Bank Holding Companies 9780231878777

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BANK HOLDING COMPANIES

BANK HOLDING COMPANIES by GERALD C. FISCHER

* New York and London

COLUMBIA UNIVERSITY PRESS

This study was made under a fellowship granted by The Ford Foundation. However, the conclusions, opinions, and other statements in this publication are those of the author and are not necessarily those of The Ford Foundation.

Copyright © 1961 Columbia University Press First printing Second printing

1961 1962

Library of Congress Catalog Card Number: 61-18119 Manufactured in the United States of America

To JANICE

Preface In 1956 a bank holding company act was passed. Some form of restrictive legislation to control bank holding companies had been advocated for decades by groups of independent bankers, a number of legislators, and bank supervisory authorities. The opponents of holding company banking in testifying in support of this legislation stated that these firms were un-American, illegal, dangerous in a period of economic stress, and uncontrolled. On the other hand, the supporters of group banking replied that these systems were the product of American ingenuity, operated completely within the law, were among the strongest institutions during the Great Depression, and were adequately regulated by Federal acts. Each group was extremely dogmatic in regard to the accuracy of its particular thesis, but neither side presented any substantial evidence to support its position. Therefore, since the writer had several years' experience in the headquarters of a leading bank holding company before entering the teaching profession, it was felt that this difference of opinion might provide the basis for some fruitful research. Because no general work on bank holding companies had been prepared since Professor Cartinhour's book( Branch, Group and Chain Banking) appeared in the early 1930s (almost immediately after the group banking movement began), I decided to consider bank holding companies collectively rather than concentrate on a single facet of group banking such as suspensions or bank holding company development in a limited area. It was hoped that with this type of study available, individuals who wished to analyze particular aspects of multipleunit banking could devote their time to current problems. Thus, they could avoid spending many months duplicating the efforts of others who had perused the same hearings, the same articles, and the same

viii

Preface

books, seeking some reference to the specific topic which interested them. Chapters One through Three and Chapters Four through Six sketch the history of multiple-unit banking from its formative years through 1929 and from 1930 through 1961 respectively; Chapters Seven through Nine review the competitive position of bank holding companies; and Chapter Ten draws some general conclusions from the data presented in the earlier sections. I have selected 1929 as the dividing point for the historical material, for most leading multiple-unit systems had been organized by that time, and it was during that year that the first reasonably complete statistical studies of the subject were made. In preparing this study, excellent cooperation has been received from the Association of Registered Bank Holding Companies, both state and Federal bank supervisory authorities, chairmen of the Senate and House Banking and Currency Committees, and numerous independent bankers. The staffs of the libraries of The American Bankers Association, the Board of Governors of the Federal Reserve System, Columbia University, and Congress have been extremely helpful. To those who read and criticized this work I am deeply indebted. G. C. F. Buffalo, New York June, 1961

Contents I. II.

Early Development of Unit and Multiple-Unit Banking in the United States

1

Actions by State and Federal Authorities before 1930

9

III.

Group Banking, 1927-1929

18

IV.

Growth of Group Banking since 1930

33

Group Suspensions

50

Federal Legislation and Control, 1930-1961

59

The Bank Holding Company and the Merged Bank

86

V. VI. VII. VIII. IX. X.

Mergers and the Stockholder

111

The Bank Holding Company and the Rural Community

127

Conclusion

138

Appendixes A:

Leading Bank Holding Companies Used in This Study

145

B:

Merged Banks Used in This Study: 138 Banks

147

C:

Selected Multiple-Unit Suspensions

152

D:

Decisions of the Federal Reserve Board under the Bank

E:

Holding Company Act

160

State Legislation Affecting Bank Holding Companies

167

Notes

173

Glossary

195

Bibliography

197

Index

207

Tables 1. 2.

3. 4.

5.

6.

7.

8. 9. 10. 11. 12.

Extent of Group and Chain Banking in the United States, December 31, 1929 Number of Chains and Groups in Each Section of the United States, Divided According to Number of Banks Controlled, December 31, 1929 Extent of Group Banking by Geographic Area, December 31, 1929 Offices and Deposits of Bank Holding Companies for Selected Years, 1931-1960, as Reported by the Board of Governors of the Federal Reserve System Number of Banks, Banking Offices, Communities Served, and Total Deposits of Fifteen Leading Bank Holding Companies, 1933, 1948, and 1960 Banks Merged with Fifteen Bank Holding Companies, January 1, 1949-December 31, 1960: Selected Statistical Summaries Selected Data for 138 Banks Which Merged with Fifteen Leading Groups Between January 1, 1949, and December 31,1960 Bank Holding Companies, Banking Offices, and Deposits of Banks in Holding Company Groups, December 31, 1960 Location and Total Deposits of Registered Bank Holding Companies, December 31, 1960 Suspensions of Group Banks, 1930-1936 Summary of State Laws Affecting the Acquisition of Bank Stocks by Holding Companies, June 1, 1961 Approximate Rate of Return on Average Balances, 1960, from a Random Sample of 10 Group Banks

30

31 32

34

38

40

42 47 48 53 76 93

xii 13.

14.

15. 16.

17.

18.

19.

Tables Total Capital, Deposits, Assets, and Loans and Discounts of Banks Merged with Fifteen Leading Holding Companies, January 1, 1949-December 31, 1960 Number and Status of New Member Banks in Fifteen Leading Holding Companies, January 1, 1949-December 31, 1960 Reasons for Joining Group Systems as Ranked by 95 Group Banks Comparison of Fifteen Leading Bank Holding Companies with All Insured Commercial Banks in the State(s) in Which They Operate Selected Balance Sheet Items Expressed as a Percent of Total Assets for New Group Affiliates and Their Competitors The Ratio of Selected New Group Members' Assets to Total Assets, Compared with Their Competitors' before and after Merger with Holding Companies The Ratio of Capital and Deposits to Total Assets of New Group Members Compared with Their Competitors before and after Merger with the Holding Companies

112

113 115

121

133

133

134

BANK HOLDING COMPANIES

CHAPTER I

Early Development of Unit and Multiple-Unit Banking in the United States During one of the sessions of the Civil War Congress a senator remarked: "If I had it in my power, I would blot out of existence every bank in this country." 1 If this remark were made on the floor of the United States Senate today, its author would probably receive at least a modicum of applause but would certainly not be taken very seriously. And yet, a century ago, comments such as this rang through the legislative halls across the nation, and several states passed laws supporting this position. Opposition to banking, combined with the severe limitations on the establishment of branches by national banks, contributed significantly to the development of unit banking in the United States in the nineteenth century. During this period the trend in American bank organization was almost the reverse of that in Western European countries. While they moved from unit to branch banking, our nation shifted from extensive branch banking to unit banking. One can state with a high degree of confidence that if the United States had followed the pattern of the other leading commercial nations and had established nationwide (or even trade-area) branch banking, there would be few, if any, bank holding companies; today, instead of having unit, branch, chain, and group banks, this country would probably enjoy a much more conventional banking system. U N I T BANKING The antagonism toward banks, which played such an important role in the movement away from branch banking in the United States in the mid-nineteenth century, did not stem primarily from a resistance to

2

Early United States Banking

branching but rather from a misuse of agents by some institutions 2 and an opposition to banks in general.3 The public had incurred sizable losses through the issuance of so-called wildcat currency; they had paid usurious interest rates; they had suffered through purchasing bank stock which proved worthless; and they had seen legislators corrupted when individuals sought special charters from them to open banks. Probably the most damaging blow to banking came as an aftermath of the Panic of 1837. Only a short time after the expiration of the charter of the Second Bank of the United States, this country was rocked by one of its worst financial crises. Some three years before, there had been a slight recession following a contraction of credit by the Second Bank, but in the interim a business and speculative inflation ensued. The state banking systems expanded tremendously in this period (1834-37), when an estimated two hundred banks were organized—one new institution for every two in operation in 1834. The Panic tested the mettle of both new and old banks, and unfortunately a great many were found wanting. Bank failures were numerous and critics of banking received growing support in many parts of the nation. The solutions advocated by these individuals were almost invariably determined by their position as opponents or friends of banking. The opponents of banking attacked banks, paper money, and corporate monopolies. As a result numerous state constitutions were amended to prohibit or severely limit state participation in the financial area. Meanwhile the friends of banking fought for reform. Under their auspices, free banking laws were passed; numerous state banks were established; and guaranty arrangements for bank notes were created. Of the elements of reform the free banking acts were probably the most significant. Free banking, in simple terms, meant that any group of individuals capable of meeting a standard list of legal requirements was permitted to open a bank. Although some authorities on branch banking have noted that these laws were not adopted as a protest against branching,4 they usually resulted in the establishment of a system of single-office banks. Thus, as the free banking movement literally swept across the nation, unit banking grew rapidly in importance.

Early United States Banking

3

Despite the popularity of free banking, this form of bank organization had many weaknesses. Often the states did not adequately supervise their banks; thousands of different bank notes were circulated, many counterfeits; and a large number of the free banks failed. With the advent of the Civil War, it soon became apparent that the multifarious banking which existed under state laws was extremely inadequate. Our nation needed a uniform system of commercial banking, a sound bank note currency, and a market for government bonds. To meet these needs, the National Bank Act was passed in 1863. While the National Bank Act employed many of the provisions of the New York free banking statute, it did not positively prohibit branches. In fact, the question of branch banking was not raised during the Congressional debates on the bill. The Act (as amended in 1864) states: "And its [the bank's] usual business shall be transacted at an office or banking house located in the place specified in its organization certificate." 5 The early Comptrollers of the Currency interpreted this strictly and would not permit national banks to have branches. Since federally chartered banks were limited to single-office institutions, any expansion of branch banking had to develop in the state systems. However, early in 1865, about six months after the revision of the National Bank Act, legislation was enacted which imposed a discriminatory tax on state bank notes. Since most bankers felt that currency issue was essential to the operation of their business, nearly all state banks sought national charters. Virtually none of these institutions retained their branches when they joined the national system, despite an 1865 amendment to the National Bank Act which permitted them to do so. Real branch banking had been centered in the Southern states, and either these systems were destroyed by the war and the reign of the carpetbaggers or else state authorities chose to dissolve them rather than allow them to convert to national banks. Members of the major branch systems in the North, on the other hand, operated in much the same way as independent banks and therefore entered the national system as unit rather than branch institutions. By the time state bankers realized that with the increased use of checks as a means of payment they could operate successfully without

