57722_1960-1964

APPENDIX C

Addresses and Selected Congressional Testimony of

JAMES J. SAXONComptroller of the Currency

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

1964

INDEX

Addresses and Selected Congressional Testimony of James J. Saxon,Comptroller of the Currency

Date and Topic Page

October 26, 1964, "Toward a Stronger Dual Banking System": remarks before the National Bank Division, AmericanBankers Association, Miami Beach, Fla 241

March 9,1965, before the Senate Permanent Subcommittee on Investigations, on chartering policies, bank failures, operatingpowers, and disclosure 243

April 26, 1965, before the House Banking and Currency Committee, on the underwriting of revenue bonds 246April 30,1965, before the Subcommittee on Bank Supervision of the House Committee on Banking and Currency* on the bank

regulatory structure 247June 30, 1965, before the House Banking and Currency Committee, on the operating powers of National Banks 248

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REMARKS OF JAMES J. SAXON, COMPTROLLER OF THE CURRENCY, BEFORE THE NATIONAL BANK DIVISION,AMERICAN BANKERS ASSOCIATION, MIAMI BEACH, FLA., OCTOBER 26, 1964

Toward a Stronger Dual Banking System

For the past 3 years we have been reexamining andrecasting the rules and regulations applied to NationalBanks in the light of today's needs and opportunities.Several advisory committees have assisted us in thiseffort, and we have had recommendations for actionfrom National Banks throughout the country.

One central theme has appeared persistentlythroughout our review of existing policies. From allsegments of the banking industry, in every section ofthe country, we had protests that bank initiative wasbeing hampered in many ways without any supportablepublic purpose to justify the restrictions. The objec-tions took a variety of forms and touched virtuallyevery major phase of bank regulation.

In the reforms we have undertaken and advocated,we have had one paramount objective. This objectivehas been to leave bank operations to bankers unlessrestrictions are required in order to safeguard the sol-vency and liquidity of the banking system. The goal isto release the full energy and initiative of the bankingindustry in the service of the community and the Na-tion.

This was a novel approach to bank regulation, incontrast with the climate which prevailed for manyyears in the banking industry and among bank regu-lators. In principle, there had always been exten-sive reliance on private initiative in banking. In prac-tice, however, the regulatory authorities had for manyyears treated the banking industry much as a groupof unruly children who needed daily guidance andperiodic scolding or finger-shaking. These disciplinarymeasures were regarded as necessary, not only by theparent chartering agencies, but also by anxious rela-tives in other governmental departments. Some ofthis attitude survives today, but there has been a not-able and growing acceptance of the need and the cap-acity of the banking industry to operate more fullyunder our traditional, standards of individual respon-sibility and competitive enterprise.

As the reins of public control have been loosened,a remarkable transformation has taken place through-out the banking industry. Armed with broader dis-cretionary powers, the banks have met the challenge

of opportunity with a sharpened sense of responsibilityand a surge of new initiative. This transformation hasnot come easily, or quickly. The new powers had to betested and appraised, and a change of outlook had tobe developed. The underlying strength and force ofthe banking industry is evident in the growing con-fidence of the banks, and in their expanding initiative,and they have experimented in the broader fieldsopened to them. This has been a highly commendableperformance on all counts, and one in which the bank-ing industry takes justifiable pride.

The momentum which has been achieved must besustained, and it should be further strengthenedthroughout the dual banking system. The attitudesand powers of bankers, the way in which they viewtheir responsibilities and their opportunities, theirvision and their initiativeall exercise a critical influ-ence on the form, the pace, and the direction of oureconomic progress.

The commercial banks today occupy a strategic posi-tion at the center of the business and industrial struc-ture. To them is entrusted for productive use a majorportion of the Nation's savings; they operate a checkmechanism which represents a principal means of pay-ment in the business life of the country; and, throughtheir powers of credit creation, they provide one ofthe most significant sources of financing for the newventures which are so essential to the continuing growthand development of the economy.

This crucial role of banks in the economy makesthe regulation of banks of critical significance to theNation's welfare. We live in a dynamic, pulsatingsociety which is undergoing rapid change. Our popu-lation is expanding greatly, and we are striving to makethe best use of the skills and talents of all our people.Population shifts have brought both urban and sub-urban problems, and we continue to struggle with thedifficulties which prevail in our agricultural commu-nities. Our markets are constantly broadening newmethods and instruments of production and distribu-tion are being introduced continually, and new prod-ucts are coming on the market at a growing rate.International considerations continue to exert a majorinfluence on our domestic policies. Our capacity tocope with these needs, to provide employment for ourpeople and sustain a rising standard of living, to

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strengthen our society and our economy, rest decisivelyon the financing facilities which are available to carryon the many new ventures which will be required.Both great segments of our dual banking system mustshare in these tasks and in this responsibility, and thepublic authorities who regulate the banks must be at-tuned to these vital needs.

It is time we understood that there is no conflict ofpurpose in strengthening both the State and the Na-tional banking sytsems, and no conflict of interest be-tween these two systems. Indeed, the highest levelof performance is required both of State and Na-tional banks if the vast diversity of banking needs in in-dividual markets throughout the country are to bemet. There is no monopoly of wisdom, and thereshould be no monopoly of initiative, in responding tothese needs. Independent dual banking systems, eachfunctioning according to its own special standards andobjectives, afford the best assurance that the essentialrequirements for banking services will be fully and ef-ficiently served.

It has been most encouraging to see that the re-forms which have been undertaken within the Na-tional Banking System are being subjected to criticalscrutiny and review by the State authorities and theState banks. We have taken the initiative in manyrespect to recast the structure of public control ap-plied to National Banks, but there has been a steadilyaccelerating and highly constructive movement toundertake reforms at the State level.

This process of strengthening the State bankingsystems would be greatly simplified if certain changeswere brought about in the present regulatory struc-ture. State banks are subject to regulation not onlyby the State authorities, but also in many areas bythe Federal Reserve Board and the Federal DepositInsurance Corporation. This multiplicity of regula-tion has operated to weaken the stature of the Statebanking authorities, and has hampered the full de-velopment of the State banks. I can see no validreason for continuing this Federal intercession intothe functioning of State banks, and I should like tosuggest a means to overcome these disabilities now im-posed on that segment of our banking industry.

At the present time, no State bank which is a mem-ber of the Federal Reserve System may open a branchwithout the approval of the Federal Reserve Board aswell as the State authorities. Where a merger isundertaken in which the resulting bank is to be a Statemember bank, a similar double approval is required.In addition to the State laws which they must observe,State member banks are also subjected to Federal Re-

serve controls of many of their basic deposit, lendingand investment operations.

The Federal Deposit Insurance Corporation exer-cises comparable controls over branching and mergersby insured State nonmember banks. Moreover, theState authorities today will not ordinarily charter anew bank unless it is approved for insurability by theFederal Deposit Insurance Corporation. A a result,the effective power to charter new State banks restsfor all practical purposes with a Federal agency.Moreover, in order to qualify for continued insur-ability, a State bank must subject its operations toexamination and supervision by the Federal DepositInsurance Corporation.

Together, these factors have had the effect of lodg-ing critical powers over the life of State banks inFederal hands. Perhaps more significantly for thestrength of the dual banking system, these all-pervasiveFederal controls over State banks have operated todiscourage the effective performance of bank regula-tion and supervision by the State authorities, and havetended to weaken the State banking systems.

Federal intercession in the operation of State bank-ing systems has, in my judgment, been founded onmistaken concepts of the proper roles of the monetaryauthority and the insuring authority in the conductof bank regulation and bank supervision. There isno purpose of monetary policy which requires thatthe monetary authority should have regulatory powerover commercial banks. It is not the operating poli-cies and practices of banks, but the total supply ofmoney and credit, which is the proper province ofthe monetary authority. Indeed, to allow the mone-tary authority to intercede directly in bank operationsis to run the risk that banks will be hampered in theircapacity to compete, and will fail to make the bestallocation of the resources entrusted to them.

It is equally inappropriate to impose insurancestandardsparticularly commercial insurance prin-ciplesin the public supervision and control of bankoperations. The potential for mischief is most seriouswhere the insuring agency has any power over bankexpansion or the kinds of risks which banks mayassume. There is a natural inclination for an insur-ing agency to minimize its losses by limiting the risksit accepts. But if this principle of cutting insurancelosses were allowed to govern eligibility for deposit in-surance, bank expansion and bank lending and invest-ment operations which entail elements of risk or uncer-tainty could be effectively blocked. Enterprise and ini-tiative in the banking industry could be paralyzed andthe performance of the entire economy retarded. This

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is surely not the objective we have sought through oursystem of deposit insurance.A proposal

I would propose that Federal regulatory powersover State banks, as distinct from those powers whichare clearly essential to the conduct of monetary policy,should be transferred to the States. Such a transferof regulartory power would encourage improved per-formance by the State authorities, and it would endthe discriminatory treatment of State banks whichresults from the exercise of Federal authority.

