FINANCIAL INSTITUTIONS ACT OF 1957 MONDAY, JULY 22, 1957 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, Washington, D. C. The committee met at 10 a. m., Hon. Brent Spence (chairman) presiding. Present: Chairman Spence (presiding), Messrs. Brown, Patman, Multer, Barrett, Mrs. Sullivan, Mrs. Griffiths, Messrs. Ashley, Vanik, Coad, Anderson, Breeding, Talle, Kilburn, McDonough, Betts, Mumma, McVey, Bass, Henderson, and Chamberlain. The CHAIRMAN. The committee will be in order. We have with us this morning, Mr. Gidney, Comptroller of the Currency. His Department is very vitally interested in this bill, and we will be very glad to hear him. Mr. Gidney, you may present your testimony without interruption, if you desire to do so, and then you may be interrogated. Mr. GIDNEY. Thank you, sir. That will be very well. I wanted to say I have brought with me Mr. L. A. Jennings, Deputy Comptroller, Mr. Roy Englert, counsel, and Mr. McConley. Mr. PATMAN. Mr. Chairman, we have with us General Anderson. I am sorry he couldn't be with us during the past week. The CHAIRMAN. Yes, sir. We are very glad to have you with us, General. General Anderson was away on a very patriotic duty. He was out to see if his division is in proper shape in case the country should need it. We are very glad to have him back. You may proceed, Mr. Gidney. STATEMENT OF HON. RAY M. GIDNEY, COMPTROLLER OF THE CURRENCY; ACCOMPANIED BY L. A. JENNINGS, DEPUTY COMPTROLLER, ROY T. ENGLERT, AND GEORGE E. McCONLEY, LEGAL DIVISION, OFFICE OF COMPTROLLER OF THE CURRENCY Mr. GIDNEY. Mr. Chairman and members of the committee, I am pleased to have this opportunity to testify on the Financial Institutions Act of 1957. This is the most important banking legislation which has been before the Congress for many years, and we hope that it can be enacted at an early date. I think a brief comment on the background of S. 1451 might be helpful. During July 1956, Senator J. W. Fulbright of Arkansas announced that the Senate Banking and Currency Committee would undertake a study of the Federal statutes governing financial institutions and credit and that Senator A. Willis Robertson of Virginia would act as chairman of the subcommittee having this work in charge. Senator Robertson stated that the purpose of the proposed study and legislation would be (1) To eliminate obsolete provisions from the statutes in order to make the financial laws more workable and understandable and (2) To add new authority where needed to meet the present and future needs of our economy. The Comptroller of the Currency and the other Federal supervisory agencies were asked to review the respective statutes administered by them with a view toward recommending changes designed to accomplish the stated purposes. In September 1956 a 27-man advisory committee headed by Mr. Kenton R. Cravens and composed of 26 other individuals prominent in the field of banking and finance was selected to assist the Senate Banking and Currency Committee in its study. On November 9 and 10, 1956, hearings were held before Senator Robertson and members of the advisory committee for the purpose of receiving an oral explanation of the agencies' recommendations. Following these hearings, the advisory committee made a report and recommendations to the Senate committee. Early in January 1957, Senator Robertson released the text of a committee print bill which was based upon the 175 legislative recommendations submitted by the Federal supervisory agencies, the views of the various trade organizations in the financial field, the recommendations of the advisory committee and suggestions offered by many other persons. Hearings were held on this proposed bill and subsequently Senator Robertson introduced in the Senate S. 1451. This bill was reported favorably by the Senate Committee on Banking and Currency, with a recommendation that it be passed. On March 21, 1957, S. 1451 passed the Senate. In our formal statement we shall comment only on those sections which contain changes of first-level importance. However, we have included two appendixes to our statement setting forth in appendix A those sections of title I, the National Bank Act, which are not commented upon specifically but are endorsed and supported by us as they appear in S. 1451 and H. R. 7026. Appendix B contains a list of sections in title I which we endorse and support but in which we recommend that minor changes of a technical nature be made. In the interests of brevity we will not comment specifically on the sections listed in appendix A or in appendix B unless the chairman or members of the committee desire us to do so. The first section on which we wish to make specific comment in section 5 of title I, the National Bank Act. SECTION 5. DEPUTY COMPTROLLERS Section 5 would provide statutory authority for the appointment of two additional Deputy Comptrollers of the Currency. For many years each of the 3 Deputy Comptrollers has been charged with the primary duty of administering the responsibilities of our office as they pertain to 4 of the 12 Federal Reserve districts. On an average each Deputy must review all matters pertaining to about 1,550 of the 4,657 national banks. In addition, all recapitalization programs and stock dividends (there were 564 during 1956), branch investigation reports (418 during 1956), consolidations, mergers, and takeovers of banks (113 during 1956), new charter investigation reports (46 during 1956), and legal opinions given to banks numbering many hundreds each year, are reviewed by each of the 3 Deputies. Conferences with bankers occur daily and are time consuming. Each Deputy holds an annual conference with the district chief examiner and the examiners of the four districts he supervises. Legislative work, the preparation of a portion of the annual report to the Congress, work with committees representing various bankers' organizations, and many other matters occupy their time. Within the past 2 years it became necessary for the First Deputy Comptroller to transfer the work of 2 Federal Reserve districts to the chief national bank examiner, who is responsible for the work of 8 assistant chief national bank examiners located in Washington and the 12 district chief examiners located throughout the country. When one of the present three Deputies is away from the office for any reason, it is very difficult for the others to carry the workload. Even when all are present, a substantial amount of evening and weekend work is necessary. Two additional Deputies are needed to relieve this situation. This change was one of our original recommendations to the Senate Banking and Currency Committee. Since the Comptroller's staff is paid out of assessments on national banks, no additional Government appropriations will be necessitated. SECTION 8. CONFLICTS OF INTEREST PROHIBITED Section 8 (a) would make it unlawful for the Comptroller of the Currency or any Deputy Comptroller to own stock in any national bank. This has been the long-standing policy of the Comptroller's office, and this policy extends to include national bank examiners and assistant national bank examiners. Section 8 (b) would make it unlawful for any employee of the Comptroller to accept