Speech

PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES STATEMENT OF THOMAS B. McCABE, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, BEFORE SENATE BANKING AND CURRENCY COMMITTEE, MARCH 1, 1950 Mr. Chairman and Members of the Committee: the Chairman of the Federal Deposit Insurance Cor­ I believe I could never forget the bank holding poration or their representatives. As a result of company legislation, because when your Committee these discussions, various changes have been made in the spring of 1948 was considering my nomi­ in the bill so as to take into account and give effect nation as a member of the Federal Reserve Board, to the best and most constructive suggestions re­ one of your chief concerns was with the holding ceived as well as we have been able to appraise company bill then pending in Congress. Some of them. I have never known a bill which had more you will recall that after being questioned at some careful and extended study and consideration by all length I was told to go back and take a sort of a post­ parties who might be interested or affected than graduate course on bank holding company matters has this bill. and to report back to the Committee after my home­ You will recall that the principal purposes of this work was completed. At that time bank holding legislation are (a) to overcome the inadequacies of company legislation had been carefully considered the present law relating to holding company affili­ by this Committee and had been favorably reported; ates, (b) to regulate the expansion of bank holding and, in this connection, I would like to request that companies, (c) to require bank holding companies the report of this Committee with respect to S. 829, to give up their investments in nonbanking com­ the bank holding company bill in the last Con­ panies, and (d) to require bank holding companies gress, be inserted in the record. Your careful study to register, make reports, and submit to exami­ of that bill, together with the fact that the present nation. In other words, the basic objectives of S. bill (S. 2318) is in large part similar to it, would 2318 are the same as those of S. 829 which your almost seem to render unnecessary any compre­ Committee reported favorably in the last Congress. hensive statement on the subject at this time. How­ Although the Senate Calendar was such that it was ever, in view of the many other matters which not possible to act on the bill at that time, you will continuously press upon the members of this Com­ recall that S. 829 had the support of the Federal Ad­ mittee for attention and the fact that there has been visory Council of the Federal Reserve System (a some change in the Committee membership, I am statutory body that is composed of a banker rep­ going to assume that you may not have clearly in resentative from each of the twelve Federal Re­ mind some of the points regarding this legislation, serve Districts and that acts in an advisory capacity and I will proceed to state as briefly as I can the to our Board) and of numerous banking organiza­ more recent developments in connection with the tions, as well as the majority of the major bank proposed legislation and the reasons why the Board holding companies. In its report on the holding feels that its enactment is necessary and important. company legislation pending in the last Congress, Since S. 829 was under consideration by the 80th the Federal Advisory Council pointed out that such Congress, the legislation has undergone further legislation was urgently necessary, and I would like careful consideration by the Board, and over a to submit for the record at this point a letter re­ period of a year and a half we have had numerous ceived in the last few days from the Council, which informal conferences with representatives of a num­ indicates its general approval of the pending bill. ber of groups who are interested. These include The need for the enactment by Congress of ap­ the American Bankers Association, the Reserve City propriate and effective bank holding company legis­ Bankers Association, the National Association of lation has been recognized by the American Bank­ Supervisors of State Banks, the Independent Bank­ ers Association and has been reiterated by the In­ ers Associations, and various bank holding com­ dependent Bankers Associations. Moreover, I am panies. These meetings, in most instances, were advised by the Director of the Bureau of the Budget attended by the Comptroller of the Currency and that the President favors legislation designed to [1] REPRINTED FROM FEDERAL RESERVE BULLETIN FOR MARCH 1950 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES provide for more effective control of bank holding of such acquisition may be to expand the size and companies, although he has not approved any par­ extent of a bank holding company system beyond ticular draft of a bill. limits consistent with adequate and sound banking I should like to emphasize that this bill is not all- and the public interest.” (Sec. 5(d).) I will com­ embracing. It does not provide a death sentence ment further on this change a little later. for bank holding companies; it does not provide Another important provision in connection with for freezing all companies in their present situa­ the consideration of the acquisition of banks or tions; it does not forbid a bank holding company branches is that which requires that the appropri­ to establish offices across State lines; it does not ate Federal supervisory agency notify the bank bring an individual under the restrictions applicable supervisor in the State in which the acquiring bank to bank holding companies; and it does not re­ is located of the proposed transaction so that he quire holding companies to accumulate any greater may submit his views and recommendations on the reserves than does the present law. On the other subject. These must be taken into consideration hand, the bill does require bank holding companies by the Federal agency in acting upon the proposal. to rid themselves, with reasonable exceptions, of (Sec. 5(e).) ^ the ownership of companies not engaged in the The term “bank holding company” in the new banking business; it provides for the regulation of bill includes any company which controls a bank expansion by bank holding companies; and it pro­ operating four or more branches, rather than a bank vides a means of more effective supervision of bank operating merely one or more branches as provided holding companies. The bill is in no sense revo­ in S. 829. We feel that the definition as applied lutionary; it is evolutionary. to a bank with one branch is too inclusive. (Sec. As I have indicated, S. 2318 is very similar to the 2(a).) bill S. 829 in the 80th Congress, but at this point In connection with the authorization to examine I think I should mention some of the principal bank holding companies and their subsidiaries, S. differences between the two: 2318 contains a provision, not in the previous bill, S. 829 included a preamble which contained the authorizing use of the reports of examination made statement that it was the declared policy of Con­ by other supervisory authorities to the extent that gress “generally to maintain competition among the information contained therein is adequate for banks and to minimize the danger inherent in con­ the purposes of the law. (Sec. 3(c).) centration of economic power through centralized S. 2318 also adds a new provision permitting a control of banks.” After listening to the various bank holding company to own up to 5 per cent viewpoints expressed as to the desirability of this of a nonbanking company or to own an investment declaration of policy, it was the Board’s feeling that company which in turn owns not in excess of 5 it might properly be omitted from the bill, and it is per cent of any nonbanking company. We feel not included in S. 2318. Some of the groups with that this provides a reasonable exception to the re­ whom we discussed the matter, notably the Inde­ quirement for the divorcement of nonbanking pendent Bankers groups, felt, and I believe still feel, assets without in any way breaking down the prin­ that it would be desirable to retain a provision of ciple which is involved. (Sec. 4(e).) this kind. Others, however, felt that it was par­ S. 2318 contains a new section specifically pro­ ticularly objectionable and should be omitted. viding that the enactment of the bill “shall not be A related change is that with respect to the pro­ construed as preventing any State, to an extent not visions of the bill which prescribe certain standards inconsistent with this Act, from exercising the same to guide the supervisory agencies in passing upon power and jurisdiction which it now has with re­ acquisitions by holding companies or banks of spect to banks, bank holding companies, and sub­ banks or branches. Included among these stand­ sidiaries thereof.” This is intended to eliminate ards in S. 829 was consideration of “the national any implication that Congress in enacting this legis­ policy against restraint of trade and undue concen­ lation is depriving the States of any power which tration of economic power and in favor of the main­ they have in this field, except where such power tenance of competition in the field of banking.” would be inconsistent with this bill. (Sec. 13.) In S. 2318 the language has been changed to pro­ There are other differences between S. 2318 and vide for consideration of “whether or not the effect the earlier bill, S. 829, but I believe I have described [2] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES the more important of the changes. Now, be­ partnership, or some other organized group. In fore discussing in more detail the proposed legis­ addition to controlling banks, a holding company lation and the inadequacies of the existing law, a may be engaged in other businesses, or in the word concerning the nature of bank holding com­ ownership and control of other businesses, unre­ panies might be helpful. lated to banking. Holding companies may them­ The bank holding company problem is, as