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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
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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 .

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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

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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.

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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.

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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

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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.

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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.

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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 .

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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.

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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.

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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.

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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

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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.

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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,

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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

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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-

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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 .

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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

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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.

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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-

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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

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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

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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

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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

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$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

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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-

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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.

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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-

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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

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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.

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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

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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

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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

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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-

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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.

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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.

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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-

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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.

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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

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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.

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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-

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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.

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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.

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(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

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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-

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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

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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.

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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

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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

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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.

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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.

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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

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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

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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.

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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

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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.

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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

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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.

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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

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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.

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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-

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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.

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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.

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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

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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

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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-

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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 .

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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 ?

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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-

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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

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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-

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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

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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

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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.

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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

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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

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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

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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.

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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

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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

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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.

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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.

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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

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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

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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.

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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-

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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

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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

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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

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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.

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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

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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...

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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

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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

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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 ?

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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--

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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?

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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

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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.

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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.

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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

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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-

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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

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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-

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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 ?

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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.

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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.

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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.

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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

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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.

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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

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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

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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-

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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

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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-

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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

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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

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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.

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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.

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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.

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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

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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,

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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

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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,

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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.

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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

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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

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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

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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,

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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.

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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 ."

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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

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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-

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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

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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

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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

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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.

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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

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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.

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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-

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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

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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.

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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.

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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

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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?

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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?

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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

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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

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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

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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-

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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

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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
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In some cases there are maximum limits
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681

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Mr. ROGERS . Would you say that thattype of
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large proportion of the total ?
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Mr. ELY. Yes. I think it is a dely acticed thod of
Have I made that clear ? You did not lookas thoughI had
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agree with the dealer that he would purchase in
Mr. ROGERS . Thank you .
ting
INTERE
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SECTION 35- MAXIMUM RATE OF
hat
interestperm
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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
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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

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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.

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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.

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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

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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-

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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

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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,

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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.

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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.

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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.

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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

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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

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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

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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.

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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 ?

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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.

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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 ?

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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 ?

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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 .

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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 .

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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.

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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-

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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

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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

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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

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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-

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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

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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

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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-

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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.

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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.

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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.

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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

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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

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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 mo