4

Early United States Banking

the privilege of issuing notes, few branch systems remained in operation. Moreover, there appeared to be little interest in branch banking in this period, for apparently it was not mentioned again in Congressional debates until the 1890s. Thus, during the last half of the nineteenth century, unit banking became firmly entrenched in the American financial system. MULTIPLE-UNIT BANKING In the early years of American banking, the common-law right of a bank to establish branches was rarely questioned; in fact, branches were considered the natural means of providing banking facilities to smaller communities. It should be noted, however, that many of these multiple-office systems more closely resembled bank holding companies than branch banks. For example, branches of both the First and the Second Bank of the United States had their own directors and presidents and acted quite independently of each other.6 A number of the most prominent state branch banking institutions— including the Bank of the State of Indiana, the State Bank of Iowa, and the State Bank of Ohio—also operated their branches practically as unit banks. The Bank of Indiana's parent institution, for example, aside from its supervisory functions, engaged in no banking. Its branches were nearly autonomous. Thus, early in America's financial development the precedent for the bank holding company type of operation was established. It should not be too surprising, therefore, that in the 1880s and 1890s, when bankers were faced with the problem of achieving expansion of their banking facilities while branch banking was prohibited in many states, limited in others, and not permitted to national banks, these men turned to what appeared to be a workable solution—independent banks with common ownership. Thus began the era of multiple-unit banking. DEVELOPMENT BEFORE 1900. Although detailed information of the stock ownership of banking institutions is not easily obtained, there is little doubt that since bank shares have been available to the public there have been individuals who invested in the securities of more than one bank. Interlocking directorates and control of several financial

Early United States Banking

5

institutions by one person, one family, or a group of friends are certainly not inventions of the twentieth century.7 As early as 1892 the development of a holding company for banks was proposed by F. W. Hayes, Vice-President of the Preston National Bank of Detroit. In an article entitled "A Plan for Bank Consolidation," published in the Banking Law Journal on July 15 of that year, he visualized a company whose financial structure closely resembles some group systems in existence today. Mr. Hayes's plan was submitted to bankers all over the country for criticism. A number of the responses were assembled in a booklet called An Argument in Favor of the Organization of a Financial Corporation and Union of Banks, Together with Plans of Consolidation. The replies indicate a general feeling among these men that multiple-unit banking would be actively opposed because of the growing antitrust spirit. While no general historical study of chain or holding company banking in the United States has ever been made,8 a review of financial literature published about the turn of the century reveals several accounts of a community of interest between two or more separately incorporated banks. 9 In reading Congressional hearings and financial histories of particular areas, one also occasionally discovers a reference to early chains or holding companies. Mildred Hartsough, in her outstanding investigation of the economic development of the Twin Cities, St. Paul and Minneapolis, discovered an instance of chain banking in North Dakota as early as 1887.10 The success of this new type of organization was later heralded in a commercial periodical as follows: "In the Northwest the branch bank question is apparently solving itself, and 'lines' or 'chains' of banks controlled by one or two men are becoming common and the number of banks so controlled greater." 11 In the South about 1889, William S. Witham began what was eventually to be the nation's largest chain in terms of number of banks. By 1911 it included 125 units, all concentrated in the Deep South with the exception of several small banks in New York and New Jersey. Unfortunately the chain became hopelessly involved in the Florida land boom following World War I, and in 1926 it failed.

6

Early United States Banking

Chain banking enjoyed considerable popularity in Chicago during the 1890s and the early 1900s.12 One writer described the later development of chain banking there as follows: The growth of population with increasing congestion in traffic has made for the rapid development of banking in residential districts since the [First] World War. The needs of the outlying communities for more convenient banking facilities has led to the rapid growth of banks in outlying districts. The downtown banks could hardly look without envy at the lucrative savings bank business that thus developed. In the absence of branch banking the only means of participating in this business was to buy into established banks in the new territory or establish new ones. 1 3

This situation resembled the recent New York City problem. Though nearly fifty years separated the two, the conditions were fundamentally the same—how can a bank hope to maintain its competitive position when there is a mass exodus of customers from its market area and it is not permitted to follow them? Here one observes a conflict between economic laws and man-made laws. The result in Chicago was the development of a hybrid institution to achieve as many of the advantages of the former laws as possible while avoiding the penalties of the latter. Had branch banking privileges existed, it is doubtful that the Chicago chains would have been established. DEVELOPMENT, 1900-1925. After 1900 the development of multiple-unit banking was quite pronounced. In the Northwest so many systems were organized that companies were formed whose business consisted largely of acting as agents in the purchase or sale of country bank stock. (A number of bank brokers are still in operation in this area today.) In this period a new form of banking, the bank holding company, began to surpass the chain systems in popularity. The profitability of the chain had not gone unnoticed, and investors were beginning to pool their resources to establish companies which would purchase and hold bank stocks. At the turn of the century the holding company type of bank organization was probably most prevalent in the Northwestern United States.14 Most of these firms were relatively small, since they were essentially ancillary operations whose owners were primarily interested in selling Western mortgages in the East. A string of small rural banks

Early United States Banking

7

would be established in a newly developed farm area. There they would obtain a supply of farm paper which would in turn be sold by their parent investment company. A few of the systems organized at that time remain as active participants in group banking. The Union Investment Company, for example, which is now a division of the Northwest Bancorporation, began operation in Granite Falls, Minnesota, in 1903. These forerunners in the development of bank holding companies provided a pattern of organization which was followed by many multiple-unit bankers during the following decades. In 1903, in Chicago, James B. Forgan of the First National Bank developed the so-called Chicago Plan. This was simply a method whereby a national bank, which could not have a fiduciary business,15 could create or purchase a trust company; a trustee arrangement made certain that the shareholders of both institutions would remain identical. This plan played a significant part in the creation and development of bank affiliates during the first quarter of this century. Even today a variation of the "trustee method" is used by a number of bank holding companies which are in turn affiliated with, but do not own, a large bank. 16 In the early 1900s a holding company system was formed in Texas literally at the behest of the state government. Because of some grave abuses which had occurred under special chartering of banks during the Reconstruction period, state banks were prohibited in Texas after 1876. In 1904, however, the state constitution was amended to make possible the enactment of a general banking law. This law, passed in 1905, prohibited branch banking, but at least one special charter bank with its branches was still in operation at that time. To bring existing institutions into conformity with the new law, a Texas banking commissioner persuaded the owners of the bank to incorporate its branches as separate banks. This was done, and a Fort Worth trust company served as a holding company. Other than the regrettable failure of the "Morse-Heinz chain" in New York City in 1907,17 which precipitated a banking upheaval felt throughout the United States, there is little mention in the banking literature of a substantial early interest in multiple-unit banking in the

8

Early United States Banking

East. This type of banking was practiced there, but it did not gain the prominence achieved in some other areas.18 Early bank holding companies usually were quite small, with only a few affiliates serving a limited area. In 1911 one writer observed: "The 'chains' of country banks possess, for the most part, little vitality, and in the total banking business of the country they play an insignificant role." 19 But within a decade a group system was formed which quickly achieved nationwide importance—the Bancitaly Corporation. By 1926 this firm owned a substantial amount of Bank of Italy stock, nearly all of the stock of the Liberty Bank of San Francisco, and a large interest in the Americommercial Corporation, which, in turn, owned the Bank of America Los Angeles. Bancitaly Corporation also owned stock in sixty-seven other domestic banks and fifty-nine banks in sixteen foreign countries.20 The success of this organization, combined with its attempts to expand into distant parts of the country, was to play an important role in the tremendous growth of group banking in the late 1920s. At about the same time that the financiers were organizing the Bancitaly Corporation, an interest in multiple-unit banking developed from a most unusual source—the nation's labor unions.21 Several leading unions purchased a controlling interest in a number of operating banks and established others. The Brotherhood of Locomotive Engineers made extensive use of the holding company device in organizing its system of banks, and outside the Engineers' group holding companies were used in starting a Jersey City bank and in futile attempts to open banks in Atlantic City and Buffalo. However, labor's interest in banking was of limited duration, and today only one union, the Amalgamated Clothing Workers of America, is classified as a registered bank holding company.

CHAPTER II

Actions by State and Federal Authorities before 1930 Because the bank holding company is essentially a financial hybrid, it has posed unusual supervisory problems, and until the early 1930s neither state nor Federal officials had much control over group banking. A bank holding company, as a majority stockholder, could exert considerable influence over the management of a bank. However, unless the holding company was also a bank, it was rarely subject to regulation by bank supervisory authorities. 1 This situation has since been rectified by Federal legislation. STATE REGULATIONS State banking superintendents have often found that it was extremely difficult to obtain adequate control over bank holding companies. Where legislation provided for supervision, banks could be supervised and examined only by an authority within that state. This had negligible effect on multi-state operations. Moreover, even this limited legislation was difficult to maintain because the courts often held that banking was strictly the private affair of the banking proprietor, who had an absolute right to own and operate his institution without "interference" by governmental authorities. 2 New York, during the Panic of 1907, had some rather unhappy experiences with chain banking and as a result passed some remedial legislation the following year. Banks and trust companies were forbidden to grant a loan secured by the stock of any "monied corporation" if this loan exceeded in aggregate 10 percent of the capital of the corporation whose stock was offered as collateral. Similar regulations

10

State and Federal Action before 1930

were enacted by California, New Hampshire, Texas, and Wisconsin. Wisconsin endeavored to obtain additional control over holding companies by requiring that directors of such groups be residents of the state. This regulation was not very successful, however, since it could be avoided by the appointment of "dummy" directors. A later Wisconsin law contained some restrictive provisions regarding the ownership of the stock of a state bank or trust company, again with the objective of controlling holding companies. One extremely unusual provision of this act deemed any corporation which was authorized to do business in the state and which had control of a state bank or trust company to be in the business of banking and subject to the supervision of the state banking department. In Missouri a ruling of the Attorney General denied the right of a bank holding company to sell its stock in that state on the ground that group banking was branch banking under a different guise.3 Other states, such as Michigan, required only that holding companies qualify with the state security commission before selling their stock. Meanwhile, states such as West Virginia and New Jersey went to the other extreme, enacting legislation that prohibited group banking. In most states, however, except for the rule that one state bank could not buy the stock of another bank, there were no legal provisions whatsoever regarding the ownership of bank shares. FEDERAL ACTIONS Since the ability of the states to control bank holding companies was quite limited, the responsibility to provide legislation which would adequately regulate these institutions rested with the Federal government. Until 1933 no specific group banking legislation was passed by Congress. Nevertheless, these companies were affected by a number of Federal laws and regulations and were subjected to several rather limited investigations by government bodies. Section 1 of the Sherman Antitrust Act (15 USC 1) prohibits any contract, combination, or conspiracy in restraint of interstate or foreign trade or commerce. Section 2 of the Act makes it illegal to monopolize, or to combine, conspire or attempt to monopolize any part of interstate

