Sec. 208. Injunctions

Whenever it appears to the Board that any person has engaged, is engaged, or is about to engage in any acts or practices constituting a violation of any regulation under this title, it may in its discretion bring an action, in the proper district court of the United States or the proper United States court of any territory or other place subject to the jurisdiction of the United States, to enjoin such acts or practices, and upon a proper showing a permanent or temporary injunction of the Board, any such court may also issue mandatory injunctions commanding any person to comply with any regulation of the Board under this title.

Sec. 209. Civil penalties

(a) For each willful violation of any regulation under this title, the Board may assess upon any person to which the regulation applies, and upon any partner, director, officer, or employee thereof who willfully participates in the violation, a civil penalty not exceeding $1,000.

(b) In the event of the failure of any person to pay any penalty assessed under this section, a civil action for the recovery thereof may, in the discretion of the Board, be brought in the name of the United States.

Sec. 210. Criminal penalty

Whoever willfully violates any regulation under this title shall be fined not more than $1,000 or imprisoned not more than one year, or both.

The CHAIRMAN. Mr. Crawford of Mutual Savings Banks is next. We will take Mr. Crawford and then we will take you in the order in which you appear here.

STATEMENT OF MORRIS D. CRAWFORD, CHAIRMAN, THE BOWERY SAVINGS BANK, NEW YORK CITY, AND CHAIRMAN, COMMITTEE ON FEDERAL LEGISLATION OF THE NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS

Mr. CRAWFORD. Thank you, Mr. Chairman. My name is Morris D. Crawford, Jr. I am chairman of the Bowery Savings Bank in New York City and chairman of the Committee on Federal Legislation of the National Association of Mutual Savings Banks. The savings bank industry appreciates this opportunity to appear before the House Banking and Currency Committee and to offer its views on H.R. 15869. I also add we particularly appreciate, Mr. Chairman, the speed with which this committee has undertaken to look into this matter and to deal with the problem which could be a most serious one.

The Board of Governors of the Federal Reserve has concluded that it does not presently have sufficient statutory authority to define these obligations as deposits and therefore to control them for purposes of such Federal Reserve regulations Q and D. The savings bank industry has reached a different conclusion based on what we regard as the unequivocal language employed in section 19 of the Federal Reserve Act, and the clear congressional intention that banks not be allowed to subvert the purposes of the interest rate control act and regulation Q through the use of holding company obligations. H.R. 15869 would make the authority of the Federal Reserve in this area even more explicit.

The savings bank industry, therefore, supports the purpose of the bill, but believes if the committee referred to in the bill is to be involved in the process, approval of any bank holding company issue should be by a majority of the committee provided for in the bill.

This morning, Mr. Chairman, you invited other suggestions as to possible ways to deal with this problem, and in the light of some of the reservations expressed this morning by some of the witnesses to H.R. 15869 as drafted, I would like to venture another approach to the problem. We suggest that you amend the Federal Reserve Act and the Federal Deposit Insurance Act, to provide in effect that whenever an obligation is issued by a holding company, and the obligation carries an effective maturity of less than 7 years, or a right of redemption which might be exercised in less than 7 years, then such obligation of the parent shall automatically be considered as a deposit in a subsidiary bank.

This seems to us to be a much simpler approach. It is positive in nature in that it would permit the holding company to issue such an obligation, but put it as we think it should be on the same basis as its bank subsidiary.

The National Association of Mutual Savings Banks believes that the offering by a bank holding company of a low-denomination, deposit-type instrument is a clear violation of the spirit of regulation Q and will produce confusion in the public mind as to the actual issuer of the notes and as to the nature of the obligations. Further, we believe a private corporation not licensed to do a banking business could not have designed a more effective instrument to compete with time deposits offered by thrift institutions and commercial banks. Under the laws of some States, these instruments may be deemed to result in the unauthorized business of receiving deposits. Supporters of the Citicorp issue have implied that savings banks are crying "crisis" where no crisis exists. I would point out that the savings bank industry, as a result of disintermediation in a time of high interest rates, has suffered a net deposit outflow of $350 million in the month of June, excluding interest, the worst June for mutual savings banks on record. In the first 5 business days of July, data available from 17 New York City savings banks indicated that the banks lost $171 million, the heaviest net outflow for a comparable period on record. We believe that a great deal of this huge outflow represented withdrawals by depositors in contemplation of investment in the muchpublicized Citicorp notes.

