economic and financial conditions. We find it rather difficult to generalize as to a specific rate.

The CHAIRMAN. Well, what you're indicating here is that it is not appropriate that bank stock loans where there is a correspondent balance will be at a lower rate than when there is not?

Mr. HEIMANN. We do not believe, in general, that is appropriate, but then, again, it has to be looked at in the individual circumstance.

The CHAIRMAN. The findings of the survey were that those bank stock loans were given at lower rates where their is a correspondent balance. Would you conclude that that suggests that this may be not only preferential but abusive in general?

Mr. HEIMANN. It certainly is preferential. It's difficult again, Mr. Chairman, to say abusive without looking at each one of those transactions which we are in the process of doing.

The CHAIRMAN. Governor Partee?

Mr. PARTEE. As I said in my statement, Mr. Chairman, I think this does raise the possibility of some abuse in bank stock lending. I do believe that we have to look into it to find out what the collateral considerations were, but I believe that when an individual holder of stock uses his bank's correspondent balance to reduce the price he would otherwise pay for the loan that the effect of that is to improperly transfer income from the bank to the individual. Now, it's a little different if the man owns 100 percent of the bank. That is, there aren't any other stockholders to be affected. If there are minority stockholders, I think it obviously is abusive to those minority stockholders if that transfer takes place. The results of the survey do bother me, but as I say, we have to look into it. It may be, in some cases, that the bank has a bad loan and it's reduced the interest rate in order to be able to collect something. We have to look into each situation.

The CHAIRMAN. Well, let me follow up on that with you. I think you or Mr. Heimann gave us these statistics. The survey showed when bank stock loans were made with fixed interest rates and no balances, the interest rates were concentrated in the 7 to 9 percent range-that was no balances-with 54 percent above 8 percent. For the same type of loans when balances were maintained by the bank whose stock was pledged interest rates were concentrated in the 6 to 8 percent range with only 21 percent of the loans carrying interest rates above 8 percent.

Now in the first place, you would agree, I presume, that this is preferential?

Mr. PARTEE. Yes.

The CHAIRMAN. Given to insider loans.

Mr. PARTEE. If it's a correct finding.

The CHAIRMAN. It's hard for me to see the justification since the loan is made not to the bank but made to the individual and therefore he benefits by getting a lower rate, while the bank places a correspondent balance that carries no interest.

Mr. PARTEE. Well, the obvious basis that I can think of, Mr. Chairman, for a lower rate in that case is there where there is a correspondent relationship, the chances are that the lending bank knows the borrower a good deal better than he would in other cases and that might justify some below market rate. But I don't

think it would justify a lending rate below the bank's prime. When the Board reviews holding company applications we are concerned when we see any kind of proposal that comes in carrying less than the prime rate on a bank stock loan.

The CHAIRMAN. I want to follow up on that. My time is up. Senator Tower.

Senator TOWER. Thank you, Mr. Chairman. I'm sorry I was not here at the beginning of the hearing and I would like to ask unanimous consent that my statement appear in the record.

The CHAIRMAN. Without objection, so ordered (see p. 141). Senator TOWER. In the report that you prepared you note the States with the largest concentrations of below average interest rate stock loans. They occur primarily in the Southwest and Midwest. Of course, Texas has the highest percentage.

I would like to ask you what significance you place on the fact that these States are unit banking or limited branching States? What significance do you attach to that, and could you expand on the reason for this particular fact?

Mr. LEMAISTRE. Senator Tower, I think that it's clear that the number of loans made at below prime and the number of loans secured by bank stock are generally centered in-the greatest number are centered in those States in which there is no branching. I would assume that has to do with the need to maintain orderly transfer of ownership from a bank in a small community to someone qualified to run it. The correspondent bank being familiar with the conditions in that community might have a great interest in seeing that qualified people were brought in to continue to run that bank, and for that reason would offer some inducement to keep a good bank in the community because no other bank can branch in there to furnish the services. That is a decision that the States make. The States decided they want to operate as units and, having done so, I think this is a logical result.

