which are competitive in many similar lines of activity. Discrimination apart, the Treasury is prepared to oppose even the first step toward capital controls which would thrust the Government into the heart of the private decisionmaking process.

I can reiterate, however, that the administration will take such steps as may be necessary to maintain the solvency of the thrift industry.

In this connection, I would point out to the committee that we strongly support section 13 of H.R. 11221, "The Depositary Institutions Amendments of 1974," which would temporarily increase the Treasury's authority to lend to the Federal Home Loan Banks by an additional $3 billion.

We consider this provision of considerable importance, since $3 billion of Treasury's present $4 billion lending authority has already been committed under the President's program of assistance to housing.

The Treasury' lending authority to the Federal Home Loan Bank System has been an assurance to the financial markets that the System would always be able to make timely payments on its obligations. This has helped to assure the ability of the System to go to the market and borrow at competitive rates.

Restoration of the uncommitted Treasury lending authority would continue this assurance to the market and provide a further margin which, in the event of short-term necessity, could be used to make additional Treasury loans to the Home Loan Bank System.

We hope, therefore, that the House will prevail in the conference on this particular measure.

We also believe that it may now be timely to give some consideration to changes in the regulation Q ceilings which would permit banks and thrift institutions to offer deposit terms which would be more competitive with market instruments, including variable rate instruments of the type proposed by Citicorp and Chase Manhattan Corp.

The banks and thrift institutions would have one valuable advantage in this competition; that is, deposit insurance, which makes their deposits Government guaranteed.

I am sure that the supervisory agencies ought to be able to work out such a competitive-type instrument within the framework of present law and with due regard to the interests of the institutions.

The Citicorp floating interest rate issue poses many economic and financial questions, and it may have been untimely. Nevertheless, we believe that any adverse consequences for the thrift institutions can best be offset by measures which do not compromise our thrust toward freer financial markets.

We should not act in haste in a manner which could prove unduly restrictive in the future.

Thank you very much, Mr. Chairman.

[The summary of the Financial Institutions Act referred to by Mr. Schmults in his statement follows:]

[Submitted by the Treasury Department, Oct. 11, 1973]

SUMMARY OF THE FINANCIAL INSTITUTIONS ACT OF 1973

TITLE ONE-PAYMENT OF INTEREST ON DEPOSIT ACCOUNTS

This title adds the Secretary of the Treasury to the present consultative comImittee which will continue to prescribe rate ceilings only for five years and six months after enactment of this Act. The appropriate supervisory agencies will

prescribe ceilings which will, eighteen months after enactment of this Act, begin to eliminate differentials between commercial banks and thrift institutions by four annual increases, not necessarily equal, and not necessarily on the same day each year, in rates of interest which commercial banks may pay on deposits.

Interest rate ceilings on negotiable order of withdrawal accounts (N.O.W.) may differ from ceilings on other accounts but may be no greater than the ceilings on passbook accounts at commercial banks. N.O.W. ceilings will be uniform for banks and thrift institutions.

Demand deposit accounts, negotiable order of withdrawal accounts and savings accounts may be offered at all banks and thrift institutions to all customers. The payment of interest on demand deposits will remain prohibited for all institutions.

In addition, this title adds truth-in-savings provisions which will require disclosure by commercial banks and thrift institutions for all depositors.

TITLE TWO-EXPANDED DEPOSIT LIABILITY POWERS AND RESERVES

This title provides federal thrift associations with third party payment authority, including negotiable order of withdrawal accounts (N.O.W.), with access to the check clearing process, and with authority to engage in credit card operations. These new powers of thrift associations would be similar to powers of commercial banks.

Banks will be empowered to offer savings accounts and N.O.W. accounts to all customers, individual and corporate. Commercial banks may presently offer savings accounts only to individuals.

All federally chartered institutions and all state chartered institutions which are members of the Federal Reserve System of the Federal Home Loan Bank System will be required to maintain reserves against deposits in demand and N.O.W. accounts in a form and amount prescribed by the Federal Reserve Board after consultation with the Federal Home Loan Bank Board. State chartered savings and loan associations insured by the Federal Savings and Loan Insurance Corporation need not be members of the Federal Home Loan Bank System just as state chartered banks need not be members of the Federal Reserve System.

TITLE THREE-LENDING AND INVESTMENT POWERS

This title would permit increased income and liquidity for thrift institutions through portfolio diversification and the acquisition of shorter term assets. Liberalization of restrictions would be made in the areas of consumer loans, real estate loans, construction loans, community welfare and development investments, and commercial paper and corporate debt securities investments.

National banks would have liberalized powers with respect to real estate loans and a leeway authority for community welfare and development investments. In addition, the Federal Reserve Board would be granted more flexible authority to define assets eligible for discount, and the Federal Home Loan Bank Board would have expanded authority to define the types of assets eligible as collateral for Federal Home Loan Bank advances to thrift institutions.

