Explanation of proposed financial institutions act of 1976


Material Information

Explanation of proposed financial institutions act of 1976
Physical Description:
ii, 8 p. : ; 24 cm.
United States -- Congress. -- House. -- Committee on Banking, Currency and Housing
U.S. Govt. Print. Off.
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Publication Date:


Subjects / Keywords:
Financial institutions -- United States   ( lcsh )
federal government publication   ( marcgt )
non-fiction   ( marcgt )


General Note:
At head of title: Committee print.
Statement of Responsibility:
Committee on Banking, Currency, and Housing, House of Representatives, 94th Congress, second session.

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Source Institution:
University of Florida
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All applicable rights reserved by the source institution and holding location.
Resource Identifier:
aleph - 029280692
oclc - 02694754
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Full Text







94th Congress, Second Session

~~~A//l/a ,'


Prite fr heus ofth Cmmtte n Bnkng Crrnc an usn
The epot hs nt ben oficall adpte bythe ommtte onBaning
Cureny nd ouin ad my otthrefreneessriy efectth vew
of is mebers

66-1 4 O- 7


HENRY S. REUSS, Wisconsin, Chairman

WILLIAM A. BARRETT, Pennsylvania
TIIOMAS M. REES, California
STEPttEN L. NEAL, North Carolina
Li-:S AiCOIN. Oregon
PAUL E. TSONGAS, Massachusetts
BUTLER DERRICK, South Carolina
)A\VID) W. EVANS, Indiana

ALBERT W. JOHNSON, Pennsylvania
STEWART B. McKINNEY, Connecticut
RICHARD T. SCHULZE, Pennsylvania
HENRY J. HYDE, Illinois


Tie February 1976 (Nolo mittee Print, containing the proposed
Fiiancal Institutions Act of 1976. relies heavily on the report of the
Comnnsilon on Money and Credit of 1961. the Hunt Commission of
1971 tlhe Adim inistrat ions proposed inancial Institutions Act of
19715 S. 1267, passed by the Sent by a 71-14 vote on December 11
1975. and on staff sti(lies coi missioned by the House Committee on
Bankin., Currency and IHousing. The bill' reflects testimony and com-
nment on the FINE study (Financial Institutions and the Nation"s
Economy) (h sjO~l principle of Novemper. 175. Whenever possible,
the bill s language 10lo-ws that of S. 126;.

The bill addresses the present system of overlappince. confusing and
sometimes conflicting jurisdictiojns and policies in bank regulation,
by creating the Federal Banking Commission, which will assume the
bank charitering. branching. examination, supervision, regulation. and
holding company functions which are now in the hands of the Comp-
troller of the Currency and the Federal Reserve Board. In approving
national bank chartering and branching, the FBC will strive to im-
prove competition and prevent any undue concentration of banking
resources which woud tend to reduce competition.
The FBC will consist of five members, devoted to the public interest,
with stairfgered five year terms, appointed by the President and con-
firmed by the, Senate. One of the five members shall be selected from
the membership of the Federal Reserve Board and shall serve on
both the FBC and the Federal Reserve Board. None of its members
need be members of any political party. and no more than three may
belong to the same political party. The Federal Banking Coin-
mission will obtain its funding throu-0h the normal Congressional
appropriation process. The fees it will charge banks for examinations
will revert to the gTeneral rev-enues.
The Federal Bankino- Coimnission is given increased authority to
act quickly on mergers, without the 30-da waiting period, in the case
of a, failing bank, as recommended by the Federal Reserve System
in April, 1975; and to prevent dishonest or negligent banking, as by
assesig civil penalties for certain violations of the banking acts. by
streamlinin,- procedures for the removal of bank officers, directors.
and employees. bv broadening the power of the regulator to regulate
the inon-bankin- activities of bank holding companies, by broadening
the enforcemelnt powers of the Federal Deposit Insurance Corpora-
tion. all as recommended by the Federal Reserve Board, the FDIC,
and the Comptroller in September. 1975.


