must be tarred with the same brush, and who are we from whom the bank management wants protection ? Just the stockholders who own the bank. American business_management, and particularly American bank management, has made a very neat reversal of corporate law in a perfectly legal way. By lawthe stockholders elect directors and the directors elect the bank officers, but as a matter of fact the bank's chief executive officers elect the directors through the exercise of management proxies. To whom does the director owe his job ? The individual stockholder ? No. Usually to the bank management, which he is supposed to control , oversee, and direct. Gentlemen, all of this hue and cry to protect bank management has one great big hole in it. How many more bank stockholders are there in America than bank managers ? I don't know, frankly, but I think it would be perfectly safe to say that the ratio is better than 1,000 to 1 . I know that you gentlemen, as elected representatives of we, the people, are not going to aid and abet a small minority in its efforts to achieve complete domination of that large but inarticulate, unorganized group, the bank stockholders of this country. Now, how did mandatory cumulative voting get into the statute. books? Where was the ABA and its witnesses when mandatory cumulative voting was put into the law and for whose protection was it enacted ? To the first part of the question my answer is that 750 STUDY OF BANKING LAWS they were in many, many cases begging at the doorstep of the Reconstruction Finance Corporation for loans or trying to sell preferred stock to the RFC, so that they could keep their doors open ; or they were sitting in the reception rooms of their Senators and Congressmen, impatiently waiting for an introduction to some RFC official, so that they could be saved. But was the United States Government, represented by the RFC , willing to buy stock in banks just to save the economy of the country? No ; not as the law then stood on the books. But if Congress would make mandatory cumulative voting a prerequisite for the banks, the RFC would make the loans. And you did and they did and the ABA, if it did not say "Thank God ," should have. Are all bank managers today so greatly different, so higher minded, such paragons of virtue, that this protection the RFC insisted upon is no longer needed ? Is the individual stockholder of today so much richer, so much more powerful, so much less in need of protection, that he or she does not need what the RFC insisted upon ? I should like to read to you now a statement which appeared in a banker's magazine, as well as on pages 10 and 11 of the hearings before the House committee which I have furnished you, and when I finish I shall paraphrase it so that it will more accurately pinpoint the real danger that will result, not if cumulative voting is allowed to continue, but if it is allowed to be barred by statute. [ Reading : ] This statement is made by Mr. Joseph E. Healy, president of Citizens National Bank of Hampton, Va. The absolute right now given to shareholders to vote stock on a cumulative basis would permit an irresponsible or unqualified individual, or one whose motives and interests might be in conflict with the best interests of a bank or the community, to acquire sufficient shares of stock in a national banking association and by means of a cumulative voting arrangement assure his election to the board of directors for his personal purposes . Situations have arisen where such minority shareholder elected as a director has conducted himself in a manner which has obstructed the orderly conduct of business of the board of directors, or which has resulted in the divulging to outsiders of confidential information about the business of the bank, its borrowing customers, and its depositors. Such directors have on occasion turned the board meeting into forums for discussion of personalities and matters detrimental to the harmonious operation of a sound bank. The responsibilities of the members of the board of directors are such that any serious discord or friction might shake the confidence of other shareholders or depositors and of the public . This is especially true in smaller communities. Minority shareholders elected to the board by virtue of cumulative voting, prompted by personal profit motives rather than by the best interests of the bank or the community, could demand the payment of excessive dividends in disregard of the condition of the bank at that time or of the better judgment of the majority of directors. They could also promote the sale or merger of a bank for the purpose of making a profit on their investments regardless as to whether the sale or merger would be in the best interests of the bank or of the welfare of the community. In addition, they could use their nuisance value to force other shareholders to buy them out at excessive prices. The present cumulative voting provision can, under certain circumstances. give a majority representation on the board of directors of a national bank to a minority group of shareholders and thus put them in a position to obstruct the carrying out of the objectives of the majority of shareholders. The percentage of shares held by the minority desiring to gain control of the board of directors need not be 40 percent, but could be a lesser percentage due to the fact that in larger banks with wide distribution of