Our Baffling Banking System

Our Baffling Banking System
Author(s): Howard H. Hackley

Source: Virginia Law Review , May, 1966, Vol. 52, No. 4 (May, 1966), pp. 565-632
Published by: Virginia Law Review
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VIRGINIA LAW REVIEW
VOLUME 52 May 1966 NUMBER 4
ARTICLES
OUR BAFFLING BANKING SYSTEM

Howard H. Hackley*
In this first of two parts, the author traces the history of banking
regulation and the pattern of conflict that has developed in recent
years. After delineating the respective powers and duties of the
Federal Reserve Board, the Comptroller of the Currency, and the
Federal Deposit Insurance Corporation, Mr. Hackley examines the
clashes of jurisdiction and enforcement which have occurred
among these agencies. In the second part, to be published in the
June issue, the author will discuss proposals for resolving the
present confusion and conflict and make recommendations to
bring order to federal banking regulation.
INTRODUCTION
S INCE the days of Alexander Hamilton and Andrew Jackson, regula-

tion of banks in the United States has been marked by contro-
versy, conflict, and confusion. In recent years, however, controversies
and conflicts in this field have attained extraordinary proportions; and
it seems likely that major changes in our present bank regulatory
system-if it can be called a "system"-are in the offing. The purposes
of this Article are to relate the manner in which this system has devel-
oped, to describe the sources of the present confusion, and to analyze
proposals for changes in the system.
At the outset, it is important to note a basic fact that is largely re-
sponsible for the complexity of our banking structure. This is the fact
that the United States has four different classes of commercial banks'
* General Counsel of the Board of Governors of the Federal Reserve System. B.A.,
1929, LL.B., 1931, University of Virginia; LL.M., 1932, Columbia University. The writer
is solely responsible for the views expressed herein and they do not necessarily reflect
the views of the Board of Governors of the Federal Reserve System or of any other person.
The term "commercial bank" is here used as meaning a corporation that engages in
[ 565 ]

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566 Virginia Law Review [Vol. 52:565
and that the extent to which any individual bank is regulated depends
upon the class to which it belongs. Banks may be chartered either
under federal law or under state law. Those chartered under federal
law are known as "national" banks. Those chartered under state law
fall into three categories. If a state bank voluntarily joins the Federal
Reserve System, it becomes a "state member bank." If it elects not to
join the Federal Reserve System but voluntarily obtains federal deposit
insurance, it becomes a "nonmember insured state bank." Finally, if
it elects neither to join the Federal Reserve System nor to seek federal
deposit insurance, it is known as a "noninsured state bank." All na-
tional banks are required to be members of the Federal Reserve
System; and all member banks, both national and state, are automat-
ically covered by deposit insurance.
As of the end of 1965, there were 13,804 commercial banks in the
United States, of which 4,815 were federally-chartered national banks.
Of the 8,989 state banks, 1,406 were member banks, 7,320 were non-
member insured state banks, and only 263 were noninsured nonmember
banks.2 Although nonmember state banks far outnumber national
banks and state member banks, about 84 per cent of the deposits of all
commercial banks are held by banks that are members of the Federal
Reserve System. Thus, deposits in national banks total about $171
billion; those in state member banks total $88 billion; those in non-
member insured state banks total $49 billion; and those in noninsured
nonmember state banks amount to only $2 billion.3
All commercial banks are engaged in substantially the same kind
of business, but a particular bank's competitive position depends upon
whether it is a national bank or a state bank and, if a state bank, upon
the state in which it is located and upon whether it is a state member
bank, a nonmember insured bank, or a noninsured nonmember state
bank.
the business of receiving demand deposits subject to check although it may also accept
"time" and "savings" deposits not subject to check. Using the deposits received by them,
commercial banks make loans of various kinds, including business loans, consumer loans,
personal loans, and real estate loans. Some commercial banks provide trust or "fiduciary"
services to their customers. Unless otherwise specifically indicated, the term "bank" as
used in this Article means only a commercial bank and does not include such institutions
as mutual savings banks, savings and loan associations, insurance companies, finance com-
panies, and other financial institutions that compete in some respects with banks but do
not meet the traditional concept of a commercial bank.
2 52 FED. RESERVE BULL. 272 (1966).
3 Id. at 226.

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1966] Banking System 567
Every state bank is subject to the laws of its own state, but the bank-
ing laws of the various states differ in countless respects, and banks in
adjoining states, although competing with each other, may operate
under substantially different restrictions. State banks that join the
Federal Reserve System are subject to additional restrictions imposed
by the Federal Reserve Act4 and other federal laws; and state banks
that obtain deposit insurance are subject to limitations contained in the
Federal Deposit Insurance Act.5 National banks are governed primarily
by provisions of the National Bank Act,6 but, as members of the Federal
Reserve System, they must also comply with various provisions of the
Federal Reserve Act.
Not only do state banking laws differ widely, but the powers of
state banks under state laws are by no means the same as the powers
of national banks under the National Bank Act. Moreover, the require-
ments and restrictions imposed by federal law with respect to the three
classes of federally-regulated banks-national, state member, and non-
member insured banks-are not uniform. Some apply only to national
banks, some only to national and state member banks, and a relative
few to all insured banks.
The confusion is compounded by the fact that the federal banking
laws are administered by three federal bank supervisory agencies: the
Comptroller of the Currency in the case of national banks; the Board
of Governors of the Federal Reserve System in the case of state member
banks; and the Federal Deposit Insurance Corporation (FDIC) in the
case of nonmember insured state banks. Even this is an over-simplifica-
tion. In some areas, these agencies have parallel or overlapping author-
ity, and this has given rise to interpretative, regulatory, and policy dif-
ferences, particularly in recent years. In some instances, provisions of
federal law intended to apply equally to two or all three classes of
federally-regulated banks have been differently interpreted by the re-
spective supervisory agencies.
The unequal application of federal and state banking laws and
regulations to the four classes of commercial banks results in a situa-
tion that involves much more than an abstract lack of logic or sym-
4 Ch. 6, 38 Stat. 251 (1913) (codified, as amended, in ? 409 of 31 U.S.C., and in various
sections of 12 U.S.C.).
5 Ch. 967, 64 Stat. 873 (1950) (codified, as amended, in ?? 1728(b) & 1811-31 of 12 U.S.C.,
and in scattered sections of 18 U.S.C.). For the history of these provisions see note 74 infra.
6 Ch. 343, 18 Stat. 123 (1874) (codified in scattered sections of 5, 12, 18, 19, 28, & 31
U.S.C.).

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metry; in terms of dollars and cents, it means that a bank in one class
enjoys certain advantages and is subject to certain disadvantages in
competing for business with banks of other classes. Consequently, banks
have been prompted to "switch," as they are free to do, from one class
to another in order to obtain greater competitive advantages. Thus,
because reserve requirements have a direct and important effect upon
a bank's earnings and because reserve requirements of member banks
under federal law are generally higher than those prescribed by state
laws, many small state banks have withdrawn from the Federal Reserve
System in recent years. Again, because of liberal regulations and rulings
issued by Comptroller of the Currency Jarnes J. Saxon, many large state
member banks have "converted" from state charters to national char-
ters. The most notable of such conversions occurred in 1965 when the
Chase Manhattan Bank of New York City, the largest state member
bank and the third largest bank in the country, became a national bank.
These and other developments have given rise to expressions of
concern regarding the preservation of our "dual banking system" and
to concern lest a "race in laxity" among the federal supervisory agencies
may lower general standards of sound banking. Whether or not such
fears are warranted, the confusion that presently plagues our banking
system, particularly at the federal level, has reached an all-time high.
In addition, the banking business has been subjected to uncertainties
by reason of increased Justice Department activity in the application
of the antitrust laws to bank mergers and bank holding company
transactions.
One is inclined to agree with the following recent editorial comment:
Subject to three discordant Federal supervisors, the Justice

Department, and the divergent policies of state supervisors in 50
states, it is surprising that the banking business has got along so
far as well as it has. It is, however, an unhealthy situation which
cries aloud for reform.7
Other commentators, referring to the differences among the federal

bank supervisors, have described the situation as a "farcical, jurisdic-
tional feud"8 and as "Washington's Silly War."9 Still another has ex-
pressed concern that such differences threaten orderliness in an im-
portant section of this country's financial operations.10
7 J. of Commerce, March 23, 1965, p. 4, col. 1.

8 Weekly Bond Buyer, Sept. 16, 1963, ? 2, p. 4, col. 1.
9 Wall Street J., Jan. 2, 1964, p. 8, col. 1.
10 American Banker, Sept. 9, 1963, p. 4, cols. 1-2. Many additional comments in the same

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In an effort to correct the muddled state of federal bank regulation,

the President and the Secretary of the Treasury have sought to bring
about greater harmony and coordination among the federal banking
agencies; bills to settle particular disputes among these agencies have
been introduced in Congress; and proposals to consolidate bank super-
visory functions in a single federal agency have also been considered
by the Congress. None of these efforts has produced significant results.
In the discussion that follows, an attempt is made (1) to describe
the manner in which our baffling banking system has developed; (2)
to indicate the reasons for the present confusion, particularly the dif-
ferences among state laws, the differences between state and federal
banking laws, the unequal application of federal laws to different
classes of banks, the division of federal regulatory authority among
several agencies, and the conflicts that have arisen among these agen-
cies; and finally, (3) to describe and analyze various proposals designed
to eliminate or minimize the confusion.
How OUR BANKING SYSTEM DEVELOPED
Before 1863
Our first bank in the modern sense was the Bank of North America,
established in Philadelphia in 1782, first under an ordinance of Con-
gress and later under a charter granted by the state of Pennsylvania."1
In succeeding years, other banks were organized under colonial laws
and, after 1789, under the laws of the various states.'2 In 1791, two
years after the adoption of the Constitution, Congress chartered the
first "Bank of the United States."1'3 That bank's charter expired in
1811. Despite considerable question as to the constitutionality of a
"federal" bank, a second Bank of the United States was chartered in
vein could be cited. One columnist compared a bank to a motorist who is suddenly con-
fronted by three different speed limit signs posted by federal, state, and city authorities,
forced to the side of the road by three police cars, and "stands helplessly by while a trio
of policemen argue over who'll arrest him." The columnist observed: "The plight of the
mythical motorist may seem far-fetched. But every bank in the country is faced with a
similar though far more complex system of overlapping regulations and duplicating
regulators." Wall Street J., Feb. 14, 1962, p. 14, col. 1.
11 See HAMMOND, BANKS AND POLITICS IN AMERICA FROM THE REVOLUTION TO THE CIVIL
WAR 48-52 (1957). The ordinance was passed by Congress on Dec. 31, 1781, but, apparently
because of doubt as to the validity of this action, the Pennsylvania Assembly on April 1,
1782, gave the bank an identical charter. Ibid.
12 Wyatt, Federal Banking Legislation, in BD. OF GOVERNORS OF THE FEDERAL RESERVE
SYSTEM, BANKING STUDIES 39 (1941) [hereinafter this collection of essays will be cited as
BANKING STUDIES].
13 Act of Feb. 25, 1791, ch. 10, 1 Stat. 191.

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1816;14 and the validity of its charter was upheld by the Supreme
Court.15 However, renewal of its charter was vetoed by President
Jackson, and the second Bank of the United States ceased to exist in
1836.16
In the following year, 1837, the Supreme Court sustained the right
of the states to charter banks.17 With this encouragement, the state of
New York in 1838 enacted a "Free Banking Act," authorizing the
formation of banks upon compliance with certain requirements.'8
This was the first general state banking law, in contrast with previous
state statutes that had provided for the special chartering of individual
banks. The New York law led to similar laws in other states. State
banks mushroomed, totalling 713 in 1836, and 1,466 in 1863.19
The years between 1837 and 1863 were the period of "wildcat" bank-
ing. The state laws were lax, and the banks organized under such laws
were not always of a type to inspire public confidence. Despite the
growth in the total number of state banks, there was a wave of adverse
reaction toward banks in general. From 1846 till 1857, banks were
outlawed in Iowa; and in 1845 the Texas constitution outlawed banks
altogether.20
The National Bank Act

In 1863, in the midst of the Civil War, Congress enacted a "National
Currency Act" providing for the organization of "national" banks
with authority to issue bank notes secured by government bonds.21 Its
immediate purpose was to finance the war by stimulating the sale of
government securities.22
In the light of many references in recent months and years to the
"dual banking system" as something deliberately planned by Congress,
14 Act of April 10, 1816, ch. 44, 3 Stat. 266.
15 McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819).
16 For a detailed and interesting discussion of the two Banks of the United States, see
HAMMOND, op. cit. supra note 11, at 144-450.
17 Briscoe v. Bank of Ky., 36 U.S. (11 Pet.) 257 (1837); see HAMMOND, op. cit. supra note
11, at 567.
18 See Hammond, Historical Introduction, in BANKING STUDIES 5, 9.
19 BANKING STUDIES 418.
20 Hammond, supra note 18, at 10.
21 Act of Feb. 25, 1863, ch. 58, 12 Stat. 665.
22 In a special message to Congress on Jan. 17, 1863, President Lincoln had urged
the establishment of a "uniform currency" to be provided by banking associations orga-
nized under a "general act" of Congress. See SENATE BANKING AND CURRENCY COMM., 88TH
CONG., 1ST. SESS., FEDERAL BANKING LAWS AND REPORTS, 1780-1912, at 306 (Comm. Print
1963) [hereinafter cited as FEDERAL BANKING LAWS AND REPORTS].

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it is interesting to note that, on the contrary, some responsible people

at the time of enactment of the 1863 act apparently expected that that
act would bring the state banking system to an end and result in a sin-
gle national banking system. Senator Sherman, Chairman of the Finance
Committee, declared that the "national banks were intended to super-
sede the State banks" and that both could "not exist together."23 In his
first report to Congress on November 28, 1863, the first Comptroller
of the Currency, Hugh McCulloch, observed that, while national banks
were not being organized as rapidly in the East as in the Western States,
nevertheless even in the Eastern states the opinion was "rapidly gaining
ground that the national system will there, at no remote period, super-
sede the State system of banking."24 Ironically, however, the 1863 act
unintentionally marked the birth of what has come to be known as our
dual banking system-the side-by-side existence of both state and
national banks.
The 1863 act established in the Treasury Department a separate
"bureau" under the head of a "Comptroller of the Currency," charged
with the execution of all laws "respecting the issue and regulation of a
national currency secured by United States bonds," and authorized the
formation, with the Comptroller's approval, of organizations to carry
on the business of banking.25 These organizations were empowered to
issue "circulating notes" secured by the deposit of United States bonds
with the Treasurer of the United States. Very few limitations were
placed upon the powers and operations of the new national banks.
The most significant was a requirement that each such bank should
at all times have on hand, in lawful money of the United States, an
amount equal to 25 per cent of its aggregate outstanding notes and
deposits.26 In addition to such reserve requirements, national banks
were prohibited from purchasing, or making loans on, their own
stock;27 they were prohibited from becoming indebted, with certain
exceptions, in an amount exceeding their capital stock;28 and they were
23 CONG. GLOBE, 38th Cong., 2d Sess. 1139 (1865).

24 FEDERAL BANKING LAWS AND REPORTS 342.
25 Act of Feb. 25, 1863, ch. 58, ? 1, 12 Stat. 665.
26 Act of Feb. 25, 1963, ch. 58, ? 41, 12 Stat. 677. For this purpose, clearing-house c
tificates were regarded as "lawful money," and up to three-fifths of the required reserves
could be in the form of balances with national banks in nine specified large cities-so-
called "reserve cities."
27 Act of Feb. 25, 1863, ch. 58, ? 37, 12 Stat. 676.
28 Act of Feb. 25, 1863, ch. 58, ? 42, 12 Stat. 677.

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limited as to the amount that they could lend to a single borrower.29

Finally, they were made subject to examination.30
The 1863 act was repealed and replaced by an Act of June 3, 1864.31
It might be noted here that neither the 1863 act nor the 1864 act was
officially titled a "National Bank Act," although both acts have usually
been referred to in this manner. While many detailed changes were
made by the 1864 act, the most important dealt with reserve require-
ments. The 25 per cent reserve requirement was retained for national
banks located in seventeen large cities; but it was reduced to 15 per
cent for national banks in other cities, and three-fifths of that amount
could be satisfied by balances due from other national banks in the
seventeen specified "reserve" cities.32
Both the 1863 and 1864 acts limited the rate of interest chargeable
on loans made by national banks to the maximum rate permitted by
the law of the state in which a national bank was located,33 except that
the 1864 act set a maximum of 7 per cent.34 This limitation could be
regarded as the first recognition of the desirability of placing national
banks on an equal basis with state banks and therefore as a recognition
of the existence of a "dual" banking system. On the other hand, the
limitation could just as easily be regarded as intended simply to put
national banks on the same basis in respect to interest rates as all other
lenders in a state, non-bank lenders as well as bank lenders, and not
as necessarily evidencing any intent to recognize a dual banking system.
Another feature of the 1864 act was designed to make it easy for
state banks to convert to national charters.35 The expectation that
national banks would entirely replace state banks was clearly reflected
in Comptroller of the Currency Hugh McCulloch's annual report of
November 25, 1864, in which he happily noted that certain states,
particularly Pennsylvania, had made it possible for state banks to ob-
tain national charters and that "this great financial revolution" was
being accomplished without disturbing the business of the country.
He observed that "nearly all the banking capital of Philadelphia has
29 Act of Feb. 25, 1863, ch. 58, ? 47, 12 Stat. 679.

30 Act of Feb. 25, 1863, ch. 58, ? 51, 12 Stat. 679.
31 Act of June 3, 1864, ch. 106, 13 Stat. 99.
32 Act of June 3, 1864, ch. 106, ? 31, 13 Stat. 108.
33 Act of June 3, 1864, ch. 106, ? 30, 13 Stat. 108; Act of Feb. 25, 1863, ch. 58, ? 46, 12
Stat. 678.

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been recently nationalized."86

the applications for national bank charters reflected conversions of
state banks to national banks.
In 1865, Congress sought to expedite the termination of the state
banking system by imposing a 10 per cent tax on the amount of any
state bank notes paid out by any national or state bank after July 1,
1866.37 It was in connection with this measure that Senator Sherman
made his observation that national banks were intended to supersede
state banks.88 Significantly, the 1865 act provided that applications by
state banks to convert to national banks should be accorded a prefer-
ence over applications for the formation of new national banks.39
The 1865 tax on state bank notes was reenacted in 1866,40 and its
constitutionality was upheld by the Supreme Court in 1869.41 Thus,
the issuance of circulating notes by state banks was effectively stopped.
As a result of enactment of the National Bank Act and the ensuing
conversion of many state banks to national charters, along with the tax
on state bank notes, the number of state banks dropped dramatically
from 1,492 in 1862 to a low of 247 in 1868.42 However, state banks
were not driven out of existence. They began obtaining funds from
the receipt of deposits rather than the issuance of notes; and in some
Eastern States they were authorized to establish branches and exercise
trust powers-privileges not at that time accorded national banks.
An important consideration also was the fact that state banks in general
were subject to less restrictive supervision than national banks. Thus
by 1892 the number of state banks exceeded that of national banks.43
The Federal Reserve Act
In 1907, a financial "panic" led to concern about over-expansion of

credit, the need for maintaining greater reserves on the part of com-
mercial banks, and the desirability of a more elastic currency. This
concern precipitated a study in 1908 by a National Monetary Commis-
sion, which first concluded that the answer lay in a single central bank-
36 Quoted in FEDERAL BANKING LAWS AND REPORTS 377.
37 Act of March 3, 1865, ch. 78, ? 6, 13 Stat. 484.
38 See text accompanying note 23 supra.
39 Act of March 3, 1865, ch. 78, ? 7, 13 Stat. 484.
40 Act of July 13, 1866, ch. 184, ? 9, 14 Stat. 146.
41 Veazie Bank v. Fenno, 75 U.S. (8 Wall.) 533 (1869).
42 BANKING STUDIES 418.
43 Ibid.

