The CHAIRMAN. Thank you, Mr. Andrus.

Mr. LARSON. I must state here, we favor the bill. I am president of one of the nine banks in Connecticut that want to set up a service corporation. There are six State nonmember banks, two National banks, and one member bank. Connecticut has passed legislation permitting the State banks to enter into a service corporation. We, as national banks, have been excluded.

That is why we are heartily in favor of H.R. 8874, as is the American Bankers Association.

The criticism that H.R. 8874 would include sporadic transactions appears to be technical and unjustified. The wording and legislative history of H.R. 8874 show that the bill is intended to deal with automation of departments of a bank. Unless a bank is thinking of moving a large portion of its bookkeeping off the premises, it seems that its activities probably would not come within the bill's definition of bank services at all. In any event, it is quite clear that where services are performed sporadically, they would not come within the bill.

(The prepared statement of Mr. Larson follows:)

STATEMENT OF ROGER J. LARSON ON BEHALF OF THE AMERICAN BANKING

ASSOCIATION

I am Roger J. Larson, president of the New Britain National Bank of New Britain, Conn. I appear before your committee as a representative of the American Bankers Association and as the president of a bank which is awaiting enactment of this bill in order to join with eight other Connecticut commercial banks to incorporate a jointly owned service center to be known as the Bank Computer Center of Connecticut, Inc.

The American Bankers Association strongly endorses H.R. 8874, a bill to authorize National and State member banks to utilize collectively automatic equipment through investment in stock of jointly-owned service corporations, and respectfully urge that the Senate Committee on Banking and Currency take favorable action on this proposed legislation.

Enactment of this bill would permit any National bank or any State bank which is a member of the Federal Reserve System (the latter only if also permitted by State law) to invest in the stock of a service corporation in an amount not exceeding 10 percent of the paidin and unimpaired capital and unimpaired surplus of the bank, provided that at least two banks so invest. H.R. 8874 would thus enable the smaller National and State member banks to enjoy the benefits of the use of modern equipment, which they are at present unable to do. Only the larger banks, generally speaking, are able to use such equipment at present, for two reasons:

(1) Only the larger banks can afford to buy or lease such equipment individually; and

(2) only the larger banks have a volume of business sufficiently large to justify the expense of such equipment.

During the 1950's when the population of the country increased by 19 percent, the number of people employed in the banking industry increased by 55 percent. In 1950 there were 435,000 people employed in banking, and in 1960, 674,000. In other words, the number of bank employees increased about three times as fast as the population in general.

In spite of this great increase in bank personnel, it has been difficult for banks to obtain the help needed to keep up with the increasing workload, and, consequently, it has been necessary for the banking industry to turn more to automatic means of handling checks and performing other functions.

The check-handling function provides a good example of how the workload has been increasing for banks. The volume of checks drawn on banks has increased tremendously during the past two decades. The estimated check volume in 1939 was 3.5 billion and in 1961, 13.6 billion. The volume is increasing at the rate of about one-half billion items a year. On the average a bank handles

a check 6.2 times and an average of 2.3 banks handle each check. Thus, using the figures for 1961, 13.6 billion checks multiplied 6.2. times 2.3 equals 193.9 billion check-handlings during the course of a year.

The trend toward greater check volume will continue. This year it is expected that the American people will write about 14 billion checks. By 1970 the number of checks is expected to be at an annual rate of 22 billion. It is safe to assume that other banking services also will show a very marked increase. Because expanding banking activities involve greater expense, banks must find more efficient methods of operation.

Check handling is usually the first area where automation is applied. But there are other functions which can be automated if volume warrants. Some banks are now processing their savings accounts in this manner, including the computation and posting of interest. Other banks use automatic equipment to handle their own payrolls, and still others use such equipment for the calculation of a variety of other credits and charges as well as for the preparation and mailing of statements.

The relatively recent and rapid development of the use of electronic processing equipment by the larger banks poses a new challenge to those smaller banks whose owners, directors, and management have a keen desire to continue as locally owned and managed banks serving their respective communities. If smaller banks are unable to band together to obtain the advantages of automation, their competitive position will be weakened. If no provision is made for smaller institutions to obtain the benefits of this type of equipment, it could lead to greater concentration in banking.

Take, for example, my State of Connecticut where the law permits statewide branch operations. Over the past dozen years or so, about 40 banks, or 4 out of every 10 commercial banks, have been acquired by other banks through purchase or merger. The reasons have been many and varied. We do not wish to see a new incentive for bank concentration arise because of the inability of smaller banks to improve the efficiency of their operations. Joint use of equipment through a bank service corporation will help to answer this problem.

While, some of the smaller banks may be able to obtain machine services from other banks or from commercial machine service organizations, we believe it is desirable that banks also should have the means which would be provided by this bill.

Moreover, in many areas the necessary machine services may not be available from other banks or from private corporations. Private commercial machine service corporations might not find it profitable to furnish these services to banks outside of densely populated areas.

