"(C) In the case of a bank holding company (as defined in the Bank Holding Company Act of 1947), the amount allowed as a credit under section 26 (d).' (2) Subsection (d) of section 26 of the Revenue Act of 1936, as amended, is amended to read as follows:

"(d) BANK HOLDING COMPANIES.-In the case of a bank holding company (as defined in the Bank Holding Company Act of 1947), the amount of the earnings or profits which the Board of Governors of the Federal Reserve System certifies to the Commissioner has been devoted by such company during the taxable year to the acquisition of cash or readily marketable assets of the kinds eligible for investment by national banks under the provisions of section 5136 of the United States Revised Statutes, in compliance with section 10 of the Bank Holding Company Act of 1947. The aggregate of the credits allowable under this subsection for all taxable years shall not exceed the amount required to be devoted under such section 10 to such purposes."

(3) Subdivision (1) (D) of subsection (c) of section 102 of the Revenue Act of 1936, as amended, is amended to read as follows:

"(D) BANK HOLDING COMPANIES.-In the case of a bank holding company (as defined in the Bank Holding Company Act of 1947), the amount allowed as a credit under section 26 (d).”

(g) (1) Paragraph 4 of subsection (c) of section 3 of the Investment Company Act of 1940 is amended to read as follows:

"(4) Any bank holding company which is registered with the Board of Governors of the Federal Reserve System pursuant to the Bank Holding Company Act of 1947."

(2) Paragraph (11) of subsection (a) of section 202 of the Investment Advisers Act of 1940 is amended by changing the words "or any holding company affiliate, as defined in the Banking Act of 1933" to read "or any bank holding company, as defined in the Bank Holding Company Act of 1947".

SEC. 14. SEPARABILITY OF PROVISIONS.-If any provision of this Act, or the application of such provision to any person or circumstance, shall be held invalid, the remainder of the Act, and the application of such provision to persons or circumstances other than those to which it is held invalid, shall not be affected thereby.

The CHAIRMAN. It was introduced by me, but was not original with me. However, I endorsed the bill and the spirit behind it, and personally feel that it is a timely piece of legislation.

The section to bring bank holding companies handling bank stocks within closer supervision of the Federal Reserve System sets up rules. and regulations which are expected to dissipate and minimize some of the weaknesses which have developed in the operation of these companies in the past.

I do not think any thoughtful person would fail to agree with me that great combinations of power, whether it is in the utilities field or in the banking field or in the railroad field or any other part of our economic life cannot be allowed to grow and grow without proper supervision, and some regulatory agency like the Congress once in a while raising in the skies a "Stop, look, and listen" sign, and perhaps legislation which might in its import mean "Thus far shalt thou go, and no farther."

This legislation is peculiar to the extent that apparently this is a piece of legislation that has very few opponents. A group of men interested in the bill came to see me the other day, and they were very happy in commenting on the fact that "We have a bill that everybody is for." I told them that if they did, I did not think it was worth very much. My experience with legislation has been that everyone being for it made me suspicious. I like something that people are both for and against, and thresh it out around this table and in the Halls of Congress in the debating forums.

Be that as it may, here is the bill, and men that know more than I do about it will explain it. There are some who will appear in oppo

sition, and there are some who would like to oppose but will not oppose because they feel that wisdom and tact and diplomacy would indicate that they had better take this bill, or they are afraid they will get something which they would not like quite so well. That is putting it baldly, but that is the naked truth.

So we are here, the Banking and Currency Committee of the Senate, sitting in solemn conclave to hear Mr. Eccles; but prior to that, Í shall read two letters.

The first is from the Secretary of the Treasury, dated May 23, addressed to me. [Reading:]

I am truly sorry that the Department is not in a position to furnish your committee with a definitive statement of our views on the bank holding company bill at this time.

As you know, my time in recent weeks has been preempted by a number of very important matters, particularly the tax bill, which has been the subject of fairly extended hearings within the Senate and House, and the general tax study commenced only this week before the Ways and Means Committee. In addition matters involving international finance have required considerable attention. Under the circumstances, I would much prefer not to take any position on such an important matter now without a more adequate basis for having one than I now have.

A substantial amount of study has been given to the matter in the Department, and I have been furnished with the views of a number of those in the Department to whom I would look for advice in such matters. However, I have not had an opportunity personally to go into the matter thoroughly. As you know, the Comptroller of the Currency, Mr. Delano, who has had the bank holding company legislation under study, has been ill and away from the office for some time. That has contributed in no small measure to my unwillingness to go on record one way or the other now, as I definitely would like to discuss this matter thoroughly with him before taking a position.

I should say that in taking this stand I do not intend to indicate or to imply opposition to the bill either in principle or in detail.

