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in larger banks. During this heavy loan demand period, when deposits were going out and the demand for loans was going up, the banks were forced to go into a heavy borrowing position and increased their bills payable and Federal funds purchased. On June 30, 1974, these borrowings and Federal funds purchased amounted to almost $26 million, compared to approximately $10 million the year before, or an increase in borrowed funds of almost $16 million.

A small part of these borrowings were at the Federal Reserve window, but the bulk of these funds came from Federal funds purchased. During this period, the Federal funds rates were far in excess of the rate at which a Montana bank could lend out the money under the 10 percent ceiling. For example, during the month of June 1974, the rates paid by our bank for these Federal funds averaged 11.8 percent, yet the highest rate we could charge on relending these funds was 10 percent. Needless to say, this cannot be continued.

Some Montana banks were willing to pay more for funds than they were able to get back under our loan rate ceiling on the theory that this high interest rate nationally was a temporary situation and the banks are obligated to keep their customers and their employees in business.

Now, however, the banks find themselves in a liquidity squeeze combined with deteriorating earnings. These banks are now forced to decline loans they would normally consider making, in order to maintain or restore a reasonable liquidity position, and due to the fact they cannot sell participations to other banks and institutions outside the State. The 10 percent ceiling on Montana loans makes these loans unattractive to the banks and other institutions in other States where there is no such ceiling.

Reports are now coming in that banks are having to decline loan requests for companies wishing to start new projects or expand existing projects. One bank reports that it had to decline a loan of $100,000 to a company to set up a seed cleaning plant because the bank would have to go into the Federal funds to get the money to cover the loan, which could not be made at more than 10 percent.

On the date of the request the Federal funds rate was about 1278 percent. The result was not only the loss of employment to build the plant, but also the loss of employees to operate the plant.

It is reported that a proposed 36 apartment complex in Kalispell, Mont., had to be shelved because the building corporation was unable to find interim financing at Montana rates.

Another bank reported that it was interested in financing a large seed and grain operation in north central Montana which necessitated a large overline loan from a large west coast bank. However, the west coast bank withdrew from negotiations for the project when it learned that Montana had a 10 percent interest ceiling.

Another bank reported that a motel construction project was dropped because the company could not find financing due to the rate structure in Montana.

The legislation under consideration here, which would provide a temporary period that would permit Montana banks to charge corporations the same rate of interest they would have to pay in 47 other States, will not solve all of the lending problems caused by the 10

percent rate ceiling in Montana because many borrowers are not corporations.

However, if banks were permitted to charge corporations a higher rate, tied to the discount rate, then the banks, in turn, could go out and compete for higher rate certificates of deposit to cover these loans to corporation, and thus develop more deposits and relieve the pressure to cut down or hold down on loans of all types. It would appear that those banks that are now sustaining their present loan level with some funds acquired at rates in excess of the Montana lending rate will have to decline to renew some of their lines of credit or existing loans.

In summary, we would urge that this committee recommend passage of S. 3817 as a measure to give temporary relief to a serious financial situation in Montana, which will no doubt get worse if this legislation fails to pass.

I review this as a temporary relief measure. I think the authors have done a commendable job in the writing of this bill and I would urge its adoption in its present form without further amendment. Thank you very much.

Senator BROCK. You make an interesting point that I think we ought to develop a little bit in the statement there over the last page when we talk about if we allowed higher rates to corporations on large loans, that would allow the bank to go out and get more money, pay more money.

Mr. MCLELLAN. That is right.

Senator BROCK. To receive these through whatever device, Federal funds if necessary. Which in turn would relieve pressure on the regular deposits which could be made for consumer or smaller loans.

Mr. McLELLAN. That is right.

Senator BROCK. Now it is a fact that a bank like any other business is going to take care of its essential customers first.

Mr. McLELLAN. That is right.

Senator BROCK. And if those by and large are major corporations in the community, there just simply is no money at all at a price for small borrowers.

Mr. McLELLAN. That is right.

Senator BROCK. By passage of this legislation, we not only would give corporate borrowers access to funds in Montana, Tennessee and Arkansas, but we would also have a greater availability of funds, residual funds for the smaller borrower, is that not a fair statement ?

Mr. MCLELLAN. Very fair.

Senator BROCK. So across the board we would increase the availability of credit in these affected States ?

Mr. McLELLAN. That is correct.

Senator BROCK. You suggest the passage of the bill without amendment. I would simply ask you this, would you be concerned if we shifted the emphasis from corporations to a minimum loan figure ? I do see the point of those who argue that the corporations by definition would be discriminatory to unincorporated or partnership corporations.

Mr. McLELLAN. I see it also but I think it opens up a whole area where it is hard to find the correct figure, the correct vehicle. I think from our standpoint we look on this as a temporary means whereby we have to change our State law. I think if it is passed as

proposed it will help solve the problem, but if it is opened up it will be difficult to solve.