The FDIC will be retained in its present form as an insuring agency,
;-, rI(t)elIInded by tle outgfoifg (lairnian FIank Wille. The Conlp-
troller wiII be removed as one of its three members, which hereafter
shall be by presidential alointment, confirmed by the Senate, with the
saiie qualificatioins of devotion to the public interest as obtains for
FDIC members and with the same 6-year terms as FDIC members
under present law, It is envisaged that the FDIC will act as an inde-
l)elident umpire between the state and the national banking systems.
The FI)1(' will examine state-chartered insured banks itself until it
determines that a particular state bank regulatory agency is capable of
ad~tefquate exanatioii. iN whic case the FDIC shall delegate its initial
examining role to such state agency. The FDIC will obtain its funding
tlhroi igh the normal Congressional appropriation process, and the fees
it will charge for exallinations will revert to the general revenues.
Federal bank regulation, under the bill, would thus be centered in
tle FB( and the FI)I('. In deference to (11:4t111, federal ,mutual sav-
ings anl loau jurisdiction would be centered( in the FIILBB and fie
FSLIC federal credit union jurisdiction in NCUA. NCUA will no
ll0i., I 1iea lted byv a iiifle A(l111iiitr ato3. but will be 1eplace(l by a
)oa 1d of t liree members, (devoted to the public interest, with staggered
1X-yeaP 1(.I*li. -N1one of its nem be,'s need be menibers of any polit' al
P1a t y, anv' d no more thani two may belong to the same l)olitical party.
The FtILBB would )e increased in size to five members, devoted to
the l)ulic interest. None of its members need be members of any politi-
cal pairtv. and no more than three av belong to the same political
party. The FIJLBB would obtain its funding through the normal
('onession al appropriation Ircess, and the fees it will charge mutual
savings banks and savings and loan associations for examinations will
r-evert to general revenues.

0, /trt oii T;me andl 8aD18lcpwoits
a. 7,i (u dq.-Tbe b)ill adopts the formula of S. 1267 with respect
to term1iiiat ihlg the Regulation Q interest rate ceilings on time and sav-
ings deposits. Five and one half years after enactment, which could
)e n Ir,)xIIIatelv JanI'rI 1 1t 9\2. 1 )irig this period. the (i'oordinat-
1n (-'ormiinititee (thle lw\l v-created Federal uBaking Commission, the
tcl, 1 )1 l(e Lmoan Blank Board. the I ederal Reserve Board, and the
I 1( i t) :u11iiiiiister te ceili(. so as to give time small saver a
efal,;Iae o ( fret 111,11. a(1 to prevenIt u(lue (lisitermediation both
I (e1 wc+ mi ii ic Va vin s +let) i v I ist it ut iow-. amI away from t he deposi-
l \ -i il ill ions. The ( '()rdinat io ( omiit tee is to report to C(ongress
-'I\IIP1It1i- PI'iur t I lhe trIiuili ion dte its recoiiieiidaoiis an1d finil1-
jI-] Ii Ih Ifec If tcmIimma In In tIhe econmic en (11v IromeIInt thenl
ntspt e(I a lp ut continue Regula-
I in ~~ t i, V-owould eI'v( the Ipuldwlc nteret.
