broadening of this provision to permit the reserve to be used for capital additions would be consistent with the purposes of the law, since, if it were used in normal times for such purposes, it might well become depleted and not be available when it would be needed in unusual circumstances in order to maintain the sound condition of the holding company affiliate's subsidiary banks.

PROVISIONS OF TITLE I QUESTIONED BY THE BOARD

Most of the provisions of this bill outside of title II have no direct effect upon the Federal Reserve System. Title I of the bill, however, relating to national banks, includes two provisions which are of concern to the Board because of their possible effect upon the soundness of the banking system.

Cumulative voting: Under present law cumulative voting in elections of directors of national banks is mandatory, and this has been the case since 1933. Cumulative voting is based on the principle of permitting due representation of minority shareholders on a corporation's board of directors.

Section 26 (c) of title I of the bill would permit cumulative voting only if provided for in the national bank's articles of association. The Board feels that the principle of cumulative voting is sound and questions whether the proposed change should be made unless Congress is satisfied that cumulative voting has produced undesirable results so great as to outweigh the obvious justice of giving proper representation to minority interests.

Since the contents of the articles of incorporation of a national bank are determined by a majority of the bank's shareholders, it is obvious that the practical effect of the proposed change would be to eliminate all cumulative voting in elections of national bank directors. Although proponents of this change have contended that cumulative voting has given rise to situations in which minority shareholders have been able to place an undesirable individual on the board of directors of a national bank, the Board doubts whether abuses of this kind have been so great as to justify abandonment of the basically sound principle of cumulative voting. It should be borne in mind in this connection that minority-elected directors often can stimulate other directors to greater activity in behalf of a bank and, furthermore, that if a minority-elected director should engage in unsound activities, he would be subject to removal under the law.

Debt limit of national banks: Section 37 of title I would increase the maximum limit of national bank's total indebtedness from 100 percent of its capital stock to 100 percent of its capital stock and surplus. This considerable expansion in the borrowing ability of national banks would, in the Board's opinion, be unnecessary and undesirable. Although bank borrowings may occasionally be necessary in limited amounts and for limited periods in order to avoid liquidation of assets that might otherwise be necessary, it is a practice that should not be encouraged because it tends to dilute the cushion of protection which is afforded depositors by a bank's capital and surplus. Enlargement of the borrowing limits as here proposed might well encourage national banks to hold smaller amounts of liquid assets and to rely unduly upon borrowings for necessary adjustments. In the case of an emergency requiring unusual borrowing, the discount facili

ties of the Reserve banks are readily available. To encourage the ability of national banks to borrow outside the Reserve banks would tend to diminish the restraining influence that the Reserve banks are directed by law to exert upon borrowing member banks which may be making undue use of credit for speculative purposes.

ADDITIONAL PROVISIONS RECOMMENDED BY THE BOARD

Before concluding this statement, the Board would like to bring to the attention of the committee certain proposed changes in the Federal Reserve law which are not included in the pending bills but which, in the Board's opinion, should appropriately be incorporated in this legislation.

Repurchase agreements: For many years the Federal Reserve banks in connection with their open market operations have utilized repurchase agreements as a convenient and flexible means of helping to smooth out temporary irregularities in the money market. These agreements are in the form of a purchase and sale and they are used only to implement open market operations pursuant to regulations of the Federal Open Market Committee.

However, such transactions admittedly have some of the attributes of a loan and present law contains no specific reference to these transactions. Accordingly, the Board believes that a clarifying amendment which would specifically authorize such repurchase agreements by the Federal Reserve banks would be desirable.

