to charge off and try to work out the credit, but it would have to be a bad loan and it could not be a loan that it may take over for the purpose of acquiring control of a nonbanking institution. Does that answer your question? Senator BUCK. Well, yes, it does, Governor, except that I do not see why the holding company could be required to do it. They do not own the bank. Mr. ECCLES. Well, the holding company in most instances does own the bank. Senator BUCK. You are talking about a lot that do not. Some do not even own stock, you say. Mr. ECCLES. That is correct, and they may not take them over. If they did not, that is all right. All we are saying is the holding company cannot take over from a bank the securities. Senator CAIN. Unless required to do so. Mr. ECCLES. Unless requested to do so. Senator CAIN. And they could not be required to do so. Senator CAIN. Unless they had a legal right so to do. Mr. ECCLES. And they would not be requested to do so, if the loan were a perfectly good loan. Senator CAIN. There are many kinds of holding companies. Mr. ECCLES. I do not think that this is a very important phase, but it just does cover up a loophole that might well exist and there have been so many evasions of the existing statutes that what we are trying to do is to make it certainly unlawful in any way for a holding company to acquire securities other than the stock of banks. Senator CAIN. Might I ask the witness if at his convenience he might submit a memorandum in furtherance of this particular paragraph, how it works, how many instances the Federal authorities could require the holding company to take over bad loans, and so on? Mr. ECCLES. We will discuss it with our Examining Division and based on their experience, we will do that. Senator CAIN. Thank you. Mr. ECCLES (reading): In addition, under an amendment which has been suggested to and approved by the Board, the holding company would also be permitted to acquire such securities as are eligible for investment by member banks. The bankers made the point here on this that the national bank or a member bank can hold certain securities under this law, why the holding company cannot acquire even what a bank can own. We are not trying to be more restrictive with the bank holding company than we are with a bank. We are trying to give it the characteristics of a bank. Senator BUCK. How does a bank holding company get set up? Is it not incorporated? Mr. ECCLES. Yes, always. Senator BUCK. Then they have their own capital. Mr. ECCLES. Yes. Senator BUCK. I see. Mr. ECCLES. Entirely so. They are all incorporated. If they are not, they would not be subject to the bill. Senator BUCK. If they do not have stock Mr. ECCLES. They might be an association that in effect would under an agreement have the effect of being a corporation. Senator BUCK. I think that is what has thrown me off completely. When you say they get together and have a holding company, and do not have any stock Mr. ECCLES. They would have stock. We have one company which is an organized company. I do not know what the capital is. It may be comparatively small. That company does not own any stock in the banks, but the people that own the stock in the banks own the stock in the management company, which is organized purely for the purpose of making and controlling the banks. But this company that they own the stock in does not own any stock in the banks. Senator BUCK. But the company itself has issued stock, the holding company. Mr. ECCLES. To the people that own stock in the banks. Senator Buck, you see, this is a bank holding company that operates and controls the bank and yet we have no control over that company. Senator BUCK. In answer to my earlier question, you did not mean to infer they do not have their own stock. They do not issue their own stock. Every holding company is incorporated, and therefore it must have stock. Mr. ECCLES. Well, the holding company does issue stock, of course. Senator Buck. You lead me to believe that they did not have any stock, did not issue any stock Mr. ECCLES. They do, of course; they all issue stock. Mr. ECCLES. (reading): The problem of how far bank holding company systems should be permitted to expand has long been of serious concern. There is perhaps a greater need for a positive declaration of congressional policy on this question than of any other phase of the holding company problems. It is in this area that one of the greatest potential evils of bank holding company operations exists. That evil, which permits a holding company without legal hindreance to dominate major portions of the banking facilities of particular sections, is one which strikes at the heart of our traditional system of competitive banking. Under existing law a chartered bank may be prevented by the regulatory agency to which it is subject from expanding its banking offices whether by the establishment of new branches or by taking over and operating the offices of other banks. In order to establish branches, national banks must first obtain permission from the Comptroller of the Currency, State member banks from the Board, and nonmember insured banks from the FDIC. But the bank holding company is