And then I have a letter from the Securities and Exchange Commission, dated May 23, addressed to me. [Reading:]

This is in reply to your letter of May 21, inviting me or some other representative of the Commission to appear before the committee and submit views on S. 829, the bank holding company bill. In view of conflicting engagements, June 2 is the only one of the dates suggested by you at which I could conveniently appear. While I should be delighted to be of any possible assistance to the committee, I believe that everything that I would have to say on the subject can be fully covered by letter. I am stating below the limited effect of the bill upon the statutes administered by the Commission. Please let me know after reading this letter whether you really think there is any need for a personal appearance by myself or by any other representative of the Commission.

The only provision of the bill which affects any of the statutes administered by the Commission are contained in the last paragraph of section 13, the section containing various "technical amendments." The Investment Company Act of 1940 now contains an exemption in section 3 (a) (4) which covers "any holding company affiliate" which is under the supervision of the Federal Reserve Board. The amendment merely substitutes a clause exempting any "bank holding company" registered under the Bank Holding Company Act. A similar "technical amendment" deals with section 202 (a) (11) of the Investment Advisers Act which presently exempts from the definition of investment adviser "a bank, or any holding company affiliate, as defined in the Banking Act of 1933, which is not an investment company." As amended by S. 829 this would simply exempt in addition to banks "any bank holding company." In either case the apparent justification for exemption from the Investment Company Act is to prevent dual regulation of companies which by reason of their close relationship to the commercial banking business are subjected to special regulation administered by the Board of Governors of the Federal Reserve System.

The Commission agrees that there is no need for regulation under the Investment Company Act or the Investment Advisers Act of companies which will be subject to regulation under the Bank Holding Company Act and therefore sees

no objection to either of these technical amendments. The Commission has not made a study of the broader problems presented by the bill nor had the benefit of the kind of discussions with companies affected, which we assume the Federal Reserve Board has had. For this reason and since we regard the broader problems presented by the bill as matters within the special interest and competence of the Federal Reserve Board, we have no views to express as to the merits of the bill generally.

That is signed by James J. Caffrey, Chairman of the Securities Exchange Commission.

Now we will hear from the Chairman of the Federal Reserve Board, Mr. Marriner Eccles, and of him I might say that he has been with this Board a long time, and has had an honorable, efficient career there. He will excuse my being ad libitum here. If I were describing him, I would use the Latin maxim multum in parvo, meaning a great deal in a small package. That applies to ability, character, and understanding.

Mr. Eccles, the floor is yours.

STATEMENT OF MARRINER S. ECCLES, CHAIRMAN, BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM, ACCOMPANIED BY J. L. TOWNSEND, ASSISTANT GENERAL COUNSEL, FEDERAL RESERVE SYSTEM, WASHINGTON, D. C.

Mr. ECCLES. Mr. Chairman and members of the committee, after such an introduction, I must say I think I should have a drink of water. It takes me a moment to get my breath here.

The CHAIRMAN. That will not stimulate you very much.

Mr. ECCLES. In 1943, the Board in its annual report to the Congress, as is required by the Federal Reserve Act, made some recommendations with reference to needed legislation dealing with bank holding companies. The Board, as an agent of Congress, from time to time in its reports to the Congress either its regular annual report or special reports makes recommendations as required by statute. Nothing was done at the time. It was during the war period, and it was indicated that legislation of this sort affecting banking which was controversial might well be deferred until a later date.

It is felt by the Board that action dealing with this problem is possibly long overdue, and it is to be hoped that the Congress will see fit in this session to pass legislation on this subject.

I have a statement that I think covers in general the problems and the recommendations on the subject of bank holding companies, and if you bear with me for a little while, I should like to read that statement. [Reading:]

The purpose of this bill, S. 829, is to regulate bank holding companies so that their operations will be in accordance with established banking principles and public policy.

This bill reflects the Federal Reserve System's experience over a period of approximately 14 years in dealing with bank-holding-company problems. Since its introduction it has been studied and appraised by various interested banking groups. With suggested technical amendments and others, all of which are acceptable to the Reserve Board and none of which would affect its basic purposes, the bill conforms to recommendations made in reports by the Federal Advisory Council of the Federal Reserve System and by the Association of Reserve City Bankers. In addition, it has the support of the Independent Bankers Association of the Twelfth Federal Reserve District and of the great majority of the major bank holding companies.

The chairman made certain comments with reference to the questions that might be raised because of an apparent general unanimity of agreement. This whole subject is rather a technical one and it was only natural that the bill should be studied closely and given a great deal of consideration by the banking fraternity of the country as a whole, not only by the unit and independent bankers, but also by organizations such as the Reserve City Bankers, which consists of 250 bankers located in what is known as the Reserve cities and the Federal Advisory Council, which consists of 12 bankers, 1 selected by each Federal Reserve bank, as well as the bank holding companies themselves which would be more directly affected by this legislation. What I started to say was that it would be only natural that those groups in studying closely this bill would suggest amendments which would be constructive, amendments which would cover matters which the Board might well overlook in connection with the drafting of the bill. It was felt that with a diverse group of banking interests, such as represented by the groups which I have enumerated, agreeing upon a bill it should have a good deal of merit. It represents without question some compromises, but at the same time, without some compromises legislation would be impossible.