employment in any national or district bank within 2 years after termination of his appointment with the Comptroller except upon approval of the Comptroller pursuant to regulations prescribed by him. This provision is consistent with the present practice of our office and we have no objection to its enactment. SECTION 12. ARTICLES OF ASSOCIATION Section 12 would amend the present law to provide that national banks may be formed only with the approval of the Comptroller after consideration by him of the factors enumerated in section 15 of the Federal Deposit Insurance Act. Since 1933 the Comptroller has been required in the case of newly organized national banks to certify to the Federal Deposit Insurance Corporation that the bank is authorized to transact the business of banking and that consideration has been given to the factors enumerated in section 6 of the present Federal Deposit Insurance Act. Prior to 1933 there was uncertainty about the extent of the Comptroller's authority to deny new charter applications, and for approximately the first 50 years after passage of the National Bank Act in 1863 the various Comptrollers of the Currency considered they were without authority to deny such applications unless they had reason to suppose the bank was being organized for "other than the legitimate objects contemplated by this act." This change was recommended by us. SECTION 14. COMMENCEMENT OF BUSINESS; SECTION 15. CAPITAL In accordance with one of our recommendations, sections 14 and 15 would provide that no national bank shall be authorized to commence the business of banking until 100 percent of its capital stock has been paid in. Under the present statute only 50 percent of the capital stock is required to be paid in, but since at least 1935 it has been the practice of the Comptroller to require that 100 percent of the capital stock of a newly organized national bank must be paid in before it shall be authorized to commence business. SECTION 20. PREFERRED STOCK Section 20 would permit national banks to issue preferred stock with the approval of the Comptroller, after determination by him that the most practicable method of obtaining desired and needed additional capital is through the issuance of preferred stock. We believe that under the language of the bills the issuance of preferred stock by national banks should be approved by the Comptroller only in urgent or unusual situations or under emergency conditions, and we believe that national banks should be permitted to issue preferred stock only in such situations. Consequently, we favor adoption of section 20 as it appears in this bill. The reasons for our views may be summarized as follows: (a) More than 1,600 national banks have sold in excess of $1 billion of new common capital during the past 10 years. Much of this in our opinion would have been in the form of preferred stock if the Comptroller had been willing to approve its issuance. It is clear that common stock is an adequate vehicle for raising new capital in national banks under normal conditions. (b) The increased weight of risk of an enlarged volume of business predicated on newly acquired preferred capital would rest in the first instance on the common shareholders. The new preferred capital would justify an enlarged volume of risk assets, or more fully Justify the existing volume of such assets, from the standpoint of depositor protection, but it must not be overlooked that the full weight of the increased risk would bear first on the common shareholders. Over a period of time this would result, in our opinion, in the common stock of banks losing some and perhaps much of its present high standing as a sound investment. The sale of preferred stock would tend to become the general rule in bank recapitalization programs, and the sale of common stock much more difficult. If preferred stock were to be approved as a medium of normal bank recapitalization, it is obvious the Comptroller would have to establish sound policies relative to the proportion of preferred stock that could be issued by a bank in relation to its common capital stock or its overall capital structure. It would be undesirable for a bank to have a capital structure top heavy with nonvoting (except under certain conditions) preferred stock controlled by a thin layer of common stock. It is true the Comptroller could control this in initial instances, but if a bank issued preferred stock in reasonable proportion to its common stock and then by reason of growth or asset losses found it necessary again to raise additional capital, and this proved possible only through the issuance of more preferred stock, the Comptroller would be forced to choose between foregoing the additional capital protection needed by the bank's depositors, or permitting the bank's capital structure to become topheavy with preferred stock. Naturally, in such a situation the additional preferred capital would be approved, with the result that the amounts of preferred stock issued by particular banks, over a period of time, would be dictated more by exigencies than by the sound policies initially established by the Comptroller. (c) One additional point is worthy of mention. If banks were to use the avenue of preferred stock for normal capital increases, it is easy to conceive of problems that would arise when some of those banks required emergency recapitalization. The two classes of stock already outstanding (common and preferred) could very well necessitate adding a third class of stock outranking both the existing common and preferred stocks. It is disturbing to contemplate the complications that would ensue from three classes of stock with an almost infinite number of possible variations in preferences as to dividends, retirement, voting rights, voluntary and involuntary liquidation, which would give rise to conflicts of interest between the several classes of shareholders. SECTION 21. DIVIDENDS In accordance with one of our original recommendations section 21 would amend present law to make it clear that national banks may declare and pay dividends quarterly, semiannually, or annually, and that they are not confined to declaring and paying semiannual dividends. In addition, this section would require the approval of the Comptroller to be obtained if the total of all dividends declared by a national bank in any calendar year is to exceed the total of its net profits for that year combined with its retained net profits of the preceding 2 years, less any required transfers to surplus or a fund for the retirement of any preferred stock. The purpose of this change which we recommended in a slightly different form is to prevent depletion of the capital funds of a bank through excessive dividends. We believe that the formula contained in the bills will accomplish this purpose and will also give the banks enough leeway that the Comptroller's approval will not be required in the case of normal and usual dividends. We believe that these provisions will enable the Comptroller to effectively cope with the infrequent case where a self-serving ownership seeks to take out of a bank an unduly large part of capital funds by an excessive dividend or dividends. 95375-57-pt. 1-11 |