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Mr. ECCLES. You have a great divergence within the country. For instance, whereas in Nevada or in a State where it is comparatively sparsely populated, where maybe there is only one bank in a county, that a substantial percentage would not be considered, I would think, an abuse of power. In fact, in order to get banking service in the past, that is very often the only way they could get it. The local community was entirely unable to provide their own banks. You had to have it.
On the other hand, take New York State. To try to fix a percentage, applying to the Nation, even 10 percent in New York State, would be a tremendous thing. Certainly what would be a proper percentage in Nevada would in New York State be entirely out of reason. Not only that, but any percentage that you fix would tend to make the maximum the minimum. It would look like the Congress had said that anything up to this percentage here is all right irrespective of what the conditions are. There would be no discretionary power. There would be no standards except just the percentage, and conditions could change so rapidly in the country that it might be dangerous if you tried to fix only a percentage formula of either offices or deposits. We have studied that idea a good deal, and the more we have done so the more impossible we find it to arrive at a formula that would meet the entire situation.
Senator FULBRIGHT. If the relationship between the Transamerica, the holding company, and the individual banks is such that if Transamerica became bankrupt, would that have any effect on these member banks?
Mr. ECCLES. Well, naturally it depends a good deal on the temper of the country. Under conditions of great unemployment, people are much more easy to frighten, but I do say this, that with the deposit insurance set-up, with the great reserves that these banks have in the form of governments, with the facility of the Federal Reserve System available, due to the Banking Act of 1935 which makes any sound assets eligible for borrowing, it would be pretty difficult to shake the financial structure.
Senator FULBRIGHT. That did happen in the twenties. I remember in Arkansas, 53 banks closed in 1 week, all owned by the same company, which was tied up with the insurance companies; the parent company was the one that got into trouble, and it went on down the line. That almost wrecked the financial structure. before the depression. It was in a period earlier.
Mr. ECCLES. You did not then have the deposit insurance. That is only $5,000, and the real big deposits may well seriously affect it, of course. Any big institution, naturally, that is carrying very large departments of very large companies, certainly would be affected under an adverse condition.
The CHAIRMAN. Could you conclude?
Mr. ECCLES. I will conclude the statement, if I may. [Reading:] Under this section any direct purchase of the stock or assets of banks by a bank holding company would have to be approved by the Board. If one of the banks in a holding company group wished to acquire the assets of a bank, the acquiring bank, if a national bank, would have to secure the approval of the Comptroller; if a State member bank, it would have to obtain approval by the Board; if a nonmember bank, it would have to obtain the approval of the FDIC.
These are powers that they do not now have. These standards are standards that would have to be considered if branches were to be granted which has not
been true in the past, just as the Board would have to consider these standards if it approved the purchase of the stock of a bank.
The proposed bill also enumerates the standards which would guide the banking agencies in deciding whether to approve such acquisitions. First, they would have to consider the financial history and condition of the applicant and the banks concerned; their prospects; the character of management; and the needs of the communities involved. These are the considerations which are today the legislative guide for administrative action in such matters as the admission of State banks to membership in the Federal Reserve System, and the granting of deposit insurance coverage. Next, they would take into consideration national policy against restraints of trade and commerce, and the undue concentration of economic power. This would give effect to the antimonopoly objective stated in the Sherman and Clayton Acts. Finally, under an amendment suggested by the Federal Advisory Council and the Reserve city bankers, they would consider whether an acquisition regardless of its competitive effect, would extend the operations of a holding company beyond limits consistent with adequate and sound banking.
As an example of that, a company may be organized in Chicago and acquire banks at random over the country, with no relation to one another, entirely unintegrated; that certainly would be considered an unsound banking set-up. Even though it would not be monopolistic, it would be considered that it was not consistent with adequate and sound banking. [Continuing:]
The Board believes that these standards would furnish an adequate guide for administrative action. Much consideration was given to various proposals on the subject, including the fixing of rigid, even mathematical formulas governing expansion, but the Board concluded that such definition would make the section difficult to enforce from an administrative standpoint and, as indicated by representatives of the Justice Department, this is the point in answer to your question, Senator, might conflict with existing governmental policy respecting the antitrust statutes. Under the Board's proposals, each case would stand on its own merits, considered in the light of standards which are deeply rooted in American traditions.
The remaining regulatory provisions of S. 829 require little discussion. The bank holding company would be required to register with the Board and to file periodic reports. It would be subject to examination as are each of its subsidiaries. Existing provisions of law respecting the maintenance of reserves by bank holding companies would be carried over and made a part of the proposed new law. Upstream loans between a bank and its holding company would be regulated, as well as loans involving the securities of the holding company and its other subsidiaries. The Board would be authorized to scrutinize the terms of any management or service contracts between a holding company and its banks. Finally, the Board would be authorized to make such rules, regulations, and orders as might be necessary to enable it to administer and carry out the purposes of the act.