I am sure that the independent bankers would prefer to have possibly what would be known as a death sentence, or a freeze, or a formula that would be rigid in its restriction, with reference to the expansion of bank holding companies.

On the other hand, we find that the opposition to any such program would be so formidable that it would be impossible to get anything.

The bank holding companies, or at least the great majority of them, in order to avoid getting legislation that may be much more drastic than this legislation, have gone quite a way toward meeting the requirement of the independent bankers. So that we have here a bill that the Board feels has no substantial or organized opposition. On the other hand the Board is confident that none of the changes which are being proposed affects the basic purposes of the bill as drawn.

A bill that would be extremely controversial among the banking fraternity I feel sure would have great difficulty passing the Congress. Senator Fulbright. You mean one eliminating bank holding companies?

Mr. ECCLES. Or one that undertook to provide a freeze. There are other objections to the freeze. I think the Reserve city bankers object to the principle of the freeze.

Senator FULBRIGHT. About what percentage of the banks are held by the banking companies or are dominated by them?

Mr. ECCLES. I think I have that here. I can look it up. We have all of those figures here.

I will proceed with the statement. In view of what the chairman said, I wanted to make that explanation or comment at the beginning of my statement.

I should like to say that I really appreciate the consideration that was given by postponing the hearings for a week. I feel that we are better able to present this subject at this time than would have been the case a week ago. [Continues reading:]

The bank holding company problem is not a new one to the Congress. In 1933, after extensive hearings which began in 1930, Congress recognized the need for and undertook to provide effective regulation of bank holding companies. As a

part of the Banking Act of 1933, section 5144 of the Revised Statutes was amended by adding several new paragraphs applying exclusively to bank holding companies (called holding company affiliates in the amendment) and placing limitations and restrictions upon the right of such companies to vote the stock of member banks which they owned. Prior to 1933, this section merely defined the rights of stockholders of national banks to vote their stock in such banks.

As amended, and as it now stands, this section provides that a holding company before it may vote its stock of a member bank, must first obtain a permit to do so from the Federal Reserve Board. The Board, in turn, is authorized in its discretion to grant or deny such a permit. As a condition to granting of the permit the holding company is required, on behalf of itself and its controlled banks, to agree to submit to examinations, to establish certain reserves, to agree to dispose of all interest in securities companies

The CHAIRMAN. What does that clause mean, "to dispose of all interest in security companies"?

Mr. ECCLES. There were a lot of banks that were engaged in the securities business. They had securities departments or security affiliates.

The CHAIRMAN. So they formed holding companies.

Mr. ECCLES. The National City Co. and the Chase Co.

The CHAIRMAN. They formed their own holding companies to handle securities.

Mr. ECCLES. They were required to divorce the securities business from commercial banking.

The CHAIRMAN. So they formed a subsidiary, a holding company, an associate to handle the securities, then, did they not?

Mr. ECCLES. No, they were supposed to be completely divorced, and not permitted to engage in such business even as a holding company. The holding company was required to dispose of all interests in security companies, as well as the bank.

The CHAIRMAN. Well, assuming there was a Benjamin Green National Bank, and the Benjamin Green National Bank, coming under the purview of this law, had to divorce itself from the securities business and formed the Benjamin Green Holding Co. or the Benjamin Green Corp., which took over the securities business of the bank from then on.

Mr. ECCLES. They are not supposed under the law to have any connection. For instance, you remember the J. P. Morgan & Co. had to determine whether or not it was going to be a bank or a securities house. Harriman is another case. Any number of institutions were required to determine whether they were going to stay in the banking business or be in the securities business. They could not be in both, and they were divorced.

This section here applies to the holding companies where they had security affiliates, and the holding companies were required to divest themselves of any interest in these security affiliates.

That was one of the requirements. That was in the Banking Act of 1933. [Continues reading:]

and its officers, directors and agents are subject to the same penalties for falsification of records as those applicable in the case of national banks.

Congress presumably felt that these amendments would be adequate to insure effective regulation. The Board's experience in administering those provisions, however, has demonstrated clearly the need for additional legislation if regulation is to be effective in correcting and preventing practices which are contrary to public policy and interest.

No one would suggest that in amending section 5144 in 1933 Congress intended to bring some bank holding companies under regulation and to leave others, even though meeting the same definitions, free from regulation. Yet that is what the