it would permit the powers of such branches to be adjusted more realistically to the conditions existing in the places where they are located. At the same time, suitable safeguards would be provided by law to assure that such foreign branches would not engage in such business as investment banking or manufacturing.

Proposed legislation to effectuate the foregoing was recommended to the Congress by the Board in May 1956, and was contained in the bill S. 3922 which was introduced by Senator Robertson on May 24, 1956.

84. PROCEDURE FOR REMOVAL OF DIRECTORS AND OFFICERS

Existing law

Section 30 of the Banking Act of 1933 (12 U. S. C. 77) provides: "SEC. 30. Whenever, in the opinion of the Comptroller of the Currency, any director or officer of a national bank, or of a bank or trust company doing business in the District of Columbia, or whenever, in the opinion of a Federal reserve agent, any director or officer of a State member bank in his district shall have continued to violate any law relating to such bank or trust company or shall have continued unsafe or unsound practices in conducting the business of such bank or trust company, after having been warned by the Comptroller of the Currency or the Federal reserve agent, as the case may be, to discontinue such violations of law or such unsafe or unsound practices, the Comptroller of the Currency or the Federal reserve agent, as the case may be, may certify the facts to the Board of Governors of the Federal Reserve System. In any such case the Board of Governors of the Federal Reserve System may cause notice to be served upon such director or officer to appear before such Board to show cause why he should not be removed from office. A copy of such order shall be sent to each director of the bank affected, by registered mail. If after granting the accused director or officer a reasonable opportunity to be heard, the Board of Governors of the Federal Reserve System finds that he has continued to violate any law relating to such bank or trust company or has continued unsafe or unsound practices in conducting the business of such bank or trust company after having been warned by the Comptroller of the Currency or the Federal reserve agent to discontinue such violation of law or such unsafe or unsound practices, the Board of Governors of the Federal Reserve System, in its discretion, may order that such director or officer be removed from office. A copy of such order shall be served upon such director or officer. A copy of such order shall also be served upon the bank of which he is a director or officer, whereupon such director or officer shall cease to be a director or officer of such bank: Provided, That such order and the findings of fact upon which it is based shall not be made public or disclosed to anyone except the director or officer involved and the directors of the bank involved, otherwise than in connection with proceedings for a violation of this section. Any such director or officer removed from office as herein provided who thereafter participates in any manner in the management of such bank shall be fined not more than $5,000, or imprisoned for not more than five years, or both, in the discretion of the court."

Recommendation

An amendment to section 30 of the Banking Act of 1933 relating to removal of directors or officers of member banks, to eliminate the participation in the proceeding by the Federal Reserve agent. With such a change the Board of Governors of the Federal Reserve System, rather than the Federal Reserve agent, would issue the warning when a State member bank appears to have violated the law or engaged in unsafe or unsound practices. In the event the violation of law or unsafe or unsound practice was repeated after the warning, a hearing by the Board to determine whether to remove the officer or director could be instituted without the formality of a certification by the Federal Reserve agent which is now required.

Reasons

Shortly after the enactment of the Banking Act of 1935 the duties of the Federal Reserve agent, other than those specified by statute, were transferred to the Federal Reserve bank, thus placing the Chairman of the Board of Directors of the Reserve bank (who is the same person as the Federal Reserve agent) on a part-time basis and devoting his attention to major matters of policy rather than detailed administration. Consequently, in situations where section 30 might be invoked, the Federal Reserve agent is not now in a position to be familiar with the facts or to form a first-hand opinion as to the desirability of issuing the warning and later instituting a proceeding for removal.

The 1933 provision for the Federal Reserve agent to issue the warning and certify to a later violation of the warning was apparently an effort to separate the function of prosecution from that of adjudication. However, that separation was only partial and largely ineffective, since the Federal Reserve agent, as his name implies, is an agent of the Board. It is unsound and unrealistic to charge him with detailed statutory responsibilities which may conflict with his duties as such an agent. The Administrative Procedure Act, passed in 1946, has since prescribed carefully worked out rules for the separation of functions that apply in all administrative proceedings. Those rules are both more flexible and more effective than the rigid assignment of functions to the Federal Reserve agent in section 30 of the Banking Act of 1933, and that assignment of functions should now be repealed.

