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solicitation of views and comments is followed under the Bank Merger Act and, in a more limited way, by the Board under the Bank Holding Company Act. Another concern with the Committee bill relates to its applicability to note issues having a redemption right within ten years or less. We believe that a shorter minimum redemption period should be made the subject of the proposed regulatory legislation. Finally, the Board is concerned that an unduly heavy "burden of proof" is placed on an applicant seeking approval under the bill's provisions. A more reasonable requirement might be a provision that would authorize agency approval only if the proposal were found not to be substantially at variance with the Act, nor to have a likely adverse impact on financial markets, and to be in the public interest. A question has been raised as to whether the Board of

Governors now has the requisite authority in sec. 19(a) of the Federal Reserve Act to regulate the Citicorp issue. Because this question is now being litigated in the U. S. District Court for the Southern District of New York, it would not be appropriate for me to comment in detail on this 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 also believes that there are no legal grounds

for objecting to the issue under the terms of the Bank Holding Company Act. In fact, the financing will improve the financial position of

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Citicorp.

Indeed the structure of our entire financial system would

be strengthened if the maturity profile of liabilities of financial institutions, and depository institutions in particular, were more nearly matched with the maturity profile of their assets.

I should note that our view regarding our authority to effect regulation of the proposed Citicorp issue would be no different even with passage of the cease-and-desist amendment contained in the Senate-passed version of H. R. 11221, inasmuch as no aspects of the Citicorp proposal would appear to support findings of the nature contemplated by sec. 8(b) of the Federal Deposit Insurance Act (12 U.S.C. 1818(b)).

As a final note, I think it might be relevant for the recent correspondence with appropriate attachments involving the Chairman of the Board of Governors and myself and the Securities and Exchange Commission, the Chairman of this Committee, and the Chairman of Citicorp be included in the record of this hearing. To that end, I have copies of this correspondence which I shall be happy to make available to the Committee.

The CHAIRMAN. Thank you, sir.

We will interrogate each member later on. Now, Mr. Schmults of the Treasury Department.

STATEMENT OF HON. EDWARD C. SCHMULTS, UNDER SECRETARY OF THE TREASURY, ACCOMPANIED BY EDWARD M. ROOB, SPECIAL ASSISTANT TO THE SECRETARY (DEBT MANAGEMENT)

Mr. SCHMULTS. Mr. Chairman and members of the committee, I will try to summarize Treasury's testimony today.

We believe that the underlying circumstances in our economy which led to the Citicorp offering are a reflection of the fact that the single most important domestic economic priority is the containment of inflation.

This will be, as I am sure members of this committee are aware, a protracted and difficult task, but the alternative is so serious that we have no choice except to exercise the greatest restraint in our budgetary and monetary policies until inflation is controlled and we have achieved price stability.

I believe it should be clearly recognized in this hearing that the Citicorp floating rate issue, and the similar Chase Manhattan issue, could have been anticipated as another inevitable consequence of the terrible dilemma posed to all of our institutions by inflation on the one hand and restrictive regulation on the other.

I would like to discuss first some of the present inadequacies of our financial markets and institutions which, in large part, make the proposed Citicorp offering of concern to this committee.

Our financial institutions are today operating under a system that is in many respects outdated and obsolete. Events in the last decade, indeed, have revealed significant defects in our financial markets and in our financial institutions.

These are such events as the credit crunch of 1966, the monetary and gold crises of 1968, the severe credit squeeze of 1969-70, the interest rate crunch of 1973, and the present stringent credit conditions of 1974.

The record shows clearly that our system does not adjust well to short term changes in our economic and financial situation. In fact, our financial system has responded badly to changes in monetary policy and the level of interest rates, and this has been to the detriment both of savers and borrowers.

We have had an overabundance of money flowing into institutions at times, followed by a total cessation of deposits and even large withdrawals at other times.

The inability of our financial system to respond creatively to changes in monetary conditions has in large part been caused by the rigidities we have built into our banking laws over the past 6 decades. It is of urgent importance that we create new laws which will allow our financial institutions to change with changing times and to provide the services that are needed, to encourage savings, and to make loans in the most efficient, prudent, and responsive manner possible.

Only in this way will our financial institutions be able to make a maximum contribution to the growth and stability of our economy and, indeed, of the world economy.

It is to meet these problems that I have mentioned, that President Nixon sent last August a message to Congress recommending changes in our financial system, to make it stronger and more efficient, and more flexible, to promote sound economic growth, including and I underscore this the provision of adequate funds for housing.

