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PROVIDING FOR CONTROL AND REGULATION OF BANK

HOLDING COMPANIES

MONDAY, JUNE 2, 1947

in

UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C. The committee met, pursuant to adjournment, at 10 a. m., room 301, Senator Office Building, Senator Charles W. Tobey (chairman) presiding

Present: Senators Tobey (chairman), Buck, Flanders, Cain, Robertson of Virginia, and Sparkman.

The CHAIRMAN. Come to order, please.

Mr. Beasley, if you will kindly give your name to the reporter, please.

STATEMENT OF ROBERT S. BEASLEY, VICE PRESIDENT, BEVERLY

HILLS NATIONAL BANK & TRUST CO., BEVERLY HILLS, CALIF., AND PRESIDENT, INDEPENDENT BANKERS ASSOCIATION OF THE TWELFTH FEDERAL RESERVE DISTRICT, ACCOMPANIED BY R. F. HOLLISTER, EXECUTIVE MANAGER, INDEPENDENT BANKERS ASSOCIATION OF THE TWELFTH FEDERAL RESERVE DISTRICT

Mr. BEASLEY. Mr. Chairman and members of the committee, my name is Robert S. Beasley. I am vice president of the Beverly Hills National Bank & Trust Co., Beverly Hills, Calif., and president of the Independent Bankers Association of the twelfth Federal Reserve district. I am here today representing the association and its 343 member banks located in the seven Western States: Arizona, California, Idaho, Nevada, Oregon, Utah, and Washington. The association was organized in 1937 to protect free enterprise in banking and to oppose the elimination of competitive banks and the extension of monopoly in banking.

By its very nature, monopoly seldom encourages or allows healthy competition. Monopoly in banking, in turn, fosters monopolies and cartels in other businesses. Free and competitive credit is essential to free and competitive business. Free and competitive credit is in grave danger when the holding company device makes it possible for one holding company to control 40 percent of all banking offices and 38 percent of ail of the commercial bank deposits in the five States of Arizona, California, Nevada, Oregon, and Washington, with their more than 10,000,000 people.

The CHAIRMAN. Is that a hypothetical illustration, or is that referred to without mentioning the name of the Gianini crowd?

Mr. BEASLEY. It does, sir.

In addition to controlling these banking resources, the same bank holding company controls the only private oil leases in the Philippines, as well as oil and gas properties in the United States. It also controls corporations engaged in such widely diversified businesses, among others, as life, fire, automobile, and marine insurance, fish canning and processing, frozen foods, castings, forgings, diesel engines, food processing machinery, power-control equipment, kitchen tools, color cameras, and agricultural equipment. These banking and nonbanking interests are located not only in the Western States, but in such widely scattered places as Italy, Hawaii, Alaska, St. Louis, Denver, Erie, Toledo, and New York City. One subsidiary alone has interests in 24 different States.

We are firmly convinced that monopoly in banking is a direct threat to the American tradition of free enterprise. The Congress and the American people have definitely shown their opposition to any type of monopoly in the Sherman Act and Clayton Antitrust Acts, and the Public Utilities Holding Company Act.

The inevitable result of the continued growth of private monopoly in banking and the attendant restriction of credit would be the socialization of banking and the end of free enterprise in our economy. There can be no free enterprise in other fields unless there is free enterprise and competition in banking and credit.

The CHAIRMAN. So up to the present time there has been no "Stop, look, and listen” sign hung in the sky, saying "Thus far shalt thou go, and no farther." There is no limit. Is that correct?

İs Mr. BEASLEY. Precisely.

The CHAIRMAN. So the octopus grows and grows, the tentacles reach farther and farther, and somebody raises their eyebrows, like this committee, and you are here; is that right?

Mr. BEASLEY. We are trying to give you the picture.
The CHAIRMAN. Thank you. Go ahead.

Mr. BEASLEY. That is why from the very beginning this association has advocated the enactment of Federal legislation for the regulation of bank holding companies.

The need for bank holding-company legislation has long been officially recognized. It was set forth in the 1943 Annual Report of the Board of Governors of the Federal Reserve System, in the Annual Report of the Federal Deposit Insurance Corporation for 1944, and also in the Annual Report of the Comptroller of the Currency for 1940. We are grateful to all of them for their courage and foresight in directing the attention of the Congress to the need for legislation.

There is a serious threat to the economic life of any area when a large portion of its banking resources are dominated by any one holding company. Any factor affecting adversely the financial position of the holding company might well be reflected throughout the entire chain of controlled banks and industries and thus affect adversely the entire area.