Taking the April-June period as a whole, savings banks experienced a $1.2 billion net deposit outflow. This was the worst deposit experience for the second quarter in savings bank history. Except for the July-September 1973 period, moreover, it was the worst experience for any quarter on record.

In fact, the second quarter reduction in deposits more than wiped out the $924 million deposit inflow registered in the post-1973 disintermediation recovery period from November 1973 to March 1974. It is important to note that the second quarter deposit drain was not limited to a few areas, but affected practically the entire industry.

Nine out of the 11 major savings bank areas reported net outflows in this brief period.

If the proposed Citicorp issue of $850 million and its companion issue by Chase Manhattan Corp. of $200 million is allowed to be offered, already serious competitive pressures brought about by high yields on traditional money market instruments would be further aggravated.

Even more serious for savings, mortgage and housing markets are the longer run consequences of the sale of this type of obligation. The Citicorp and Chase Manhattan Corp. issues could signal a flood of variable rate issues of as much as $15 billion in the months ahead, according to a report in the Wall Street Journal on July 5. The results of such a development would be quite clear. Potential mortgage funds would be siphoned off from thrift institutions in ever increasing volume, thereby destroying any foreseeable early prospect of a recovery in the already depressed housing industry.

It has been asserted by some that prohibition of the Citicorp issue would discriminate against so-called small, unsophisticated and less affluent savers, who are allegedly barred from seeking yields which exceed ceiling rates on time and savings deposits. This argument fails to take into account the wide variety of open market investments which are not deposit-type bank obligations. Such open market instruments are highly publicized and readily available to yield-conscious individuals. These include bond and money market investment funds, U.S. Government and Federal agency obligations, and tax-exempt municipal bonds.

Moreover, the circumvention of existing Federal ceilings on deposit interest rates through such devices as the Citicorp issue would gravely weaken the competitive position of thrift institutions. Over the long pull, the best assurance that small savers will be treated fairly and receive maximum returns on savings is provided by the existence of vigorous thrift institutions, competing alongside business-oriented commercial banks whose interest in generating individual savings varies over the cycle. Given their long-term mortgage orientation, maintenance of interest rates ceilings and differentials is necessary to the continued viability of thrift institutions and, therefore, is of longterm benefit to the small saver.

In summary, the Citicorp issue and similar issues pose a grave threat to the thrift institutions and to the housing industry. The savings bank industry strongly supports the purposes of H.R.

Mr. BARRETT [presiding]. Mr. Crawford, would you like to summarize?

Mr. CRAWFORD. I have completed all but one line.

The savings bank industry strongly supports the purpose of H.R. 15869 as a means of insuring Federal control over a potentially dangerous loophole in our Nation's financial structure.

Mr. BARRETT. Thank you, Mr. Crawford.

All right, we take now Mr. Scott, the legislative chairman of the U.S. League of Savings Associations.

Mr. Scott, we will give you as few minutes as we possibly can.

STATEMENT OF TOM B. SCOTT, JR., LEGISLATIVE CHAIRMAN, U.S. LEAGUE OF SAVINGS ASSOCIATIONS

Mr. Scorr. My name is Tom B. Scott, Jr., and I am president of Unifirst Federal Savings and Loan Association of Jackson, Miss. I appear today as legislative chairman of the U.S. League of Savings Associations.

The savings loan business is grateful for this opportunity to present its views on H.R. 15869. We appreciate the efforts of the chairman in scheduling these hearings on such an urgent matter.

Apparently the Federal Reserve and the SEC are powerless at this time to stop the major bank holding companies from conducting a massive raid on our Nation's savings markets. As you are aware, over $1 billion in super-rate note issues by bank holding companies have already been announced. According to the Wall Street Journal, another $4 billion is waiting in the wings.