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ing institution but finally determined that a novel "regional" system

would be best suited to the diverse conditions of a large country.44
The result was the enactment of the Federal Reserve Act in 1913.45
It provided for the establishment of twelve regional Federal Reserve
Banks to operate under the general supervision of a Federal Reserve
Board46 in Washington. It required every national bank in the conti-
nental United States to subscribe to stock of its regional reserve bank
and thereby to become a member of the Federal Reserve System.47
State banks were permitted to subscribe to such stock and become
members of the System on a voluntary basis.48
In order to accomplish one of its stated objectives-"to afford means
of rediscounting commercial paper"49-the act authorized the reserve
banks to rediscount for their member banks short-term commercial
and agricultural paper.50 Provision was also made for the issuance
through the reserve banks of a new form of currency, "Federal Reserv
notes," secured by the short-term paper discounted by the reserve
banks.5' It was expected that, because it was so secured, the volum
the new currency would expand and contract in direct relation to the
credit demands of the economy and that thus the currency would be
more "elastic" than the old bond-secured national bank notes.52
The third stated objective of the act was "to establish a more effective
supervision of banking."53 To this end, the act imposed certain restric-
tions on the operations of member banks of the System. The most im-
portant was a requirement for the maintenance of specified reserves
against their time and demand deposits, with the amount of such re-
serves depending upon whether a member bank was located in a
"central reserve city," a "reserve city," or some other city.54 Such
44 S. Doc. No. 243, 62d Cong., 2d Sess. (1912). The majority report of the Senate Bank-
ing and Currency Committee with respect to the original Federal Reserve Act similarly
concluded that "the system should be the regional Federal reserve bank system instead of
a central bank ...." S. REP. No. 133, 63d Cong., 1st Sess., pt. 2, at 7 (1913).
45 Ch. 6, 38 Stat. 251 (1913) (codified in ? 409 of 31 U.S.C., and in various sections of
12 U.S.C.).
46 Federal Reserve Act, ch. 6, ? 2, 38 Stat. 251 (1913).
47 Ibid.
48 Ch. 6, ? 9, 38 Stat. 259.
49 Ch. 6, ? 1, 38 Stat. 251.
50 Ch. 6, ? 13, 38 Stat. 263.
51 Ch. 6, ? 16, 38 Stat. 265.
52 S. REP. No. 133, supra note 44, at 24, 25; H.R. REP. No. 69, 63d Cong., 1st Sess. 26,
55 (1913).
53 Ch. 6, ? 1, 38 Stat. 251.
54 Ch. 6, ? 19, 38 Stat. 270.

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reserves were designed to insure the liquidity of member banks and

at the same time afford a means of "mobilizing" reserves in times of
stress.55 The concept of reserves as a means of influencing national
credit conditions was not to emerge until some years later. Aside from
reserve requirements, the principal bank supervisory provisions of the
Federal Reserve Act were those that made state member banks subject
to the same capital requirements as national banks and to the same
limitations with respect to purchasing or lending on their own stock,
withdrawal or impairment of capital, and payment of unearned divi-
dends.56
There had been some thought of requiring all state banks that joined
the System to become national banks; but this idea was apparently
abandoned on the ground that it would be sufficient if state member
banks were subjected to the same capital and reserve requirements as
national banks. At the same time, it was recognized that state member
banks and national banks would not be placed "upon the same basis"
with respect to "investments and general business."57
With the enactment of the Federal Reserve Act a second federal
banking agency came into being. The new Federal Reserve Board
consisted of seven members, five appointed by the President and two
ex officio members-the Secretary of the Treasury and the Comptroller
of the Currency. The Comptroller was made a member apparently on
the ground that, since he was in charge of the national banking system,
he would be "a necessary adjunct in the management of the reserve
bank system,"58 but at the same time it was contemplated that the
Board "would have power to instruct the comptroller upon all neces-
sary matters ...."59
To assure the exercise of independent judgment by the Board, free

from executive dominance, the act gave its members ten-year terms,60
and in subsequent years their terms were lengthened first to twelve
years and then to fourteen.6' In 1935, the Board was reconstituted,
55 S. REP. No. 133, supra note 44, at 7, 23.
56 Ch. 6, ? 9, 38 Stat. 259.
57 H.R. REP. No. 69, supra note 52, at 42.
58 Id. at 43.
59 Id. at 44.
60 Ch. 6, ? 10, 38 Stat. 260. Members of the Board were subject to removal by the
President only "for cause."
61 Such terms were changed to 12 years by the Act of June 16, 1933, ch. 89, ? 5, 48
Stat. 166, and to 14 years by the Banking Act of 1935, ch. 614, ? 203, 49 Stat. 704, 12 U.S.C.
? 241 (1964).

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effective February 1, 1936, to consist of seven appointive members, with

termination of the ex officio membership of the Secretary of the Trea-
sury and the Comptroller of the Currency.82 Meanwhile, in 1933, the
funds of the Board, which are derived from assessments on the twelve
Federal Reserve Banks, were declared not to be "Government funds
or appropriated moneys," thus exempting the Board from audit by the
General Accounting Office;88 and the Board was given freedom to
determine its expenses and the compensation of its employees.64
Over the years since 1913, the "central banking" powers of the
Federal Reserve System have been significantly expanded, particularly
with respect to reserves of member banks, open market operations by
the Federal Reserve Banks,85 and extensions of credit for the purchase
of securities registered on national exchange markets.66 The System's
bank regulatory responsibilities have also been substantially expanded.
Among others, the Board has been given regulatory functions with re-
spect to branches of state member banks,87 the payment of interest on
deposits by member banks,"8 interlocking bank directorates,"9 foreign
banking operations,70 bank mergers,71 and bank holding company trans-
actions.72
The essential significance of the Federal Reserve Act for present
purposes is that it superimposed on the state and national banking
systems a third, hybrid system embracing both state and national banks,
under the supervision of a new federal banking agency. For the first
62 Banking Act of 1935, ch. 614, ? 203, 49 Stat. 704, 12 U.S.C. ? 241 (1964).
64 Ibid.
65 In 1935, the Board was authorized, within stated limits, to change the reserve
requirements specified by the Federal Reserve Act "in order to prevent injurious credit
expansion or contraction." Banking Act of 1935, ch. 614, ? 206, 49 Stat. 706. In 1933,
Congress established a Federal Open Market Committee consisting of representatives of
the twelve Federal Reserve Banks, but regulation of open market operations was vested
in the Federal Reserve Board. Act of June 16, 1933, ch. 89, ? 12A, 48 Stat. 168. In 1935,
such regulation was vested in the Open Market Committee, but its membership was
changed to consist of the 7 members of the Board and 5 representatives of the reserve
banks. Banking Act of 1935, ch. 614, ? 205, 49 Stat. 705. Since March 1, 1943, such rep-
resentatives have been required to be presidents or vice presidents of the reserve banks.
Act of July 7, 1942, ch. 488, ? 1, 56 Stat. 647, 12 U.S.C. ? 263(a) (1964).
66 See Securities Exchange Act of 1934, ch. 404, ? 7, 48 Stat. 886, 15 U.S.C. ? 78g (1964).
67 12 U.S.C. ? 321 (1964).
68 12 U.S.C. ? 371 b (1964).
69 15 U.S.C. ? 19 (1964).
70 12 U.S.C. ? 601 (1964).
71 12 U.S.C. ? 1828(c) (1964).
72 12 U.S.C. ? 1842 (1964).

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time, state banks were brought within the ambit of federal regulation,
albeit on a voluntary basis. In this sense, the Federal Reserve Act may
be regarded as marking the end of a strictly "dual" banking system.
Federal Deposit Insurance
As a result of the banking crisis of late 1932 and early 1933, involving
the failure of many banks, Congress enacted the Banking Act of 193373
in an effort to prevent the recurrence of such a crisis. Among other
things, that act provided for the insurance of bank deposits within
certain limits and subject to certain conditions.74
Governmental insurance of bank deposits was not a new idea. It had
been considered by Congress at the time of enactment of the original
Federal Reserve Act,75 and some states had had deposit "guaranty
fund" laws for many years.76 The Banking Act of 1933, however, for
the first time afforded deposit insurance by the federal government.
At the outset, it was contemplated that only member banks of the
Federal Reserve System, i.e., national banks and state member banks,
would be covered, although such insurance was made available to non-
member state banks until July 1, 1936,77 and this period was later
extended to July 1, 1937.78 If the provisions of the 1933 act had re-
mained unchanged, deposit insurance would now apply only to mem-
ber banks, and some of the present confusion in the federal bank
supervisory structure would have been avoided. The Banking Act of
193571 provided for the termination of deposit insurance in the case
of any state bank that had deposits of $1 million or more during 1941
or any succeeding calendar year unless it was a member of the Federal
Reserve System.80 However, this requirement was abandoned in 1939.81
Had it not been repealed, only insured banks with deposits of less than
$1 million would be exempted from mandatory membership in the
73 Ch. 89, 48 Stat. 162 (codified in scattered sections of 12, 15 & 39 U.S.C.).
74 The insurance provisions of the 1933 act, ch. 89, ? 8, 48 Stat. 168, were initially
incorporated into new ? 12B of the Federal Reserve Act. In subsequent years, these pro-
visions were amended in many respects, and in 1950 were withdrawn from the Federal
Reserve Act, and enacted, with further revisions, in a separate Federal Deposit Insurance
Act. See ch. 967, 64 Stat. 873 (1950), 12 U.S.C. ?? 1811-31 (1964).
75 See, e.g., 50 CONG. REC. 4919, 5022, 5058-59 (1913).
76 See 9 ZOLLMANN, BANKS AND BANKING ? 5861 (1936).
77 Banking Act of 1933, ch. 89, ? 12B(t), 48 Stat. 172.

78 Act of June 16, 1934, ch. 546, ? 1(8), 48 Stat. 970.
79 Ch. 614, 49 Stat. 684 (codified in scattered sections of 11, 12, 15, 39 & 40 U.S.C.).
80 Ch. 614, ? ll(y)(l), 49 Stat. 703.

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Federal Reserve System. As it turned out, however, federal deposit in-

surance was made available to all state banks whether or not they joined
the Federal Reserve System.
The instrumentality through which deposit insurance was provided
was a new government agency in corporate form-the Federal Deposit
Insurance Corporation, usually referred to as the FDIC. Its capital
funds were furnished by the Federal Reserve Banks, which were re-
quired to subscribe to the Corporation's stock in an amount equal to
half of their surplus funds.82 It was to be managed, and its powers were
to be exercised, by a board of three directors, one of them being the
Comptroller of the Currency.83 Thus, both the Federal Reserve and
the Comptroller played a part in the organization of the new agency,
though in quite different ways.
While primarily an insurance agency, the FDIC was given certain
regulatory powers with respect to nonmember insured banks. Since
1933, these powers have been expanded to cover, among other matters,
the payment of interest on deposits,84 the establishment of branches,85
and bank mergers.86 It has thus become the third of the triumvirate of
federal bank supervisory agencies.
Nonmember insured state banks, under the supervision of the FDIC,
constitute the largest class of federally-regulated banks. In many re-
spects they are not subject to the restrictions of federal law that apply
to national banks and state member banks. Nevertheless, the extension
of federal deposit insurance to nonmember state banks as a quid pro
quo for federal regulation may be regarded as marking a further
"erosion" of the dual banking system.
Developments Since 1933
The National Currency Act of 1863, the Federal Reserve Act of

1913, and the Banking Act of 1933 that created the Federal Deposit
Insurance Corporation were the three principal landmarks in the
development of our present federal banking structure. However, there
have been some further developments since 1933 that should be
mentioned briefly.

84 12 U.S.C. ? 1828(g) (1964).
85 12 U.S.C. ? 1828(d) (1964).
86 12 U.S.C. ? 1828(c) (1964).

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The Securities Exchange Act of 193487 vested the Federal Reserve

Board with responsibility for limiting the amount of credit that may
be extended for the purchase and carrying of any security registered
on a national securities exchange.88 This authority with respect to
''margin requirements" on registered securities was made applicable to
extensions of credit by brokers and dealers in securities and to loans
made by any other persons, including banks. Under this authority,
the Board has issued regulations limiting loans for such purpose by all
banks in the country.89
The Banking Act of 1935, as already noted, enlarged the jurisdiction
of the Federal Reserve Board with respect to certain activities of mem-
ber banks. It also added to the FDIC's regulatory powers over non-
member insured state banks, including, among other things, authority
to limit the rate of interest payable by such banks on time and savings
deposits90-an authority paralleling that given to the Federal Reserve
in 1933 in this area with respect to member banks.9'
The Bank Holding Company Act of 195692 requires the approval
of the Federal Reserve Board for the formation of any new "bank
holding company"-a company owning or controlling 25 per cent or
more of the stock of two or more banks93-and for the acquisition by
any existing holding company of more than 5 per cent of the stock of
any bank.94 This is another of the rare instances in which federal
regulation has been extended to all banks in the country.
In 1960, an amendment to the Federal Deposit Insurance Act95 re-
quired that every bank merger involving an insured bank be approved
by one of the three federal bank supervisory agencies, depending upon
the nature of the continuing bank. Thus, a bank merger is subject to
approval by the Comptroller of the Currency if the resulting bank will
be a national bank, by the Federal Reserve if it will be a state member
87 15 U.S.C. ? 78 (1964).
88 15 U.S.C. ? 78g (1964).
89 12 C.F.R. ? 221 (1963).
90 12 U.S.C. ? 1828(g) (1964).
91 Act of June 16, 1933, ch. 89, ? 11(b), 48 Stat. 182, 12 U.S.C. ? 371 b (1964).
92 12 U.S.C. ?? 1841-48 (1964).
93 12 U.S.C. ? 1841 (1964).
94 12 U.S.C. ? 1842 (1964).
95 Act of May 13, 1960, 74 Stat. 129. This act was substantially amended in 1966, but no
change was made in the distribution of jurisdiction among the three federal bank super-
visory agencies. See Act of Feb. 21, 1966, Pub. L. No. 89-356, 80 Stat. 7. For provisions of
the so-called Bank Merger Act, as amended, see 12 U.S.C. ? 1828(c) (1964).

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bank, and by the FDIC if it will be a state nonmember insured bank.

In 1964, amendments to the Securities Exchange Act of 1934 re-
quired banks with widely held stock, whether traded on stock exchanges
or over the counter, to register and disclose certain financial and other
information in the interest of protecting the investing public. While
other types of corporations were made subject to the jurisdiction of
the Securities and Exchange Commission in this respect, jurisdiction
with respect to banks was divided among the Comptroller of the
Currency, the Federal Reserve, and the FDIC, according to the nature
of the banks involved.96
Other recent enactments of Congress have expanded the scope of
federal regulation of banks in certain respects. However, the statutes
above mentioned represent the most significant developments since
1933 that have affected regulation of the banking system at the federal
level. For present purposes, the relevant point is that they have gener-
ally tended to distribute responsibilities in the same areas among the
three federal bank supervisory agencies, thus sowing the seeds of con-
flict and leading to inequalities among the three classes of federally-
regulated banks.
DIFFERENCES AMONG STATE LAWS
Volumes could be written about the lack of uniformity among the

laws of the fifty states and the District of Columbia relating to the
operations of commercial banks. Although uniform state laws have
been enacted in some commercial and financial fields,97 there are
bewildering variations with respect to the powers and operations of
state banks. Even without our hodge-podge of federal banking laws
and without three federal bank supervisory agencies, our banking
system would present a complex and confounding picture. For present
purposes, it is sufficient to mention only a few of the differences among
the banking laws of the states.98
In each state, a specified minimum capital is prescribed for the
96 See 15 U.S.C. ? 781(i) (1964).

97 The Uniform Commercial Code has been enacted in all the states except Arizona,
Delaware, Idaho, Louisiana, Mississippi, South Carolina, and Vermont, and is now in
effect in the District of Columbia and the Virgin Islands. Among other matters, it covers
negotiable paper (replacing the old Negotiable Instruments Law), bank collections, sales,
and secured transactions.
98 For a detailed comparison of state banking laws, see SUBCOMM. ON DOMESTIC FINANCE
OF THE HOUSE COMM. ON BANKING AND CURRENCY, 88TH CONG., 1ST SESS., COMPARATIVE REG-
ULATIONS OF FINANCIAL INSTITUTIONS (Subcomm. Print 1963).

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organization of a new state bank, generally according to the population

of the place in which the bank is located. However, such requirements
are so widely different as to defy comparison. For example, Alabama
requires a capital of $25,000 for a bank in a town of less than 3,000;
$50,000 in a town of 3,000 to 6,000; $100,000 in a town of 6,000 to
50,000; and $200,000 in a town of more than 50,000. Connecticut re-
quires a capital of $100,000 in a town of less than 50,000, and $200,000
in a town of 50,000 or more. Simplest of all, Hawaii requires a capital
of $200,000 regardless of population.99
As to reserve requirements, state laws are even more difficult to
compare because of differences not only with respect to percentages
but with respect to the forms in which reserves may be carried. The
most stringent are the laws of Alaska, Louisiana, and Wyoming, which
require banks to maintain reserves equal to 20 per cent of their demand
deposits in cash or in balances with other banks. Other states prescribe
reserves of from 7 to 161/2 per cent against demand deposits. With
respect to time and savings deposits, the reserve requirements range
from 3 to 15 per cent. In some states, banks in specified "reserve" cities
or in cities of more than a certain population are subjected to higher
reserve requirements than banks in other cities, particularly with re-
spect to reserves against demand deposits. Certain states permit re-
quired reserves to be carried partly in specified types of assets as well
as in cash or balances with other banks. In nearly half the states, the
state banking authorities have power to vary the statutory percentages,
usually within specified limits. One state, Illinois, has no reserve re-
quirements whatsoever.'00
With respect to their loans and investments, state banks are similarly
subject to divergent limitations. Thus, all states limit the amount their
banks may lend to a single borrower, and basically such limitations are
stated in terms of a specified percentage of a bank's capital and surplus.
However, the percentages vary from a low of 10 per cent in about a
third of the states to a high of 35 per cent in Alaska. In addition, there
are some states in which the limitation is based upon undivided profits
as well as capital and surplus. Finally, more liberal limitations or com-
plete exemptions are provided with respect to certain types of loans in
various states.'0'
State banks are subject to different rules regarding the maximum
99 Id. at 5.
100 Id. at 17.
101 Id. at 30.

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rates of interest that they may pay on time and savings deposits. About
two-thirds of the states prescribe no limitations; the remaining states
set statutory limits or authorize the state banking authorities to pre-
scribe maximum rates of interest on deposits. Even where limitations
are prescribed by statute, they are not uniform.102
A final and important example of variations among state banking
laws relates to the establishment of branches. In a dozen states, branch-
ing is completely prohibited, although a few of such states permit the
establishment of a drive-in facility within a specified distance from the
bank. In other states, branch banking is permitted on a state-wide
basis or is geographically limited to the city or county in which the
head office is located, the adjoining counties, or an area within a
specified distance from the head office. Some states prohibit the es-
tablishment of branches in places in which there is already the head
office of a bank or except by the take-over of an existing bank. Con-
fusion in this area is enhanced by differences among state laws regard-
ing capital requirements for the establishment of branches.103
It must be emphasized that the five examples of variations among
state laws here cited-capitalization, reserves, loans to one borrower,
interest on deposits, and branches-are merely illustrative examples.
There are many other such variations. In general, they may not have
the effect of creating competitive inequalities between state banks
located in different states, although this could result where the com-
peting banks are located close to the artificial boundaries that separate
one state from another. The main point to be noted here is that we
have fifty different state banking systems (plus that of the District of
Columbia) and that'any attempt to compare these systems might chal-
lenge even the most advanced computer.
STATUTORY INEQUALITIES BETWEEN STATE AND NATIONAL BANKS

In any particular state, all state-chartered banks are of course subject
to the limitations prescribed by the banking laws of that state. How-
ever, every such bank has advantages and disadvantages in competing
with other banks because of differences between the state's banking
laws and those of the federal government. In many respects, the disad-
vantages result because most state banks have voluntarily joined the
Federal Reserve System or obtained deposit insurance and are there-
fore bound by rules of federal law that are stricter than those of state
102 Id. at 14.
103 Id. at 62.