There is no regulartory objective which requires thatState banks should be treated differently from Na-tional Banks with respect to deposit insurance. Thechartering and branching decisions of the State au-thorities, and their exercise of the examinatory andsupervisory functions., should have the same standingas comparable actions by the Comptroller of the Cur-rency in qualifying banks both for initial and forcontinuing deposit insurance.

Similarly, no discernible public purpose is servedby requiring the approval of the Federal ReserveBoard for the branching or merger of State banks.These decisions properly belong with the charteringauthority which is charged with responsibility forshaping the banking structure. The complete divorce-ment of bank regulation from monetary controls wouldentail still broader modifications in the regulatorystructure. The Federal Reserve Board now exercisescertain regulatory powers over the operating policiesand practices of National as well as State banks.Where these powers are not essential to the conductof monetary policy, they should be transferred to thechartering authority, whether it be State or National.

The plan which I have outlined is in sharp con-trast with certain other proposals which have beenadvanced for reformation of the bank regulatorystructure. One proposal which has attracted wideattention calls for the retention of all existing Federalpowers over State banks, and provides that theseFederal powers over State banks should be combinedwith Federal powers over National Banks and placedunder the jurisdiction of a single new Federal agency.The consequence of this proposal would be to cen-tralize in a monolithic new agency full control of theNational Banking System and vital powers over allthe State banking systems. If that proposal wereadopted, the erosion of the stature of the State bank-ing authorities would undoubtedly be accelerated, andthe dual banking system as we now know it would beon its way out.

What we need in banking is not greater centraliza-tion of authority, not more rigorous conformity to im-posed rules of conduct, but enlarged freedom to re-spond to the challenge of the future. What we re-quire is greater scope for enterprise and initiative, nota common mold into which we force the entire bankingsystem.

Under the inspiration of the new opportunitieswhich have been unfolded, the banking industry hastaken on new life and new vigor. A vital new imagehas been established which holds bright promise forthe future. Once again, we have had a dramaticdemonstration of the latent force of our private enter-prise system. Our purpose now should be to makecertain that this creative force in our society finds fullexpression throughout the dual banking system.

BEFORE THE SENATE PERMANENT SUBCOMMITTEE ONINVESTIGATIONS, TUESDAY, MARCH 9, 1965

I should like to confine my opening remarks to abrief background statement which I hope will setbanking policies in proper perspective.

Three aspects of banking policy have attracted par-ticular attention in recent months. These relate tothe enlarged operating discretion of banks, the increasein bank population through new charters, and the dis-closure of facts about bank operations and bank owner-ship and control. To appraise these policies fairly, weshall have to understand the place of the banking in-dustry in the economy, and the purposes of bankregulation.

The single fact to bear in mind throughout is thatwe live in a private enterprise economy. This meansthat we place primary reliance on the individual tochoose his own occupation, to spend his income as hewishes, and to undertake such ventures as he cares torisk. The presumption is against governmental restric-tion of this free discretion unless there is a clear publicneed which the Government can satisfy better than theindividual.

These precepts have a particular bearing on thebasis, and the bounds, of public regulation of banking.Under our public policy, we control entry into bank-ing, and we place certain limits on the operating pow-ers of bankers. In administering these restrictions, thebanking agencies have certain discretionary authority.When we place this fact in the context of a basic publicpolicy which favors individual initiative, it seems clearthat the banking agencies should exercise their discre-tionary powers in a way which will avert needlessimpediments to the initiative and enterprise of theindividual banker.

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This is the principle we have followed in the reformswe have undertaken. Our aim has been to make theNational Banking System a more effective servant ofthe people. We have sought this objective by enlarg-ing the operating discretion of bankers, by respondingmore sensitively to the demands for additional bankingfacilities, and by pursuing a full disclosure policy.Our test in the case of operating powers has beenwhether a restriction of free discretion is required inorder to preserve the solvency and liquidity of thebanking system. Our test in the case of new facilitieshas been the public need for additional banking offices.We have pioneered programs of disclosure to share-holders and requirements for the reporting of changesin ownership and control.

The reforms which we have introduced in the Na-tional Banking System are winning increasing supportthroughout the country as goals for the State bankingsystems. These efforts to modernize the other greatsegment of our dual banking system portend livelycompetition and effective participation in the growthand development of the Nation's economy.

Chartering policyTo understand chartering policy, we have to realize

that bank entry is restricted by public authority. Abank charter is a license to do business, and withoutit no bank can be formed or operate. This is in clearcontrast with the freedom of entry all of our citizensenjoy in the nonregulated industries.

In many respects, the problem of entry is identicalin all industries. Individuals have capital to investand they seek the most profitable outlets for that cap-ital. In our dynamic economy, the factors which affectmarket profitability are undergoing constant change.Incomes are rising, savings are increasing, our popula-tion is growing and shifting, demands are changing,new technologies are being developed, new productsand services are being introduced, and new industriesare springing up. New opportunities thus abound, butthese changes bring uncertainty and risk. This is thenature of a free enterprise system.

When a banking agency is presented with an appli-cation for a new charter, it faces much the same prob-lems that confront any businessman who seeks to judgethe prospects of a new market. The banking author-ities can estimate the need and the profitability ofproposed new banks, but they cannot resolve all doubts.There is, therefore, an unavoidable element of chance.

There is also an inescapable necessity of choice.The responsibility of the banking agencies is not to barbank entry, but to regulate it in accordance with the

public need. The demands for banking services dochange, and private entrepreneurs do seek to respondto these changes. When individuals apply for bankcharters, the banking authorities must rule on the appli-cations. Failure to allow new facilities to be providedto meet changing consumer demands for banking serv-ices can defeat private initiative in meeting these de-mands. It is the responsibility of the banking authori-ties to see that this does not occur where there is agenuine need which can be profitably served.

Bank failuresThe failure of several banks within the recent

months has been linked, by some, with chartering pol-icy. What is the public interest in the prevention ofbank failures?

The failure of an enterprise in any industry meansthat productive resources have been misdirected. Inthe nonregulated industries, there is no public effortto prevent failure. The assumption is that the publicbenefits of free initiative and enterprise will outweighany wastage of resources which may result.

In banking, there is greater public concern aboutfailure. Confidence in the banking system is essentialif banks are to perform effectively. But, there is anequal public necessity to assure that banking facilitiesexpand as consumer demands change.

The procedures for chartering new banks take ac-count of both these considerations. In reviewing anapplication for a new National Bank charter, we care-fully examine the market which the applicant proposesto serve, in order to determine the probable need forthe additional facility. Charters are issued only wherewe conclude that such a need exists, and that the appli-cant is capable of satisfying that need profitably. Therehas been no instance of National Bank failure, cer-tainly not in recent years, which can be traced to amiscalculation of the market opportunity.

Before we approve a National Bank charter, we mustalso be satisfied of the character and competence ofthe proposed management to conduct the affairs ofthe bank. The single failure among the National Bankswhich were approved for chartering during the past3 years may be traced to management deficiencies.The information at our disposal at the time of approvalwas favorable in that case as in the others. It is al-ways difficult to anticiapte or to uncover deliberatemisconduct, and the pattern of misconduct is notusually evident at the early stages. The record willshow that prompt and decisive action was taken where-ever misconduct was discovered.

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Operating powersThere is a variety of public controls restricting bank

competition for deposits which are the "raw materials"of banking, and for the loans and investments whichare the "products" of banking operations. Some crit-icism has been directed against the enlarged competi-tive power of banks in both these respects under ourprogram of banking reform. It is well to understandthe implications of these views.

The philosophy we have followed has been to re-pose greater trust and confidence in the discretionand judgment of the individual banker. This has beena calculated effort to instill a greater sense of respon-sibility, and a more enlivened spirit of enterprise, inthe banking industry. In resting these new powerswith bankers, we have understood that banks wouldbecome more venturesome. Indeed, this was our aim.

Banking is not an industry which functions withinitself. It occupies a central role in financing our grow-ing economy. There is no way to take the risk out ofbanking without taking the risk out of the industry andcommerce which it serves. There is the choice of with-drawing the banking system from participation in ournational growth and development. But this is anempty choice, and one we cannot tolerate. The econ-omy which banking serves is the vital product ofgenerations of free enterprise. A banking system at-tuned to its needs must be no less enterprising.