you selves be banks, including national banks as well know, not a new one to the Congress. Bank hold­ as State institutions. ing companies had a rapid growth during the 1920’s, In some instances, there are two or more holding most of the major companies being organized in companies controlling the same banks, directly that period. After extensive hearings which began or indirectly. The simplest example of this is in 1930, Congress recognized the need for and where one company owns the controlling stock of undertook to provide for the regulation of bank another company which, in turn, owns control of holding companies. This legislation was a part of a group of banks; but there also are other methods the Banking Act of 1933. However, the inade­ which have been used to establish indirect control. quacy of the law soon became apparent, and there In this connection, it should be mentioned that, were recommendations and proposals for new leg­ without owning any of the stock of the banks, a islation. For example, in a message to Congress company may indirectly, or even directly, control a in 1938, President Roosevelt recommended the group of banks, as in the case of trust arrange­ enactment of legislation to prohibit further ex­ ments, as well as in other situations. pansion of bank holding companies and to require Ordinarily, of course, control is based upon stock their elimination as soon as practicable. In its ownership, but this does not necessarily mean annual report for 1943, the Board pointed out in majority ownership; holding companies can and do some detail the deficiencies in the existing law and exercise a controlling influence over banks through made certain broad recommendations with respect the ownership of lesser amounts of stock. to new legislation. Since then, various bills have The banks controlled by a bank holding com­ been introduced in Congress; and the Board, as well pany may include national banks, State member as others, has continued to urge enactment of effec­ banks and State nonmember banks, whether or not tive legislation on this subject. insured; and the major holding company groups May I say at this point that we do not regard usually include more than one class of banks. bank holding companies as being necessarily un­ Bank holding companies range in size from small desirable; in some instances, they have been help­ organizations to large, nationally known organiza­ ful in providing better management for banks, in tions controlling a large number of banks in numer­ assisting them financially, and in encouraging im­ ous States. Such companies are to be found in proved banking service. Nevertheless, dangerous almost every section of the country. The proposed abuses are possible in the absence of effective regu­ legislation, therefore, deals with a problem nation­ lation. One of these is the unlimited expansion of wide in scope. control over banks. Of like importance is the com­ bining under the same management of large seg­ Inadequacy of Present Law ments of our banking structure with miscellaneous nonbanking businesses. Basically, our view is that A discussion of the major provisions of the pro­ bank holding companies should be regulated in posed legislation will be assisted by some explana­ much the same manner as banks themselves are tion of the present, inadequate law concerning regulated. bank holding companies. A bank holding company is most likely to be As a part of the Banking Act of 1933, Section a State-chartered corporation organized to own a 5144 of the Revised Statutes was amended by add­ majority of the stock of a group of banks and to ing several new paragraphs applying exclusively manage or supervise these banks. However, there to bank holding companies (called “holding com­ is a great variety of factual situations in which, by pany affiliates”) and placing limitations and re­ one method or another, organized groups of per­ strictions upon the right of such companies to vote sons control banks. A holding company is not nec­ the stock which they owned in member banks of essarily a corporation; it may be a business trust, the Federal Reserve System. This section provides 3 [ ] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES that a holding company, before it may vote its permit, but it also fails to reach others because of stock of a member bank, must first obtain a per­ inadequacies in the definition of a “holding com­ mit to do so from the Board. The Board is au­ pany affiliate.” The definition in the existing law thorized in its discretion to grant or deny such embraces only those holding companies which con­ a permit. As a condition to the granting of the trol member banks. This excludes from any regu­ permit, the holding company, on behalf of itself lation those companies which operate in all respects and its controlled banks, is required to agree to as bank holding companies, but which control submit to examinations, to establish a reserve fund, only nonmember banks, even though the latter and to dispose of all interests in securities com­ include insured banks. panies. Another and more important defect is in that Present law is optional. The amendments to Sec­ portion of the definition in the existing law which tion 5144 provided a means for bringing some defines a bank holding company as any company bank holding companies under regulation, but “which owns or controls, directly or indirectly, left others, even though meeting the same defini­ either a majority of the shares of capital stock of tions, free from regulation. This is because the law a member bank or more than 50 per centum of the is based solely upon the voting permit. A holding number of shares voted for the election of direc­ company becomes subject to the law only if a voting tors of any one bank at the preceding election, permit is issued. But there is no mandatory re­ >5 quirement in the law that a holding company The purpose underlying this part of the statute is obtain such a permit. Undoubtedly it was believed to reach those companies which control the man­ that all would do so. Not all have done so, how­ agement and policies of banks, and with this basic ever. This is because in many instances holding premise we are in agreement. However, as pre­ companies, as a practical matter, can control the viously pointed out and as Congress and the courts operations of banks whether or not they vote their have long recognized, effective control of one com­ shares in such banks. pany by another does not depend upon the owner­ Whenever the Board receives an application for ship or control of a majority of the voting shares. a voting permit, it makes a thorough examination Thus, the present law in this respect does not cover of the holding company and its affiliated nonbank- cases where control is exercised through the owner­ ing organizations and reviews reports of exami­ ship of a smaller proportion of the total shares out­ nations of the affiliated banks to determine what standing, or where control is maintained without corrections, if any, are necessary to meet basic the ownership of any shares. standards. If such corrections appear necessary, Similarly, the number of shares owned or con­ they are made a condition to the granting of the trolled, as compared with the number of shares voting permit. In one important case, however, voted for the election of directors at the preceding when advised of the need for such corrections, the election, is an unsatisfactory basis for determining applying company simply abandoned its application whether a holding company relationship exists. for a voting permit. It was able to control its banks Such a restricted test puts it within the power of without voting the shares which it owned in these the holding company to establish an absence of banks, and thus was able to avoid regulation. control when, in fact, it is at the same time exer­ Clearly the law should apply to all bank holding cising most effective control. The case in which companies alike. This cannot be accomplished by regulation is most necessary may very well be the a law which permits a holding company to elect case in which the attempt is made to take advantage not to subject itself to regulation. The law must of a deficient definition to escape regulation. be mandatory to be effective. The present bill pro­ The definition of a bank holding company in vides that all bank holding companies meeting the Section 2(a) of the bill conforms more nearly to prescribed definition shall register and shall be sub­ the practical realities of intercorporate relationships. ject automatically to all of the regulatory pro­ The first part of the definition extends automatic visions of the statute. coverage to all companies which own 15 per cent Present definition of holding company is inadequate. or more of the voting shares of two or more banks, Not only does the present law fail to reach those or of one bank operating four or more branches, or companies which elect not to apply for a voting of one or more other banks in the case of a com­ [4] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES pany which is a bank. However, provision is made Nonbanking Activities of Bank Holding for the exemption of such institutions which would Companies be covered under the definition automatically, if One of the most salutary requirements of the they can demonstrate that they do not exercise a con­ bill is contained in Section 4 and is designed to trolling influence over the management or policies limit the nonbanking activities of bank holding of their subsidiary banks. Subsequent provisions companies. To that end, a holding company would of the definition permit the Board to declare an be required to divest itself of any securities except institution to be a bank holding company even those in companies which are incidental to its though it does not own the 15 per cent of bank banking operations, those which are eligible for stock requisite to automatic coverage under the investment by national banks, or those which repre­ definition, provided the Board finds, after hearing, sent