CONCLUSIONS AND RECOMMENDATIONS

Historically, the American concept of banking has been based upon a dual system of banks in which both State and National Banks competed vigorously in the financial markets of the country. During the last 30 years, however, events have transpired in the field of banking which have severely transformed the entire structure of the Nation's banking system and have threatened to alter the fundamental assumptions underlying the deposit and credit structure of the economy.

In the last 30 years, the banking population of the country has been more than halved. In 1921, there were more than 30,000 banks serving the Nation's creditors and depositors. At the end of June 1952, only 14,599 banks were operating in the United States. While the Nation's banks were deeply stricken by the depression and the lean years that followed, the onset of the decline in the number of banks occurred prior to 1929 and has continued with but brief respite ever since.

This depletion of the ranks of the country's banks has lessened competition among banks in many communities. While the existence of rural and sparsely populated areas must be taken into consideration, nevertheless, in 1950, 76 counties in the United States had no commercial banking facilities whatsoever, while more than half the counties in the United States had three or fewer banks serving their populace. As the Comptroller of the Currency recently reported to a committee of the Congress:

Within less than a generation, the number of commercial banks in the United States has been halved, while the business transacted by the commercial banking system has multiplied many times. During that period, hundreds of small, rural American communities have become "bankless towns," and many others are served by only one bank in place of the two or three which existed in the 1920's.80

A large share of the Nation's loss of banks may be attributed to the ravages of the depression when approximately 9,000 banks were forced to suspend operations during the 4-year period between 1930 and the end of 1933. Also playing an important part in the continued decline in the Nation's banks have been mergers and consolidations which, despite prosperous times, have continued to take a large annual toll of the banking population. Between 1945 and the end of 1951, more than 580 of the country's commercial banks disappeared by way of merger and consolidation. Mergers and consolidations have averaged 82 per year for the last decade, and between January 1 and June 30 of this year, 52 independent banks have been consolidated or otherwise absorbed by their banking competitors. Thus, as the Comptroller of the Currency recently indicated in his annual report, "The trend toward mergers is continuing or perhaps increasing

* * * 81

What lies behind the unremitting trend toward bank mergers? Again, part of the answer lies in the effort to prevent financial failure

80 Monetary Policy and the Management of the Public Debt, S. Doc. No. 123, pt. 2, 82d Cong., 2d sess. (1952), p. 925.

81 Eighty-ninth Annual Report of the Comptroller of the Currency (1951), p. 2.

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of banking houses. During the years 1929 through 1932, more than 2,500 banks were consolidated or absorbed largely to prevent outright bankruptcy and suspension. But mergers to avert failure have played a continually smaller role in the demise of our banks. In recent times, two principal factors, working either separately or in conjunction with one another, have combined to precipitate most bank mergers.

One of these has been the fact that the shares of many banks have frequently been selling in the open market well below their book value. Stockholders, able to realize the full value of their shares upon consolidation with another institution, have been highly receptive to merger proposals. The second reason encouraging the unabating merger trend has been the desire of many large banks to expand their capital, their deposits, and their branches through the acquisition of competing banks. Not only has this eliminated many independent banking houses from competing in the financial market but it has also augmented the already large size of some of the Nation's biggest banks. Other important trends have accompanied the demise of many of the Nation's banks. In the first place, banks have gradually heen. increasing in size. A bank that was considered large in size in the mid-thirties is now a relatively small institution. Smaller banks have become fewer in number, the bigger banks greater in proportion to the banking population.

The banking system is also characterized by a high degree of concentration of financial resources. At the present time, a few large banks control a disproportionate share of total loans and deposits. In 1951, the 100 largest banks in the United States held more than 46 percent of the Nation's bank deposits. Of all insured commercial banks doing business in the United States at the end of the year, a mere 1.5 percent of them controlled well over half of their combined deposits. As of December 31, 1951, each of the 25 largest commercial banks in the United States had loans and discounts outstanding of more than $100,000,000. These 25 big banks taken together held a total portfolio of loans and discounts valued close to $20,000,000,000, or more than one-third of total loans and discounts of all commercial banks throughout the United States.

A contemporary phenomenon of the demise of many of the Nation's smaller banks and and the expansion of the country's larger banksthough not necessarily resulting therefrom-has been a comparative contraction in the credit extended to borrowers by the banking system. While the fewer than 15,000 banks doing business in 1951 had loans and discounts outstanding greater by two-thirds than the almost 25,000 banks in existence in 1921, figures show that rate of increase of commercial loans was far below the rise in both total deposits which had increased threefold in the period and the gross national product, a measure of the Nation's annual output of goods and services, which had also tripled. Even in the post-Korean year of 1951, when industrial activity reached record levels, bank loans occupied a smaller percentage of gross national product than at any time in the depression and recession years of the thirties.

It is difficult, without further study, to ascertain whether the decline in the proportion of commercial credit of banks to the remaining economic forces in the Nation is in any way related to the changes in the banking structure outlined above or whether, at any time during the period, a shortage of credit has existed. It is clear, however, that

the credit portfolios of banks have been severely contracted since the halcyon days of banking, occupying in 1951 no more than 44 percent of total bank investments, whereas between 1914 and 1930 generally more than 70 percent of loans and investments of commercial banks existed in the form of loans to business, consumers, and others.