The most disturbing suggestion I have heard is thatthe banking agencieis should be responsible to preventbankers from exercising poor judgment. Under thepresent system of bank examination and supervision,banking operations are subjected to careful and expertsurveillance, and bank officials are apprised of thecriticisms of bank examiners. Subsequent conduct inresponse to these criticisms is also closely observed andreported to bank officials. To go beyond this and re-quire prior approval of bank loans and investmentsby public authorities, would fundamentally alter therelationship between the government and the bank-ing industry. Indeed, it could communize and socializethe banking industry and, indeed, the entire economywithout additional steps. It would entail governmentallocation of resources, a concept which is wholly re-pugnant to a private enterprise system. I cannot be-lieve that anyone would seriously advocate this moreintensive form of bank regulation.

The course we have chosento place greater re-liance on the initiative and enterprise of the individ-ual bankeris the only course that is in keepingwith our traditions. It is the only course that can as-

sure the most effective participation of the bankingindustry in the Nation's progress.

Disclosure and controlThe effective operation of a private enterprise

system rests in no small degree upon informed pro-ducers, consumers, and investors. We have soughtto bring this discipline of the market to bear on thebanking industry through the measures we have in-stituted to require the disclosure of information toshareholders and reports on ownership and control ofbanks. Here again, to take the further step and re-quire prior approval of ownership changes, wouldentail a fundamental change in the relationship be-tween the government and the banking industry.

Some factsI should like now to turn to some more mundane

matters. A variety of figures are being cited as indica-tive of the rate of recent bank chartering. Theimplication has been that a vast expansion has takenplace in the National Banking System at the expenseof the companion State banking systems. While I donot believe that the wisdom of bank chartering policycan be judged by such a measure, I do believe thatwe should set the record straight on the facts.

During the period 1952 through 1964, charters wereissued to 1,166 new State banks and 661 new NationalBanks. For every year from 1952 through 1962, therewere from two to four times as many new State bankschartered as there were National Banks. During thepast 3 years, charters were issued to 434 new NationalBanks and 392 new State banks. This represents anaverage annual increase in bank population of lessthan 2 percent.

There are also other interesting comparisons whichmay be made. During the period 1952 through 1964,the gross national product rose from $347 billion to$622 billion. This represented approximately an 80percent increase. During this same period, bank cap-ital rose from about $13 billion to about $28 billion,an increase of 114 percent; and bank assets rose from$189 billion to $340 billion, an increase of about 80percent. The business-failure rate during this periodranged from 28.7 to 64.0 per 10,000 firms, while thebank-failure rate ranged from 0 to 5.2 per 10,000 banks.The high for the period in the case of banks wasreached in 1964. It may be noted that the 1964failure-rate for National Banks was 2.1 per 10,000banks, whereas the failure-rate for State banks was 6.9per 10,000 banks.

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The futureBy any test, the banking industry has become a more

effective, driving competitive force throughout theeconomy. There is a steady flow of new capital intobanking, and earnings are being retained at a high ratefor added strength in meeting the enlarged responsi-bilities and opportunities. Successful businessmenfrom other fields are being attracted to the industryin greater numbers, and have added new spirit andinitiative to this ancient craft. Management compe-tence throughout has reached new heights, and thebanking industry is better prepared than ever before,both in spirit and in substance, to serve its vital func-tion in furthering the Nation's growth and develop-ment. The future has never been so challenging norso bright.

BEFORE THE HOUSE BANKING AND CURRENCY COM-MITTEE, MONDAY, APRIL 26, 1965

Mr. CHAIRMAN, MEMBERS OF THE COMMITTEE: Iappear here today to express my views on commercialbank underwriting of revenue bonds.

As was stated in the Economic Report to the Con-gress in January of this year, we must help our citiesto develop the transportation, housing, and other facil-ities which they need. It is my view that this bill consti-tutes a most important contribution to this effort.

Since the end of World War II, borrowing by stateand local governments to finance such facilities hasincreased annually at an unprecedented pace. Theseneeds have caused annual spending by State and localgovernments for goods and services to rise from anamount under $8 billion in 1941, to over $65 billion atthis time. As a result, outstanding long-term obliga-tions of State and local governments now total around$90 billion, and State and local governments soldover $10.5 billion of securities in 1964.

In recent years, increasing reliance has been placedon the revenue bond as a means of financing by Stateand local governments. From negligible figures in theearly 1930's, the annual amount of revenue bonds is-sued rose to about $500 million in the early post-WorldWar II years. This figure has climbed to almost $4billion in 1964. While in the late 1940's, revenue bondsaccounted for less than 20 percent of new State andlocal bond issues sold, they have continued to increaseand now account for almost 40 percent of State andlocal government financing.

The use of revenue bonds for self-liquidating proj-ects has been invaluable in helping State and localgovernments meet their financial needs. Indeed,

revenue bonds are, in many instances, the only prac-tical way in which many an already overtaxed com-munity may solve its pressing problems on a financialbasis which is sound for both the issuing communityand the bond investor.

Revenue bond financing is therefore of tremendousimportance to both State and local governments. Anymeasure which would lower the cost of such financingwould be of significant benefit to these governments.It is our belief that H.R. 7539 will afford substantialsavings to State and local governments and ultimatelyto their taxpayers. It would increase competition inthe bidding for and distribution of revenue bonds. Itwould broaden and strengthen the market for revenuebonds. The resulting enlarged market would enhancetheir attractiveness as investments. Even small banks,intimately familiar with the needs of their communi-ties, could provide essential assistance in the prepara-tion and marketing of revenue bond issues of theircommunities. Throughout the country, investors,who customarily rely on their bank for informationconcerning tax-exempt securities, would become moreinterested in sound revenue bonds. Finally, per-mitting the banks to trade in and make markets inrevenue bonds would improve their marketability andcharacter as liquid investments suitable for bank port-folios and fiduciaries generally. Commercial bankshave the facilities and capabilities needed to makemarkets in many of the smaller revenue bond issues.

Opponents have argued that the only saving to theborrowing governments, resulting from this increasedcompetition, would be a slight reduction in "spreads,"that is, the difference between the price the under-writers pay for an issue of bonds and the price atwhich they sell it to the investor. Even if we assumethis argument is valid, such a saving would be sub-stantial and significant when multiplied by the billionsof dollars of revenue bonds being issued annually.

There is an even more basic flaw in this argument.Its advocates assume that a presumption exists infavor of the existing competitive restrictions. Theydemand proof that benefits would result from remov-ing the restrictions rather than beginning with thepresumption that restrictions on competition are un-warranted unless they can be justified by overridingpublic interest considerations. Their method of ap-proval is contrary to the fundamental premises of ourAmerican philosophy. We have seen absolutely noevidence that it is in the public interest to deny com-mercial banks greater competitive latitude in this area.

This bill would not substantially increase the risksincurred by commercial banks. It would permit them

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to deal in and underwrite only the same types of se-curities which they are at present allowed to purchasefor their own accounts. No bank, therefore, wouldbe allowed to purchase for underwriting any securitywhich it may not presently buy for its own investmentaccount. Moreover, the bill would limit the totalamount of securities of any one issuer which a bankcould hold at any one time, whether as a result of anunderwriting transaction or in its dealer or investmentaccounts, to a total amount not in excess of 10 percentof the bank's capital stock and surplus. Accordingly,under this bill, no bank could acquire investment se-curities of lesser quality or in greater amount than thatwhich it is now permitted to acquire for its investmentportfolio. There is in fact less risk in underwriting, atypically short-term transaction, than there is in invest-ing, as that term is ordinarily used.

It has been suggested that there is a danger of con-flicts of interest between the underwriting function andthe deposit, investment, and trust functions of banks.It is contended, for example, that banks underwritingsecurities would have an interest in selling these securi-ties to depositors and correspondents and that such in-terest would impair the ability of those banks to givedisinterested advice. Firstly, it should be noted thatthe increased knowledge concerning the issuer and themarket, which an underwriting bank would have,would greatly enhance its ability to give accurate andhelpful investment advice. Secondly, it should be rec-ognized that the business of providing correspondentservices, of which investment portfolio advice is but apart, is a highly competitive one. It is unrealistic tocontend that an underwriting bank could recommendinferior securities to its customers because of its havingunderwritten such securities. The threat of losingits correspondents and their deposit accounts in ahighly competitive atmosphere will afford adequate as-surance that the underwriting bank will give the bestpossible advice to its correspondents.

The opponents suggest that commercial banks mightbe tempted to sell securities which they have under-written to their trust accounts. They cite no evidenceof such self-dealing on the part of commercial banksengaged in underwriting general obligations and therehas been no reason given as to why this problem willsuddenly exist in the case of revenue bonds. How-ever, any such possibility has been obviated by thebill itself, which provides that the purchase of revenuebonds by a bank as fiduciary from itself as an under-writer or dealer shall not be permitted, unless lawfullydirected by court order.