This was the Financial Institutions Act, and it was carefully and painstakingly worked out over almost 2 years of review and consultation. It is a balanced and consistent set of reforms which need to be enacted as a package. It is now the subject of extensive hearings before Senator McIntyre's Subcommittee on Financial Institutions of the Senate Committee on Banking, Housing and Urban Affairs.

With the chairman's permission, I would like to insert for the record a summary of the explanatory material relating to the proposed act. The CHAIRMAN. Without objection, so ordered. It may be inserted in the record.

[The summary of the Financial Institutions Act referred to may be found at the end of Mr. Schmults statement.]

Mr. SCHMULTS. Enacted as a package, it will improve, I am sure, the efficiency of all of our financial institutions and reduce their dependence upon Government. We will be able to rely more on market determinations of the cost and availability of credit. Our institutions, whatever the future may be, will have greater ability to deal with the rapidly changing market conditions and the evolution of our economy. Let me stress that it is by relaxing and removing restrictions on the activities of savings and banking institutions, and by eliminating self-defeating regulatory measures such as ceiling rates for time deposits and maximum nominal rates on guaranteed mortgages-that we will assure the strength and continuing viability of these institutions and an adequate flow of savings to meet our capital needs, whether for housing, large or small business, agriculture, consumers, or State and local governments.

Phasing out regulation Q and other ceiling rates for time deposits at commercial banks and thrift institutions depends on the widened asset and liability powers which the proposed act would grant, especially for thrift institutions. By strengthening the asset and deposit structure of savings institutions, we can make them more competitive for savings with commercial banks without the need for Government intervention.

Elimination of regulation Q ceilings will benefit small savers who have been neglected and are penalized by the deposit ceiling rates set by the regulatory agencies.

It is easy to forget, Mr. Chairman and members of the committee, that savings accounts of less than $1,000 are more than half the total number of time and savings deposits in commercial banks. It is more than simply unfortunate that it is argued that the continued solvency of our thrift institutions can be achieved only by penalizing those who have so little or who are so lacking in financial sophistication that they cannot seek out higher yielding investments to reward their savings.

It is also clear, Mr. Chairman, that the proposed amendments to the Bank Holding Company Act, which are being reviewed today, would do the same penalize those with the least in savings and sophistication.

We can, of course, count the one-time events that have significantly

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exacerbated inflation, both here in the United States and worldwide, but when we have done that, we are still faced with the prospect that prices will be rising at a rate of 7.5 percent per year. The reason is that we, as a Government and as a people, have increased Government spending faster than we have been willing to pay for those expenditures through taxes. We have, as a nation, permitted, encouraged, and even forced the demand for goods and services to outrun our ability to produce.

We have failed to recognize that when we decide to give more to some, we are at the same time deciding to take those resources from others, explicitly through increased taxes or more reduced expenditures elsewhere, or through inflation, which proves to be the worst tax of all.

Since the Government is partly responsible for some of the events which have resulted in the present great difficulties for the thrift institutions and the housing industry, the Government clearly has an obligation to do what is needed to assure the continued solvency of the thrift institutions and to maintain a level of housing activity which is consistent with our anti-inflation policies.

It seems to us that these obligations are best met by positive stepsincluding, for example, enactment of the measures included in the President's special housing message 10 months ago-not by adding additional restrictions to those which already bear too heavily on our financial institutions.

Surely, if the proposed $850 million Citicorp issue and the $200 million Chase Manhattan Corp. issue are viewed by the thrift institutions as a threat, they are, at the same time, potentially beneficial if they bring added strength to the issuing financial institutions.

Many financial institutions today have significantly more short-term liabilities than they had even a year ago. At the same time, with the expansion in their total assets and liabilities which has taken place in the same period, their capitalization ratios have measurably declined. Thus, it is important for these institutions to have the ability, without undue regulatory restraint, to extend the maturity of their liabilities. Clearly there are many considerations which should be balanced; some may be viewed as favorable and some unfavorable, depending upon your perspective. Legislation, such as these proposed amendments to the Bank Holding Company Act, can have tremendous implications for financial institutions. I am not at all sure that it is possible to understand all of the ramifications without a great deal more study and consideration than has been possible in the last few days, either for us or for the committee. But, in any event, we believe this hasty proposal is the wrong approach, and the administration is strongly opposed to its enactment.

Let me also add that, beyond increasing the burdens of regulation, no matter how well the Federal Reserve might administer the amendments, the amendments are fundamentally antagonistic to savers and to saving at a time when we should be encouraging more savings, just at the time when we are beginning to appreciate the tremendous investment needs of expanded capacity, energy, and pollution control. Moreover, the proposed amendments would be unfair in discriminating against bank holding companies as against other corporations