NOTICE OF CHANGE IN CONTROL OF MANAGEMENT OF INSURED BANKS WEDNESDAY, AUGUST 12, 1964 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The committee met, pursuant to notice, at 10 a.m., in room 1301, Longworth House Office Building, Hon. Wright Patman (chairman) presiding. Present: Representatives Patman, Multer, Barrett, Mrs. Sullivan, Reuss, Ashley, Vanik, Moorhead, Stephens, St Germain, Gonzalez, Pepper, Minish, Weltner, Hanna, Grabowski, White, Kilburn, Widnall, Fino, Mrs. Dwyer, Halpern, Bolton, Taft, Talcott, and Clawson. The CHAIRMAN. The committee will please come to order. The hearing this morning involves H.R. 12267 and related bills which provides for notice of changes in control of the management of insured banks. There have been several instances in recent months where banks, usually small ones, have come to grief and upon investigation it has developed that a new group had recently taken over control and proceeded to get the bank into difficulties. The FDIC is of the opinion that the law should be revised to require a report in the case of takeover of control so that immediately such institutions could be kept under observation and that this in turn would eliminate or gradually reduce the possibility of fraud. Our witness this morning is the Honorable Joseph W. Barr, Chairman of the Board of Directors of the Federal Deposit Insurance Corporation. We will insert in the record at this point a copy of H.R. 12267 and H.R. 12268. (H.R. 12267 and H.R. 12268 follow:) [H.R. 12267, 88th Cong., 2d sess.] A BILL To provide for notice of change in control of management of insured banks, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the Federal Deposit Insurance Act (12 U.S.C. 1811-1831), as amended, be amended by adding the following new subsection (j) at the end of section 7 thereof: "(j) (1) Whenever a change occurs in the outstanding voting stock of any insured bank which will result in control or in a change in the control of the bank, the president or other chief executive officer of such bank shall promptly report such facts to the appropriate Federal banking agency upon obtaining knowledge of such change. As used in this section, the term 'control' means the power to directly or indirectly direct or cause the direction of the management or policies of the bank. If there is any doubt as to whether a change in the outstanding voting stock is sufficient to result in control thereof or to effect a change in the control thereof, such doubt shall be resolved in favor of reporting the facts to the appropriate Federal banking agency. 1 "(2) Whenever an insured bank makes a loan or loans, secured, or to be secured, by 25 per centum or more of the voting stock of an insured bank, the president or other chief executive officer of the lending bank shall promptly report such fact to the appropriate Federal banking agency of the bank whose stock secures the loan or loans upon obtaining knowledge of such loan or loans, except that no report need be made in those cases where the borrower has been the owner of record of the stock for a period of one year or more, or the stock is that of a newly organized bank prior to its opening. "(3) The reports required by paragraphs (1) and (2) of this subsection shall contain the following information to the extent that it is known by the person making the report: (a) the number of shares involved, (b) the names of the sellers (or transferors), (c) the names of the purchasers (or transferees), (d) the names of the beneficial owners if the shares are registered in another name, (e) the purchase price, (f) the total number of shares owned by the sellers (or transferors), the purchasers (or transferees) and the beneficial owners both immediately before and after the transaction, and in the case of a loan, (g) the name of the borrower, (h) the amount of the loan, and (i) the name of the bank issuing the stock securing the loan and the number of shares securing the loan. In addition to the foregoing, such reports shall contain such other information as may be available to inform the appropriate Federal banking agency of the effect of the transaction upon control of the bank whose stock is involved. The reports required in this subsection shall be in addition to any reports that may be required pursuant to other provisions of law. "(4) Whenever such a change as described in paragraph (1) of this subsection occurs, each insured bank shall report promptly to the appropriate Federal banking agency any changes or replacement of its chief executive officer or of any director occurring in the next twelve-month period, including in its report a statement of the past and current business and professional affiliations of the new chief executive officer or directors. "(5) The Comptroller of the Currency shall immediately furnish to the Board of Governors of the Federal Reserve System and to the Federal Deposit Insurance Corporation a copy of any such report required in this subsection and received by him, and the Board of Governors of the Federal Reserve System shall immediately furnish to the Federal Deposit Insurance Corporation a copy of any such report required in this subsection and received by it. "(6) As used in this section, the term 'appropriate Federal banking agency' shall mean (a) the Comptroller of the Currency in the case of a national banking association or a district bank, (b) the Board of Governors of the Federal Reserve System in the case of a State member insured bank (except a district bank), and (c) the Federal Deposit Insurance Corporation in the case of a State nonmember insured bank (except a district bank)." [H.R. 12268, 88th Cong., 2d sess.] A BILL To provide for notice of change in control