If bank holding companies such as Citicorp and Chase Manhattan Corp. are permitted to siphon off such tremendous amounts of savings capital at this time, sources of funds for the farmer, home buyer, and the ordinary banking customer across the country will suffer. Savings associations, in particular, are threatened with the loss of savings flows needed to get the depressed housing market back on its feet.

We do not deny that these giant banks and their holding companies have ingeniously designed their notes to attract the small saver while cleverly evading the rate control system and the Federal Reserve's present regulations governing bank holding companies. We do declare that such financings are not in the public interest at this time. In fact, we urge that any legislation make it abundantly clear that debentures issued by bank holding companies which can be redeemed at par in less than 7 years are not in the public interest.

We question whether the $5,000 saver is well advised to chase after these super-rate instruments. They are not federally insured savings deposits despite the similarity in names between Ciitcorp and Citibank, Chase Manhattan Corp. and Chase Manhattan Bank. In between redemption periods, their value fluctuates, unlike a savings certificate, which maintains its value to maturity. Though the Treasury bill rate is involved in the rate-setting formula, these are not Treasury bills covered by the full faith and credit of the United States. Nor do we believe that the general public fully appreciates the risks involved; the issues appear to be a substitute for financing via commercial paper, which commands much higher rates today, a spread of 3 to 4 percent today over Treasury bills.

The big selling point, moreover, is the opportunity to redeem at par at relatively short term intrevals. However, there is a trap. The investor must announce that he is cashing in at least 30 days in advance; but the rate for the next period is not yet determined. Thus, the noteholder must guess what the new rate will be, or he is locked in for the next investment period. Particularly in periods of declining Treasury bill rates, this gimmick is unfair to the investor.

Treasury bill rates are a highly volatile statistic. These rates bounce up and down from week to week as shown by exhibit A. Furthermore,

over an extended period of time-such as the last 25 years-the rates have ranged from under 2 percent to nearly 9 percent reached recently.

As a general rule, the Treasury bill rates have been below the return available to savers at savings associations. The exceptions, of course, are the four credit crunch periods we have experienced in the last 8 years. Thus, over the long haul, the modest saver has received a good return by investing in a savings and loan association and, in addition, has had a fairly low risk investment.

The rate control system is one stabilizing mechanism in our current economic crisis. While elimination of rate control may be desired eventually by some, last fall's brief wild card experience demonstrates that the banking system cannot yet tolerate its elimination.

In 1969, this committee attempted to close what it called a loophole in regulation Q where bank holding companies issued short-term notes in the commercial paper market to raise funds for their subsidiary banks. As a result, this committee gave the Federal Reserve authority to determine what types of obligations, whether issued by a bank or its holding company, were indeed deposits, at least for reserve purposes. The Federal Reserve subsequently defined deposits to include obligations of a holding company of 7 years or less, the proceeds of which are used in the banking business.

Given the provisions of these present note offerings, the Federal Reserve has determined that it has no grounds for objecting under the Bank Holding Company Act nor could it classify the issues as deposits unless the proceeds could be traced to the banks. The SEC contends that it cannot prevent the registration from becoming effective if full and adequate disclosure is made.

Therefore, it is imperative that the committee act on H.R. 15869 to shut down this new end run around rate control and threat to the entire bank system.

We approve the general purposes of the legislation before the committee today. In view of recent developments, however, we believe that H.R. 15869 may not go far enough. There needs to be a clear distinction between savings deposits and certificates on the one hand and long-term investments on the other. Savers and investors need to be able to easily distinguish between savings deposits which stress safety and liquidity, rather than yield. in contrast to longer term investments, which typically offer higher yields commensurate with their risk.

In the case of the Citicorp notes, a long term investment is combined with a short term maturity. There is danger that the holding company will be confused with a bank in the minds of savers and investors. There is danger also that the short redemption period will lead to confusion between a savings certificate and a longer term instrument. The funds raised by these offerings are supposedly destined for a limited number of selected activities. both here and abroad. Such a reallocation of banking resources may well fuel inflation by sustaining the high rates of lending of the giant bank holding companies in recent months. It takes funds away from the 6,000 thrift institutions, and roughly 12,000 commercial banks which are not part of the holding companies, and which provide the full range of banking and