State and Federal Action before 1930

11

or foreign trade or commerce. Senate Report No. 196 on the Regulation of Bank Mergers (April, 1959) noted that it is now generally accepted that these sections apply to bank mergers and consolidations by either stock or asset acquisitions. But the only test of this law against a bank holding company (the Firstamerica case) 4 was terminated before a decision was rendered by the court, and not all authorities fully agree that this law applies to these firms. Senator Fulbright, former chairman of the Senate Banking and Currency Committee, recently remarked in a speech before Congress: It is not clear whether the Sherman Antitrust Act of 1890 would now be held to apply to banking in general and to bank mergers in particular, though it seems clear that Senator John Sherman, the former Secretary of the Treasury, for whom the act was named, and the 51st Congress, did not expect or intend banking to be covered by an act applicable to interstate commerce. And even if the Sherman Act is held to apply to banking and to bank mergers, it seems clear that under the rule of reason spelled out in the Standard Oil case, different considerations will be found applicable in a regulated field like banking, in determining whether activities would "unduly diminish competition." 5 In 1908, nearly two decades after the passage of the Sherman Act, the National Monetary Commission considered the bank holding company significant enough for inclusion in a questionnaire requesting suggestions for changes in the national banking laws. Of the eightyfive replies published in Volume X I X of the Commission's publications, over 80 percent contain comments on this phase of banking, which indicates it was not unfamiliar to the authors of the letters. The following question was posed to these eighty-five men: The Supreme Court of the United States has held that it is unlawful for a national bank to purchase or invest in the shares of stock of other corporations, but the laws of several States authorize the ownership of stock of national banks by other corporations. There have been several instances in which the directors of the holding corporation and of the national bank have been the same individuals, and when trouble arose the holding corporation became involved as well as the bank, and in such cases the possibility of double liability was entirely annulled. In your opinion, would it be wise to provide against the holding of shares of national banks by any other corporation, except in cases when taken in satisfaction of debts? 6

12

State and Federal Action before 1930

Over one-half of the respondents favored such a provision, about onethird opposed it, and most of the others felt it would be difficult to enforce or would be unconstitutional. Senator Carter Glass, in his extensive researches in preparing the Banking Act of 1933, uncovered an early opinion of the Solicitor General of the United States (November 6, 1911) concerning bank holding companies. It reads in part: N o authority is given by the Federal statutes to the National Banking Association for assigning their powers and delegating their duties to a corporation created by a State, and which, under its charter from the State, may engage in a business and exercise powers denied to the banking association by the law of its creation. Here again it is to be observed that if the power in question exists, it exists without limit. The company may extend its powers to the full control of all the banks into which it has made entrance. Nor need it stop with these. As it grows by what it feeds upon it may expand into a great central bank, with branches in every section of the country. It is in incipient stage, a holding company of banks, with added power to hold whatever else it may find to be to its advantage. . . . I conclude the Company in its holdings of national-bank stocks in usurpation of Federal authority and in violation of Federal law. 7

Shortly after this opinion was issued, it was either purposely or accidentally filed and forgotten until discovered by Senator Glass. Other events significant for multiple-unit banking occurred in 1911. That year both the president and the secretary of the treasury called for legislation which would affect these systems. In a special message to Congress, President Taft included a request for preserving the individuality and independence of each bank. 8 The secretary of the treasury, in his Annual Report for 1911, asked for the enactment of laws prohibiting national or state banks from owning stock in any other independent bank. During the same period the Pujo Committee, investigating the money trust, unearthed some rather startling examples of consolidation of competitive or potentally competitive banks. In its final recommendations, the committee suggested methods to curb this "cooperation" which had been achieved by gathering several banks under a

State and Federal Action before 1930

13

unified control. Included in its ideas was the following: "No part of the stock of any national bank should be permitted to be owned or held directly or indirectly by any other bank or by any trust company or holding company. . . . " 9 Legislation to this effect would have either eliminated bank holding companies or forced all of their members into the state banking systems. The legislative reaction to the findings of the Pujo Committee investigation may be observed in the provisions of the Clayton Act, passed in 1914. Section 7 of the Act (15 USC 18), as originally enacted, prohibited the acquisition of the whole or any part of the stock of one corporation by another where the effect of such acquisition may substantially lessen competition between such corporations or restrain commerce in any section or community, or tend to create a monopoly. Section 11 of the Act expressly vests in the Federal Reserve Board the power to enforce these provisions in the field of banking. This did not move quite as far as had been suggested by the Pujo Committee, but the objective was fundamentally the same. In the only test of this section in which the defendant was a bank holding company and in which a decision was rendered by the court, the court found in favor of Transamerica Corporation (see Chapter VI). Moreover, there is considerable doubt among prominent legislators regarding the applicability of the antimerger provisions of this Act to banks. Senator Fulbright testified in support of a recent bill: On previous occasions when the Senate has considered bank merger bills, the principal issue has been whether bank mergers should be regulated by the Federal bank supervisory agencies—the Comptroller of the Currency in the case of national banks, the Board of Governors of the Federal Reserve System in the case of State member banks, and the FDIC in the case of insured nonmember banks—on the basis of banking factors, like other regulated industries; or whether bank mergers should be subject to the antimerger provisions of section 7 of the Clayton Act, like ordinary nonregulated industrial or commercial enterprises. As it passed the Senate, S. 1062 expressed the view of the Senate for the third time, that bank mergers should be regulated by the Federal banking agencies on the basis of banking factors and competitive factors, with no single factor being in itself controlling. S. 1062 was a clear statement, for the third time, of the Senate's view that the provisions of section 7 of the Clayton Act should not apply to bank mergers.

14

State and Federal Action before 1930

The amendments to S. 1062 made by the House do not change this aspect of the bill. The House has agreed with the Senate that bank mergers should be controlled by the Federal banking agencies on the basis of both banking factors and competitive factors, and that section 7 of the Clayton Act should continue to be inapplicable to bank mergers. Banking is regulated and subject to many controls not applicable to the ordinary industrial or commercial enterprises: entry into the field of banking is restricted; the establishment of branches is restricted; and the practices and procedures of banking, from the payment of interest on deposits to the kinds of loans made and the reserves which must be maintained, are closely regulated and controlled. Competition in banking is desirable and beneficial; but unrestricted competition in banking, with the bank failures which would result, is no more possible than it is in the field of public utilities or other industries affected to a greater or lesser extent with the public interest. Banking is too important to depositors, to borrowers, to the Government, and the public generally to permit unregulated and unrestricted competition in that field.10

In the years following the enactment of the Clayton Act, deficiencies were discovered in the provisions of Section 7. Mergers by asset acquisition had become more important than the prohibited stock acquisitions. Moreover, the judicial interpretations of this section adopted virtually the same rule of reason which had been applied to the Sherman Act. Finally in 1950 Section 7 was amended to correct these deficiencies. The Celler-Kefauver Act of 1950 extended the Clayton Act to cover asset as well as stock acquisitions. However, only corporations subject to the jurisdiction of the Federal Trade Commission were covered by this change in the law, and banks being subject to the jurisdiction of the Board of Governors, by virtue of Section 11 of the Clayton Act, were not affected by this amendment. The 1950 amendment also eliminated from the statute the test, whether the effect of the acquisition might be to lessen competition between the acquiring and the acquired corporation. This provision was relied on by the Court of Appeals for the Third Circuit in holding that the Transamerica acquisitions did not violate Section 7 of the Clayton Act. In addition, the reference to lessening of competition "in any community" was eliminated, and the test was made whether competition might be lessened "in any line of commerce in any section of the country." 11

State and Federal Action before 1930

15

In its recommendations, the Pujo Committee had also emphasized that legislation was needed to limit the use of interlocking bank directorates. To prevent the reduction of competition through this device, Congress developed Section 8 (15 USC 19) of the Clayton Act. In general terms, this section stated that it was illegal for a person to be a director or other officer or employee of more than one bank, banking association, or trust company organized under the laws of the United States, either of which has deposits, capital, surplus, and undivided profits aggregating more than $5 million. In addition, no director, officer or other employee of a national bank located in a city of more than 200,000 inhabitants could hold a position with another bank in the same city. This section of the Act was not overly successful. Since it applied chiefly to larger institutions, the small banks which were often candidates for membership in country chains were not covered. Furthermore, state banks were not substantially affected. 12 Section 8 was completely reworded under the provisions of the Banking Act of 1935 (Section 329); nevertheless, it is still of little importance in the control of multiple-unit banking. Because bank holding companies were sometimes formed in anticipation of a relaxation of branch controls, changes or the expectation of changes in branch banking regulations affected multiple-unit banking development. Since the passage in 1865 of an act permitting state banks to retain their branches after joining the National Banking System, there had been little further liberalization of national bank branch restrictions. The passage of the Consolidation Act of 1918 provided some liberalization and suggested that more changes might follow. Under this Act a national bank which had retained its branches upon conversion from a state bank could consolidate with another national bank and the consolidated bank could retain the branches. Four years later Comptroller of the Currency Crissinger permitted national banks to establish additional offices within the city limits of the parent bank. These offices could receive deposits or checks but could not make loans. This was regarded by many bankers as an important step toward the expansion of branch banking in the United States. Representative McFadden introduced a major banking bill on

16

State and Federal Action before 1930

February 11, 1924, but not until February 26, 1927, did this bill, with certain changes, pass the Senate. Controversy centered on certain amendments limiting branch banking which were introduced by Congressman Morton D. Hull. Twice the bill was sent to the Senate with the Hull amendments attached. Senator Carter Glass, spokesman for a group of dissenters, savagely attacked the bill on the Senate floor. Each time he gained sufficient support to eliminate the Hull amendments. The House finally eased its position in January and the bill was signed by the president on February 25, 1927. The McFadden Act as finally passed contained specific provisions relating to branches which were applicable to Federal Reserve member banks—state and national. It permitted these banks to retain all branches legally established prior to the date of approval of the Act, regardless of location, but it prohibited the opening of new branches outside the city limits of the parent bank. New branches could be established within this geographic limitation in those states where state banks were permitted to do so under state law. Early in 1926 the Federal Reserve Board had suggested to Congressman McFadden that an amendment be made to existing banking laws to give the Board power to make a simultaneous examination of security and investment companies affiliated with national banks. This, the Board felt, would afford a better check on the abuses of chain banks. 13 Representative McFadden replied by suggesting that administrative controls be adopted by the Comptroller of the Currency for national banks and by the Federal Reserve Board for state member banks. Thereby, he believed chain banking among members of the Federal Reserve System could be controlled. The bank supervisory authorities noted that such action was not possible under the existing law. Nevertheless, the Board's suggested legislation was omitted from the McFadden Act. For several years prior to the passage of the McFadden Act, the Federal Reserve Board had attempted to place at least some restrictions upon the expansion of multiple-unit banking. Occasionally the Board had required state banks to accept a condition of membership designed to prevent such banks from acquiring, either directly or through affiliated corporations, more than 20 percent of the stock of

State and Federal Action before 1930

17

any other bank. This condition was incorporated in Regulation H as a general condition of membership in 1924 and remained in effect until 1928. However, some doubt arose with regard to the Board's authority to prescribe this broad condition after passage of the McFadden Act. Thus, following January 3, 1928, even this limited control over groups was eliminated, for the condition for membership prescribed by the Board was restricted to bank stock acquisitions by a bank or trust company, with no reference to asset purchases or interests in banks acquired by affiliated corporations.