Senator BROCK. Thank you very much. I appreciate it. We next have a distinguished panel from our neighboring State of Arkansas. Gentlemen, before von begin, I would like to note a letter from your Senator, Senator Fulbright, to the chairman of the subcommittee, in which he expressed his very sincere regret to not being able to be here. He has a previous commitment so he couldn't be here even though he wanted to be here to introduce you to the committee.

And I think vou will appreciate that he did express his interest in your testimony and his support of the legislation. May I ask von—without objection, to insert this letter into the record.

[The letter from Senator Fulbright follows:]

U.S. SENATE,

Washington, D.C., July 31, 1974. THOMAS J. MCINTYRE, Chairman, Subcommittce on Financial Institutions, Committee on Banking, Housing and Urban Affairs, U.S. Senate, Washington, D.C.

DEAR MR. CHAIRMAN: While a long-standing commitment to be elsewhere keeps me from personally introducing the distinguished Arkansans who will testify before you today, I do want you to know that I endorse their appearance in connection with S. 3817, legislation which I have cosponsored designed to enable the banking industry in the States of Arkansas, Montana, and Tennessee to make loans to corporate customers at rates of interest comparable to those charged in other States to corporate borrowers.

Edward M. Penick, Chairman and Chief Executive Officer, Worthen Bank and Trust Company ; H. L. Hembree, Chairman and CEO Arkansas Best Corporation; Robert Wickard, President, Wickard and Company; Ed Cherry, President, Bank of Northeast Arkansas, and Professor John Dominick of the University of Arkansas, are all able and highly respected leaders in our State and are particularly well-informed in the areas of business and finance. I believe that their knowledge of Arkansas's own experience with interest rates will be most helpful to the Committee, and I am sure that the testimony of these gentlemen will significantly contribute to your record on S. 3817. Sincerely yours,

J. W. FULBRIGHT. Senator BROCK. Because of our time problems, I would ask you to summarize, as best and as directly as you can, your statements in order to give the other witnesses time to present their cases as well. So who wants to start ?

STATEMENTS OF EDWARD M. PENICK, CHAIRMAN OF THE BOARD,

WORTHEN BANK & TRUST CO., LITTLE ROCK, ARK.; ROBERT H. WICKARD, PRESIDENT, WICKARD & CO., LITTLE ROCK, ARK.; EDWARD H. CHERRY, PRESIDENT, BANK OF NORTH EAST ARKANSAS; JOHN DOMINICK, PROFESSOR OF BANKING, UNIVERSITY OF ARKANSAS; AND H. L. HEMBREE, CHAIRMAN, ARKANSAS BEST CORP., FORT SMITH, ARK.

Mr. PENICK. Mr. Chairman, I am Edward Penick. I am chairman and chief executive officer of the Worthen Bank & Trust Co., a national bank in Little Rock. I would like to submit my previously prepared testimony for the record.

Senator BROCK. It will be put into the record (see p. 44).

Mr. PENICK. First I would like to submit an opinion from the attorney general of the State of Arkansas which is strongly in support of the constitutionality of this as it applies to the Arkansas law. There has been some question raised by our State bank commissioner as to its applicability to State banks and this opinion as of July 22d strongly supports that and I would like to enter that in the record.

Senator BROCK. We will have it put in the record at this point. [The opinion of the attorney general, State of Arkansas follows:]

STATE OF ARKANSAS,
OFFICE OF THE ATTORNEY GENERAL,

Little Rock, Ark., July 22, 1974.
Re Opinion No. 74_94
H. C. ADAMS, Commissioner,
State Bank Department,
200 University Tower Building,
Little Rock, Ark.

DEAR MR. ADAMS: This is in response to your letter requesting an opinion as to the constitutionality of a bill proposed by Senator Brock of Tennessee to amend 12 U.S.C. 1830. The proposed bill would, among other things, allow State chartered banks insured by the Federal Deposit Insurance Corporation to charge interest in excess of the ten percent (10%) Arkansas Constitutional limit.

The questions presented by you raise three issues : 1. Whether Congress by law may preempt a state constitutional provision ?

2. Whether the activities of a state chartered Federal Deposit Insurance Corporation insured bank are so local in character as to exclude them from the control of Congress under Article 1, $8 of the United States Constitution?

3. Whether the specific provisions of the proposed legislation submitted to our office wou'd be valid and constitutional with regard to state chartered F.D.I.C. insured banks?

The answer to the first issue is clear. That the U.S. Congress has the power to preempt the Arkansas Constitution is not open to question. Article VI of the United States Constitution provides, inter alia:

“This Constitution, and the laws of the United States which shall be made in pursuance thereof ... shall be the supreme law of the land; and the Judges in every state shall be bound thereby, any thing in the Constitution or Laws of any state to the contrary notwithstanding."

