TO PERMIT NATIONAL BANKS TO UNDERWRITE AND DEAL IN "REVENUE BONDS" MONDAY, APRIL 26, 1965 HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The committee met, pursuant to call, at 10 a.m. in room 2128, Rayburn House Office Building, Hon. Wright Patman (chairman) presiding. Present: Representatives Patman, Barrett, Mrs. Sullivan, Reuss, Moorhead, Stephens, St Germain, Gonzalez, Weltner, Gettys, Todd, McGrath, Hansen, Annunzio, Widnall, Mrs. Dwyer, Harvey, Johnson, Stanton, and Mize. The CHAIRMAN. The committee will please come to order. Today the committee begins hearings on H.R. 7539, a bill to permit national banks to underwrite and deal in revenue bonds issued by States and their political subdivisions. This bill would broaden section 5136 regarding national banks and member banks of the Federal Reserve System to permit them to underwrite and deal in all obligations issued by a State or political subdivision or agency of the States which are at the time eligible for purchase by such banks for their own account except for special assessment obligations and industrial development obligations. Further, the bill would permit national banks to underwrite and deal in public obligations of 18 months or less maturity which are guaranteed by agreements between a public housing agency and the State requiring the latter to lend sufficient funds to pay principal and interest as they become due. Extensive hearings were conducted on similar proposed legislation in the last Congress. No action, however, was taken at that time. Today the committee will hear representatives from the Federal agencies on this bill, and tomorrow outside witnesses will be heard. Our first witness will be the Vice Chairman of the Federal Reserve Board, Mr. C. Canby Balderston, who will be followed by Mr. James J. Saxon, Comptroller of the Currency. Without objection, I will insert in the record at this time a letter from the Federal Deposit Insurance Corporation on this legislation. (H.R. 7539, a summary analysis of H.R. 7539, and the letter from the Federal Deposit Insurance Corporation follow :) [H.R. 7539, 89th Cong., 1st sess.] A BILL To assist cities and States by amending section 5136 of the Revised Statutes, as amended, with respect to the authority of national banks to underwrite and deal in securities issued by State and local governments, and for other purposes Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That paragraph "Seventh" of section 5136 of the Revised Statutes of the United States, as amended (12 U.S.C. 24), is hereby amended (1) by striking out the colon preceding the word "Provided" in the sixth sentence thereof and inserting the following: "or (3) by an agreement between the public housing agency and the State in which such public housing agency is situated, in which agreement the public housing agency agrees to borrow from the State, and the State agrees to lend to the public housing agency, prior to the maturity of such obligations (which obligations shall have a maturity of not more than eighteen months), moneys in an amount which (together with any other moneys irrevocably committed to the payment of interest on such obligations) will suffice to pay the principal of such obligations with interest to maturity thereon, which moneys under the terms of said agreement are required to be used for the purpose of paying the principal of and the interest on such obligations at their maturity"; and (2) by adding the following new sentences at the end of such paragraph: "The limitations and restrictions contained in this paragraph as to dealing in and underwriting investment securities shall not apply to all other obligations issued or guaranteed by or on behalf of a State or any political subdivision thereof or agency of a State or any political subdivision thereof (except special assessment obligations and industrial development obligations) which are at the time eligible for purchase by a national bank for its own account, except that (1) no association shall hold such obligations of any one obligor or maker (other than general obligations of a State or political subdivision thereof) as a result of underwriting, dealing, or purchasing for its own account (and for this purpose obligations as to which it is under commitment shall be deemed to be held by it) in a total amount exceeding at any one time 10 per centum of its capital stock actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund, and (2) the purchase of such obligations by a national bank as fiduciary from such bank as an underwriter or dealer shall not be permitted unless lawfully directed by court order. For purposes of this paragraph the term 'industrial development obligation' shall mean an obligation, not secured by the full faith and credit of the issuer, payable solely from the rentals received by the issuer from the letting of property to private manufacturers for the principal purpose of manufacturing articles for sale if such obligations have been issued to finance the acquisition, construction, equipment, or other development of such property and such property is held or to be held by the issuer for the principal purpose of such letting and not as part of or incidental to another project of the issuer." H.R. 7539 SUMMARY ANALYSIS OF THE BILL TO PERMIT NATIONAL BANKS TO UNDERWRITE AND DEAL IN REVENUE BONDS ISSUED BY STATES AND THEIR POLITICAL SUBDIVISIONS (Introduced by Mr. St Germain on April 15, 1965) PROVISIONS The Glass-Steagall Act of 1933 expressly limits the business of dealing in investment