not subject to any such requirements. If a bank in its group is denied the right to establish an additional office, there is nothing to prevent it from acquiring stock of an existing bank and simply adding the institution to its list of controlled banks, operating it, for all practical purposes as a branch of the entire system. This loophole, enabling a bank holding company to expand at its pleasure, lends itself readily to the amassing of vast resources obtained largely from the public, which can be controlled and used by the relatively few who comprise the management of the holding company, giving them an unfair and overwhelming advantage in acquiring additional properties and in carrying out an unlimited program of expansion. Such power can be used to acquire independent banks by measures which leave the local management and minority stockholders little with which to defend themselves except their own strenuous protests. Senator FLANDERS. I would like to ask one or two questions. I have to go to another committee meeting. This paragraph you have just read refers indirectly to the questions in my mind. To what extent is the Federal Reserve Board under the bill given new controls over banks which are not now members of the System? Of course, the holding company is not a member of the System, and giving power over the holding company is a new power; is that right? Mr. ECCLES. No; it is not a new power. We have a power of voting permits which I have indicated were inadequate. Senator FLANDERS. Yes. Mr. ECCLES. What we propose in the bill here is to give us first a new definition of bank-holding companies; secondly, to give the Board power to control bank holding companies effectively, which is not possible under the existing legislation. There are two primary purposes, one is to make them divorce the ownership, control of businesses other than banks, and those businesses that are incidental to or related to the bank operations. The other portion of the legislation is to enable or to prevent bankholding companies from acquiring additional banks unless the Board would consider that it was in the public interest to do so. Today they can go out and if they fail to get a permit to establish a branch, they may go out and buy out the competitor, buy the stock. There is nothing to stop them from expanding very extensively. Senator FLANDERS. There is no disturbance of the existing responsibilities of the Comptroller; the Federal Reserve System and the FDIC? Mr. ECCLES. None whatever. Senator FLANDERS. I just wanted to be clear on that point. Mr. ECCLES. There is a strengthening of the powers of both the FDIC and the Comptroller, as well as the Board under this legislation. Senator FLANDERS. I just wanted to get that clear, to become clear on that point. Mr. ECCLES. Yes; that is true. Senator FLANDERS. That was the question in my mind. The CHAIRMAN. Does that phrase "the public interest" which is pretty elusive, appear in your basic act? Mr. ECCLES. Mr. Chairman, these are the standards that the Board must consider [reading]: In determining whether it will approve any acquisitions subject to paragraphs (a), (b), or (c) of this section, consideration shall be given to the financial history and condition of the applicant and the banks concerned, their prospects, the character of their management, the convenience, needs, and welfare of the communities and the area concerned, and the national policy against restraint of trade and undue concentration of economic power, and in favor of maintenance of competition in the field of banking: Provided and this is the amendment which we are going to add, which I think is more restrictive than this, and that some of the Reserve city bankers in particular, and the Federal Advisory Council, not the holding company groups, but the holding company groups have accepted, but the proposal is from the other groups, and we think it well to accept it as this: Provided, however, That nothing herein contained shall be construed to authorize the approval of any acquisition subject to paragraphs (a), (b), or (c) or this section, where regardless of its competitive or other aspects, the effect of such acquisition may be to extend the size and the extent of the banking holding company system beyond the limits coincident 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 a bank. The CHAIRMAN. Read back what you had about the word "sound," about halfway through there. Go back and read that. Mr. ECCLES (reading): the effect of such acquisition may be to extend the size and extent of a bankholding-company system beyond limits consistent with adequate and sound banking. The CHAIRMAN. "And the public interest"? Mr. ECCLES. Well, certainly there is no objection to that. The CHAIRMAN. I would like to have it put in, if you do not object. Has the committee any objections? Mr. ECCLES. There will be no objection. Those are the criteria that the Board must use in connection with the approval of a holding company acquiring the stock of a bank. Also, they would apply if a member bank is going to buy out the assets and assume the liabilities of a bank in the community where they are operating Today there is no such