the regulation and supervision of over 9,300 banks with assets in excess of $180 billion. These State-chartered banking institutions, along with the national banks chartered by the Comptroller of the Currency under delegation of authority from Congress, comprise the dual banking system which has been in existence for 100 years.

Before I commence my testimony I would like the record to show the deep appreciation of all the 50 State bank supervisors of the United States to the able chairman of this subcommittee for his assistance over the years in introducing bills in the House of Representatives embracing the basic legislative program of the National Association of Supervisors of State Banks.

As we look back over the past 3 or 4 years, almost every major piece of legislation which our association has sponsored has been introduced by him in the House.

For this same period of time, we have struggled long and hard to be heard on this legislation but without success. It now appears that the logjam has been broken, and, for the first time, we look forward to the opportunity to present to this committee our reasons for urging certain fundamental changes in Federal banking legislation.

The bills which are before this committee this morning are far reaching in their importance and elicit a broad range of comment running the whole gamut of banking supervision. I think, therefore, that the most helpful way for me to begin would be to briefly outline for this subcommittee the fundamental principles to which the State bank supervisors are dedicated and which they apply in testing proposed legislation as well as in formulating their own legislative program. Such an analysis will form the basis for improvements of the bills before this committee today which I will suggest later on in my testimony.

It will further be responsive, Mr. Chairman, to your request made during the recent hearings before the full House Banking and Currency Committee on conflicts between Federal and State banking laws to show in this hearing how, as you phrased it, "the law should be improved or changed or corrected to meet the situations" which our witnesses described during that hearing.

Our starting point, of course, is the preservation and strengthening of the dual banking system.

Frankly, we have been very alarmed by some observations which. have been recently made on the dual banking system. These observaCons seem to imply that the dual banking system is no longer a vital national goal, and that it has become a shibboleth to somehow disguise an unprogressive State banking program in contrast to a vigorous, Modernized, national banking system.

I cannot subscribe to these views.

It might be initially noted that modern State banking codes formed e basis for the amendments to the National Bank Act in the McFadAct of 1927, for the deposit insurance provisions of the Banking of 1933, and for many of the recommendations in the report of Comptroller's Advisory Committee in 1962. It is the National Act, not most of the State banking codes, which has not been ided in any major respect since 1933.

hermore, I urge considerable caution in any evaluation of who who is not progressive in the matter of banking regulation.

Banking regulation always requires the exercise of that very narrow judgment line between a concern, on the one hand, for that part of the public represented by depositors, which requires strong banks able to fulfill their depositors' trust, and a concern, on the other hand, for that part of the public represented by the borrower, which benefits from vigorously competing banking institutions. An overemphasis of the concern for bank stability, at the sacrifice of competition, can be unprogressive. On the other hand, an overemphasis on the concern for competition, at the sacrifice of bank stability, can be reckless. In our view, the State supervisors, on the whole, with their intimate knowledge of local conditions, have trod this narrow line well. They most certainly cannot be charged with being unprogressive. For the 10-year, 3-month period, ending with March of 1963, they chartered 738 new banks, as contrasted with only 301 national banks. Nor have they been reckless. During the same period, there were only 24 State, insured and uninsured, bank failures, an average of a little over 2 a year in an operation consistently involving well over 9,000 State-chartered banks.

Of particular importance, however, is the fact that any momentary evaluation of the age-old tension between bank security and bank competition cannot form the basis for action which would jeopardize the dual banking system. That system has been with us for 100 years.

The State bank supervisors, therefore, stand on the goal of the dual banking system. In our view, this great system rests upon three fundamental principles. I will now try to outline these principles for you and, at the same time, to sketch the legislation which we deem imperative to repair the erosion which has been made into two of those principles.

1. The first principle underlying the dual banking system, is a freedom of movement of banks between the two segments of the system. Without such a two-way street, there would not be the competitive spirit between the two segments which has resulted in a restraint on the part of both segments in their regulatory activities, thereby resulting in less Government regulation than is found in many foreign banking systems. This same competitive spirit has also created the necessary interplay to lead each segment to try to adopt the most effective and modern banking regulation procedures found in the other.

