SUBCOMMITTEE ON BANK SUPERVISION AND INSURANCE The subcommittee met, pursuant to recess, at 10 a.m., in room 1301, Longworth House Office Building, Hon. Abraham J. Multer (chairman of the subcommittee) presiding. Present: Representatives Multer, Patman, Moorhead, Minish, Weltner, Grabowski, Wilson, Kilburn, Bolton, and Lloyd. Mr. MULTER. Good morning, gentlemen. The hearing will please come to order. We e are very pleased to have with us this morning the Chairman of the Federal Reserve Board, Mr. Martin, an old friend of this committee, and three members of the Board, whom we are also happy to welcome here. We have the Honorable J. L. Robertson, one of the Governors, Hon. A. L. Mills, Jr., another Governor, Hon. George W. Mitchell, also a Governor of the Board. We have received a report dated May 6, 1963, over the signature of Mr. Martin, as Chairman of the Board, with reference to H.R. 729, which we will make a part of the record at this point. (The report referred to follows:) Hon. ABRAHAM J. MULTER, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Chairman, Subcommittee on Bank Supervision and Insurance, House of Representatives, Washington, D.O. DEAR MR. CHAIRMAN: This is in response to your request of April 16, 1963, for the Board's comments on H.R. 729, a bill to establish the Federal Deposit and Savings Insurance Board. The Board does not believe that it would be desirable, as contemplated by this bill, to consolidate the management of the Federal Deposit Insurance Corporation and the Federal Savings and Loan Insurance Corporation under a single agency. To combine under a single Board the responsibility for management of the two insuring corporations would lead to commingling of responsibilities which would blur the distinction between bank deposits and savings and loan share accounts. In our judgment, this would be detrimental to the sound growth of both banks and savings and loan associations. There are important and, in our judgment, desirable differences between banks and savings and loan associations. The separate existence of these two types of financial institutions, with Federal insurance plans tailored to their particular needs, offers the public a choice which we feel they should continue to have. Furthermore, the supervision and examination of banks and savings and loan associations should take into account the significant differences in the nature of their respective liabilities and the assets that it is appropriate for them to hold in the light of these differences. Sincerely yours, (Signed) WM. MCC. MARTIN, Jr. Mr. MULTER. I don't seem to have any report on H.R. 5874. We have copies of the report on H.R. 729. Would you give one to the reporter and distribute the others, please? Mr. Martin, did a report come up on H.R. 5874? Mr. MARTIN. Well, our comments today, Mr. Chairman, are all on H.R. 5874. So we have sent you the report on H.R. 729. But all four of us are reporting on H.R. 5874 today. Mr. MULTER. Good. Mr. MARTIN. And I want to point out that we are not discriminating against the other members of the Board. If you want them, I am sure they will be glad to come up at any time and testify. Mr. MULTER. Very good, if that should become necessary or desirable, we will fix a mutually agreeable time. Mr. Martin, you may proceed in your own way. STATEMENT OF HON. WILLIAM MCCHESNEY MARTIN, JR., CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. MARTIN. I am appearing today in my individual capacity as Chairman and one member of the Board of Governors of the Federal Reserve System, rather than as a spokesman for the Board as a whole. The Board's views on H.R. 729 have already been provided to you in writing, and my statement today will relate only to H.R. 5874, which would establish a Federal Banking Commission to administer all Federal laws relating to the examination and supervision of banks. I am glad that you will hear from other members of the Board today, so you will have an opportunity to observe for yourself the points at which our views coincide and diverge. Let me say that I feel that this procedure is especially appropriate in this case. As I will develop later in my statement, I believe that we are confronted with a real problem in the field of bank supervision in the United States. I do not agree with those who feel that it will either disappear with the passage of time or solve itself without legislative action. On the other hand, I do not feel that it is an urgent problem. Here in Washington to say something is "not urgent" is often taken to mean that we can forget about it, and I hasten to add that I am not using the words in that sense. This is a matter which must be dealt with, but one which, fortunately, I think, we can afford to handle carefully and judiciously, rather than in haste. I think I might say, at that point, Mr. Chairman, you can legitimately say "You have been working on this for 2 or 3 years-why haven't you come up with the answer? Why do you temporize?" I think the more you work on this problem the more you realize that unless it were a matter of urgency, that we ought to listen to all views on this, and be sure that we are pulling together all the aspects of this subject that we should; that is why I am trying to put it in this framework today. Mr. MULTER. Mr. Chairman, may I say to you that in the opening statements that were made yesterday, as these hearings got underway, I think we made it amply clear that we want to give full and careful consideration and most thorough consideration to this matter. We appreciate its importance. Everybody, apparently, up to the present moment, except the Congress, has studied this problem in recent years. And we thought it was about time we did some studying of the problem, too. And we need your help. We have indicated we have not closed our minds as to what should be done, if anything. We do believe something should be done, but what it is we have not made up our minds. We want to hear anybody and everybody that wants to be heard for or against the principle or any part of it, or any part of the bill. As a matter of fact, even as to any changes they can recommend as to the basic statute-whether it be a part of this bill or separate, if it is related to this subject. Mr. MARTIN. Full discussion of the pros and cons of various approaches to the problem in appropriate public forums is one of the things that is necessary if we are to obtain the best judgments of the many groups that would be affected directly and indirectly by a change in the bank supervisory structure. We are all indebted to the Commission on Money and Credit for stimulating such discussion by its report 2 years ago. Since then, understanding of the problem and one possible approach to its solution has been furthered on several occasions by addresses by my colleague, Governor Robertson. More recently, the Advisory Committee on Banking to the Comptroller of the Currency has contributed to the discussion, as has Mr. Cocke, the Chairman of the FDIC. Finally, we have, within the past few weeks, some further examination into the question by the President's Committee on Financial Institutions, on which I was privileged to serve. All this has been useful, but it is only through the introduction of a bill like H.R. 5874, and hearings like these, that we will get the crystallization of views that is essential to constructive legislation. It may be helpful if I review, briefly, the history of the present arrangements and various alternatives that have been