CHAPTER III

Group Banking, 1927-1929 The early bank holding companies were generally small, closely held organizations whose success or failure was all too often highly dependent upon the speculations of their owners. In this regard, they were similar to chains. But by the 1920s the organization of bank holding companies had changed so radically that they bore little resemblance to the early multiple-unit systems. Now their assets reached into the hundreds of millions; their stockholders were located in almost every state of the union; their membership, though still composed largely of rural banks, invariably included at least one metropolitan institution of considerable size; and their management no longer followed banking as an avocation but ranked among the leaders of the profession. This new movement was known as group banking. The popular use of the term "group" began in the mid-1920s. Essentially there is no difference between group and holding company banking. The former is merely an expression used to describe the genus of holding company banking which reached its zenith during the Hoover administration. The typical group (bank holding company) is a corporation organized under the business corporation laws of a state and is not empowered itself to engage in banking. T h e usual procedure in forming a group system is to organize a holding company which acquires bank stocks, since, generally, banking laws make it impossible for banks to build a group directly. Another device used on occasion is a trustee arrangement whereby the stocks of the operating banks are placed with a trustee. Thereafter the trustees operate in much the same way as the directors of a holding company. Regardless of which method is used, the resultant company, managed by bankers, owns a controlling stock interest in a number of banks a n d / o r trust companies. Through this organization, a group of corporately independent financial institutions—retaining their own identity, capital, personnel, management, and directors—are coordinated through a

Group Banking, 1927-1929

19

majority control of their stock by a supervising holding company. The stock of the holding company, though widely held, is concentrated in the area in which the system operates. A group is distinguished by two fundamental characteristics almost never found in a chain. First, a holding company usually has a metropolitan bank as its nucleus to obtain greater prestige and to have access to its facilities and managerial talent. Second, a group customarily has some form of central management. Chain systems, on the other hand, have experienced little change since the turn of the century. Most chains still consist of a small number of banks controlled directly or indirectly by a few individuals. Though occasionally bankers, these people are generally businessmen who have acquired banks and operate them as adjuncts to their business interests. The importance of chain banking has diminished over the years, and with the sizable growth in holding company banking during 1927-1930 the chains' share of the multiple-unit bank resources has been vastly reduced. 1 REASONS FOR EXPANSION Because major financial developments, such as the expansion ol group banking in the 1920s, result from the interaction of many variables, it is often difficult if not impossible to select the most significant cause of economic change. The growth of group banking, for example, was influenced by the need for rural bank reform, the consolidation movement in industry, the fear of competing groups and the possible loss of correspondent business, restrictions on branch banks and hope for change, and the bull market speculation which gave such facility to the sale of holding company shares. THE N E E D FOR RURAL BANK REFORM. Between 1920 and 1921 the nation's economy experienced a precipitous decline. Bankers suddenly found themselves with large amounts of frozen assets, and in at least one state (Iowa) it was estimated that if the banks had been required to liquidate, even within two years' time, 95 percent would have proved insolvent. 2 Although business activity soon recovered, the prices of farm products, which had declined over one-third from their high in 1919, remained at this low level throughout the 1920s. As a result farmers

20

Group Banking, 1927-1929

suffered considerably during this readjustment period and bankers serving agricultural areas faced tremendous pressures. The situation was made worse by the huge farm mortgage debt which had been built up during the war. This impaired the farmer's ability to obtain bank loans for the planting and harvesting of crops, and land values in the agricultural communities collapsed.3 Numerous other problems plagued the rural banker. Among these were the shift of population to urban areas; the increased use of the automobile, which made it convenient for people to both shop and bank in the cities and for insurance salesmen from metropolitan areas to visit the small town; and the growth of the chain store, which often drove the bank's best customer, the country general store, out of business. In addition one cannot neglect a factor which was often the greatest source of consternation to the country banker—too many other country bankers. Because of the difficult situation in a great many rural areas, numerous small banks failed and public confidence in others was undermined. Bankers whose institutions survived the initial wave of suspensions were anxious to improve the banking and general business conditions of their district. Business leaders in the rural communities also sought to restore the impaired prestige of country banks. A number of these men believed that most banking troubles were rooted in inadequate management and that this weakness could be remedied if the inefficient managers were replaced.4 Some conservative bankers felt that a group of banks which enjoyed geographic diversification could best meet this emergency, cooperating with each other as correspondent systems had in the past. Therefore, the holding company type of organization seemed ideal, since it could provide the advisory organization necessary to improve management and also achieve diversification through maintaining units over a wide area. Realizing this, bankers formed groups in the South, the Midwest, and the Northwest.5 Although each newly organized group contained at least one metropolitan bank, this was not an urban movement. A vice-president of the First Bank Stock Corporation stated in 1930: "In reaching our decision to embark upon the group-banking program we were

Group Banking, 1927-1929

21

prompted solely by the necessity of some form of practical reorganization of the rural banking structure." 8 The movement thus experienced its greatest development in agricultural districts rather than in cities, since it was in farm areas that banking reform was most desperately needed in the late 1920s. G E N E R A L M E R G E R M O V E M E N T O F T H E 1920s. In addition to the poor economic conditions in rural areas, country banks were adversely affected by the growth of absentee ownership of local corporations. Between 1919 and 1929 seven thousand independent manufacturing concerns consolidated with other firms in one of the greatest merger waves in our history. 7 Also a great many small drug and grocery stores were absorbed by chains. Thus, as the economic structure of the town changed, the small independent bank found its business drifting more and more to cities. Moreover, throughout the country there was a growing need for banking institutions large enough to meet the demands of the customers of their area. In the major financial centers there was little or no problem involved in supplying the necessary lines of credit; but in the sparsely populated rural areas the task was almost impossible. For example, in 1929 the combined resources of the ninth, tenth, and eleventh Federal Reserve Districts—consisting of eleven states and part of a twelfth—had total banking resources of only $6 billion, or an average of $2 billion per district. The total assets of three leading Chicago banks were equivalent to this average figure. Some bankers felt that, by means of group banking, sufficient financial resources could be accumulated to meet the requirements of even the largest concerns. This would mean that firms which had been obliged to go to major cities for credit accommodation could be served in their own areas. Also, profits from these loans would go to small banking institutions instead of to New York or Chicago. FEAR O F O T H E R G R O U P S AND LOSS O F C O R R E S P O N D E N T

BUSINESS.

Bankers throughout the United States had followed with considerable interest the activities of A. P. Giannini in California. His banking enterprises were extremely successful and had expanded rapidly. However, when he announced that he intended to form a nationwide chain of banks, the interest of some bankers changed to suspicion and even

22

Group Banking, 1927-1929

fear. Bankers in Minneapolis watched small blocks of stock shift from local owners to Mr. Giannini. In addition, there was bidding by eastern capitalists for control of St. Paul, Fargo, and Aberdeen banks. The activities of Giannini and the eastern interests had brought considerable outside capital into the Twin Cities area. Bankers there felt certain that financial control of the district would pass to San Francisco or New York unless they could strengthen their operation. In a number of instances banks which had a close relationship with the Northwestern National Bank were approached by outside capital seeking to buy control. The board of directors of Northwestern was told by their president, "If these banks are going to pass into other hands the control should be kept in this district." 8 This was an important consideration in the decision to form the first of the large Twin Cities groups, the Northwest Bancorporation. Once the Northwest Bancorporation had begun to organize, country bank officers received invitations from this holding company to bring their banks into the new organization. But many of these men had long-established relationships with the other major Twin Cities banks, the First National Bank of Minneapolis and the First National Bank of St. Paul, and therefore sought to affiliate with them. A large number were important correspondents of these institutions and some method of amalgamation had to be developed. The result was a jointly owned subsidiary of the two First National banks called the First Bank Stock Investment Company, which began operation April 1, 1929. Naturally, the correspondent business of other leading banks in the Northwest was affected by this growth of group banking in Minneapolis and St. Paul. These banks, searching for some method of retaining their correspondents permanently, decided to enter the field of group banking themselves.9 The establishment of new groups had a cumulative effect on other bankers, who felt that for their own protection they had to enter group banking. For example, one holding company banker reported that he "had been forced to enter into it as a protective measure and on investigation had become convinced that this type of banking could be engaged in profitably." 10 This feeling was prevalent in other areas as well; a Washington, D.C., banker reported in 1930 that, although he knew of no instance of group banking in Washing-

Group Banking, 1927-1929

23

ton, if some group operating outside of Washington began to purchase local banks, "it would no doubt be necessary for their own protection for Washington banks to resort also to group banking." 11 Even on the basis of these few observations one could fairly assume that the stock purchases throughout the nation by the Giannini interests and by eastern capitalists played an important role in the development of multiple-unit banking in the 1920s. RESTRICTIONS ON BRANCH BANKING. Restrictions on branch banking encouraged the formation of groups for two related reasons. The first was the bankers' expectation that the restrictions would be relaxed and through the use of the holding company they could develop "readymade" branch systems in preparation for that event. The second was that while these limitations on branch banking were in effect, business expanded and customers moved to the suburbs and the urban banker often had no other way to follow them. Many bankers in the 1920s expected a considerable relaxation of branch restrictions in the United States. The Federal Reserve Board, in its Annual Reports for the years 1915 to 1919, had repeatedly suggested that the national bank branch provisions be made more liberal. 12 The Comptroller of the Currency, J. S. Williams, in his Annual Reports from 1917 to 1921, also had recommended that national banks be authorized to establish domestic branches within certain limits. 13 Comptroller Crissinger, who succeeded him, went even further and virtually reversed the policy of his predecessors by permitting agencies or additional offices to be established by national banks under certain conditions. Furthermore, rumors were circulated at bankers' conventions that the government would soon permit branch banking. Therefore, a number of bankers who felt confident that branch banking would soon be established on a large scale began to acquire banks through the use of holding companies. The more industrious were developing these systems with the aim of administering a future branch operation. Others, sensing the opportunity for achieving a considerable profit, built up a string of banks with the goal of selling them to a larger branch organization when the branch laws were eased. The congestion which existed in all major cities made banking at a single office, usually located in the business district, very difficult. In

