BANK EXAMINATION AND SUPERVISION

Since the laws and standards which govern the operation of Statechartered banks vary among the 50 States, and differ from those which uniformly apply to national banks, the standards for examination and supervision are not the same for both classes of banks. For this reason, there is no benefit to be derived through consolidating the examining and supervisory functions at the Federal level. Moreover, such consolidation of Federal powers over National and State-chartered banks would in time obliterate the distinction between National and State Banks-and the dual banking system itself.

RECOMMENDATIONS

Since this subcommittee has before it a plan for consolidation, we believe it would be worthwhile for the subcommittee to consider the merits of alternative approaches.

The present bill has, in our judgment, at least three basic weaknesses: (1) It would imperil the dual banking system by consolidating Federal authority over National banks and State-chartered banks in a single agency; (2) it would create an independent commission to add to the proliferation and expansion of Government outside the executive branch; and (3) it would disperse authority among a number of commissioners, and thus obscure and divide responsibility for action and hamper expeditious administration.

If any plan of consolidation of bank regulatory functions is to be considered, we believe it would be wise to separate entirely the Federal powers over National banks from those over State-chartered banks. We are in full sympathy with those who argue that the preservation of a dual banking system requires such a clear separation of powers over each of these classes of banks.

It would be possile to avert the weaknesses of the bill before this subcommittee by providing for consolidation in the manner proposed in the report of the Advisory Committee to the Comptroller of the Currency.

That Committee recommended that all Federal power over National banks should be centered in the Office of the Comptroller of the Currency; and that comparable provision should be made to centralize all Federal power over State-chartered banks to the extent that such power should be permitted to exist in a single agency under a single administrator.

This latter objective, it was recommended, could be achieved by reorganizing the FDIC under a single administrator, placing all examinatory, regulatory, and supervisory Federal power over State-chartered banks in that agency, and transferring it to the Department of the Treasury.

It would be most appropriate to place the responsibility for coordination of Federal banking powers in the Secretary of the Treasury, who is the chief financial officer of the Government.

If the FDIC were reorganized as suggested, were assigned all Federal power over State-chartered banks, and transferred to the Treasury-it would then not seem logical to combine the FDIC with the FSLIC.

As a matter of principle, there are persuasive reasons for confining the central bank to the performance of purely monetary functions. Coordinately, there is much to be gained through centralizing in separate single agencies, Federal powers over National banks and State-chartered banks.

The plan which the Advisory Committee recommended would achieve both of these basic objectives.

Some of the nonmonetary functions now exercised by the Federal Reserve Board do not appropriately fall within the special competence of any bank regulatory agency.

The Secretary of the Treasury seems to be the proper official with whom to lodge these powers.

The supervisory authority which the Federal Reserve Board exercises over bank holding companies raises special problems because holding companies are ordinarily conglomerates of National and State-chartered banks.

In order to preserve the necessary distinction between National and State-chartered banks, it would be most appropriate to transfer that function to the Secretary of the Treasury.

It is an anomaly that the regulation of the foreign operations of National banks now rests with the Federal Reserve Board, while such banks are generally under the supervision of the Comptroller of the Currency.

This power should be transferred to the Comptroller of the Currency.

Moreover, in furtherance of the plan described earlier, control over the foreign operations of State-chartered banks could be transferred to the FDIC to the extent that any such Federal power over Statechartered banks is retained.

This broad approach to the consolidation of the bank regulatory agencies, is, in our judgment, preferable to that followed in the bill before this subcommittee.

Mr. MULTER. Thank you, Mr. Saxon. You have, as usual, made a very fine presentation.

It appears to me that implicit in your statement is the fact that something must be done on the subject we are considering.

Mr. SAXON. What we have sought to do, in line with the extensive thinking we have given to this subject, Mr. Chairman, is to present the basic issues-what should be the role of the central bank? What should be the role of depositors and share insurance? And what should be the role and purpose of the dual banking system?

