Speech

PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES ADDITIONAL STATEMENT OF THOMAS B. McCABE, CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, BEFORE SENATE BANKING AND CURRENCY COMMITTEE, MARCH 17, 1950 Mr. Chairman and Members of the Committee: program. Their attitude at all times has been constructive, not destructive. The testimony which I want to express my very great thanks to the they have given to the Committee and the amend­ members of the Committee for allowing us this ments which they have proposed are ample evi­ opportunity to discuss some of the matters which dence of their constructive approach to the problem. have developed in the course of these hearings. I shall limit my remarks this morning to a As you may know, I have attended all of the discussion of the principal suggestions which were sessions and have listened with much interest to made by the proponents of this legislation. When the various suggestions and criticisms which you I have finished, I shall ask Mr. Townsend, the have received. Needless to say, these have all Board’s Solicitor, if he will briefly discuss the received our very careful attention at the Board objections which have been raised by the repre­ and we are now prepared to make certain con­ sentatives of Transamerica Corporation. crete recommendations in the light of them. As I listened to the various proponents of the I should like to say at the outset that I was bill, I was left with the impression that there particularly impressed, as I hope the Committee are but two or three basic matters which they was, with the fact that only two organizations would have the Committee consider further be­ appeared here in opposition to this bill. On fore determining whether or not to amend the the other hand, as the Committee remembers, you present draft of the bill. The first of these relates have received expressions endorsing the primary to whether or not there should be a preamble to purposes of this legislation from the American the bill similar to that contained in the bill which Bankers Association, the Federal Advisory Coun­ you considered last session. Most of the inde­ cil, the National Association of State Supervisors, pendent organizations were desirous of inserting the Independent Bankers Association of Sauk such a preamble. On the other hand, the repre­ Centre, Minnesota, the Independent Bankers As­ sentative of the American Bankers Association sociation of the Twelfth Federal Reserve District, was opposed to so doing. and from numerous other individuals occupying In my previous testimony I pointed out that important places in the banking world. These the Board had removed the preamble because it organizations collectively represent the cream of had become convinced, as a result of its many American banking thought. Their views are deliberations on the subject, that some of the not only those of big banks but of thousands of language contained therein was so broad as to little banks scattered throughout the country. And draw not only the legitimate and serious objec­ the Committee will remember that, as I testified tions of those within the bank holding company earlier, all of these organizations have had one field and the Reserve City Bankers, but also of or more conferences with members of the Board many other business organizations as well, who and its staff during which S. 2318 was literally were concerned that it might introduce a new picked to pieces. Having in mind their testi­ and potentially harmful concept in the field of mony, I think, it is fair for everyone to believe regulatory legislation generally. In removing the that this legislation has been drafted in the light preamble the Board felt, as it now feels, that the of every possible concept of the public interest. various provisions of the bill are entirely adequate I want publicly to thank the representatives of to insure effective regulation of bank holding all of those organizations, as well as the many companies in the public interest. other individuals, who have given so freely of Another, and I think more substantive, ques­ their time and talents in aiding the Board in this tion which has been raised by various proponents [1] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES of the bill is related to the subject of States’ rights. tions of States’ rights would be removed from I am sure the members of this Committee realize the deliberations of this Committee and the Con­ that this is a subject which very frequently finds gress in dealing with the bank holding company its way into the deliberations of the Congress problem. when considering legislation of all kinds. It is Mr. Brumbaugh made suggestions respecting a subject which certainly received the very careful four sections of the bill. I shall discuss them in attention of the Board in drafting this legislation. order. As I explained in my previous testimony, various In commenting upon Section 3, which relates to provisions were inserted in this bill with the examinations of bank holding companies and the genuine attempt to insure that the powers granted banks controlled by such companies, he suggested to the Board under this bill should contain only that the bill should be amended by requiring the an irreducible minimum of those now vested Board, before it examined any State nonmember exclusively in the States. And the purpose of bank, first to secure the approval of the Federal suggesting that those powers be conferred upon Deposit Insurance Corporation in the case of the Board was in order that the bank holding insured banks or the approval of the State Super­ company problem, which the proponents of the visor in the case of a noninsured bank. As Mr. legislation themselves told you cannot be effec­ Brumbaugh pointed out, I had suggested in my tively dealt with by the various States individually, previous testimony that the Board would have might be brought under integrated and effective no objection to this and, accordingly, an amend­ regulation. ment