of management of insured banks, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the Federal Deposit Insurance Act (12 U.S.C. 1811-1831), as amended, be amended by adding the following new subsection (j) at the end of section 7 thereof: "(j) (1) Whenever a change occurs in the outstanding voting stock of any insured bank which will result in control or in a change in the control of the bank, the president or other chief executive officer of such bank shall promptly report such facts to the appropriate Federal banking agency upon obtaining knowledge of such change. As used in this section, the term 'control' means the power to directly or indirectly direct or cause the direction of the management or policies of the bank. If there is any doubt as to whether a change in the outstanding voting stock is sufficient to result in control thereof or to effect a change in the control thereof, such doubt shall be resolved in favor of reporting the facts to the appropriate Federal banking agency. "(2) Whenever an insured bank makes a loan or loans, secured, or to be secured, by 25 per centum or more of the voting stock of an insured bank, the president or other chief executive officer of the lending bank shall promptly report such fact to the appropriate Federal banking agency of the bank whose stock secures the loan or loans upon obtaining knowledge of such loan or loans, except that no report need be made in those cases where the borrower has been the owner of record of the stock for a period of one year or more, or the stock is that of a newly organized bank prior to its opening. "(3) The reports required by paragraphs (1) and (2) of this subsection shall contain the following information to the extent that it is known by the person making the report: (a) the number of shares involved, (b) the names of the sellers (or transferors), (c) the names of the purchasers (or transferees), (d) the names of the beneficial owners if the shares are registered in another name, (e) the purchase price, (f) the total number of shares owned by the sellers (or transferors), the purchasers (or transferees) and the beneficia owners both immediately before and after the transaction, and in the case of an, (g) the name of the borrower, (h) the amount of the loan, and (i) the n of the bank issuing the stock securing the loan and the number of shares se ing the loan. In addition to the foregoing, such reports shall contain such ot r information as may be available to inform the appropriate Federal banking agency of the effect of the transaction upon control of the bank whose stock is involved. The reports required in this subsection shall be in addition to any reports that may be required pursuant to other provisions of law. "(4) Whenever such a change as described in paragraph (1) of this subsection occurs, each insured bank shall report promptly to the appropriate Federal banking agency any changes or replacement of its chief executive officer or of any director occurring in the next twelve-month period, including in its report a statement of the past and current business and professional affiliations of the new chief executive officer or directors. "(5) The Comptroller of the Currency shall immediately furnish to the Board of Governors of the Federal Reserve System and to the Federal Deposit Insurance Corporation a copy of any such report required in this subsection and received by him, and the Board of Governors of the Federal Reserve System shall immediately furnish to the Federal Deposit Insurance Corporation a copy of any such report required in this subsection and received by it. "(6) As used in this section, the term 'appropriate Federal banking agency' shall mean (a) the Comptroller of the Currency in the case of a national banking association or a district bank, (b) the Board of Governors of the Federal Reserve System in the case of a State member insured bank (except a district bank), and (c) the Federal Deposit Insurance Corporation in the case of a State nonmember insured bank (except a district bank).” The CHAIRMAN. Before hearing Chairman Barr on the merits of the bill I would like to make one or two observations. The first is that I have long felt there ought to be a requirement in the law for annual reporting of the leading bank stockholders in the country. While this approach is a little different from the present bill, it is aimed at the same general objective, public knowledge of ownership changes. The committee is now compiling a list of the 20 main stockholders of each of the member banks of the Federal Reserve System. It is our hope that this will be published early this fall along with an analytical study of bank ownership. Secondly, by way of general observation, it appears to me that this bill deals with one specific element of the public interest; namely, the control of banks. But there are many other questions involving the public interest that might well be looked into. The question of services to the public, for example, and the whole issue of trust funds which have increased to far in excess of $100 billion-$144 billion. We have no time today to get into the matters of general bank regulation and disclosure requirements, but I want to say here and now, that I hope to have the committee spend more time on them in the near future. One other point. The Federal Home Loan Bank Board has submitted a draft bill which parallels this FDIC bill. It would require recording of control changes in stock in savings and loan companies. We will not have time to go into that today. The committee will get to it as soon as possible. It is my understanding that Mr. Barr will testify. He is probably the only witness for the proponents and I wonder if Mr. Saxon