Fiscal agency operations by the Federal Reserve banks: Under various provisions of present law, the Federal Reserve banks are authorized or directed to act as fiscal agents of the United States and of a number of departments and agencies of the Federal Government. The activities of the Reserve banks as such fiscal agents have increased tremendously in recent years. An equivalent of more than 3,100 of the approximately 18,600 employees of the Federal Reserve banks are now engaged full time in fiscal agency operations on behalf of more than 25 governmental agencies in some 50 different capacities. It has become increasingly evident that, in addition to the general authority of the Board to supervise the Reserve banks, the law should contain some more specific authority for the overall coordination of the fiscal agency operations of the Reserve banks. In five instances such authority now exists; and it would be helpful if it existed in all cases so as to make certain that the many activities which the Reserve banks are required to perform on behalf of Government departments and agencies do not become inconsistent with the overall purposes of the Reserve banks or unduly burdensome.

The Board, therefore, recommends that this legislation include at an appropriate place a provision making all fiscal agency operations of the Reserve banks specifically subject to supervision and regulation by the Board.

Payment of interest on deposits: Since 1933, the law has prohibited member banks from paying interest on demand deposits, directly or indirectly, by any device whatsoever, and has required the Board of Governors to fix maximum rates of interest which may be paid by member banks on time and savings deposits.

Similar provisions are contained in the Federal Deposit Insurance Act with respect to payment of interest on deposits by nonmember

95375-57-pt. 1—3

insured banks. For many years, the matter of determining whether particular practices involve a payment of interest on deposits has presented substantial and almost impossible administrative problems. Questions arise, for example, as to whether the furnishing of free parking facilities, special printing of checks, lower rates of interest on loans to depositors, and numerous other practices constitute indirect payments of interest under the broad language of the statute. In order to make the law more workable, the Board recommends that the words "directly or indirectly, by any device whatsoever" be deleted from the statute and that the words "payment of interest" be expressly defined as including only cash payments made, or credits given, by a bank for the account or benefit of a depositor.

In the Board's opinion such a change would carry out the basic purposes of the statute and at the same time make posible a more practical administration of the law.

In this connection the Board also recommends that the law be clarified so as to make the same rules as to what constitutes a payment of interest on deposits apply to member banks and nonmember insured banks alike. Obviously this was the intent of Congress when the law was originally enacted. However, in the application of the statute, the Board has ruled that absorption of exchange charges by member banks is a payment of interest, whereas the Federal Deposit Insurance Corporation has taken the opposite position with respect to nonmember insured banks.

As a result, member banks in some sections of the country have been placed at a serious competitive disadvantage with respect to nonmember banks, and the check collection process has been slowed up by the unnecessary circuitous routing of checks drawn on nonpar banks. If the law should be amended as previously suggested by the Board to define interest as including only cash payments or credits, it is believed that absorption of exchange would come within that definition. However, if the law should not be amended to include such a definition, the Board believes that the law should be amended either by including an explicit statement regarding absorption of exchange charges by both member and nonmember banks, or, in the alternative, by authorizing either the Board or the FDIC to define a "payment of interest" for both classes of banks.

It should be emphasized that this recommendation is made only for the purpose of removing existing inequities which have arisen in this field and not for the purpose of forcing "par clearance" upon banks that now charge exchange. The Board's proposal relates not to the making of exchange charges but to the absorption of such charges as a device for paying interest on deposits. The purpose is simply to make the same rules applicable to all insured banks and to preclude situations in which nonmember insured banks are permitted to absorb exchange while competing State and national member banks are not allowed to do so.

With respect to this matter, the report of the Senate Banking and Currency Committee recognized that the law should apply uniformly to both classes of banks, but stated that the Board and the FDIC should resolve the question by developing uniform regulations for both member and nonmember insured banks. However, all efforts for such uniform regulations, over a period of many years, have proved fruit

less. In the Board's opinion, the problem is one which can be resolved only by specific legislation.

CONCLUSION

In view of the length of this statement, it may be appropriate in conclusion to say again that the Board endorses the general objectives of the pending legislation. With the few exceptions that have been indicated, the Board approves the provisions of the bill insofar as they affect the Federal Reserve System. Enactment of such a codification of Federal statutes relating to financial institutions is long overdue and the Board hopes that it will be approved.

Now, Mr. Chairman, I would like to indicate that Governor Robertson, who is with me, is working on Operation Alert, and he handled this subject on behalf of the Board in the Senate Banking and Currency Committee, and I would urge that as many as possible have an opportunity to question him this morning because he will have to leave after this morning.