These, we consider to be the three fundamental issues. And until these are resolved, as the Congress should see it--and here the total discretion lies--it would be extremely difficult to grapple with any proposal of reorganization as we see it-it would amount merely to a grappling with means rather than ends.

Mr. MULTER. That is precisely what this subcommittee and full committee is trying to do.

There is, of course, some overlapping of jurisdiction between the subcommittee which is chaired by our distinguished chairman, Mr. Patman, the chairman of the full committee, and his subcommittee. which has jurisdiction over the Federal Reserve System, and this subcommittee.

But the full committee will have to make the decision, and if it decides to do something, make a recommendation to the Congress which is going to present these very issues that you raise.

I think this committee needs the guidance of everyone who can give us any help, as to just how we should proceed.

As I stated before during the course of these hearings, I think the first question to be determined is, do we want a centralized agency, shall we keep the Federal Reserve Board as the one in control of monetary policy and take from it all regulatory matters, place that somewhere else and if that is to be done, if we are to limit the Federal Reserve System to monetary policy, what do we do with the regulatory procedures that are now vested there, where do we put them? Shall we put them in one single Federal agency, or in several? Mr. SAXON. Or, Mr. Chairman, should they be returned to the States, to the extent the Congress would so in its judgment ordain? Mr. MULTER. Of course, that is an important question to be determined, too.

Obviously, as to the national institutions, the national banks, the Federal savings and loan associations, we are not going to give any jurisdiction there to the States.

Isn't that right? If they are to be national institutions, there will have to be a national agency to take care of them.

Mr. SAXON. AS federally chartered institutions, instrumentalities, the Congress; yes, sir.

Mr. MULTER. Then, of course, the subsidiary question arises as to the State institutions.

Shall the State authorities have complete regulatory control and authority there, and to what extent should the insuring agencies, either FSLIC as to savings and loans, or FDIC as to savings banks and commercial banks-to what extent should we keep the insuring agency solely as an insuring agency and out of supervision? That question must be determined.

As you have pointed out, the insuring agencies necessarily today, under the statutes that brought them into being, have regulatory and supervisory powers.

Shall we now convert these into solely insuring agencies, and keep them doing just the insuring job, and give the regulatory power as to the State institutions to the State authority and as to the national institutions to a national authority, and, if so, shall there be one or two?

Again, you have the question, shall we join the regulatory and supervisory powers together on the commercial and savings institutions on a national level, or shall we keep them separate as they are now?

Then, of course, the further question arises, should any of the regulatory supervisory authorities, such as the Comptroller of the Currency, as to commercial banks, the Home Loan Bank Board as to savings and loans, shall those authorities that have the right to charter and supervise also sit or control or have any voice in the insuring agency?

These are the questions that the committe must determine that are presented by these bills.

Now, I don't believe any of us thinks that either of these bills are the last word on the subject. But we do need guidance as to what

we should do with the question, in order to make the basic determination of where we are going, how do we do it, so far as the details of the bill are concerned.

If you can give us any further guidance on that as to those things, we would certainly like to have them.

Mr. SAXON. Mr. Chairman, these are complex issues, as is obvious to us and, I am sure, to you, members of the committee.

We haven't been able to find any easy answers to these.

In grappling with them, what we have presented here is just the result of some intensive thinking and what in effect is barely transferring the issues in the form of questions to the appropriate authority, being the Banking Committee. We don't know the answers. Mr. MULTER. We are observing the 5-minute rule.

My time has expired. I hope I can come back to you again before the morning is over.

Mr. Patman?

Mr. PATMAN. Thank you, Mr. Chairman.
No questions at this time.

Mr. MULTER. Mr. Bolton?

Mr. BOLTON. Thank you, Mr. Chairman.

I would like to compliment the gentleman on his statement. It certainly offers very constructive suggestions and alternatives in the consideration of this not very easy problem.