has been drafted, which I shall hand to you Most of those who raised this question in their in a moment, which incorporates this suggestion. testimony have not offered any concrete sugges­ So far as concerns his suggestion that a provision tions by way of amendment to meet their criticisms. be inserted in this section which would require However, Mr. Brumbaugh, Chairman of the such examinations to be made concurrently with Legislative Committee of the National Association the examinations of the bank by the Federal of Supervisors of State Banks, did offer certain Deposit Insurance Corporation or the State Super­ amendments along this line. These have received visor, the Board feels that an emergency situation the very careful and sympathetic consideration of might arise which would make such a provision the Board. In considering these suggestions the undesirable. Furthermore, the necessity for secur­ Board felt, as it hoped this Committee might feel, ing approval even in emergency cases necessarily that the views expressed on this subject by Mr. implies that the Federal Deposit Insurance Cor­ Brumbaugh probably represent the most practical poration or the State Supervisor might grant such thinking on the question of States’ rights so far approval only upon condition that it be made as this bill is concerned because they reflect the concurrently with their own examination. Be­ views of all of the State Bank Supervisors. After cause of the close relations which exist between all, these officers are the ones whose powers might the various examining authorities, I would not be directly affected by this legislation and who, anticipate the slightest difficulty in obtaining the therefore, would be most likely to express realistic complete cooperation of all concerned in this concern over the question of how far, if at all, S. matter. 2318 derogates from the powers of the States. In his next suggestion Mr. Brumbaugh pointed The Board was pleased in reading Mr. Brum­ out that in Section 4 a State bank which is a baugh’s statement to find that he pointed out that bank holding company might be compelled to the National Association of State Supervisors did conform to the investment standards prescribed not feel—and I quote—“that the bill is as seriously by Federal law for national banks. This he felt deficient in this respect as has been suggested in was an invasion of the power of the States to the past two sessions of this Committee’s hearings.” prescribe the investment standards for State banks. Only as to a very few sections of the bill did Mr. The Board did not feel that this represented any Brumbaugh express any concern on behalf of important segment of the holding company prob­ the State Supervisors. Accordingly, the Board lem or that in actual practice the investment felt that it should make every effort to meet these standards for State banks, generally speaking, are suggestions in the hope that by so doing all ques­ materially different from those of national or [2] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES member banks. However, in order to meet Mr. 13 which would prevent the Board, the Comp­ Brumbaugh’s suggestion, an amendment has been troller, or the Federal Deposit Insurance Corpora­ prepared, and will be offered, under which a tion from allowing any expansion within a bank State bank which is a bank holding company may holding company group if to do so would be in be permitted to invest its funds in any manner contravention of any State law now existing or conformable to State law on the subject. hereafter enacted which places a limitation upon In Section 5 Mr. Brumbaugh suggested that the size of domestic bank holding companies. there be eliminated that provision which would The Board believes that this suggestion is require a State member bank in a holding com­ probably the one most likely to insure the fullest pany system to first obtain the approval of the possible protection against the invasion of States’ Board before establishing a branch within the rights in the bank holding company field. Further­ limits of the city or town in which the head office more, it is one which is in conformity with of such bank is located. The Board did not existing legislation respecting national banks. As agree with Mr. Brumbaugh’s suggestion on this the Committee knows, no national bank may point and for the following reason. establish a branch in any State which prohibits Under existing law national banks must obtain its own banks from establishing branches. This permission to establish branches from the Comp­ principle would now be carried over into the troller; State member banks must obtain consent holding company field. While the Board does of the Federal Reserve Board, except in the case not know of any existing State bank holding where the branch is to be located in the head company regulatory statutes, nevertheless, should office city of such State member bank; and non­ a State hereafter enact such a statute in which member insured banks must obtain the approval it declares the public policy of that State respect­ of the Federal Deposit Insurance Corporation. ing the expansion of bank holding companies One of the fundamental purposes of S. 2318 is domiciled therein, then it would be entirely con­ to provide a single set of standards for the sistent to require that the Federal authorities in guidance of these three agencies in dealing with this field should adhere to such State requirements. the expansion of any bank within a bank holding In recommending the adoption by this Commit­ company group. The Congress can, of course, tee of the amendments thus proposed by Mr. apply these standards to the Federal bank super­ Brumbaugh, the Board felt that every conceivable visory authorities; it cannot apply them to State avenue of objection on the score of alleged violation authorities. Consequently, it was felt that to of States’ rights has been fully and adequately leave any area of possible bank holding company closed. expansion