Existing law

85. BANK MERGERS

Section 18 (c) of the Federal Deposit Insurance Act (12 U. S. C. 1827 (c)) provides:

"(c) Without prior written consent by the Corporation, no insured bank shall (1) merge or consolidate with any noninsured bank or institution or convert into a noninsured bank or institution or (2) assume liability to pay any deposits made in, or similar liabilities of, any noninsured bank or institution or (3) transfer assets to any noninsured bank or institution in consideration of the assumption of liabilities for any portion of the deposits made in such insured bank. No insured bank shall convert into an insured State bank if its capital stock, or its surplus will be less than the capital stock or surplus, respectively, of the converting bank at the time of the shareholders' meeting approving such conversion, without prior written consent

by the Comptroller of the Currency if the resulting bank is to be a District bank, or by the Board of Governors of the Federal Reserve System if the resulting bank is to be a State member bank (except a District bank), or by the Corporation if the resulting bank is to be a State nonmember insured bank (except a District bank). No insured bank shall (i) merge or consolidate with an insured State bank under the charter of a State bank or (ii) assume liability to pay any deposits made in another insured bank, if the capital stock or surplus of the resulting or assuming bank will be less than the aggregate capital stock or aggregate surplus, respectively, of all the merging or consolidating banks or of all the parties to the assumption of liabilities, at the time of the shareholders' meetings which authorize the merger or consolidation or at the time of the assumption of liabilities, unless the Comptroller of the Currency shall give prior written consent if the assuming bank is to be a national bank or the assuming or resulting bank is to be a District bank; or unless the Board of Governors of the Federal Reserve System gives prior written consent if the assuming or resulting bank is to be a State member bank (except a District bank); or unless the Corporation gives prior written consent if the assuming or resulting bank is to be a nonmember insured bank (except a District bank). No insured State nonmember bank except a District bank) shall, without the prior consent of the Corporation, reduce the amount or retire any part of its common or preferred capital stock, or retire any part of its capital notes or debentures."

Recommendation

An amendment to section 18 (c) of the Federal Deposit Insurance Act to require the prior approval of the appropriate Federal bank supervisory agency in the case of any bank merger or consolidation, whether or not such merger or consolidation results in a diminution of capital or surplus; together with an express requirement that the appropriate banking agency shall take into consideration the usual banking factors and also whether the proposed transaction would tend to lessen competition unduly or tend unduly to create a monopoly, with a provision requiring the agency to seek the views of each of the other two banking agencies with respect to the question of competition and authorizing such agency to request the opinion of the Attorney General with respect to such question.

Reasons

Under section 18 (c) of the Federal Deposit Insurance Act, a bank merger or consolidation must now have the prior approval of the appropriate Federal bank supervisory agency, but only if the capital stock or surplus of the resulting bank will be less than the aggregate capital stock or aggregate surplus of the merging or consolidating institutions. Because of the limited scope of the statute, many mergers involving State banks do not now have to be approved in advance by any Federal agency. The proposed amendment would fill this gap by requiring prior approval in all cases, irrespective of diminution of capital stock or surplus, by the Comptroller of the Currency if the resulting bank would be a national bank, by the Board of Governors if the resulting bank would be a State member bank, and by the FDIC if the resulting bank would be a nonmember insured bank.

The provisions of the present statute do not expressly require consideration of the competitive effects of a proposed merger or consolidation. It is desirable, as contemplated by the proposed amendment, that the appropriate agency be specifically required to consider, not only the usual banking factors (financial condition, adequacy of capital, character of management, and needs of the community), but also whether the proposed transaction would tend unduly to lessen competition or create a monopoly. In order to promote a substantially uniform approach to the problem of competition, it is also desirable to require the appropriate banking agency to seek the views of each of the other two banking agencies with respect to the impact of the proposed transaction upon competition or monopoly; and, as suggested by the proposal, the appropriate agency would also be authorized to ascertain the attitude of the Department of Justice regarding the competitive or monopolistic aspects of the proposed transaction.

Certain bills introduced in the last Congress would have sought to meet the problem presented by bank mergers through an amendment to section 7 of the Clayton Antitrust Act by expanding that section to cover acquisitions of assets of banks as well as acquisitions of bank stock. Under those bills, advance notice of a proposed merger would have been required to be given to the appropriate banking agency and to the Attorney General; but they would not have required prior approval by the appropriate banking agency. Moreover, those bills would have applied only the test now contained in the Clayton Act; i. e., "substantial" lessening of competition. Because of the nature of banking, it is essential that the soundness of the banks involved, the adequacy of banking facilities and needs of the community, and other such banking factors be given consideration, as well as the effect of the proposed transaction upon competition. It is desirable, therefore, as contemplated by the proposed amendment, that the test should be whether the proposed transaction would "unduly" lessen competition and that the competitive factor be weighed against other factors of a banking nature.

Bills in the last Congress, subjecting bank mergers to the Clayton Act, would have made the Board of Governors responsible for passing upon the question whether every bank merger would violate the provisions of that act, since, under the Clayton Act, the enforcement of its provisions is vested in the Board insofar as they are applicable to banks. It is believed, however, that enforcement of the Clayton Act in the case of bank mergers is a function which should not be vested in the Board of Governors, in view of the essentially different nature of the Board's principal functions in the field of monetary and credit policy and bank supervision. It would be preferable, as contemplated by the proposed amendment, if bank mergers were made subject to the advance approval of the appropriate Federal bank supervisory agency in the manner suggested.

A bill, S. 3911, which was in accordance with the views of the Board of Governors and with the amendment here suggested, passed the Senate on July 25, 1956.