Finally, by recommending retention of the general statutory framework of holding company regulation with the modest improvements offered, the "Discussion Principles" appear to accept existing statutes as adequate. This would appear to preclude consideration of proposals to make the law more effective in controlling further expansion of multibank holding companies.

In short, we urge you to conduct a searching examination of the statutes governing multibank holding companies, to determine whether their administration by the Federal Reserve Board has fulfilled the legislative intent of the Congress and has been in the best interest of the public. Nearly all of the Nation's largest banks are now controlled by multibank holding companies. In addition, several thousand small to medium sized banks are owned and controlled by registered multibank holding companies. In numerous States-especially the unit banking or limited branching States-multibank holding companies have grown significantly in both size and market powers.

Concentration of commercial banking had, by mid-1973, reached extremely high levels in 175 of the Nation's 233 SMSA's, where the five largest banks or bank groups controlled 70 percent or more of the commercial bank deposits. A significant factor in the growth of concentration in these SMSA's is the expansion of multibank holding companies through the acquisition of independently owned banks.

In 8 of 11 States where bank holding companies accounted for 70 percent or more of the State's deposits, the five largest banks or bank groups controlled from 56 to 93 percent of the State's deposits, and multibank holding companies were consistently among the five largest banking organizations. Clearly, concentration in commercial banking has reached dangerous proportions in many States, and in many SMSA's, and the aggressive, acquisitive policies of multibank holding companies are closely associated with that growth of concentration.

The multibank holding companies were given an added incentive to keep expanding when the concept of "potential competition" adopted by the Justice Department went down the drain in court case after court case. The final blow came when the Supreme Court, in United States v. Marine Bancorporation ruled against the Government's antitrust suit. The effect of this decision was to remove the concept of "potential competition" as a basis for antitrust challenge of multibank holding company market extension in those States which impose limits on entry into bank markets.

To close the gap created by Marine Bancorporation, the Bank Holding Company Act and/or the Clayton Act should be amended to revise the definition of geographic markets so that the term "any section of the country" can be interpreted to embrace such market extension mergers generally in any line of commerce, and thus remove the necessity of relving upon the concept of "potential competition" in challenging other market extension mergers.

Another approach to strengthening Federal control over multibank holding company expansion by merger or acquisition which Congress should consider is the placing of a statutory limit on the percentage share of a State or a local market which a multibank holding company would be permitted to obtain by acquisition or merger. Several State legislatures have already enacted percentage limitations on the total proportion of State deposits that a banking organization can acquire.

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It is our understanding that the Senate Banking Committee intends to hold hearings aimed at placing a limit on multibank holding companies' share of any one market. We would suggest that the findings of those hearings might provide this subcommittee with some. valuable insight and information that could be incorporated in FINE legislation.

There is also evidence that multibank holding companies are overdiversified and undercapitalized due, in large measure, to the permissiveness of the regulatory agencies in approving multibank holding company diversification. It should be conceded here that the Fed has finally embarked upon a course of taking a harder look at such expansion. However, legislation appears to be the only answer to preventing bank holding companies from overextending themselves in nonrelated fields. Congress could establish minimum standards for capital requirements which must be met before a bank holding company can enter permissible non-bank-related businesses.

Congress should also give further study to the need for modification of the Bank Holding Company Act to return much of the regulatory power over holding companies to the States, with the proviso that if a State fails to enact regulations governing bank holding companies within a specified period of time, Federal law would govern.

In the context of these comments on bank holding company legislation, we feel compelled to point out that tighter controls over multibank holding company acquisitions of independently owned banks are not likely to retard this movement until at least two things occur. First, Federal tax laws on capital gains must be modified. These laws constitute a major inducement to the stockholders of independent banks to sell out to multibank holding companies rather than a purchaser who would maintain its status as an independent bank, since the holding company can, by exchanging its stock, a piece of paper so to speak, for the stock of the independent bank, postpone the capital gains tax of the seller until such time as he sells the holding company stock.

Second, the survival of the independent bank also rests upon an amendment to the Bank Holding Company Act which will eliminate the requirement of Federal Reserve Board approval for local citizen shareholders to form a corporation for the sole purpose of purchasing control of a bank in their community, in order to avoid a takeover by a big, city-based multibank holding company unfamiliar and unsympathetic with their problems and needs. Such an amendment could easily be drafted to accommodate situations where there is no anticompetitive effect within the market area served by the bank to be acquired.

Unless this traditional transfer of ownership via what is now called a one-bank holding company can be restored, without the necessity of Fed approval, and the disparity in capital gains treatment is overcome, multibank holding company growth through acquisitions will continue to erode the independently owned sector of commercial banking, to the detriment of the towns and cities across our Nation which have always relied on these community-owned institutions for their banking needs.

Thank you for your attention. And now, I would like to turn our panel presentation over to Mr. DuBois, chairman of our Federal legislative committee.

STATEMENT OF PAT DUBOIS, CHAIRMAN, FEDERAL LEGISLATIVE COMMITTEE, INDEPENDENT BANKERS ASSOCIATION OF AMERICA

Mr. Du Bois. Mr. Chairman, members of the subcommittee, I am Pat DuBois, and I am chairman of the IBAA Federal Legislative Committee.

My comments today will be directed to the Federal Reserve System, taxation, housing, and regulatory agencies.

In regard to the relationship to the Federal Reserve System, the Independent Bankers Association cannot support the FINE recommendation with regard to the relationship of financial institutions to the Federal Reserve System.