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law. The various inequalities among federally-regulated banks will

be discussed at a later point.104 It seems desirable first to mention some
of the more important respects in which different rules apply to
national banks under federal law and state banks under state law,
without regard to the limitations of federal law to which most state
banks have voluntarily subjected themselves. Such differences operate
sometimes to the advantage of national banks and sometimes to the ad-
vantage of state banks.
First, as to the capital required for the organization of a new bank,
a national bank generally must have a capital of $50,000 if it is located
in a town of 6,000 or less, $100,000 in a place with a population be-
tween 6,000 and 50,000, and $200,000 in a city of over 50,000; and in
any case it must have a paid-in surplus equal to 20 per cent of its
capital.105 These requirements contrast with the great variety of re-
quirements prescribed by state laws for the organization of state
banks.106
A national bank is prohibited from making loans to one borrower

in excess of 10 per cent of the bank's capital and surplus, with a num-
ber of exceptions.107 However, both the prohibition and the exceptions
are quite different from the corresponding provisions of state laws
relating to loans by state banks to one borrower.
As to reserves, the requirements prescribed for national banks by
the original National Bank Act have been superseded by those pre-
scribed by the Federal Reserve Act for member banks, national and
state.'08 These requirements are generally more restrictive than those
prescribed by most state laws for state banks.109 As we have seen, this
fact has been a prime reason for the withdrawal of state banks from
membership in the Federal Reserve System.
In some respects, federal laws have sought to place national banks
on an equal competitive basis with state banks. In 1918, the authority
of national banks to exercise certain limited trust powers was expanded
104 See pp. 586-92 infra.
105 12 U.S.C. ? 51 (1964).
106 See text accompanying note 99 supra.
107 12 U.S.C. ? 84 (1964).
108 12 U.S.C. ? 462 (1964).
109 Every generalization has exceptions. For example, state bank reserves in Florida are
higher than those prescribed by federal law for member banks; one case has been cited in
which a state bank in that state was required to carry reserves of $25 million, whereas its
reserves as a national bank would have been only $6 million. See Why Banks Switch
Charters, Banking, Aug. 1965, p. 60.

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to authorize the exercise of any fiduciary powers permitted by state

law for state banks.1"0 This was obviously intended to give national
banks powers equal to those of state banks. Other amendments to
federal law have been designed to prevent national banks from enjoy-
ing competitive advantages over state banks. Thus, in 1927, Congress
prohibited national banks from paying interest on time and savings
deposits at rates in excess of those permitted by state law for state
banks."' By the same act, Congress authorized national banks to es-
tablish "in-town" branches, but only to the same extent as permitted
by state law for state banks."12 In 1933, national and state member
banks were allowed to establish out-of-town branches, but only if they
were authorized "by the statute law of the State in question by language
specifically granting such authority affirmatively and not merely by
implication or recognition, and subject to the restrictions as to location
imposed by the law of the State on State banks."1"3
Even these few efforts to place national and state banks on an equal
competitive basis have not been entirely successful. For example, in
one state, the banking commissioner, pursuant to state law, authorized
state banks to pay a maximum of 4 per cent on savings deposits only
if the depositor by contract agreed not to withdraw his deposit within
less than a year, but the Comptroller of the Currency held that the state
rule pertained to terms of withdrawal rather than the maximum rate
and that therefore national banks in that state were not bound by the
state rule.14 Again, the Comptroller has authorized national banks to
establish branches in situations in which state banks were not permitted
to do likewise. These and other interpretations issued by the Comp-
troller in recent years, to be discussed at a later point,1"5 have resulted
in inequalities between state and national banks.
Such inequalities were the principal theme of hearings held in 1963
by the House Banking and Currency Committee, at which state bank
supervisors and representatives of the Independent Bankers Association
and the National Association of Supervisors of State Banks alleged that
the Comptroller's policies and interpretations-particularly with re-
spect to the chartering of new national banks and approval of branches
110 Act of Sept. 26, 1918, ch. 177, ? 2, 40 Stat. 968, 12 U.S.C. ? 248 (1964).
111 Act of Feb. 25, 1927, ch. 191, ? 16, 44 Stat. 1232, 12 U.S.C. ? 371 (1964).
112 Act of Feb. 25, 1927, ch. 191, ? 7(c), 44 Stat. 1228, 12 U.S.C. ? 36 (1964).
113 Act of June 16, 1933, ch. 89, ? 23(c), 48 Stat. 189, 12 U.S.C. ?? 36 & 321 (1964).
114 See American Banker, March 27, 1962, p. 1, col. 4.
115 See pp. 597-632 infra.

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were a threat to the maintenance of the dual banking system.-"' On

the other hand, the Comptroller has maintained that state banking
laws, particularly with respect to branches, have hampered the growth
of a progressive banking system."17
"CONSTITUTIONAL" ADVANTAGES OF NATIONAL BANKS
Because they are chartered by the federal government and are re-
garded as "instrumentalities" of the United States, national banks
have been considered immune from restrictions of state laws that
would impair the exercise of their powers.118 In general, this immunity
has been premised on the ground that national banks are not subject
to state laws that "interfere with the purposes of their creation, tend
to impair or destroy their efficiency as federal agencies or conflict with
the paramount law of the United States."1"9 Difficult questions arise as
to whether, under this doctrine, particular state statutes would so
interfere with the operations of national banks as to be inapplicable to
such banks. It is at least clear that a state may not tax a national bank
except to the extent permitted by federal law; and Congress has specifi-
cally defined the extent to which the states may tax national banks.'20
116 See Hearings on Conflict of Federal and State Banking Laws Before the House
Committee on Banking and Currency, 88th Cong., 1st Sess. 3, 5, 8, 10-16 (1963); Hearings
on Proposed Federal Banking Commission and Federal Deposit and Savings Insurance
Board Before the Subcommittee on Bank Supervision and Insurance of the House Com-
mittee on Banking and Currency, 88th Cong., 1st Sess. (1963) [hereinafter cited as Hearings
on Federal Banking Commission].
117 After criticizing the "selfish" branch banking laws of the State of Michigan, Comp-
troller Saxon in 1962 stated: "For far too long the states have been in a position of im-
peding the National Banking System. In no other industry of which we are aware are
there imposed such restrictions on growth and expansion as there are in banking." Amer-
ican Banker, March 20, 1962, p. 1, col. 2.
118 Stemming from the landmark decision in McCulloch v. Maryland, 17 U.S. (4 Wheat.)
316 (1819), the constitutional theory of federal supremacy has been strengthened with
respect to national banks by subsequent Supreme Court cases. See, e.g., First Nat'l Bank
v. Missouri, 263 U.S. 640 (1924); First Nat'l Bank v. Fellows, 244 U.S. 416 (1917); Easton
v. Iowa, 188 U.S. 220 (1903); Davis v. Elmira Sav. Bank, 161 U.S. 275 (1896).
119 First Nat'l Bank v. Missouri, supra note 118, at 656.
120 12 U.S.C. ? 548 (1964) provides:
The legislature of each State may determine and direct, subject to the provisions
of this section, the manner and place of taxing all the shares of national banking
associations located within its limits. The several States may (1) tax said shares, or
(2) include dividends derived therefrom in the taxable income of an owner or holder
thereof, or (3) tax such associations on their net income, or (4) according to or mea-
sured by their net income ..
The imposition of one of these forms of tax is in lieu of any of the others, except that
under some circumstances a state may impose forms 3 or 4 together with form 2. In addi-
tion, the section makes real estate of national banks subject to state taxation. Ibid.

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A national bank that engages in activities in a state other than its

home state is generally exempt from the so-called "doing business"
laws of the other state that apply to activities of out-of-state banks.12'
However, it is by no means clear whether a national bank is exempt
from certain laws of the state in which it is located, such as a state
bank holding company statute122 or a state law prohibiting the issuance
of negotiable promissory notes.123
Until the law is clarified, one must assume that, in some respects,
national banks enjoy competitive advantages over state banks that
result from constitutional doctrines rather than from differences in
the corporate powers of national banks and state banks under federal
and state banking laws.
THE LABYRINTH OF FEDERAL BANKING LAWS
One of the most confusing and illogical features of our banking

system is the fact that many provisions of federal banking laws do not
apply uniformly to all classes of federally-regulated banks. Some apply
only to national banks; some apply only to member banks, state and
national; others apply to all insured banks, national, state member,
and nonmember insured; and a very few apply to all banks regardless
of class.
121 Bank of America, Nat'l Trust & Sav. Ass'n v. Lima, 103 F. Supp. 916 (D. Mass. 1952)
(national bank may sue in state court without qualifying as "foreign corporation"); State
Nat'l Bank v. Laura, 45 Misc. 2d 430, 256 N.Y.S.2d 1004 (Westchester County Ct. 1965)
(alternative holding). The fact that a state bank, but not a national bank, is restricted in
carrying on certain interstate activities, such as the sale of travelers' checks, was allegedly
one of the reasons that prompted The Chase Manhattan Bank of New York City to con-
vert from a state bank to a national bank in 1965.
122 This question is involved in proceedings pending before the Federal Reserve Board
as a result of the recent decision of the Supreme Court in Whitney Nat'l Bank v. Bank
of New Orleans & Trust Co., 379 U.S. 411 (1965). For a discussion of this matter, see 1965
BD. OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM ANN. REP. 242. In 1966, Comptroller
of the Currency Saxon challenged the applicability of the New York State Bank Holding
Company Act to a proposal by Chase Manhattan Bank to acquire the stock of the Liberty
National Bank and Trust Co. of Buffalo. See Washington Financial Reports, Feb. 21,
1966, p. A-16 [hereinafter cited as Wash. Fin. Rep.].
123 Section 298(4) of the Penal Law of New York, enacted in 1829, prohibits a bank
from issuing any "bank bill or note" bearing interest and payable at a future date. N.Y.
PEN. LAW ? 298(4). This statute has been interpreted as prohibiting state banks from
issuing negotiable notes. Leavitt v. Palmer, 3 N.Y. 19 (1849). The Comptroller of the
Currency in 1965 held that this statute does not apply to national banks. See 3 NATIONAL
BANKING REV. 117 (1965). However, the New York State Superintendent of Banks has
stated that the applicability of the statute to national banks is "not free from doubt."
N.Y. Herald Tribune, Oct. 28, 1965, p. 30, col. 8; see ADVISORY COMM. ON COMMERCIAL
BANK SUPERVISION OF THE STATE OF NEW YORK, REPORT TO THE SUPERINTENDENT OF BANKS
OF THE STATE OF NEW YORK 53 (1965).

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Laws Applicable Only to National Banks
A new national bank must have a specified amount of capital and

surplus, depending upon the population of the place in which it is
located.124 The original Federal Reserve Act required state banks to
have a like amount of capital and surplus in order to be eligible for
membership in the Federal Reserve System;125 but since 1952 a state
bank applying for membership has been required to have capital stock
and surplus only in amounts that are "adequate," in the judgment of
the Board of Governors of the Federal Reserve System, in relation to
the character and condition of the bank's assets and to its existing and
prospective deposit liabilities and other corporate responsibilities.126
No specified capital is required for federal insurance of deposits, al-
though the FDIC, in passing on a bank's application for insurance,
must consider "the adequacy of its capital structure."'927
To engage in a trust business, a national bank must obtain a special
permit from the Comptroller of the Currency and comply with certain
federal statutory restrictions, as well as with regulations issued by the
Comptroller.128 No similar restrictions are imposed by federal law
upon state member and nonmember insured state banks.
Real estate loans by national banks are subject to restrictions regard-
ing the nature of the collateral, the amount that may be loaned in
relation to the appraised value of the real estate, maturities, and the
aggregate amount of all such loans.'29 Again, federal law does not pre-
scribe similar limitations on real estate loans by other classes of
federally-regulated banks.
The amount that a national bank may lend to a single borrower has
been limited by federal law since enactment of the National Currency
Act'30 in 1863, although various exceptions have been made since that
date. No similar limitations on loans to one borrower (except on stock
and bond collateral) have been imposed by Congress on other classes
of banks. Similarly, only national banks are limited as to the aggregate
amount of their indebtedness.13' Furthermore, national banks may
act as insurance agents or real estate loan brokers only if they comply
124 12 U.S.C. ? 51 (1964).

125 See Federal Reserve Act, ch. 6, ? 9, 38 Stat. 259 (1913).
126 12 U.S.C. ? 329 (1964).
127 12 U.S.C. ? 1816 (1964).
128 12 U.S.C. ? 92a (1964).
129 12 U.S.C. ? 371 (1964).
130 Act of Feb. 25, 1863, ch. 58, 12 Stat. 665, 12 U.S.C. ? 84 (1964).
131 12 U.S.C. ? 82 (1964).

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with certain requirements of federal law that do not apply to other

banks.132
Laws Applicable Only to Member Banks
Under the Federal Reserve Act and other federal statutes, many
limitations and restrictions of federal law apply to all member banks,
i.e., national banks and state members, but not to nonmember state
banks. The most important of such provisions from a competitive
standpoint are those that require member banks to maintain reserves
against their deposits as specified by the Board of Governors of the
Federal Reserve System.133 It is this requirement that often deters state
banks from joining the System or impels state member banks to with-
draw in order to enjoy the advantage of lower state reserve require-
ments. While they may not be so significant, numerous other provisions
of federal law similarly apply to member banks only.
Under the Federal Reserve Act, a member bank may not make loans
of more than $2,500 to one of its own executive officers;134 pay a
preferential interest rate on deposits of its directors, officers, or em-
ployees;135 make loans to its "affiliates," with certain exceptions, in
excess of 10 per cent of its capital stock and surplus;136 invest in bank
premises in an amount exceeding the amount of its capital stock with-
out the approval of the Comptroller in the case of a national bank or
the Board of Governors in the case of a state member bank;137 carry
deposits with a nonmember bank in excess of 10 per cent of its own
capital and surplus;138 or act as agent for any nonbanking organization
in making loans on securities.139
Under the Banking Act of 1933,140 certain restrictions are likewise
made applicable to all member banks. Thus, a member bank is pro-
hibited from being affiliated with a securities company;141 its directors,
officers, and employees are prohibited from serving as directors, officers,
132 12 U.S.C. ? 92 (1964).

133 12 U.S.C. ?? 462 & 462b (1964).
134 12 U.S.C. ? 375a (1964).
135 12 U.S.C. ? 376 (1964).
136 12 U.S.C. ? 371c (1964).
137 12 U.S.C. ? 371d (1964).
138 12 U.S.C. ? 463 (1964).
139 12 U.S.C. ? 374a (1964).
140 Ch. 89, 48 Stat. 162 (codified in ? 19a of 15 U.S.C. and in scattered sections of 4,
12, & 39 U.S.C.).
141 12 U.S.C. ? 377 (1964).

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or employees of any securities company;'42 and it is prohibited from

having less than five or more than twenty-five directors.143
Certain provisions of federal laws affecting the operations of national
banks have been made applicable also to state member banks. As a re-
sult, all member banks, state and national, are prohibited, with some
exceptions, from purchasing corporate stock and underwriting securi-
ties;'44 they may not purchase, or make loans on, their own stock;145
they are subject to certain limitations regarding withdrawal or impair-
ment of capital and payment of dividends;146 their stock may not be
voted by a "holding company affiliate" without a permit from the Board
of Governors of the Federal Reserve System;147 they must have a speci-
fied capital in order to establish branches;148 and they must comply with
certain statutory requirements and regulations of the Board of Gov-
ernors in order to establish foreign branches or invest in foreign bank-
ing or financing corporations.'49
Under Section 8 of the Clayton Act,'50 directors, officers, and em-
ployees of member banks are prohibited from serving any other bank
in like capacities, subject to specified exceptions and under regulations
of the Board of Governors.
Since the provisions of federal law above mentioned are not appli-
cable to nonmember state banks, whether or not insured by the FDIC,
member banks are placed at a distinct disadvantage in competing with
nonmember banks, particularly as to reserves, loans and investments,
and interlocking directorates.
Laws Applicable to All Insured Banks

Some provisions of federal law are applicable to all banks insured
by the FDIC and therefore to three of the four classes of commercial
banks-national banks, state member banks, and state nonmember in-
sured banks.
Thus every insured bank must obtain the approval of a federal bank
supervisory agency before it may establish a branch'5' or participate
142 12 U.S.C. ? 78 (1964).
143 12 U.S.C. ? 71a (1964).
144 12 U.S.C. ?? 24 & 335 (1964).
145 12 U.S.C. ?? 83 & 324 (1964).
146 12 U.S.C. ?? 55, 56 & 324 (1964).
147 12 U.S.C. ?? 61 & 337 (1964).
148 12 U.S.C. ?? 36(c), 36(d) & 321 (1964).
149 12 U.S.C. ?? 321, 335, 601 & 611-31 (1964).
150 15 U.S.C. ? 19 (1964).
151 12 U.S.C. ?? 36, 321 & 1828(d) (1964).

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in a merger.152 All insured banks are prohibited from paying interest

on demand deposits and from paying interest on time and savings de-
posits at rates in excess of maximums prescribed by a federal agency-
the Board of Governors in the case of member banks and the FDIC
in the case of nonmember insured banks.'53 All insured banks with
more than a specified number of stockholders are required by 1964
amendments'54 to the Securities Exchange Act of 1934155 to disclose
certain information regarding their financial condition for the benefit
of investors in their stock and to comply with certain requirements
relating to proxies and "insider trading."'156 All insured banks are
prohibited from reducing their capital stock without the consent of
the appropriate federal bank supervisory agency.'57 Every insured bank
is required to report to the appropriate agency any changes in its voting
stock that will result in acquisition of, or a change in, the control of
such bank.'58 An insured bank may invest in stock of a "bank service
corporation" only if "assurances" are furnished to the appropriate
agency to the effect that the performance of the services involved will
be subject to regulation and examination by such agency to the same
extent as if they were being performed by the bank itself on its own
premises.'59
Laws Applicable to All Banks

A very few provisions of federal law apply to all four classes of banks
in the country. On March 6, 1933, President Roosevelt by Proclama-
tion160 ordered the suspension of operations by all banks in the country
during the so-called "banking holiday." They were allowed to resume
operations only with the approval of the Secretary of the Treasury.
This action, taken pursuant to broad provisions of the Trading with
the Enemy Act of 1917161 and promptly confirmed by Congress on
March 9, 1933,162 was probably the first instance of the exercise by the
152 12 U.S.C. ? 1828(c) (1964).

153 12 U.S.C. ?? 371a, 371b & 1828(g) (1964).
154 Act of Aug. 20, 1964, Pub. L. No. 88-467, ?? 3-5 & 8, 78 Stat. 565-70, 579 amending
15 U.S.C. ?? 781, 78m, 78n & 78p (1964).
155 15 U.S.C. ?? 78a-78hh (1964).
156 15 U.S.C. ?? 781, 78m, 78n & 78p (1964).
157 12 U.S.C. ?? 59, 329 & 1828(c) (1964).
158 12 U.S.C. ? 1817(j) (1964).
159 12 U.S.C. ?? 1861 & 1865 (1964).
160 Exec. Proclamation No. 2039, 19 FED. RESERVE BULL. 113 (1933).
161 12 U.S.C. ? 95a (1964).
162 Act of March 9, 1933, ch. 1, ? 2, 48 Stat. 1, 12 U.S.C. ? 95a (1964).

