Banking law ; Garn-St. Germain Depository Institutions Act of 1982

Verle Johnston

English

Research Papers in Economics

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October 15, 1982 
Sero Sed Serio 
It has been almost one year since Congress 
undertook serious action designed to address 
the severe problems confronting depository 
institutions. A number of thrift institutions, in 
particular, began losing money in 1980, and 
their losses accelerated in 1981. In the last 
quarter of 1981, regulators began a patch-
work of intrastate and interstate emergency· 
mergers of failing institutions that has since 
been accompanied by a national reassess-
ment of past principles regarding geographic 
and industry business boundaries. The re-
assessment culminated, for the time being, in 
the passage of  the "Garn-St. Germain Depos-
itory Institutions Act of 1982': 
Past was prologue 
About a year ago, the House of Representa-
tives passed HR 4603 by a 371-46 vote. This 
was the so-called "Regulators" or "Emer-
gencyTakeover" bill expanding the form and 
conditions under which federal regulatory 
and insurance agencies could extend 
financial assistance to a growing number of 
troubled depository institutions. The bill also 
provided for the inter-industry (commercial 
bank and thrift) and interstate acquisitionof. 
failed or failing savings and loans and large 
(approximately $2 billion in assets) failed 
savings banks. 
However, it was not until almost a year later, 
on October 1, that a revised and broader 
"Depository Institutions Act of 1982" finally 
cleared both the House and Senate. This 
Letter reviews some of  the conditions and 
concerns that led to its passage and that seem 
likely to shape efforts at further reform of 
financial market regulation next year. 
In the course of  the debate on H R  4603 a year 
ago Federal Reserve Board Chairman Paul 
Volcker stated that."the entire savings and 
loan industry was not in jeopardy," but that a 
number faced "transitional problems," and, 
depending on the course of interest rates, the 
.  1 
legislation could save the Government "hun-
dreds of millions of dollars" in liquidation 
costs. He further warned that if  the Congress 
did not approve the legislation with its strict 
gl!idelines for interstate and interindustry 
emergency acquisitions, the Fed reluctantly 
might have to exercise its authority under the 
Bank Holding Company (BHC) Act to permit 
the acquisition offailing S&L's by bank hold-' 
ing companies in emergency situations. 
When the House bi  II moved to the Senate, its 
provisions, with some modification, were 
incorporated into a much more comprehen-
sive "Financial Institutions Restructuring and 
Services Act" submitted by Banking Commit-
tee Chairman Jake Garn (R-Utah) and even-
tually supported by the Administration. The 
measure quickly became the object of fierce 
debate. Trade groups clashed over various 
provisions designed to substantially broaden 
the lending, investment and deposit powers 
of  federally chartered thrift institutions, and to 
modify the 1933 Glass-Steagall Act to permit 
banks and thrifts to compete more effectively 
with institutions such as money market funds. 
late, but earnest 
The bill approved by the Senate this Sep-
tember after bitter inter- and intra-industry 
debate represented a vastly modified version 
of  the original"restructuring" proposal. Even 
then, it secured last-minute support from the 
American Bankers Association (ABA), 
although not the Independent Bankers 
Association of America (IBAA), only because 
of amendments added on the floor during 
final debate which re-incorporated several 
(but not all) provisions insisted upon by the 
large bankers association. 
The bill HR 6267, the "Depository Institu-
tions Act of 1982," that was finally approved 
by both houses on October 1 includes key 
provisions for financial assistance to and for 
the emergency acquisition of failed or failing 
depository institutions, as well as various pro-()pinion'.i  C'xpn's~'~ed in thi')  nevvsletter do Ilot 
necc~:;~:,arilv rellect  tht' VieV\h of till::'  nlClllagelTlerTt 
of the Federal  ReSf'rH' Bank of \:';an  Francisco. 
or of the Board ()f Cov('rnors oi the Federal 
Reserve SvstCIl1. 
visions authorizing expanded powers for 
both commercial banks and thrifts. 
A major catalyst helping to move HR 6267 
was the continued decline in the net worth of 
the nation's S&L's through August (a drop of 
20 percent over the year), and announce-
ments by both the FDIC and the FSLlC that 
over the last 18-20 months each had ex-
pended almost $2 billion in financial assis-
tance in support of  troubled banks and S&L's, 
including aid in the mergers of  failing or 
