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PROPOSED FEDERAL BANKING COMMISSION AND FEDERAL DEPOSIT AND SAVINGS INSURANCE BOARD

WEDNESDAY, MAY 15, 1963

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON BANK SUPERVISION AND INSURANCE
OF THE COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C. The subcommittee met, pursuant to recess, at 10:10 a.m.,

in room 1301, Longworth House Office Building, Hon. Abraham J. Multer (chairman of the subcommittee) presiding.

Present: Representatives Multer, Patman, Moorhead, St Germain, Gonzales, Minish, Weltner, Hanna, Grabowski, Kilburn, Bolton, Brock, and Lloyd.

Mr. MULTER. Good morning, gentlemen.
The hearing will be in order.

We are indeed pleased to have with us this morning the Comptroller of the Currency, the Honorable James J. Saxon. He has always been of extreme help to this committee. I think this is the third time this year, Mr. Saxon, is it not, we have had you here?

Mr. Saxon. Yes, Mr. Chairman. Mr. MULTER. And we are certain your testimony this morning will also be very helpful.

You may proceed in your own way-either present your full statement or summarize it, as you please, sir.

STATEMENT OF HON. JAMES J. SAXON, COMPTROLLER OF THE

CURRENCY Mr. Saxon. If I may, I should like to read my statement, Mr. Chairman.

Mr. Chairman, members of the committee, at the outset, I should say to the subcommittee that the views I shall express are those of the Office of the Comptroller of the Currency.

The bill which is before this subcommittee to establish a Federal Banking Commission deals with means, not ends. It is concerned with the mechanics of carrying out public policy, rather than the substance of that policy.

Based on our own continuing studies, we are persuaded that there are certain fundamental questions of basic public policy which need to be resolved before the reorganization proposals dealt with in this bill, or indeed other similar proposals, may properly be considered. These fundamental questions are

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1. What is the proper role of the central bank in our country, and what should be its functions?

2. What is the proper role of a dual banking system in our country, and how should it function?

3. What is the proper role of deposit and share insurance in our national financial structure, and should the insuring agency have any regulatory or supervisory functions ?

CENTRAL BANKING FUNCTIONS

In the half century since the Federal Reserve System was established, the central bank has through historical accident or otherwise acquired a number of functions unrelated to its basic task of monetary control. As a consequence, the Federal Reserve Board is now deeply and broadly involved in bank regulation, examination, and supervision for both National and State-chartered banks. We raise the basic question:

Should the central bank exercise any such nonmonetary functions, or should it be confined to purely monetary functions as is traditional to central banks in the Western world?

Specifically, for example, is there any proper justification for the Federal Reserve Board to regulate: (1) The acceptance by member banks of drafts or bills of exchange (regulation C); (2) corporations doing foreign banking or other foreign financing (regulation K); (3) interlocking bank directorates (regulation L); (4) foreign branches of national banks (regulation M); (5) loans to executive officers of member commercial banks (regulation 0); (6) holding company affiliates (regulation P); (7) payment of interest on deposits (regulation Q); (8) relationships with dealers in securities (regulation R); (9) credit by brokers, dealers, and members of national securities exchanges (regulation T); (10) loans by banks for the purpose of purchasing or carrying registered stocks (regulation U); and (11) holding company creation and expansion (regulation Y) ?

These are solely or primarily bank regulatory and supervisory functions, and it appears to us that before any reorganization of the bank regulatory agencies is undertaken, the Congress would want to reexamine the wisdom of intermingling these functions with the essential central bank function of monetary control.

There is one further basic issue which is related to the proper role of the central bank. For State-chartered banks which are members of the Federal Reserve System, the Federal Reserve Board now exercises basic authority over mergers and the establishment of new branches. Moreover, the Federal Reserve Board administers all Federal authority over the formation and expansion of holding companies, whether the banks involved are National or State-chartered. As a result, the central bank exercises a pervasive and intimate role in the expansion of banks in the banking systems of all the 50 States. It appears to us that this far-reaching intercession of authority by the central bank in the functioning of the State banking systems should be reexamined before any plan for the reorganization of the Federal banking agencies is considered.

THE DUAL BANKING SYSTEM

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As we indicated in earlier testimony to the full House Banking and Currency Committee, it is our view that a dual banking system can function properly only if the National and State banking systems each has the maximum degree of autonomy. At present, beyond the enormous powers now lodged with the Federal Reserve Board over the operations of both National and State-chartered banks, other powers over State-chartered banks are exercised by the Federal Deposit Insurance Corporation. For the some 7,000 State-chartered banks which are not members of the Federal Reserve System, the Federal Deposit Insurance Corporation determines their insurability at the time they are formed, passes upon branch applications by those banks, passes upon merger applications where the emerging bank is to be a State-chartered bank, examines all such banks, and exercises myriad other authority over them. In fact, the FDIĆ is indeed the regulator of nonmember State banks in the United States.

appears to us that the Congress should reexamine the basic issues whether State-chartered banks should be subject to any Federal jurisdiction with respect to branching, with respect to mergers where the emerging bank is to be a State-chartered bank, with respect to regular examination, and, of course, with respect to other public controls. These questions, it appears to us, should be resolved before any specific plan for the reorganization of the Federal bank supervisory agencies is considered.

A more difficult issue is the automatic insurability of State-chartered banks, as is now provided for national banks. A distinction could be drawn here on the ground that national banks are subject to Federal supervision and standards. However, the Congress may wish to consider similar treatment for all State-chartered banks with respect to deposit insurance, if it regards such treatment as essential to the preservation of a dual banking system.