investments of a relatively unsubstantial nature. that it does in fact control the specified number of Such divestment must be accomplished within a banks. This definition we believe is practical, just, period of two years, or within a maximum period and essential in view of the prevailing situations. of five years if additional time should be deemed All institutions similarly situated are affected alike. necessary to avoid undue hardship. Each has a ready procedure for escaping regula­ The reasons underlying this requirement are tion by demonstrating that it does not in fact exert simple. Accepted rules of law confine the business the kind of influence upon banks which requires of banks to banking and prohibit them from en­ that it be subject to regulation. gaging in extraneous business, such as owning and operating industrial and manufacturing concerns. Some question has been raised as to that part of The lender and borrower or potential borrower the definition of “bank holding company” in the should not be dominated or controlled by the same bill which authorizes the Board, after notice and management. As indicated earlier, however, the opportunity for hearing, to determine that an insti­ holding company device has been used to gather tution is a bank holding company even though it under one management enterprises wholly unre­ does not own 15 per cent of the stock of a bank. lated to the conduct of a banking business. I may say that we have studied this point very In keeping with sound banking principles, it carefully and have tried to develop a formula which is necessary that a bank holding company should would constitute a satisfactory definition of the be required by law to divest itself of any substan­ term without giving the Board any discretionary tial interests in nonbanking ventures. The excep­ authority. We have approached this problem sym­ tion in the bill which permits a holding company pathetically but we have been unable to find a defi­ to own not over 5 per cent of the voting securities nition based solely upon an arithmetical formula of another company directly or through the instru­ which would do the job adequately. We have also mentality of an investment company, is not incom­ asked those who had some question about this in patible, we believe, with these principles. If, how­ their minds to suggest a satisfactory substitute for ever, this exception should be used to evade the purposes of the law, the bill provides that the hold­ the present definition but no one has brought for­ ing company may be required to dispose of any ward a suggestion which seemed to us to meet the such securities. situation. The discretionary authority for the de­ Where, pursuant to the requirements of Section termination of a bank holding company is patterned 4, a holding company distributes its nonbanking after similar authority which is contained in the assets, such a transaction is given appropriate tax Public Utility Holding Company Act and which exemption under a provision of the bill prepared has been in operation over a period of some 15 with the assistance of the Treasury tax experts. years. The rights of all parties will be adequately (Sec. 12(f).) protected under the provisions of the bill, since the Board can determine that a company is a bank Bank Holding Company Expansion holding company only after notice and hearing and any action taken by the Board is subject under The problem of how far bank holding company the bill to judicial review. systems should be permitted to expand has long [5] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES been of serious concern. It is in this area that one ment; and the needs of the communities involved. of the greatest potential evils of bank holding com­ As this Committee pointed out in favorably report­ pany operations exist. ing upon this legislation in 1947, these are in gen­ Under existing law, a chartered bank may be eral the considerations now specified in the law as prevented by the regulatory agency to which it is the basis for administrative action in connection subject from expanding its banking offices either with the admission of State banks to membership by the establishment of new branches or by taking in the Federal Reserve System and the granting of over and operating the offices of other banks as deposit insurance coverage. However, under the branches. In order to establish branches, national bill the agency concerned would also have to con­ banks must first obtain permission from the Comp­ sider whether the proposed expansion of a bank troller of the Currency, State member banks from holding company or of any banking subsidiary in the Board, and nonmember insured banks from a bank holding company group would extend the the Federal Deposit Insurance Corporation. But operation of the holding company group beyond a bank holding company is not limited by any such limits consistent with adequate and sound banking requirements. Through the acquisition by the and the public interest. In this connection, I should holding company of the stock of an existing bank point out that this represents a difference in lan­ which thereafter may be operated, for all practical guage from that contained in the bill previously purposes, as a branch of the holding company sys­ acted upon by this Committee. The earlier bill tem, the denial of a branch application of a con­ contained language which was objected to by a trolled bank may become almost meaningless. The number of groups, including nonbanking groups holding company device lends itself readily to the with whom I have met, on the ground that the amassing of vast resources obtained largely from language was so broad as to present serious difficul­ the public, which can be controlled and used by the ties in interpretation. The language which has relatively few who comprise the management of been inserted in the present bill I believe meets the holding company, giving them a decided ad­ these objections without in any way narrowing the vantage in acquiring additional properties and in considerations which the supervisory agency may carrying out a program of expansion. Such power take into account in passing upon questions of hold­ can be used to acquire independent banks by meas­ ing company expansion. Chief among these con­ ures which leave the local management and mi­ siderations, as this Committee pointed out in 1947, nority stockholders little with which to defend is the anti-monopoly principle enunciated in the themselves except their own protests. Sherman and Clayton Acts. Under Section 5 of the bill, this situation would In the discussions which we have had on this bill be remedied by preventing bank acquisitions with­ with the interested groups, the suggestion was out first obtaining the approval of some agency of made, particularly by the State bank supervisors, the Federal Government. Under this section, any that it would be well for the Comptroller, the Fed­ acquisition of the stock or assets of banks by a eral Deposit Insurance Corporation, or the Board, bank holding company would have to be approved in considering any proposal for the acquisition of by the Board. If one of the banks in a holding banks or the establishment of branches under this company group wished to acquire the assets of bill, to consult with the appropriate State bank a bank, the acquiring bank, if a national bank, supervisory authority and get his consent before would have to secure the approval of the Comp­ approving the transaction. We discussed this at troller; if a State member bank, it would have to great length with various groups and among our­ obtain the approval of the Board; if a nonmember selves and with others and we did not feel that bank, it would have to obtain the approval of the it would be practicable to go so far as to give to Federal Deposit Insurance Corporation. the State supervisor what in effect would be a veto Section 5(d) of the bill enumerates the standards in the matter. We have included in the bill a pro­ which would guide the banking agencies in decid­ vision which requires that in any such case the ing whether to approve any such expansion. First, bank supervisor in a State must be notified and they would have to consider the financial history given 30 days in which to submit his views and and condition of the applicant and the banks con­ recommendations. (Sec. 5(e).) As a practical cerned; their prospects; character of their manage­ matter, in emergency cases the State supervisor Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES would, of course, be expected to submit his views uninsured bank. As to national banks, the exam­ very promptly. These must be taken into account ination practice and the relationship between the by the Federal agency in acting upon the matter Comptroller of the Currency and the Board in that and they become a part of the record in the case. regard have been long established under existing The views of the State authorities will thus be fully provisions of the law; this has worked very satis­ considered in each instance and a decision will be factorily and the present provisions of the bill reached only in the light of their recommendations. would not change the effect of existing law. S. 2318, like S. 829 in the last Congress, provides that the Federal Reserve Board shall be the admin­ Other A spects of Proposed Legislation istering agency, because the Board is named as the administering agency in the existing law enacted Under the present law, the only provision which in 1933 relating to holding company affiliates. How­ implies a degree of administrative supervision of ever, we are more concerned in this bill with the bank holding companies relates to such examina­ principles which would be established by it than tions “as shall be necessary to disclose fully the we are with the question of what agency admin­ relations between” the holding company and its isters it. It is our view that, regardless of what controlled banks, and the further provision that, agency is selected for the purpose, only one agency for violation of the