Even without this amendment, any such possibilityis obviated by the provisions of our regulation 9 andby applicable examination procedures of this Office.Regulation 9 was issued in execution of our generalsupervision of trust departments of National banksand expressly prohibits the use of fiduciary funds topurchase property or obligations from the bank unlesslawfully authorized by the governing instrument, bycourt order, or by local law. Regulation 9 is enforcedby this Office irrespective of the intrinsic qualities ofthe property or obligations involved. This injunctionagainst misuse of fiduciary funds involves a funda-mental precept of fiduciary law which is widely rec-ognized in the courts of this country.

The bill excludes from those investment securitieswhich a commercial bank may underwrite or deal in,special assessment obligations and industrial develop-ment obligations. This Office has no objection to eitherof these exclusions.

We believe that this bill would enable the commercialbanks to make a substantial contribution toward assist-ing state and local governments in the next decadeswhen their financial needs will spiral and when theywill need all possible assistance. In 1963, we changedour Investment Securities Regulation to clarify the de-finitions of the term "political subdivision" and "gen-eral obligation" so as to take account of changes thathave occurred in government financing in the past30 years. Although we believe that our InvestmentSecurities Regulation now permits the banks in somedegree to perform their functions in this area of publicfinance, in order to achieve the full benefits of bankparticipation in this market, we strongly endorse thepassage of H.R. 7539.

BEFORE THE SUBCOMMITTEE ON BANK SUPERVISIONAND INSURANCE OF THE HOUSE COMMITTEE ONBANKING AND CURRENCY, FRIDAY, APRIL 30, 1965

Bank Performance and Bank RegulationI apprised the Secretary of the Treasury of the com-

mittee's request that I testify, and the Secretary hasauthorized me to present my personal views to thecommittee.

The best test of the effectiveness of bank regulationis the performance of the banking industry itself. Thisperformance is now at record levels throughout thecountry. Deposits, loans and investments, and profitshave reached new heightsand they continue to grow.Added banking facilities are being brought to areaswhich long had suffered deficiencies. The servicesoffered to bank customers are being progessively

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broadened. The banking system is alive and teem-ing with energy. The consuming public is the ultimatebeneficiary of all this activity.

The record performance of the banking industryreflects a greater awareness by the regulatory authori-ties of the obligation to allow sufficient scope for inno-vation and initiative in banking to meet growing andchanging consumer requirements. Consumer needsfor banking services are constantly undergoing changeas our population grows, as new industries develop,and as new communities arise. The banking industrycannot meet these changing demands unless theregulartory authorities constantly adapt their policiesto the new opportunities and the new requirements.

The present bank regulatory structure, by dispers-ing the centers of public power, has preserved avariety of sources from which initiative may appearin fashioning bank regulation according to publicneeds. Beyond the powers over National Banks whichrest with the Comptroller of the Currency, the 50 in-dividual States charter and regulate State banks, al-though they share this power in some major respectswith the Federal Reserve Board or the FDIC. Thisdiffusion of public authority offers the best safeguardagainst stagnation in bank regulation, and the besthope that the banking industry will be allowed thefreedom to make its maximum contribution to theNation's economic growth and development.

Your committee now has before it several bills whichpropose modification of the existing bank regulatorystructure. I should like to suggest to the committeesome very fundamental issues which are raised bythese proposals.

Perhaps the most fundamental issue in bank regula-tion is the role of the dual banking system. In cur-rent discussions of bank regulatory policies, the sug-gestion is made that there should be greater uniformity,or at least greater consistency, within the Federal regu-latory structure, and, of course, by the same token,greater uniformity or consistency among the laws,regulations, and policies of the 50 individual States.

The 50 individual States now have broad freedom toadopt banking policies of their own choice in any formthey may select. If meaningful uniformity or consist-ency were to be sought, this freedom would have to becurbed. It would be necessary for the Federal Gov-ernment to assert authority over the entire commercialbanking industry, and to impose uniform policiesthroughout, as the Congress has the power to provide.

If all Federal powers over commercial banks werecentralized, a single Federal agency would gain theauthority to choose between National and State banks

in deciding what new banks to charter, which banksshould be allowed to branch or merge, and in author-izing and regulating holding companies. We do notface this problem today, because, for the most part, noFederal agency has jurisdiction in these matters overboth National and State banks. The likely result ofcentralizing Federal banking powers would, therefore,be a federally imposed and a federally enforced planfor the entire structure of the commercial banking in-dustry of the country.

If Federal powers affecting the lending and invest-ment practices of commercial banks were to be central-ized, a single Federal agency would gain vast author-ity over the volume and the allocation of creditthroughout the economy. This agency would be in aposition to influence critically both the pace and thedirection of the Nation's economic growth and de-velopment. It is difficult to reconcile such centralizedpublic power with the principles of our private enter-prise system.

BEFORE THE HOUSE COMMITTEE ON BANKING ANDCURRENCY, WEDNESDAY, JUNE 30,1965

Mr. Chairman, yesterday I was presented with adocument which challenged 29 actions of our Office.We have no question as to the legal and economicsoundness of these actions. Our Law Department isnow assembling the detailed replies to each item onthat list, and I request that these responses be madepart of the record.

The document reflects a fundamental misunder-standing of the congressionally mandated function ofthis Office vis-a-vis the National Banking System inparticular and the American economic structure ingeneral. The dual banking system was created by amandate of our Congress over a century ago, and theirintention, as I see it, was to provide for Federal regu-lation of national banking in a growing and changingprivate enterprise economy. The National BankingAct is not a merchandise mail-order catalog. It israther, like the Constitution of the United States, aframework under which National Banks may employtheir inventiveness and capacity for change to respondto the needs of our growing industry and commerce,both domestic and international.

The document also assumes that any departure fromthe position of any Comptroller of the Currency since1863, or indeed of any other banking agency, is some-how improper. I would point out that even the courtsof this land, whose appreciation of the value of prec-edent and consistency is probably stronger than thatof any other branch of the Government, do not hesitate

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to change previous positions where the passage of timeand changing circunastances have rendered obsoletetheir prior judicial opinions.

Our primary aim since assuming office has been tomodernize the regulatory structure for National Banksand to carry out effectively the century-old congres-sional intent of a vital dual banking system. Virtuallyall of the subjects contained on the list in question hadnot been examined by any Federal banking authorityfor many years prior to our work on them. Thebusiness of banking, like all other institutions in the20th century, is undergoing rapid and continuouschange. The inevitable responses of our Office musttake place in a flexible statutory and administrativeframework. Obviously, banking cannot survive withvitality under rigid and stagnant regulation, as hadtoo long been the case.

We strongly believe that our administrative, pro-cedural and regulatory determinations, including thoseset forth by the chairman, are not only unquestion-ably well-supported in law but also equally well-founded in the basic philosophy of this country con-cerning the relationship of government to business.We are a private enterprise economy and we placeprimary reliance on individual initiative. Consistentwith this philosophy, governmental limitations are im-posed only where there is clear public purpose to beserved, and those limitations must be strictly inter-preted so as to avoid needless interference with the freediscretion of the individual.

In applying this philosphy to bank regulations, westrongly believe that the presumption should be infavor of freedom of initiative and innovation by theindividual banker. The same policy, it appears to me,is incumbent upon the bank regulatory agencies. Thebank regulatory authorities, State and Federal, asany other regulatory authority, have an affirmativeresponsibility to assure that the regulated industry hasthe tools and the capacity to carry out its role withmaximum effectiveness. Excessive reliance on the"negative crutch" of all-knowing governmentwhether at the State or Federal levelcan lead only tostagnation and regression. Not all the financial know-how of this great country is lodged in the "genius" ofthe financial and monetary regulatory agencies inWashington. Hence, the banking authorities shouldset, as their goal, the broadest reliance upon the initi-ative of the individual banker consistent with the spe-cific proscriptions of the banking statutes.

It is difficult to see how any other policy can servethe consumers of banking services whose critical needsare our ultimate concern in framing public policy and

regulation in this field. Only a vital, competitive,vigorous, innovational commercial banking industrycan advance the interest of the United Statesathome and abroadand the well-being of all of itscitizens.

Clearly, a rigid, stagnant backward-looking regula-tory, administrative, and procedural policy can intime only strangle the commercial banking businessand with it the business community and economy ofthe country.

It is, in my opinion, extraordinary even to suggestthat the test of propriety of administrative or pro-cedural rulings should be a rigid and unchanging con-formance to all rules of the past, however ill-conceivedor narrowly construed they may be in in terms of lawor economic policy. Shall I, as Comptroller of theCurrency, be ever foreclosed from changing any rule,regulation, interpretation or policy of this Office laiddown by Mr. Hugh McCulloch, the first Comptrollerof the Currency who left this Office in 1865, or indeedany of his successors, over the last 100 years?