share ownership, many shareholders are negligent or indifferent in connection with fulfilling their voting prerogatives. That is the end of Mr. Healy's statement. Now, here is my version : The absolute right now given to shareholders to vote stock on a cumulative basis permits a sincere and qualified individual, whose mo- STUDY OF BANKING LAWS 751 tives are in accord with the best interests of the bank and of the community, to acquire sufficient shares of stock in a national banking association to assure his election to the board of directors so that he may serve the bank and those stockholders of the bank who , trusting him, and not being subject to the many pressures exerted by bank management, give him their proxies. Situations exist today where the majority-elected directors, under pressure from management, have entirely disregarded the best interests of their bank and the stockholders they are supposed to represent in order to keep minority-backed directors from being elected. Do they fear constructive criticism ? Do they have something to hide ? Situations exist where majority-elected directors seek information and advice from the stockholder who has been denied a seat on the board of directors as to how they can make the changes that he has recommended-to date he has never failed to tell them-but wouldn't it be more efficient to have the man on the board where he could discuss the matters in detail ? Situations have arisen where such management-elected directors have conducted themselves in such a manner, namely, failure to file proper Federal income-tax returns, which has resulted in discredit, not only to the directors involved, but also to the bank. Such directors have on occasion allowed the board meetings to become meek acquiescence to all recommendations of the operating head of the bank rather than forums for the discussion of the results being achieved or not achieved by management as compared with those achieved by neighboring banks. Majority shareholders elected to the board by the elimination of cumulative voting, prompted by personal profit motives, rather than by the best interests of the bank or community, could demand the payment of excessive dividends in disregard of the condition of the bank at that time or of the better judgment of the minority director, and the majority directors could approve such a dividend, whereas the minority director could not-he would be outvoted by the majority. The management directors, being in the majority, could also promote the sale or merger of a bank for the purpose of making a profit on their investments regardless of whether the sale or merger would be in the interests of the bank, its stockholders, or of the welfare of the community, and if it was a two-thirds majority they could make it stick, whereas the minority director could not. In addition, they could use their control of proxies to force minority stockholders to either sell out to them at less than the real value of their shares or force the minority to pay excessively high prices for more stock in the hope that they could acquire enough to protect their already large investments . The present cumulative voting provision cannot, under the usual existing circumstances, assure even a substantial minority of representation on the board of directors. Due to the expense involved, few men are willing to invest $ 15,000 in bank stock, spend $ 1,000 for attorney's fees and $500 to $1,000 for postage and printing bills in order to collect $675 in dividends and get involved in a proxy battle. I was, and still am, but not because of any hope for profit . I could do better buying U. S. Treasury bonds at 90 percent of par or tax-exempt bonds yielding 3 percent or better. But I am more concerned with seeing modern management methods installed in my community's national bank than I am in the profit. 752 STUDY OF BANKING LAWS The percentage of shares held by the management of many national banks is minute compared to that held by the large body of shareholders. Due to the indifference and negligence of most shareholders in exercising their voting prerogatives in person , management can effect the election of friends and those they can control as directors ; management can recommend to directors that the directors receive attendance fees twice as large as those received by directors of other banks in the city ; directors can vote larger salaries to the officers than those paid to the officers of banks that make twice as much money for their stockholders ; management can obtain proxies at the bank's expense and use these same proxies to retain control of the bank. They not only can do this-they have done it in the American National Bank of Portsmouth, Va. Let the American Bankers Association come forward now and name one bank where a nonmanagement director has been able to get control of a bank board unless there is a case where the management was so inefficient that all directors, even management-appointed directors, turned out management. A minority cannot upset management. The majority is entitled to control. They do at the polls on election day ; they will again when your committee acts ; they will again . when the Congress finally acts upon this proposed bill, and they will again next election day. But in each of these instances a sincere but nonconforming minority is enttiled to be heard ; their points of view compared with others