failed institutions. The FDIC's outlays far sur-
passed the $350 million total of such outlays 
over the past 50 years, while the FSLlC's pay-
ments, involving some 74 S&L's with $36 
billion in assets, also represented a record. 
Moreover, both agencies indicated that they 
expect the number of cases requiring assis-
tance to increase. 
With this prospect in mind Congress included 
a key provision permitting the FDIC to ap-
prove the acquisition of large ($500 million 
or more in assets), closed, insured commer-
cial banks as well as of  failed mutual savings 
banks or failed or failing S&L's. In all cases, 
the acquisition can take place only after con-
sultation with state authorities whose objec-
tions can be overridden by the unanimous 
vote of the insuring agency. 
Priority in acquisitions permitted by the 
agencies is to be accorded to (1) institutions of 
the same type in the same state, (2) institu-
tions of the same type in different states, (3) 
institutions of  different types in the same state, 
and finally, (4) institutions of different types 
in different states. This order generally was 
favored by thrifts, concerned over the pros-
pect of  acqu isitions by banks. Bankers, fearfu I 
of any weakening of present restrictions on 
interstate banking, generally favored accord-
ing priority to intra-state mergers even when 
these involve industry crossovers. However, 
in considering interstate offers, the bill gives 
priority to bids from entities in adjoining 
states. In any case, the acquisition provisions 
are subject to "sunset"-expiration -after 
three years. 
2 
Other forms of assistance 
Among the other key provisions of HR 6267 
are those which would increase the forms of 
assistance that the FDIC and FSLlC can 
extend to troubled depository institutions and 
the conditions under which they can be 
extended, including the existence of  severe 
financial problems in particular areas. 
A related "capital assistance" provision gives 
the regulatory agencies authority to bolster 
institutions with government backed "Net 
Worth Certificates," which can be counted as 
additions to net worth. The assistance can 
range in amountupto 70 percent of  operating 
losses, the amount depending in part upon 
whether an institution's net worth ranges 
from zero to three percent. Also, to qualify for 
the assistance, an institution must have at 
least 20 percent of its loan portfolio in resi-
dential mortgages, and must have incurred 
operating losses during the two previous. 
quarters. As an institution's earnings and net 
worth improve, the promissory notes or cer-
tificates are to be paid off. The assistance 
program is subject to "sunset" in three years. 
DIDe mandate 
Yet another-and, according to some bank-
ers, the key-provision of  the bill mandates 
the DIDC to create, within 60 days, a new 
account directly equivalent to and competi-
tive with money funds. The account must 
include no interest ceiling and a limitofthree 
third party and three preauthorized or auto-
matic transfers a month if  it is not to be subject 
to System reserve requirements on transac-
tions accou nts. Wh  i  Ie 01 DC is to work out the 
detai  Is, the House-Senate Conference Report 
expressed the view that the minimum of the 
account should be no higher than $5,000. 
The ABA strongly supports such an account 
-which, unlike money market funds, will be 
insured-but many small bankers and some 
thrifts expressed fear over its potential for 
"cannibalizing" their remaining low rate 
passbook savings. Related provisions also 
mandate the DIDC to forego the imposition of 
an interest rate ceiling or rate differential on 
any new deposit account, and to eliminate all interest rate differentials between banks and 
S&L's by January 1, 1984. 
Other key provisions permit S&L's and 
mutual savings banks to place an increasing 
proportion of  their assets in commercial and 
agricultural loans, up to a maximum of 10 
percent after January 1, 1984, with related 
authority to offer  demand deposits to persons 
having a business relationship. 
The measure also overrides state laws which 
permit enforcement of "due on sale" clauses 
in outstanding conventional home mortgage 
loans. This override means that lenders (state 
as well as federally chartered institutions) will 
be able to prevent the assumption of mort-
gage loans that they hold when a house is 
sold. The override will not affect transactions 
involving assumptions that occurred prior to 
the bill's becoming law, but generally will 
apply to outstanding as well as to newly 
originated loans containing due on sale 
clauses. The bill contains an exception for 
loans made or assumed during periods when 