TITLE FOUR-CHARTER AND THRIFT INSTITUTIONS

This title strengthens the dual banking system by authorizing stock thrift institutions at the federal level, just as stock institutions are now permitted at the state level. The Federal Home Loan Bank Board will be empowered to charter stock thrift institutions, which will have powers identical to those possessed by mutual savings and loan institutions. These thrift institutions will be called either Federal Savings and Loan Associations or Federal Savings Banks.

Federally chartered and state chartered mutual institutions may convert to federal stock institutions and federally chartered mutual institutions may convert to state stock institutions, subject to approval of the Federal Home Loan Bank Board pursuant to the regulations. State institutions which convert to federal institutions may retain their life insurance, equity investment and corporate bond investments.

TITLE FIVE-CREDIT UNIONS

This title modernizes the federal law dealing with credit unions. In addition to technical amendments, the title liberalizes certain credit union powers and

facilitates credit union operations in different economic periods, e.g., by permitting with the approval of the Administrator of the National Credit Union Administration, loan rates to be more than the present statutory 1 percent per month.

To deal with periods of severe credit restraint or emergency events, such as a plant closing, a Central Discount Fund is established for federally- or state-insured credit unions. The Fund is created solely to provide funds to meet emergency and temporary liquidity problems. The Fund will be administered by the Administrator of the National Credit Union Administration.

TITLE SIX-GOVERNMENT INSURED AND GUARANTEED MORTGAGE LOANS

This title corrects the situation, which has existed for some time, of restricted funds for housing because of governmental attempts to keep interest costs artificially low. The administrative interest ceilings placed upon Federal Housing Administration-insured and Veterans Administration-guaranteed mortgage loans have resulted in the widespread use of "points" and the general unavailability of funds through these mediums. The removal of interest rate ceilings on FHA and VA loans should result in more adequate funds to solve the nation's housing problem.

TITLE SEVEN-UNIFORM TAX TREATMENT OF FINANCIAL INSTITUTIONS

In light of the expanded powers to be granted thrift institutions and the overall goal of reducing the degree of functional specialization among financial institutions, the objective of Title VII is a uniform tax formula for all financial institutions. A tax neutrality is sought, such that a given investment or activity will be subject to the same income tax provisions regardless of the functional type of financial institution making the investment or engaging in the activity. Differences in tax treatment and thus, overall tax burden and effective rates of taxation among financial institutions will continue to exist. These differences will result from a combination of three factors: (1) the form of the institution, i.e., mutual bank versus capital stock corporation; (2) federal and state regulations which will grant certain types of institutions the power to make certain investments and engage in certain activities which are denied to other institutions; and (3) the extent of utilization by an individual institution of the powers granted to it.

Under current law a subsidy is provided for the residential mortgage market through special bad debt reserve deductions for thrift institutions. Consistent with the objective of a “uniform tax formula," this subsidy should be eliminated. If the current subsidy for the residential mortgage market and hence for the housing industry is eliminated, an alternative incentive to insure a continued flow of capital from the private sector into the residential mortgage market could be provided for all taxpayers, not just thrift institutions. In addition, such an incentive would provide a mechanism whereby thrift institutions could be compensated for the tax benefit which would be lost via elimination of the current special bad debt reserve provisions.

In providing a "uniform tax formula" for financial institutions the principal area of current law which would be affected is those provisions relating to deductions for additions to a reserve for losses on loans. Currently, thrift institutions under section 593 of the Internal Revenue Code are allowed to compute reserve additions for qualifying real property loans on the basis of a percentage of taxable income. The 1969 Tax Reform Act reduced the applicable percentage over a ten-year period from 60 percent to 40 percent. In addition, deductions are limited by an overall limitation on the size of the reserve (6 percent of outstanding loans). If more than 18 percent of a thrift institution's total assets (28% in the case of a mutual savings bank) are invested in nonqualifying assets (principally cash, government obligations, real property loans, and student loans), the applicable percentage is reduced and if less than 60 percent of the assets are invested in qualifying assets the percentage of taxable income method may not be used. In the case of nonqualifying loans, reserve additions are based on the actual loss experience of the institution in a manner consistent with provisions applicable to commercial banks.