securities by national banks to purchasing and selling securities for the account of customers only. National banks are permitted to purchase investment securities for their own account only under limitations and restrictions prescribed by the Comptroller of the Currency, and in no case to exceed 10 percent of the bank's capital and surplus with respect to the total amount of the invest ment securities of any one obligor or maker. National banks are prohibited from underwriting any issue of securities or stock. However, these restrictions as to dealing in, underwriting, and purchasing for its own account investment securities are not applicable to obligations of the United States, or general obligations of any State or of any political subdivision thereof (sec. 5136, Rev. Stat.). Under the Federal Reserve Act, State member banks of the Federal Reserve System are made subject to the same limitations and conditions contained in paragraph 7 of section 5136 as to national banks. H.R. 7539 would broaden section 5136 to permit national banks to underwrite and deal in all obligations issued by a State or political subdivision or agency of a State except for special assessment obligations and industrial development obligations. It would also permit national banks to underwrite and deal in public obligations of 18 months or less maturity which are guaranteed by agreements between a public housing agency and the State requiring the latter to lend sufficient funds to pay principal and interest as they become due. The proposed revision would thus permit national banks to underwrite revenue bonds-obligations which are not supported by the faith and credit of a State or local government. PRESENT CONFLICT State and local governments sometimes issue bonds which are payable from a designated source of revenue but which may also be defrayed from other revenue sources if the need arises. A conflict of interpretation has arisen between the Comptroller of the Currency and the Federal Reserve Board with respect to such bond issues. The most publicized is the Comptroller of the Currency's ruling of August 16, 1963 (12 CFR 1.127) to the effect that school bonds payable from the sales tax receipts of the State of Washington qualify for national bank underwriting as general obligations of the State. Twenty days later the Federal Reserve Board ruled that this issue did not qualify as a general obligation of the State and that it was therefore ineligible for underwriting by State member banks (12 CFR 208.104). The proposed revision would eliminate the source of the present conflict by permitting national banks and Federal Reserve member banks to underwrite both general obligations and the so-called revenue bonds. The Comptroller's ruling, however, by classifying certain revenue bonds as "general obligations" automatically exempts them from the provisions of section 5136 that would otherwise limit investment in them to 10 percent of unimpaired capital and surplus and make them subject to limitations prescribed by the Comptroller. The proposed amendment would not entail such an exemption. SECTION-BY-SECTION ANALYSIS The bill provides that the seventh paragraph of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24) be amended as follows: (1) by adding to the permitted obligations listed in the aforementioned paragraph obligations involving an agreement between a public housing authority and the State in which it is situated, in which agreement the public housing agency agrees to borrow from the State and the State agrees to lend to the public housing agency, prior to maturity, moneys sufficient to assure payment of principal and interest (it is further provided that the obligations have a maturity of not more than 18 months); (2) by redefining the category of securities presently exempted from the limitations and restrictions on underwriting contained in the Glass-Steagall Act, expanding the category to include all obligations of a State, political subdivision or agency of a State, or political subdivision, except assessment obligations and industrial development obligations, where such investment securities are at the time also eligible for purchase by a national bank for its own account. It also provides that no national bank may hold such obligations of any one obligor or maker as a result of underwriting, dealing or purchasing for its own account in an amount exceeding at any one time 10 percent of its unimpaired capital and surplus. The bill would prohibit the purchase by a national bank as fiduciary of revenue bonds with respect to which the bank has acted as underwriter or dealer unless lawfully directed by court order. The bill also contains a definition of "industrial development obligation" for the purposes of this bill. JUSTIFICATION The justification made for this proposal is that it would furnish a more flexible market for revenue bonds, which is expanding rapidly in number of issues and outstanding aggregates. It would also, according to proponents, result in lower interest costs to communities faced with heavy outlays for roads, schools, and other facilities which must, for one reason or another resort to revenue bond financing. FEDERAL DEPOSIT INSURANCE CORPORATION, Hon. WRIGHT PATMAN, Chairman, Committee on Banking and Currency, DEAR MR. CHAIRMAN: Your committee has requested the views of this Corporation on H.R. 7539, 89th Congress, a bill to assist cities and States by amending section 5136 of the Revised Statutes, as amended, with respect to the authority of national