24 addition, portance this new his 1929

Group Banking, 1927-1929 retail as opposed to wholesale banking was growing in imand many bankers wished to adjust their facilities to meet market pattern. Comptroller of the Currency Pole noted in report:

These holding companies are attempting to do under the sanction of existing laws, which are crudely adapted to the purpose, what should be made possible in a simpler manner by new legislation. If branch banking were permitted to be extended from the adequately capitalized large city banks to the outlying communities within the economic zone of operations of such banks, there would be no logical reason for the existence of the local holding company and it would give way to a system of branches operated directly by the central bank of the group. 14

Surprisingly, however, the first substantial statistical study of multiple-unit banking found many of these institutions in the leading branch banking states. In those areas where statewide branch banking was permitted, the offices of chain and group banks represented 19 percent of all banking offices and 25 percent of all bank loans and investments. In the same areas the chain and group banking offices represented 18 percent of all chain and group banking offices in the United States. In those areas where limited branch banking was permitted, the offices of chain and group banks represented 14 percent of all banking offices and 16 percent of all bank loans and investments. In the same areas the chain and group banking offices represented 38 percent of all chain and group banking offices in the United States. In those areas where limited branch banking was permitted, the offices of chain and group banks represented 10 percent of all banking offices and 23 percent of all bank loans and investments. In the same areas the chain and group banking offices represented 44 percent of all chain and group banking offices in the United States. The ratio of chain and group loans and investments to all loans and investments was highest not in the states which limited or prohibited branch banking but in those where statewide branching was allowed. Some authors feel that this invalidates the hypothesis that chain and group development was influenced by branch restrictions. If one looked no further than the percentages presented, this conclusion might be

Group Banking, 1927-1929

25

inevitable. However, there is another explanation of this phenomenon, and, if combined with some knowledge of the personalities involved, it appears to strengthen rather than disprove the hypothesis. Essentially, the above analysis tacitly assumes that no bank would desire to branch beyond state lines. However, our state lines bear no necessary relationship to economic trade areas. In fact, in the states which permitted statewide branch banking, only one chain or group among those with over $20 million of loans and investments limited its operations to a single state.15 In addition, trade-area or nationwide branch banking seemed inevitable to a large number of scholars and bankers during the 1920s. One holding company, Transamerica, as mentioned earlier, was formed specifically to prepare for expanded branch banking.16 If the $1.1 billion of loans and investments of Transamerica's California affiliates in 1929 were not included in the "statewide branch banking permitted" data, the percentage of loans and investments of groups and chains to those of all banks in this category would fall from 25 percent to only 8 percent. Correspondingly, if the 4^7 branches operated at that time by the Bank of Italy and Bank of America were deducted, the ratio of chain and group banking offices to all banking offices in this category would be reduced from 19 percent to 5 percent. Therefore, if one looks behind the statistics, one finds considerable evidence that the development of group banking was definitely related to branch limitations. If branch restrictions were of some importance in bringing forth multiple-unit banking, another question inevitably arises. Were group banks established only as a means to an end (branch banking) or as an end in themselves? While the attitude of the holding company officer or public official today may be considerably different from that of his counterpart three decades ago, statements made shortly after the group banking movement began indicate most clearly that these organizations were established largely as a step toward branch banking.17 THE BULL MARKET OF THE LATE 1920s. Conditions were nearly perfect for the growth of multiple-unit or multiple-office banking in the late 1920s. The desperate need for support of banking institutions in rural areas, the merger wave in industry, and the other factors discussed earlier made the expansion of branch, chain, or group banking

26

Group Banking, 1927-1929

seem inevitable. The only question was what form this movement would take. Branch banking was not the answer—at least at that time —since it was severely limited by state and national legislation. Chain banking was considered, but this suffered from two severe handicaps —chains had fallen into disrepute in some areas following some tragic failures, 18 and, as they were closely held organizations, their capital for expansion was extremely limited since it had to be obtained from the few owners of the chain. Thus, since the 1920s were the "golden era of stock flotations" in America, the selection of the bank holding company as the form of multiple banking to be employed in this period was quite natural. This institution enjoyed the advantage of ease in raising capital, and no stigma of failure attached to it. In addition, an exchange of stock with a holding company often provided tax advantages for the shareholders of a merged bank. Hence, an enthusiastic and speculative public, extremely receptive to the large stock flotations of groups, may be added to the list of factors which encouraged this form of banking three decades ago. The advantages of the holding company type of organization were observed not only by the banker but by the speculator as well, for he saw in this development a splendid opportunity to gain considerable profit. Country bank shares were selling at prices usually considerably below book value, whereas the stock of banks in major cities often sold at twice its book value. The price-earnings ratios were about equally disproportionate. Herein a promoter might profit in several ways. At least in theory, the banks under group supervision could be placed under better management and larger earnings would result. Furthermore, since holding company stock was more marketable than local bank stock, the total of the prices of the individual bank shares before consolidation would often be much less than the market price of a share of the resulting holding company. This was an instance where the whole did not always equal the sum of its parts. Brokerage houses also profited by the organization of group systems. These firms could gain handsome underwriting fees with limited risk by selling new issues of bank holding company stock. A few examples will indicate how readily these shares were distributed to the public during the stock market boom:

Group Banking, 1927-1929

27

Five thousand shares of [Bank Shares Corporation] Class A were to be sold for cash. When the new stock was placed on the market, it was reportedly oversubscribed 150 times. . . . This publicity proved so successful that investors stood in line to subscribe to the stock in the new organization [Northwest Bancorporation]. . . . The issue was not underwritten by outside dealers but was offered for sale through the two security affiliates of the First Bank Stock Corporation, the First St. Paul Company and the First Minneapolis Company. This issue was ten times oversubscribed. People patiently stood in line to enter their subscriptions, and bank officers were besieged by influential customers who wanted their allotments increased. . . . 19

For a time actively traded bank stocks, like the shares of many other industries, continued to be bid far above their value based upon their potential earning power. Not only the public but holding companies, too, purchased bank shares at prices that were extremely high in relation to expected profits. However, in the late 1920s this situation was rather abruptly reversed by the stock market crash. The third sale of stock by the Northwest Bancorporation in September, 1929, for example, was planned at $82.50 per share, since the market value was $85. By the time an underwriting group was formed, the price had slipped and had to be revised to $72.50 a share. Scarcely had the underwriting agreement been signed when a cataclysm struck the stock market. The stock fell to $50 and any effort by the underwriters to sell the stock drove prices down further. Virtually overnight the lines of buyers were gone and the plush life of the "order taker" was over. An era of seemingly unlimited optimism had come to an end, and with it (and in part because of it) the greatest period of bank holding company expansion in our nation's history. WHY THE GROUPS WERE NOT CENTERED IN NEW YORK OR CHICAGO Surely the Chicago and New York bankers were as anxious as others to have their firms achieve the greater profits, enjoy the added growth and prestige, and obtain the diversification which were, at least theoretically, accomplished through the establishment of a group system. They were as much angered by branch restrictions, especially in Chi-

28

Group Banking, 1927-1929

cago, as were other bankers in the United States. Why, then, did they not participate to any great extent in the bank holding company movement? There are two primary reasons for the apparent limited interest in group banking on the part of bankers in our nation's financial centers. First, banks in New York and Chicago had gained representation in their immediate areas by means other than the formation of a bank holding company. In Chicago, interlocking directorates were used to establish relationships among banks which might one day be formed into a branch system. On the other hand, in New York, limited area branch banking was already available. Second, both the Loop and Wall Street bankers probably feared the group banking movement only slightly less than the possibility of Federal legislation authorizing tradearea branch banking, because the major institutions in these centers had become important bankers' banks with a vast correspondent business. If they had formed holding companies with the objective of expanding their areas of operation, they would have been regarded as opponents by many independent bankers. If this had occurred, longestablished and exceedingly profitable correspondent relationships might have been brought to an end.20 Earlier it was mentioned that some Northwestern holding companies were organized at least partly to protect correspondent relationships. This may appear to contradict the opinion presented above; however, there is a fundamental difference between the two situations because of the nature of the correspondent banks involved. Small rural banks tend to maintain their primary balances with a sizable bank in their area. On the other hand, large (especially reserve city) institutions tend to maintain their primary balances in New York and Chicago. (This topic is discussed further in Chapter VII.) Since the motive for establishing most holding companies was local in nature, 21 the largest institution in many systems was a reserve city bank. Affiliated with it were a number of its rural correspondents. But reserve city banks displayed little interest in joining a multiple-unit system with a New York or a Chicago bank as the nucleus. Hence, if the Wall Street or the Loop institutions had desired to form a holding company, they would

Group Banking, 1927-1929

29

have had to absorb the small bank correspondents of their depositors, the reserve city banks, and as a result they might have lost many valuable accounts. To avoid this conflict most New York and Chicago banks refrained from engaging in group banking. F E D E R A L RESERVE BOARD RESEARCH, 1929 The House Hearings on Branch, Chain and Group Banking, held in 1930, unearthed more statistical material on this subject than had ever been compiled before. The research division of the Board of Governors of the Federal Reserve System gathered information from the Comptroller of the Currency, state banking departments, bankers, and numerous published sources. The result was a picture of chain and group banking which has never been equaled. 22 The Federal Reserve Board's study noted that on December 31, 1929, 8 percent of the banks and 12 percent of the banking offices in the United States were controlled by groups and chains. These multiple-unit systems held over $11 billion of the $58 billion of total loans and investments of all United States banks. If one adds to this the $19 billion in loans and investments held by branch banking institutions which had no chain or group affiliation, one finds that over one-half of the loans and investments of all banks in the United States were on the books of multiple-unit or multiple-office systems at the end of 1929. The groups and chains were largely concentrated in the Midwestern and Western states. (See Table 1.) About one-half of the chains and groups, one-half of their offices, and nearly two-fifths of their loans and investments were located in these two sections of the United States. The loans and investments of multiple-unit organizations ranged from zero to nearly two-thirds of the total amount in some states, with the heaviest concentrations in Georgia, Florida, Arkansas, Michigan, Minnesota, North Dakota, Montana, and Nevada. At the end of 1929 two-thirds of the groups and chains had only six banks or less and only 3 percent had over twenty. Table 2 indicates that, rather than being vast networks spread throughout the nation, most chains were limited to a small number of affiliated banks.

