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The Federal Reserve Board would set the percentages for the credits at a percentage of qualifying loans that would, generally speaking, allow an institution truly specializing in low- and moderatehousing loans to substantially escape the new reserve requirements on time deposits. The only restriction would be that net required reserves (required reserves less the reserve credit) would have to be positive for all institutions.

Because of the obvious influence that the reserve credits would have on the nation's housing program, the Federal Reserve would have to be guided by the coordinating committee described in Title II, 2.

TITLE III: DEPOSITORY INSTITUTIONS HOLDING

COMPANIES

The general statutory framework that provides for depository institutions holding companies' regulation and places limits on their activities should be retained. Both statutory amendments and improved regulation are needed to reduce the possibility that relationships between and among depository institutions and their nonfinancial affiliates can impair the soundness of the depository institutions.

1. Federal Depository Institutions Commission.-The Federal Depository Institutions Commission would have authority for supervising, regulating and examining bank holding companies and holding companies involving savings and loan associations.

2. Competition.-In order to promote healthy competition among depository institutions, holding companies would be subject to the jurisdiction of the Federal Depository Institutions Commission so as to prevent the acquisition of bank or savings and loan subsidiaries which would tend to lessen competition in a financial market.

3. Avoiding Confusion.-Naming of holding companies, other subsidiaries of the same holding companies, and their affiliates in a way sufficiently close to that of a financial institution so as to cause public confusion would be prohibited. Any liability issued by a non-financial subsidiary would clearly state that the liability carries no guarantee by any depository institution in the holding company system, or by the U.S. government.

4. Prohibited Transactions. The Federal Depository Institutions Commission would determine, before permitting any action by a depository institution with a holding company, a subsidiary, or an affiliated non-financial institution, that such action would not weaken the depository institution in question. Present limitations on the amount of loans between and among affiliated depository institutions and the requirement that they be secured, would be removed, thus treating these transactions as similar to inter-branch bank transactions. Transactions, other than routine deposit transactions, would be prohibited between a depository institution which is a subsidiary of a depository institution holding company and any investment company (including real estate investment trusts) which it manages or advises. 5. Public Information.-The Federal Depository Institutions Commission would obtain, and make publicly available by market area on a periodic basis, information concerning loans and other financial transactions between and among depository institutions, their holding companies, their non-financial affiliates, and institutions such as real estate investment trusts which obtain advice from a non-financial affiliate.

6. Independent Directors.-The Board of Directors of each financial institution in a holding company system, as well as the important committees thereof, would be required to have at least one-third their members independent-having no affiliation with the holding company or any of its nonfinancial affiliates or subsidiaries.

TITLE IV: REGULATORY AGENCIES

In a speech to the American Bankers Association Convention in October, 1974, Chairman Arthur Burns of the Federal Reserve Board characterized the present bank regulatory system as "a jurisdictional tangle that boggles the mind."

This tangle of confusing, overlapping, and sometimes conflicting jurisdictions and policies, Chairman Burns noted, has resulted in a "competition in laxity" among the regulators that poses a grave danger to the public interest.

The alarm sounded by Chairman Burns echoed past admonitions by knowledgeable officials. As far back as May, 1962, the former Vice Chairman of the Federal Reserve Board, Governor J. L. Robertson, warned that the tripartite bank regulatory system tends to reduce the standards of supervision "to the level of the lowest or most lenient." Hearings by committees of the Congress have disclosed a widespread increase in dubious bank practices approved by regulators who are supposed to be guided by principles of soundness. These questionable practices include excessive foreign currency speculation, extensive bank involvement in unsound loans to real estate investment trusts, and enormous expansion of banks through bank holding companies and in operations overseas. The collapse of three major U.S. banks, suggests that the quality of bank regulation may be inadequate.

In part, the deficiencies in the present regulatory apparatus can be attributed to the jerrybuilt nature of its construction. Until the National Bank Act of 1863, all banks were regulated solely by the states, which continue to play an important supervisory role. A superstructure of federal regulation has developed on top of state regulation. The Comptroller of the Currency supervises nationallychartered banks; the Federal Reserve Board supervises state-chartered member banks, all bank holding companies, and so-called Edge Act Corporations (international banking subsidiaries of U.S. Banks); the Federal Deposit Insurance Corporation (which insures nearly all banks) supervises state-chartered banks that are not members of the Federal Reserve system.