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federal government of regulatory control over all banks in the United

States. However, this assumption of federal jurisdiction was prompted
by a serious national emergency; and within a few days the require-
ment that closed banks reopen for business under "licenses" from the
Secretary of the Treasury was limited to national banks and state mem-
ber banks; the reopening of state nonmember banks was left to the
discretion of the various state banking authorities.'63
The first federal statute of a nonemergency nature to be made
applicable to all banks was Section 21 of the Banking Act of 1933,164
which makes it a criminal offense for any organization engaged in the
securities business to engage at the same time in the business of re-
ceiving deposits or for any organization to engage in the business of
receiving deposits un 'ess it is chartered under federal or state law
or is permitted by state law to engage in such business and is subject
to examination by the state banking authorities. This criminal statute,
which is still in effect, limits the operations of every bank in the
country.
All banks, as well as other lenders, were subjected to regulation by
the Federal Reserve Board in respect to consumer installment credit
during various periods from August 1941 until June 1952.165 Similarly,
real estate construction loans by banks and other financial institutions
were subjected to Federal Reserve regulation from October 1950 until
September 1952.166 These temporary regulations of consumer and real
estate credit were experiments in "selective" credit control and were
not, strictly speaking, aimed at bank supervision.
163 Exec. Order No. 6073, 19 FED. RESERVE BULL. 119 (1933).
164 12 U.S.C. ? 378 (1964).
165 Exec. Order No. 8843, 6 Fed. Reg. 4035 (1941), issued pursuant to ? 5(b) of the
Trading with the Enemy Act, 12 U.S.C. ? 95a (1964), authorized regulation of consumer
credit by the Board of Governors of the Federal Reserve System. This authority was ter-
minated as of Nov. 1, 1947, by Act of Aug. 8, 1947, ci. 517, 61 Stat. 921, 12 U.S.C.
? 249 (1964). Such authority was restored by S.J. Res. 157 of Aug. 16, 1948, ch. 836,
62 Stat. 1291, but only for a temporary period expiring June 30, 1949. The Defense Pro-
duction Act of 1950, ch. 932, ? 601, 64 Stat. 812, as amended, 50 U.S.C. App. ?? 2061-94 &
2136-66 (1964), again provided for consumer credit regulation by the Board of Governors
in accordance with Exec. Order No. 8843, but the authority was repealed by Act of
June 30, 1952, ch. 530, ? 116a, 66 Stat. 305. During all three periods, the Board's regulation
in this field was known as Regulation W.
166 Authority for such regulation was conferred by Exec. Order No. 10161, 15 Fed. Reg.
6105-06 (1950), issued pursuant to the Defense Production Act of 1950, 50 U.S.C. App.
?? 2061-94 & 2136-66 (1964), and under this authority the Board issued its Regulation X,
effective October 12, 1950. 15 Fed. Reg. 8075 (1950). However, the regulation was suspended
effective Sept. 16, 1952. 38 FED. RESERVE BULL. 1004 (1952).

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Under authority of the Securities Exchange Act of 1934,167 all banks,

for more than thirty years, have been subject to regulation (again by
the Federal Reserve) with respect to the amount of credit that may be
extended by them for the purpose of purchasing or carrying securities
registered on national securities exchanges.168 Like the previously
mentioned consumer and real estate credit regulations, this regulation
falls essentially in the area of selective credit control rather than bank
supervision.
The one area in which all banks are presently subject to federal
regulation for purposes of supervision and regulation rather than credit
control is the area of bank holding companies. Under the Bank
Holding Company Act of 1956,169 no bank, whatever its nature, may
be acquired by a bank holding company withou*-the prior approval of
the Board of Governors of the Federal Reserve System, and bank
holding companies, with certain exceptions, are prohibited from
having interests in nonbanking organizations.
THE FEDERAL JURISDICTIONAL JUNGLE
It is confusing enough that many provisions of federal banking law

do not apply uniformly to different classes of banks. However, even
those federal laws that apply to two or more classes of banks in many
instances are administered by different federal agencies. Indeed, the
diffusion of regulatory authority among three federal banking agencies
is unquestionably the most confusing aspect of our banking structure.
As to a few matters, all federally-regulated banks are subject to the
jurisdiction of only one federal banking agency. For example, all banks
in the country are subject to control only by the Board of Governors
of the Federal Reserve System with respect to the amount of credit
that they may extend for the purpose of purchasing registered securi-
ties; and, similarly, the extent to which the stock of any bank in the
country may be acquired by a bank holding company is subject to
control only by the Board of Governors. At this point, however, the
simplicity of the federal bank supervisory structure comes to an end.
As we have noted, many provisions of the Federal Reserve Act and
of certain other federal statutes apply to all member banks of the
Federal Reserve System. Under some of these provisions, the Federal
Reserve Board is vested with authority to issue regulations, such as
167 15 U.S.C. ? 78a-78hh (1964).

168 15 U.S.C. ?? 78g & 78h (1964).
169 12 U.S.C. ?? 1841-48 (1964).

62.93.45.12 on Sat, 04 Mar 2023 16:51:07 UTC
1966] Banhing System 593
those relating to reserve requirements, interest on deposits, loans to

executive officers, and interlocking directorates with other banks and
with securities companies. Certain other provisions, although also
applicable to all member banks, do not confer regulatory authority
upon the Board of Governors.
It appears to have been contemplated that all provisions of the
Federal Reserve Act applicable to "member banks," both state and
national, would be enforceable by the Federal Reserve Board, whether
or not the Board was vested with regulatory authority. Thus, section
9 of that act'70 makes state member banks subject to its provisions and
the Board is authorized to institute proceedings to terminate a state
bank's membership for violations of that section.'7l National banks
likewise are required by Section 2 of the Federal Reserve Act'72 to
comply with its provisions, and noncompliance is made a ground for
forfeiture of a national bank's franchises in proceedings to be brought
by the Comptroller of the Currency "under direction of" the Federal
Reserve Board. As a means of determining compliance, the Board is
authorized not only to examine state members but also to order special
examinations of national banks'78 and to require reports of every
member bank.'74
Despite these provisions, it is evident that, as a practical matter, any
question of noncompliance by a national bank with provisions of law
and regulations of the Board applicable to member banks will normally
be raised in the first instance only by national bank examiners ap-
pointed by the Comptroller of the Currency; and it is quite possible,
of course, that the Comptroller and his examiners may interpret a
particular provision of law or a regulation of the Board of Governors
differently from the Federal Reserve.
The Banking Act of 1933 made the directors and officers of any
member bank subject to removal by the Board of Governors of the
Federal Reserve System for continued violations of law or unsafe and
unsound banking practices.'75 Again, this provision at least suggests
that the Board was expected to have certain enforcement authority
with respect to all member banks, national as well as state. However,
170 12 U.S.C. ? 330 (1964).

171 12 U.S.C. ? 327 (1964).
172 12 U.S.C. ? 501a (1964).
173 12 U.S.C. ? 483 (1964).
174 12 U.S.C. ?? 248(a) & 325 (1964).
175 12 U.S.C. ? 77 (1964).

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removal proceedings in the case of a national bank may be instituted

only if violations of law by such bank are reported to the Board of
Governors by the Comptroller of the Currency;'76 if the Comptroller
fails to report a particular practice of a national bank as a violation of
law, the Board of Governors is powerless to institute removal proceed-
ings even though it may be of the opinion that the practice is clearly
contrary to law.
In addition to provisions of the Federal Reserve Act and other
statutes that specifically apply to all member banks, there are certain
provisions of the National Bank Act'77 relating to national banks which
are applicable also to state member banks, such as limitations on the
purchase of corporate stocks, dealings in investment securities, im-
pairment or withdrawal of capital, and payment of dividends. Under
one of these provisions, that relating to dealings in investment securi-
ties, the Comptroller has regulatory authority, and his regulations
apply to both national and state member banks.'78 Again, however, it
is possible that the Board of Governors and its examiners may apply
such provisions to state member banks in a manner not wholly con-
sistent with the way in which they are applied by the Comptroller to
national banks.
Up to this point, reference has been made only to provisions of
federal law that apply to both national banks and state member banks
and that vest regulatory authority, or appear to place enforcement
jurisdiction, in a single federal bank supervisory agency. However, a
number of provisions of federal law, most of them enacted in recent
years, have deliberately divided jurisdiction among two or more federal
agencies in connection with the administration of the same or similar
provisions of federal banking laws.
No such division of jurisdiction was provided by the Federal Reserve
Act of 1913.179 This act gave the Federal Reserve Board regulatory
authority in some respects over both national banks and state member
banks, but it did not purport to divide responsibility for the adminis-
tration of particular provisions of law between the Board and the
Comptroller of the Currency.
The first instances of such division of responsibility were reflected
176 Ibid.
177 Ch. 106, 13 Stat. 99 (1864) (codified in scattered sections of 5, 12, 18, 19, 28 & 31
U.S.C.).
178 12 U.S.C. ? 24 (1964).
179 Ch. 6, 38 Stat. 251 (1913) (codified in various sections of 12 & 31 U.S.C.).

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in the Banking Act of 1933. As we have seen, section 30 of that act'80

provided for the removal by the Federal Reserve Board of directors or
officers of member banks for violations of law or unsafe and unsound
practices by such banks; but removal proceedings could be instituted
only on the basis of reports of violations made to the Board by the
Comptroller of the Currency in the case of a national bank and by the
Federal Reserve Bank of the appropriate district in the case of a state
member bank. The 1933 act also required approval of any investment
in bank premises by a member bank in excess of the amount of its
capital stock; but such approval was required to be given by the
Comptroller of the Currency in the case of a national bank and by the
Federal Reserve Board in the case of a state member bank.'8' This
was probably the prototype of the "fragmentation" of jurisdiction that
has increased in recent years. Since 1933, Congress has proliferated
instances of such division of authority among the three federal bank
supervisory agencies for the administration of the same or similar pro-
visions of federal law.
Member banks, both state and national, are prohibited from paying
interest on demand deposits and are limited as to the rate of interest
they may pay on time and savings deposits. Nonmember insured state
banks are subject to similar provisions. However, regulatory authority
is vested in the Federal Reserve as to member banks and in the FDIC
as to nonmember insured state banks.182
All insured banks must obtain the approval of a federal agency for
the establishment of branches. However, such approval must be given
by the Comptroller in the case of national banks,'83 the Federal Re-
serve Board in the case of state member banks,'84 and the FDIC in the
case of nonmember insured state banks,185 except that the establishment
of foreign branches by both nationall86 and state member187 banks,
must have the prior approval of the Federal Reserve Board. Changes
in the location of a branch must be approved by the Comptroller in
the case of a national bank188 and by the FDIC in the case of a non-
180 12 U.S.C. ? 77 (1964).

181 12 U.S.C. ? 371d (1964).
182 12 U.S.C. ?? 461, 371b & 1828(g) (1964).
183 12 U.S.C. ? 36 (1964).
184 12 U.S.C. ? 321 (1964).
185 12 U.S.C. ? 1828(d) (1964).
186 12 U.S.C. ? 601 (1964).
187 12 U.S.C. ? 321 (1964).
188 12 U.S.C. ? 36(e) (1964).

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member insured state bank;189 but the Federal Reserve has no similar
authority with respect to the moving of a branch of a state member
bank.
Reductions in capital stock must be approved by the Comptroller in
the case of national banks,190 by the Federal Reserve in the case of state
member banks,191 and by the FDIC in the case of nonmember insured
state banks.192 Insured banks that invest in the stock of "bank service
corporations" must provide "assurances" that performance of the ser-
vice in question will be subject to examination by the appropriate
federal agency,'93 and significant changes in the control of an insured
bank must be reported to the appropriate supervisory agency.'94 All
insured banks with widely-held stock are required under 1964 amend-
ments to the Securities Exchange Act of 1934 to disclose certain infor-
mation regarding their financial condition, proxy solicitations, and
"insider" trading in their stocks; but regulatory authority is distributed
among the Comptroller of the Currency, the Federal Reserve Board,
and the FDIC.195
Finally, but importantly, the so-called Bank Merger Act of 1960196
requires approval by a federal bank supervisory agency of every bank
merger involving an insured bank. Again, jurisdiction is divided ac-
cording to the nature of the bank continuing after the merger. If it
will be a national bank, the merger must be approved by the Comp-
troller; if it will be a state member bank, the Federal Reserve Board
has jurisdiction; if it will be a nonmember insured state bank, the
FDIC must pass on the merger.197
All of these divisions of authority among the three federal bank
supervisory agencies obviously contain the seeds of conflict and con-
fusion. How these seeds have germinated and grown into a thicket of
divergent federal regulations, interpretations, and policies is the subject
of the following section of this Article.
189 12 U.S.C. ? 1828(d) (1964).

190 12 U.S.C. ? 59 (1964).
191 12 U.S.C. ? 329 (1964).
192 12 U.S.C. ? 1828(c) (1964).
193 12 U.S.C. ? 1865 (1964).
194 12 U.S.C. ? 1817 (1964).
195 15 U.S.C. ? 781(i) (1964).
196 Act of May 13, 1960, 74 Stat. 129 (now 12 U.S.C. ? 1828(c) (1964)).
197 Ibid.

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CONFLICTS AMONG FEDERAL BANKING AGENCIES
Differences between state and federal banking laws generally, though

not always, have tended to favor state banks. In recent years, the scales
have been heavily tipped in the direction of national banks by the fact
that the Comptroller of the Currency, in his supervision of national
banks, has issued rulings and followed policies more liberal than those
of the Federal Reserve Board and the FDIC in their administration
of statutes applicable to state member banks and nonmember insured
state banks.
The numerous conflicts between the Comptroller of the Currency
and the Federal Reserve Board have dominated the headlines in the
banking news. For example, particular conflicts have evoked comments
to the effect that these agencies had "crossed swords,"198 or that they
were "locked in combat";199 or that there was "open warfare, feud,
power struggle, or whatever you want to call it," between the Comp-
troller and the Board.200 It must not be assumed, however, that the
conflicts have involved only the Comptroller and the Federal Reserve.
In some cases, the Comptroller and the FDIC have clashed; and in a
few instances differences have arisen between the Federal Reserve and
the FDIC.
Disagreements among the federal banking agencies were a major
theme of hearings held in 1965 before a subcommittee of the House
Banking and Currency Committee on bills to consolidate the functions
of those agencies.201 The record of those hearings includes memoranda
submitted by the FDIC and the Federal Reserve Board on this sub-
ject;202 a document prepared by the Committee staff charging the Comp-
troller with twenty-nine "illegal" actions, hereafter referred to as the
"House Committee's 29 Charges";203 a memorandum prepared by the
198 Business Week, Jan. 4, 1964, p. 21.

199 Wash. Post, Jan. 3, 1964, ? A, p. 14, col. 1.
200 Bank News, Jan. 15, 1964, p. 11. In other newspapers, editorial comment has been
directed at "The Banking Supervision Mess," J. of Commerce, Mar. 23, 1965, p. 4, cols. 1-
2; see N.Y. Herald Tribune, Mar. 23, 1965, p. 31, cols. 2-5, at 32, col. 1.
201 Hearings Before the Subcommittee on Bank Supervision and Insurance of the
House Committee on Banking and Currency and the House Committee on Banking and
Currency on H.R. 107 and H.R. 6885 With Respect to Consolidation of Bank Examining
and Supervisory Functions (1965) [hereinafter cited as 1965 Hearings on Consolidation of
Federal Bank Supervisory Functions].
202 Id. at 345, 350.
203 Id. at 289.

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Comptroller's Office in reply to such charges, hereafter referred to as

the "Comptroller's Answers to the 29 Charges";204 and a rebuttal mem-
orandum by the Committee staff, hereafter cited as the "House Com-
mittee's Rebuttal of the Comptroller's Answers."205 At least one attempt
has been made to appraise the merits of the opposing positions taken
by the Comptroller and the Federal Reserve with respect to certain
questions.206
Our purpose here is not to determine whether one agency was right
and another was wrong in any disputed area, but simply to demonstrate
the existence of conflicts among the banking agencies and to describe
the more important conflicts that have produced competitive inequali-
ties among the different classes of federally-regulated banks. It should
be emphasized that the points of conflict here mentioned are not ex-
haustive; many have been omitted, and new conflicts arise almost every
week.
Repurchase Agreements
The question whether a particular transaction constitutes a "loan"

or a "borrowing" is important in determining the applicability of
provisions of the National Bank Act that limit the amount that a
national bank may lend to one customer207 and that restrict the ag-
gregate amount of borrowings by a national bank.208 While the Federal
Reserve has no administrative authority with respect to these provisions,
it is charged with the administration of various provisions of the Fed-
eral Reserve Act that place limitations on certain types of loans by mem-
ber banks, both national and state. For example, section 23A of that
act limits loans by member banks to their affiliates,209 section 11(m)
limits loans on stock or bond collateral,210 and section 22(g) limits
loans to executive officers.21' In addition, Section 13 of the Federal
Reserve Act prohibits a Federal Reserve Bank from discounting, for
any member bank, paper of one borrower in excess of the amount that
a national bank may lend to a single customer.212
204 Id. at 375; see Wash. Fin. Rep., Sept. 6, 1965, p. 4.

205 1965 Hearings on Consolidation of Federal Bank Supervisory Functions 375.
206 Note, 65 COLUM. L. REV. 660 (1965). It should be noted that the present writer
would be compelled to disagree with this appraisal in numerous respects.
207 12 U.S.C. ? 84 (1964).
208 12 U.S.C. ? 82 (1964).
209 12 U.S.C. ? 371c (1964).
210 12 U.S.C. ? 248(m) (1964).
211 12 U.S.C. ? 375a (1964).
212 12 U.S.C. ? 345 (1964).

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For years, both the Comptroller and the Board of Governors had
agreed that, where a bank bought securities with an agreement. to
resell, the transaction constituted a loan by the bank and a borrowing
by the "seller."213 In April 1963, however, the Comptroller ruled that
such a "purchase" of securities by a national bank, under an agreement
to "resell" at the end of a stated period, was not a loan subject to lend-
ing limitations and that, conversely, a "sale" of securities under repur-
chase agreement was not subject to borrowing limitations.214
The Comptroller's ruling was assailed as being "contrary to the
clear intent of Congress."'215 The Comptroller replied that, in "form
as well as legal effect, such transactions are neither borrowings nor
lendings but rather are purchases and sales," and that his office could
not, "because of possible isolated instances of evasion of applicable
statutory limits by a few bankers, view transactions as being applicable
[sic] to statutory limitations which, in fact and in law, are not appli-
cable. "216
Federal Funds Transactions
Over the years, a practice has developed under which a member

bank in need of loanable funds or temporarily short in its reserve posi-
tion will "buy" reserves from another member bank that has excess
reserves with its Federal Reserve Bank. Usually, such "federal funds"
transactions are for short periods of one or two days; at the end of the
period the "buying" bank retransfers the amount involved from its re-
serve account to the account of the "selling" bank.
In 1963, the Comptroller ruled that a federal funds transaction does
not constitute a borrowing by the "purchasing" bank or a loan by the
"selling" bank for purposes of the statutory limitations on loans and
borrowings by national banks.217 The Comptroller based his ruling on
the ground that such a transaction represents "a buying of money for
213 See, e.g., Comptroller's Digest of Opinions ? 650 (superseded by the Comptroller's
Manual for National Banks, infra note 214).
214 U.S. TREASURY DEP'T, COMPTROLLER'S MANUAL FOR NAT'L BANKS ? 1131 (1965). T
manual, a loose-leaf compilation of national banking laws and regulations and rulings of
the Comptroller, is hereinafter cited as COMPTROLLER'S MANUAL. The Comptroller has
applied the same principle to purchases and sales of mortgages under repurchase agree-
ments. Id. ? 1132.
215 House Committee's 29 Charges, #19, 1965 Hearings on Consolidation of Federal
Bank Supervisory Functions 291.
216 Comptroller's Answers to the 29 Charges, #19, 1965 Hearings on Consolidation of
Federal Bank Supervisory Functions 397.
217 COMPTROLLER'S MANUAL ? 1130; see 1 NATIONAL BANKING REV. 600 (1964); Americ
Banker, Aug. 26, 1963, p. 1, cols. 2-3.