state laws preventing enforcement of due on 
sale clauses were in effect, creating a 
three-year "window period" during which 
the state laws can remain in force. 
Another provision wi  II exempt from Fed 
reserve requirements the first $2 million of 
depository institutions' reservable liabilities. 
The exemption will affect an estimated 
21,000 credit unions, S&L's and commercial 
banks. While these represent about half of all 
depository institutions, they account for less 
than 2 percent of  total deposits and thus do not 
materially affectthe System's abilityto imple-
ment its monetary policy responsibilities. 
Industry reactions 
Industry responses to the new bill vary. Thrifts 
generally welcome the financial assistance 
provisions and broadened lending and de-
posit authority, although some view the new 
deposit instrument and interest rate differen-
tial provisions with some misgiving. The ABA 
warmly welcomes the provision for a deposit 
instrument "truly competitive" with money 
3 
market funds but laments the provisions that 
generally prohibit bank holding companies 
from offering property and casualty insurance 
and the absence of authorization to under-
write municipal revenue bonds. 
The Independent Bankers opposed the bill 
outright. They object to the extension of 
any additional asset and deposit authority 
to the thrifts and, wary of takeovers by in-
terstate bankers, do not welcome the inclu-
sion of  failed large commercial banks among 
the institutions potentially eligible foracqui-
sition by out-of-state banks and bank holding 
companies. 
For his part, Senator Garn notes that there still 
are "large issues that we were not able to 
address" but which "have not gone away and 
will have to be dealt with fully and openly by 
the next Congress." 
Just how congressional perspectives on the 
remaining "large issues" will be influenced 
by the forthcoming electoral festivities re-
mains to be seen, but most assuredly, the 
issues of interstate banking and the continued 
viability of  the selective restraints of the 
McFadden Act (whose branching restrictions 
do not apply to thrifts or money marketfunds) 
and of  the Glass Steagall Act (whose restric-
tions on the formation of  security subsidiaries 
apply only to national and state member 
banks-not  to non-member banks) are cer-
tain to remain on the front burner. 
California's legislature and the governments 
of  some other states have recently authorized 
interindustry acquisitions by banks and thrifts 
and authorized both industries to operate 
money market funds. When actions on these 
as yet unresolved issues do come at the fed-
erallevel, it may well be prompted, as past 
actions have been, by market developments 
and the actions of state legislators. Conse-
quently, they, too may be "sero sed serio" 
-"late  but earnest." 
Verle Johnston SS'dl:l l.Si:II:I 
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BANKING DATA-TWELFTH fEDERAL RESERVE DISTRICT 
(Dollar amounts.in millions) 
Selected Assets and Liabilities 
Large Commercial Banks 
Loans (gross, adjusted) and investments* 
Loans (gross, adjusted) - total# 
Commercial and industrial 
Real estate 
Loans to individuals 
Securities loans 
U.s. Treasury securities* 
Other securities* 
Demand deposits - total # 
Demand deposits - adjusted 
Savings deposits - total 
Time deposits - total# 
Individuals, part. & corp. 
(Large negotiable CD's) 
Amount 
Outstanding 
9/29/82 
162,511 
142,650 
45,812 
57,567 
23,517 
2,652 
6,568 
13,293 
38,473 
26,694 
30,795 
100,653 
90,584 
38,019 
Change 
from 
9/22/82 
427 
452 
212 
5 
47 
- 99 
25 
50 
369 
- 760 
- 196 
340 
215 
90 
-
-
-
Weekly Averages  Weekended  Weekended 
of Daily Figures 
Member Bank Reserve Position 
Excess Reserves (+  )/Deficiency (  - ) 
Borrowings 
Net free reserves (+  )/Net borrowed (  -) 
* Excludes trading account securities. 
#  Includes items not shown separately. 
9/29/82  9/22/82 
88  81 
70  10 
18  71 
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Change from 
year ago. 
Dollar  Percent 
9,345  6.1 
10,435  7.9 
5,706  14.2 
2,867  5.2 
319  1.4 
1,127  73.9 
877  15.4 
1,967  - 12.9 
3,910  9.2 
1,826  - 6.4 
1,206  4.1 
15,318  18.0 
13,189  17.0 
4,163  12.3 
Comparable 
year-ago period 
222 
99 
123 
Editorial comments may be addressed to the editor or to the author ....  Free copies of this and other Federal 
Reserve publications can be obtained by calling or writing the Public Information Section, Federal Reserve 
Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 544-2184. 

Sero sed serio

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Sero sed serio

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