The proposed ligislation for the first time to my knowledge in any Federal. banking statute contains a provision granting a statutory right of judicial review to anyone aggrieved by any action of the Board taken under any of the various regulatory provisions of the bill. This provision should help to crystalize at an early date the precise boundaries of Board authority under those sections involving the application of administrative discretion.
Mr. Chairman, I have a list of amendments that I have referred to in the beginning of the second paragraph of this statement. I will not take the time to read them.
The CHAIRMAN. Have you more than one copy?
Mr. ECCLES. Yes.
The CHAIRMAN. Will you see that a copy is given to the clerk and each member of the committee?
Mr. ECCLES. Some concern matters of substance that were necessary to accept in the process of tightening and to meet the recommendations of certain people; others are intended to meet certain situations, and you might consider them as slightly liberalizing. But none of them, I am sure, affects the basid purpose of this bill, and
the ability of the Federal Reserve Board to administer and to regulate this situation adequately.
I can assure you that if I felt for one moment, and I am sure that the Board feels just as strongly about this as I do, if these amendments so weakened the legislation as so make it ineffective, I would prefer certainly to leave the situation as it is than to come before this committee and ask for legislation so as to deal with this situation if it was not adequate.
The CHAIRMAN. The Chair will state that we heard from the Treasury, and from the SEC by their letters. We have learned from Mr. Eccles in person, and the opposition to the bill will be here in two or three groups on Monday, June 2. The hearings on this particular phase will stand adjourned until Monday, June 2, at 10 o'clock in the morning.
Mr. ECCLES. If I can put in the record these suggested amendments. The CHAIRMAN. Yes; we will be glad to have them. We will look these over.
(The amendments referred to are as follows:)
Amend section 3 as follows:
Change the figure "10" appearing on page 2, line 20, to the figure "15." Insert the following after the comma on page 2, line 21: "or any company which is a bank and which directly or indirectly owns, controls, or holds with power to vote 15 per centum or more of the voting shares of one or more other banks." Change the figure "10" appearing on page 4, line 8, to the figure “15.” Add new subsection (f) as follows:
"(f) For the purposes of this section there shall be excluded from consideration all voting shares of banks or other companies acquired or held by a bank in a fiduciary capacity, except where such voting shares are acquired or held for the benefit of all or a majority of the persons beneficially interested in such bank or except where the Board, after notice and opportunity for hearing, finds that such acquisition or holding is being employed as a device for avoiding the provisions of this Act."
Amend section 5 as follows:
Add the words "banking or" on page 7, at the end of line 4.
Add the following after the comma on page 7, line 14: "or engage in the business of furnishing managerial, auditing, supervisory, purchasing and other similar services solely to such bank holding company and its subsidiaries, or in the business of procuring and servicing solely for such bank holding company and its subsidiaries investments and paper eligible for bank investment, or in the business of liquidating assets acquired from such bank holding company and its subsidiaries,"
After the word "subsidiaries" and before the semicolon on page 7, line 22, add the following: "or with the prior approval of the Board."
Add new subsection (d) as follows:
(d) Nor shall the prohibitions of this section apply to voting shares or other securities or obligations which are held or acquired by a bank in a fiduciary capacity or which are otherwise lawfully owned by such bank on the effective date of this Act; nor shall the prohibitions in this section apply to investment securities of the kinds and amounts eligible for investment by national banks under the provisions of section 5136 of the Revised Statutes. If, while such bank or bank holding company owns or controls such shares, securities or other obligations, the Board, after notice and opportunity for hearing, determines that the ownership or control of such shares securities or obligations is being employed as a device for avoiding the provisions of this Act, it may by order require such bank or bank holding company to dispose of all or any part thereof forthwith." Amend section 6 as follows:
Change the figure "10" on page 8, line 10, to figure "15".
Insert the following after the period on pgae 8, line 15:"Provided, however, That nothing herein contained shall be construed to apply to the acquisition by a bank holding company of any additional voting shares of a bank in any case where such bank holding company, prior to such acquisition, owned a majority of the voting shares thereof."
Add the following to subsection (d) on page 9: "Provided, however, That nothing herein contained shall be construed to authorize the approval of any acquisition 62394-47-3
subject to paragraphs (a), (b), or (c) of this section where, regardless of its competitive or other aspects, the effect of such acquisition may be to expand the size and extent of a bank holding company system beyond limits consistent with adequate and sound banking. The factors stated in this section shall likewise be considered by the Board, the Comptroller of the Currency or the Federal Deposit Insurance Corporation in determining whether to approve an application of any bank, which is a part of a bank holding company system, to establish a branch or branches of such bank.'
Amend section 7 as follows:
Add the following after the period on page 9, line 23: "Provided, however, That any bank may, with the prior approval of the Board, accept such capital stock as a security for debts previously contracted."
Change the figure "10" to the figure "20" on page 10, line 12.
