APPENDIX A f. Preconditions for Merger Approval The FHLBB can demand that before a merger is approved that certain specified preconditions regarding the salaries or other compensation of directors and officers be complied with before approval. g. Lending Limitations The Board exercises a variety of lending limitations and may find an unsafe and unsound practice if the limits are exceeded. For example, an unsafe and unsound practice may exist if more than 30% of the mortgage loans made by a savings and loan association are loans in excess of 80% of the value of the home. j. Appointment of Conservators or Receivers The association may be placed under the jurisdiction of a conservator who operates the association or a receiver who must liquidate the association if a final cease and desist order is violated. K. Cease and Desist Orders At present the FHLBB can issue cease and desist orders against any savings and loan association and its officers, directors or employees where an unsafe and unsound practice occurs. The CHAIRMAN. Thank you very much, Mr. Lombardi. Mr. Brooks, I understand you're president of the Federal Savings & Loan of Richmond, Va., and both you gentlemen represent the U.S. League of Savings Associations. Mr. BROOKS. That's correct. STATEMENT OF EDWIN B. BROOKS, JR., PRESIDENT, SECURITY FEDERAL SAVINGS & LOAN, RICHMOND, VA.; REPRESENTING U.S. LEAGUE OF SAVINGS ASSOCIATIONS Mr. BROOKS. As you stated, my name is Ed Brooks of Richmond, Va. I am president of Security Federal Savings & Loan Association and legislative policy committee vice chairman of the U.S. league. Mr. Chairman, I have a very brief oral statement. I am here today to discuss S. 73, the Federal Reserve's recommended bill to prohibit interlocking management and director relationships and S. 1433, prohibitions on the "revolving door." After years of study and at least three separate sets of proposals, the FHLBB has developed strict rules for S. & L.'s concerning management and director interlocks which are described in our written statement. At some future date they could reduce the allowable exceptions still further. Our basic concern with the outright statutory prohibition contained in S. 73 is that businessman serving on the board of both banks and S. & L.'s are more likely to choose the commercial bank if forced to leave one board or the other. Commercial banks traditionally represent a more prestigious directorship in many communities, and, of course, the variety of commercial services which the bank provides to a business firm are far more extensive than those available from savings and loan associations. Under our rules, the only significant credit which a businessman-director can receive from his savings and loan is a mortgage loan for his personal residence. Thus, if directors are forced to choose, the savings and loan business could be faced with the loss of many leading citizens who provide valuable financial expertise. If, however, Congress does enact S. 73, section 10 does allow the Federal Reserve to make some exceptions and we think there is a definite need for maximum flexibility. I might list some exceptional situations we envision as follows: First, financial institutions controlled by minority or ethnic groups or those newly chartered may need special assistance; Second, the availability of well-educated and financially astute community members to serve on a board is particularly a problem in small towns and rural communities and in larger communities in "unit banking" States; and Third, there is less justification for a strict prohibition on honorary or advisory board members. In sum, Congress should be concerned about imposing too many, and too rigid restrictions on the kinds of people that the savings and loan business can have on their boards if these boards are to provide for meaningful policy guidance. Now I would like to make a few brief comments about S. 143. We are not aware of any significant abuses by the present or past members of the FHLBB while in office to create employment opportunities following Government service. If, however, the committee and the Congress are concerned about the potential for abuse, we would point out that the bill as drafted certainly leaves open a number of other possibilities. For example, a departing Board member could accept a position with a law firm, a commercial bank or its holding company, an insurance company-for instance, a private mortgage insurance company-a pension fund, an accounting firm, a brokerage house, an equipment manufacturer, or even with an industry-related trade association-all of which could arguably be affected by actions taken while a Federal employee. One obvious effect of legislation such as S. 1433 is to severely discourage all savings-and-loan executives-particular those in midcareer, with family responsibilities-from entering public