Nine States (Connecticut, Iowa, Maine, Massachusetts, Michigan, Ohio, Pennsylvania, Virginia, and South Carolina) have enacted specific legislation which would permit State banks to hold such stock. In other States, such as New York, State banks may own stock in a service corporation under general provisions of existing law. National banks and State member banks should not be prevented from sharing this privilege because of restrictions in the applicable Federal statutes. H.R. 8874 will remove these restrictions.

I am particularly conscious of the difficulties under existing Federal law, because my bank and one other in our Connecticut group are national banks and one is a State-chartered Federal Reserve member. Our problem will be the problem of a vast number of national and member banks across the country unless Congress affords a solution through enactment of remedial legislation.

Our Connecticut group began its work in March 1960 when invitations to discuss the possibilities of a jointly owned corporation were mailed. The group met for discussions once a month. Committees assembled data on volume and present costs. The details were submitted to equipment manufacturers for bids on the necessary equipment. When the bids were in, we found no one in our group sufficiently knowledgeable in the automation field to be able to appraise the economics of this undertaking. A consulting firm of national prestige was then employed. Its economic feasibility report was in our hands by late August 1961. In February 1962 outlines of our needs were again submitted to manufacturers. Their revised reports have been submitted to us.

All the many decisions incidental to our incorporation have finally been resolved. Many hundreds of hours have been spent resolving bylaws, cost allocations, board representation, corporate procedures, and policies.

In 1961 our Connecticut Legislature passed legislation enabling State-chartered commercial banks to invest in a service corporation, but this still does not permit

our national banks and Federal Reserve member banks to invest in service corporations.

As stated above, the main purpose of H.R. 8874 is to enable the smaller banks of the country to make use of modern equipment and thereby retain their ability to compete with those of the larger banks which can afford to buy or lease such equipment individually. The bill is not intended to allow banks or service corporations to encroach into professional fields such as the practice of law or accountancy. The activities of the service corporation will be largely devoted to performance of services of a routine nature for banks which would normally be performed by bank personnel. In fact, the law provides that at least half of these activities must actually be performed for banks.

It is our sincere hope and desire that the Committee on Banking and Currency will take favorable action on H.R. 8874 so that the bill may soon be enacted into law.

The CHAIRMAN. Thank you, and I am sure the Members of the Senate, when they read this record, will appreciate the cogent reasons you give in your full statement. Thank you very much.

The next witness?

Mr. GUNTHER. Mr. Chairman, I also had a rather complete statement which I would file, and I would like to give a very brief summary. The CHAIRMAN. That will be acceptable. Your whole statement will appear in the printed record.

Mr. GUNTHER. We, the American Bankers Association, favor the passage of H.R. 12899 and H.R. 12577. There is one additional comment that I would like to make, because it has been commented on by other witnesses on the bill. That is, the bill would place the authority over the trust powers of national banks under the Comptroller of the Currency. There is an understandable sensitivity on the part of many State bankers to any hint of a blurring of a distinction between the State and National systems. Since both State and National banks operating common trust funds must be subject to uniform regulations for tax purposes, the ideal situation might be to have regulations issued by some agency other than the Comptroller of the Currency.

If an amendment to this end were offered and if it met the requirements of the Internal Revenue Service, we would, of course, support it. The CHAIRMAN. Wait just a minute. You would support it for the National banks as well as the State banks? Which would you prefer? The State bank examiner does not want the Comptroller of the National banks to issue regulations for the State banks. He wants that issued by the Bureau of Internal Revenue.

Mr. GUNTHER. Mr. Chairman, we support 12577 as drafted under the strong belief that the bill as it is drafted does not affect the fundamental principles of the dual banking system. However, if in the wisdom of the committee or the Congress, they decided they wanted to change it so that the Internal Revenue were to issue those common trust fund regulations, we would not oppose it.

The CHAIRMAN. Which would you prefer?

Mr. GUNTHER. We prefer the bill as it is.

The CHAIRMAN. All right, now, your second choice. If the Comptroller issues any regulations, you want him to issue all of them or just for the State banks?

Mr. GUNTHER. He will only issue regulations which govern the operation of national banks' trust departments under this bill. The only way that it affects State banks in any way is that the Internal Revenue Service only gives exemptions from taxes to common trust

funds if they are operated under a common regulation. And that is now issued by one Federal authority and this bill simply moves it over to another Federal authority.

The CHAIRMAN. That is what Mr. Andrus said was the standpoint of the State banks. What is your viewpoint?

Mr. ANDRUS. I would feel, sir-I have not had this under consideration with our management-but I think we would lean toward the suggestion of Mr. Myers this morning.

The CHAIRMAN. Mr. Myers?

Mr. ANDRUS. Yes.

The CHAIRMAN. That is regulation for State banks be issued by the collector of internal revenue?

Mr. ANDRUS. I would think that that would be our management's view.

The CHAIRMAN. We will think about that.

Now, your recommendation is if we do not take this bill, the collector issue it for all banks?

Mr. GUNTHER. If the Comptroller issues regulations defining how a common trust fund shall be operated, we feel that it will not impinge upon the rights of State banks or have any bad effect on the dual banking system for them to follow those regulations as they do now in the case of regulations issued by the Federal Reserve.