banks to underwrite and deal in securities issued by State and local governments, and for other purposes. This is to advise you that this Corporation would interpose no objection to the enactment of this legislation. We have been advised by the Bureau of the Budget that it has no objection to the submission of this report from the standpoint of the administration's program. Sincerely yours, K. A. RANDALL, Chairman. The CHAIRMAN. Mr. St Germain, I believe you offered this bill recently. Mr. ST GERMAIN. Yes, Mr. Chairman. The CHAIRMAN. I wonder if you would like to make a brief explanation of the bill before we hear testimony of the witnesses. STATEMENT OF HON. FERNAND J. ST GERMAIN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF RHODE ISLAND Mr. ST GERMAIN. I appreciate it, Mr. Chairman. As the chairman said, we are today considering H.R. 7539, which was recently introduced. The predecessor bill, H.R. 5845, was the subject of very extensive hearings during the 88th Congress before this same committee. I have before me a volume that runs 1,075 pages, the reports for the hearings. Of these 1,075 pages, approximately 850 are devoted to H.R. 5845, the hearings that were held in the last Congress. The committee did not take any action on H.R. 5845 in the last Congress as it was felt that in view of a difference of opinion as to the existing laws and regulations in some areas, it might be wise to incorporate some of these in the bill to make the effect of the bill crystal clear. The very extensive testimony has been carefully examined and studied. It appears that there were two areas of concern. These were the growing use of industrial revenue bonds and the potential conflict of interest resulting from a bank acting as both an underwriter and as a trustee. The bill under consideration today, H.R. 7539, has met both of these areas of concern. As you can see from lines 20, 21, and 22 on page 2 of the bill, it would not allow a bank to act as an underwriter or dealer of industrial revenue bonds. As you can also see from lines 8 through 11 on page 3 of the bill, it would also in effect codify existing regulation, existing practices, and the existing case law by simply prohibiting a bank from buying municipal revenue bonds as a fiduciary from the same bank as an underwriter or dealer. It is my belief that with the changes incorporated in H.R. 7539 there are no valid objections to the passage of this legislation. The legislation has been strongly endorsed by many public officials and associations throughout the country. These include such associations as the National League of Cities, the U.S. Conference of Mayors, and the National Institute of Municipal Law Officers. The central domestic issue in the United States today is the fiscal responsibilities of State and local governments. There is a great demand on State and local governments to provide the necessary facilities for urban, suburban, and rural United States. These are such local necessities as water, sewer and power facilities, tunnels, bridges, roads, parks, airport facilities, transit facilities, and schools. The annual expenditures of State and local governments are estimated to exceed $65 billion in 1965. The State and local governments have annual long-term borrowings of over $10 billion. The outstanding long-term debt of State and local governments has exceeded $90 billion. It is established that the annual borrowings of State and local governments will continue to increase dramatically. The interest costs alone on these outstanding bonds runs into the billions. As part of a modern fiscal philosophy and proper allocation of resources, State and local governments and State authorities have increasingly relied upon the use of revenue bonds in order to finance selfliquidating projections. These are sound and investment-worthy securities. Revenue bonds now represent nearly 40 percent of the outstanding debts of State and local governments. Likewise, annual revenue bond issues now account for between 35 and 40 percent of the new long-term bond issues of State and local governments, or nearly $4 billion a year in new revenue bond issues. At the present time, the capital facilities of the investment banking industry and the commercial bank industry are available for the underwriting and dealing in general obligations of State and local governments as well as Public Housing Authority bonds, TVA bonds, World Bank bonds, and Inter-American Development Bank bonds. However, the capital market for municipal revenue bonds does not have the benefit of such competition since the commercial bank capital and experience is not available. The legislation under consideration today would provide for full competition in the capital markets of revenue bonds of State and local governments by permitting the commercial banks to freely compete in this very important and significant market. Enactment of this legislation would result in lower borrowing costs for State and local governments by providing increased competitive bidding for primary offerings of municipal revenue bonds and strengthening the secondary markets by the addition of capital and expertise. This reduction in borrowing costs will permit State and local governments to provide even more needed municipal facilities, thereby helping to create more jobs and easing some of the unemployment problems resulting from the age of automation. In conclusion, let us not become confused in a maze of unimportant facts, statistics, and figures. The final-the only issue is not whether |