I/ (// ;l. ...........T e hill allows 1aYmit of a 1 of 1 percent
I)IrII.hI1II ilil I v'a1 e oiI tinge and savings (0el)osits to various deposi-
0,r\ ill it Ill l()is1 IjI l h 'li(,s to niailiim i s1lIsta trial portion of their
ii ~i' r~lent ui I lii_- ;1a )s ( not imlchl dil1(Z construction loans). In
,)rJ(hto t I ii'- j'Iltt, : saviin!s amid loan association or inn-
na 1s~avingrs h ,uk ,:11 111,-11 a :,t leas 7o l)ev('ent (f all new assets it

obtains after April 1. 1977, in residential mortgages. and niaintai, a
ratio of residential mortgages (not including const ruction lans) to
total assets no less than the ratio it had on December 31. 1975, or 70
percent. whichever is lower. A commercial bank. which under existing
Regulation Q is not eligible to pay the higher rate, will be permitted to
do so if it has total assets of under $25 million. has at least 35 percent
of all new assets (roughly 70 percent of new time and savings ac-
counts). it obtains after April 1, 1977, in residential mortgages, and
maintains a ratio of residential mortgages (not incluiincr construc-
tion loans) to total assets no less than the ratio it had on December 31,
1975. The purpose of all this is to help all housing-oriented institutions
in a manner generally equitable as between classes of institutions. The
agency meinbers of the Coordinating Conmfittee shall promulgate ap-
propriate and timely regulations concerning the implementation of
this provision.
c. Reports.-The bill provides that the Coordinating Comnittee re-
port annually to the Congress on its justification for the- maximum
allowable rates fo interest (e.g. why they were not set higher) which
is set for the previous year as well as its recommendation whether the
differential permitted during the previous year should be changed up
or down.
2. Interest on TMid Paty Payment Accounts
The bill removes the current statutory prohibition against the pay-
ment of interest on third party payment accounts, as of January 1,
1978. After this date all financial institutions will be permitted to pay
interest on third party payment accounts up to a maximum rate which
will be determined by the Coordinating Conmittee. The Coordinating
Committee will have to justify in an ainmal report to the Banking
Committees of the House and Senate the interest rate it has .set. It is
expected that, the Committee will, in increasing the permissible inter-
est rate from its present zero. take into account general economic Con-
ditions. the interest of the consumer, and the impact this will have on
the financial institutions affected.
3. Disclosur e
To insure that borrowers and depositors receive sufficient inforima-
tion to make sound judgments regarding banks. the Federal Banking
Commission is directed to promulgate regulations within six months of
the bill's effective date, requiring appropriate disclosure from all banks
and bank holding companies. The Commission nav not impose new re-
porting burdens which are disproportionate to the usefulness of the
information to be obtained.
4. Reset're Re~u irem en s
The power to grant checking accounts by federal credit unions, say-
ings and loan associations. and mutual saving-s banks entails the obli-
gation of reserve requirements for such accounts. The bill provides
that, since these financial institutions will now be in a position to
compete equally for third party payment accounts, they should be
treated alike on reserve requirements. At the same time, the present
law, which allows state banks which choose to escape Federal Reserve
reserve requirements to do so, should be amended. Consequently. the
Federal Reserve Board is directed to set reserve requirements, to )e
maintained at a Federal Reserve Bank or in vault cash, for all institu-

tions with more than $15 million in third party payment deposits. For
all these additional institutions thus subjected for the first time to
reserve requirements, the Board is directed to phase-in the reserve re-
quirements over a five-year period. The bill directs the Federal Reserve
to conduct a study, and to report its recommendations to the Congress
by December 31, 1977 of the desirability of the Federal Reserve's pay-
ir interest on required reserves on both time deposits and third party
payment accounts (with special emphasis on time deposits), together
with findings on how much of the resulting loss of federal revenues
could be recouped by the Fed's charging financial institutions for the
service functions it performs for them.
5. Mutual Savings Banks
The bill permits de novo chartering, and conversion of state-
chartered mutual savings banks to a federal charter, upon approval
by the Federal Home Loan Bank Board. Upon conversion to a federal
charter, a particular state-chartered mutual savings bank may con-
tinue all activities carried on by it as of December 31, 1975. In issuing
federal charters, the Board is instructed to give primary consideration
to the best practices of thrift institutions and the needs of the families,
consumers and commune ties to be served. Federal mutual savings banks
are given expanded powers-to accept demand deposits; to engage in
expanded consumer lending, including credit cards and revolving lines
of credit; to invest in commercial paper, corporate debt, and bankers'
acceptances; and to engage in traditional trust department activities,
including acting as trustee, executor, administrator, registrar of secu-
rities, guardian, and similar activities, upon a finding by the Federal
Home Loan Bank Board that the institution has adequate financial
and managerial resources and future prospects.