As Chairman Eccles stated, accepted rules of law confine the business of banks to banking, and prohibit them from engaging in extraneous enterprises. The reason is clear. Banking must be kept free from entanglement with other business enterprises in order that the

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banker may maintain the disinterested judgment necessary to the sound extension of credit and the protection of the depositor's money.

There is another important reason why banking must be kept free from entanglement with other enterprises. The banker has access to a great deal of confidential information about his customer and his customer's business. The confidential relationship between the banker and his customer is endangered when the banker is the indirect employee of a bank holding company which also controls competitive business interests in the same field as that of the customer. In addition, where those who control a bank also control another business, that business enjoys an unfair competitive advantage in the obtainment of credit.

The public's stake in banking has long been recognized and protected through governmental regulation of banks. For example, under existing laws, a bank must obtain permission to open a branch from the Comptroller of the Currency in the case of national banks, or from the State banking department in the case of State banks. However, under present laws, it has been and is possible for bankholding companies to circumvent this requirement by acquiring control of banks without permission from any Federal or State agency, and in effect to operate them as branches. This has happened many times. It is still happening.

Legislation is necessary to provide supervision of the expansion of bank-holding companies just as there is now supervision of the establishment of branches of banks. We believe that the rules should be the same for all of us, small banks, large banks, and bank-holding companies.

I am sure that our position reflects the attitude of most bankers in the western states who are not themselves connected with bankholding companies. I believe that it reflects the attitude of bankers generally

I would like to read a resolution adopted at the annual convention of the California Bankers Association only last week, asking that the Congress enact legislation with reference to the bank holding-com. pany problem. It is as follows:

Whereas a bank-holding company may sometimes be used to circumvent the existing Federal and State banking laws and to engage in lines of business which are prohibited to banking institutions; and

Whereas the California Bankers Association is opposed to such practices; and

Whereas the Congress undertook to provide for the control and supervision of bank-holding companies; and it appears that the present law is inadequate to accomplish the purpose for which it was enacted, and there is in existence no effective control of bank-holding companies; and

Whereas it is necessary in the public interest and in keeping with sound banking principles that the activities of bank-holding companies be restricted solely to the banking business, and that they be regulated in the same manner as the activities of banks themselves: Now, therefore, be it

Resolved, That this convention urges the Congress that legislation be enacted designed to supervise and effectively control bank-holding companies, to regulate the creation of new bank-holding companies, and to require the separation from such companies of all nonbanking activities.

Senator Cain. May I ask if the Bank of America is a member of the California Bankers Association?

Mr. BEASLEY. They are not a member of that Association.

Senator Cain. What percentage of the total deposits are controlled in the State of California by the Bank of America?

Mr. BEASLEY. About 40 percent; a little over.

Senator CAIN. Your California State Bankers Association therefore represents only approximately 60 percent.

Mr. BEASLEY. Sixty percent of the banking interests, that is correct.

Senator Cain. In California. And it therefore follows that the Bank of America, who is not a party to this resolution urging regulation of banking companies.

Mr. BEASLEY. That is correct, sir.

The CHAIRMAN. I suppose we can understand that because the Bank of America is not going to be a party to cutting its own head off.

Senator Cain. I wanted to make that very clear to myself, sir, as well as to others. Mr. BEASLEY. Another indication of the seriousness with which western bankers view the growth of banking monopoly is the fullpage advertisement which the First National Bank of Willows, a country bank in a California town of some 3,000 people, published, at its own expense, in a number of newspapers in its neighboring communities, and in the Pacific coast edition of the Wall Street Journal. With your permission I would like to offer a copy of this advertisement as an exhibit.

Also, I would like to offer as an exhibit a map of Los Angeles on which there are a number of red and blue dots.

(The map referred to is on file with the committee.)
The CHAIRMAN. Very well.
(The advertisement referred to is as follows:)

(Reprint of advertisement published in Willows Journal on April 11, 1947)

Do You Wish The FEDERAL GOVERNMENT TO TAKE OVER THE BUSINESS OF

OPERATING ALL BANKS IN THE UNITED STATES? As a firm believer in the traditional American system of free enterprise and free unrestricted competition, we hope we will never see the day when such a possibility becomes a reality. We sincerely believe, however, that unless the Congress of the United States immediately awakens to the dangers of the growing tendeny toward the creation of cartel and monopoly in the field of banking, and enacts legislation limiting the further unregulated expansion of bank-holding companies, that the American Public will ultimately insist upon the socialization of banking in preference to permitting the continuance of a system whereby individuals or groups of individuals, acting through the medium of the corporate bank-holdingcompany device, can create and maintain virtual cartels and monopolies in the all-important field of banking and credit.

