If we had been able to use a scientific sample, rather than 14,400 banks, we would have probably obtained equally valid results, at must less cost.

The cost to the individual bank is something we did not ask them to keep. I don't know what it cost them. A number of them did voluntarily call us or write us and as a matter of fact, three of them submitted bills to us and said "We had this much cost, you pay it." But the ones we have seen have gone from $450 to $7,700. And I am sure that the $3.5 million is a reasonably conservative estimate of the cost to the industry.

To get back to your main point, though, I certainly think it is time we began to look at the benefit, the ratio of cost to benefit, whenever we ask for any additional information or survey or call report, or whatever, because we are loading the banks of this country down with paper.

Senator MCINTYRE. Does any other witness wish to respond? Mr. PARTEE. Senator McIntyre, I think I would be a little stronger in my reaction to this. I think it was an unnecessarily costly survey. I think that pretesting would have helped greatly, and sampling would have provided not just equally good, but much better results.

Further, as I indicated earlier, I believe that many of these questions involve a snapshot of information surrounding the_loan and the circumstances of the loan that require interviews. I am concerned about the quality of the results, not only because they look odd in some places and because it took 10,000 editing calls to try to clarify the instructions, but I am concerned also because there is so much collateral information that we don't have.

The survey properly done would have taken longer. A pretest, for example, takes us about 1 month ordinarily. That would have added 1 month to the time. An interview system with a sampling of banks would have taken quite a long while, because the important thing there is to have a face-to-face confrontation between the principal banker and the interviewer.

So it would have been longer, but I think we would have gotten better results for somewhat less money and a good deal less burden on the banks than this survey occasioned.

Mr. HEIMANN. Senator, I would like to say I think it was a necessary survey. The question is whether or not given some more time it could not have been handled more efficiently and perhaps more effectively and with less cost.

The answer to that always has to be yes. Certainly I think the survey itself was terribly important.

Senator MCINTYRE. I think the legitimacy of the effort was apparent. But I think we have got a lesson here we may have learned, and we better be more careful in the future.

Mr. Chairman, I would like to have this article from the Wall Street Journal, page 21, of Tuesday, March 14, "Federal; Regulation of Business on Rise, Budget Study Shows," included in the record. Thank you, Mr. Chairman.

The CHAIRMAN. Without objection, it is so ordered. [The newspaper article follows:]

[From the Wall Street Journal, Mar. 14, 1978]

FEDERAL REGULATION OF BUSINESS ON RISE, BUDGET STUDY SHOWS

INCREASE IN U.S. AGENCY COSTS INDICATES MORE REDTAPE DESPITE CARTER'S PLEDGE

ST. LOUIS.-Government regulation of business will continue its climb in fiscal 1979, despite pledges from the Carter administration to trim redtape, says a report by the Center for the Study of American Business at Washington University here. The federal government's 41 regulatory agencies have a combined budget of $4.82 billion in fiscal 1979, up from $4.54 billion in fiscal 1978 and $2.24 billion in fiscal 1974.

This level of expenditure "represents a growth rate that is unsurpassed by the federal budget as a whole, the population of the country, the gross national product or any other applicable basis for comparison," the study notes.

In an interview, Murray L. Weidenbaum, the center's director, said the study "is a good, direct measure of the rising intervention of government in the economy." He stressed that "the overriding concern isn't just $4.8 billion, but the costs to business for complying with the regulations" which are ultimately passed on to the consum

er.

Multiplier effect

"An earlier study by the center indicated a multiplier effect of about 20 times the federal regulatory expenditures," Mr. Weidenbaum said. Thus, we reasoned that the cost to business in fiscal 1979 "could easily be close to $100 billion."

Mr. Weidenbaum, formerly Assistant Treasury Secretary for economic policy, said he and a graduate student, Robert DeFina, had poured through the budget since late January, when it became available, picking out regulatory costs.

"It was quite a chore," he continued, noting that "you have to know your way around budget concepts and tables." Nonetheless, he added with a chuckle, "it was something like a detective story. You had to find bits and pieces" related to costs of regulation.

The report disclosed that the bulk of budgeted expenditures for fiscal 1979, which begins Oct. 1, are earmarked for areas of social regulation that have received increasing attention in recent years. For instance, the total for consumer health and safety is $2.67 billion, up 3 percent from fiscal 1978, but a 105 percent increase from fiscal 1974. Job safety receives $626 million, up 11 percent from fiscal 1978 and 102 percent from five years earlier.