I will not spend any time on this principle because the last block to a free movement between systems was eliminated by the Bank Conversion Act of 1950.

2. The second principle underlying the dual banking system, is a minimum of Federal control over State banks, exercised only in those narrow instances where it is related to a legitimate aim of the Federal Government.

As you know, for the first 124 years of the existence of State banks, there was no general supervision and regulation by the Federal Government.

Then in 1913, the Federal Reserve Act required Federal supervision by the Federal Reserve Board of State member banks in the System, and in 1933, Federal deposit legislation required such supervision for State nonmember banks from the Federal Deposit Insurance Corporation.

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This encroachment of Federal authority over State banks has created two serious problems.

First of all, carried to its ultimate, any system wherein the Federal Government is given the major role in the supervision and regulation of State banks is inconsistent with the tradition of the separation of powers between the Federal and State Government inherent in our republican form of government, and raises a substantial question why there should be any dual banking system at all.

As one aspect of this policy, the association has sponsored, and Mr. Multer has introduced, legislation in the last three Congresses to transfer power over branch approval of State member banks from the Federal Reserve Board to the FDIC.

I have attached to my testimony as appendix A, a draft bill, accompanied by a supporting memorandum, embracing this legislative recommendation.

A second problem occasioned by the growth of Federal control over State banks has been the competitive advantages to National banks which have developed by reason of this Federal control over State banks.

In many respects, therefore, we agree with the first of the policy statements set forth in section 2 of H.R. 5874 to eliminate overlapping of Federal regulatory jurisdiction, fragmentation of responsibility, and resulting conflicts of policy.

These competitive advantages to national banks are threefold.

First, the Comptroller of the Currency, the supervisor of National banks, serves as one of the three members of the Board of Federal Deposit Insurance Corporation, where he passes upon applications of State nonmember banks.

This service, we believe, creates a direct conflict of interest when he is called upon to pass upon competitive applications of State and National banks for branch authority.

We do not think it is reasonable to expect any Comptroller of the Currency to exercise an unbiased judgment when he studies a National bank application, and then crosses the street to vote as one of three men on a competitive State bank application.

Our association has long been in favor of the removal of the Comptroller from the Board of the FDIC and Mr. Multer has consistently, through the past three Congresses, introduced legislation to this effect. The present bill is H.R. 673.

There is attached hereto as appendix B a copy of that bill and a supporting memorandum.

A second competitive advantage to National banks flowing from Federal control over State banks is the obvious fact that National banks need only secure one approval of a new bank charter or branch from the Comptroller, whereas most State banks must secure two such approvals-one from the supervisor and the other from the Federal Reserve Board or the FDIC, depending upon whether it is a member or nonmember insured bank.

Particularly in the case of competitive applications of National and State banks for branches this advantage becomes particularly significant.

Our association, therefore, has favored legislation which requires both National and State insured banks to secure approvals for both

branches and the initial insurance of new banks from the FDIC, as well as from the Comptroller or State supervisor, as the case may be. Such a provision with regard to branches has already been included in prior legislation introduced by Mr. Multer.

The bill which we have suggested, and which is attached hereto as Appendix A, expands this proposal to include such a provision with regard to new charters.

Third, and finally, there have developed conflicts of policy between the three Federal banking agencies which, in turn, has created confusion and, in some instances, competitive advantages in favor of one or the other banking system.

Take the matter of merger approval, for example, which is "split" between the Comptroller, Federal Reserve Board, and FDIC, depending upon whether a National bank, State member bank, or State nonmember insured bank survives.

Opinions within these three agencies can differ greatly on the question of merger policy. This is a situation which was clearly foreseen by the State bank supervisors at the time of the Bank Merger Act of 1960.