C. Savings and Loan Associations
The bill gives federal savings and loan associations the demand
deposit, lending, and investment powers authorized by S. 1267-
checkin" accounts; consumer, development, construction, commercial
real estate, and education loans; investments in corporate debt secu-
rities. colme cial paper, bank deposits, and bankers' acceptances; and
trust. department activities, including acting as trustee, executor, ad-
1l'1sl ratl.Itor. registrar of seeirities, guardian, and similar activities,
uploii a finding 1 tel Federal 1HTome Loan Bank Board that the insti-
tiltion has adequate financial managerial resources and future

S. 1267 provides that these expanded powers are available only to
a federal savings and loan association with 70 percent of its loan port-
foil() I i This bill coitains no similar proyisioii, iII the belief
tht lii1s limitilIi the explanded powers provision would be self-
(eI eat ing. Instead. this bill permits :a federal savings anl loan sso-
cimlion to invest in excess of 30 percent of its assets in other than
r(sIdeIntal jortgagc loans, but if it does so it will not be permitted to
pay the interest prei umn (usually 141 of 1 percent) on time and sav-
ingsdelpsits. permitted those institutions which remain priinarily
housing-o lentedi.
7. C/red i UTins
Credit, unlionls are grt"Iii ed a substantial expansion of their powers,
as proposed in the Credit I Jion Finaneial Institutions Bill of 1975

and in S. 1267, passed by the Senate in December, 1975-the ability to
offer checking accounts; to issue share certificates with varying divi-
dend rates and maturities; to make secured and unsecured loans over
longer terms and in higher amounts than currently permitted; to offer
owner-occupied, residential home mortgage loans (in value not more
than 150 percent of the median value of homes in the area); and to
engage in trust activities upon approval by the NCUA on the same
terms as federal mutual savings banks and savings and loan associ-
ations. A central discount fund to deal with emergency liquidity
problems of credit unions is established.
III. HousiNG
The bill offers two major means of ensuring an adequate flow of
funds for housing. An adequate flow of funds for housing is particu-
larly needed since the housing-oriented thrift institutions are author-
ized by the bill to diversify their loan portfolios, which taken by itself
could mean a dilution of their present housing portfolios.
1. First, as described under II., the bill shapes the interest rate dif-
ferential of Regulation Q so as to permit depository institutions to pay
a higher interest rate on savings and time deposits only to the extent
that they maintain a principal orientation toward residential
2. Because this permission to pay a differential will not of itself
be sufficient to ensure an adequate supply of funds to residential mort-
gage markets in times of disintermediation and tight money, a second
provision of the bill creates a new program. In order to provide funds
for housing construction during periods of housing credit shortage,
the bill authorizes the Federal Home Loan Bank Board to expand its
current system of five-year "advances" to savings and loans to a sys-
tem of long-term (up to 30-year) loans to commercial banks, mutual
savings banks, credit unions and savings and loans, provided the funds
are relent to borrowers for non-luxury housing (not more than 150
percent of the median value of the ownership or rental unit). In pe-
riods of tight money, FHLBB would borrow directly in the market, or
by using the Federal Financing Bank. The Treasury, or the Federal
Financing Bank, would have the power to determine the maturity of
their borrowing in the market, but they would have to comply with
the FHLBB's request that the borrowing be made. It is hoped that
insurance companies and pension funds would be active purchasers of
this debt, thus making their long-term funds available for housing
which now has to depend too much on short-term sources of credit.
In turn, the Board would make these funds available to financial
institutions at cost, plus a charge calculated to cover its administrative
costs. The institutions, in turn, would charge their mortgage borrowers
an interest rate that would reflect the institutions' costs.
A reasonable portion of these funds would be available for con-
struction loans.
Regulations would assure that the benefits of moderate interest
rates would pass through to rentors and to the ultimate purchaser in
a construction loan situation.