Within this three-headed structure, anomalies abound. The Federal Reserve, for instance, regulates bank holding companies, but usually does not regulate the bank involved. The Federal Reserve has sole authority over Edge Act corporations, but often does not regulate the bank with which the Edge Act corporation is associated. The Federal Reserve has sole authority to supervise the overseas operations of U.S. banks, but in many cases does not regulate the domestic operations of the same bank.

As early as 1937, the Brookings Institution called for consolidation of regulatory and supervisory responsibility. Since then, the Hoover Commission in 1949, the Commission on Money and Credit in 1961, and the Hunt Commission in 1971 all have made extensive recommendations for reform.

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Clearly today's complicated financial world cannot afford to run the risk of recurrent crises before adopting safeguards. The present system must give way to a single, strong Federal Depository Institutions Commission that will better serve both the public interest and the interest of the financial community here and abroad.

1. Creation of a Single Agency

A single Federal Depository Institutions Commission would be created, which would draw together the activities of the Comptroller of the Currency, and the regulatory and supervisory functions of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Federal Home Loan Bank System, and the National Credit Union Administration. The Commission would be phased in over a threeyear period.

Under this proposal the Office of the Comptroller of the Currency and the National Credit Union Administration would cease to exist. The agencies that presently provide federal insurance to depository institutions would be combined into a single agency under the aegis of the Federal Depository Institutions Commission.

The Federal Reserve Board would be responsible only for the conduct of monetary policy, as described in Title V-The Federal Reserve System. The Federal Home Loan Bank System would receive a new charter which would include the authority to administer the Federal Home Loan Mortgage Corporation and to administer a program of housing finance that would utilize all depository institutions as a source of mortgage funds for low- and moderate-income housing, as described in Title II-Housing.

Creation of a single agency would make it easier to upgrade the quality of bank examination, supervision, and regulation by enhancing the prestige of the agency and by concentrating resources on better training and recruitment of personnel. It would also result in substantial savings through elimination of duplication.

2. Composition of Commission

The Federal Depository Institutions Commission would be comprised of five commissioners including the Deputy Attorney General, a commissioner of the Securities and Exchange Commission (selected by the Chairman of the SEC), the Vice Chairman of the Federal Reserve Board, and two representatives of the public interest, one of whom would be Chairman. The representative of the public interest and the Chairman would be appointed by the President and confirmed by the Senate. They would serve six year terms, except that the initial term of the non-chairman public interest representative would be for four years.

3. Duties of Commission

The Commission would be responsible for the chartering, conversion, mergers, examination, supervision and regulation of foreign banks as well as all federally chartered depository institutions (including Edge Act corporations) and their holding companies. The Commission would also be responsible for the examination, supervision and regulation of state chartered banks, savings and loan associations, credit unions, mutual savings banks and the overseas branches of U.S. banks. This responsibility could be delegated by the Commission to state

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supervisory authorities upon a finding that the state authority was doing an adequate job.

Depository institutions not insured by the federal government would be omitted from the jurisdiction of the Federal Depository Institutions Commission. The Commission would also respect and observe the elements of the dual banking system in its examination, supervision and regulation of state chartered depository institutions. 4. Structure of Commission

The Federal Depository Institutions Commission would have a dual charge: to encourage the soundness of depository institutions, and to encourage competition among them.

To accomplish this, the Commission would be composed of two units:

(a) One unit would pursue the examination, supervision and regulation functions relating to the soundness of depository institutions.

(b) The second unit would be responsible for promoting competition. It would do this through analysis and recommendations with respect to mergers, new charters, holding company activities, and disclosures of relevant information.

The Commission would be required to submit a public report and testify at least once a year before the appropriate committees of Congress with respect to its efforts to improve the competitive performance of depository institutions and its efforts to promote soundness.