unregulated in this bill would be to One other subject and I will have completed offer a potentially important loophole for bank my statement. I should like once more to advert holding company expansion, which expansion to that important provision of S. 2318 which could be obtained outside the limits of the Con­ would require the divorcement of bank holding gressional standards prescribed for all other banks companies from their nonbanking activities. in a holding company group. The Board is not Gentlemen, I came into my position with the suggesting that State member banks not a part Federal Reserve with no feelings for or against of a bank holding company system should be banks or for or against bank holding companies. required to secure such approval. The suggestion I have no desire to see any business organization is made only in that extremely limited number subjected to penalties which are contrary to our of cases where the State member bank is also a American way of life. But of this fundamental part of a bank holding company system. truth I have become convinced: That the business Mr. Brumbaugh’s final suggestion is one with of banking is a sacred public trust. Only in which the Board has agreed. Incidentally, it is recent times has banking generally emerged as one which was touched upon in one way or a profession; it is now a profession with a public another by some of the other proponents of the trust. The moment you mix private business bill who raised the question of States’ rights. Mr. with banking, and that private business is already Brumbaugh’s suggestion is that a provision be in competition with other businesses, you thereby inserted in the bill as an amendment to Section create the possibilities of favoritism of one business [3] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis PROPOSED LEGISLATION REGARDING BANK HOLDING COMPANIES over another, just Su Soon, in my judgment, Will I am now' i.u ask Mi. Tuwiibcnu Lu Lake the strength of the private enterprise system as up and discuss with you some of the particular we know it become impaired. To me, just on objections which Mr. Stewart has raised in connec­ the face of it, the mixing of vast nonbanking tion with this bill. Before doing so, however, organizations with equally vast banking opera­ I cannot refrain from expressing the deprecation tions is ethically and basically wrong and should I feel over the unfortunate personal references be prevented. I cannot help but believe that those which Mr. Stewart saw fit to make respecting who oppose this separation of banking from non­ Mr. Townsend. I wish to say to this Committee banking affiliations are pursuing a philosophy on behalf of the Board that in whatever duties which cannot but continue the present trend toward Mr. Townsend has assumed on behalf of the the ultimate destruction of the very cause they Board, whether it be in helping prepare bank purport to espouse, namely, a fair field and no holding company legislation, in trying the Board’s favor. Looking backward, I wonder if the busi­ present proceeding against Transamerica Corpora­ ness leaders of yesterday were more often merely tion under the antitrust laws, or in any of the leaders of the opposition than they were statesmen other many responsibilities which he discharges trying to view objectively the problems of their for the Board, he has at all times had the full day. Today none of us would question the wisdom of, or the necessity for, child labor laws, work­ confidence of the Board and has been acting in men’s compensation statutes, and other similar all those respects under the Board’s supervision legislation. The record of opposition to such and pursuant to its express direction. regulation on the part of business leaders of an I should now like to hand to the Committee earlier day, however, is a lesson in history we the various amendments to which I have referred should not quickly nor easily forget. in my statement. ADDITIONAL AMENDMENTS PROPOSED BY CHAIRMAN McCABE TO S. 2318 Amend Section 3 by adding the following new shares or investments which such bank is per­ paragraph: mitted to own under the laws of the State in which such bank is operating; “(d) Notwithstanding any of the provisions of this section no examination shall be made by the Amend Section 13 by changing the period at Board of a State nonmember insured bank pur­ the end of the section to a semicolon and adding suant to this section without the prior consent of the following: the Federal Deposit Insurance Corporation; and no examination of a State nonmember noninsured “and notwithstanding any of the provisions of this bank shall be made pursuant to this section with­ Act no application for the expansion of a bank out the prior consent of the State bank supervisory holding company or any bank in a bank holding authority in the State in which such bank is company group shall be approved by the Federal located.” Reserve Board, the Comptroller of the Currency or the Federal Deposit Insurance Corporation if Amend Section 4(d) by adding the following the effect of such approval will be to expand a clause after the word “Act;” appearing on line 17 bank holding company group in any State beyond of page 9 of the bill: limits permitted under any law of such State now “nor shall the prohibitions of this section apply to existing or hereafter enacted which regulates the a nonmember State bank which is a bank holding size of bank holding company groups or the company if the effect of applying such prohibi­ number of banks in such groups located in any tions is to prevent^ such bank from owning any such State.” 4 [ ] Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Thomas B. McCabe (1950, March 16). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19500317_mccabe

@misc{wtfs_speech_19500317_mccabe,
  author = {Thomas B. McCabe},
  title = {Speech},
  year = {1950},
  month = {Mar},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19500317_mccabe},
  note = {Retrieved via When the Fed Speaks corpus}
}