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a short term use" and that "custom and practice within the banking
industry" recognize such transactions as purchases and sales of funds.218
In reply to the charge that his action was contrary to previous rulings
by his office,219 the Comptroller stated that to impose the borrowing a
lending limits on federal funds transactions "merely because previous
Comptrollers viewed these transactions in a different light would be to
perpetuate a position for its own sake without regard to its legal cor-
rectness."s220
Shortly after announcement of the Comptroller's action, the Board
of Governors issued a statement reaffirming its position of many years22'
that federal funds transactions constitute loans and borrowings for
purposes of statutory provisions administered by the Board.222 In taking
what was regarded as "sharp exception"223 to the Comptroller's ruling,
the Board concluded that a "purchase" and "sale" of federal funds
legally constitutes a borrowing-lending transaction, and that, therefore,
a "sale" of federal funds by a member bank, "whether State or na-
tional," to its affiliate is subject to the limitations of Section 23A of the
Federal Reserve Act224 on loans by member banks to their affiliates.225
Promissory Notes
One of the most intriguing questions in the banking field in recent

years has related to the status of short-term notes issued by banks in
order to obtain additional loanable funds. The practice was inaugu-
rated by the First National Bank of Boston in September 1964.226
Other banks followed suit. The Comptroller of the Currency ruled

Federal Bank Supervisory Functions 382; see 1 NATIONAL BANKING REV. 134 (1963).
221 16 FED. RESERVE BULL. 81 (1930); 14 id. at 656 (1928).
222 12 C.F.R. ? 208.106 (Supp. 1966); see American Banker, Sept. 13, 1963, p. 1, col. 4.
223 American Banker, Aug. 27, 1963, p. 1, col. 3.
224 12 U.S.C. ? 371c (1964).
225 12 C.F.R. ? 208.106(b) (Supp. 1966). The Board also referred to its previous ruling,
12 C.F.R. ? 222.110 (1963), to the effect that the so-called "sale" of federal funds by a
bank subsidiary of a bank holding company to a fellow bank subsidiary would result in
a criminal violation of provisions of the Bank Holding Company Act of 1956, 12 U.S.C.
? 1845 (1964). For additional discussion of the federal funds conflict, see 1965 Hearings
on Consolidation of Federal Bank Supervisory Functions 349, 351.
226 Bratter, Should Banks Be Allowed to Issue Promissory Notes?, Banking, Nov. 1965,
p. 49.

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that the issuance of such notes by national banks was an "essential part
of the business of banking" and that, as "borrowings," they were sub-
ject to the borrowing limits imposed upon national banks.227 In the
same ruling, he held that the proceeds of such notes do not constitute
deposits and are therefore not subject to provisions of federal law with
respect to deposit reserves of member banks, limitations on deposit in-
terest rates, and deposit insurance assessments.228 Concurring with the
Comptroller, the Board of Governors held that unsecured notes issued
by member banks constituted "borrowings" and therefore were not sub-
ject, "under present law and regulation," to the deposit interest rate
limitations and reserve requirements applicable to member banks
under the Board's regulations.229
Subsequently, the Comptroller reversed himself and held that such
notes were not to be regarded as borrowings for purposes of limitations
on borrowings by national banks.230 He did not, however, change his
position that the proceeds of such notes were not deposits, although it
might be questioned how such notes could be neither borrowings nor
deposits.23'
The situation was complicated in January 1966 by a proposal by the
Board to define "deposits" as including bank promissory notes (with
certain exceptions) for purposes of its regulations relating to reserve
requirements of member banks and the payment of interest on deposits
by member banks.232 The Comptroller violently opposed the Board's
proposed action on the ground that it went beyond the Board's statu-
tory authority.233
227 COMPTROLLER'S MANUAL ? 7530.

228 Ibid.
229 12 C.F.R. ? 217.138 (Supp. 1966).

230 3 NATIONAL BANKING REV. 117 (1965).
231 12 U.S.C. ? 82 (1964) provides ten exceptions to the borrowing limitation, and the
only one within which such notes could reasonably fall is that which exempts "moneys
deposited with or collected by" a national bank. Moreover, the Comptroller's ruling
characterized the notes as being issued "in the ordinary course of banking business as a
means of obtaining funds to be used in making loans,..." a fairly accurate description of
"deposits." 3 NATIONAL BANKING REv. 117 (1965).
232 31 Fed. Reg. 1010 (1966); see Wash. Fin. Rep., Jan. 24, 1966, p. T-14. The Board's
proposal was based upon its statutory authority, under 12 U.S.C. ? 461 (1964), to define
terms and to issue regulations to prevent evasions of requirements of the Federal Reserve
Act regarding reserves and payment of interest on deposits and was apparently prompted
by the Board's belief that, merely by designating an instrument as a "note" instead of
a "deposit," a bank could evade these requirements.
233 Letter From Comptroller of the Currency to Board of Governors of the Federal
Reserve System, Feb. 23, 1966; see Wash. Fin. Rep., Feb. 28, 1966, pp. A-13, T-4. The

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Capital Notes and Debentures
The Comptroller and the Board of Governors have differed not only
as to what constitutes a loan or a borrowing for purposes of statutory
limitations but also as to what may be included in the "base" in apply-
ing such limitations.
Both the borrowing and the lending limits of national banks are
based on a specified percentage of a bank's "capital stock" and "surplus
fund."234 Similarly, other provisions of federal law limit particular
types of loans and investments by member banks, both national and
state, to a specified percentage of the bank's "capital," "capital stock,"
or "capital stock and surplus."235 Traditionally, only common and
preferred stock have been regarded as "stock" for purposes of these
limitations; and the terms "surplus" and "surplus funds" have usually
been construed as including only funds that represent a part of a bank's
true surplus, i.e., funds clearly free from any charge or liability.
In efforts to add to their "capital" funds, many banks in recent
years have sold to the public so-called "capital notes" or "capital de-
bentures," instruments giving the holder a creditor position instead
of the "equity" ownership status affored by capital stock, although
normally they are expressly subordinated to claims of depositors. In
December 1963, the Comptroller ruled that capital notes issued by
national banks have "all of the protective effect of capital and surplus
insofar as depositors are involved" and that therefore they might be
regarded as part of such bank's capital stock and surplus funds in com-
Comptroller's letter stated that, if the proposed regulation were issued, his office "would
have to give its consideration to the manner in which the question can best be presented
to the courts for final determination." Following publication by the Board of a revised
draft of its proposal, see 31 Fed. Reg. 5320 (1966), the Comptroller again indicated that
he would "join any affected member bank in a court test of the question." Wall Street J.,
April 11, 1966, p. 30, col. 2.
234 The total indebtedness of a national bank, with certain exceptions, may not exceed
100% of its "capital stock . . . actually paid in and remaining undiminished by losses
or otherwise, plus 50 per cent of the amount of its unimpaired surplus fund." 12 U.S.C.
? 82 (1964). Loans by a national bank to any one person, with certain exceptions, may
not exceed 10% of the bank's "capital stock . . . actually paid in and unimpaired and
10 per centum of its unimpaired surplus fund ...." 12 U.S.C. ? 84 (1964).
235 For example, a member bank may not make loans secured by stock or bond col-
lateral to any one person in excess of 10% of its "unimpaired capital and surplus," 12
U.S.C. ? 248(m) (1964); its loans to any one affiliate may not exceed 10% of its "capital
stock and surplus," 12 U.S.C. ? 371c (1964); and its investments in bank premises may
not exceed the amount of its "capital stock" without the approval of the Comptroller
in the case of a national bank or the Federal Reserve in the case of a state member
bank, 12 U.S.C. ? 371(d) (1964).

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puting the lending limits of the bank.236 The Comptroller reasoned

that, "to the extent that they are subordinated to deposit liabilities,"
capital notes and debentures "stand in the same relationship to de-
positors as traditionally recognized forms of capital and surplus."237
The Board of Governors promptly issued a statement to the effect
that capital notes and debentures were not "stock" and that, for pur-
poses of the Federal Reserve Act limiting loans and investments of
member banks to a certain percentage of their capital stock and surplus,
capital notes and debentures could not be regarded as "capital,"
"capital stock," or "surplus.' '238
The Comptroller's ruling related only to the amount that a national
bank may lend to one borrower, and since the Federal Reserve Board
has no enforcement authority in this respect, there was no direct clash
between the two agencies except in principle.239 However, a subsequent
ruling by the Comptroller created such a direct conflict. Section 23A
of the Federal Reserve Act240 limits the amount that any member
bank, national or state, may lend to a single affiliate and to all of its
affiliates in the aggregate, and these limitations are based on a specified
percentage of the member bank's capital stock and surplus. The Board's
statement specifically held that capital notes and debentures could not
be counted in determining these limitations. However, the Comp-
troller later applied his earlier ruling to loans by national banks to
their affiliates for purposes of Section 23A of the Federal Reserve Act.2
The Comptroller's position with respect to the treatment of capital
notes and debentures was criticized as "not provided by law and con-
236 12 C.F.R. ? 7.7 (Supp. 1966).

237 1 NATIONAL BANKING REV. 425 (1964); 12 C.F.R. ? 14.5 (Supp. 1966); see 2 NATIONAL
BANKING REV. 264 (1964); American Banker, Dec. 27, 1963, p. 1, cols. 3-4, at 16, col. 2.
238 12 C.F.R. ? 208.108 (Supp. 1966). The Board observed that a note or debenture,
embodying a promise to pay a certain sum of money, is quite different from stock of a
bank that evidences a proprietary or equity interest in the bank's assets, and that the
proceeds of a note or debenture that must be repaid on a specified date "cannot reason-
ably be regarded as 'surplus funds' of the issuing corporation." Ibid.
239 Federal Reserve Banks are prohibited from lending to a member bank on the
security of paper of one obligor more than a national bank may lend to one borrower.
See text accompanying note 212 supra. Thus, even though the Comptroller's ruling per-
mitted a national bank to count its capital notes and debentures as part of its capital
stock and surplus in computing its lending limit, the Board's statement of January 9,
1964, 12 C.F.R. ? 208.108 (Supp. 1966), made it clear that a Reserve Bank could not do
likewise in determining the amount it could lend to a member bank (including a na-
tional bank) on the security of paper of a single obligor.
240 12 U.S.C. ? 371c (1964).

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trary to traditionally accepted corporate and accounting practice."242

The Comptroller defended his position on the ground that protection
of depositors was the primary purpose of the restriction on the amount
that a national bank may lend to any one person and that, therefore,
subordinated notes and debentures, standing in the same relationship
to depositers as equity capital and surplus, should "appropriately be
included in the bank's loan base."243 On the other hand, the Board of
Governors noted that the National Bank Act defines the term "capital"
as including only a national bank's unimpaired common stock plus the
amount of its preferred stock outstanding and unimpaired.244
Undivided Profits as Part of "Capital"

The Comptroller, early in 1965, ruled that the "undivided profits"
of a national bank may be included in its "unimpaired surplus fund"
in determining whether loans to a single borrower exceed the maxi-
mum amount prescribed by Section 84 of Title 12 of the United States
Code, i.e., 10 per cent of the bank's capital stock and unimpaired sur-
plus fund, with certain specified exceptions.245 Shortly thereafter, the
Board of Governors ruled that a bank's undivided profits do not con-
stitute "capital," "capital stock," or "surplus" for purposes of provi-
sions of the Federal Reserve Act.246 As with respect to capital notes and
debentures, the Board noted that Congress had explicitly indicated in
the national banking laws that the term "capital" is limited to common
stock and preferred stock. The Board also noted that the Supreme
Court of the United States had made a distinction between undivided
profits and surplus,247 and that various provisions of the federal banking
laws likewise give the terms different meanings.248

244 12 U.S.C. ? 51c (1964).
245 COMPTROLLER'S MANUAL ? 1100(C).
246 12 C.F.R. ? 208.111 (Supp. 1966).
247 See Edwards v. Douglas, 269 U.S. 204, 215 (1925).
248 For example, the Board cited 12 U.S.C. ? 333 (1964), which requires that a mutual
savings bank, in order to be eligible for membership in the Federal Reserve System shall
have "surplus and undivided profits" not less than the amount of capital required for
the organization of a national bank. The Board also noted that subscriptions to Federal
Reserve Bank stock are based upon a member bank's "capital stock and surplus," 12
U.S.C. ?? 282, 287 & 321 (1964), and that, if undivided profits are treated as a part of
surplus, a bank's subscription would have to be adjusted continuously. 12 C.F.R. ? 208.111
(Supp. 1966).

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The Comptroller's ruling was referred to as "one more step by Mr.

Saxon in liberalizing rules for national banks."249 The Board's sub-
sequent conflicting statement gave rise to a typical newspaper headline:
"Federal Reserve Board, Currency Comptroller Again Split on Rul-
ing. "250
Revenue Bonds
One of the most important and controversial conflicts between the

Comptroller of the Currency and the Board of Governors has related to
the authority of member banks to underwrite obligations of states and
municipal subdivisions. Paragraph "Seventh" of Section 5136 of the
Revised Statutes251 provides that a national bank "shall not underwrite
any issue of securities" and shall not for its own account invest more
than 10 per cent of its capital and surplus in the investment securities
of any one obligor; but the section provides that these restrictions shall
not apply to "general obligations of any State or of any political sub-
division thereof ....." Section 9 of the Federal Reserve Act252 subjects
state member banks to the same limitations in this respect "as are
applicable in the case of national banks under paragraph 'Seventh' of
section ... [5136] ... ." Stated simply-and over-simplified-the Board
of Governors has taken the position that obligations do not fall within
the "general obligations" exemption unless they are supported by a
promise made by a governmental entity that possesses general power of
taxation, including property taxation, and by the full faith and credit
of the promisor, while the Comptroller has held that the exemption
applies to obligations of a state that are payable only from specified
revenues, such as sales taxes, and to obligations of a political subdivision
that has no taxing powers.253
This conflict was first emphasized late in 1963 by contrary rulings
of the Comptroller and the Board with respect to certain bonds of the
State of Washington. The Comptroller held that the bonds were eligi-
ble for underwriting and for unlimited purchase by national banks,
248 N.Y. Herald Tribune, May 1, 1964, p. 26, col. 4.

250 Wall Street J., June 22, 1964, p. 15, col. 4.
251 12 U.S.C. ? 24 (1964).
252 12 U.S.C. ? 335 (1964).
253 For a complete discussion of this controversy, see Hearings on Increased Flex
for Financial Institutions Before the House Committee on Banking and Currency
Cong., 1st Sess. (1964) [hereinafter cited as 1964 Hearings on Increased Flexibili
Financial Institutions].

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principally on the ground that the state's highest court had ruled254
that the bonds were backed by the credit of the state and were, "in
truth, debts of the state."255 The Board, however, took the position
that the bonds were payable only from the proceeds of retail sales taxes
and, as expressly stated by state law, were not in the nature of "general
obligations," and that, consequently, such bonds were not eligible for
underwriting by state member banks.250
The Comptroller's Washington State ruling was followed by numer-
ous rulings to the same general effect.257 In November 1965, he held
that bonds of the Port of New York Authority were eligible for under-
writing by national banks, even though the Authority has no taxing
power and may not pledge the credit of either the State of New York
or the State of New Jersey.258 The Board issued an additional ruling in
clarification of its own position. It held that, if a state or other govern-
mental authority with general taxing powers agrees unconditionally to
pay to the issuer of securities rentals sufficient, in all events, to cover
payments of principal and interest on such securities, the securities
would be "indirectly" supported by general taxing powers and, accord-
ingly, would constitute "general obligations" under Section 5136 of
the Revised Statutes.259
In the meantime, the "rift"260 between the Comptroller and the
Board was widened by a revision of the Comptroller's "investment
securities" regulations26' effective September 12, 1963, only eight days
after the Board's ruling with respect to the Washington State bonds.
254 See State ex rel. Wash. State Fin. Comm. v. Martin, 62 Wash. 2d 645, 384 P.2d 833
(1963).
255 12 C.F.R. ? 1.127 (Supp. 1966).
256 12 C.F.R. ? 208.105 (Supp. 1966). Two days after the Board's ruling was issued, the
Comptroller stated that "no reasonable challenge" could be made to his ruling and that
"legal dignity" could not attach to "the expression of a differing opinion by the mone-
tary authority." Statement by Comptroller of the Currency, Sept. 6, 1963. For an account
of the contrary rulings of earlier Comptrollers on this subject, see Memorandum by David
B. Hexter, Assistant General Counsel, Board of Governors of the Federal Reserve System,
Dec. 13, 1963, in 1964 Hearings on Increased Flexibility for Financial Institutions 1046.
257 See 12 C.F.R. ? 1.128-.167 (Supp. 1966).
258 12 C.F.R. ? 1.167 (Supp. 1966); see American Banker, Nov. 4, 1965, p. 1, col. 2.
259 12 C.F.R. ? 208.109 (Supp. 1966). One financial newspaper regarded this ruling as
suggesting that there was "very little difference" between the positions of the Board and
the Comptroller. J. of Commerce, May 13, 1964, p. 2, col. 6. However, as subsequent
events indicated, the difference was in fact a very real one.
260 Wall Street J., Sept. 12, 1963, p. 18, col. 3.
261 12 C.F.R. ?? 1.1-.167 (Supp. 1966). These regulations had been published for com-
ment in June 1963, but were adopted in substantially the form in which they had been
proposed. 1 NATIONAL BANKING REV. 138, 264 (1963).

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The revised regulations, applicable to state member as well as national

banks, defined a "general obligation" as one supported by the full
faith and credit of the obligor and as including one "payable from a
special fund when the full faith and credit of a State or any political
subdivision thereof is obligated for payments into the fund of amounts
which will be sufficient to provide for all required payments in con-
nection with the obligation,"262 whether or not the obligation is sup-
ported by plenary taxing authority of the obligor. The Board of Gov-
ernors took the position that these regulations purported to authorize
national banks and state member banks to underwrite and purchase
without limitation securities that were not exempted from the statu-
tory prohibition against underwriting and against investing in excess
of the 10 per cent limitation, such as securities payable solely out of
revenues derived from the operation of tunnels, turnpikes, or bridges,
and that the Comptroller was not authorized by law thus to expand the
category of exempt securities.263
The conflict between the Comptroller and the Board with respect
to the authority of member banks to underwrite revenue bonds has
been reflected not only by divergent interpretations of present law and
clashing opinions as to the regulatory powers of the Comptroller but
also by sharply different views as to how the law in this area should be
changed. In 1963, the Comptroller favored and the Board opposed a
bill264 that would have authorized national banks and state member
banks to underwrite obligations of states and political subdivisions
(other than any payable solely from special benefits assessments) if
they qualified for purchase by a national bank for its own account.265
This bill, not surprisingly, was supported by commercial bankers266
262 12 C.F.R. ? 1.3(d) (Supp. 1966).
263 12 C.F.R. ? 208.107 (Supp. 1966).
264 H.R. 5845, 88th Cong., 1st Sess. (1963).
265 See 1964 Hearings on Increased Flexibility for Financial Institutions 12, 92, 96. In
its 1965 Annual Report the Board of Governors, in keeping with its position, recom-
mended that the law be amended to define "general obligations" as
only obligations that are supported by an unconditional promise to pay, directly or
indirectly, an aggregate amount which (together with any other funds available for
the purpose) will suffice to discharge, when due, all interest on and principle of such
obligations, which promise (1) is made by a governmental entity that possesses gen-
eral powers of taxation, ... and (2) pledges or otherwise commits the full faith and
credit of said promisor; said term does not include obligations not so supported
that are to be repaid only from specified sources such as the income from designated
facilities or the proceeds of designated taxes.
1965 BD. OF GOVERNORS OF THE FEDERAL RESERVE Sys. ANN. REP. 239.
266 For example, it was favored by the American Bankers Association. 1964 Hearings
on Increased Flexibility for Financial Institutions 159.