statute or of its agreement with should be charged with the responsibility for ad­ the Board prerequisite to its obtaining a voting ministering it. We are unalterably opposed to the permit, such permit of a holding company may be administration of this Act by a board made up of revoked. In that event, certain penalties affecting various supervisory agencies for the obvious rea­ the banks in the holding company system may be sons of efficiency and economy as well as time sav­ applied. When considered in the light of the vol­ ing on the part of the executives of the different untary aspects of the existing law, such provision agencies. Only by naming one agency can there falls far short of providing effective regulation. be effective administration of the legislation and In the first place, the Board’s right to examine a responsibility clearly fixed for the carrying out of holding company is not coupled with the specific the Congressional purpose. power to require corrections. Secondly, the penal­ Section 3(c) of the bill authorizes the Board to ties for violation of the statute or of a holding com­ make such examinations of a holding company and pany’s agreement with the Board are directed prin­ of its subsidiaries, including bank subsidiaries, as cipally at the controlled banks, rather than at the shall be necessary to disclose fully the relations bank holding company. between the holding company and its subsidiaries, The provisions of the present bill, as previously but it also provides that the Board may use reports indicated, would require registration of all bank of examination made by the Comptroller of the holding companies (Sec. 3(a)). A bank holding Currency, the Federal Deposit Insurance Corpora­ company would be required to file periodic reports. tion, or the appropriate State bank supervisory (Sec. 3(b).) It, as each of its subsidiaries, would authority to the extent that the information con­ be subject to examination. (Sec. 3(c).) The more tained therein is adequate. As a matter of prac­ important requirements of the present statute re­ tice, of course, so far as banks are concerned, we garding reserve funds of bank holding companies would expect to rely almost wholly upon reports are included as a part of the bill (Sec. 8). Invest­ of examinations made by these agencies, instead of ments by a subsidiary bank in the capital stock of making the examinations ourselves. Accordingly, its bank holding company would be forbidden and if the Committee should consider it advisable, the loans by such a bank to its holding company or its Board would have no objection to putting a pro­ other subsidiaries would be regulated (Sec. 6(a) vision in the bill which would require that the and 6(c)). The terms of any management or serv­ Board obtain the consent of the Federal Deposit ice contracts between a holding company and its Insurance Corporation before it makes an examina­ bank would be open to surveillance (Sec. 7). Fi­ tion of any nonmember insured bank that is a nally, the Board would be authorized to make such subsidiary of a bank holding company, and the con­ rules, regulations, and orders as might be neces­ sent of the appropriate State supervisory authority sary to enable it to administer and carry out the for an examination of a subsidiary nonmember purposes of the Act. (Sec. 9.) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES With respect to its effective administration, the I ask that these two proposed amendments which bill provides certain sanctions believed to be neces­ I now submit be included in the record.* sary to assure compliance with its provisions. Thus, Before concluding this statement, I would per­ if it is found, after notice and hearing, that a bank sonally like to express my deep appreciation to the holding company has willfully violated the Act or various banking groups and individuals who have any rules, regulations, or orders issued thereunder, given so much of their time and attention to the the holding company may be forbidden to pay the consideration of the various points in connection salary of its officials who participated in the viola­ with this proposed legislation and have united with tion, to receive dividends or management or service us in trying to bring forth a sound and effective bill fees from its subsidiary banks, or to participate in which would meet the views of as many varying any way in the management or control of any sub­ interests as possible. They have all been most help­ sidiary bank (Sec. 11(a)). In addition, the bill ful in the discussions of the matter and in sub­ provides for the criminal prosecution of willful mitting constructive suggestions. We are also most violators (Sec. 11(b)). appreciative of the helpful consideration which we The bill extends a statutory right of judicial re­ have had from the Attorney General’s office, the view to anyone aggrieved by any action of the Bureau of the Budget, and other Government agen­ Board taken under any of the various regulatory cies. We have felt free to call upon any and all provisions of the bill (Sec. 10(d)). This provision of these groups and agencies at any time for their is similar to that contained in comparable legisla­ points of view. Their assistance has been most tion in other fields. generously given and our discussions have been At this time I would like to suggest for the con­ carried on in a most cordial atmosphere. sideration of the Committee two proposed amend­ As I said at the commencement of this statement, ments to the bill which we believe are desirable the bank holding company problem first came for­ changes. These amendments, which are of a tech­ cibly to my attention when I was before this Com­ nical nature and consistent with the general pur­ mittee nearly two years ago. In view of the intense poses of the bill, reflect the results of further con­ interest of this Committee in the subject, I have sultation with interested parties. made an extensive and what I consider a completely Under the first proposed amendment, a bank objective and fresh approach to the problem with­ would not be a “bank holding company” merely out personal prejudice in the subject, and have because it may have a subsidiary trust company reached the conclusion on my own that legislation located in the same city or town. In such a situa­ on this subject is highly desirable from the stand­ tion, the subsidiary stands in much the same posi­ point of the public interest. It is also desirable in tion as a bank’s own trust department. my judgment in order to give the bank holding The second proposed amendment would exclude companies a sort of yardstick by which they can from the definition of “bank,” those organizations which are engaged principally in international or operate, so that they will know what they are law­ foreign banking and in whose shares national banks fully permitted to do and what they may not do. may invest with the Board’s permission. This pro­ The necessity for appropriate legislation in the field posal is merely a clarification of the provision al­ is generally recognized and on behalf of the Board, ready in the bill excluding banks which do not do therefore, I respectfully urge upon your Commit­ business within the United States. tee the desirability of prompt and favorable action. S. 2318, A BILL TO PROVIDE FOR CONTROL AND REGULATION OF BANK HOLDING COMPANIES, AND FOR OTHER PURPOSES Be it enacted by the Senate and House of Repre­ of each of two or more banks or of a company sentatives of the United States of America in Con­ which is a bank holding company by virtue of this gress assembled, That this Act may be cited as the section, or any company which is a bank and which “Bank Holding Company Act of 1949.” directly or indirectly owns, controls, or holds with Sec. 2. Definitions.—(a) “Bank holding com­ power to vote 15 per centum or more of the voting pany” means (1) any company which directly or indirectly owns, controls, or holds with power to vote 15 per centum or more of the voting shares * For full text of proposed amendments, see p. 16. [8] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES shares of one or more other banks, or any company ing, however, any such company which is owned which directly or indirectly owns, controls, or holds by the United States. with power to vote 15 per centum or more of the (d) “Board” means the Board of Governors of voting shares of one bank provided such bank the Federal Reserve System. operates four or more branches, unless the Board as (e) “Subsidiary,” with respect to a specified bank hereinafter provided by order declares such com­ holding company, means (1) any company 15 per pany not to be a bank holding company; (2) any centum or more of whose outstanding voting shares company which the Board determines, after notice (excluding shares owned by the United States or and opportunity for hearing, directly or indirectly, by any company wholly owned by the United exercises (either alone or pursuant to an arrange­ States) is owned or controlled by such bank holding ment or understanding with one or more other company, unless the Board as hereinafter provided persons) such a controlling influence over the man­ by order declares such company not to be a sub­ agement or policies of two or more banks or of sidiary of such bank holding company; or (2) any only one bank if such bank operates four or more company the management and policies of which the branches as to make it necessary or appropriate in Board determines, after notice and opportunity for the public interest or for the protection of investors hearing, are subject to a controlling influence by or depositors that such company be subject to the the specified bank holding company. obligations, duties, and liabilities imposed in this The Board, upon application, shall by order de­ Act upon bank holding companies; and (3) any clare that a company is not a subsidiary company company which is a bank and which the Board of a specified bank holding company under clause determines after notice and opportunity for hear­ (1) above if the Board finds that