The CHAIRMAN. Thank you very much.

(The prepared statement of Mr. Gunther follows:)

STATEMENT OF FRANK A. GUNTHER, ON BEHALF OF THE AMERICAN BANKERS

ASSOCIATION

Mr. Chairman and members of the committee, my name is Frank A. Gunther. I am president of Security Bank, Washington, D. C., and chairman of the Legislative Committee of the State Bank Division, the American Bankers Association, and a member of its Federal legislative committee. I am appearing today on behalf of the association in support of H.R. 12825 and H.R. 12577. Earlier this month I testified for the American Bankers Association in support of these bills before the Banking and Currency Committee of the House of Representatives.

In considering the merits of proposed legislation dealing with the structure of commercial banking, the American Bankers Association is guided by its firm belief that the dual banking system must be preserved and strengthened at every opportunity. By dual banking we mean that system which permits commercial banks to operate under either State or Federal charter, and under such regulations as will assure, as far as possible, that neither class of bank is given an unfair advantage over the other.

It is our belief that the bills before you are in conformity with the principles of the dual banking system and, in addition, provide some additional strength to that system. Accordingly, we urge that they receive your favorable consideration. H.R. 12825 relates to bank branches which may be retained upon conversion of a State bank to a national bank, or after a consolidation or merger where the resulting bank is a national bank. The purpose is simple: to permit a bank already operating branches to continue to operate such branches if (1) it is a State bank and converts to a national bank or, (2) it is a national bank which takes over another bank (or banks) in a merger or consolidation. In either caseexcept for branches opened prior to 1927-the continued operation of already existing branches would be subject to the approval of the Comptroller. However, the bill specifically provides that such approval must be withheld if, in an exactly similar situation, a State bank would be prohibited from continuing the operation of its already existing branches.

It should be noted that in merger and consolidation transactions H.R. 12825 relates only to the continued operation of branches of the receiving national bank. The bill would make no change in present law with respect to the reten

tion of branches previously operated by other banks parties to the merger or consolidation. Neither would it permit the operation of the head office or the absorbed bank as a branch unless, with the Comptroller's approval, such office could be opened as a branch in conformity with State law.

The proposal incorporated in H.R. 12825 is not new; a proposal identical in purpose was included in the Financial Institutions Act as it passed the Senate in 1957. The American Bankers Association supported this proposed legislation when it came before the House of Representatives.

Actually the scope of this bill is fairly limited. It will only be of significance in those cases where, because of a change in State law or because of changed circumstances, a branch originally opened in conformity with law can no longer be retained if the bank chooses to convert to a national charter, or becomes involved as the receiving national bank-in a consolidation or merger. By providing that branches already opened can be retained in such circumstances, H.R. 12825 should remove some technical roadblocks from the "two-way street," designed to permit unimpeded movement between the two classes of banks-State and National.

The second of the two bills under consideration today is H.R. 12577, the purpose of which is to place authority over the trust powers of national banks in the Comptroller of the Currency. As in the case of H.R. 12825, this proposal was also a part of the Financial Institutions Act, passage of which was recommended by the American Bankers Association.

Under present law the authority to exercise trust powers must be obtained from the Board of Governors of the Federal Reserve System by national banks, which banks are thereafter subject to such regulations respecting trust powers as the Board may issue. The bill simply transfers this authority to the Comptroller of the Currency. There would appear to be no question that its passage would provide a more logical distribution of supervisory authority, in view of the other supervisory authority which the Comptroller exercises over national banks, including examination of their trust departments.

It should be noted that the bill will transfer all authority presently exercised by the Board of Governors with respect to trust powers of national banks to the Comptroller of the Currency, including regulatory authority over their common trust funds. State banks as well as national banks are presently required by the Internal Revenue Code (sec. 584) to conform to the regulations of the Federal Reserve Board with respect to the collective investment of trust funds by national banks in order to qualify for income tax exemption of their common trust funds. Under H.R. 12577 a State bank in order to continue to qualify for such tax exemption would have to conform instead to regulations issued by the Comptroller of the Currency pertaining to the collective investment of trust funds.

We do not believe that this bill will result in any change in the present distribution of power between Federal and State Governments, nor do we see in it any weakening of the principles underlying the dual banking system. The practical fact is that the Internal Revenue Code requires that for tax purposes regulations applicable to the collective investment of trust funds be issued at the Federal level. State banks with common trust funds are already subject to regulations issued for national banks by the Board of Governors. H.R. 12577 simply shifts this authority to issue regulations from one Federal agency to another. The regulations will continue to be uniform for all banks-State and National. It is our understanding that under this bill the Comptroller of the Currency would have no authority to exercise any supervisory functions in regard to State banks. Examination and other direct supervisory authority for State banks will continue to be fully exercised by State authorities.

The CHAIRMAN. We have a number of witnesses representative of the National Society of Accountants. Mr. Kaufman is next.

Mr. Kaufman, I am going to have to ask you, as time is running out as we have to go to vote very shortly, to insert your full statement in the record and summarize it, please.