It seems equally extraordinary to me to suggest thata difference between any ruling or policy of this Officeand a ruling or policy of another agency would, bysome intellectual gymnastic, automatically open therulings of this Office to question. If, as has been thecase for decades, other agencies have not reexaminedtheir own rules, how can such a test be in any sensea reasonable basis for judging any rule of this Office?Should we be inextricably bound to the past when weface a future alive with change, progress andconfidence?

The following are the answers to the 29 allega-tions referred to above.1. Appointment of Additional Deputy Comptrollers of

the CurrencyThe charge of illegal action as listed in the specifica-

tion sheet is the "appointment of seven Deputy Comp-trollers of the Currency" in violation of 12 U.S.C. 4.Section 4 states that "the Secretary of the Treasuryshall appoint no more than four Deputy Comptrollersof the Currency." The fact is that the statute wasstrictly complied with in that the Secretary of theTreasury has not appointed more than four DeputyComptrollers of the Currency.

The Comptroller, pursuant to his general authorityto execute his duties and administer his bureau, ap-pointed three additional administrative aides whom hedesignated Deputy Comptroller for Trusts, DeputyComptroller for Mergers and Branches, and DeputyComptroller for International Banking and Finance,

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respectively. These three assistants to the Comptrollerwere appointed in order to implement an administra-tive reorganization of the Office whereby duties wereassigned by function rather than by geographicalregion. To characterize the granting of these titlesrather than some other title, such as a special assistant,as a violation to 12 U.S.C. 4, is to grossly overemphasizethe effect of this administrative action and to assertform over substance. The three appointments werenot made by the Secretary pursuant to Section 4 andthe salaries of the three employees concerned were notfixed by the Secretary pursuant to Section 4. All threeemployees had previously been employed in the Officeof the Comptroller as attorneys for some time prior totheir assuming their new administrative duties.

2. Access to Shareholder ListsThe Office has not published any ruling or inter-

pretation on the subject of rights of shareholders ofNational Banks to inspect the complete list of share-holders. The subject of such inspection has beentraditionally handled by the courts of general juris-diction in the location at which a bank is situated andthere are a number of court decisions on the point.

This Office, in reply to written inquiries from Na-tional Banks, has advised that it would not intervenein disputes between shareholders and officers and di-rectors over the granting of access to the shareholderlist and that the proper forum for the resolution ofsuch disputes is a court. Accordingly, we haveadvised officers and directors that if the Board ofDirectors is of the opinion that a request to inspect ashareholder list is not made in good faith and for apurpose inimical to the best interests of the bank,that this Office would not object to a refusal by suchBoard of Directors to turn over the list until orderedto do so by a court of competent jurisdiction.

We do not see how the position of the Office, ascommunicated to these inquirers, constitutes any vio-lation of 12 U.S.C. 62, which requires that NationalBanks keep a list of its shareholders "subject to theinspection of all the shareholders and creditors of theassociation."

3. Charitable FoundationsIt is stated in paragraph 7445 of the Comptroller's

Manual that a National Bank may, upon certainstated conditions, establish a charitable foundation toassist in making the charitable contributions permit-ted by paragraph Eighth of 12 U.S.C. 24. This rulingis challenged on the grounds that it is not provided bylaw and that it conflicts with the provisions in para-

graphs Seventh and Eighth of 12 U.S.C. 24. Theseobjections, in light of those provisions of 12 U.S.C.24, appear frivolous.

Congress clearly stated in paragraph Eighth of 12U.S.C. 24 its intention regarding charitable contribu-tions when it authorized National Banks "to contributeto community funds, or to charitable, philanthropic,or benevolent instrumentalities conducive to publicwelfare, such sums as its board of directors may deemexpedient and in the interests of the association, ifit is located in a State the laws of which do notexpressly prohibit State banking institutions fromcontributing to such funds or instrumentalities."Congress, with equal clarity in paragraph Seventh of12 U.S.C. 24, also granted to National Banks "allsuch incidental powers as shall be necessary to carryon the business of banking."

It is entirely reasonable; and consistent with theseclear expressions of Congressional intent to concludethat a National Bank may establish a charitablefoundation to assist in making the charitable contri-butions permitted by paragraph Eighth of 12 U.S.C.24. As is evidenced by their widespread acceptanceand use by businesses generally, charitable founda-tions, either in the form of a charitable trust or non-profit corporation as provided by State law, constitutea most useful and efficient means of implementing abank's program of making contributions. Any asser-tion that such use of a charitable foundation by aNational Bank is prohibited by provisions containedin paragraph Seventh of 12 U.S.C. 24, which prohibitinvestment by a National B:ank in corporate stock incertain circumstances, reflects lack of understandingwith respect to their meaning, purpose, and legislativehistory. These provisions serve only to limit the se-curities in which a National Bank may invest its funds.Similarly, such an assertion reflects a disregard for thejudicial recognition of the authority of National Banksto lawfully carry on certain of their activities eitherdirectly or indirectly, through a subsidiary corpora-tion. As stated, Congress has, in paragraph Eighthof 12 U.S.C. 24, concluded that it is a proper activityfor National Banks to contribute to charitable fundsand instrumentalities. There is no sound basis forconcluding that a National Bank may not lawfullycarry on this activity through a trust or subsidiarycorporation. Acceptance of their use by NationalBanks has been consistently recognized by previousComptrollers, as is evident from paragraph 7220 ofthe Comptroller's Digest of Opinions which predated,and contained language almost identical to that con-tained in paragraph 7445 of the Comptroller's Manual.

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4. Contributions !o Community Development Cor-porations

It Is stated In paragraph 7480 of the Comptroller'sManual that National Banks, as a necessary businessexpense, may make reasonable contributions to localcommunity agencies and groups to further the physical,economical, and social development of their com-munities, and that such contributions may take theform of investment in a corporation organized to carryon such activities. This ruling is challenged on thebasis that it is not provided for by law and that it vio-lates paragraph Seventh of 12 U.S.C. 24, whichrelates to the purchase of corporate stock by a NationalBank. These objections, similar to those made againstthe establishment of a charitable foundation by a Na-tional Bank, are without merit.

Paragraph Eighth of 12 U.S.C. 24 authorizes a Na-tional Bank "to contribute to community funds, or tocharitable, philanthropic, or benevolent instrumental-ities conducive to public welfare, such sums as its boardof directors may deem expedient and in the interestsof the association, if it is located in a State, the lawsof which do not expressly prohibit State banking in-stitutions from contributing to such funds or instru-mentalities." As an application of this authority, itis stated in paragraph 7480 of the Comptroller'sManual that National Banks, as a necessary businessexpense, may make reasonable contributions to localcommunity agencies and groups to further the physical,economic, and social development of their commu-nities. Such contributions may take the form of aninvestment in a corporation organized to carry on suchactivities. The aggregate investment in such corpora-tions may not exceed 2 percent of the bank's capitaland surplus. This ruling not only is an implementa-tion of paragraph Eighth of 12 U.S.C. 24; it is intendedto encourage National Banks to assist, and assume theirproper responsibilities within their communities. Itis a means by which National Banks may play a rolein the President's program of building a truly greatsociety through private initiative and resources.

It is entirely consistent with the clear expression ofCongressional intent contained in paragraph Eight of12 U.S.C. 24, which permits contributions to com-munity funds and instrumentalities conducive to pub-lic welfare, that a National Bank make such contribu-tions in the form of an investment in the stocks or bondsof a corporation organized to carry on such activities.Paragraph Eighth contains no standard or limitationwith respect to the form that such contribution maytake. The Comptroller's Office has, with respect toNational Bank contributions in the form of investments

in the stocks or bonds of a development corporation,recognized that such investments generally do notqualify as "investment securities" within the meaningand requirements of the Investment Securities Regula-tion and has therefore held that all such investments,which do not meet the requirements of that Regula-tion, must be charged off as a business expense and notbe carried as part of the bank's assets.

5. Stock Option PlansIt is stated in paragraph 5015 of the Comptroller's

Manual that a National Bank may provide employeestock option and stock purchase plans in accordancewith applicable regulations of this Office. This rulingis challenged on the grounds that it is not provided forby law nor permitted by previous Comptrollers.

The use of employee stock option plans by corpora-tions was implicitly approved by Congress when itgranted certain tax privileges with respect to such plansin Sections 421 and 422 of the Internal Revenue Code.No reason has been advanced why banks, as distin-guished from other corporations, should not be per-mitted to have such plans.