Examination is the core of bank regulation. So long as this power over State banks is exercised by any Federal authority, the ultimate control of such banks will continue to lie in Federal hands. There are today pervasive, direct Federal controls over the organization, operation, expansion, and even dissolution and liquidation of State banks. If a truly meaningful dual banking system is to be established in our country, the States should fully assume the examinatory responsibility over their own banks—and the entire regulatory structure may then be built upon the discharge of that basic function.

THE INSURANCE FUNCTION

There are other and equally fundamental considerations relating to the proper role of deposit insurance which need to be resolved before the reorganization of the bank supervisory agencies should be considered.

The House Banking and Currency Committee now has before it a proposal to extend the coverage of deposit insurance. There is at issue, however, the more basic question of the proper role of deposit insurance in the entire structure of bank regulation and supervision. This is a question which should be resolved before we may properly consider any need for reorganization of the regulatory structure, in our opinion.

Deposit insurance entails risks as well as benefits to the effective functioning of our banking system, and a choice should be made which will achieve a proper balance between these conflicting considerations. The insurance of deposits operates as a safeguard to smaller, lessknowledgeable depositors who are unable to appraise the soundness of banks, or to diversify their deposits sufficiently to overcome such risks. In some degree, we perhaps also rely upon deposit insurance to maintain an element of confidence in the banking system, although deposit insurance exercises only a secondary role for

this purpose. There are also risks, however, to the effective functioning of banks where deposits are insured. The insurance of deposits tends to make some depositors indifferent to the quality of bank management. It thus

may operate to subsidize inefficiency and withhold the rewards of efficiency. As a result, deposit insurance may distort and impair the effectiveness of the competitive forces in banking. Great care must therefore be exercised in setting the limits of insurance coverage, so that competitive effectiveness will not be weakened in any greater degree than is necessary in order to provide the required safeguards to depositors.

The greatest danger in expanding the role of deposit insurance is the risk that it will result in the application of purely commercial standards of insurability. If this occurred, the tendency would be to minimize bank expansion and bank competition in order to minimize insurance risks. This could defeat the fundamental aims which we have set for our banking system.

It has been said that increased deposit insurance coverage, by diminishing the hazards of banking operations, would encourage more risk-taking on the part of bankers, and thus improve the effectiveness of our banking system in meeting the needs of economic growth. It is, however, directly contrary to the philosophy of our private enterprise system to have the Goverment take the risks out of enterprise. The reliance we place upon private initiative is founded fundamentally on individual responsibility for decision-making. It cannot be consonant with such individual responsibility for the Government to take the risks. Indeed, it is only a step from risk-taking by public authorities, to direct control of the industry for which those risks are assumed.

There may, of course, be circumstances in which the subsidization of risks is a proper means through which public incentives are provided to private entrepreneurs. But this device may properly be used only when there is a clear public objective to be achieved, and this is the best means of doing so. The general subsidization of the risks of enterprise by Government does not meet this test.

SPECIFIC PROPOSALS

To appraise fairly the need for and the adequacy of any reorganization plan, it appears to us that we should look at each of the bank regulatory and supervisory functions to see whether the proposed consolidation would be likely to improve matters or to worsen them.

There are three basic tasks performed by the bank regulatory authorities: (1) The control of mergers; (2) the control of chartering and branching; and (3) bank examination and supervision.

I will discuss each of these separately.

CONTROL OF MERGERS

The chief criticism directed against the administration of merger policy has been the approval of some mergers in the face of adverse advisory opinions on the competitive factor.

This fact has been interpreted as evidence of policy differences and lack of coordination.

The Bank Merger Act provision for advisory opinions on the competitive factor, however, was designed to furnish the responsible agency with independent appraisals of this factor only.

The purpose, moreover, was not to suppress differences of view, but to allow such differences to be expressed.

Indeed, so that authority for ultimate decision would be clear, the advisory opinions were not made binding on the responsible agency, and it was required that decisions should be reached on the basis of all the criteria set forth in the act, with no single criterion to be controlling.

It should not be surprising that the decisions reached on this broader basis should sometimes have failed to coincide with the advisory opinions based on a single criterion.

Even differences of view on the competitive factor should not be cause for concern. Uniformity may be achieved only at the expense of restraining independent expression, if indeed uniformity could, or should be achieved at all.

The only proper cause for concern would be differences in the decisions on comparable cases. It is too early to say whether such differences will emerge.

We are persuaded that a convergence of treatment of comparable cases will most likely evolve if the responsible agencies will clearly set forth and make known the bases of their decisions.

Should evident differences appear, perhaps more precise standards could be provided through amendment of the Bank Merger Act or through the courts.

Consolidation of the regulatory agencies would not contribute to, much less assure, consistency of decisions.

CONTROL OF CHARTERING AND BRANCHING

The need for consolidating the bank supervisory agencies is even less apparent in the regulation of chartering and branching.

Only a single Federal agency, the Comptroller of the Currency, may formally charter a bank or authorize the establishment of a branch, even though the FDIC has effective power in this respect over State-chartered banks, as I indicated earlier.

The only significant problem of policy coordination which may arise in branching cases is the treatment of conflicting applications between National and State-chartered banks.

The resolution of these cases, however, involves relationship between National and State supervisory authorities, and not among Federal regulatory agencies.

Consolidation of the Federal regulatory agencies would not, therefore, alleviate any problems which we see.

More often, indeed, the conflicting applications for branches are between and among national banks.

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