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and opposed by investment bankers.267 In the end, however, no action

was taken by Congress to resolve the conflict between the Comptroller
and the Board of Governors. Indeed, the hearings on the bill served
only to reflect the "general state of confusion."268
More than two years later, in January 1966, a group of about one
hundred investment banking firms sought to resolve the issue in the
courts. In a suit against the Comptroller they charged that, in contra-
vention of Section 5136 of the Revised Statutes, he had illegally
authorized national banks to underwrite and deal in the obligations of
states and political subdivisions not secured by the general power of
taxation.269
Purchase of Stock Generally
Perhaps the most far-reaching rulings of the Comptroller of the Cur-

rency have been those relating to the authority of national banks to
purchase corporate stocks. Section 5136 of the Revised Statutes270 pro-
vides in part:
Except as hereinafter provided or otherwise permitted by law,

nothing herein contained shall authorize the purchase by . . . [a
national bank] for its own account of any shares of stock of any
corporation.
Section 9 of the Federal Reserve Act makes state member banks "sub-
ject to the same limitations and conditions with respect to the pur-
chasing . . . of . . . stock as are applicable in the case of national
banks." 271
Until recent years, these provisions had been regarded as prohibiting
national banks and state member banks from purchasing any corporate
stocks for their own account except to the extent that federal law
expressly or by clear implication authorized the purchase of particular
types of stock. The present Comptroller, however, has substantially
expanded the powers of national banks in this area by liberal inter-
pretations of the stock-purchase prohibition, while the Federal Re-
267 Id. at 513.
268 Weekly Bond Buyer, Sept. 30, 1963, ? 2, p. 1, col. 2.
269 Baker, Watts & Co. v. Saxon, Civil No. 97-66, D.D.C., complaint filed Jan. 14, 1966.
Seeking a declaratory judgment, the plaintiffs asked the court to enjoin the Comptroller
from purporting to authorize national banks to underwrite and deal in revenue obliga-
tions. See Wash. Fin. Rep., Jan. 17, 1966, p. A-10; N.Y. Times, Jan. 15, 1966, p. 31, col. 6.
270 12 U.S.C. ? 24 (1964).
271 12 U.S.C. ? 335 (1964).

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serve Board has adhered to the view that the prohibition means what it
says and that state member banks may not purchase corporate stocks
for their own account unless authorized by some provision of federal
law.
In a few instances, the Comptroller has based his position on the
ground that the purchase of stock by a national bank may properly be
regarded as a "necessary business expense," as with respect to the pur-
chase of stock of local "development" corporations.272 In most cases,
however, he has premised his rulings on the general ground that Section
5136 of the Revised Statutes-the same section that prohibits purchases
of stock-authorizes a national bank to exercise "all such incidental
powers as shall be necessary to carry on the business of banking," and
that therefore a national bank may purchase all or a majority of the
stock of a corporation engaged in a business in which the bank itself
could engage. Moreover, he has stated that what is "properly incident"
to a national bank's business will be determined by him in the light
of banking developments.273 The principal arguments for and against
the Comptroller's position may be briefly stated.274
In support of the Comptroller, it may be contended that the purpose
of the stock-purchase prohibition was simply to prohibit national
banks from using their funds for "speculative" investments in corporate
stocks and that it was not meant to prohibit stock purchases as a means
of implementing the acknowledged powers of national banks, such as
the operation of a subsidiary corporation to carry on a business in
which a national bank may directly engage. The prohibition excepts
not only stock purchases as "hereinafter provided" by Section 5136 of
the Revised Statutes (i e., stock of safe deposit companies) but purchases
"otherwise permitted by law," and this exception, it is argued, covers
purchases that are properly incident to the banking business as well as
purchases of stock expressly sanctioned by specific provisions of federal
statutes.
On the other hand, it may be contended that the stock-purchase
272 COMPTROLLER'S MANUAL ? 7480; see American Banker, June 10, 1964, p. 1, cols. 3-4;
Wall Street J., June 9, 1964, p. 9, col. 1.
273 N.Y. Times, Nov. 28, 1965, ? 3, p. 1, col. 2, at 5, col. 4.
274 For a detailed statement of arguments on both sides of the question, see legal
memoranda attached to New York State Bank Superintendent Wille's recommendation
to the New York State Banking Board that an application by The Chase Manhattan
Bank to acquire the stock of another bank be denied. Mr. Wille's recommendation, dated
Feb. 16, 1966, and the accompanying legal memoranda are reprinted in Wash. Fin. Rep.,
Feb. 21, 1966, p. T-7.

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prohibition is not expressly limited to purchases for "speculative"

purposes and that, apart from acquisitions of stock to prevent loss on
loans,275 the exceptions to the prohibition cover only those cases in
which Congress has expressly or by clear implication authorized the
purchase of stock by national banks.276 This argument is supported by
the fact that Congress in recent years has considered it necessary to
enact special legislation expressly authorizing national banks to pur-
chase stock of certain kinds of corporations, even though such corpora-
tions were engaged in businesses in which national banks could engage
directly.277 It may also be argued that the fact that the stock-purchase
prohibition in section 5136 excepts purchases "hereinafter provided"
indicates that it was not intended to exempt stock purchases that might
otherwise fall within the "incidental" powers provision that appears
earlier in that section. Furthermore, the Supreme Court of the United
States has held that national banks may exercise only expressly granted
powers, and that the grant of "incidental" powers covers only those
"necessary" to carry on the banking business.278 Thus, the purchase of
stock to avoid loss on a loan may reasonably be regarded as a "necessary"
measure; but purchase of stock in a corporation engaged in a business
in which the bank may itself directly engage cannot so easily be re-
garded as necessary to the bank's business, however desirable it might
be as a means of implementing the bank's business.
On the ground that a national bank has "incidental" power to
275 It has always been recognized that "salvage" operations, i.e., the purchase of stock
to avoid or minimize loss, is a necessary incident to the banking business. See, e.g., Ather-
ton v. Anderson, 86 F.2d 518 (6th Cir. 1936).
276 Thus, member banks are expressly authorized to purchase stock of Federal Reserve
Banks, 12 U.S.C. ?? 282, 321 (1964), foreign banking corporations, 12 U.S.C. ? 601 (1964),
small business investment companies, 15 U.S.C. ? 682 (1964), bank service corporations,
12 U.S.C. ? 1862(a) (1964), and the Federal National Mortgage Association, 12 U.S.C.
? 1718 (1964). By clear implication they are authorized to purchase stock of safe-deposit
companies, 12 U.S.C. ? 24 (1964), and bank premises companies, 12 U.S.C. ? 371(d) (1964).
277 For example, in its report on the Bank Service Corporation Act, the Senate Banking
and Currency Committee stated:
The bill would free from any limitation or prohibition otherwise imposed by any
provision of Federal law, exclusively relating to banking (including, for example, 12
U.S.C. 24 [which contains the stock-purchase prohibition], 12 U.S.C. 84, 12 U.S.C. 335
[which applies the stock-purchase prohibition to state member banks], and 12 U.S.C.
1845), an investment of not more than 10 percent of the paid-in and unimpaired
surplus of each of the two or more investing banks.
S. REP. No. 2105, 87th Cong., 2d Sess. 5 (1962).
278 Texas & Pac. Ry. v. Pottorif, 291 U.S. 245, 253 (1934); see Yonkers v. Down
U.S. 590, 596 (1940). The Pottorif decision said that the "measure of their powers is the
statutory grant; and powers not conferred by Congress are denied." 291 U.S. at 253.

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purchase all or a majority of the stock of a corporation engaged in a

business in which the bank could engage directly, the Comptroller has
held that national banks may own stock in a charitable corporation,279
a mortgage servicing corporation,280 a credit bureau,281 a corporation
engaged in the business of a travel agency,282 and a corporation provid-
ing messenger service between subscribing merchants and banks of
their choice.283 The Comptroller has also approved the purchase by
national banks of stock in nationwide credit card corporations.284 Logi-
cally, the rationale of these rulings could be applied so as to make it
possible for national banks to organize or acquire subsidiary corpora-
tions engaged in any business which the Comptroller might determine
to be properly "incidental" to the business of banking, including,
perhaps, small loan companies.
As of this writing, the Board of Governors of the Federal Reserve
System has not published any ruling specifically relating to the pur-
chase by state member banks of stock in corporations of the types above
mentioned. However, past positions of the Board have reflected an
279 COMPTROLLER'S MANUAL 1 7445. This ruling was based partly on the authority of
national banks under 12 U.S.C. ? 24 (1964) to make "charitable" contributions. The
Comptroller stated that, despite the statutory prohibition against the purchase of stock
by national banks, there had been "judicial recognition" of the authority of such banks
to carry on their activities "either directly or indirectly, through a subsidiary corpo-
ration." See Comptroller's Answers to the 29 Charges, #3, 1965 Hearings on Consolidation
of Federal Bank Supervisory Functions 378.
280 2 NATIONAL BANKING REV. 430 (1965); Comptroller's Answers to the 29 Charges,
#12, 1965 Hearings on Consolidation of Federal Bank Supervisory Functions 388. The
House Rebuttal to the Comptroller's Answers to the 29 Charges concluded that the Comp-
troller's position was "untenable" and that there was "not one relevant court decision"
that supported his position. See Wash. Fin. Rep., Sept. 20, 1965, p. 6.
282 COMPTROLLER'S MANUAL ? 7475; Comptroller's Answers to the 29 Charges, #13,
1965 Hearings on Consolidation of Federal Bank Supervisory Functions 389.
284 In September 1965, the First National City Bank of New York City announced
that it planned to purchase a half interest in Hilton's Carte Blanche Corporation.

American Banker, Oct. 29, 1965, p. 1, col. 1. In November 1965, The Chase Manhattan
Bank announced its plan to acquire all of the stock of Diners' Club, Inc. American
Banker, Nov. 18, 1965, p. 1, col. 1. The Justice Department instituted antitrust proceed-
ings with respect to First National City Bank's acquisition of Carte Blanche. Wash. Fin.
Rep., Jan. 10, 1966, p. A-16. Chairman Patman of the House Banking and Currency
Committee urged the Justice Department to block Chase Bank's acquisition of Diners'
Club, alleging that this proposal was "another of many flagrant examples of Comptroller
of the Currency James J. Saxon's apparent contempt for the will of Congress and court
decisions." Wash. Fin. Rep., Nov. 22, 1965, P. 16. Later, because of the threat of such
action by the Justice Department, Chase announced that it had dropped its proposal.
American Banker, April 13, 1966, p. 1, col. 4.

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interpretation of the stock-purchase prohibition of Section 5136 of the

Revised Statutes285 in sharp conflict with rulings of the Comptroller,
particularly as applied to the purchase of stock of other banks, both
foreign and domestic.
Purchase. of Stock of Foreign Banks
National banks are expressly authorized, subject to the approval of

the Federal Reserve Board,286 to purchase the stock of foreign banking
or financing corporations that operate under regulations of the Board;287
and such corporations may acquire stock in foreign banks. The Comp-
troller of the Currency in 1964 ruled that, in addition to such indirect
acquistions of stock of foreign banks, national banks may directly pur-
chase stock of foreign banks "as a means of conducting their overseas
operations."288
Shortly after the Comptroller's ruling, the Board flatly held that the
"direct acquisition and holding by member banks of stock of foreign
banks is not permissible under present law."289 The Board's statement
prompted newspaper headlines, such as "Fed Blocks Saxon on Foreign
Stocks."290 It also prompted a retort by the Comptroller that he could
"only assume the board was motivated by a desire to bar this office
from proper exercise of its authority over the international operation
of national banks."291
Purchase of Stock of Domestic Banks
Shortly after enactment of the stock-purchase prohibition in 1933,

the Federal Reserve Board held that a state member bank could not
lawfully purchase the stock of another domestic bank.292 There has
been no ruling of the Board since 1933 suggesting any change in this
position;293 on the contrary, the Board clearly continues to adhere to
285 12 U.S.C. ? 24 (1964).

286 12 U.S.C. ?? 601 & 618 (1964).
287 12 C.F.R. ? 211.8 (Supp. 1966) (Regulation K).
289 12 C.F.R. ? 208.112 (Supp. 1966).
290 N.Y. Herald Tribune, July 16, 1964, p. 28, cols. 4-6. Another newspaper observed:
"The long-standing dispute . . . reached the name-calling stage today." N.Y. Times, July
16, 1964, p. 43, col. 5.
291 N.Y. Herald Tribune, July 16, 1964, p. 28, col. 4.
292 19 FED. RESERVE BULL. 449 (1933).
293 A 1965 ruling of the Board might be misinterpreted as suggesting that a national
bank may indirectly purchase the stock of other banks. In a case in which the stock
of a bank holding company was held by a national bank as trustee for the benefit of

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it. The Comptroller of the Currency, however, recently held that a

national bank may lawfully acquire the stock of another domestic bank.
In 1965, The Chase Manhattan Bank (National Association) of New
York City, only recently converted from a state bank to a national
bank, announced its intention to acquire a majority of the stock of the
Liberty National Bank and Trust Company of Buffalo.294 The Comp-
troller of the Currency, after first taking the position that no provision
of federal law would preclude the proposed acquisition,295 concluded
that the transaction required his approval under the Bank Merger
Act of 1960,296 apparently on the ground that it involved an "indirect"
acquisition by a national bank of the assets of another bank.297 In the
meantime, Chase, beset by both federal and state statutory restrictions,
was obliged to file an application with the New York banking author-
ities for approval of the proposed transaction under the state Bank
Holding Company Act;298 and, in order to vote the stock of the Liberty
that bank's stockholders, it was proposed that the bank's stockholders donate their bene-
ficial interest in such stock to the bank, thus causing the bank to become the beneficial
as well as the legal owner of the holding company's stock and therefore to own and
control, indirectly, the stock of banks in the holding company system. In a letter dated
April 14, 1965, the Board took the position that, since the beneficial interest in the
holding company's stock would be transferred to the national bank without consider-
ation, there would be no "purchase" of stock by the bank within the meaning of ? 5136
of the Revised Statutes, 12 U.S.C. ? 24 (1964). See Wash. Fin. Rep., Nov. 8, 1965, p. 16.
The point was that the stock-purchase prohibition of ? 5136 applies only to the purchase
of stock by a national bank for its own account. In an earlier ruling regarding the same
transaction, the Comptroller of the Currency had ruled that elimination of the trust
arrangement would be permissible, but apparently on entirely different grounds. The
Comptroller felt that the Bank Holding Company Act of 1956 and provisions of ? 23A
of the Federal Reserve Act, 12 U.S.C. ? 371c (1964), regarding investments by member
banks in stock of affiliates, impliedly authorized the purchase of stock by national banks
in subsidiary banks and affiliated corporations. See Wash. Fin. Rep., Nov. 8, 1965, p. 15.
294 N.Y. Times, Oct. 21, 1965, p. 69, col. 2.
295 American Banker, Oct. 22, 1965, p. 1, cols. 1-3, at 3, col. 4.
296 Wash. Fin. Rep., Jan. 10, 1966, p. A-6.
297 The Bank Merger Act of 1960, actually an amendment to the Federal Deposit
Insurance Act, requires the approval of the appropriate federal bank supervisory agency
before a bank may merge or consolidate with another insured bank or, "either directly
or indirectly, acquire the assets" of another insured bank. 12 U.S.C. ? 1828(c) (1964). How-
ever, it is questionable whether the acquisition of the stock of a bank constitutes an
indirect acquisition of the assets of the bank; and in any event, the Supreme Court of
the United States has indicated that the Bank Merger Act does not apply to "outright
stock acquisitions." United States v. Philadelphia Nat'l Bank, 374 U.S. 321, 345 n.22
(1963).
298 N.Y. BANKING LAW ? 142(l)(b). It may be noted that the state statute covers a
"one-bank" holding company, in contrast with the federal act, which covers only com-
panies controlling 25% or more of the stock of at least two banks. Compare N.Y. BANKING

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Bank, the Chase Bank filed with the Federal Reserve Board a request
for exemption from certain provisions of federal law requiring a
"holding company affiliate" to obtain a "voting permit" in order to
vote shares it holds in a member bank,299 and, in the alternative, a
request for such a voting permit.300
At it turned out, the Chase Bank's proposal was "killed" in Febru-
ary 1966, when the New York State Banking Board, following the state
bank superintendent's recommendation, denied Chase's application
under the state statute, principally on the ground that, because of the
conflicting views of the Comptroller and the Federal Reserve as to the
authority of member banks to purchase the stock of other banks, ap-
proval of the transaction would result in discrimination against state
banks and would not be in the "public interest."'301 Consequently, it
was not necessary for the Comptroller to render any decision under
the Bank Merger Act, or for the Federal Reserve Board to act on
Chase's request for exemption from the voting permit provisions of
federal law or its alternative request for such a permit. A few months
later, however, the Board in a published ruling made clear its position
that a member bank has no authority to purchase the stock of another
bank.302
Obviously, if a national bank may acquire a controlling interest in
another bank, the way is open for such a bank to transact a banking
business, through wholly-owned or controlled subsidiaries, at places
in which heretofore they could do so only through regular branches
established in accordance with the branching provisions of the Na-
tional Bank Act. Indeed, by this device, a bank theoretically could
extend its operations to other states, contrary to the traditional assump-
LAW ? 142(l)(b), with 12 U.S.C. ? 1828(c) (1964). Thus, Chase was not obliged to seek the
Federal Reserve Board's approval under the federal statute.
299 12 U.S.C. ? 61 (1964). A company need not obtain such a permit if the Board of
Governors determines that it is not engaged "as a business in holding the stock of, or
managing or controlling, banks . 12 U.S.C. ? 221a (1964).
300 Wash. Fin. Rep., Nov. 8, 1965, p. 13.
301 Wash. Fin. Rep., Feb. 21, 1966, p. T-7. The New York State Bank Superintendent's
opinion of Feb. 16, 1966, cited a letter from the Comptroller holding that the incidental
powers of a national bank include the ownership of stock of another bank and a con-
flicting 1963 ruling of the Federal Reserve Board holding that "national banks have no
authority under statute or under their incidental powers to purchase stock of other
banks." Subsequently, it was disclosed that the Board, with specific reference to the
Chase Bank's proposal, had indicated its views that the transaction would violate not
only the stock-purchase prohibition of 12 U.S.C. ? 24 (1964), but also at least the spirit
of the branch banking provisions of 12 U.S.C. ? 36 (1964).
302 52 FED. RESERVE BULL. 655 (1966).

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tion that a bank may have offices only within its home state. It might
be argued that the Comptroller would not regard the acquisition of
stock of a bank in another state as a "proper" incident to the business
of a national bank; but there is no federal statute that expressly re-
quires the Comptroller's approval for the purchase by a national bank
of the stock of another bank, and, if the acquisition of such stock is
embraced within the incidental powers of a national bank, it is at
least conceivable that a national bank in New York could acquire
control of a bank in California despite the Comptroller's disapproval
of such acquisition.
With respect to the Comptroller's position that national banks have
"incidental" power to acquire controlling stock interest in other banks,
it may be worthwhile to hark back to an 1899 decision of the Supreme
Court of the United States. In Concord First National Bank v. Haw-
kins,303 the Court held that a national bank in New Hampshire had no
authority to invest a part of its surplus funds in the stock of a national
bank in Indiana. In support of this conclusion, the Court said:
[W]e think that the reasons which disqualify a national bank

from investing its money in the stock of another corporation are
quite as obvious when that other corporation is a national bank
as in the case of other corporations. The investment by national
banks of their surplus funds in other national banks, situated,
perhaps, in distant States, as in the present case, is plainly against
the meaning and policy of the statutes from which they derive
their powers, and evil consequences would be certain to ensue if
such a course of conduct were countenanced as lawful.304
Prophetically (in the light of the Bank Holding Company Act of 1956
and the Bank Merger Act of 1960), the Court stated that, "if large and
wealthy banks were permitted to buy and hold the capital stock of
other banks, . . . the banking capital of a community might be con-
centrated in one concern, and business men be deprived of the
advantages that attend competition between banks. ..."305 It should
be borne in mind that this decision was rendered long before the
Banking Act of 1933 prohibited national banks (and state member
banks) from purchasing for their own account the stock of any corpo-
ration except as otherwise permitted by law.
303 174 U.S. 364 (1899).