the management ing, directly or indirectly, exercises (either alone or or policies of the applicant are not subject to a pursuant to an arrangement or understanding with controlling influence, directly or indirectly, by such one or more other persons) such a controlling in­ bank holding company (either alone or pursuant to fluence over the management or policies of one or an arrangement or understanding with one or more more other banks as to make it necessary or appro­ other persons). priate in the public interest or for the protection of (f) For the purposes of this section there shall investors or depositors that such company be sub­ be excluded from consideration all voting shares ject to the obligations, duties, and liabilities imposed of banks acquired or held by mutual savings banks; in this Act upon bank holding companies. also, there shall be excluded from consideration all The Board, upon application, shall by order de­ voting shares of banks or other companies acquired clare that a company is not a bank holding com­ or held by a bank in a fiduciary capacity; except pany under clause (1) above if the Board finds that where such voting shares are acquired or held for the applicant does not, either alone or pursuant to the benefit of all or a majority of the persons bene­ an arrangement or understanding with one or more ficially interested in such bank or except where the other persons, exercise such a controlling influence Board, after notice and opportunity for hearing over the management or policies of the stated finds that such acquisition or holding is resulting in number of banks as to make it necessary or appro­ the violation or evasion of any of the purposes or priate in the public interest or for the protection of provisions of this Act. investors or depositors that such company be subject Sec. 3. Registration, Reports, and Examina­ to the obligations, duties, and liabilities imposed in tions.—(a) Within ninety days after the effective this Act upon bank holding companies. date of this Act, or within ninety days after be­ (b) “Bank” means any national bank, or any coming a bank holding company, whichever is later, State bank, banking association, savings bank, or every bank holding company shall register with the trust company, but shall not include any organiza­ Board on forms prescribed by the Board, which tion which does not receive deposits nor conducts a shall include, with such other information as the trust business within the United States. “State mem­ Board may require, statements showing (1) its ber bank” means any State bank which is a mem­ financial condition at the end of its fiscal year last ber of the Federal Reserve System. “District bank” preceding the date of registration, including therein means any State bank organized or operating under the amount of its accumulated net income at such the Code of Law for the District of Columbia. (c) “Company” means any bank, corporation, time; (2) name and address of each of the bank partnership, joint-stock company, business trust, holding company’s subsidiary banks and address of voting trust, association, or any similar organized each branch of each such bank; (3) name and ad­ group of persons, whether incorporated or not, or dress of each other bank of which the bank holding any receiver, trustee, or other liquidating agent of company or its subsidiaries own shares; (4) num­ any of the foregoing in his capacity as such; exclud­ ber of shares of each class of stock of each bank [9] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES owned by the bank holding company or its sub­ year at a time if, in its judgment, such an exten­ sidiaries; (5) information concerning the manner sion would not be detrimental to the public inter­ in which such shares are owned; (6) name, address, est. However, nothing herein provided shall be and nature of business of each of the bank holding construed to authorize the Board to extend any such company’s subsidiaries, other than banks, and the period beyond a date five years after the enactment manner in wrhich the relationship arises; and (7) hereof. such information as the Board may deem necessary (b) The prohibitions in this section shall not or appropriate. apply to shares or other securities or obligations The Board may, in its discretion, extend the owned or acquired by a bank holding company in time within which a bank holding company shall any company engaged solely in holding and operat­ register and file the requisite statement. ing property in which the bank premises are located, (b) Each bank holding company shall furnish or engaged solely in conducting a safe-deposit busi­ to the Board from time to time such reports as ness, or engaged solely in the business of furnish­ may be required by the Board and in such form ing managerial, auditing, supervisory, purchasing, and detail as the Board may prescribe. Such reports and other similar sefvices to such bank holding shall contain such information concerning the bank company and its subsidiaries, or solely in the busi­ holding company and its subsidiaries as the Board ness of liquidating assets acquired from such bank shall deem necessary to disclose fully the relations holding company and its subsidiaries, or in any among such companies, the effect of such relations other company all the activities of which the Board upon the affairs of the subsidiary banks, and has determined are so closely related to the business whether the provisions of this Act have been com­ of managing, operating, or controlling banks as to plied with. be a proper incident thereto. (c) Each bank holding company and each sub­ (c) Nor shall the prohibitions in this section sidiary thereof shall be subject to such examina­ apply to shares or securities or obligations acquired tions by examiners selected or approved by the by a bank holding company from any of its subsidi­ Board as shall be necessary to disclose fully the aries which have been requested to dispose of such relations between such bank holding company and voting shares, securities, or obligations by any Fed­ its subsidiaries, the effect of such relations upon the eral or State authority having statutory power to affairs of the subsidiary banks, and whether the examine such subsidiaries or which have been provisions of this Act or of the Board’s orders, rules, acquired from such subsidiaries with the prior or regulations have been complied with; and the approval of the Board; but such bank holding com­ examiner making such an examination shall have pany shall dispose of such shares, securities, or obli­ power to administer oaths and to examine any of gations within a reasonable time. If, while such the officers, directors, employees, and agents of such bank holding company owns or controls such bank holding company or subsidiary under oath. shares, securities, or obligations, the Board, after The expenses of any such examination may, in the notice and opportunity for hearing, determines that discretion of the Board, be assessed against the bank the ownership or control of such shares, securities, holding company and, when so assessed, shall be or obligations is resulting in the violation or eva­ paid by such bank holding company. To the extent sion of any of the purposes or provisions of this that the information contained therein is adequate Act, it may by order require such bank holding for the purposes of this section the Board is author­ company to dispose of all or any part thereof forth­ ized to use the reports of examination made by the with. Comptroller of the Currency, the Federal Deposit (d) Nor shall the prohibitions of this section Insurance Corporation, or the appropriate State apply to shares or other securities or obligations bank supervisory authority. which are held or acquired by a bank, which is Sec. 4. Interests in Nonbanking Organiza­ a bank holding company, in a fiduciary capacity or tions.—(a) Except as otherwise provided in this which are otherwise lawfully owned by such bank Act, it shall be unlawful for any bank holding or any of its wholly owned subsidiaries on the effec­ company, after two years after the effective date tive date of this Act; nor as to any bank holding hereof, to own any shares or other securities or obli­ company shall the prohibitions in this section apply gations of any company other than a bank or to to investment securities of the kinds and amounts engage in any business other than that of banking eligible for investment by national banks under or managing or controlling subsidiary banks. The the provisions of section 5136 of the Revised Stat­ Board is authorized, upon application by a bank utes. If, while such bank or bank holding company holding company, to extend this period from time owns or controls such shares, securities, or other to time as to such company for not more than one obligations, the Board, after notice and opportunity [ 10] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES for hearing, determines that the ownership or con­ (c) No plan, undertaking, or agreement by or trol of such shares, securities, or obligations is result­ on behalf of a banking subsidiary of a bank hold­ ing in the violation or evasion of any of the pur­ ing company to acquire all or substantially all of poses or provisions of this Act, it may by order the assets of any bank shall be consummated, effec­ require such bank or bank holding company to tuated, or completed except with the prior approval dispose of all or any part thereof forthwith. of (1) the Comptroller of the Currency if the (e) Nor shall the prohibitions of this section acquiring bank is a national bank or district bank; apply to the ownership by a bank holding company or (2) the Board if the acquiring bank is a State of shares or other securities or obligations of any member bank, or (3) the Federal Deposit Insur­ company which do not include more than 5 per ance Corporation in the case of any other acquir­ centum of the outstanding voting securities of such ing bank. Nor shall any State member bank (not company, and do not have a value greater than 5 