deposit, a correspondent balance, at the bank which makes the loan to that particular insider.

Mr. Partee, I think, was correct in saying there might not be an abuse if the insider that got the personal loan owned 100 percent of the stock in the bank. But if not, wouldn't the stockholders suffer from that kind of situation?

Mr. LEMAISTRE. Well, obviously I think you are right, that is preferential, and it may be abusive. And it certainly ought to be the first thing the examiner looks at when he sees that loan, he ought to find out whether that compensating balance was placed in the lending bank solely to compensate them for having made that loan, or if a bigger balance than is needed is kept there to compensate them for having made the loan.

It can be abusive, I agree, but I think the easiest way to find it is to let the examiner take on himself the burden of looking at each of them. He should do that anyway.

The CHAIRMAN. In view of the overwhelming showing here in the survey that these loans are made to insiders at preferential interest rates, that is, interest rates you agree are preferential, they are below the other interest rates, they average, depending on the nature of the loan, from one-half percent to 1 percent below others, on the average.

Isn't it clear that there is a pretty widespread abuse here?

Mr. LEMAISTRE. No. I think there is a pretty widespread preference here, and I think——

The CHAIRMAN. Why not? You just told me that you agree with Mr. Partee that preference can't be justified unless the borrower has a 100-percent ownership in the bank, or did I misunderstand you?

Mr. LEMAISTRE. It may not be damaging if he owns 100 percent of the bank. What I am saying is we are taking action from the information developed in this survey. Our examiners are being instructed to look at those loans to insiders at below prime, and see if there is an abusive relationship. That is the thing that they will do. We are following up on that.

The CHAIRMAN. I can understand how maybe in some cases it is hard for maybe my imagination or knowledge is too limited, that could easily be. But it is hard for me to understand why in most cases where the borrower doesn't have 100 percent stock in the bank, where there would not be an adverse effect on the other stockholders.

If I had 10 percent stock in the bank, or no stock in the bank, and I am president of the bank, and I get a preferential loan, and then I put a correspondent balance with a bank, it seems to me my stockholders are likely to be injured by that.

Mr. LEMAISTRE. I would think so. I think you wouldn't likely be president for long.

The CHAIRMAN. Your survey indicates that that is very common. Mr. LEMAISTRE. The point I am making is that there must be other things looked at. It may be that the prevailing interest rate in that area is below prime. Maybe everybody else in that bank is getting loans at interest rates below prime.

The CHAIRMAN. Then I come to this question: What steps does your agency-I am asking each of you gentlemen this question

what steps do your agencies plan to take to investigate the cases of apparent preferential treatment uncovered through the survey? Mr. Heimann.

Mr. HEIMANN. Each example of what we consider a problem of preferential treatment-are we restricting this question to just bank stock loans or the whole set of activities?

The CHAIRMAN. The whole set of activities.

Mr. HEIMANN. We have started to review each individual case, taking the most serious examples that we have found first and working from the top down, rather than proceeding broadly across the whole spectrum.

We intend to go after each of them. For example, in the national banks there are 130 insiders' overdrafts in excess of $50,000. We started with that $50,000 and we will go all of the way through. When we started our followup review, which was about 1 week ago, we only had knowledge of 98 such loans. The numbers I am giving you are with respect to 98 of the 130 loans, but we will do all 130 within the next few weeks.

The CHAIRMAN. These are the big loans, $50,000 and over?

Mr. HEIMANN. Yes. We thought we would go to those first. It is clear those are the correct ones to get at immediately. And we have done a survey on those loans. Approximately 55 percent seem justified: Mistakes in bookkeeping, computer errors, moneys transferred but not recorded in time, a host of minor errors.

There are no reasonable explanations for the remaining 46. Therefore, they are each being investigated separately and action will be taken in each case.

The CHAIRMAN. Now how deep do you plan to have your staff go in each case?

For example, overdrafts might be given to a public official in return for the deposits under his or her direct control.

Would you examiners be instructed to follow up on cases where a quid pro quo is possible?