Prior to 1969, commercial banks computed reserve additions on the basis of a percentage of outstanding eligible loans or on the basis of the actual loss experience of the individual institution. The Tax Reform Act of 1969 eliminated

the percentage of outstanding eligible loan method subject to an 18 year transition period. Under the transition rules, reserve additions may not increase the balance of the reserve to an amount in excess of 1.8 percent of eligible loans outstanding in the case of taxable years before 1976; 1.2 percent for taxable years between 1976 and 1982; and 0.6 percent for years before 1988 after which time all commercial banks will be required to compute reserve additions on the basis of actual loss experience. In addition, the reserve addition in any one year may not exceed 0.6 percent of eligible loans outstanding. Under the experience method, reserve additions are computed on the basis of actual loss experience for the current taxable year and the preceding five taxable years. If the balance of the reserve as of the close of the last taxable year beginning on or before July 11, 1969 exceeded the amount allowable on the basis of the specified percentage of eligible loans or on the basis of the six-year actual loss experience, the bank, nevertheless, is allowed to deduct amounts necessary to maintain the dollar balance of the reserve (assuming the level of outstanding loans does not decrease). This insures that a commercial bank will receive a deduction for the amount of loans which are written off as wholly or partially worthless during the taxable year.

The CHAIRMAN. Thank you, sir.

Mr. Bomar? Chairman Bomar, of the Federal Home Loan Bank Board, we would like to hear from you, sir.

STATEMENT OF HON. THOMAS R. BOMAR, CHAIRMAN, FEDERAL HOME LOAN BANK BOARD

Mr. BOMAR. Thank you, Mr. Chairman and members of the committee.

I appreciate this opportunity, on behalf of our Board, to present its views on the bill to amend the Bank Holding Company Act of 1956 to provide for the regulation of the issuance and sale of debt obligations by bank holding companies and their subsidiaries.

The bill, the Board believes, as it is introduced, is broader than is necessary to accomplish its intended purpose. Additionally, the Board is concerned about the potentialities of having the Federal Home Loan Bank Board involved in the affairs of the banking agencies, when it would appear that Congress has set up these other agencies to deal with banks and appropriately so. We question the advisability of including the Federal Home Loan Bank Board in that area.

If the committee intends to stop bank holding companies from issuing obligations that compete directly with savings accounts, it would appear that there are other alternative approaches that would be preferable. However, whichever way the committee chooses to handle this immediate bank holding company problem, I am sure that it recognizes that such a solution will deal only with a small percentage of the potential issuers of such obligations as these. There are many potential issuers in the market other than bank holding companies, such as public utilities and industrial and manufacturing corporations and others. The assets of these potential issuers dwarf the assets of the bank holding companies.

This development of late, rather than being isolated, is one in a series of events over recent years which cause serious threats to the thrift industry.

Bank holding company borrowings of this type have some merits, we all recognize. For savers, they present an alternative investment. For bank holding companies, there would appear to be some benefits. However, the thrift industry is largely unable to compete with borrowings of this type. The issuance of a large volume of such obligations will further threaten the thrift industry and contribute to an even greater decline in the homebuilding industry. These developments will widen the gap between the public's housing needs and its availability. Mr. Chairman and members of the committee, let me turn your attention to what we see is the basic problem.

Thrift institutions are unable to compete due to statutory constraints which limit their investments almost exclusively to home loans. They have done their job well and have provided sufficient funds to help make Americans the best housed people in the world.

The magnitude of their success in doing the job that needed to be done is proportionate to these problems. Low-rate, long-term home mortgages originated in the past will remain in the portfolios of thrift institutions for many years. These mortgages produce the major portion of savings and loan income. Thus, it is clear that during periods such as we are now experiencing, savings and loans have inadequate capacity to produce sufficient income to compete. For example, the initial rate on a proposed bank holding company offering was announced at 9.7 percent. The average current yield on savings and loan longterm mortgage portfolios is only 7.3 percent. Thus, savings and loans are at a severe competitive disadvantage.

The Board, through the Federal Home Loan Bank system, is providing support for housing at record levels, and we are grateful that we have this capacity. However, no support mechanism can make up for major fundamental inadequacies in our free market system.

Inflation, as has been pointed out by others, is the primary cause of our problem. The very existence of a thrift industry and an adequate supply of reasonably priced mortgages are inconsistent with the rate of inflation existing in our country today. This is especially true when undue reliance is placed upon monetary policy to correct the problem as is now the case.

We know that getting the rate of inflation to an acceptable level is likely to take a period of years. Even when inflation is under control, we will still have variations in interest rates. In order to overcome the type of difficulty we are now experiencing and to produce a lasting solution, we need to expand the capacities of thrift institutions. Savings and loans must have the ability to adjust their income much more rapidly and to balance the structure of their assets and liabilities. Specifically, the Board recomends that these institutions be allowed consumer loan powers, unsecured construction loans to builders, greater capacity to invest in debt securities, checking accounts, family trust powers and other powers needed to accomplish this objective. Although such new investment powers would reduce the thrift industry's percentage investment in housing, its capacity to attract more savings deposits would be increased and, though the percentage investment may be smaller, the actual dollar investment in housing may well be larger. This would be a good beginning. However, there is also a critical need for responsible variable rate mortgages and for access