Figures also disclose that as banks grow larger, they tend to have fewer dealings with smaller businesses. According to studies conducted by the Federal Reserve Board, the very large banks with deposits of $500,000,000 or more had the least number of loans with small business of all classes of banks, the next to lowest dollar volume of loans with small business, and the smallest percentage of dollar volume of all loans with small business. Read in conjunction with the decrease in the proportion of small banks in the financial community, the over-all drop in credit extended, and the frequent resort to the RFC for funds, it is at least possible that the characteristics of the banking system described above may have at times entailed credit shortages, especially for smaller enterprises.

Statutory enactments relating to bank mergers and the preservation of competition in the field of banking are wholly inadequate. Section 7 of the Clayton Act applies only to the acquisition by banks of the stock of a competing bank since it was not affected, insofar as assets of banks are concerned, by the recent amendment to the statute. It is also deficient in that its provisions may be employed only after the fact and offers no previous restraints upon mergers of banks which may adversely affect competition or tend toward monopoly.

Existing statutory enactments requiring that banking authorities, such as the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, or the Federal Deposit Insurance Corporation, review proposed mergers are likewise failing inasmuch as they do not apply to all bank mergers and no standards are established for the judging of mergers and consolidations between banks to which they do apply in the light of conditions affecting competition and monopoly.

Other inadequacies exist in Federal laws relating to bank-holding companies. These organizations exercise a high degree of control over banking facilities in such areas as Massachusetts, where holding companies operate 38 percent of all commercial banking offices and hold 48.5 percent of commercial bank deposits; Minnesota, where bank-holding companies operate 15.2 percent of commercial banking offices and 59.6 percent of commercial bank deposits; and in Montana where they operate 17.3 percent of all commercial banking offices and hold 44 percent of commercial bank deposits.

Federal banking laws relating to bank-holding companies are severely limited in application. To begin with, they are only effective with regard to banks which are members of the Federal Reserve System, leaving nonmember banks free of holding-company provisions. Bankholding companies may expand their banking business absent the usual requirements imposed upon independent banks of obtaining the sanction of appropriate banking authorities. There is also no limitation upon the various forms of economic endeavor in which such organizations may engage in addition to their banking activities. Thus we find bank-holding companies also interested in the business of insurance, the manufacture of tractors, the processing and selling of canned fish, and the production of castings and forgings. Bank-holding companies

are only subject to examination of the Board of Governors of the Federal Reserve Board after application has been made for a voting permit requesting permission to vote in the election of the directors of its subsidiaries. Many holding companies are able to exercise control of their affiliates without resort to the election ballot and accordingly escape regulation by refraining from seeking a permit. Finally, a holding company is defined, in the main, as a concern owning a majority of shares of stock in a member bank, not recognizing that effective control may be exercised with far less holdings.

Despite the request of President Roosevelt in 1938 that Congress restrict the uncurbed powers of bank-holding companies and the repeated urgings over the years of such Government agencies as the Federal Reserve Board, the Comptroller of the Currency, and the Federal Deposit Insurance Company, and many private associations in the field of banking, including the American Bankers Association, the Federal Advisory Council, and the Association of Reserve City Bankers, the deficiencies in bank-holding-company legislation have not been remedied.

The staff therefore recommends that the subcommittee lend its full auspices to the support and passage of bank-holding-company legislation. No effort has been made to draft a remedial statute by the staff inasmuch as many bills strengthening the holding-company provisions of existing law have been introduced without success in preceding Congresses. While the tenor of these various measures have differed in several respects, their ultimate effect would have been to place bank-holding-company activities under greater supervision and control. It is important that effective legislation of a similar nature_dealing with the activities of bank-holding companies be enacted promptly.

The staff of the subcommittee, in view of the many considerations heretofore set forth, also recommends that the subcommittee consider the introduction of measures designed to halt the unrelenting merger trend in the field of banking, especially insofar as such mergers may adversely affect the competitive structure of the banking economy and tend to encourage undue concentration of financial power. Accordingly, it suggests the introduction of a statute which would amend existing law so as to require all bank mergers to receive the scrutiny and approval of Federal banking authorities who, in passing thereon, would be obliged to determine whether the effect of such merger might unduly lessen competition or tend to create a monopoly in the field of banking. A draft of such a proposal appears immediately following the conclusion of this report in the appendix, and would appear to be a necessary supplement to the recent amendment to section 7 of the Clayton Act strengthening the antitrust laws with respect to corporate mergers which may substantially lessen competition.

The staff of the subcommittee finally recommends that legislation be offered which would establish a special committee of the Congress to inquire into the Nation's banking structure with a view to revision and codification of the Federal laws relating to banks and their practices. The last complete overhauling of Federal banking laws occurred almost a century ago with the revision of the National Bank Act in 1864. Nobody engaged in examining the nature of the banking

system in our present economy can fail to be struck by the overwhelming maze of complicated statutes and jurisdictions which now envelop our lending and deposit institutions and the confusion, contradiction, and difficulties which they entail. The staff believes that there is great merit in the opinion once expressed by the Federal Reserve Board, that "a comprehensive review of the entire field should disclose those respects in which our banking laws and our system of banking and bank supervision could be improved, simplified, coordinated, and better equipped to serve the public interest." 82

82 Federal Reserve Board, Banking Studies (1941), p. 62.