We then urged, and we urge again today, that uniformity of judgment can only be obtained by giving one agency, the FDIC, ultimate approval of all mergers.

The system of advisory opinions has simply not worked. For the convenience of the committee I am attaching hereto as appendix C, a portion of the testimony of our representative before the House Banking and Currency Committee back in 1960, outlining the reasons why we felt this action should be taken.

The reasons advanced then are even more valid today.

Or take the conflict of policy which can result in the matter of branch approvals between the three Federal agencies.

Now, mind you, I am not talking about a difference in branch philosophy between State supervisors and the Comptroller, I am talking about a difference in philosophy between the Comptroller, on the one hand, and the FDIC and Federal Reserve Board, on the other hand, which must approve all branches of insured State banks.

It seems to us, again, unhealthy to have a situation wherein one Federal agency, the Comptroller, can approve a branch, but another Federal agency, the FDIC or Federal Reserve, can disapprove a branch in the same location.

Uniformity of judgment on the Federal level here seems to be the only intelligent approach.

This principle, in its broad outlines, is in accord with the policy objective of clause 3 of section 2 of H.R. 5874.

The association has previously urged legislation, to implement that policy, to require the approval by the FDIC of all branches and new bank charters of insured banks, whether National or State.

See appendix A following this statement.

I now move to the third, and final, principle which we believe underlies the dual banking system.

It is our conviction that it is now, and always has been, the intent of Congress that there be competitive equality between national banks in certain basic areas, and that such competitive equality must be achieved by means of State law as the standard for such national and State banks.

Without such competitive equality in basic areas, such as branching, for example, the dual banking system would simply collapse because all banks would move to the preferred segment.

Such being the case, it is far more practical for the National Bank Act to incorporate State law, than for 50 State legislatures to change their law every time the National Bank Act is amended.

Furthermore, the orginal constitutional justification for banks chartered by the Federal Government was that they were required as instrumentalities to implement the fiscal power of the Federal Government.1

It is not inconsistent with that principle for Congress to require that in certain basic areas in the private operation of a bank, State law should govern as the standard for such operation.

Indeed, such a requirement is far more consistent with our Federal system which emphasizes local autonomy wherever possible.

Now, I covered this matter in considerable detail in my recent testimony before the full committee on behalf of the NASSB.

Rather than repeat all of that testimony here, I have reproduced the pertinent part as appendix D to my statement here, and would ask that it be included in this record.

In that testimony, I outlined five ways by which, in our opinion, the Comptroller was avoiding what we consider to be the spirit, if not the letter, of section 36 (c) of the National Bank Act which establishes State law as the standard for branches of national banks.

Mr. Chairman, you have asked that in these hearings we outline for you legislation which we believe would eliminate these problem areas. I will briefly do so.

The first area of dispute relates to branch definition. At our request, you introduced legislation in the last two sessions of Congress which required the Comptroller to follow State law in the definition of a branch.

This provision is also included in our bill which is contained along with a supporting memorandum, in appendix A to this statement. The second relates to chain banking where chain banking would be barred as a prohibited branch under State law.

This procedure, as you know, was sustained by a a 2-to-1 decision in the Camden Trust case.2

We are attaching hereto as appendix E legislation to make State law applicable in this regard.

We do not, however, stand by this particular language and are open to any suggestions which anyone may have to strengthen this bill. Two other devices relate to branching by merger, and by the bank holding company approach.

Both of these matters are presently the subject of litigation. If the case is decided in favor of the Comptroller, then we shall undoubtedly have legislation to recommend in this respect.

Finally, there is the matter of moving the main office of a branch to a location where a branch would be prohibited.

Our association's executive committee has not yet considered this matter. I would anticipate that we will shortly recommend legislation here, too.

1 M'Culloch v. Maryland, 4 Wheat. 316 (1819); Osborn v. The Bank of the United States, 9 Wheat, 738 (1824). 2 Camden Trust Co. v. Gidney, 301 F. 2d 521 (D.C. Cir. 1962).