presented ; their basic arguments considered , and in many cases, their ideas are lifted by the majority and made a part of the majority program. So if you gentlemen will refuse to recommend the proposed change in the National Banking Act on cumulative voting, you will be insuring the existence of democratic bank boards ; if you do not, you will be inviting oligarchic bank boards to become dictatorships, which has through history generally resulted in the appearance of a tyrant. As a native Virginian, I know of no motto to equal "Sic Semper Tyrannis.” I thank you for your patience and will be happy to answer any questions to the best of my ability. Senator ROBERTSON . Are there any questions ? Senator BENNETT. No questions. Senator ROBERTSON. We thank you very much. The next witness is Mr. Lewis D. Gilbert of New York. Will you please identify yourself for the record ? STATEMENT OF LEWIS D. GILBERT, NEW YORK, N. Y. Mr. GILBERT. My name is Lewis D. Gilbert. I am appearing here today as a permanent investor in national bank shares. Together with other members of my family we own some 1,500 shares of such national banks as First National City of New York, National Bank of Detroit, National Bank of Tulsa , Okla., Wells Fargo and Crocker National of San Francisco, Fort Neck National and Rye National in suburban New York. In addition, each year I represent a number of other public shareholders of First National City at the annual meeting, the democratic forum provided by law where the public shareholders can express their views and vote as they desire. I do so, of course, without ever charging any fee, as a public duty to my fellow owners who share my views of STUDY OF BANKING LAWS 753 corporation democracy. I am not now, in the past or in the future interested in the control of any corporation or bank. I am also in correspondence with many other owners of national bank shares who have informed me on many occasions they share my general philosophy as [ Reading : ] to shareholder rights. The first viewpoint I wish to present here today is that the public interest demands that the right of mandatory cumulative voting must be preserved. The interests of bank shareholders are not always the same as that of dominant bank management. Only the right to mandatory cumulative voting can provide the assurance of fair and equitable representation for all segments of the ownership. We are now witnessing a growth of size of national banks. Expansion is in the air. In some cases it will be through the bank holding company to the extent permitted by law. In others it will be through creation of new branches in expanding city areas. This does not worry me, as I believe that the wheels of progress in our present economy must not be held back by horse-and-buggy thinking. But this can only be safe doctrine if we are vigilant in seeing that oligarchy is not allowed to develop and maintain itself at the top of the pyramid. The channels of democratic control must remain in the hands of the ever- growing number of Americans now owning or who will own these banks in increasing numbers if the right of mandatory cumulative voting is maintained. Experience has demonstrated that optional cumulative voting is not safe or in the public interest, because those who dislike being questioned at the meeting of the board of directors, in the manner, Senators, you question one another in the public interest, will not adopt, retain, or recommend it. We hear much about the dangers of undesirable people coming into bank boards as a result of allowing mandatory cumulative voting to continue. I have but to recall to you the recent bank scandals at South Amboy, New Jersey, Ellenville, New York, or what happened in Illinois, as proof that we cannot have too much vigilance-and cumulative voting is one of the tools for doing just that . I maintain that the banking authorities have the power to curb undesirable directors under other sections of this bill and, if it is not strong enough, I say to you, make it stronger. This and not the removal of the right of mandatory cumulative voting is the proper answer to the question of keeping the really undesirable people off bank boards. Now, if I may, I should like to touch on the need for being sure that the right of the shareholders to have the list of fellow partners is maintained as it stands in the bill now before you. Some have urged on you that it should be made more difficult for owners to know who their partners are. Let me now quote from the views of Senator Homer E. Capehart on this very subject. I am now reading from page 1328 of the recent stock-market study. Said the Senator from Indiana : Frankly, I would like to find some way to divulge the ownership of every share. I am a great believer that if I own one share of stock in a corporation and there is a proxy fight, then I think I ought to be able to go to the corporation before election time and receive the names and addresses of the owners of every share of stock. I believe that is a right I have as a stockholder, to know the names and addresses and the number of shares owned by every other stockholder. 