Our opposition flows from the following: Nonmember banks would be forced to shift reserves from earning assets or correspondent balances to nonearning Federal Reserve bank balances, reducing earnings by an estimated $200 to $225 million or 14 percent of the $1.5 billion before tax net income of nonmember banks; and uniform mandatory reserves, as proposed for all federally insured depository institutions, would seriously impair, if not destroy, the dual banking system.

Furthermore, this proposal, which would essentially achieve the reserve requirement goals the Fed has been seeking for more than a decade, would also erode the correspondent banking system which underpins the entire concept of participating loans throughout the Nation.

Another major factor in IBAA's opposition to this proposal is the cost burden it would place on nonmember banks. Uniform mandatory reserve requirements deposited at the Fed would, in effect, place a taxlike penalty on nonmember bank earnings at a time when small and medium banks are encountering difficulty in improving their capital position by the principal way that is open to them, namely, the retention of earnings.

Reserve requirements lead a double life. They are both a tool of monetary policy and a tax on bank deposits. If Congress feels control of reserves is essential to control of monetary policy, it might consider changing the law to permit payment of interest on reserves in lieu of making uniform reserves mandatory by statute.

This course of action is not a new one. It involves, among other things, unbundling the costs of Fed services. The problem is the approach has yet to be fully explored. The rules could be changed so that reserve balances at the Fed be classified as time or savings balances and that, as such, interest be paid thereon. IBAA would be interested in commenting on such a course of action if it were to be more completely explored by the Congress, and the Federal Reserve would come up with some estimates on prices.

As to taxation, the "Discussion Principles" generally recommend a policy of uniform treatment under Federal tax laws for banks and credit unions but offer no specific proposals for achieving this objective. We support the thrust of this proposal but urge that the committee assay the means to achieve the uniform tax treatment of all regulated depository institutions, with special emphasis on the prominence of low-yielding, but tax-exempt, municipals in commercial bank portfolios.

With regard to housing, all of the proposals put forth in FINE concerning housing are worthy of consideration, and, in the opinion of IBAA, should be given the fullest study.

The association does have grave doubts about the ability of the mortgage tax credit, as presently envisioned, to bring about any substantial increases in the amount of money set aside for mortgage lending. Considerable support for this view is found in the paper on housing and financial reorganization prepared for the FINE Study by Craig Swan of the University of Minnesota.

Mr. Swan concluded that the tax credit provided very little incentive for very large banks with less than 10 percent of their assets in mortgages the point they must reach in order to be eligible for a 1.5-percent tax credit. Nor did he find any incentive in the measure for banks that had already reached the 10-percent level to increase their mortgage activities, since they stood to gain very little taxwise once past this benchmark. However, a more liberally structured tax credit might be a meaningful inducement.

The remaining incentive proposals raise a number of questions which should be given thorough statistical study. With respect to giving depository institutions direct access to loans from the Federal Home Loan Bank Board, what effect would such access have on the role presently played by FNMA and GNMA?

The proposal to provide mortgage credits against Federal Reserve reserves is predicated on the condition that all depository institutions would be required to have reserves held at the Fed, a proposal to which IBAA has expressed its opposition.

And, finally, as to the proposal which would insure mortgage lenders against interest rate increases, this appears on its face to be more of an indirect subsidy to homeowners and builders through lending institutions than a genuine insurance program for lenders and would, in the end, probably be more costly to the Treasury than even a liberalized tax credit or, perhaps, a direct housing subsidy.

REGULATORY AGENCIES

IBAA supports the concept of a full and exhaustive study by the Congress into the operations of Federal regulatory agencies as a means of streamlining the structure and improving the performance of all financial institution regulators. The association does not believe that sufficient study has been done in this area to determine the best means of achieving such efficiency. For this reason, we do not feel IBAA can endorse the proposal of the "Discussion Principles" calling for the creation of a superagency, the Federal Depository Institutions Commission, as the best means of handling financial institutions and monetary regulation.

The association believes the information to make a recommendation of this nature can best be acquired through oversight hearings specifically and solely on this aspect of FINE. IBAA testified with respect to S. 2298, Federal Bank Commission Act, that hearings of this nature would develop a body of material that would point the way to needed regulatory changes at the Federal level.

We would hope that any such undertaking would involve close coordination between both the House and Senate Banking Committees. as well as the Government Operations Committees in both chambers.

This latter recommendation should be considered, even though the jurisdiction of both Government Operations Committees may be limited in this area.

THE FEDERAL RESERVE SYSTEM

The "Discussion Principles" proposal would divest the Federal Reserve Board of its regulatory functions, leaving it with monetary policy as its prime responsibility. It would place all responsibility for monetary policy in the Board of Governors rather than the Federal Open Market Committee, the Board of Governors and the Board of Directors of the 12 Reserve banks, as it is today. While this organizational change may be beneficial, there is no assurance that it would improve the mechanics of shaping monetary policy or the implementa tion of such policy decisions.

While we agree that the Fed's independence may have insulated monetary policy from political influence, the proposal to make the Fed more responsive to the economic policies of the administration in power or the particular interest of certain sectors of the Nation's economy may require definite safeguards to protect the Federal Reserve Board from excessive pressures. Such pressures could force it to adopt monetary policies which would not be in the best interests of the economy in both its national and international aspects. Thank you, Mr. Chairman.

[The prepared statement of Mr. Benda on behalf of the Independent Bankers Association of America follows:]