Regulatory costs for environment and energy increased 13 percent to $1.12 billion from $989 million a year earlier, and reflect a 222 percent gain since fiscal 1974. For instance, the budget for the Environmental Protection Agency is $522 million, up from $473 million in fiscal 1978 and $232 million in fiscal 1974.

Old-line agencies

Mr. Weidenbaum maintained that "much media attention" is focused on "oldline" agencies such as the Federal Communications Commission, the Federal Trade Commission and the Interstate Commerce Commission. Yet, this group's expenditures "have a much more stable pattern," he said. "The big money isn't here; the action is in the newer agencies," he said.

Regulatory costs budgeted for these "old-line" agencies edged upward to $341 million in fiscal 1979 from $340 million the year earlier. The fiscal 1979 figure was up 39 percent from fiscal 1974, the economist said.

"Frankly," he observed, "I wasn't aware of the extent the Department of Agriculture has expanded its role." The overall regulatory costs declined to $830 million from $862 million in fiscal 1978; however, both years "are substantially ahead of” fiscal 1974's costs of $314 million, he said.

"In all fairness," Mr. Weidenbaum said, “a lid has been kept on expenditures of the Consumer Product Safety Commission" in recent years. The fiscal 1979 budget allotted the commission $40 million, from $42 million the year earlier and $40 million in fiscal 1977.

The CHAIRMAN. Gentlemen, I appreciate Senator McIntyre's questions. I think it is excellent that we raise these questions on the cost of this kind of action.

I think we have to, in a sense, though, recall the situation that faced the committee and the country in the summer of 1977. It was a tremendous loss of confidence on the part of many people in our banking system, because they felt the practices of overdrafts and so

forth, because of the situation with Mr. Lance, were widespread and there was a lot of accusation of our bankers and the banking

system.

I think this survey has cleared the air, I think it has given us information we wouldn't have had otherwise.

As to whether or not the survey should have been more of a sample, as Mr. Partee indicates, or more comprehensive, our staff discussed this with the regulators. There was no member of the committee, no regulator, who suggested, after the letter was sent out, that it ought to be a sample, it ought to be cut down. There was a request for more time, and as Mr. Heiman has properly indicated, there always is that, we always have to determine how short a time frame.

If you had had more time, you probably could have done it at less cost. But I think under the circumstances, we did the thing we should have done, the committee would have been criticized and should have been criticized if we hadn't requested this kind of a determination as to how widespread these overdrafts and preferential loan practices were in the country, and we found out.

I would like to ask you this: Each of you have questioned the validity of at least some of the information obtained from the survey. It is very difficult to tell on an aggregate basis just when preferential treatment is given for loans.

Let's look at the specific circumstances where preference might be given, and in each case I would like to know whether your examiners have been instructed to cite the banks for giving preferential treatment.

First, loans made to insiders below the prime rate at the time the loan was made. Mr. Heimann?

Mr. HEIMANN. As I indicated before, Mr. Chairman, that would be carefully looked at as a signal. The question would be whether there was some other business relationship which justified that. The CHAIRMAN. But you would look at it. You might cite the bank or might not, depending on the specifics?

Mr. HEIMANN. The specifics of that circumstance.

The CHAIRMAN. Do you agree, Mr. LeMaistre?

Mr. LEMAISTRE. I agree. That is the way the bank can be sure that the loan will be examined, if it made it, you can be sure the examiner will pick it up.

Mr. PARTEE. Yes; if there were loans to insiders that did not seem to be on appropriate terms and conditions, they would be cited.

The CHAIRMAN. Loans made to an insider of the bank maintaining a loan with the lending bank where the interest that is charged on the loan is below the rate charged other customers with comparable credit ratings and collateral?

In other words, that relates to the correspondent situation.

Mr. PARTEE. Since the bank that is making the loan may have a prefectly good loan, if it is getting compensation in the form of a correspondent balance, we can't really fault the lending bank. But the information on the existence of the loan involving an insider at another bank is then transmitted among the agencies, so it gets back to the examiner of the bank that may have been involved in the negotiating for its insider, and is checked by the examiner.

It has been a procedure we have followed for over 10 years now. Mr. HEIMANN. The new FDIC insider regulations that have been proposed, I think I am right about this, and correct me if I am wrong, the FDIC would require that the insider who is borrowing from such a third party institution, in which there is a relationship, report that to the bank of which he is an insider. Therefore that will be another method by which to trace, if you will, the line of possible preferential treatment.