I have no further questions at this time.

There is another matter which I would like to come back to.

Mr. MULTER. Mr. Moorhead?

Mr. MOORHEAD. Thank you, Mr. Chairman.

Mr. Saxon, do I understand that you recommend that the FSLIC and the FDIC be kept separate bodies, is that correct?

Mr. SAXON. No, sir. In effect, yes-the answer is, in effect, yes, by suggesting or recommending that the FDIC converted to a single administrator agency and transferred to the Treasury, under the same conditions in which this office operates within the Treasury. This would resolve the problem of consolidation of the two insuring agencies.

Mr. MOORHEAD. But the FSLIC under your recommendation would continue to operate as it now is under the management of a board. of directors?

Mr. SAXON. Yes, sir.

Mr. MOORHEAD. I don't understand why a single administrator is recommended for FDIC and a board of governors for FSLIC, when they are both carrying on insuring functions.

Mr. SAXON. We are really not prepared-much as we have studied this question-to make any recommendation on the consolidation of the two insuring agencies because of the distinctness of the two creatures dealt with here.

These are basically two different types of financial institutions, one based on a debtor-creditor relationship in the form of a deposit and the other a share or investment corporation. Their powers are vastly different. Their purposes are essentially different.

What we were seeking here insofar as commercial banking is concerned, is to attempt, in the bank supervisory area, to seek coordination through the U.S. Treasury and a single administrator, and

without trying to resolve the much more difficult question, as we see it, as to whether appropriately the two insuring agencies could effectively be combined.

Mr. MOORHEAD. In your judgment, which of the two insuring agencies should have jurisdiction over mutual savings banks?

Mr. SAXON. This question, Mr. Moorhead, has been complicated by proposals submitted by the National Association of Mutual Savings Banks for a dual system, that is, through congressional action in authorizing Federal chartering, through a new plan promulgated by the U.S. Savings and Loan League, which would admit mutual savings banks on a different basis now, as I understand it, to the Home Loan Bank System.

In the light of all of these developments, it is extremely difficult to grapple with this question at this juncture in the evolution of it. Apparently a strong effort is being made in an attempt to unite thrift institutions, in one case through share investment, in the other through deposit--being the mutuals-into one organization.

I am not trying to evade the question. I just don't know how to answer it.

Mr. MOORHEAD. It is a difficult question-I recognize that.
Thank you, Mr. Chairman.

Mr. MULTER. May I suggest that we will have a full hearing on that bill, and at that time I hope Mr. Saxon will come in and give us some help in that connection, too.

Originally, when the bill was introduced the idea suggested by the bill is that they be part of the FDIC for insurance and in the Comptroller's Office for chartering and supervising. The current bill calls for their being under the Home Loan Bank Board for chartering and supevising, and FSLIC for insurance. That is one of the questions we will have to resolve at that time.

Mr. SAXON. We have one instance in Cleveland of the conversion of a mutual savings bank to a national bank-the Society Nationalwhich has done quite an extraordinary job since its conversion in the exercise of full commercial banking powers. It has become a substantial competitive force in banking in the Cleveland area.

Mr. MULTER. That is a topic, incidentally, as to which I am hopeful you will come up with some recommendation for legislation. That is getting considerable attention by other institutions. We have the same problem elsewhere. It is giving the Home Loan Bank Board considerable trouble in connection with the conversion of mutuals into stock companies.

And I think it requires legislative enactment to cover the situation. As I see it, there is no law on the books now to cover these situations.

Mr. SAXON. It was done in Cleveland with great difficulty and expense and some facilitation of this new congressional action would be extremely helpful.

Mr. MULTER. I think there was some litigation in the courts involved there, too, just as with the savings and loan institutions. Mr. SAXON. Yes. sir.

Mr. MULTER. Mr. Kilburn, I apologize for not having recognized you as the ranking minority member.

Do you have any questions, Mr. Kilburn?