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Federal Deposit Insurance Corporation. Mr. Wille will be here in a few minutes. They will be followed by representatives from the AFLCIO-that will be this afternoon-the American Bankers Association, the National Savings and Loan League, the National Association of Home Builders, the U.S. Savings and Loan League, and others.

Mr. Mitchell, I just want to ask each one of you gentlemen these three questions. Mr. Mitchell, almost all of the revenue of Citicorp emanates from the upstream-dividend payments from the First National City Bank of New York and not from other subsidiaries of Citicorp. Šince First National City Bank itself could not float such an issue without being subject to Federal regulation by one or several of the bank regulatory agencies, do you think it is a proper observation to make that this issue of $850 million by Citicorp is nothing more than an ingenious device to get around regulation Q controls?

What do you say about that, Governor Mitchell?

Mr. MITCHELL. Well, in brief, no, I do not think so. I think it is primarily to replace some of the volume of commercial paper they have outstanding.

The CHAIRMAN. Mr. Bomar, it has been rumored that in addition to this Citicorp, there is an estimated $5 billion in total of similar bank holding company issues that will soon come to market if this Citicorp issue is successful. Given the fact that the thrift institutions are in a rather dire situation and have no funds at reasonable rates to loan for home mortgages as a result of either the withdrawal of large sums of money from thrift institutions or the lack of additional deposits at such institutions, what effect would $5 billion worth of debentures, Mr. Bomar, issued similar to Citicorp have on thrift institutions?

Mr. BOMAR. Mr. Chairman, the $4 to $5 billion figure I have heard may very well just be bank holding companies. However, the information that I have been given, which is hearsay-type information, is the $4 to $5 billion may include bank holding companies, public utilities and others as well. It is not just bank holding companies. However, as to the thrust of your question and the impact on thrift institutions, it is a very difficult problem for thrift institutions as you pointed out.

They have a limited capacity to compete for funds. It is, at these market rates, close to impossible for thrift institutions to meet these terms, and therefore the impact is a very negative one on the thrift industry and on housing.

The CHAIRMAN. Mr. Wille, we are glad to have you, sir.

Since more than 95 percent of the assets of Citicorp, Mr. Wille, consist of the assets of First National City Bank, is it not fair to assume that an investor in this $850 million debenture issue of City Corp. is really looking to the assets on earnings of the First National City Bank for the repayment of the investment or in case of default, and therefore the Federal regulators such as the FDIC should have some surveillance or control over such issues as this by bank holding companies?

What do you say to that, Mr. Wille?

Mr. WILLE. I believe the public identification of Citicorp with City Bank is clear and definite, Mr. Chairman. While there are legal distinctions between the two entities, I think, in the eye of the public in

vestor, the two are closely related. I believe your comment to be a reasonably fair one from the point of view of the average investor who would believe the issuer of this to be City Bank.

The CHAIRMAN. Is it not a fact, though, that the bank is not legally obligated to these bonds?

Mr. WILLE. That is correct, sir. The bank would not be liable.

The CHAIRMAN. Why would you agree to have two separate entities there? Of course the holding company owns the bank, does it not? Mr. WILLE. Yes, sir.

The CHAIRMAN. The holding company is issuing these bonds. The holding company, is the master, I believe, and the bank is the subsidiary, is that right?

Mr. WILLE. Yes, sir. That is the effect of the present situation.

The CHAIRMAN. Do you think they could avoid liability on a test case?

Mr. WILLE. I will leave that to their counsel, Mr. Chairman. I am sure they are well advised.

The CHAIRMAN. I want to yield to Mr. Widnall.

Mr. WIDNALL. Thank you, Mr. Chairman.

I want to join in welcoming all of the witnesses here before the committee today, and we certainly are going to count on your expertise, your experience, and the fact that you are very knowledgeable in the field, to assist us in considering a bill that is presently before us.

Mr. Chairman, I just wish we had had the opportunity to listen to all the witnesses before the questioning began, and hope that we will now be able to go through with the usual routine of the committee and hear from each witness fully before we begin questioning.

The CHAIRMAN. All right. The witnesses I have called, Mr. Mitchell, Mr. Bomar, Mr. Schmults, and now, Mr. Robb, are you not with the same department?

Mr. SCHMULTS. Yes, we are.

The CHAIRMAN. Mr. Wille-and I will ask each one of you to summarize your testimony. It is really embarrassing to me to ask such a distinguished and honorable group of public officials as you gentlemen to restrict your time, but it just will not be possible to do anything today if we were not to do that.

We have you gentlemen this morning, and we will have the other witnesses this afternoon. So if you will do that we would appreciate it very much, and you can get through a lot in 10 minutes, and if you will bring out the main issues, that will lend itself to each member of our committee interrogating you. I think this procedure would bring out all the facts concerning it.

Governor Mitchell, you are recognized first.

STATEMENT OF HON. GEORGE W. MITCHELL, VICE CHAIRMAN OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Mr. MITCHELL. Mr. Chairman, I have a very brief statement, but I will leave portions of it out in order to conform to your request. The CHAIRMAN. You may file the entire statement for the record. Mr. MITCHELL. Thank you. In public statements the Board has

issued recently it has indicated that the implications of this security offering of the type proposed by Citicorp deserves intensive consideration by Government officials and the Congress so that all segments of the public may be served. The characteristics of the Citicorp issue. have I think, been developed primarily with the interests of the individual saver-investor in mind.