As to the second issue, that banking, whether by state chartered or national banks, is involved in interstate commerce does not seem to be open to question. In United States v. Philadelphia National Bank, 374 U.S. 321, 1 L.Ed. 915 (1963) the United States Supreme Court held that banks were subject to federal anitrust laws. In so holding the Court stated :

“Commercial banks are unique among financial institutions in that they alone are permitted by laws to accept demand deposits. This distinctive power gives commercial banking a key role in the national economy. For banks do not merely deal in, but are actually a source of money and credit; when a bank makes a loan by crediting the borrower's demand deposit account, it augments the Nation's credit supply. Furthermore, the power to accept demand deposits makes banks the intermediaries in most financial transactions (since transfers of substantial moneys are almost always by check rather than by cash and, concomitant'y, the repositories of very substantial individual and corporate funds. The banks' use of these funds is conditioned by the fact that their working capital consists very largely of demand deposits, which makes liquidity the guiding principle of bank lending and investing policies; thus it is that banks are the chief source of the country's short-term business credit.”

In a footnote to the above case, the Court stated :

"No argument is made in this case that banking is not commerce . . . such an argument would have no merit."

Once the Congress determines that an activity is in interstate commerce its power to regulate is extremely broad. In National Labor Relations Board v.

Jones and Laughlin Steel, Inc., 301 U.S. 1, 81 L.Ed. 873 (1937), the United States Supreme Court stated :

“Although activities may be intrastate in character when separately considered, if they have such a close and substantial relation to interstate commerce that their control is essential or appropriate to protect that commerce from burdens and obstructions, Congress cannot be denied the power to exercise that control. The fundamental principle is that the power to regulate comerce is the power to enact all appropriate legislation for its protection and advancement and to adopt measures to promote its growth and insure its safety."

Section 5 of the Federal Deposit Insurance Act provides, inter alia:

“Subject to the provisions of this Act .. any state non-member bank, upon application to and examination by the Corporation and approval by the Board of Directors may become an insured bank ..."

This language is a Congressional grant to state non-member banks to become an insured bank under the Federal Deposit Insurance Act. Several cases have arisen discussing the effect of such association by state banks. The case of Weir v. United States, 92 F. 2d 634 (7th Cir. 1937) (cert. denied 268 U.S. 704, 69 L.Ed. 1167, 45 S. Ct. 638) involved a criminal prosecution under the penal provisions of the FDIC Act relating to the embezzlement of funds of an insured state bank. In affirming the conviction, the Court upheld the constitutionality of the FDIC Act by stating :

“... the creation of the corporation (FDIC) was within the constitutional power of the government ...".

In upholding the constitutionality of the F.D.I.C. Act, the Court indicated its basis for such action by saying:

“Its obvious intent was, by insuring deposits to prevent runs on banks by depositors, to preserve solvency of insured banks, and thus to keep open the channels of trade and commercial exchange."

This language is a strong indication that this court is sanctioning the regulation of banking, at the Federal level, due to its important, if not vital, influence on interstate commerce. The Court further said:

“Embezzlement ... It tends to destroy the solvency of the bank, to cause closing thereof and, thus, to block the open channels of commercial exchange essential to the efficient operation of the government's fiscal and financial undertakings.”

This latter quoted language indicates that, in addition to the Commerce Clause, Congressional regulation of banking is based upon the Constitutional provisions relative to the monetary system. This portion of the opinion also indicates that an interrelationship exists between "commercial exchange" and the operation of the "government's fiscal undertakings”. The Court draws an inference that the fiscal operations of the government are dependent upon the channels of commercial exchange. Commercial exchange in this context would certainly include interstate commerce and, thus, resulting regulation pursuant to the Commerce Clause. This language recognizes that a further purpose of the F.D.I.C. was to promote the soundness of banking.

The law of the State of Indiana, in which state this case arose, allowed state banks to associate themselves and to participate in organizations formed pursuant to Federal legislation, where the purposes of such organization were not inconsistent with any law of the state.

With reference to this State Act, and F.D.I.C. insurance; the Court held:

“To the extent of its participation in the federal legislation, each bank became an instrumentality of the federal government, enjoying its remedial legislation and bound by its legal limitations and responsibilities."

Language similar to the last quoted phrase is found in United States V. Doherty, 18 F. Supp. 793 (D.C.D.N. 1937), affirmed at 94 F. 2d 495 (8th Cir. 1938) (cert. denied 303 U.S. 658, 58 S. Ct. 763, 82 L. Ed. 1118), interpreting a Nebraska statute.

For other cases dealing with state chartered banks which are members of the Federal Deposit Insurance Corporation, see Westfall v. United States, 274 U.S. 256, 71 L.Ed. 1036, 47 S. Ct. 629 (1926) and Hiatt v. United States, 4 F. 2d 374 (7th Cir. 1925) (cert. denied 268 U.S. 704, 69 L. Ed. 1167, 455 S. Ct. 638).

Given the broad power to regulate commerce as set out above, it appears that the United States Congress has the authority to establish interest rates which

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