National Banks have long been handicapped in ob-taining and retaining competent executives becausethey were not permitted to offer stock options as a formof incentive compensation. The obstacle had been aprohibition against the holding of Treasury stock, andthe apparent unwillingness of previous Comptrollersto permit the banks to have authorized but unissuedstock. In order to implement a stock option plan, it isnecessary for a bank to have a supply of shares readyfor issuance under the plan when and as the employeeselect to exercise their options or purchase rights. Ourruling permitting the banks to have authorized butunissued shares removed the only technical obstacle tothe adoption of stock option plans.

In order to control the use of the stock option priv-ilege and see that it is not abused, we have exercisedstrict control. Before any National Bank may put intoeffect an employee stock option or stock purchase plan,it must obtain approval of our Office and the approvalof the holders of two-thirds of its outstanding shares asto all of the provisions of the plan. We require thatthe plan be administered by a disinterested committeeof directors and that the total amount of shares al-located to the plan and the proportionate amountwhich any one employee may be granted are heldwithin reasonable limits.

In our original ruling, we required that all plansqualify for the special tax treatment afforded by Sec-tion 421 of the Internal Revenue Code. Since the

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passage of the recent amendments to the Internal Rev-enue Code, many banks have expressed interest inadopting employee stock option or stock purchase planswhich might not qualify for the special tax treatmentafforded to restricted and qualified plans meeting thedefinitions contained in the Code.

Employees and banks operating under a nonquali-fied plan presumably would be subject to taxation inthe usual manner on transactions entered into pur-suant thereto. This Office perceived no considerationof public policy which should prevent the managementof a National Bank, desiring to adopt a nonqualifiedplan, from doing so on the basis of the same businessand competitive conditions which govern the actionsof business corporations generally in this area.

Accordingly, we recently amended our regulations toeliminate as a prerequisite to the approval of thisOffice, that stock option or purchase plans mustqualify for preferential tax treatment under the In-ternal Revenue Code of 1954, as amended. In placeof the former requirements, a set of general guidelinesfor such plans was adopted.

6. Access to Examination Reports to the FDICThe allegation is made that "for one year beginning

February 1964" the Comptroller of the Currency didnot permit access to examination reports of NationalBanks to the FDIC. The position of this Office hasnever been to deny to the FDIC the access to itsexamination reports required by 12 U.S.C. 1817. Theissue, as has been widely reported and is well known,is whether the Office of the Comptroller, which op-erates entirely on nonappropriated funds, is requiredto grant such access free of charge. There is nothingin 12 U.S.C. 1817 or indeed in any other statute whichprohibits the making of a reasonable charge for copiesof such reports which are prepared at great expense tothis Office. Section 1817 vests the FDIC with theauthorization necessary to becoming privy to con-tents of National Bank examination reports. It is aclearance or authority to have access to examinationreports, to assure that access would not be denied tothe FDIC on the basis of the lack of status required tobecome privy to such information. There is nothingin this provision or in any other law requiring theComptroller of the Currency to furnish the FDICwith copies of National Bank examination reports freeof service charge.

The request by the present Comptroller that reason-able charges be paid for copies of National Bank ex-amination reports is not a novel one. Since 1921, theFederal Reserve System has recognized the equity of

service charges for copies of National Bank examinationreports. In that year, Comptroller of the CurrencyD. R. Crissinger announced that arrangements hadbeen made with the Federal Reserve Board underwhich Federal Reserve Banks would pay for reportsprovided by the Comptroller.

In 1957, Comptroller of the Currency Raymond F.Gidney proposed that both the Federal Deposit Insur-ance Corporation and the Federal Reserve Systemshare with the Comptroller's Office the heavy cost ofNational Bank examination reports.

In 1962, an agreement was reached between theFederal Reserve Board and the Comptroller's Officewhereby the Federal Reserve Banks would pay theComptroller's Office a fee of $100 for each examina-tion report which they wished to retain in their ownfiles. In addition, the agreement provided that theFederal Reserve Board staff in Washington could ob-tain copies of examination reports at no charge. TheFDIC, since its inception in 1933, has declined to payfor copies of examination reports.

In 1962, following the agreement between theFederal Reserve Board and the Comptroller of theCurrency, the Comptroller suggested to the FDICthat the matter of an equitable charge for examina-tion reports be submitted to the Comptroller Generalof the United States for review, with the understand-ing that both banking agencies would abide by theComptroller General's determination. The FDICdeclined to submit the question to arbitration by theComptroller General.

Every one of the eight Comptrollers of the Currencysince 1921 has favored service charges for examinationreports. They have contended that National Banks,through the costs involved in their membership in theFederal Reserve System and the FDIC, were in effecthelping to subsidize the examinations which the Fed-eral Reserve and the FDIC make of state banks atno charge.

In any event the FDIC presently is being givenaccess to the reports. During the period referred toin the specification sheet, physical changes in our filingsetup caused a temporary suspension of the arrange-ments for access. It is our understanding that duringthis period the FDIC received copies of the reportsfrom the Federal Reserve.

7. Purchase and Sale of Federal FundsIt is stated in paragraph 1130 of the Comptroller's

Manual that when a bank purchases "Federal funds"from another bank, the transaction ordinarily takesthe form of a transfer from the seller's account in the

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Federal Reserve Bank to the buyer's account therein,payment to be made by the purchaser, usually witha specified fee. The transaction does not create anobligation subject to the lending limit or a borrowingsubject to 12 U.S.C. 82, but is to be considered a pur-chase and sale of such funds. This ruling is chal-lenged on the grounds that it is contrary to rulingsof previous Comptrollers, and that it is contrary tothe provisions of 12 U.S.C. 82 and 84.

Earlier Comptrollers took the position that, whena National Bank acquired, through "purchase," Fed-eral Reserve funds from another bank, such acquisi-tion taking the form of a transfer of the funds fromthe "seller's" account to the "buyer's" account in theFederal Reserve Bank, with payment to be made bythe "buyer" usually with a specified fee, the transactionwas a loan by the "seller" bank to the "buyer" bank,and the amount of such "loan" could not exceed thestatutory lending limit of the "seller" nor the statutoryborrowing limit of the "buyer."

However, such purchases and sales are in reality,and are so recognized by the banking industry, tradingin an established money market. It is in truth a buy-ing of money for a short-term use. The Comptroller'sOffice has, therefore, held that, consistent with customand practice within the banking industry, transactionsof this nature constitute purchases and sales of fundsunder which no obligations arise that are subject tothe lending limitation of 12 U.S.C. 84. Similarly,such transactions are not subject to 12 U.S.C. 82which imposes borrowing limitations on NationalBanks. To impose these limitations merely becauseprevious Comptrollers viewed these transactions in adifferent light would be to perpetuate a position forits own sake without regard to its legal correctness.In this connection, it is noted that a significant num-ber of State bank supervisors view these transactionsin the same manner as does the Comptroller's Office.8. Corporate Savings Accounts

It is stated in paragraph 7510 of the Comptroller'sManual that a National Bank may accept savings ac-counts without regard to whether the funds are de-posited to the credit of one or more individuals, or of acorporation, association or other organization, whetheroperated for profit or otherwise. This ruling is chal-lenged on the basis that it is contrary to a regulation ofthe Federal Reserve Board although no question hasbeen raised with respect to its being legally correct.

After a thorough and careful study of the 1935statute (12 U.S.C. 461), and its legislative history, aswell as the regulations and opinions of the FederalReserve Board issued both before and since the statute,

the Comptroller's Office concluded that the authorityof the Board of Governors of the Federal Reserve Sys-tem to define the terms "time deposits" and "savingsdeposits" extends only to the terms of the deposit con-tract, such as a description of withdrawal requirementsand interest rate limitations and that there is nothingcontained in the statute that would preclude, or thatwould authorize a Regulation which would preclude,the maintenance of such accounts by any class of de-positors. There is neither legal jurisdiction, nor anyauthority in the Board, to define "savings deposits" bythe character or general purpose of the depositor.

The legal issue is whether or not the Federal ReserveBoard has exceeded its authority by defining time de-posits and savings deposits by the character or generalpurpose of the depositor. The fact that the Comptrol-ler's Office has called attention to this abuse of au-thority is of secondary significance. Of primary im-portance is the fact that the study and analysis of thelegal issues by the Comptroller's Office was promptedby economic considerations and the need for NationalBanks to serve the public in their own service areas.The Comptroller's ruling eliminates two types of dis-crimination: between large and small firms; and be-tween commercial banks and other financial inter-mediaries.