The advances would be repaid to FHLBB by the financial institu-
tion as the residential mortgage loan was amortized; if the loan were

sold prior to maturity, the financial institution would be obligated to
repay the FHLBB in full.
This provision of the bill aims to ensure that when funds for resi-
dential mortgage loans are otherwise insufficiently available, FHLBB
will cause such funds to be borrowed in the market, (thus "crowding
out" credit demands deemed less meritorious). The funds thus ob-
tained would then be relent by the FHLBB to financial institutions
for non-luxury residential mortgage loans. The program would be op-
erated without cost to the taxpayer, other than that caused by the
additional demand on the credit market.
The mortgage interest tax credit, suggested by the Adininistration's
Fi ancial Institutions Act of 1975, would cost taxpayers an estimated
S$00 million annually, with no assurance that it would appreciably
increase the flow of housing credit. It is believed that the two induce-
ments to housing finance here suggested will be both more effective,
and less costly to the taxpayer.
The FBC is required, with 90 days of January 1, 1977, the effective
date of this bill, to file with both Houses of Congress its then existing
list of permissible bank holding company activities.
Any new permissible activity approved by the Commission would
have to be filed within 30 days of promulgation by the FBC and
would be subject to veto by resolution of either House of Congress
within 90 days.
The existing powers of banking regulatory agencies to regulate
transactions between bank holding companies and banks and their sub-
sidiaries and affiliates are conferred on the FBC and extended to cover
i transaction with other closely related business entities such as real
statee investment trusts.
The FBC is au1thorized to promulgate regulations to assure against
lu)lllliC (onfusion as to the names and separate identities of subsidiaries
:uidl related affiliates (including advisory relationships such as with
1. kallst ate investment trusts) of bank holding companies. These regu-
1:ttion i would take effect no later than January 1, 1978, except that
th(r FBC aiiuy oranit exenl)tions for an additional two years
A bank hol(ling coiiipany is prohibited from acquiring ownership
or (cntrol of the shares of a savings an( loan associat ion.

The bill makes a number of changes in the present structure of the
Federal Re serve $sten-chaniges not merely for the sake of change.
W1 t 11 pm 11,,it the Fcderal Reserve to focus its energies on the shaping
,,f ,,o il IW 1)li Wy.
T!, b~ill retains lpresentf length of terms for the mem1i1l)ers of the
le V,! IraBI i'd, 1;11 of Govermrs, afld the size of the Board. The
dates of the four-year term of the Chairman of the Board is changed
-o tIhat it coinides, witli a six-month lag, with the term of the U.S.
S,'esmit :, J i ~1 ) ('ha i mman Arthur Burns. The Chair-
uan's appointmelit will h)e niade 1)y the President, subject to con-
firmat ion by the SenateS. terms expire. the 12 presidents of

the regional banks of the Federal Reserve System, because of their
importance as regional rotating members of the Federal Open Market
Committee, will also be nominated by the President and confirmed
by the Senate.
The requirement of ownership of Federal Reserve stock by member
banks will be abolished since "member" bank status is abolished. Re-
serve requiirenents are imposed on all institutions similarly situated.
All institutions that are required to meet reserve requirements would
have direct. full and equitable access. under appropriate regulations,
to Federal Reserve services, including the discount window and wire
tarnsfer system. Those banks which presently own stock in the F ederal
Reserve banks may either retain this stock, or voluntarily obtain re-
payment by the Federal Reserve.