I do think that it is wise, as Chairman Proxmire pointed out a moment ago, when we see this preference the examiners ought very quickly to look at it and see whether there is justification for it. It points up what I have contended all along, the greatest tool we have is the right to examine banks. The examiner goes in and finds out what the conditions are around each one of these particular loans. So it doesn't disturb me particularly that the concentration is greater in the unit banking States because that's just a characteristic of doing business in that way.

Senator TOWER. Do you attach any significance to the fact that most of these States, with perhaps one or two exceptions, are large growth States; this coupled with the antibranch situation?

Mr. LEMAISTRE. Not only are they States in which there has been rapid growth, but they are also States in which the ordinary industry is capital intensive. To carry on the operations that directors in those States carry on usually requires more money.

Senator TOWER. I might suggest in the case of Texas this corresponds to the fact that with all the industrial growth and corporate movement in the State that out banks didn't have adequate capital base to handle these industries. An example of the top 50 corporations in my State having about $45 billion in banking services

outside the State. This was an effort I think to meet demand which clearly arose, given our antibranch banking statute.

On the matter of the survey, what's the estimate of the cost and the number of man-years involved in this survey? What would this survey cost? I think it probably cost the Government less than it cost the banks, but do you have an estimate of what it cost the agencies?

Mr. LEMAISTRE. We have the cost to the three agencies which is around $850,000. We have estimated by a sampling of the cost to banks over the country at somewhere between $3 million and $4 million. The number of man-years, I don't know what it is in the banks. In the agencies it looks like it's 22 to 25 man-years were devoted to this particular survey.

Senator TOWER. Would it not have been more appropriate to have had a sample survey first? Would that have been a better procedure to follow?

Mr. LEMAISTRE. I certainly think it would have been. There were reasons why it appeared to the committee staff that they wanted more information than would be obtained from a sampling, and, as you know, the sampling was recommended in the conference between the staffs of the agencies and the committee and was rejected.

But I agree with you, it certainly would have been less costly, and probably just as effective.

Senator TOWER. It seems to me that the survey results, while giving indications, might be a little incomplete or inconclusive because they are not in enough depth. Being politicians, we are in the survey business quite a bit. We are interested in not only just the numbers of who is for candidate X or who is for candidate Y, we want to know why, we want profiles, we want to go behind the figures to get some illumination, some rationale.

It seems to me there are several things excluded by the survey. For example the survey excluded any data on fixed overdraft charges, and the results of overdraft practices were not compared with data for all bank customers in general, as I see it. And, too, there is no way the survey results can describe special or extinuating circumstances that surround certain banking practices.

I would like to note, too, that apparently the survey didn't take into consideration the different money supply situations in various areas of the country. Even within Texas, for example, there is a surplus of money in banks in some communities, and a paucity of money in other banks. You can go from one town to another and get a variation on rates of 1 percent throughout the State.

Is that a factor to be considered in all of this, in evaluating the survey data?

Mr. LEMAISTRE. I think definitely that in some way reflects on the value of the survey. I think the more of that kind of information we could develop, the better the results would have been. I think you put your finger on probably the most difficult point, and that is that there is no comparison with the general public, we don't know whether a bank which did not charge interest on overdrafts didn't charge anybody interest, or just didn't charge public officials, insiders, insiders of other banks.

I think from my own experience in most banks there may be a fee for that sort of thing. I am particularly disturbed by the fact that we don't know whether these banks charged a fee. They say they didn't charge interest. They might not have to charge interest, a fee might represent a much larger interest rate than 6 or 8 percent would have been. Because most of these overdrafts clear in a very short period of time.

Senator TOWER. Thank you. I would like to ask a question, and I would like to have the comment of each of you on it. Do you believe that if S. 71 is passed by the House there will be need for any additional legislation to deal with the problems that may have been illuminated by the survey, or that were observed through the activities of your own particular agencies? If you would respond to that in turn, I would appreciate it?

Mr. PARTEE. Senator Tower, we think S. 71 will go a long way toward giving us the powers we need to deal with these problem situations.