including a district bank) which is a subsidiary per centum of the value of the total assets of the of a bank holding company, establish any branch bank holding company, as determined under regu­ within the limits of the city, town, or village in lations prescribed by the Board; nor shall they which the head office of such bank is located apply to the ownership by a bank holding company, except with the prior approval of the Board. in excess of such limitations, of shares or other (d) In determining whether to approve any securities or obligations of an investment company acquisition subject to paragraphs (a), (b), or (c) which is not engaged in any business other than of this section consideration shall be given to the investing in securities if the bank holding company financial history and condition of the applicant and all such investment companies (in which the and the banks concerned; their prospects; the bank holding company has investments in excess character of their management, the convenience, of such limitations) do not together own shares or needs, and welfare of the communities and the other securities or obligations of any one other com­ area concerned; and whether or not the effect of pany which are in excess of the foregoing limita­ such acquisition may be to expand the size and tions. If, while such bank holding company owns extent of a bank holding company system beyond or controls such shares, securities, or obligations, limits consistent with adequate and sound bank­ the Board, after notice and opportunity for hearing, ing and the public interest. The factors stated in determines that the ownership or control of such this section shall likewise be considered by the shares, securities, or obligations is resulting in the Board, the Comptroller of the Currency, or the violation or evasion of any of the purposes or pro­ Federal Deposit Insurance Corporation in deter­ visions of this Act, it may by order require such mining whether to approve an application of any bank holding company to dispose of all or any part bank, which is a part of a bank holding company thereof forthwith. system, to establish a branch or branches of such Sec. 5. A cquisitions of Bank Shares or Bank bank. A ssets.—(a) No plan, undertaking, or agreement (e) Before determining whether to approve any by or on behalf of any company which would result acquisition or application pursuant to this section, in that company becoming a bank holding com­ the Comptroller of the Currency, the Federal De­ pany, as defined in section 2 (a) (1) of this Act, posit Insurance Corporation, or the Board, as the and no plan, undertaking, or agreement by or on case may be, shall notify the bank supervisory au­ behalf of any bank holding company to acquire thority in the State in which the acquiring or apply­ either directly or indirectly any voting shares of ing bank is located and shall afford such State bank­ a bank, shall be consummated, effectuated, or com­ ing authority a period of thirty days within which pleted except with the prior approval of the Board: to submit a written statement of his views and Provided, however, That nothing herein contained recommendations as to whether such acquisition or shall be construed to apply to the acquisition by a application should be approved. Such statement bank holding company of any additional voting and recommendation shall be taken into considera­ shares of a bank in any case where such bank hold­ tion by the Comptroller of the Currency, the Federal ing company, prior to such acquisition, owned a Deposit Insurance Corporation, or the Board, as majority of the voting shares thereof. the case may be, in determining whether to ap­ (b) No plan, undertaking, or agreement by or prove any acquisition or application pursuant to on behalf of any bank holding company or any this section, and such statement and recommenda­ of its nonbanking subsidiaries to acquire all or tion shall be made a part of the record upon which substantially all of the assets of any bank shall be such acquisition or application is approved or re­ consummated, effectuated, or completed except with jected. the prior approval of the Board. Sec. 6. Borrowing by Bank Holding Com­ [11] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES pany or Its Subsidiaries.—(a) No bank shall invest to (1) any company of the types described in any of its funds in the capital stock of (1) a bank section 4 (b) of this Act, or (2) any company whose holding company of which it is a subsidiary, or (2) subsidiary status has arisen out of a bona fide debt a subsidiary of such bank holding company. to the bank contracted prior to the date of the crea­ (b) No bank shall accept the capital stock of tion of such status, or (3) any company whose (1) a bank holding company of which it is a sub­ subsidiary status exists by reason of the ownership sidiary, or (2) a subsidiary of such bank holding or control of voting shares thereof by the bank as company as collateral security for advances made executor, administrator, trustee, receiver, agent, or to any person, partnership, association, or corpora­ depositary, or in any other fiduciary capacity, ex­ tion: Provided, however, That any bank may, with cept where such shares are held for the benefit of the prior approval of the Board, accept such capital all or a majority of the stockholders of such bank. stock as a security for debts previously contracted. Sec. 7. Service Fees or Benefits.—The Board (c) No bank shall (1) make any loan or any is authorized, if in its opinion such action is neces­ extension of credit to, or purchase securities under sary or appropriate for the protection of depositors repurchase agreement from, (a) a bank holding or investors and after appropriate notice and oppor­ company of which it is a subsidiary, or (b) a sub­ tunity for hearing, to determine the reasonableness sidiary of such bank holding company; or (2) of any service, management, or similar charge or invest any of its funds in the bonds, debentures, fee or benefit obtained by a bank holding company or other such obligations of any such bank holding or any of its subsidiaries from a subsidiary bank company or subsidiary; or (3) accept the bonds, of such bank holding company, and to order that debentures, or other such obligations of any such all or any part of such charges or fees or benefits bank holding company or subsidiary as collateral which it finds to be unreasonable shall be discon­ security for loans or advances made to any person, tinued. It shall be unlawful for such bank holding partnership, association, or corporation, if, in the company or any of its subsidiaries thereafter to case of all such bank holding companies and sub­ assess or obtain any such charge or fee or benefit sidiaries, the aggregate amount of such loans, exten­ in contravention of the Board’s order. sions of credit, repurchase agreements, investments, Sec. 8. Reserve Fund.—After the effective date and advances against such collateral security will of this Act, every corporate bank holding company exceed 20 per centum of the capital stock and sur­ shall use all its net earnings over and above 6 per plus of such bank. Non-interest-bearing deposits to centum per annum of the book value of its own the credit of a bank shall not be deemed to be a shares to accumulate a fund, and every noncorporate loan or advance to the bank of deposit, nor shall the bank holding company shall accumulate a fund in giving of immediate credit to a bank upon uncol­ accordance with the terms prescribed by the Board, lected items received in the ordinary course of in an amount equal to at least 12 per centum of the business be deemed to be a loan or advance to the aggregate par value of all bank shares owned by it. depositing bank. Within the foregoing limitations, Such fund shall consist of readily marketable assets, each loan or extension of credit of any kind or char­ other than bank stocks, and shall be identified in an acter to such bank holding company or subsidiary appropriate manner and kept free and clear of any shall be secured by collateral in the form of stocks, lien, pledge, or hypothecation of any kind or bonds, debentures, or other such obligations having nature. Such assets may be used by the bank hold­ a market value at the time of making the loan or ing company to replace capital of its subsidiary extension of credit of at least 20 per centum more banks and to eliminate losses and depreciation from than the amount of the loan or extension of credit, the assets of such banks, and, with the prior ap­ or of at least 10 per centum more than the amount proval of the Board, to increase the capital or sur­ of the loan or extension of credit if it is secured by plus of its subsidiary banks, but, except as per­ obligations of any State or of any political subdivi­ mitted by the Board, shall not be used by the bank sion or agency thereof: Provided, That no margin holding company for any other purpose, and any of collateral shall be required when such loan or deficiency in such assets resulting from such use extension of credit is secured by obligations of the shall be replaced in the same manner as above pro­ United States Government, the Federal intermediate vided. credit banks, the Federal land banks, the Federal Sec. 9. Regulations.