Group Banking, 1927-1929

30

Table 1. EXTENT OF GROUP AND CHAIN BANKING IN THE UNITED STATES, DECEMBER 31, 1929 GROUPS AND CHAINS

SECTION

a

New England Eastern Southern Midwestern Western Pacific Total

Total Number

Banks Controlled

Total Offices (branches and head office)

9 48 46 90 60 34 287

69 213 321 731 523 246 2,103

157 524 402 1,117 523 795 3,518

Loans and Investments (in $ million) 1,132 3,211 815 3,644 452 1,923 11,177

• New England: Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut; Eastern: New York, New Jersey, Pennsylvania, Delaware, Maryland, District of Columbia; Southern: Virginia, West Virginia, North Carolina, South Carolina, Georgia, Florida, Alabama, Louisiana, Texas, Arkansas, Kentucky, Tennessee, Mississippi; Midwestern: Ohio, Indiana, Illinois, Michigan, Wisconsin, Minnesota, Iowa, Missouri; Western: North Dakota, South Dakota, Nebraska, Kansas, Montana, Wyoming, Colorado, New Mexico, Oklahoma; Pacific: Washington, Oregon, California, Idaho, Utah, Nevada, Arizona, Alaska, Hawaii. Source: House Hearings, 1930, pp. 464-71.

BANK HOLDING COMPANIES, DECEMBER 31, 1929 Unfortunately, the data gathered by the Federal Reserve Board in 1929 did not separate chain banking from holding company banking. However, from material published in The American Banker and the data in the House Hearings, 1930, one may obtain some indication of the extent of group banking at the end of 1929. (See Table 3.) At that time there were about twenty-eight group systems in operation. They represented only about one-fourth of the banks but approximately one-half of the banking offices, resources, and loans and investments of all chains and groups reported in the Federal Reserve study. Although these firms constituted only about 2 percent of the banks, they controlled approximately one-tenth of the loans and investments of

Group Banking, 1927-1929

31

all banks in the United States. Thus, by the end of 1929 bank holding companies had become the dominant element in the field of multipleunit banking. But multiple-office, branch banking, was still considerably larger in terms of assets than group banking. Table 2. N U M B E R O F C H A I N S A N D G R O U P S IN E A C H SECTION O F T H E U N I T E D STATES, D I V I D E D A C C O R D I N G T O N U M BER OF BANKS CONTROLLED, D E C E M B E R 31, 1929 NUMBER OF GROUPS AND CHAINS CONTROLLING

3 Banks

4 to 6 Banks

7 to 10 Banks

11 to 20 Banks

Over 20 Banks

TOTAL

New England Eastern Southern Midwestern Western Pacific

2 25 9 8 9 11

4 15 19 43 35 11

2 5 14 20 12 8

1 3 3 14 3 2

0 0 1 5 1 2

9 48 46 90 60 34

United States

64

127

61

26

9

287

SECTION

a

* New England: Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut; Eastern: New York, New Jersey, Pennsylvania, Delaware, Maryland, District of Columbia; Southern: Virginia, West Virginia, North Carolina, South Carolina, Georgia, Florida, Alabama, Louisiana, Texas, Arkansas, Kentucky, Tennessee, Mississippi; Midwestern: Ohio, Indiana, Illinois, Michigan, Wisconsin, Minnesota, Iowa, Missouri; Western: North Dakota, South Dakota, Nebraska, Kansas, Montana, Wyoming, Colorado, New Mexico, Oklahoma; Pacific: Washington, Oregon, California, Idaho, Utah, Nevada, Arizona, Alaska, Hawaii. Source: Compiled from data in House Hearings, 1930, p. 471.

32

Group Banking, 1927-1929

Table 3. EXTENT OF GROUP BANKING BY GEOGRAPHIC AREA, DECEMBER 31, 1929» SECTION

b

New England Eastern Southern Midwestern Western Pacific Total

Number of Groups

Number of Banks

Resources (in $ million)

3 2 7 8 7

36 33 52 265 21 104

1,129 661 541 2,621 138 2,480

28

511

7,570

1

* A few small companies with under $25 million of resources have been excluded. Included are those organizations which later registered as bank holding companies under the provisions of the Banking Act of 1933, and added to these are others which maintained this type of operation according to the literature of the time. ' N e w England: Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut; Eastern: New York, New Jersey, Pennsylvania, Delaware, Maryland, District of Columbia; Southern: Virginia, West Virginia, North Carolina, South Carolina, Georgia, Florida, Alabama, Louisiana, Texas, Arkansas, Kentucky, Tennessee, Mississippi; Midwestern: Ohio, Indiana, Illinois, Michigan, Wisconsin, Minnesota, Iowa, Missouri; Western: North Dakota, South Dakota, Nebraska, Kansas, Montana, Wyoming, Colorado, New Mexico, Oklahoma; Pacific: Washington, Oregon, California, Idaho, Utah, Nevada, Arizona, Alaska, Hawaii. Sources: "Roll Call of Leading Bank Groups in the United States, December 31, 1929," The American Banker, February 20, 1930, pp. 7-12; and House Hearings, 1930, pp. 162-84, 454-55.

CHAPTER IV

Growth of Group Banking since 1930 The growth of group banking is difficult to measure. There are at least three methods of estimating the development of multiple-unit banking during a specific period. Each of these methods is valid, and yet they provide considerably different answers. For example, the Board of Governors of the Federal Reserve System reports deposit figures for all registered bank holding companies and their affiliates as of a given date, making no adjustment for changes in the composition or number of the groups included in its statistics. (See Table 4.) A firm may be listed in the Board's data at one time but not at another. A group is dropped from the Federal Reserve statistics when it no longer controls a specified number of banks, which may mean merely that a holding company has combined its affiliates into a branch system 1 (i.e., the Marine Bancorporation). Or a group may be dropped from the Board's data because one of the firm's affiliates has returned to the ranks of the independent banks, its ties with the holding company having been severed (i.e., the First National Bank of Boston and the Bank of America). As a result, material which has not been adjusted to minimize the effect of such variations can be very misleading, for on many occasions the statistics reflect a change in the attitude of supervisory authorities or a change in legislative definition, not a change of interest in group banking. A recent study of bank holding companies attempted partially to adjust for this by including all leading groups except the Firstamerica Corporation (now called Western Bancorporation). 2 This firm was omitted because of its predecessor's divorce from the Bank of America during the period reviewed. Since this approach would substantially reduce the number of merged banks available for analysis in later sections of this book, it was not completely satisfactory for my purposes. Therefore, in compiling data for trend analysis, I have used a

Growth of Group Banking since 1930

34

Table 4. O F F I C E S A N D D E P O S I T S O F B A N K H O L D I N G COMPANIES FOR SELECTED YEARS, 1931-1960, AS REPORTED BY THE BOARD OF GOVERNORS OF T H E FEDERAL RESERVE SYSTEM PERCENT OF ALL U.S. NUMBER

TOTAL

DEPOSITS

YEAR-END

OF COMPANIES

OFFICES

1931 1936 1937

97 52 47

n.a. n.a. 1,344

n.a. 6,841 6,453

n.a. n.a. 7

n.a. 14 11

1938 1939 1940

43 41 38

1,319 1,296 1,265

6,672 7,173 7,606

7 7 7

11 13 11

1941 1942 1943

37 35 31

1,246 1,242 1,201

8,175 10,532 12,407

7 7 7

12 13 11

1945 1948 1950

33 20 28

1,248 1,231 1,386

18,142 15,290 18,525

7 7 7

12 11 12

1951 1952 1954

31 34 46

1,458 1,472 1,018

20,496 20,820 14,277

8 8 5

12 12 8

1957 44 43 1958 1959 43 1960 42 n.a.: not available.

1,268 1,266 1,380 1,463

15,139 15,998 17,311 18,274

6 6 6 6

8 7 8 8

{in S million)

COMMERCIAL BANKS

Offices

Deposits

Note: The figures for 1931-1945 cover known groups controlling three or more banks; 1948 includes the twenty companies then registered under the Banking Act of 1933; 1950-1952 figures include known groups controlling two or more banks; 1954 includes known groups controlling 25 percent or more of two or more banks; and the 1957-1960 figures include companies registered under the Bank Holding Company Act of 1956, but no group is counted in the 1957-1960 data more than once even though some groups technically include more than one holding company. The First National Bank of Boston and Bank of America were not reported in the Board's data after 1952 and 1954 respectively.

Growth of Group Banking since 1930

35

third approach. My statistical compilations include fifteen leading bank holding companies which have been in operation for three decades. Affiliates of these firms had about 85 percent of the banking offices and deposits of registered bank holding companies in 1960. (See Appendix A for a list of these firms.) Instead of eliminating certain holding companies from the analysis, I have deducted the Bank of America and the First National Bank of Boston from the early data of their former affiliates. This approach tends to exaggerate somewhat the growth of multiple-unit banking, 3 but it was the most effective method I could devise to provide a fair degree of consistency in the composition of the statistics for the years studied. 1930-1948 Before the great depression of the 1930s had begun, most of the growth of bank holding companies was completed. It is almost certain that if the stock market had maintained its phrenetic pace and if the economy had remained prosperous, other groups would have been formed and new members would have been added to existing holding companies. However, the further expansion of groups would probably have been limited, for most of the leading systems had accomplished the objectives for which they were created. Some groups were formed to protect correspondent relationships and/or obtain potential branches, but by 1930 they had absorbed the majority of the banks which they desired and which were willing to affiliate with them. The agricultural depression and the industrial and commercial merger movement, which had inspired many rural banks to join or form groups, had been in progress for nearly a decade. The New York and Chicago banks, which might have given a tremendous impetus to holding company banking by trying to establish nationwide organizations from their vast correspondent networks, displayed little interest in group banking. Furthermore, A. P. Giannini, who had visions of creating such a system, encountered opposition rather than cooperation from other holding company executives. One writer aptly described the holding companies as "separate and isolated growths arising out of the economic life of different and widely separated communities." 4 Thus their unwillingness to participate in a

36

Growth of Group Banking since 1930

nationwide system is not surprising. The goal of these groups was to obtain the representation they desired in a given trade area, and, once this was accomplished, they apparently planned no further expansion except under extraordinary circumstances. The early 1930s constituted a period of retrenchment rather than growth among bank holding companies. Following the introduction of a number of Congressional bills opposing bank holding companies in 1930 and the House hearings on branch, chain, and group banking in that year, little interest was displayed in forming new systems or adding to the old. In fact, data compiled by the Federal Reserve Board reported ninety-seven groups with 978 banks were in operation in 1931, and only fifty-two groups with 479 banks were in operation in 1936. Failures, of course, substantially reduced the number of banks in the nation during this period, and some of these were group members. Another factor which contributed to the decline in the ranks of bank holding companies between 1932 and 1936 was the relaxation of legislation restricting branch banking. The number of states which permitted statewide branching doubled (nine to eighteen) during these few years, while the number of states which prohibited branch banking declined by 50 percent.5 In addition, the Federal Banking Act of 1933 permitted national banks to establish branches to the extent permitted state institutions. As these branch laws were revised, a number of groups became branch systems. Despite the equitable provisions concerning bank holding companies in the Banking Act of 1933, few new groups were organized. The depressed economy, the antagonism toward holding companies in general (as evidenced by the passage of the Public Utility Holding Company Act of 1935), and the fact that most groups had expanded too zealously in the 1920s 6 restrained any possible interest in multiple-unit banking. As a result, the position of groups in the American banking system showed relatively little change between the mid-1930s and 1948. In 1937, according to Federal Reserve data, these firms controlled approximately 7 percent of the commercial banking offices and 11 percent of the commercial bank deposits of all United States banks. In 1948 the respective percentages were almost unchanged.