In our case, we are undertaking the followup on this survey to find out precisely, along the lines you were suggesting, what the situation was in each case where there seems to be improper action. Perhaps on the basis of that followup, we will want to recommend additional legislation.

But at this point we can't do that, since, we don't have that much confidence in the survey. Nor do we know that much about the conditions that surrounded the loans that were made.

Senator TOWER. Then, as I understand it, you believe that S. 71 should be passed, but perhaps hold back on additional legislation until we have additional information?

Mr. PARTEE. I think that is right, yes.

Mr. LEMAISTRE. I think that is a fair statement, in my view. We, too, are following up all of the information from the survey in the individual banks, and until we have developed that, I certainly would not recommend any additional legislation as a result of this survey.

Mr. HEIMANN. Senator Tower, we are clearly following up. I agree with my colleagues that we would like to see the specifics, what has happened in many of these cases, before we address additional legislation.

Senator TOWER. Thank you very much, gentleman.

The CHAIRMAN. Senator Sparkman.

Senator SPARKMAN. Let me say that I did have in mind the very questions that Senator Tower asked. Of course we have already passed S. 71 through the Senate, and I gather from what you said that it would cure, shall I say, most of the defects or shortages, as you see it, in the report?

Mr. LEMAISTRE. I am not sure it would change the pattern significantly, but it would give us something to deal with it better. We could deal with the individual banker in a way that we can't do now. And I think we would be much more effective in going against the individual for this kind of abuse than going against the institution. That is the key to S. 71. I think it would be effective in that way.

Mr. PARTEE. Senator, we would have greater powers, as you know. But in addition, there would be some standards that would be extended to other groups which aren't now covered by the law. For example, we speak of preferential loans to insiders. The fact of the matter is there is now, as I understand it, no absolute requirement that a loan to a director or to a stockholder be on the same terms as are available to the general public. S. 71 would correct this by extending that requirement which now applies to officers of the bank to the directors and owners also.

Senator SPARKMAN. It would certainly be an improvement?
Mr. PARTEE. Yes.

Senator SPARKMAN. By the way, what is the status of S. 71 in the House? Is it active or just holding?

Mr. PARTEE. It is subsumed in the safe banking bill, and I just don't know where that stands. I believe there will be hearings and we expect the bill to be pushed along this year. But the difficulty is that there are so many controversial proposals in the safe banking bill, whereas S.71 was pretty generally agreeable to everyone. Senator SPARKMAN. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Sparkman. I am a little bit puzzled as to your answer, gentlemen, to the question asked by Senator Sparkman and Senator Tower with respect to S. 71, your uniform statement that you didn't want any additional legislation until we have had more information. I think particularly John Heimann told us that he favored certain things, and I though you said "now." Maybe I didn't understand you correctly.

For instance, you favored action to restrict the ability of people to buy banks without some kind of expression of concern, and perhaps some authority on the part of the regulator to prevent the purchase of banks by people who you may feel didn't have the capital or expertise or the moral record.

Mr. HEIMANN. I do, Mr. Chairman. I clearly feel that way.

The CHAIRMAN. In addition to that, I think both Mr. LeMaistre and Mr. Heimann have favored in the past payment of interest on correspondent balances. Is that correct?

Mr. LEMAISTRE. On all demand deposits.

The CHAIRMAN. Right. Of course that would eliminate an element in the Lance case and in other cases where many feel there have been abuses.

Mr. LEMAISTRE. Mr. Chairman, may I clarify that answer that I gave, and that Governor Partee gave? I thought the question was was there anything in the survey that indicated we needed more legislation.

Obviously I also favor the payment of interest on demand deposits and the control on the transfer of stock. But I am not sure the survey brought that out.

The CHAIRMAN. All right. I have a lot of other things to get into. But before I do that, Mr. LeMaistre, you indicated that preferential loans might not be abusive, and I think that is correct, you made a very helpful and thoughtful statement about that, and you enlightened me on it.

But I am not sure that you could make that generalization where you have the borrower an insider in a bank, which bank makes a