or his representative is here? I see Mr. Camp is here. Yes, I see him. Do you have a statement that you would like to make? Mr. CAMP. Yes. The CHAIRMAN. You will be privileged to do so after we conclude with Mr. Barr. Mr. Barr, you may proceed in your own way. Mr. KILBURN. May I say this? For the benefit of the new members of the committee, Mr. Barr was a very distinguished member of this committee. I am sure the members of the committee welcome him. It is a pleasure to have you before this committee. Mr. BARR. Thank you, Mr. Kilburn. Mr. BARRETT. I would like to say that Joe Barr is more familiar to me than Mr. Barr. He was one of the hardest-working Congressmen that ever came from Indiana. It is a great pleasure to have you before us here this morning. Mr. BARR. Thank you, Mr. Barrett. Mrs. SULLIVAN. Mr. Chairman. The CHAIRMAN. Mrs. Sullivan? Mrs. SULLIVAN. Before we hear from Mr. Barr, I would like to express my wholehearted support for this legislation and I am going to ask to be excused in about 10 minutes because a bill of mine is coming up for hearing before another committee and I am going to have to leave. The CHAIRMAN. If we were to vote-if we were to notify you about the time we would vote, could you return for that? Mrs. SULLIVAN. Yes. I am very much in favor of it. In fact, in view of the experience we had recently in Missouri of the control of a bank being taken over without the FDIC being aware of the change in control and then having it fail within a few months, I think this legislation is necessary. Thank you. The CHAIRMAN. Mr. Barr, you may proceed in your own way now. STATEMENT OF HON. JOSEPH W. BARR, CHAIRMAN, BOARD OF DIRECTORS OF THE FEDERAL DEPOSIT INSURANCE CORPORATION Mr. BARR. Mr. Chairman, before beginning on my statement, I would like to take this opportunity to present my colleague, Mr. K. A. Randall. The CHAIRMAN. He can join you at the table if you like. Mr. BARR. Mr. Randall came to the Corporation from Provo, Utah, and has proved to be a hard-working and diligent member of the Corporation and a real asset to our activities. The CHAIRMAN. Glad to have him. Mr. BARR. Mr. Chairman, today I am appearing in support of H.R. 12267 and H.R. 12268, identical bills, introduced by Chairman Patman and Congressman Widnall. These bills are designed to provide for notice of change in control or management of insured banks. This proposed legislation would require the president or other chief executive officer of any insured bank to report to the appropriate Federal banking agency the facts surrounding changes which occur in the outstanding voting stock of the bank which will result in a change in the control of the institution. The term "control" would be defined to mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of the bank. National banks would be required to report such a change in control to the Comptroller of the Currency, State banks which are members of the Federal Reserve System would report to the Board of Governors, and insured State banks which are not members of the Federal Reserve System would report to the Federal Deposit Insurance Corporation. Under the proposed legislation a report would also be required in cases where a loan or loans are made by any insured bank which are secured by 25 percent or more of the shares of the voting stock of any insured bank. In the case of such a loan the report would be made to the appropriate Federal banking agency of the bank whose stock secures the loan. An exception would apply to loans in the case of stock of a newly organized bank prior to its opening or where the applicant or borrower has been the owner of record of the stock for more than 1 year. Provision is also made that when there has been a change in control, each insured bank would be required to report promptly to the appropriate Federal banking agency any changes or replacements of the chief executive officer or directors that occur within 12 months after the change in control. The proposed bill sets forth the information which must be contained in the reports of changes in control, loans, and executive officers and directors. When I assumed my responsibilities as Chairman of the Federal Deposit Insurance Corporation, in January of this year, I was impressed with the thorough and painstaking investigations that precede the granting of insurance to newly chartered banks. In these investigations, particular emphasis is placed on the character and ability of the management and board of directors. A very complete report is submitted on every director and every chief executive officer of each bank applying for insurance. However, I was surprised to discover that when the control of a bank shifted or when a bank obtained new management, we had no such comparable reports to review. As a matter of fact, I learned that between examinations we usually found out about changes of control or management only through rumor. Since 1934 it has become apparent that the vast majority of bank failures could be attributed to the business cycle, to bad judgment, to embezzlement, or to a combination of these factors. Up until about 1955, shifts of control or management seemed to have relatively little to do with bank failures. Consequently, in January of this year, while I was surprised at this apparent gap, I was not unusually perturbed. I was not prepared to do anything about it. But since March of this year, we have had five bank failures. The first occurred in Marlin, Tex., the second in Minden City, Mich., the third in Dell City, Tex., the fourth in Belleview, Mo., and the fifth in Covelo, Calif. All of these failures had this in common-they were preceded by a recent change in control or management, some 36-772-64– 2 |