The Federal Reserve System of the United States has recognized the danger to our entire economic system caused by the unrestricted and unregulated operations of bank-holding companies, and has recommended that Congress enact necessary corrective national legislation. We quote from the Thirtieth Annual Report to the Congress of the United States made by the Board of Governors of the Federal Reserve System, dated April 29, 1944, as follows:

"In the Banking Act of 1933 the Congress undertook to provide for the supervision of bank-holding companies. The Board, in the light of its experience, believes the present law inadequate to accomplish the purposes for which it was enacted, and accordingly the Board wishes to recommend certain broad changes which it believes should be incorporated in the law if it is to be effective

Accepted rules of law confine the business of banks to banking and prohibit them from engaging in extraneous businesses such as owning and operating industrial and manufacturing concerns. It is axiomatic that the lender and borrower should not be dominated or controlled by the same management. In the exceptional case, the corporate device has been used to gather under one management many different and varied enterprises wholly unallied and wholly unrelated to the conduct of a banking business. When the bank-holding company has thus

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expanded its operations into other and unrelated activities, it tends more and more to have the characteristics of the type of institution to which the Investment Company Act of 1940 was addressed. Yet, if the company controls banks and has a voting permit for any one of such controlled banks, it is exempted from the provisions of that Act. The Board believes that such a company should be required, by law, to adjust its affairs so as to become either a bank-holding company or an investment company. In no event should it be permitted to remain a hybrid beyond the period necessary for it to adjust its affairs in this respect.

"In the exceptional case, the Board has found that the corporate device of the holding company has been used to escape the supervisory powers of the various bank-supervisory agencies. Briefly stated, Congressional policy with respect to the establishment of branches of banks, as reflected in current statutes, is designed to limit Federal permission to establish branches in each State to the legislative policy of the State. The Federal supervisory authorities now have authority to control the direct establishment of branches of banks under their respective jurisdictions. This is because national banks must first obtain permission from the Comptroller of the Currency to establish branches, State member banks from the Board and nonmember insured banks from the FDIC. Through the corporate device of the holding company, however, these controls are defeated and the holding company, by indirection, can do what the bank can not do directly. Thus the same management which is restricted in its operation under a bank charter can, through the holding company device, acquire unit banks, operate them in the same manner branches would be operated, and thus defeat the expressed will of Congress regarding the establishment of branches.

“There is not no effective control over the expansion of bank-holding companies either in banking or in any other field in which they may choose to expand. Moreover, the device lends itself readily to the amassing of vast resources obtained largely from the public which can be controlled and used by a few people and which give to them, when they choose so to use them, an unfair and overwhelming advantage in acquiring additional properties and in carrying out an unlimited program of expansion. In the exceptional case, these resources have been used to acquire independent banks by measures which leave the local management and minority shareholders little with which to defend themselves except their own strenuous protests. Likewise, these resources have been used to support the market for their own stocks and thus to facilitate the acquisition of independent banks by the exchange of stocks, as well as to create trading profits for favored participants.

"The Board believes, therefor, that it is necessary in the public interest and in keeping with sound banking principles that the activities of bank-holding companies be restricted solely to the banking business and that their activities be regulated, as are the activities of the banks themselves.

"For these reasons the Board recommends that immediate legislation be enacted preventing further expansion of existing bank-holding companies or the creation of new bank-holding companies. Such legislation should be so designed as to prevent any such company from using the corporate device to circumvent and evade sound banking principles, regulatory statutes, and declared legislative policy.”

The Federal Deposit Insurance Corporation is even more emphatic in recommending corrective legislation. We quote from the annual report made to the Congress of the United States by the Federal Deposit Insurance Corporation under date of August 21, 1945, as follows:

"Restriction of banking monopoly.The business of lending money is well suited to private initiative and is best performed under competitive conditions. Monopoly in banking is a threat to American traditions, both because it limits the opportunities to engage in the business of banking, and because it provides an opportunity for favoritism in the extension of credit which may foster monopolies in other industries. The growing tendencies toward monopoly in the banking business are serious, and prompt action should be taken to curb them. Monopolistic practices in the banking system have contributed to the growing demand for credit agencies operated by the Federal Government. The Corporation believes that the maintenance of genuine competition among banks is a much better solution to this problem than the further extension of governmental lending activities.

"A partial monopoly which develops when one bank obtains a disproportionate percentage of the total banking resources of an area may have a serious effect on the economic life of the district. Another monopolistic tendency which has aroused.customer discontent is the agreement among banks, in some areas, to fix

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