—The Board shall have the home-loan banks, or the Home Owners’ Loan Cor­ authority to make and issue such rules, regulations, poration, or by such notes, drafts, bills of exchange, and orders, not inconsistent with the provisions of or bankers’ acceptances as are eligible for redis­ this Act, as may be necessary to enable it to admin­ count or for purchase by Federal Reserve banks. ister and carry out the purposes of this Act and (d) The provisions of this section shall not apply prevent evasions thereof and it shall likewise have [12] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES authority to amend, modify, or rescind any such documentary or otherwise, required of him may rules, regulations, or orders so made or issued. All tend to incriminate him or subject him to penalty powers and functions of the Board prescribed by or forfeiture; but no individual shall be prosecuted this Act, other than the issuance, amendment, modi­ or subject to any penalty or forfeiture for or on fication, or rescission of rules, regulations, and account of any transaction, matter, or thing concern­ orders and the determination of matters of gen­ ing which he is compelled to testify or produce evi­ eral policy, may be performed through such mem­ dence, documentary or otherwise, after having bers of the Board or such officers and employees claimed his privilege against self-incrimination, ex­ thereof or such Federal Reserve banks or officers or cept that such individual so testifying shall not be employees thereof as the Board may deem advisable exempt from prosecution and punishment for per­ in order to facilitate the administration of this Act. jury committed in so testifying. Any person who Sec. 10. Hearings, Investigations, and Court without just cause shall fail or refuse to attend and Review of Orders.—(a) In addition to the hearings testify or to answer any lawful inquiry or to produce authorized in this Act, the Board also shall have books, records, or other papers in obedience to the authority to make such investigations as may be subpena of the Board, if in his or its power so to necessary to determine whether any proceeding do, shall be guilty of a misdemeanor and upon con­ under this Act should be instituted against a par­ viction shall be subject to a fine of not more than ticular person or persons, or with respect to a $1,000 or to imprisonment for a term of not more particular transaction or transactions; and the Board than one year, or both. shall keep appropriate records of all hearings and (d) Any person or party aggrieved by any final investigations. action of the Board under this Act may obtain a (b) For the purpose of any hearing or investi­ review of such order in the circuit court of appeals gation under this Act, any member of the Board, or of the United States within any circuit wherein any officer thereof designated by it, is empowered such person resides or has his principal place of to administer oaths and affirmations, subpena wit­ business, or in the United States Court of Appeals nesses, compel their attendance, take evidence, and for the District of Columbia, by filing in such require the production of any books, records, or court, within sixty days after the entry of such other papers which are relevant or material to order, a written petition praying that the order of the inquiry. Such attendance of witnesses and the the Board be modified or set aside in whole or in production of any such papers may be required part. A copy of such petition shall be forthwith from any place in any State or in any Territory or served upon any member of the Board or upon the other place subject to the jurisdiction of the United Board’s secretary at its offices in the City of Wash­ States at any designated place where such a hear­ ington, and thereupon the Board shall certify and ing is being held or investigation is being made. file in the court a transcript of the record upon (c) In case of refusal to obey a subpena issued which the order complained of was entered. Upon to, or contumacy by, any person, the Board may the filing of such transcript such court shall have invoke the aid of any court of the United States exclusive jurisdiction to affirm, modify, or set aside within the jurisdiction of which such hearing or such order in whole or in part. No objection to investigation is carried on, or where such person the order of the Board shall be considered by the resides or carries on business, in requiring the at­ court unless such objection shall have been urged tendance and testimony of witnesses and the pro­ before the Board or unless there were reasonable duction of books, records, or other papers. And grounds for failure so to do. The finding of the such court may issue an order requiring such person Board as to the facts, if supported by substantial to appear before the Board or member or officer evidence, shall be conclusive. If application is made designated by the Board, there to produce records, to the court for leave to adduce additional evidence, if so ordered, or to give testimony touching the and it is shown to the satisfaction of the court that matter under investigation or in question; and any such additional evidence is material and that there failure to obey such order of the court may be pun­ are reasonable grounds for failure to adduce such ished by such court as a contempt thereof. All evidence in the proceeding before the Board, the process in any such case may be served in the court may order such additional evidence to be judicial district whereof such person is an inhabit­ taken before the Board and to be adduced upon the ant or wherever he may be found. No person shall hearing in such manner and upon such terms and be excused from attending and testifying or from conditions as to the court may seem proper. The producing books, records, or other papers in obedi­ Board may modify its findings as to the facts by ence to a subpena issued under the authority of this reason of the additional evidence so taken, and it Act on the ground that the testimony or evidence, shall file with the court such modified or new find­ [13] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES ings, which, if supported by substantial evidence, lows the colon and by inserting in lieu thereot the shall be conclusive, and its recommendation, if any, following: “Provided, That whenever any member for the modification or setting aside of the original banks within the same Federal Reserve district are order. The judgment and decree of the court affirm­ subsidiaries of the same bank holding company ing, modifying, or setting aside, in whole or in part, within the meaning of the Bank Holding Company any such order of the Board shall be final, subject Act of 1949, participation in any such nomination to review by the Supreme Court of the United States or election by such member banks, including such upon certiorari or certification as provided in bank holding company if it is also a member bank, section 1254 of title 28, United States Code. The shall be confined to one of such banks, which may commencement of proceedings to review an order be designated for the purpose by such bank hold­ of the Board issued under this Act shall not oper­ ing company.” ate as a stay of the Board’s order unless the court (b) (1) The eighteenth paragraph of section 9 otherwise orders. of the Federal Reserve Act is amended by striking Sec. 11. Penalties.—(a) If, after notice and out the last sentence of such paragraph. opportunity for hearing, the Board finds that a (2) The twenty-first paragraph of section 9 of bank holding company has willfully violated any the Federal Reserve Act is repealed. of the provisions of this Act, or of any rules, regu­ (c) Subsection (c) of section 2 of the Banking lations, or orders of the Board issued pursuant Act of 1933, as amended, is repealed. thereto, or has knowingly permitted or assented (d) Section 5144 of the Revised Statutes, as to or participated in any such violation by any sub­ amended, is amended to read as follows: sidiary, the Board may issue an order, effective for “Sec. 5144. In all elections of directors, each such period as may be fixed by the order and con­ shareholder shall have the right to vote the number taining any one or more of the following prohibi­ of shares owned by him for as many persons as tions: (i) That such bank holding company shall there are directors to be elected, or to cumulate not pay any salary or other remuneration to any such shares and give one candidate as many votes officer or director of the company found by the as the number of directors multiplied by the num­ Board to have willfully participated in such viola­ ber of his shares shall equal, or to distribute them tion or violations and who was made a party to on the same principle among as many candidates as such hearing by the Board; (ii) that no subsidiary he shall think fit; and in deciding all other ques­ bank of such bank holding company shall pay divi­ tions at meetings of shareholders, each shareholder dends on shares owned by such bank holding com­ shall be entitled to one vote on each share of stock pany or pay or become liable to pay to such bank held by him; except that (1) this shall not be con­ holding company or any of its subsidiaries any serv­ strued as limiting the voting rights of holders of ice, management, or similar charges or fees, or ren­ preferred stock under the terms and provisions of der any specified benefit; and (iii) that such bank articles of association, or amendments thereto, holding company shall not directly or indirectly adopted pursuant to the provisions of section 302 vote the shares owned by it or otherwise participate (a) of the Emergency Banking and Bank Con­ in the management or control of any subsidiary servation Act, approved March 9, 1933, as amended; bank. (2) in the election of directors, shares of its own (b) Any person who willfully violates any pro­stock held by a national bank as sole trustee, vision of this Act or any rule, regulation, or order whether registered in its own name as such trustee issued by the Board pursuant thereto shall upon or in the name of its nominee, shall not be voted conviction be fined not more than $10,000 or im­ by the registered owner unless under the terms of prisoned not more than two years, or both. Every the trust the manner in which such shares shall officer, director, agent, and employee of a bank be voted may be determined by a donor or bene­ holding company shall be subject to the same pen­ ficiary of the trust and unless such donor or bene­ alties for false entries in any book, report, or state­ ficiary actually directs how such shares shall be ment of such bank holding company as are appli­ voted; and (3) shares of its own stock held by a cable to officers, directors, agents, and employees of national bank and one or more persons as trustees member banks for false entries in any books, may be voted by such other person or persons, as reports, or statements of member banks under sec­ trustees, in the same manner as if he or they were tion 1005 of title 18, United States Code. the sole trustee. Shareholders may vote by proxies Sec. 12. Technical Amendments.