The note as now modified would provide a variable interest rate related to 90-day Treasury bills, and an option for redemption would be afforded every 6 months after a period of 2 years. The most important thing, perhaps, about this issue is that it is going to be listed on the New York Stock Exchange and marketed by brokers all over the country, and not just in New York.

The fundamental question and the one on which there is some uncertainty until we have some experience with issues of this type, is that it is going to be most competitive with, and it certainly is going to be highly competitive with the Treasury bill and securities market, and it will also be competitive with banks and thrift institutions.

But the Board has the feeling that this type of issue has important public benefits and these benefits are conceived as being the improved opportunities for individual savers and investors to get better yields, a reduced pressure on the commercial paper market, which as you probably know is under severe pressure right now, and also a strengthening of the financial condition of bank holding companies.

The amount of disintermediation that might take place were these issues to be widely sold is problematical, and there is no way of predicting in advance the probable effect on the flow of mortgage bonds or the deposits of banks and thrift institutions in a particular area, for the reason that I mentioned, that the notes are to be marketed nationally through dealers and not locally. Of course, these notes are not insured, another deficiency that some depositors in banks and thrift institutions will consider important. So it is not obvious today that the longrun public interest will be served by prohibiting or even severely limiting innovative financing efforts of this type.

The Board believes it would be best to observe the results of this innovation in its early stages before arriving at a conclusion as to what should be done, and the Board feels more comfortable with this position since Citicorp has postponed its redemption option for the first 2 years of the life of the issue.

As to what kind of legislation might be used, we have some suggestions. First, if it turned out that there were serious damage to the housing finance and thrift institutions, this might be offset by special assistance programs. Other public officials are better equipped to comment on specific measures than I am. But one obvious approach would be to expand the present loan program of the Home Loan Bank Board. Also, since mutual savings banks may be especially vulnerable, such programs of assistance probably ought to be extended to include them. Second, Congress might wish to encourage thrift institutions to compete with such offerings, also offering a variable rate instrument of some type. For example, they could duplicate the Citicorp offering by selling notes through brokers, just as Citicorp is doing. Or they could issue and themselves market longer term obligations with flexible

rates.

Of course, if the obligations are to be issued directly by thrift institutions it would be important that investors be fully aware that these instruments were not insured deposits. Even in the case of the Citicorp issue, the Board recommended to the SEC that the prospects be amended to include a bold-type caution to those investors.

Third, Congress might indicate its intent to give the Board authority to subject note issues of bank holding companies and their nonbank subsidiaries to regulation, regardless of the intended use of the proceeds, the approach that you have. This would make it possible, for example, for the Board to limit the ability of the issuer to offer investors the options of periodic redemption. The Board believes that the redemption opportunity in the early life of the issue is the principal feature making such issues appear similar to time deposits.

Finally, the Board's regulatory authority with respect to the issuance of cease-and-desist orders could be enlarged. This would enable the Board, on a case-by-case basis, to determine if a proposed note issue of a bank holding company or one of its affiliates would have sufficiently adverse impact on financial markets and depository institutions to justify the imposition of restrictions. This authority would be extremely broad and flexible, and I believe it would be quite difficult to administer.

None of these suggestions would give the Board or any other agency the authority to deal with offerings outside the bank holding companies. If the Citicorp offering is actually marketed and has a good investor acceptance, offerings of this type will undoubtedly spread. In any event, issuers will not be limited to bank holding companies and their subsidiaries, but almost certainly will include public utilities and national firms primarily engaged in nonfinancial business.

With regard to H.R. 15869, the Board has not had time to reach any firm views. At the moment we think that enactment of this bill would be premature, and in our preliminary review of the bill's provisions we have encountered some difficulties which make us, or lead us, to the conclusion not to recommend action of this kind at this point.

For example, the bill would require referral by the Board to, in effect, the coordinating committee. In view of existing responsibilities of the agencies around the coordinating committee, we believe the referral procedure would be unduly burdensome, and for that reason would not contribute significantly to the congressional purpose.

The coordinating group is a relatively efficient group, I think. Meetings are held as needed, but perhaps average something like a dozen a year, and I would be fearful that a procedure of this kind would place a burden on the coordinating committee that it could not expeditiously respond to. It is possible, of course, to use the coordinating committee to consider guidelines that might be used in the administration of the act.

A question has arisen as to whether the Board has authority under section 19 (a) of the Federal Reserve Act to regulate the Citicorp

issue, and because this question is being litigated in the U.S. District Court for the Southern District of New York it would not really be appropriate for me to comment in detail on the matter. Suffice it to say that the Board believes its present statutory powers do not authorize us either to prevent a Citicorp type of issue or to regulate its terms. The Board believes that there are no legal grounds for objecting to the issue under the terms of the present Bank Holding Company Act. In fact, we are pretty sure the financing will improve the financial position of Citicorp. Indeed, we believe that the structure of our entire financial system would be very much strengthened if the maturity profile of liabilities of financial institutions and depository institutions in particular were more matched to the maturity profile of

their assets.

That, I believe, Mr. Chairman, represents the thrust of our state[The prepared statement of Governor Mitchell follows:]

ment.

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