Mr. HEIMANN. Yes, sir. We have already started that in terms of public officials. That is one of the questions that is being asked specifically the relationship of public officials and public deposits. That is being checked on specifically among all of the other questions one would normally raise in terms of that possible abusive interrelationship.

The CHAIRMAN. Thank you. Mr. LeMaistre, what steps does your Agency plan to take?

Mr. LEMAISTRE. Mr. Chairman, we outline those steps on pages 6 through 12 in the statement that we filed. They include sending to the regions a list of all of the information that is contained in this report that indicates that there may have been a preferential treatment of an insider or an insider of another bank, or a public official. And we have directed the examiners to go into the bank in which that appears to check out exactly what the facts are surrounding those. Included in that he has one job, which I admit is not easy, to develop a list of insiders. He can find out who the directors and officers are, the large stockholders. But he can't find out who is the brother-in-law of some director, something of that sort.

It makes it a little taxing on his ingenuity to go in and come up with a good list of insiders. But he is charged with doing that. When he goes in and finds out who the insiders are, then he will check that against the loans in the bank, to see if any preference exists, particularly if any preference exists that is in any way detrimental to that bank.

Included in being detrimental to the bank would be preventing the bank from obtaining investment opportunities by putting money here at lower rates than it could be put somewhere else. The CHAIRMAN. Mr. Partee?

Mr. PARTEE. Well, Mr. Chairman, I can't tell you just exactly what our plan of attack will be. We will, as I said before, isolate cases where there is an indication of possible abusive treatment. We will then go through the Federal Reserve banks to the member banks involved.

I think we will probably do this through an interview technique. Our interest will be to find out what the surrounding factors were. But if, in the course of the investigation, we discover that there is a clearly improper practice or an illegal practice, it will be stopped.

In the case of overdrafts-we are particularly sensitive to thiswe will have a list and the examiners will check them and check exactly what the loans might have been under the overdraft categories reported in the survey.

The survey has given us a good many leads and we are looking into them.

The CHAIRMAN. Do you think these responses, gentlemen, suggest the need for a bank commission, a single agency, who will have uniform policy, rather than this disperate approach that you have suggested here?

Wouldn't it be better to have a uniform response to this kind of thing, instead of having agencies operate differently?

Mr. PARTEE. Mr. Chairman, I think maybe the diversity, in an area of uncertainty, will be useful to see what the different results and responses are.

The CHAIRMAN. I suppose we can make a virtue out of almost anything. You are very skilled at that. But you certainly won't get a uniform and consistent treatment that everybody can consider fair.

Mr. PARTEE. Mr. Chairman, may I say, with respect to that, I think we might well. As you know we have a group, within the Interagency Committee setup, that will be looking at examination procedures to be used. I think that the results that we get from our different kinds of inquiries will be taken into account by that technical group and maybe a very standard procedure will be developed as a result of that.

At this point I can't guarantee that, but it is possible.

The CHAIRMAN. That may be. Mr. LeMaistre made a specific point about the high cost of the survey and Senator Tower questioned about that, too, and properly so. We really had no alternative, as far as I know, because none of you collected data on a regular and routine basis that was readily accessible and would indicate the extent and magnitude of these banking practices.

What steps are you taking, Mr. LeMaistre, or will you recommend, so that preferential banking practices can be better moni

tored? Will you recommend that this type of information be collected regularly through the call report, or some other means, so that special surveys are not needed?

Mr. LEMAISTRE. I don't know of any changes in the call report. The CHAIRMAN. I hate to think that every time we come up with this kind of investigation that people will complain there is another $1 million down the drain.

It would seem to me we could regularize this in some way, so it would be far less expensive and we could monitor it all of the time. Mr. LEMAISTRE. I would have to say that I don't know of any changes in the call report that would regularly produce this.

We are requiring, at least we have put out for comment a proposal to require insiders to report to the board of directors when they make loans from correspondent banks and then for the board of directors at least annually to examine the correspondent relationships between the bank they serve and the bank in which it has deposits, to see whether they are in fact getting their money's worth for the balances they keep in the other bank.