Growth of Group Banking since 1930

37

The development of group banking during this period, as reflected in the adjusted data compiled for fifteen leading bank holding companies, closely parallels the picture presented by the Federal data. Following the period of retrenchment between 1930 and 1933, these systems increased the total number of banking offices which they controlled by only 5 percent during the next fifteen years. The most significant change was in the composition of the banking offices, for a substantial amount of switching from unit to branch banks occurred within the multiple-unit systems. Deposits of the fifteen groups rose by 300 percent between 1933 and the end of 1948, but this was somewhat less than the 320 percent average growth achieved by all commercial and stock savings banks. (See Table 5.) Throughout the later years of this period (after 1937) the future of multiple-unit banking was very uncertain. Several additional bills were introduced specifically to abolish group banking, President Roosevelt called for the elimination of all holding companies, and in 1948 the Board of Governors initiated proceedings against the largest bank holding company, Transamerica Corporation, under the antitrust laws. If these factors were not sufficient to discourage any plans for group banking expansion (and they probably were), the lack of interest in bank shares displayed by investors during much of this period made the raising of additional capital both difficult and expensive, in relation to the book value of the holding companies' shares. Furthermore, the low earnings in many of these years and the rebuilding of reserves following the depression prevented the accumulation of large sums through retained income. The alternative to the purchase of stock of small banks was an exchange of shares, but the owners' enthusiasm for this arrangement had dimmed following the 1929 debacle. 1949-1961 While the period 1933-1948 was one of negligible expansion of group banking, there has been considerable growth of these systems since 1948. This era has in many ways followed the pattern of the late 1920s, when holding company banking enjoyed its greatest development. Just as in the 1920s, there has been an increasing amount

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3 ta ta OT °Eb oÖ M I C Q» aa a,. O, e E-® n o 73 8 S ° O,® S .. «3 i! S s cO oc cL-2 ofr o O o 5 2 S S e 1ii3 » •Ö o ¿5 c â "o ¿3 > SÌ oo «í tí r« 73 ^ -g fr oo oCL,oCO .3 e aC3 yo ^ S3 -S I I ta c 2 o 2 * soa -a- CQ M S to o eea j• « ~ oî M yC u,s ¡P N ÇA Ic/i ;H C co O3O « U\tabs. Eisenhower, Dwight D., 77, 83 Employees, 98, 99-100 Empire Shares Corporation (N.Y.), 48 Evans, Rudolph M., 67 Exchange of stock, 117-18, 122-23 Exemptions, in Bank Holding Company Act, 74-75 Expansion of group banking: reasons for, 19-27; control of, 70-71; restrictions on, 72-73, 75-76; through purchases of existing banks, 111-13 Failures, 50-58; free banks and, 3; rural banks, 20; Witham Chain, 152-54; BancoKentucky and Caldwell and Company, 154-56; Detroit groups, 156-59 Federal controls, 63-64, 142 Federal Deposit Insurance Act, 83-84 Federal Deposit Insurance Corporation, 57 Federal government securities, 133/aft. Federal legislation: prior to 1930, 10-17; opposition to bank holding

210 Federal legislation (Continued) companies, 36; effect on mergers of bank holding companies, 39, 43; 1930-1961 period, 59-86; list of bills, 68; Bank Holding Company Act of 1956, 69-75 Federal Reserve Bank of Philadelphia, 114 Federal Reserve Board: antimerger provisions and, 13; chain banks and, 16; multiple-unit banking and, 16-17; on relaxation of branching restrictions, 23; 1929 research, 29-30; Transamerica case, 43, 66-67; registration of holding companies with, 62; study on group suspensions, 52; powers of, 63, 72-73; attacks on bank holding companies, 65-66; observations on, and administration of, Bank Holding Company Act, 77, 78-85; First National City case, 80-81; Firstamerica case, 81-83; decisions under Bank Holding Company Act, 160-66 Federal Reserve System, 16, 62 Financial Institutions, Incorporated (N.Y.), 49 First Bank Stock Corporation, (Minn.), 94, 136; statistics, 38, 48, 112, 113, 121 tabs.; member banks, 148 First Bank Stock Investment Company, 22 First National Bank (Chicago), 7 First National Bank of Detroit, 157, 158, 159 First National Bank of Louisville, see Trustees, First National Bank of Louisville First National Bank of Reno, 52 First National Bank of St. Joseph, The (Mo.), 48 First National City Bank of New York, 76, 80-81 First New York Corporation, 78 First Security Corporation: statistics, 38, 49, 112, 113, 121tabs.; member banks, 148 First State Bank of Elmwood Park, 56-57 First Virginia Corporation, 49, 78

Index First Western Bank and Trust Company, 81-84 First Wisconsin Bankshares Corporation: statistics, 38, 49, 112, 113, 121 tabs.; member banks, 148 Firstamerica Corporation: Sherman Antitrust Act and, 11 ; divorce f r o m Bank of America, 33; acquisition of California Bank, 41; Federal Reserve Board role in case of, 81-83; see also Transamerica Corporation, Western Bancorporation Florida: bank holding companies in, 41 tab., 168; Witham Chain suspension, 152-54 Foreign trade, 10 Forgan, James B., 7 Ford, Henry, 158 Fort Worth National Bank, The (Tex.), 49 Fourth and First National Bank of Nashville, 154, 155 Free banking movement, 2 Fringe benefits, 99 Fulbright, James William, 11, 13 General Bancshares Corporation, 48, 105 General Bancshares Corporation ( M o . ) , 48 General Contract Corporation, see General Bancshares Corporation General Motors Corporation, 159 Georgia: bank holding companies in, 47tab., 168; Witham Chain suspension, 152-54 Georgia State Bank of Atlanta, 153 Giannini, A. P., 21-22, 35, 52 Girard Trust Corn Exchange Bank, 84 Glass, Carter: on bank holding companies, 12; opposition to McFadden Act, 16; bill introduced by, 61, 65, 71; comments on Detroit holding companies, 156 Goldsborough Bill, 60 Grant, John M., 51 Group banking: 1927-1929 period, 18-32; difference between chain banking and, 19; reasons for expansion, 19-27; Federal Reserve

Index Board research, 29-30; 1929 statistics, 30, 31-32fai>s.; 1930-1948 period, 35-37; 1949-1961 period, 37-44; merger, growth by, 39-43; branching, growth by, 43-44; failures, 50-58; Federal legislation and controls, 59-85; disappearance of opposition to, 64-65; independent banks compared with, 86; bank holding company and, 86-110; personnel, 96-100; correspondent banking compared with, 105-110; reasons for merger, 114-15; earnings after merger with holding company, 127-29; trust services, 130; list of holding companies and competitors of, 136-37; branch banking compared with, 138-39; advantages gained from merger, 140, 141; attacks of independent banks against, 140-41; future of, 142-43; state and Federal legislation affecting, 167-72 Guardian Detroit Union Group, 54-56, 156-59 Guardian National Bank, 158-59 Hamilton National Associates, Incorporated (Tenn.), 49 Hanover Bank, 108 Hartsough, Mildred, 5 Hawaii, laws affecting bank holding companies, 76, 168 Hayes, F. W„ 5 Hodge, Orville, 57 Holding companies, see Bank holding companies "Home Companies" of Little Rock, Ark., 154 Hoover, Herbert, 59 House of Representatives: hearings on branch, chain, and group banking, 60; bank holding company bills, 66-68; Judiciary Committee reports on bank mergers, 113-14 Hull, Morton D., 16 Idaho, bank holding companies in, 47tab., 76, 168 Illinois, bank holding companies in, 41 tab., 168; failure, 56-57

211 Illinois Shares Corporation (N.Y.), 48 Income tax, exemption from, through stock exchange, 117-18 Independent banks: group banks compared with, 86, 139; value and salability of stock of, 125; general operation services, 130-31; reasons for merger with holding companies, 140; attacks against group banking, 140-41 Independent Bankers Association, 77 Indiana, Bank of the State of, 4 Indiana: bank holding companies, 47 tab., 169 Insurance plans for personnel, 99 Interbank deposits, 105, 108-110 Interest rates: effect of merger on, 129-30; of country banks, 135; of group and independent banks, 139-40 Interstate trade, 10 Investment companies, bank holding companies as, 64 Investment Company Act of 1940, 64 Investments: divestment of nonbanking assets, 71; prohibitions on nonbank, 74; earnings from, 119; capital adequacy and, 120 Investment services, 94-96, 107 Iowa, State Bank of, 4 Iowa, bank holding companies in, 47tab.; legislation, 76, 169 Jenkins, Ellwood O., 105 Judiciary Committee, House, reports on bank mergers, 113-14 Justice Department, role in bank mergers, 83, 84-85 Kansas, legislation, 169 Kentucky, bank holding companies in, 47tab.; legislation, 169 Labor unions, interest in multiple-unit banking, 8 Legislation, see Federal legislation; State legislation Liabilities, changes after merger, 132 Liberty Bank (San Francisco), 8