The CHAIRMAN. I trust the committee will ask questions with reference to the bills before us, and Chairman Martin and Governor Robertson will be able to come back and answer questions as to policy and other matters tomorrow or the next day.

Mr. MARTIN. Yes, sir; I will be available whenever you want me. The CHAIRMAN. What is the purpose of the provision that a State member bank may purchase stock in other banks in contemplation of merger or absorption? Wouldn't that make mergers a little easier? Governor ROBERTSON. May I answer that, Mr. Chairman?

This is a very insignificant portion of the bill, and we really don't urge it one way or the other. It comes up because of a situation in California, for example, where this procedure has been used in the past.

If it is used, we say that the acquiring bank should have to get the consent of the Board before it enters into an agreement to purchase the stock, but if this is merely incidental to it, we see no reason to stand in the way of using this device. But it is not important. It is a very limited sort of proposition, and we wouldn't urge it or oppose it.

The CHAIRMAN. Is it the policy of the Federal Reserve System to make mergers easier or to make the laws more restrictive?

Governor ROBERTSON. I would not say the policy of the Board is to make mergers easier or more liberal. But I think the policy of the Board is to see that mergers, to the extent that they are entered into, are in the public interest; neither more liberal nor more restrictive. We think we should act upon them in the light of the public interest in the particular circumstances.

The CHAIRMAN. Could you furnish us some statistics as to the mergers which have been effected in the last 5 years?

Governor ROBERTSON. I am sure we could. I don't have them with me. But we have submitted those same figures in connection with other hearings, and I am sure we could get them.

The CHAIRMAN. Whether or not they have increased or diminished in the past 5 years.

Governor ROBERTSON. I am sure we can do that.

1951.

1952

1953.

1954.

1955

1956.

(The data requested above is as follows:)

Bank consolidations, mergers, and absorptions, 1952–56

1 Excludes banks and branches in United States Territories and possessions except. beginning with Apr. 15, 1954, 1 bank in Alaska which became a member of the Federal Reserve System on that date. Also excludes banking facilities (other than branches) that are provided at military and other Government establishments through arrangements made by the Treasury Department.

2 Complete analysis of changes in number of banking offices shown in annual reports of Board of Governors of the Federal Reserve System (table No. 20 in 1952 and No. 18 in 1953-56).

The CHAIRMAN. We will call the committee under the 5-minute rule.

Dr. Talle, do you have any questions?

Mr. TALLE. Yes, sir, Mr. Chairman.

Chairman Martin, it is always a pleasure to have you as a witness, and I want to say the same for all members of your Board. Mr. MARTIN. Thank you, sir.

Mr. TALLE. You have made an excellent statement, a concise statement, of the position of the Board on the various proposals contained in the Financial Institutions Act.

I should like to refer to what you say in your statement, on page 17 and also 18.

I am particularly interested in the comments you make beginning at the top of page 17 and continuing to page 18, with reference to absorption of exchange by banks.

There appears to be a conflict of opinion, because, as pointed out, the Federal Reserve takes the position that absorption of exchange is in effect a payment of interest to deposits, and FDIC holds a contrary view; and I agree, Mr. Martin, that that is something that should be clarified by law.

Now, may I refer to experience on this point, in my own area.
My district borders on Minnesota to the north.

All banks in Iowa, whether they are members or nonmembers of the System, clear checks at par, and do not make exchange charges. At the end of last year we had 667 banks in the State of Iowa. In Minnesota there were 681 banks, and of these, approximately 60 percent or 403 banks were not on the par list. We have both small and large banks in Iowa, just as there are small and large banks in Minnesota. If the banks in Iowa can operate on a par system of check clearance, the question may be raised as to why they cannot be managed in the same way in Minnesota.

When one looks at the figures nationally, one finds that 11,815 of the 13,569 banks clear checks on a par basis. That is more than 87 percent of all the banks operating in the country.