304 Id. at 368.
305 Id. at 369.

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Acceptance Powers
Section 13 of the Federal Reserve Act provides that any member
bank of the Federal Reserve System may accept drafts or bills of ex-
change that grow out of three specified types of transactions: (1) the
importation or exportation of goods; (2) the domestic shipment of
goods; and (3) the storage of readily marketable staples covered by a
warehouse receipt or other such document conveying or securing title
to such staples.806 In addition, the statute limits the amount that a
member bank may accept for any one person as well as the aggregate
amount of all such acceptances.
Since state banks derive their powers from state law, the Board of
Governors ruled in 1923 that state member banks are not limited by
these provisions of the Federal Reserve Act as to the kinds of accep-
tances they may make, but that they are subject to the prescribed
amount limitations.807 It had generally been assumed, however, that
national banks were restricted by the qualitative as well as the quantita-
tive limitations of the Federal Reserve Act; and the Board's Regulation
C,308 regarding acceptances by member banks, has long reflected this
assumption.
In July 1963, the Comptroller of the Currency challenged this
assumption. On the ground that the making of acceptances is "an
essential part of banking" and therefore falls within the "incidental"
powers granted by Section 5136 of the Revised Statutes,309 the Comp-
troller ruled that national banks "are not limited in the character of
acceptances which they may make in financing credit transactions.'"310
Loans to Executive Officers

Section 22(g) of the Federal Reserve Act,31' prohibits an executive
officer of any member bank from borrowing from his bank in an
amount exceeding $2,500; and the Board of Governors of the Federal
Reserve System is authorized to define the term "executive officer,"
to determine what shall be considered a "borrowing" for purposes of
this prohibition, and to prescribe such rules and regulations as it may
deem necessary to effectuate these provisions and to prevent evasions.312
306 12 U.S.C. ? 372 (1964).

307 9 FED. REsERVE BULL. 316 (1923).
308 12 C.F.R. ? 203.1 (1963).
309 12 U.S.C. ? 24 (1964).
310 COMPrROLLER'S MANUAL ? 7420.
311 12 U.S.C. ? 375a (1964).
312 Ibid.

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Pursuant to this authority, the Board in its Regulation O313 has

defined the term "executive officer" to include every officer of a mem-
ber bank who "participates or has authority to participate in the oper-
ating management of the bank" otherwise than in the capacity of a
director, whether or not he has an official title; but the regulation
states that the chairman of the board, the president, every vice presi-
dent, the cashier, secretary, treasurer, and trust officer will be assumed
to be executive officers, unless a resolution of the board of directors
or the bank's bylaws provide that such officer is not authorized to
participate in the operating management of the bank and he does not
actually participate therein.314
Despite the Board's statutory authority to define the term "executive
officer" with respect to all member banks, including national banks,
the Comptroller of the Currency, on December 24, 1963,, announced
his own definition of the term. He stated that "executive officer" means
"each officer of a bank who, by virtue of his position, has both voice in
the formulation of the policy of the bank and responsibility for the
implementation of such policy"; that a person acting solely as a
director is not an executive officer; and that it is the responsibility of,
and function performed by, the individual, rather than his title, that
determines whether he is an executive officer. Obviously implying that
the Board's definition of the term was improper, the Comptroller
stated that the law did "not authorize the expansion, by definition, of
the term 'executive officers' to include persons who do not in fact and
in law exercise executive functions."315
The Comptroller's statement was criticized as contrary to the Federal
Reserve Board's statutory authority to define the term "executive
officer."316 The Comptroller replied that he had taken a "realistic
approach" to the matter317 and stated-incorrectly-that, following his
ruling, the Board had amended its regulation on the subject to exempt
persons who, regardless of title, have no authority to perform and
actually do not perform the duties of an executive officer.318
313 12 C.F.R. ?? 215.1-.6 (1963).

314 12 C.F.R. ? 215.1(b) (1963).
315 12 C.F.R. ? 7.9 (Supp. 1966); COMPTROLLER'S MANUAL ? 5235. For a conte
newspaper comment see N.Y. Herald Tribune, Dec. 25, 1963, P. 22, cols. 1-2.
318 Actually the Board's regulation on this subject, 12 C.F.R. ? 215.1(b) (1963) had not
been amended for many years, and it had always stated that a person's title was not a

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While much of the Comptroller's ruling was entirely consistent with

the Board's definition of an "executive officer,''319 it seems clear that
it was his intent to construe the term more narrowly (and therefore
more liberally) with respect to loans by national banks to their execu-
tive officers than it was construed by the Board with respect to similar
loans by state member banks.
Savings Deposits of Charitable Organizations
Section 19 of the Federal Reserve Act320 requires the Board of

Governors of the Federal Reserve System to limit by regulation the
rate of interest that may be paid by member banks (national and
state) on time and savings deposits. The statute authorizes the Board
to define "savings deposits" for this purpose;321 and the Board in its
Regulation Q has defined that term as including a deposit by an orga-
nization "operated primarily for . . . charitable . . . purposes and not
operated for profit."322
In 1960, the Board ruled that an organization known as "Associated
Hospital Service," although declared by state statute to be a "charita-
ble" organization, was not qualified to have a savings deposit, because
actually it merely provided hospital and medical insurance to sub-
scribers without any "charitable" feature.323 In March 1963, the Comp-
troller expressed a directly contrary view,324 principally on the ground
that the state statute described the institution as charitable and
benevolent in nature.
Corporate Savings Accounts
A more basic conflict between the Comptroller and the Board has
arisen with respect to the authority of member banks to accept savings
deposits from business corporations. The Board's regulatory definition
of a "savings deposit" explicitly excludes deposits of profit-making
conclusive factor in determining whether he was an "executive officer" of a member

bank. See text accompanying note 313 supra.
319 See House Committee's Rebuttal to Comptroller's Answers, #21 where the view was
expressed that the standards embodied in the Comptroller's ruling do not appear to be
"substantially at variance" with those established by the Board. 1965 Hearings on Con-
solidation of Federal Bank Supervisory Functions 299; Wash. Fin. Rep. Sept. 20, 1965,
p. 10.
320 12 U.S.C. ? 371b (1964).
321 12 U.S.C. ? 461 (1964).
322 12 C.F.R. ? 217.1(e)(1) (1963).
323 12 C.F.R. ? 217.119 (1963).
324 See Hearings on Federal Banking Commission 257.

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business corporations.325 However, in 1963 the Comptroller ruled that

a national bank could accept savings accounts from any organization,
"whether operated for profit or otherwise."326 He argued that the
Board's authority to define " 'savings deposits' extends only to the terms
of the deposit contract such as a description of withdrawal require-
ments and interest rate limitations" and that the law does not author-
ize a regulation that would "preclude . . . the maintenance of such
accounts by any class of depositor.' '327
A week later, the Board reiterated its position that, under its Regula-
tion Q. a deposit by a corporation operated for profit could not be
classified as a savings deposit by any member bank, including a
national bank.328 The Board pointed out that, unless the deposit came
within the definition of a "time deposit," it would constitute a demand
deposit on which the payment of interest is prohibited.329 The Board
also noted that its Regulation D, relating to reserve requirements of
member banks, contained a definition of savings deposits identical
with that contained in Regulation Q, and that, if a member bank
treated a deposit of a profit-making corporation as a savings deposit
for reserve purposes, the bank would be subject to a penalty for any
resulting reserve deficiency, unless the deposit met the definition of
a "time deposit" and was therefore not subject to the higher reserve
requirements applicable to demand deposits.30
This particular conflict between the Comptroller and the Board
gave rise to more general interest-and to more newspaper headlines
-than almost any other conflict between the two agencies. It was
described in one paper as the "Corporate Deposit Fracas."'331 For
325 12 C.F.R. ? 217.1(e) (1963).

326 12 C.F.R. ? 7.8 (Supp. 1966); COMPTROLLER'S MANUAL 1 7510; see N.Y. Herald Tri-
bune, Dec. 25, 1963, p. 22, cols. 1-2.
327 12 C.F.R. ? 7.8 (Supp. 1966).
328 12 C.F.R. ? 217.135 (Supp. 1966).
329 12 U.S.C. ? 371a (1964).
330 Putting teeth into its statement, the Board pointed out that ? 2 of the Federal
Reserve Act, 12 U.S.C. ? 501a (1964), subjects national banks to forfeiture of their charters
for failure to comply with the Federal Reserve Act. This section also provides that any
violation of the Federal Reserve Act by a national bank shall be determined by a court
of the United States in a suit brought "under direction of the Board of Governors of
the Federal Reserve System by the Comptroller of the Currency." This provision gives
rise to the interesting possibility that the Board might direct the Comptroller to bring
suit to forfeit the franchise of a national bank for acts regarded by the Board, but not
by the Comptroller, as constituting violations of the Federal Reserve Act.
331 Wash. Post, Jan. 3, 1964, p. A-14, col. 1. However, another news organ observed:

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national banks, subject to the Board's interest on deposit regulations

but also subject to supervision by the Comptroller, it posed a genuine
problem; as one national banker put it, they were "caught between
two fires. 332
Absorption of Exchange Charges

Most of the recent conflicts among the federal banking agencies
have been between the Comptroller of the Currency and the Federal
Reserve. However, one of the most ancient conflicts has reflected a
difference between the Federal Reserve and the Federal Deposit In-
surance Corporation, agencies that in other respects have enjoyed
harmonious relationships.
In 1943, the Board of Governors ruled333 in a particular case that the
absorption of exchange charges by a member bank constituted an
indirect payment of interest on demand deposits in violation of a pro-
vision of Section 19 of the Federal Reserve Act, which prohibits mem-
ber banks from paying interest on demand deposits, "directly or in-
directly, by any device whatsoever." An exchange charge is a charge
made by some banks-generally referred to as "nonpar" banks-for
the payment of checks drawn on them and presented through the
mails. When such checks are deposited with the payee's bank which
absorbs the exchange charge made by the drawee nonpar bank, the
payee is in effect credited with an amount greater than the amount
actually collected by his own bank. In the opinion of the Federal
Reserve Board, this absorption of the exchange charge by the deposi-
tary bank was an "indirect" payment of interest on the payee's deposit.
The FDIC, on the other hand, took the position that the absorption
of exchange charges by nonmember insured banks, which like member
banks are prohibited from paying interest on demand deposits,334 did
not result in an indirect payment of interest.335
"The issue is hardly earth-shaking. . . . All that has been really damaged so far seems
to be the dignity of the regulators." Wall Street J., Jan. 2, 1964, p. 8, col. 2.
332 N.Y. Times, Dec. 27, 1963, p. 31, col. 7.
333 29 FED. RESERVE BULL. 817 (1943).
334 12 U.S.C. ? 1828(g) (Supp. I, 1965).
335 Both the Board's Regulation Q, 12 C.F.R. ? 217.2(a) (1963), relating to the payment
of interest on deposits by member banks, and the FDIC's regulation, 12 C.F.R. ? 329.2(a)
(1963), relating to the payment of interest on deposits by nonmember insured banks,
defined a payment of interest as "any payment to or for the account of any depositor as
compensation for the use of funds constituting a deposit." However, this provision of the
FDIC's regulation was (and still is) accompanied by a footnote stating that the "absorption
of normal or customary exchange charges by an insured nonmember bank, in connection
with the routine collection for its depositors of checks drawn on other banks, does not

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Despite many efforts to resolve this conflict, member banks and

nonmember insured banks continue to be subject to different rules
in this respect.336 Although governed by similar provisions of federal
law, a nonmember insured bank may solicit deposits by agreeing to
absorb exchange charges on checks drawn on nonpar banks, while a
competing member bank across the street may not do likewise.
In connection with proposed legislation in 1956 to simplify federal
banking laws, the Board recommended that this conflict be resolved
by Congress one way or the other so that member and nonmember
insured banks might be placed on an equal basis in this respect.337
In 1965, the Board repeated this recommendation, and going further,
recommended federal legislation that would absolutely prohibit the
making of exchange charges.338
Foreign Banking Operations
Since 1913, when the Federal Reserve Act was enacted, national
banks have been required by section 25 of that act339 to obtain the
approval of the Board of Governors in order to establish foreign
branches and to comply with regulations of the Board in this respect.
In 1916, section 25 was amended to authorize national banks to invest
in the stock of any bank or corporation organized under the laws of
the United States or of any state and engaged principally in "inter-
national or foreign banking," but only if such corporation enters into
an agreement with the Board to restrict its operations in such manner
and under such limitations as the Board may prescribe.340 Such foreign
banking corporations have generally been referred to as "agreement"
corporations. In 1919, there was added to the Federal Reserve Act a
new section 25(a),34' providing for the organization, with the permis-
sion of the Board, of corporations to engage in "international or
foreign banking or other international or foreign financial operations,"
constitute the payment of interest within the provisions of this part." For a detailed ac-
count of the earlier stages of the exchange charge controversy, see Hackley, Absorption
of Bank Exchange Charges As a Payment of Interest, 30 VA. L. REV. 603 (1944).
336 The Board, as a matter of administration and on the de minimis theory, permits
member banks to absorb exchange charges of up to $2 a month for any one customer.
12 C.F.R. ? 217.120 (1963).
337 SENATE BANKING AND CURRENCY COMMITTEE, 84TH CONG., 2D SESS., STUDY OF BANKING
rAws 200 (Comm. Print 1956).
338 1965 BD. OF GOVERNORS OF THE FED. RESERVE Sys. ANN. REP. 240.
339 12 U.S.C. ? 601 (1964).

340 Act of Sept. 7, 1916, ch. 461, 39 Stat. 755; see 12 U.S.C. ? 603 (1964).
341 Act of Dec. 24, 1919, ch. 18, 41 Stat. 378, 12 U.S.C. ?? 611-31 (1964).

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subject to specified limitations and under regulations of the Board.342

Such corporations are often referred to as "Edge Act corporations,"
after the name of the Senator who sponsored the 1919 amendment.
Under Section 9 of the Federal Reserve Act, state member banks
may establish branches343 and invest in stock344 on the same conditions
and subject to the same limitations as are applicable to national banks.
Consequently, both national banks and state member banks are subject
to regulations of the Board in connection with the establishment of
foreign branches and investments in foreign banking or financial corpo-
rations, whether Edge Act corporations chartered by the Board or
"agreement" corporations chartered under state laws. The establish-
ment of foreign branches is governed by the Board's Regulation M,345
and the operations of foreign banking and financial corporations are
governed by the Board's Regulation K.340
In 1962 Congress amended Section 25 of the Federal Reserve Act
to permit foreign branches of national banks to exercise such powers
as may be "usual" in connection with the transaction of a banking
business in the countries in which they operate, subject to regulations
of the Board.347 Following this enactment, the Board revised its Regula-
tion M348 in order to expand the powers of foreign branches. The
Comptroller of the Currency, however, charged that the Board's re-
vised regulation was too restrictive,349 and published a proposed regula-
tion of his own that would have required a national bank to obtain
his prior approval for the opening of a foreign branch or the purchase
of a controlling interest in a foreign bank or company.350 This action
was regarded as opening "a new area of potential policy conflict"
between the Office of the Comptroller and the Board.351 It did. The
Board promptly observed that the Comptroller's proposed regulation
would result in "administrative duplication and confusion."352
342 12 U.S.C. ? 611 (1964).

343 12 U.S.C. ? 321 (1964).
344 12 U.S.C. ? 335 (1964).
345 12 C.F.R. ?? 213.1-.6 (Supp. 1966).
346 12 C.F.R. ?? 213.1-.1O (Supp. 1966).
347 12 U.S.C. ? 604a (1964), added by Act of Aug. 15, 1962, Pub. L. No. 87-588, 76 Stat.
388.
348 12 C.F.R. ?? 213.1-.6 (Supp. 1966).
349 American Banker, April 12, 1963, p. 1, col. 4; J. of Commerce, Aug. 6, 1963, p. 1,
col. 3.
350 28 Fed. Reg. 13868 (1963); 1 NATIONAL BANKING REv. 429 (1964).
351 American Banker, Dec. 20, 1963, p. 1, col. 3.
352 N.Y. Herald Tribune, Feb. 4, 1964, p. 25, col. 7; Wall Street J., Feb. 4, 1964, p. 2,
col. 3.

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As finally adopted, the Comptroller's regulations, instead of requir-

ing his approval, provided only that a national bank must give him
prior notification with respect to the establishment of a foreign
branch, the establishment of any branch by an Edge Act or "agree-
ment" corporation or by a foreign bank controlled by a national bank,
or the direct acquisition of a controlling interest in an Edge Act or
"agreement" corporation or a foreign bank.353 Even this watered-down
version of his regulation was alleged to amount to "dual regulation,"
contrary to statutory provisions that vest the Federal Reserve Board
with complete authority to regulate the foreign operations of all mem-
ber banks3354
In 1963, a bill that would have transferred to the Comptroller the
Board's jurisdiction over the foreign operations of national banks355
was opposed by the Board on the ground that it would result in an
inadvisable distribution of authority in the field of foreign banking
operations. The Comptroller, however, took the position that full
authority over foreign branches of national banks should rest with his
office; and a bill to vest such authority in him is now pending.356
Bank Service Corporations
The Bank Service Corporation Act of October 23, 1962,357 author-

izes two or more banks to invest not more than 10 per cent of their
respective capital and surplus in a "bank service corporation," notwith-
standing any "limitation or prohibition otherwise imposed by any
provision of Federal law exclusively relating to banks ....358 It pro-
vides that no insured bank may cause services to be performed for
itself unless "assurances satisfactory" to the bank's supervisory agency
-the Comptroller of the Currency, the Board of Governors, or the
FDIC-are furnished to such agency by both the bank itself and the
353 12 C.F.R. ? 20.3 (Supp. 1966).

355 H.R. 5800, 88th Cong., 1st Sess. (1963).
356 H.R. 9950, 89th Cong., 2d Sess. (1966). For a discussion of arguments for and against
the transfer to the Comptroller of jurisdiction over the foreign operations of national
banks, see Bratter, Who Should Regulate the Foreign Branching of National Banks?, Bank-
ing, Oct. 1965, p. 58.
357 12 U.S.C. ?? 1861-65 (1964). The term "bank service" was defined to include "services
such as check and deposit sorting and posting, computation and posting of interest and
other credits and charges, preparation and mailing of checks, statements, notices, and
similar items, or any other clerical, bookkeeping, accounting, statistical, or similar func-
tions performed for a bank." 12 U.S.C. ? 1861(b) (1964).
358 12 U.S.C. ? 1862(a) (1964).

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party performing the services, to the end that the performance of the
services will be subject to "regulation and examination by such agency
to the same extent as if such services were being performed by the
bank itself on its own premises."359
When the bill was under consideration in Congress, the Comptroller
objected to the "assurances" provision on the ground that it constituted
"excessive regulation not needed for the purpose sought to be accom-
plished,"3f60 while the Board of Governors361 and the FDIC362 urged
enactment of the bill. After the bill became law, the Board of Gover-
nors and the FDIC issued substantially identical regulations under
the statute, relating particularly to the form and time of submission
of the required assurances and to dispensation with such assurances
under certain emergency conditions.363 The Comptroller, in keeping
with his position regarding excessive regulation, issued no regulations
on the subject.364
While these differences may not be of great significance, they provide
another illustration of the fact that even laws designed to apply alike
to all classes of federally regulated banks are not in fact applied in the
same way to all such classes.
Bank Securities "Disclosure" Regulations
On August 20, 1964, Congress amended365 provisions of the Securi-

ties Exchange Act of 1934,836 relating to public disclosure of informa-
tion with respect to the financial condition of the issuer of securities,
proxy solicitations, and "insider" trading, to make them applicable to
359 12 U.S.C. ? 1865(a) (1964).