The Federal Reserve Board allows savings depositsto individuals of unlimited means and to nonprofitcorporations, associations, or other organizations pos-sessing vast fortunes while it refuses such "privilege"to a small corporate business enterprise. Banks shouldbe encouraged and enabled to assist these small businessfirms which are ill-equipped to operate in short-termmoney markets. The knowledgeable and sophisti-cated treasurer of the large corporation is not undulyrestricted by this overextension of authority on the partof the Federal Reserve Board. It is the small unso-phisticated corporation which is the real injured partyunder the Board's regulation. The discrimination be-tween commercial banks and other financial intermedi-aries results from the fact that these other financialinstitutions, primarily savings and loan associations,are allowed to accept savings deposits of this type.

Attached is a copy of a detailed memorandum pre-viously prepared by the Comptroller's legal staff withrespect to the authority of the Federal Reserve Boardto prohibit business corporations or any other particu-lar class of depositors from maintaining savingsaccounts.9. Reporting Requirements for International Opera-

tionsThe International Operations Regulation of the

Comptroller (12 CFR 20) sets forth certain reporting253


1964

requirements with respect to the international opera-tions of National Banks.

This Regulation is challenged on the grounds that itamounts to dual regulation contrary to Section 25 ofthe Federal Reserve Act (12 U.S.G. 601) which is saidto vest the Federal Reserve Board with complete au-thority to regulate the foreign operations of all mem-ber banks, including National Banks.

Section 25 of the Federal Reserve Act specificiallyprovides in the sixth paragraph (12 U.S.C. 602) thatevery national banking association operating foreignbranches shall be required to furnish information con-cerning the condition of such branches to the Comp-troller of the Currency upon demand. This languageplus that contained in 12 U.S.C. 161 constitutes com-plete authority for the reporting requirements con-tained in the International Operations Regulation ofthe Comptroller. Furthermore, it (12 U.S.C. 602)constitutes Congressional recognition that the Comp-troller has a continuing responsibility for the operation,regulation and supervision of National Banks althoughsome phases of their operation may also be subject toregulation by the Federal Reserve System.

10. Direct Acquisition of Stock of Foreign BanksIt is stated in paragraph 7525 of the Comptroller's

Manual that a National Bank may acquire and holddirectly and indirectly stock interests in foreign banksas a means of conducting its overseas operations.

This ruling is challenged on the grounds that theEdge Act permits only an indirect equity interest inforeign banks; that it is "contrary to FRB Ruling 1000promulgated unde rthe authority of 12 U.S.C. 601";and that it is contrary to 12 U.S.C. 24 which is said toprohibit corporate stock purchases by National Banks.

The Federal Reserve ruling referred to (1964 FRB,p. 1000) is an interpretation of language contained in12 U.S.C. 24 and of the application of that languageto State member banks pursuant to the provisions ofSection 9 of the Federal Reserve Act (12 U.S.C. 335).Our interpretation of the language contained in 12U.S.C. 24 will be discussed later. It should be noted,however, that the ruling was published, 29 FR 9787,12 CFR 208.112, as a part of Regulation H. Regula-tion H relates to the membership of State banking in-stitutions in the Federal Reserve System and is basedupon and issued pursuant to the provisions of Section 9of the Federal Reserve Act (12 U.S.C. 321 et seq.)and related provisions of law. Section 9 also relates toState banks as members of the Federal Reserve System.The ruling thus purports to apply only to investmentsby State member banks in the stock of foreign banks.

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The corporate powers of National Banks are setforth in 12 U.S.C. 21 and 24 which authorize theformation of an association for carrying on the "busi-ness of banking" which shall have power to exercise"all such incidental powers as shall be necessary tocarry on the business of banking." These are broadpowers which have never been and should not be com-pletely defined. The banking business must meet thefinancial needs of our continually growing society.This was recognized by the House Banking and Cur-rency Committee when it recommended the adoptionof the McFadden Amendments of 1927. The Com-mittee made the following comment with respect toprovisions relating to the holding of stock in a safedeposit corporation and to the investment securitybusiness that had appeared in an earlier bill as newgrants of power:* * * they now appear as a confirmation and regulation ofan existing banking service or business. It is a matter ofcommon knowledge that national banks have been engagedin the investment-securities business and the safe-depositbusiness for a number of years. In this they have proceededunder their incidental corporate powers to conduct the bank-ing business. [The bill] * * * recognizes this situation butdeclares a public policy with reference thereto and therebyregulates these activities. Page 2, H. Report No. 83, 69thCongress.

The claim that 12 U.S.C. 24 prohibits corporatestock purchases by National Banks is based upon thefollowing sentence:Except as hereinafter provided or otherwise permitted bylaw nothing herein contained shall authorize the purchase bythe association for its own account of any shares of stock ofany corporation.This sentence was added in 1933 as a part of the revi-sion and clarification of the Congressional regulation ofthe business of dealing in securities and stock and thepurchase of investment securities by a bank for its ownaccount. The sentence is clearly a disclaimer thatthese related powers constitute authority for a bank topurchase corporate stock as a part of its investmentportfolio. It does not preclude a bank from usingcorporate instrumentalities in carrying on the busi-ness of banking. One of the earliest recognitions ofthis power was the judicial recognition that a bankcould hold real estate necessary for its accommodationin the transaction of its business either directly or in-directly through a corporation. Fourth Nat. Bank v.Stahlman 178 S.W. 942 (Tenn. 1915). This powerwas later recognized and regulated by Congress in 12U.S.C. 371 (d).

Similarly, the Edge Act does not constitute a grantof power to National Banks but rather a plan for


1964

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t hd o f l . si i t\ i i ' i t n**estmentsla ic ip L i ' ' ! r ' t i L t< ' i < xi u cial opera-f nM i )propriateri( a s . f1i ^ i r , 1 ^ 1 i c aerations

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11 D h Reqi revr >sTl ' S ^sare foUlati s 12 C . R 10, 11, 12

and 1^ !=> fv' K\ tKe ( i p t ^ ' l e -.^ fficf' pursuantt > th S ,* -in \iU Vr T hn^4- r 1061 ire ques-t oncJ on ti'f rounds rh ^ t1 cv ar^ r >nt i r y to the.irt ' nt -f C( nr ess is e \p^ e^c1 in the Jaw and do notappir^ h tl * r[ sfV->\iif r d d d1? oiâncd in theFL If i Rose \ e Boaid'^ i ^d Ttd'11 7 Deposit Insur-

] li F v T> ind the F i ' J l p i+t( i nf d t1 eir regu-lnti >* s - cnr c!ose\ on tho3e xS uoJ 'A th(s Securitiesand F \ r ' in ^ oi * , >' i ^ M h ^ Vv ilhaTiis Amend-

ment, giving to t r e banking "ênîes administrationof < c J i i ,1. n iriî > jl tt e E ban A* \ct, as amended,to be tht't * t o inking asfc^cics hoi !d id^pt their ownregul i ( T s I) s( d on ti ^ public m4 itst as determinedin the >n *S of th^ b j n \ ivz indu tn7, while givingdue re? ^c1 t o the spen n reed of sba1 (holders of bank

securities. We have endeavored to do that and tobalance off the considerations of public policy thatsometimes diverge in attempting to maintain depositorconfidence while at the same time keeping investorsinformed. Furthermore the Amendments Act specif-ically states that the existing rules, regulations andorders of the Securities and Exchange Commissionare not to be binding on the banking agencies.

It must be remembered that our Office was thefirst banking agency ever to require the use of annualfinancial reports to shareholders, the first bankingagency ever to require the use of proxy statements,and the first banking agency ever to require reportsof change of ownership control of banks. All theserequirements were imposed by our Office in Decemberof 1962, a year and a half before the Securities ActsAmendments were passed.

Our regulations still require disclosure in a veryimportant area which neither the act nor the otherbanking agencies have touchedthat of the publicsale of securities by new banks and existing banks.We require a full registration statement and offeringcircular to be used by every newly organized or existingbank going to the public for $1 million or more. TheFed. and F.D.I.C. rules do not impose cuch arequirement.

12. Purchase and Operation of Mortgage ServiceCompany

The ruling which recognizes the right of a NationalBank to purchase the stock of a mortgage servicecompany and to operate such company is challengedon the grounds that it is not provided for by law andthat it violates paragraph Seventh of 12 U.S.C, 24,which relates, in part, to the purchase of corporatestock by National Banks. As in the case of otherquestions raised, this challenge as to the legality of thisruling reflects a lack of understanding of the powersgranted and limitations contained in paragraph Sev-enth of 12 U.S.C. 24.