The CHAIRMAN. How about loans made to an insider of another bank and the other bank maintains a balance with the lending bank, where the rate is not below prime, but the balance is increased beyond that required for services rendered?

Mr. HEIMANN. I think we addressed in our testimony the difficulty in pricing the services of a correspondent relationship, where there is a compensating balance.

The imprecision that is involved here makes it rather difficult, unless it is an egregious case of compensating balances tied to a stock loan, for the examiner to determine exactly the cost and/or value. That is looked at, but it is quite imprecise.

The CHAIRMAN. How about overdrafts that are allowed for insiders or public officials without interest being charged or without fees, or without either?

Mr. HEIMANN. May I start with that? One of the problems I think we found in the survey is that the banking institutions of the Nation do not normally categorize loans to individuals who also happen to be public officials by some sort of schematic approach. Second, it is rather difficult for the examiners to determine-The CHAIRMAN. Will you be able to do that in the future? Will you have a requirement that should identify loans to public officials?

Mr. HEIMANN. That is something we are looking at, we are reviewing all of our procedures. The examiner going in may or may not know all of the local officials. It is possible the examiner would not able to identify by loan the name of the individual, whether he or she is indeed a public official. I think there are something over 750,000 elected officials in the United States, from Congress down to local school boards.

So that if the banks had to identify through their own mechanisms the public officials, it is difficult.

The CHAIRMAN. But for overdrafts to insiders without interest being charged? The examiners are going to cite a bank for giving preferential treatment where that is done?

Mr. HEIMANN. Oh, sure, absolutely.

The CHAIRMAN. Mr. LeMaistre?

Mr. LEMAISTRE. There are two things to consider there. Many States have laws prohibiting that. And if it is in violation of a State law, obviously it would be classified or commented on by the examiner and he would insist on correction. But even if it is not in violation of the State law, then the inquiry would be, did the board of directors authorize the extension of this credit consciously knowing what the relationship was.

If they determined whether there was a benefit to the bank, or whether, the other side of it, there was no detriment to the bank,

253

then the examiner would be required to look behind their decision to see if in fact it were a detriment.

The CHAIRMAN. Governor Partee?

Mr. PARTEE. I think those answers have been quite good. They certainly know much more about it than I do.

The only comment I would make is that I understand we have had some difficulty with this subject, because, of course, the typical procedure of an examiner is to take the trial balance on the day of the examination, showing the overdrafts on that day. I think we will have to consider taking daily average overdraft experience, since the possibility might be that the overdraft would be gone on the day of the examination.

Then I think in that case, which is a considerable statistical job, it is better to point to the insiders, rather than to try to cast a net to catch 750,000 public officials as well.

Mr. LEMAISTRE. Mr. Chairman, in connection with the handling of overdrafts, one of the problems in a situation like the blizzard in the East this year, might be that all of the checks have not got in and half of the them would have to be paid in overdraft. Obviously the examiner would find that out and would not make a great point of it.

But if it happened all of the time, I think he would do something. The CHAIRMAN. How about whether or not your examiners are instructed to cite the bank for giving preferential treatment where bank stock loans are made without a margin being required of the borrower? In other words, you make a 100-percent loan?

Mr. LEMAISTRE. Well, that really is a little more difficult, because that assumes that the only basis for the credit is the stock. Obviously if that is the case, there should be some cushion in there. But the fact that the bank stock loan exists at all ought to awaken the examiner to the need to look at it and see what the situation is. I think it can be perfectly proper to have it 100 percent of the value of the stock if the man is creditworthy otherwise.

If it is solely based on the value of the stock, I even have doubts about whether bank stocks ought to come in to the prime rate. The CHAIRMAN. So you wouldn't cite the bank necessarily, but consider it a red flag and take a careful look at it, do you all agree with that?

First, a requirement that all overdrafts of 1 day or longer carry an interest charge at the market price. Do any of you object to that?

Mr. LEMAISTRE. I don't object to it. I think you will be depriving some banks of a little more income than they would get under that procedure.

If you charged $5 for a $5 overdraft, you are certainly getting a lot more than market rate interest for 1 day. And most of them do charge a fee.

I would say the usual way of handling an overdraft would be with a fixed fee for the service of handling the overdraft.

Mr. HEIMANN. I would agreed with Chairman LeMaistre's answer. I would like to go a little further in terms of the time period. I am not sure that 1 day would be fair or proper-I think George mentioned the snowstorm. It does happen from time to time, through no fault of the user of the creidt, that checks are