—(a) The last duly authorized in writing; but no officer, clerk, sentence of the sixteenth paragraph of section 4 of teller, or bookkeeper of such bank shall act as the Federal Reserve Act, as amended, is amended proxy; and no shareholder whose liability is past by striking out all of the language therein which fol­ due and unpaid shall be allowed to vote. When­ [ 14] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES ever shares of stock cannot be voted by reason of suant to an order of the Board of Governors being held by the bank as sole trustee, such shares of the Federal Reserve System authorizing, ap­ shall be excluded in determining whether matters proving or directing such exchange as effectuat­ voted upon by the shareholders were adopted by ing the policy of the Bank Holding Company the requisite percentage of shares.” Act of 1949, transfers property not permitted (e) The second paragraph of section 5211 of the to be owned by a bank holding company under Revised Statutes is amended by striking out the the provisions of section 4 of such Act, to a second sentence of such paragraph. corporation organized to receive such property (f) (1) Subsection (d) of section 26 of the solely in exchange for all of the stock of such Internal Revenue Code, as amended, is amended to transferee corporation and such stock is dis­ read as follows: tributed forthwith in a distribution subject to “(d) Bank Holding Companies.—In the case the provisions of subparagraph (A). of a bank holding company (as defined in the Bank “(C) Application of subparagraphs (A) and Holding Company Act of 1949), the amount of (B).—The provisions of subparagraphs (A) the earnings or profits which the Board of Gov­ and (B) of this paragraph shall not apply unless ernors of the Federal Reserve System certifies to the Board of Governors of the Federal Reserve the Commissioner has been devoted by such com­ System shall certify that such distribution or pany during the taxable year to the acquisition of exchange was of property not permitted to be readily marketable assets in compliance with section owned under the provisions of section 4 of the 8 of the Bank Holding Company Act of 1949. The Bank Holding Company Act of 1949 and was aggregate of the credits allowable under this sub­ necessary or appropriate to effectuate the pro­ section for all taxable years shall not exceed the visions of such Act. In such certification, the amount required to be devoted under such section Board of Governors of the Federal Reserve 8 to such purposes, and the amount of the credit System shall specify and itemize the stock, se­ for any taxable year shall not exceed the adjusted curities or other property so distributed or net income for such year.” exchanged.” (2) Subdivision (3) of subsection (b) of section 27 of the Internal Revenue Code, as amended, is (4) Section 113 (a) of the Internal Revenue Code amended to read as follows: is amended by inserting at the end thereof the “(3) The bank holding company credit provided following: in section 26 (d).” “(23) Property acquired in distribution pur­ (3) Section 112 (b) of the Internal Revenue Code is amended by inserting at the end thereof suant to bank holding company act of 1949.— the following: “(a) If property other than stock or secu­ rities is acquired in a distribution subject to “(11) Distributions and exchanges pursu­ the provisions of section 112 (b) (11), then the ant TO BANK HOLDING COMPANY ACT OF 1949.— basis of such property shall be the same as it “(A) Distributions.—In the case of a distri­ would be in the hands of the company dis­ bution of property not permitted to be owned tributing such property; and an amount equal by a bank holding company under the provi­ to the adjusted basis which such property had sions of section 4 of the Bank Holding Com­ in the hands of such distributing company at pany Act of 1949, held by a bank holding the time of such distribution shall be applied company on the date of enactment of such against and reduce the adjusted basis of the Act or thereafter legally acquired pursuant to stock in respect of which the distribution was such Act, made pursuant to an order of the made, and if in excess of such basis, such excess Board of Governors of the Federal Reserve shall be taxable in the same manner as a gain System authorizing, approving or directing from the sale or exchange of property. such distribution as effectuating the policy of “(b) If stock or securities is acquired in a the Bank Holding Company Act of 1949, to distribution subject to the provisions of section a shareholder in such bank holding company 112 (b) (11), then the basis in the case of the as defined in such Act, without the surrender stock in respect of which the distribution was by such shareholder of stock or securities in made shall be apportioned, under regulations such company, no gain to the distributee shall prescribed by the Commissioner with the ap­ be recognized. proval of the Secretary, between such stock and “(B) Exchanges.—No gain or loss shall be the stock or securities acquired in such dis­ recognized if a bank holding company, pur­ tribution. [15] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES “(c) Where stock or securities and property company affiliate, as defined in the Banking Act other than stock or securities are acquired in of 1933” to read “or any bank holding company, a distribution subject to the provisions of sec­ as defined in the Bank Holding Company Act of tion 112 (b) (11), subparagraph (a) of this 1949, or any banking subsidiary or any other sub­ paragraph shall be applied before subpara- sidiary thereof which is exempt from section 4 by graph (b). reason of the provisions of subsection (b) thereof as “(d) If stock is acquired by a bank holding defined in said Act.” company in an exchange subject to the pro­ (h) Subsection (b) of section 2 of the Banking visions of section 112 (b) (11) (B), then the Act of 1933, as amended, is amended by adding the basis of such stock shall be the same as in the following paragraphs: case of the property exchanged; and when, in “(4) which owns or controls, directly or in­ a distribution subject to the provisions of sec­ directly, either a majority of the shares of cap­ tion 112 (b) (11) (A), such stock is acquired ital stock of a member bank or more than 50 per by a distributee of such company, then the basis centum of the number of shares voted for the shall be determined as though the stock were election of directors of any one bank at the pre­ property other than stock or securities. ceding election, or controls in any manner the “(e) If property is acquired by a corporation election of a majority of the directors of any one in a transfer from a bank holding company bank; or subject to the provisions of section 112 (b) “(5) for the benefit of whose shareholders or (11) (B), then the basis of such property shall members all or substantially all of the capital stock be the same as it would be in the hands of such of a member bank is held by trustees.” bank holding company.” Sec. 13. Reservation of Rights to States.—The (g) (1) Paragraph 4 of subsection (c) of section 3 enactment by Congress of the Bank Holding Com­ of the Investment Company Act of 1940 is amended pany Act of 1949 shall not be construed as pre­ to read as follows: venting any State, to an extent not inconsistent with “(4) Any bank holding company which is regis­ this Act, from exercising the same power and juris­ tered with the Board of Governors of the Federal diction which it now has with respect to banks, Reserve System pursuant to the Bank Holding Com­ bank holding companies and subsidiaries thereof. pany Act of 1949, or any banking subsidiary or Sec. 14. Separability of Provisions.—If any pro­ any other subsidiary thereof which is exempt from vision of this Act, or the application of such pro­ section 4 by reason of the provisions of subsection vision to any person or circumstance, shall be held (b) thereof as defined in said Act.” invalid, the remainder of the Act, and the applica­ (2) Paragraph (11) of subsection (a) of section tion of such provision to persons or circumstances 202 of the Investment Advisers Act of 1940 is other than those to which it is held invalid, shall amended by changing the words “or any holding not be affected thereby. AMENDMENTS PROPOSED BY CHAIRMAN McCABE TO S. 2318 I. Amend subsection (a) of section 2 by inserting not substantially engaged in commercial banking between the first and second paragraphs thereof a business, and operates no branches outside of such new paragraph reading as follows: municipality.” “Notwithstanding the foregoing, no company II. Amend the first sentence of subsection (b) of shall be a bank holding company by reason of the section 2 to read as follows: fact that one bank (or stockholders of such bank “ ‘Bank’ means any national bank, or any State or trustees for their benefit) owns, controls, or holds bank, banking association, savings bank, or trust voting shares, or exercises a controlling influence over the management or policies, of one other bank, company, but shall not include any organization if the principal offices of both banks are located in operating under section 25 or 25(a) of the Federal the same municipality and one of them is a trust Reserve Act or any organization which does not do company principally engaged in trust business, is business within the United States.” [ 16] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Thomas B. McCabe (1950, February 28). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19500301_mccabe

@misc{wtfs_speech_19500301_mccabe,
  author = {Thomas B. McCabe},
  title = {Speech},
  year = {1950},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19500301_mccabe},
  note = {Retrieved via When the Fed Speaks corpus}
}