It seems to me that these decisions of this kind really are management decisions, whether a bank wants to do business in Chicago or Denver or Detroit. If it has enough business going in that direction, that will determine whether they want to do business in that city.

So it seems to me the board ought to make those decisions and determine whether what they are doing is proper. If they make the wrong decision, that doesn't of itself make it proper. A board can be guilty of insider misconduct as well as an individual.

What we ask our examiners to do is weigh each one of these and see if there is a detrimental result to the bank which is involved. And if there is no detriment, we don't really worry that much about it.

The CHAIRMAN. My time is up. Senator McIntyre.

Senator MCINTYRE. Thank you, Mr. Chairman.

Mr. Chairman, I support this committee's zeal in ferreting out and highlighting the types of bank abuses which were the subject of exhaustive analysis conducted by the three Federal regulatory agencies represented here today.

I would like to make an observation, however, that this study was expedited at the insistence of this committee, and you responded to Senator Tower that had the information sought here been gathered in a more regular fashion, the costs involved might have been substantially reduced. Is that correct? Is that what you said? The CHAIRMAN. That is right, I just asked about that, yes.

Senator MCINTYRE. It would have been substantially reduced. Is that correct?

Mr. LEMAISTRE. I think it could have been very substantially reduced, because one of the most obvious eliminations would have been the expensive telephoning back and forth. We made over 10,000 calls to the banks to edit their reports which, if they had been properly understood by the bank and properly filled out coming back, it would have eliminated many thousands of dollars in man-time and telephone calls.

Senator MCINTYRE. Mr. Chairman, you know as well as I that the Congress is being increasingly criticized for the burdensome costs

of regulation, paperwork. As cochairman of the Federal Paperwork Commission, I am acutely aware of the problems we have created through regulations. This is not to say that regulation is not appropriate. Clearly it is essential.

I think it is also essential for the Congress to impose upon itself a cost-benefit discipline, so a proper balance can be struck between legitime regulatory pursuits and the cost of those pursuits.

Mr. Chairman, I would like to call the committee's attention to an article which appeared in Tuesday's Wall Street Journal which reports on an analysis conducted by the Center for the Study of American Business at Washington University, in St. Louis.

The article points out that in fiscal year 1979, the Federal regulatory agencies are expected to spend $4.8 billion, up from $4.4 billion in fiscal 1978, and up from $2.4 billion in fiscal 1974. And the article states, and I quote:

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. Weidebaum, 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.

An earlier study, gentlemen, indicated a multiplier effect of about 20 times the Federal regulatory expenditures.

Quoting again:

Mr. Weidenbaum said "Thus we reasoned that the cost to business in fiscal 1979 could easily be close to $100 billion.”

Mr. Chairman, at the insistence of this committee these agencies and the institutions they regulate have engaged in what can only be called a heroic effort to comply with our directive, but at what cost?

It is estimated that the cost of compliance to the institutions involved exceeded $3.5 million. When added to the amounts expended by the agencies, including 22 man-years of effort, I think we have a responsibility to ask ourselves whether these resources were wisely and judiciously spent.

It seems to me, Mr. Chairman, that we can't have it both ways. We seem to be constantly carping at the agencies about their excessive spending, and at the same time I suspect that more resources have been expended on this survey than perhaps any other single project.

I believe, Mr. Chairman, that we may have required the expenditure of excessive amounts of time and money, and I would like the opinion of the witnesses on this, particularly since it appears that S. 71, which we have already passed, may suffice to remedy the more serious abuses that were highlighted.

Would you respond to that? Have we required the expenditure of excessive amounts of time and money?

Mr. LEMAISTRE. Senator, I think there is no doubt, as the Chairman pointed out, this has been costly. It has cost us more than it might have, for instance, if we had been able to field test this survey and find out where the bugs were, we would have saved a great deal of time and a great deal of calling back and forth.