754 STUDY OF BANKING LAWS Every word the Senator from Indiana stated at that hearing applies with even more vigor to the bank shareholders of the United States. They are getting so big that they are becoming sort of semipublic affairs-again borrowing the terminology of the distinguished gentleman from Indiana. This question also brings us straight to the glaring omission of the present suggested revision of the banking laws. The time has very clearly come for putting these growing banks under the same rules in regard to proxy solicitation and full disclosure that fully listed corporations now must obey. Therefore, on behalf of my fellow independent stockholders I ask that there be provision whereby the solicitation of proxies shall be required once a year at all national banks and the SEC or the Comptroller of the Currency or some similar agency shall be charged with the enforcement of the same kind of rules and regulations in this regard as we now have at SEC in the case of listed corporations. This will insure for every American stockholder owning bank shares the right to know how many shares each director has in the bank, the top salaries and bonus payments, and the scale of pensions to top executives. It will insure the right of all the owners of a fair use of the proxy statement and will strengthen the confidence of shareholders in our banking system, just as it has in the case of large listed corporations . Next, we want to be on record here as strongly protesting the granting of options to executives of banks, as provided for the first time on page 18 of the bill. There is no valid reason, in our opinion , for extending this to bank officers too . In our opinion options should never have been authorized by the Congress, in the general corporate world. Recipients of options only exercise them if the price of the stock rises and the man who has one takes no risk. Sale of the stock results in capital -gains income, while we other taxpayers pay high income tax rates on all our earnings or from our dividends- and this includes the Senators of the United States, who get no options, for a job which is just as time-consuming, difficult, and important as the managing of the banks of the United States. Nevertheless, if your committee and the Senators are still determined to grant the option right, then at least we should be assured that the options will not be for the purpose of encouraging speculation, but for bona fide investment. The way to insure this is to insist that they must be held for at least 3 years after exercise of the option, instead of the weak present 6 -month period which enables an officer to pretend it is bought for "investment." May I interpolate here. Senator Robertson, your most distinguished friend, Governor Battle, can emphasize what took place in the Virginia-Carolina situation, which is of great interest to you as a Senator from your State. In conclusion, one word on yet another subject. In view of the need for encouraging more money to be on demand deposit, should we not take another look at the question of whether or not some degree of interest should be allowed on demand deposits ? Now prohibited by Federal law, this makes me call to your attention that there is no other business in the country which gets its raw material for nothing-yet STUDY OF BANKING LAWS 755 this is exactly what is done when a banker gets the use of money for nothing. Certainly too high a rate of permitted interest can be very dangerous, but the absolute prohibition is equally ludicrous in the opinion of this witness. I have now discussed the matters which the group of shareholders I represent here without compensation, as a public duty, thus exercising the citizen's right of petition, are concerned with in the pending banking legislation now before your body. Thank you, Senator. May I add one thing for the record for Mr. Rogers and for you ? I have a statement here. This is from Mrs. Wilma Soss, who is from the Federation of Women Shareholders, who is not coming down and would like it filed in the record, with your permission. Senator ROBERTSON. That may be filed. It has something to do with this bill? Mr. GILBERT. It is her viewpoint and the members of the federation on the same bill. Senator ROBERTSON. It may be filed. ( The statement of Mrs. Soss follows :) STATEMENT OF WILMA SOSS , PRESIDENT, FEDERATION OF WOMEN SHAREHOLDERS IN AMERICAN BUSINESS, INC. Re National Bank Act, Section 26, Subsection ( c ) ; Section 23 Shareholders' List ; Listing of Bank Stocks ; Regulation and Disclosure--the Platinum Curtain Gentlemen of the Senate, the Federation of Women Shareholders in American Business, Inc., a nonprofit association of women for the protection of stockholder rights, capital, and income wishes to be recorded as opposed to the proposed elimination of the mandatory right to the cumulative voting of bank shares in the election of bank directors for the following reasons, which we ask to be made part of the printed record of these hearings. Not to be repetitious, we also wish to be recorded as endorsing the written statement of Mr. Fred Walker, director of the First National Bank of Arlington, Arlington, Va., in opposition to the proposal to eliminate cumulative voting of the bank shares in the election of directors of national banking associations, unless provided for in the articles of association. PROTECTING SMALL COMMUNITY BANKS 1. With the trend toward branch banks and holding companies cumulative voting is necessary for the protection of the small banks which may be absorbed through stock purchase or other means of control-otherwise ousting or overwhelm
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