The Boards of Directors of the regional Federal Reserve banks will
be increased in size from 9 to 12 members. Tlhey will be nominated by
their regional President, and elected by the Board of GoveIlors in
W ashington. -ix of the lnelnbers will be representative of the Iinan-
cial institutions which inaintain reserves with the Federal IReserve.
with due consideration to the diversity of t fee financial institltioniz.
their size. and their geographical distribution withlin the Federal ]o-
serve i'eo'ion. The other six members will be selected from the iviliain-
der of the public, must be reasonable representative of the popuba-
tion characteristics of the Federal Reserve district, and must offer
fair representation to business, farmino, labor., education, and
The bill requires the Federal Reserve Board to pursue )olicies-
maximum production, employment and purchasing" power (whicl
neans anti-inflationary price stability)-consistent with the policy ob-
jectives of the Employment Act of 1946. It also makes permanent the
provisions of House Concurrent Resolution 113 of March, 1975, which
requires the Federal Reserve Board to consult with the (onriessiona]
Banking Committees at quarterly hearings on the monetary goals
which the Federal Reserve Board intends to pursue in the next twelve
This provision is intended to establish a national policy on foreign
banks entering and operating in the United States, and a system of
supervision and regulation of these operations by the Federal Bankin(-"
Commission. It follows closely the 1975 recommendations of the Fed-
eral Reserve Board. It is intended to give foreign banks the same op-
portunities to conduct domestic banking in the United States that are
available to domestic banks, and to subject them to similar supervi-
sion and regulation.
The bill requires that all banking branches and agencies of forei n
banks established in the United States be chartered by the Federal
Banking Commission. Federal charters would also be available to sb-
sidiaries of foreign banks. For these subsidiaries. one third of tle di-
rectors of a foreign bank can be non-citizens of the United St"'te.
Foreign banks would also be permitted to establish Edge Act corpora-
tions under the same conditions as apply to such corporations estab-
lished by U.S. banks. Before such approval is granted, however. tle
Federal Banking Commission would be required to consult with the

Treasury Departmeiit and the Secretary of State, and to make a deter-
minition that approval of the application would not adversely affect
the domestic or foreign commerce of the United States.
TIQ ,)rincipal distinctions between the bill and the Federal Reserve
Board's proposal are three:
1. The Fed's proposal mandates compulsory Fed membership for
foreign banks a requirement not visited on U.S. banks. The bill on
the principle of non-discrimination, rejects compulsory membership.
2. The Fed's proposal requires insurance by the FDJC on the de-
posits of a domestic branch, agency, or a subsidiary of a foreign bank.
Ihe bal. instead. requires that foreign banks maintain a surety deposit
with the FDIC. in an amount sufficient to give coverage like that given
by FDIC insurance.
,. The Fed's proposal grandfathers the existing ownership of secu-
rt ies underwriting and non-banking companies, and the multi-state
b.nk)0 operation of foreign banks. The bill, instead, provi(les that
i i. o,'ti,,li iis, hot permittedI do estic banks, niust be phased out
wit 1iii live years of the bill's effective date.

The bill 'lives the Federal Banking Commission authority to regu-
late the mierntional operations of United States banks and bank
tmldij)a" conipanies"1-
1. It requires a bank to seek the approval of the Commission before
it can )art1 icipate in international operations through branches, sub-
sidiries, aflihates and joint ventures. Before granting such approval,
tho ( 1oniissiun iiust mlale an affirllative (lecision that the proposed
foreign undertaking by the U.S. bank will not endanger the applicant's
capital or, directly or indirectly, unduly lessen competition in the
United States, or tend to create a monopoly in the United States.
2. It permits U.S. banks to carry out international banking opera-
lions. c'omlparable to operations undertaken in foreign branches,
l1idrough separate (lepartinents in the home office of the bank, thus
avoiding the need for' wasteful and unnecessary offices in the Bahamas
or I ie ,(I and ( Caians.
3. It would permit U.S. banks to establish and operate branches in
count ieS whiich (10 not permit the Federal Banking Commission to
exaiimie t1e !'ranc and to have Complete access to its records, unless
i lie FB( (leterluines that the capital of the parent would be endan-
g eieI y V ranchingg activity. fIe CommlssIon is also authorized
1o permit banks and bank holding companies to establish subsidiaries
,' joiit tres onil y il countries where it can conduct an examination
I dt l t iIll, t11:11 t le C(a)it:l of the parent or any other participating
laI ovr wh-icl it l1a:s jurisdi,'t ion would not be endangered.


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