360 Hearings on H.R. 7796 Before the Senate Committee on Banking and Currency,
87th Cong., 2d Sess. 40 (1962).

361 Id. at 63.
362 Id. at 59.
363 For the Board's Regulation S, see 12 C.F.R. ?? 219.1-.4 (Supp. 1966); for the FDIC's
corresponding regulation, see 12 C.F.R. ?? 334.1-.4 (Supp. 1966).
364 Prior to issuance of the regulations of the Federal Reserve and the FDIC, the
Comptroller, in an unpublished but widely circulated letter of Jan. 10, 1963, to a na-
tional bank, stated that to require a national bank providing services to a state member
or nonmember insured bank to give the required assurances to the Federal Reserve or
the FDIC would give the statute a "strictly literal reading that is totally without regard
to the general intent of the legislation." However, the Board of Governors ruled explicitly
that a national bank rendering services to a state member bank must furnish the specified
assurances to the Board. 12 C.F.R. ? 219.102 (Supp. 1966).
365 Securities Acts Amendments of 1964, Pub. L. No. 88-467, 78 Stat. 565 (codified in
scattered sections of 15 U.S.C.).
366 15 U.S.C. ?? 78a-78hh (1964).

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securities of large publicly-held corporations, including banks, that

are traded "over the counter." The amended act divided jurisdiction
with respect to bank securities among the three federal bank super-
visory agencies, depending upon whether the bank is a national bank,
a state member bank, or a nonmember insured state bank.367
Each of the federal banking agencies had taken a different view as
to the desirability of the 1964 amendments. The Comptroller of the
Currency was "strongly opposed" to making the public disclosure
provisions applicable to national banks on the ground that such action
was "both unnecessary and unwise."368 The Federal Deposit Insurance
Corporation raised no objection to making the disclosure requirements
applicable to banks but suggested that jurisdiction over banks in this
area be placed in the "appropriate Federal banking supervisory author-
ity."369 The Federal Reserve supported the legislation but questioned
the desirability of diffusing jurisdiction among the federal bank super-
visory agencies on the grounds that such diffusion would (1) detract
from the comparability of information available to investors and (2)
result in administrative inefficiency and duplication of effort.370
One week after enactment of the 1964 amendments to the Securities
Exchange Act, the Comptroller issued relatively brief regulations for
national banks relating to annual reports to stockholders, proxy solicita-
tions, security ownership reports, and the filing of registration state-
ments and offering circulars with his office.371 The first three regulations
purported to be issued only under authority of the national banking
laws; the fourth, with respect to registration statements and offering
circulars, purported to be issued under both the national banking laws
and the Securities Acts Amendments of 1964. In contrast, effective
January 1, 1965, the Federal Reserve and the FDIC adopted substan-
tially identical, detailed regulations with respect to registration state-
ments and periodic reports, proxy solicitations, and insider-trading by
state member and nonmember insured banks respectively, that were
367 15 U.S.C. ? 781(i) (1964).

368 Hearings Before a Subcommittee of the House Committee on Interstate and Foreign
Commerce on "Investor Protection," 88th Cong., 1st Sess., pt. 2, at 1357 (1963); see Hear-
ings Before a Subcommittee of the Senate Committee on Banking and Currency on "SEC
Legislation, 1963," 88th Cong., 1st Sess. 171 (1963); see also American Banker, June 6,
1963. p. 1, col. 3.
369 Hearings on "SEC Legislation, 1963," supra note 368, at 228.
370 Hearings on "Investor Protection," supra note 368, at 1357; see Hearings .on "SEC
Legislation, 1963," supra note 368, at 177; American Banker, June 6, 1963, p. 2, col. 2.
371 12 C.F.R. ?? 10.1-.4, 11.1-.6, 12.1-.12 & 16.1-.11 (Supp. 1966).

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patterned closely after the regulations of the Securities and Exchange

Commission applicable to nonbanking corporations.372
Obviously, the purpose of the 1964 amendments, as they applied to
banks, was to provide the investing public with readily available and
comparable information regarding the financial condition of the larger
banks in order to enable investors in bank stocks to make intelligent
investment decisions. To the extent that regulations of the Comptroller
differ from those of the Federal Reserve and the FDIC, meaningful
comparisons between the securities of different banks are difficult if
not impossible, and consequently the purposes of the legislation have
been defeated.373 In addition, national banks and state insured banks
have been placed on a different basis in this respect by reason of the
substantial differences between the disclosure regulations of the Comp-
troller and those issued by the Federal Reserve and the FDIC. One of
the reasons alleged for the conversion in November 1964 of the largest
state member bank in Missouri to a national charter was its desire to
escape the "tough" disclosure regulations then contemplated by the
Federal Reserve.374
Bank Mergers
The differences among the federal bank supervisory agencies men-

tioned thus far involved conflicting interpretations of law or divergent
regulations. In one respect, important differences have resulted from
different policies in the administration of a federal statute designed to
apply equally to all banks supervised by the three federal agencies.
The Bank Merger Act of 1960375 prohibited the absorption by any
insured bank of another insured bank, by way of merger, consolidation,
or acquisition of assets, without the prior approval of the appropriate
federal banking agency, i.e., the Comptroller, the Federal Reserve, or
372 See 12 C.F.R. ?? 206.1-.7 (Supp. 1966) (regulations of the Board of Governors); 12
C.F.R. ?? 335.1-.7 (Supp. 1966) (regulations of the FDIC).
373 It was charged that the Comptroller's regulations were contrary to the intent of
Congress and did "not approach the disclosure standards contained in the FRB-FDIC
regulations." House Committee's 29 Charges, #11, 1965 Hearings on Consolidation of
Federal Bank Supervisory Functions 290. However, the House Committee's staff later con-
ceded that the Comptroller was empowered by the law "to act independently of other
regulatory agencies in formulating regulations in this field." House Rebuttal to Comp-
troller's Answers, #11, 1965 Hearings on Consolidation of Federal Bank Supervisory
Functions 388.
374 See American Banker, Nov. 19, 1964, p. 1, col. 4.
375 Pub. L. No. 86-463, 74 Stat. 129. The Bank Merger Act was a revision of ? 18(c)
of the Federal Deposit Insurance Act, 12 U.S.C. ? 1828(c) (1964).

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the FDIC, depending upon whether the absorbing bank is a national

bank, a state member bank, or a nonmember insured state bank. The
act required the three agencies, in passing on mergers, to consider
certain "banking" factors (financial condition, prospects, and character
of management) and, in addition, the convenience and needs of the
communities concerned and the effect of the transaction on competi-
tion. With respect to the factor of competition, the agency having
jurisdiction was required to obtain the views of the other banking
agencies and the Department of Justice, "in the interest of uniform
standards.' '376
Congress clearly contemplated that the same standards should apply
to all mergers. Thus, a Senate report stated that the three agencies
"must review applications with the same attitude, and must give the
same weight to the various banking and competitive factors."377 It was
expected that uniformity in the application of the competitive factor
would be furthered by the requirement that the agency passing on a
merger must obtain "competitive factor reports" from the other two
federal banking agencies, as well as from the Attorney General.378
The expectations of Congress were not realized in practice. The
three federal banking agencies have not in fact applied the statutory
standards in a uniform manner.379 They have differed in their judg-
ments as to the competitive effects of particular mergers;380 and, indeed,
376 12 U.S.C. ? 1828(c) (1964). The standards were somewhat changed by an amend-
ment to the act in 1966 that in effect gave greater importance to the "competitive" factor.
Act of Feb. 21, 1966 Pub. L. No. 89-356, 80 Stat. 7.
377 S. REP. No. 196, 86th Cong., 1st Sess. 23 (1959). The Report of the House Banking
and Currency Committee stated that there should be uniformity in application of the
statutory standards in order "to avoid a situation where one Federal agency is 'tough'
about mergers and another one is 'easy' . H.R. REP. No. 1416, 86th Cong., 2d Sess.
12 (1960).
378 H.R. REP. No. 1416, supra note 377, at 12-13.
379 In 1965, the Superintendent of Banks of the State of New York specifically refe
to conflicting policies of the Federal Reserve and the Comptroller of the Currency in
bank merger cases. 1965 Hearings on Consolidation of Federal Bank Superuisory Functions
250.
380 While many other examples could be cited, a recent case provides an excellent
illustration. On March 4, 1966, the Comptroller, in approving the merger of the Provident
National Bank of Philadelphia with the Central-Penn National Bank, stated that the
merger would "not result in the elimination of a significant amount of competition be-
tween the applicant banks." Wash. Fin. Rep., April 4, 1966, p. T-11. However, in its
"competitive factor report" in this case, the Federal Reserve stated that the merger
"would eliminate significant competition between the banks." American Banker, April 1,
1966, p. 1, cols. 2-4, at 10, col. 3. Despite this clear conflict as to the effect on compe-
tition, it should be noted that the Federal Reserve's adverse comment on the competitive

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there have been cases in which one agency has disapproved a proposed
merger and another agency has subsequently approved the same, or
substantially the same, transaction. For example, after a state member
bank had been denied permission by the Federal Reserve to take over
a small national bank in Pennsylvania, the Comptroller approved a
request by a larger national bank to take over the same bank.38' In
another instance, the Federal Reserve disapproved an application by a
state member bank to absorb another bank;382 but shortly thereafter
the state member bank converted to a national charter and the Comp-
troller promptly approved the merger.383
Relation of Holding Company Banking to Branch Banking

Under the Bank Holding Company Act of 1956,384 the formation of
new bank holding companies and the acquisition of banks by existing
holding companies are subject solely to the jurisdiction of the Federal
Reserve, as far as federal banking laws are concerned. The Federal
Reserve, in 1960, held that, in the light of the legislative history of
the Holding Company Act, bank holding company acquisitions are not
governed by the branch banking laws of the several states.385
The Comptroller of the Currency, in February 1966, took the posi-
tion that, since the Federal Reserve Board had indicated that the
Chase Manhattan, a national bank in New York State, could not law-
fully acquire the stock of another bank in that state without violating
the branch banking provisions of federal law,386 the Board was "es-
topped" from approving pending holding company applications in
factor was not, as some might conclude, tantamount to a recommendation that the
merger should be disapproved. The "action" agency, the Comptroller in this case, is
required by the law to weigh all of the factors, while the advisory agencies are required
to express their views only as to the competitive factor.
381 See Why Banks Switch Charters, Banking, Aug. 1965, p. 60, at 62.
382 50 FED. RESERvE BULL. 711 (1964).
383 It appears that the Comptroller, even before the conversion of the state member
bank, had stated that he would have approved the particular merger and that, on the
basis of this statement, the state bank applied for permission to convert to a national
bank, thereby prompting one newspaper to observe: "Two morals are being drawn from
the continuing struggle. One is that a single supervisory agency should replace the multi-
plicity of agencies that currently regulate banks. The other is that Saxon's merger ap-
proval pledge raises questions about the use of his power." Wash. Post, July 19, 1964,
p. C9, cols. 5-6. See also an editorial in the Wall Street Journal which, referring to this
case, stated that "there certainly is something wrong with a regulatory system that not
only keeps the regulators fighting among themselves but sets banks to shopping around
for softer-hearted supervision." Wall Street J., Aug. 5, 1964, p. 10, col. 2.
384 12 U.S.C. ?? 1841-48 (1964).
385 Farmers & Mechanics Trust Co., 46 FED. REsERvE BULL. 14, 16 (1960).
386 See note 301 supra.

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New York State. He argued that the "end result" was "the same in that
subsidiary banks would be located in areas where de novo branching
is forbidden to the lead bank."387 In connection with its approval of
these holding company applications, the Board specifically dealt with
the Comptroller's argument. Reiterating its view that holding-company
banking is not the same as branch banking, the Board pointed out
that the Chase Bank's proposal had "involved bank ownership, control
and, thus, operation of another bank in an area where a 'direct'
branch office would be prohibited to the acquiring bank," whereas
the acquisition of banks by holding companies had been "expressly
authorized" by both federal law and the law of New York State.388
Condition Reports
National banks, state member banks, and nonmember insured state

banks are required by federal law to file with their respective super-
visory agencies periodic reports of condition, sometimes referred to as
"call reports."389 Until recently, the report forms prescribed for all
three classes of banks were nearly identical; and most of the states
used similar ones.390 In the last few years, however, differences have
developed in the contents of such reports. The present Comptroller
prescribed an abbreviated call report for national banks, except in the
case of year-end reports.391 For statistical purposes, the Federal Reserve
regarded such condensed forms as inadequate and therefore required
national banks to submit "supplemental" information.392 There is
evidence that in recent months some progress has been made toward
uniformity as to the content of call reports of national banks and those
of state member banks and nonmember insured state banks,393 but
complete conformity is still lacking.
387 Letter From Comptroller of the Currency to Chairman of the Board of Governors
of the Federal Reserve System, Feb. 18, 1966.
388 Security N.Y. State Corp., 52 FED. RESERVE BULL. 512, 517 (1966); BT N.Y. Corp.,
52 id. 517, 519 (1966); Charter N.Y. Corp., 52 id. 527, 528 (1966).
389 12 U.S.C. ? 161 (1964) requires national banks to file condition reports with the
Comptroller of the Currency. Section 9 of the Federal Reserve Act, 12 U.S.C. ? 324 (1964),
requires state member banks to file condition reports with the Board of Governors.
Section 7(a)(1) of the Federal Deposit Insurance Act, 12 U.S.C. ? 1817(a)(1) (1964), requires
each insured state nonmember bank to make condition reports to the FDIC.
391 American Banker, Oct. 4, 1963, p. 1, cols. 3-4.
392 Under ? 11(a) of the Federal Reserve Act, 12 U.S.C. ? 248(a) (1964), the Board is
authorized to require from each member bank "such statements and reports as it may
deem necessary."
393 Wash. Fin. Rep., Dec. 20, 1965, p. 5.

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The timing, as well as the content, of condition reports has occa-

sioned conflicts among the federal agencies. All insured banks are re-
quired by law to submit to their respective federal bank supervisors
four condition reports annually "upon dates which shall be selected
by the Chairman of the Board of Directors [of the Federal Deposit
Insurance Corporation], the Comptroller of the Currency, and the
Chairman of the Board of Governors of the Federal Reserve System,
or a majority thereof."394 Traditionally, two of the four annual reports
were required to be submitted as of the last business days in June and
December, while the other two-the Spring and Fall "calls"-were
required as of "surprise" dates.395 In 1963, the Comptroller at first
refused to go along with the majority decision of the Board of Gov-
ernors and the FDIC in fixing the mid-year call date as June 29, the
last business day of that month; but later (even though the law clearly
left him no alternative), the Comptroller "agreed" to the date selected.396
The Comptroller's position was based on the ground that the routine
last-business-day call tended to permit "window dressing" by banks,
that is, an adjustment of accounts in anticipation of the date that
would make a bank's published condition report show its condition
in the most favorable light. On the other hand, the Federal Reserve
and the FDIC, while agreeing that "window dressing" was undesirable,
felt that this fact was outweighed by the need for comparable statistical
information year by year.397
Access to Examination Reports of National Banks

One of the first conflicts that developed among the federal bank
supervisory agencies after Mr. Saxon became Comptroller of the Cur-
rency in November 1961 involved the right of the Federal Reserve and
the FDIC to have access to examination reports of national banks and
to the charges made by the Comptroller for copies of such reports.
394 12 U.S.C. ? 1817(a)(3) (1964).
395 For a list of call dates from 1914 to 1963 for national banks, see 1963 COMPTROLLER
OF THE CURRENCY ANN. REP. 272.
396 See N.Y. Times, July 4, 1963, p. 21, col. 1, in which it was observed: "Over the
public protest of the Comptroller of the Currency, James J. Saxon, the three Federal
agencies that regulate banks have issued a routine call for statements of condition as of
June 29."
397 In a letter to all national banks dated July 3, 1963, the Comptroller stated that
"surprise calls would serve our supervisory responsibilities more effectively without im-
pairing, and perhaps improving, the statistical worth of the data." With respect to the
contrary positions of the Federal Reserve and the FDIC, see N.Y. Herald Tribune, July
4, 1963, p. 18, cols. 4-7; American Banker, July 5, 1963, p. 1, cols. 3-4, at 3, col. 1.

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For many years, the Comptroller had charged the two other federal
banking agencies $10 for each copy of a regular national bank examina-
tion report and $5 for trust department and branch reports. Early in
1962, he proposed very substantial increases in such charges, ranging
from $300 to $5,000 per copy, depending upon the total resources of
the bank involved. Both the Federal Reserve and the FDIC objected
on the ground that the law398 requires that the expense of their ex-
amination be assessed by the Comptroller upon the banks and that the
Federal Reserve and the FDIC could not lawfully pay the cost of con-
ducting the examination-an expense clearly reflected by the high
charges for copies of the reports.399 Subsequently, the Comptroller
reduced the charges to $100 per copy and the Federal Reserve reluc-
tantly agreed that Federal Reserve Banks would pay the reduced charges,
but for only one examination report of each national bank per year.400
The FDIC refused to pay even the reduced charges.401
Prior to August 1, 1962, the Comptroller had permitted the Board
of Governors of the Federal Reserve System and the FDIC in Washing-
ton (as distinguished from the Federal Reserve Banks and the regional
offices of the FDIC) to borrow national bank examination reports from
the Comptroller's Office. This practice has been continued (with some
slight interruptions) as to the Board of Governors. However, beginning
August 1, 1962, the Comptroller made such reports available to the
FDIC only in the offices of the Comptroller in Washington, and even
this access was suspended for certain periods. Ironically, the FDIC is
expressly authorized by law to have access to national bank examination
reports,402 while the Federal Reserve is not.
The Comptroller's increased charges for copies of national bank ex-
amination reports were later cited as an example of lack of cooperation
among the federal banking agencies that may have contributed to the
closing of the San Francisco National Bank in January 1965. The
Chairman of the FDIC indicated that his agency was not fully informed
398 12 U.S.C. ? 482 (1964).

399 For an account of the long controversy regarding charges for copies of national
bank examination reports, see 1965 Hearings on Consolidation of Federal Bank Super-
visory Functions 350, 455-87. For comments regarding the controversy, see American
Banker, Feb. 5, 1965, p. 1, cols. 3-4, at 3, col. 3; id. July 10, 1962, p. 1, col. 1; N.Y.
Times, April 25, 1962, p. 50, col. 3; Wall Street J., Feb. 5, 1965, p. 4, col. 3; Wash. Post,
April 26, 1962, p. D13, col. 3.
400 1965 Hearings on Consolidation of Federal Bank Supervisory Functions 455-87.
401 Ibid.
402 12 U.S.C. ? 1817 (1964).

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632 Virginia Law Review
regarding the condition of the bank because of the Comptroller's re-

fusal to furnish copies of its examination reports without payment of
the $100 charge.403 The Federal Reserve Bank of San Francisco, which
had made advances to the national bank, had a copy of the national
bank's examination report (at a cost of $100), but it appeared that that
report did not contain all essential information regarding the bank's
condition.404 During congressional hearings prompted by the closing
of the San Francisco National Bank, the chairman of the investigating
committee stated that it was a "fine kettle of fish when federal agencies
do not cooperate in supplying each other information."405
403 Wash. Evening Star, Feb. 3, 1965, p. A13, col. 1.

404 American Banker, March 17, 1965, p. 1, cols. 3-4; see S. REP. No. 1103, 89th Cong.,
2d Sess. 42 (1966).
405 American Banker, March 17, 1965, p. 1, col. 4, at 3, col. 1. An Interim Report of the
Senate Committee on Government Operations that had undertaken this investigation
criticized the Comptroller for his failure to keep the other federal banking agencies fully
informed regarding the condition of the San Francisco National Bank. S. REP. No. 1103,
supra note 404, at 9. This Report recommended legislation that would direct each federal
bank supervisory agency "to engage with other agencies in complete interchange of infor-
mation and reports concerning individual banks of interest, as promptly as possible and
without charge." Id. at 17.

62.93.45.12 on Sat, 04 Mar 2023 16:51:07 UTC

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