requirement. Under this the Comptroller and the FDIC would likewise have to approve the acquisition of the assets of a bank by a national bank or an insured nonmember bank. If a bank owned by a holding company was going to take over those assets, that is. Today there is no requirement of approval by any of these Federal banking agencies, where it comes to taking over the assets of another bank. If there is a formal merger that does require the approval, but so often there is no merger involved. You buy the assets and assume the liabilities, and thus buy out the competition. In the case where a branch is to be established, the Comptroller, the FDIC would have to consider this. These standards would apply to the situation when the bank which wanted a branch is owned by a bank holding company, just as the Board would have to consider these requirements, or these standards if it was asked to permit the acquisition of stock of another bank by the holding company itself. In other words, the adding of additional banking offices through branches or through the acquisition of the stock of another bank, these standards must be considered in that. If this had been the case over the years, you would not have had some of the developments and the growth that has materialized. Senator ROBERTSON. Governor, I understand that you are recommending three major things to us today; one that we close the loopholes in the present bank holding-company law and bring all bankholding operations under the supervision and control of the Government; two, that you restrict the future expansion of bank holding companies, and three that you force bank-holding companies to divest themselves of their investment business so that they either are a bank holding company or investment holding company. They cannot be both. Mr. ECCLES. Yes. Senator ROBERTSON. Those are your three major recommendations. Mr. ECCLES. Yes. Senator ROBERTSON. Is your Board unanimous in making those recommendations? Mr. ECCLES. They are, not only unanimous, but as I stated in the beginning of my statement, these suggestions not only are made by the Board and such amendments as I will present later are acceptable to the Board, but the bill conforms to the recommendations made in reports made by the Federal Advisory Council. The Federal Advisory Council is composed of 12 bankers, one from each Federal Reserve District selected by the Reserve banks of the district, and also by the Association of Reserve City Banker, which is the association of 250 bankers representing the banks in the Federal Reserve System. In addition to that, it has the support of the Independent Bankers Association of the Twelfth Federal Reserve district, I understand that the independent group in the Minneapolis district has also approved the bill, and it also has the support of a great majority of the major bank-holding companies, which feel that there is some danger to a continuation of the opportunity for abuse that now exists that in turn might well bring forth a death sentence at some later date. Therefore, although they are not the sponsors of the bill and they are not opposing the bill, they feel this is as possibly as good a bill as they can get, and they feel that it is in their interest to support it at this time, rather than get something worse at a later date. Senator ROBERTSON. Have these amendments been accepted by the American Bankers Association? Mr. ECCLES. It has been considered by these groups. The association itself is a very, very large one, and the association is not in convention. It does not meet until fall, but I would say that the leaders, the Advisory Council of the Board, the Reserve City Bankers, and these independent bankers, certainly would make up the most active leadership in the American Bankers Association. Senator ROBERTSON. I understand that the majority of the bankholding corporations favor making everybody subject to the spirit of this. Mr. ECCLES. That is exactly right. Senator ROBERTSON. Which now can be violated because of the voting permit. Mr. ECCLES. Exactly. Senator ROBERTSON. The majority of them would be for that act. Mr. ECCLES. Yes. Senator ROBERTSON. What is their attitude about the next proposal to make a further expansion of bank-holding-corporation operations subject to some control in the Federal Reserve bank? Mr. ECCLES. They are perfectly willing to accept this set of standards which I just read. Senator ROBERTSON. Then the real fight will come on the divorce between the operations of the bank-holding company, and the investment business. Mr. ECCLES. Well, that is one aspect of it which even they have been willing to accept, because there is no good argument of logic for arguing in favor of a bank-holding company being an investment company. Senator ROBERTSON. Who do you mean by "they"? Mr. ECCLES. I mean practically all of the groups that I have enumerated there. Senator Robertson. You have already divorced the banks themselves from their investment business. They cannot engage in the insurance business. Mr. ECCLES. That is correct. Senator ROBERTSON. And do a lot of collateral things like that. They are now confined to the banking business, the banks are. |