The activities normally carried on by a mortgageservice company have long been recognized as an es-sential part of the business of banking in which a Na-tional Bank may lawfully engage under paragraphSeventh of 12 U.S.C. 24. No one would argue thata bank could not properly service mortgage loans itmakes itself. The servicing of such loans held byothers is a logical and economically sound extension ofsuch activity. As previously stated, neither the pro-visions contained in that paragraph, nor their purposeor legislative history prohibit, or in any way limit, thejudicially recognized right of a National Bank to ex-

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ercise all such powers as are incidental to the businessof banking, including the power to carry on certainactivities which are a part of the business of bankingthrough a subsidiary corporation. It has long beensettled law that for various business considerations, aNational Bank may carry on certain of its bankingactivities such as mortgage servicing either directly orthrough a subsidiary corporation.

13. Ownership and Operation of Travel AgenciesIt is stated in paragraph 7475 of the Comptroller's

Manual that, incident to those powers vested in themunder 12 U.S.C. 24, National Banks may providetravel services for their customers and receive compen-sation for such services. This ruling, as well as theComptroller's ruling relating to the authority of Na-tional Banks to acquire the stock of a travel agencycorporation and operate such a corporation are chal-lenged on the ground that they are not provided by lawand that paragraph Seventh of 12 U.S.G. 24, whichrelates to the purchase of corporate stock by a NationalBank, prohibits the purchase and operation of a travelagency corporation.

As have previous Comptrollers, the present Comp-troller has recognized that National Banks may, as anincident of their banking powers, provide travel serv-ices for their customers and may receive compensationfor these services. Travel services may properly in-clude the issuance of travel credit cards, the sale of tripinsurance and the rental of automobiles as agent for alocal rental service. As a legitimate exercise of theirbanking powers, National Banks may advertise, de-velop and extend such travel services for the purpose ofattracting customers to the bank.

The provision of travel services is the natural andnecessary complement of long standing banking serv-ices such as the issuance of travelers' letters of creditand travelers' checks, the making of loans to finance thecosts of travel, the provision of custody accounts andsafe deposit facilities and the entire range of bankcredits employed in international trade and investment.

As in the case of other activities which are eithera part of the business of banking or incidental thereto,such as mortgage servicing activities, as discussedabove, a National Bank may, consistent with the pro-visions contained in paragraph Seventh of 12 U.S.C.24, and in accordance with applicable judicial prece-dents, engage in such activities either indirectlythrough a subsidiary corporation, the stock of which isowned by the bank, or directly through a departmentwithin the bank.

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14. General Insurance Agency ActivitiesIt is stated in paragraph 7100 of the Comptroller's

Manual that 12 U.S.C. 92 provides that National Banksmay act as agents for any fire, life, or other insurancecompany in any place the population of which does notexceed 5,000 inhabitants. This provision is applicableto any office of a National Bank when the office islocated in a community having a population of lessthan 5,000 even though the principal office of suchbank is located in a community whose population ex-ceeds 5,000. This ruling is challenged on the groundsthat 12 U.S.C. 92 has been removed from the U.S.Code of laws since 1916 and that this ruling is con-trary to rulings of previous Comptrollers.

There is specific statutory authority in 12 U.S.C.92 for a National Bank to act as a general insuranceagent in a community with a population of less than5,000 people. The ruling contained in paragraph 7100is consistent with the clear Congressional intent, evidentat the enactment of the statute. It is realized thatthere is a disagreement among lawyers as to the techni-cal status of 12 U.S.C. 92 as having the force of law.It was for this reason that this provision of law wascited as paragraph II of Section 13 of the Federal Re-serve Act in paragraph 9405 of the Digest of Opinionswhich predated paragraph 7100 of the Comptroller'sManual. In this connection, it is gross error to assertthat this ruling is contrary to rulings of previous Comp-trollers. The Comptroller's Office, along with theother banking agencies and the banking industry gen-erally, has always gone on the assumption that the pro-visions contained inl2U.S.C92 remain as part of thelaw.

15. Insurance Activity Incidental to Banking Trans-actions

It is stated in paragraph 7110 of the Comptroller'sManual that under the powers vested in them under12 U.S.C. 24, National Banks have the authority to actas agent in the issuance of insurance which is incidentalto banking transactions and that commissions receivedtherefrom or service charges imposed therefor may beretained by the bank. This ruling is challenged on thebasis that it is not provided for by law and that it iscontrary to rulings by previous Comptrollers.

A National Bank, wherever located, may, pursuantto its corporate powers contained in paragraphSeventh of 12 U.S.C. 24, participate in insurancetransactions which are incident to banking transac-tions. An example would be a bank selling to a cus-tomer credit life insurance to pay the balance of a loanheld by the bank, in the event of the customer's death.


1964

A National Bank has an insurable interest in anautomobile on the security of which it has extendedcredit to a customer. A bank also has an interest inmaintaining through liability insurance the credit-worthiness of its customer, so long as the loan is out-standing, in order that its ability to collect from thecustomer is not impaired by judgments arising out ofthe negligent operation or use of the automobile. Thebank's interest in the automobile and in the unimpairedcredit-worthiness of the customer, so long as the loanis outstanding, can be protected by making insuranceavailable to the customer. It is unreasonable and en-tirely without justification to expect a bank to gratui-tously supply this service for an insurance companywithout receiving any payment for the necessary ex-penses which the bank incurs through the use of itsemployees and facilities.

Congress has consistently recognized that the busi-ness of banking covers a wide range of activities. Inthe National Bank Act of 1864 Congress wisely refusedto define the business of banking as it then existed,foreseeing that the banking business would changeand develop with the passing years. It is clear thatthe business of banking is advanced by financial andrelated services, and powers necessary to achieve andpromote the fundamental purposes of banking must beregarded as powers incidental to those expresslygranted by paragraph Seventh of 12 U.S.C. 24. More-over, there is no evidence contained in the legislativehistory of 12 U.S.C. 92 that Congress intended to pro-hibit National Banks from acting in the limited capac-ity as agents in the issuance of insurance which is in-cidential to banking transactions. With respect tothe position of previous Comptrollers who approvedof the bank doing the work of an agent so long as itdid not receive any compensation for it, it suffices tosay that the receipt of payment for a service does notin itself make the service performed illegal or ultravires, but it is the character and nature of the serviceitself which determines whether its performance isconsistent with the bank's corporate powers.16. Debt Cancellation

It is stated in paragraph 7495 of the Comptroller'sManual that a National Bank may provide for lossesarising from cancellation of outstanding loans uponthe death of borrowers. This ruling is challengedon the basis that it is not provided for by law.

The Comptroller's Office has, in paragraph 7495,simply recognized that, as a means of protecting itselfagainst losses from its lending transactions, a NationalBank may provide for losses arising from the cancella-tion of outstanding loans upon the death of borrowers.

The imposition of an additional charge, and the estab-lishment of necessary reserves in order to enable thebank to agree to such debt cancellation clauses, area lawful exercise of the powers of a National Bankand necessary to the business of banking. This rulingis founded on paragraph Seventh of 12 U.S.C. 24,which authorizes a National Bank to exercise "all suchincidental powers as shall be necessary to carry on thebusiness of banking; . . . " The execution of loanagreements with debt cancellation clauses pursuant tosection 24 is an exercise of a National Bank's corporatepowers precisely as in the case of its other bankingactivities.

The debt cancellation ruling is not intended as ameans of enabling National Banks to invade the fieldof insurance. Rather, it is a recognition of a NationalBank's right to protect itself against anticipated lossesin connection with its lending activities, through theestablishment and maintenance of appropriate reserves.The necessity to maintain such reserves, and to adjustcharges in relation to the risk involved in a particulartransaction, has long been recognized as an essentialpart of the prudent conduct of the banking business.

It has been contended that a debt cancellationclause is an insurance contract which is subject toregulation by state authorities because cancellation ofthe debt upon the death of the borrower results in abenefit to his estate and satisfaction of the debt isprovided for out of a reserve established by the bank.This contention is without merit. No payment is madeto the borrower's estate. The reserve established bythe bank is for its benefit and sole protection. Thecancellation of the debt on the death of the borroweris in no way dependent upon the size or, indeed, theexistence of a reserve created by the bank.

The establishment of a reserve by a National Bankfor its benefit is obviously not the business of insurance.Whether such reserves have been established and areadequate are, like other banking matters, subject tothe exclusive supervisory authority of the Office ofthe Comptroller. The provisions of 15 U.S.C. 1012are not to the contrary. Although section 1012 vestsin the several states certain authority in connectionwith the business of insurance, Congress did not, bySection 1012, confer on the states any authority overthe banking activities of National Banks. A bankingtransaction by a National Bank does not become thebusiness of insurance subject to the provisions of sec-tion 1012 merely because a state official or legislaturedefines the business of insurance so broadly as toencompass banking transactions as well as the widevariety of insurance which they purport to regulate.

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Documents

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bank failures

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bank initiative wasbeing