suggested, before turning to my own views on the proposed legislation. The fact that this is its centenary year makes us especially alert to the fact that the present structure began as far back as 1863, when Congress passed the statute that became known as the National Bank Act. This act provided for the chartering and supervision of national banks by the Office of the Comptroller of the Currency, a bureau of the Treasury Department. As the name of the office implies, a principal reason for the legislation was to provide a new form of currency-national bank notes that national banks issued against the pledge of U.S. Government securities. Although now discontinued, national bank notes for many years were this coutry's principal form of currency. When the National Bank Act was passed, there were many thousands of State banks in the United States. However, there was no Federal supervision of State banks until a half century later, when Congress passed the Federal Reserve Act. One of the purposes stated in the preamble to the Federal Reserve Act was "* *** to establish a more effective supervision of banking in the United States ***” national banks are required to be members of the Federal Reserve System created by the act, and any State bank can voluntarily become a member of the System by accepting the requirements of the act and becoming subject to supervision by the Federal Reserve. All A third group of banks was brought under Federal supervision by the Banking Act of 1933, which established the Federal Deposit Insurance Corporation and provided for the insurance of bank deposits. All member banks of the Federal Reserve System, both national and State, were required to have their deposits insured by the FDIC, and, in addition, any other State bank can obtain deposit insurance by voluntarily accepting the requirements of the deposit insurance legislation and becoming subject to supervision by the FDIC. Thus the two-way division of Federal bank supervision that had existed since 1913, became a three-way division in 1933, the Comptroller of the Currency having principal responsibility for supervision of national banks, the Federal Reserve for State member banks, and the FDIC for insured State nonmember banks. In two instances since 1933, Congress has placed responsibility for regulation of all banks in a single Federal agency. The Securities Exchange Act of 1934 placed upon the Federal Reserve Board unified responsibility for regulations regarding stock market credit, not only the margin requirements applicable to brokers and dealers, but also the similar regulations that apply to all banks, even noninsured banks. The Bank Holding Company Act of 1956 established unified supervision of bank holding companies; it requires the Federal Reserve Board to pass on applications of such a holding company to acquire the stock of any bank, even a noninsured bank. In general, however, the three-way division of Federal bank supervision established in 1933 has continued. For example, the bank merger legislation of 1960 divided responsibility for bank mergers among the three supervisory agencies, depending on whether the continuing bank would be a national bank, State member bank, or an insured State nonmember bank. The act provides that the agency that must pass on a proposed merger must obtain from the other two agencies, and also from the Attorney General a report on the competitive factors involved. In 1962, following a recommendation the Federal Reserve Board had made in 1957 and renewed in 1962, Congress transferred authority over trust powers of national banks from the Federal Reserve to the Comptroller of the Currency. As of the end of 1962, about 98 percent of all the commercial banks of the country were subject to one or another of the three types of Federal bank supervision, and the banks so subject had about 99 percent of the deposits of all commercial banks. Roughly, 34 percent of of the banks in the United States with 54 percent of the deposits are chartered as national banks, supervised by the Comptroller of the Currency, and, as indicated, are also members of the Federal Reserve System. An additional 11 percent of the banks, holding 29 percent of the deposits, are chartered by the States in which they are located, but maintain voluntary membership in the System. Finally, 53 percent of the banks, holding 16 percent of the deposits, are insured nonmembers. To speak of a three-way division of Federal bank supervision, as I have been doing, really is something of a simplification of the actual situation. Banks under the principal supervision of one agency are also subject to regulation by one or more of the others. For example, both national and State member banks are subject to regulations of the Board on several subjects, both national and State members are subject to regulations of the Comptroller of the Currency on the purchase of investment securities and all three types of banks pay insurance assessments to the FDIC. The banks principally supervised by the three different agencies are frequently in direct competition with each other for the same kinds of banking business. They are often located in the same communities, even side by side or across the street from each other. Accordingly, different rules applied by the different agencies can profoundly affect competitive relations between different banks. Over the years there has been a considerable amount of cooperation among the agencies and with the State supervisors, with a view to developing and maintaining desirable and uniform standards of bank supervision. An outstanding example is the agreement on bank examination and reporting procedure that was worked out by the three agencies and the executive committee of the National Association of Supervisors of State Banks in 1938, and revised in 1949. The present three-way division of Federal bank supervision has been strongly supported and also strongly criticized. Those favoring the present structure offer essentially two arguments. They say (1) that it prevents an undue concentration of powers, and (2) that it works reasonably well. Those opposing the present structure disagree with both those arguments. As to the first, they point out that such divided supervisory responsibility is most unusual, in fact is virtually unique to the field of banking; and they insist that there is no such difference between this industry and others as to justify such a widely different supervisory structure. As to the second, they assert that the divided responsibility leads to inefficiency, conflicting policies, and lowered standards; that necessary consistency in policies can be achieved, if at all, only by the expenditure of inordinate amounts of time and effort. Without attempting here to appraise the arguments pro or con, I can say from personal experience that the present structure does require that considerable time be devoted to liaison, coordination, cooperation, and negotiation between the various parts into which the structure is divided. There have been various proposals for changing the present organizational setup. Some of the more recent plans illustrate the range of possibilities. The Commission on Money and Credit recommended that responsibility for all Federal supervision over commercial banks be transferred to the Federal Reserve, thus unifying responsibility. Some have argued that this might overburden the System and interfere with its responsibilities for monetary policy. However, others assert 20-602-63--12 |