212 Lines of credit, 114-15 Loans: state regulations concerning, 9-10; of merged banks, 1949-1961 statistics, 42tab.; loan participation, 79, 91, 106-107; holding companyconstituent bank relationship in field of, 88-93; earnings from, 119; capital adequacy and, 120; interest rates in local banks, 129; changes in post-merger period, 132-35 Loan reports, 89-90 Louisiana, legislation, 76, 169 McAdoo, W. G., 64, 65 McFadden Bill, 15-16, 60 Maine: Bank holding companies, 47tab.; legislation, 76, 169 Management: advantages of group banking in field of, 96-100; directors of group banks, 100-104; problem of succession as reason for merger, 115 Manley, W. D„ 153 Manufacturers and Traders Trust Company of Buffalo, 46 Marine Corporation, The (Wis.), 45, 49tab., 78 Marine Midland Corporation (Buffalo, N.Y.): statistics, 38, 49, 112, 113, 121 tabs.; assets of banks merged with, 39; group banks and competitor banks, 136; member banks, 148-49 Marine National Exchange Bank of Milwaukee, 45 Marshall and Ilsley Bank, 45 Maryland, legislation, 76, 169 Massachusetts: bank holding companies, 47tab.; legislation, 169 Medical plans for employees, 99 Mergers: Federal regulation of, 11; Pujo Committee and, 12-13, 15; Clayton Act provisions, 13-14; movement of 1920s, 21; group banking growth by, 39-43; Federal Reserve Board approval required for, 72; Firstamerica case, 83-84; amendment to Federal Deposit Insurance Act on, 83-84; holding company and merged bank, 86-110; stockholder and, 111-26; statistics on banks merged with leading hold-

Index ing companies, 112, 113; reasons for, 114-15, 140; gains claimed through, 116-18, 122-23; earnings, effect on, 127-29; interest rates, effect on, 129-30; rural banks before and after, 131-35; list of banks affiliated with groups between 1949 and 1960, 147-51; decisions of Federal Reserve Board under Bank Holding Company Act, 160-66 Metropolitan bank: as nucleus of holding company, 19; correspondent relationships and, 28, 106-107; failures, 51; interest rates, 129 Michigan: control over holding companies, 10; Detroit bank failures, 53, 54-56, 156-59; legislation, 169 Midwestern states: group and chain banking in, 29, 30tab., 31 tab. Minneapolis, Minn., rise of group banking, 22 Minnesota: bank holding companies, 47tab.; legislation, 76, 169 Mississippi, legislation, 170 Missouri, 10, Altab.; legislation concerning holding companies, 76, 169 Monopoly, 10 Montana: bank holding companies, Al tab.; legislation, 76, 169 Montana Shares, Incorporated, 48 Moratorium, Detroit group, 157-58 Morgan Guaranty Trust Company of New York, 46 Morgan New York State Corporation, 45, 46 "Morse-Heinz chain," 7 Multiple-office banking, see Branch banking Multiple-unit banking, 4-8; Federal Reserve Board efforts to place restrictions upon, 16-17; bull market of late 1920s and, 25-26; growth by branching, 43-44; suspensions, 52-53, 152-59; advantages of, 86-87, 140; see also Chain banking, Group banking, Bank holding companies National Bank Act (1863), 3 National banking system, branch banking and, 3-4

Index National Bank of Commerce (Detroit), 157 National Bank of Detroit, 159 National Bank of Kentucky, 54, 155 National banks: provisions concerning branches of, 3, 15, 23; Chicago plan, 7; sales of stock by, 123 National Monetary Commission, 10 National Shawmut Bank of Boston, 48, 150 Nebraska: bank holding companies, Altab.; legislation, 76, 170 Nevada: bank failures, 51-52; bank holding companies, Altab.; legislation, 76, 170 New England, group and chain banking, 30, 31 tabs. New Hampshire: bank holding companies, Altab.; legislation, 76, 170 New Hampshire Bankshares, Incorporated (N.H.), 48tab.; personnel, 97-98; board of directors, 105 New Jersey, legislation, 10, 170 New Mexico: bank holding companies, Altab.; legislation, 76, 170 New York City: banking situation before 1900, 6; failure of "MorseHeinz chain," 7-8; lack of interest in group banking, 27-29, 35; correspondent balances, 108-110; interest rates, 129 New York Holding Corporation, 45, 46 New York State: regulation of chain banking, 9-10; holding companies, 45-46, Altab.; First National City case, 80-81; legislation, 170 Nonbanking assets, 71 North Carolina, legislation, 76, 170 North Dakota: chain banking, 5; bank holding companies, Altab.; legislation, 76, 170 Northern Bank, 45 Northwest Bancorporation: Union Investment Company, 7; organization of, 22; stock sales, 27; statistics, 38, 48, 112, 113, 121 tabs.; investment services, 94; group banks and competitor banks, 137; member banks, 149 Northwestern National Bank, 22 Northwestern states: chain banking,

213 6; holding companies' organization, 28 Offices of bank holding companies: statistics, 34, 38, Altab.; composition of, 37; expansion of, 39, 43 Ohio, State Bank of, 4 Ohio: bank holding companies, Altab.; legislation, 76, 170 Oklahoma: legislation, 76, 170 Old National Corporation (Wash.), statistics, 38, 49, 112, 113, 121 tabs., 149 Oregon: bank holding companies, Altab.; legislation, 76, 171 Otto Bremer Company (Minn.)» 48 Out-of-state bank holding company, 73 Pacific states, group and chain banking statistics, 30, 31, 32tabs. Panic of 1837, 2 Pennsylvania, legislation, 171 Pension plans, 99 Personal loans, 92-93; changes after merger, 132, 135 Personnel: advantages provided by holding companies in field of, 87; advantages of group banking in field of, 87, 96-100; recruiting by affiliated banks, 96-97; employees training programs, 98; fringe benefits, 99; questions concerning, as reasons for merger, 115-16; of group and independent banks, 139 Philadelphia National Bank, 84 Pole, John W., 24, 59 Preferred stock, 124 Preston National Bank of Detroit, 5 Profits, see Earnings Pujo Committee, 12-13, 15 Real estate loans, statistics, 93tab. Reconstruction Finance Corporation, role in Detroit failures, 55, 156, 158 Registration of bank holding companies, 44-50, 71-72; list of registered companies, 46-48; Federal Reserve Board and, 62-63 Reserve city bank, 28 Rhode Island, legislation, 76, 171 Robertson, A. Willis, 71, 77

214 Roosevelt, Franklin D., 37, 65 Rural banks: in Northwestern United States, 6; need for reform, 19-21; share prices, 26; correspondent relationship and, 28, 106-108; failures, 51; sale of stock by, 123; value and salability of stock of, 125; bank holding company and, 127-37; earnings after merger, 127-29; interest rates after merger, 129-30; general operations, 130-31; trust services, 130; before and after merger, 13135; list of banks used in analysis, 136-37 St. Joseph Agency, Incorporated (Ind.), 48 St. Paul, Minn., rise of group banking, 22 Savings deposits, 129 Second Bank of the United States, 2 Securities acts of 1933 and 1934, 6364 Securities and Exchange Commission, 63-64 Senate, United States: bank mergers and authority to regulate, 13-14; bank holding company bills, 66-68 Shares, see Bank stock Shawmut Association: statistics, 38, 48, 112, 113, 121 tabs.; member banks, 150 Sherman Antitrust Act (1890), 10-11 Small Business Investment Act of 1958, 77 Southern states: branch banking in, 3; Witham Chain, 5; group and chain banking statistics, 30, 31, hltabs. South Carolina, legislation, 171 South Dakota: bank holding companies, Al tab.; legislation, 76, 171 Southeastern Shares Corporation (N.Y.), 48 Springfield Savings Society of Clark County (Ohio), 49 State bank notes, 3 State banking systems: expansion of, 2; national charters, 3; Texas, 7; regulations concerning stock ownership, 10; branches of, 15; supervision of, 9, 73 State government, 2

Index State legislation: before 1930, 9-10; affecting bank holding companies, 73, 76, 142, 167-72 Steagall, H. B., 65 Stock, see Bank stock Stockholders: goals of, as primary reason for merger, 116-18; selection of directors of group bank, 100; mergers and, 111-26, 140; marketability of stock, 122-26 Stock Market, of late 1920s, 25-27 Strong Bill, 60 Supervision of banks: state regulations, 9; of member banks by Federal Reserve System, 62; of bank holding companies in 1956 Act, 72; of investments by members of holding company, 94 Supreme Court of the United States: Transamerica case, 68; Firstamerica case, 83, 84 Suspensions, see Failures Taft, William Howard, 12 "Trustee method," 7, 18 Taxation: on state bank notes, 3; exemption of stock exchange from, 117-18 Tennessee: bank holding companies, 47tab.; legislation, 76, 171 Tennessee Shares Corporation, 49 Texas: bank holding companies, 7, 47tab.; legislation, 76, 171 Texas Bank and Trust Company of Dallas (Tex.), 49 Thomson, J. Cameron, 69, 102, 107 Time deposits, 129 Time loans, statistics, 93tab. Tobey, C. W„ 66 Training programs for employees, 98 Transamerica Corporation, 66-68; branch banking and, 25; proceedings against, 37; Bank of America and, 41, 42-43; role in Nevada, 51-52 Trust Company of Georgia: statistics, 38, 48, 112, 113, 121 tabs.; member banks, 150 Trust Company of Georgia Associates, 48, 150 Trustees, First National Bank of Louisville: statistics, 38, 48, 112, 113, 121 fata.; member banks, 150

215

Index Trust services, 107, 130 Twin Cities (Minneapolis-St. rise of group banking, 22

Paul),

United California Bank, 83 Union Bond and Mortgage Company (Wash.), 49 Union Guardian Trust Company, 158 Union Investment Company, 7 Unit banking, 1-4 United States, Second Bank of the, 2 Utah: bank holding companies, Altab.; legislation, 76, 171 Vermont, legislation, 171 Virginia: bank holding companies, Allah.; legislation, 76, 171 Voting permits, 62, 63 Wall Street bankers, 28 Washington, D.C., group banking in, 22

Washington state: bank holding companies, Altab.; legislation, 171-72 Western Bancorporation: study of bank holding companies and, 33; statistics, 38, 48, 112, 113, 121 tabs.; assets of banks merged with, 39; size of, 45; personnel, 97; group banks and competitor banks, 137; member banks, 150-51 Western states, group and chain banking, 29, 30, 31, lltabs. West Irving State Bank, 57 West Virginia: prohibition of group banking, 10; legislation, 172 Williams, J. S., 23 Wingfield chain banks, failure of, 5152 Wisconsin: bank holding companies, 10, Altab.; legislation, 76, 172 Witham, William S., 5, 152 Witham Chain of banks, 51-52, 15254 Wyoming: bank holding companies, Altab.; legislation, 76, 172