service. This pool of talent is effectively diminished by the prohibitions of S. 1433. This concludes our testimony. Mr. Lombardi and I look forward to your questions. The CHAIRMAN. Thank you very much, Mr. Brooks. Our next witness is Mr. Andrew Shepard. Mr. Shepard is chairman and president of the Salem National Bank of Salem, Ill., and representing the American Bankers Association. Mr. Shepard, we are happy to have you. STATEMENT OF ANDREW J. SHEPARD, CHAIRMAN AND PRESIDENT, EXCHANGE BANK OF SANTA ROSA, CALIF.; REPRESENTING THE AMERICAN BANKERS ASSOCIATION Mr. SHEPARD. Mr. Chairman, I appreciate that introduction. You did get it wrong. I know we have a drought in California but the bankers have not dried up and gone away. I'm really from California. I'm chairman and president of the Exchange Bank of Santa Rosa, Calif. The CHAIRMAN. I see. Well, something went wrong with this sheet here. They're got you down as the same description as Mr. Sinclair. Mr. Sinclair is the man from Salem? Mr. SHEPARD. That's right. Anyway, it's a pleasure to be here. I am also vice chairman of the American Bankers Association's Government Relations Council. The CHAIRMAN. At least I got that right. You are representing the ABA? Mr. SHEPARD. Yes; and Mr. Gerry Sinclair is with me who is executive vice president of the Salem National Bank of Salem, Ill. [Complete statement follows:] STATEMENT OF ANDREW J. SHEPARD ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION BEFORE THE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS ON S. 71 AND S. 1433 MAY 25, 1977 Mr. Chairman, members of the Committee, my name is Andrew J. Shepard and I am the Chairman and President of Exchange Bank of Santa Rosa, California, and Vice Chairman of the American Bankers Association's Government Relations Council. I am accompanied today by Mr. Gerald Sinclair, Executive Vice President of The Salem National Bank, Salem, Illinois, who is also a member of our Association's Government Relations Council. We are here today to address the issues raised by four pieces of legislation and several proposed amendments thereto being considered by this Committee. In view of the breadth and complexities of some of the provisions of the bills under consideration today, I will be presenting the views of the American Bankers Association on S. 71 and S. 1433, and Mr. Sinclair will address S. 73 and S. 895. S. 71 S. 71 is designed to provide the Federal bank regulatory agencies with more effective enforcement tools for the supervision of the nation's banking system. It would establish a system of civil penalties for the violation of sections of existing law, clarify the authority of the banking agencies to institute cease-and-desist proceedings against individuals, and provide more practical standards for officer and director removal. In addition, the bill is intended to strengthen Federal Reserve System supervision of bank holding companies by authorizing the Board of Governors to order the termination of activities or the divestiture of subsidiaries by a bank holding company which threaten the safety or soundness of a subsidiary bank. S. 71 also seeks to curb the concentration of risk in a bank's loan portfolio which may be caused by excessive loans to bank insiders. The bill, therefore, would amend the Federal Reserve and the Federal Deposit Insurance Acts to require that loans by a bank to one of its officers, or directors, or to an individual owning in excess of 5 percent of such bank's voting securities must be aggregated with loans to companies controlled by such officer, director, or shareholder for the purpose of applying the bank's lending limit. The bill would also increase the limit on bank loans to their executive officers and subject the budgets of the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and National Credit Union Administration to annual review by the Appropriations Committee of the Congress. The American Bankers Association is in basic agreement with the desire of the Federal bank regulatory agencies to obtain more effective and flexible authority to discharge the responsibilities with which they are charged. We did testify in support of similar legislation (S. 2304) last year which could have accomplished these objectives. We believe that S. 71 is a reasonable vehicle for providing additional supervisory authority, but there are several areas in which S. 71 could be significantly improved. During our testimony on S. 2304 last year, we discussed three areas in which we considered that bill deficient: first, it provided little due process protection for institutions and individuals intended to be subject to its enforcement provisions; second, it was insufficiently flexible in application; and, third, it would cause undue hardship for certain banks and bank employees subject to its strictures. We are pleased to note that a |