"Non-interest-bearing deposits to the credit of a bank shall not be deemed to be a loan or advance to the bank of deposit, nor shall the giving of immediate credit to a bank upon uncollected items received in the ordinary course of business be deemed to be a loan or advance to the depositing bank."
Amend section 9 as follows:
Substitute the word "book" for the word "par" appearing on page 12, line 8. Strike the words "and to eliminate losses and depreciation from the assets of such banks," appearing on page 12, lines 17 and 18, and substitute the following: "and, with the permission of the Board, to increase the capital or surplus of its subsidiary banks and to eliminate losses and depreciation and to remove undesirable assets from the assets of such banks."
Amend section 13 as follows:
Change the figure "10" appearing on page 21, line 20, to the figure "9". Amend paragraph (g) by adding before the quotation marks appearing on page 22, line 19, the following: or any subsidiary thereof as defined in said Act."
Add new paragraph at the end of line 19 on page 22 as follows:
"(h) Subsection (b) of section 2 of the Banking Act of 1933, as amended, is amended by adding the following paragraphs:
"(4) which owns or controls, directly or indirectly, either a majority of the shares of capital stock of a member bank or more than 50 per centum of the number of shares voted for the election of directors of any one bank at the preceding election, or controls in any manner the election of a majority of the directors of any one bank; or
(5) for the benefit of whose shareholders or members all or substantially all of the capital stock of a member bank is held by trustees.'"
The CHAIRMAN. We stand adjourned until next Monday.
(Thereupon, at 12 noon, the committee adjourned, to reconvene Monday, June 2, 1947.)
(The following letter was later received for the record:)
Hon. HENRY CABOT LODGE,
BOSTON 10, MASS., April 28, 1947.
United States Senate, Washington, D. C.
MY DEAR SENATOR LODGE: I understand that bill S. 829 has been referred to the Committee on Banking and Currency. This bill which I have read but which, owing to the legal phraseology I do not understand too well, will, I think, correct in time the most extraordinary defects in the Shawmut Association here in Boston. For many years I have reluctantly been a fairly large owner of this association, and have been shocked by the fact that its regulation does not directly come under either the SEC or the Federal Reserve Board. The result is that the shareholders are without any recourse whatsoever, although they have, of course, put up the money. This money, against their will, is being used to further branch banking by the Shawmut Bank of Boston, which buys controlling interest in small suburban banks at exorbitant prices, and very much against the desire of any stockholders that I have ever talked to or seen. As I stated above, these stockholders have been powerless to get any say in the affairs of their own company; they have no voting rights in the association whatsoever really a most extraordinary set-up. As near as I can make out, bill S. 829 is a step in the right direction in correcting a flagrant abuse, which under the old law the Securities and Exchange Commission and the Federal Reserve Board are apparently powerless to remedy.
Very truly yours,
PROVIDING FOR CONTROL AND REGULATION OF BANK
MONDAY, JUNE 2, 1947
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,
Washington, D. C.
The committee met, pursuant to adjournment, at 10 a. m., in room 301, Senator Office Building, Senator Charles W. Tobey (chairman) presiding.
Present: Senators Tobey (chairman), Buck, Flanders, Cain, Robertson of Virginia, and Sparkman.
The CHAIRMAN. Come to order, please.
Mr. Beasley, if you will kindly give your name to the reporter, please.
STATEMENT OF ROBERT S. BEASLEY, VICE PRESIDENT, BEVERLY HILLS NATIONAL BANK & TRUST CO., BEVERLY HILLS, CALIF., AND PRESIDENT, INDEPENDENT BANKERS ASSOCIATION OF THE TWELFTH FEDERAL RESERVE DISTRICT, ACCOMPANIED BY R. F. HOLLISTER, EXECUTIVE MANAGER, INDEPENDENT BANKERS ASSOCIATION OF THE TWELFTH FEDERAL RESERVE DISTRICT
Mr. BEASLEY. Mr. Chairman and members of the committee, my name is Robert S. Beasley. I am vice president of the Beverly Hills National Bank & Trust Co., Beverly Hills, Calif., and president of the Independent Bankers Association of the twelfth Federal Reserve district. I am here today representing the association and its 343. member banks located in the seven Western States: Arizona, California, Idaho, Nevada, Oregon, Utah, and Washington. The association was organized in 1937 to protect free enterprise in banking and to oppose the elimination of competitive banks and the extension of monopoly in banking.
By its very nature, nonopoly seldom encourages or allows healthy competition. Monopoly in banking, in turn, fosters monopolies and cartels in other businesses. Free and competitive credit is essential to free and competitive business. Free and competitive credit is.in grave danger when the holding company device makes it possible for one holding company to control 40 percent of all banking offices and 38 percent of all of the commercial bank deposits in the five States of Arizona, California, Nevada, Oregon, and Washington, with their more than 10,000,000 people.