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of the Corporation for half of the balance of his account due in 1 year, and another debenture for the other half due in 3 years; in other words, to give the Insurance Corporation 3 years to liquidate the assets. It is a guarantee of solvency only. We think that the Corporation can pay 3 percent on those debentures because they know they will be paid in 2 or 3 years and they will enjoy a market value of 98, 99, or 100. We ask no Government guarantee of that.

Senator GORE. Not yet.

Mr. BODFISH. We just want them to be a debenture of the Corporation, but we want the Corporation authorized to pay 3 percent on those debentures so that if a man has a debenture for his insured account he will not have to go out and sell it at 92. Therefore, we want to strike out the words “negotiable non-interest-bearing” and insert:

member, cash herein provided and negotiable debentures of the Insurance Corporation bearing interest at the rate of 2 percent per annum for”.

It is purely a debenture to the Corporation because the Corporation will have the earnings from the assets of this defaulted institution when it takes it over. It is a perfecting amendment.

Senator GORE. It is the insurance agency which you are setting up that is issuing these debentures when it takes over a failed concern?

Mr. BODFISH. When it takes over a defaulted concern it pays 10 percent in cash and half the balance in a debenture due in 1 year and the other half in a debenture due in 3 years. We feel that they should get a debenture that pays 3 percent interest. The corporation can pay it. It is not a claim on the Government.

The next amendment that we suggest is on page 25, at the end of line 9. There is a very real and difficult problem in the administration of this new process of duplicating examinations. We have the States examining institutions and the Federal Home Loan Bank Board, and then if we have an insurance corporation, we will have the insurance corporation examining them; and all those examinations cost money and harass these institutions.

Senator GOLDSBOROUGH. We have been familiar with that from the hearings on the stock-exchange control bill.

Mr. BODFISH. So we propose the following addition, which will at least state it to be the policy of Congress that there are not to be duplicated examinations unless the trustees feel that it is necessary. Our amendment provides as follows:

All examinations shall be made by the Federal home loan bank of which the applicant or insured institution is a member. The report of such examination may be reviewed by the trustees and an additional examination at the expense of the insurance corporation may be ordered if the trustees find the information or the examination unsatisfactory or inadequate.

There is a complete power on the part of the trustees to examine, but what we merely do is to say it is the policy to use the Federal home-loan banks if they can.

Senator GOLDSBOROUGH. If not, the trustees can make an independent examination?

Mr. BODFISH. They can go right ahead if they want to, but it suggests that they work the other way. Now, we come to the most important amendment that we want to propose, on page 26, line 3, through line 18.

Senator GOLDSBOROUGH. Does that cover the whole of section (b) (1) ?

Mr. BODFISH. Yes, sir; I will read the language so that we will get it clearly before us [reading]:

The Insurance Corporation shall fix an initial and annual premium for applicants for insurance of their accounts as follows:

1. All eligible institutions having a surplus of more than 5 percent shall pay an annual insurance premium of one fifth of 1 percent of their total insured accounts, plus other creditor obligations for the first 4 years of their existence, and loan associations, excepting all converted or companion institutions, shall pay an insurance premium of one fifth of 1 percent of their total insured accounts, plus other creditor obligations for the first 4 years of their existence, and thereafter shall be classified as are other eligible member institutions.

In other words, the bill is considering 300 or 400 or 500 small cooperative building and loan associations, and they cannot build up their reserves immediately, and this will let them have as much

Senator GORE. I do not want to divert you, but aren't we getting too many savings banks and post offices in on that?

Mr. BODFISH. That was a very wise thing in its original conception, Senator, for the foreign born and persons who did not speak English and who had been dealing with government-sponsored banks in Europe. I am a hearty believer in the postal savings, but when the depression came along it became a banking system, to the detriment of privately conducted institutions.

In answer to your question as to whether there are not enough savings banks, I believe if we had had the New England mutual savings bank idea spread over the country we would have had a lot fewer bank failures and a lot less credit contraction. They have a substantial part of their savings in what are essentially investment institutions,

Senator GOLDSBOROUGH. A number of cities have had serious difficulty, and have stopped it, apparently.

Mr. BODFISH. In my State—Illinois—we do not have a single mutual savings bank in the State, and we have had a large numbei of bank failures. We are prevented from having that sort of a law other than through building and loan associations. . I think it would have been sounder public policy throughout the Middle West if we had had mutual savings banks.

Senator GORE. You think the people in the Middle West would not voluntarily follow that?

Mr. BODFISH. I think so. I think you are going to have a very striking development of the mutual savings bank and old-fashioned building and loan associations throughout this cuntry in the next few years, if they are not too discouraged by Government competition. I think that system has demonstrated its soundness all through the depression, and it answers the question by the financial stability of New England largely, in my judgment.

Now, going on with this amendment [reading]:

2. All other institutions having a surplus of more than 2 percent and not more than 5 percent shall pay an annual insurance premium of two fifths of 1 percent of the total of their insured accounts, plus any other creditor obligations.

3. All other institutions having a surplus of not more than 2 percent shall pay an annual insurance premium of three fifths of 1 percent of the total of their insured accounts, plus any other creditor obligations.

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That means that an institution that has provided the least of its own insurance has got to make the biggest contribution to the insurance fund, the same as an old man has to pay a higher premium than a young man.

I have here a statement which I would like to insert in the record. It is a careful study

Senator GOLDSBOROUGH. As I understand you, you favor title I?
Mr. BODFISH. Except section 5.
Senator GOLDSBOROUGH. And you oppose title II in its entirety?
Mr. BODFISH. Yes.

Senator GOLDSBOROUGH. And title III you favor with the amendments which you have submitted ?

Mr. BODFISH. Yes, sir. I might say, Senator, that we had about 60 of our best building and loan minds together about 6 weeks ago, and this is their judgment after a study of the question. This memorandum I would like to insert in the record. It is a study of all the losses in building and loan associations for some 15 years; also a study of what this schedule of annual premiums will yield in relation to the losses; and it clearly demonstrates this insurance schedule applied to 80 percent of the best building and loan associations. Of course, the loss figures are based on all of them, including some second-mortgage operations in Philadelphia, and everything else. It conclusively proves that this formula will twice over pay any losses we have experienced at any time in the past. Therefore we think that this schedule is adequate. This document is merely a study of the matter based on statistics, for the proof of that contention and for the information of the committee.

The CHAIRMAN. It may be inserted in the record.

(The document referred to and submitted by the witness is here printed in full as follows:)

RE ASSESSMENTS FOR BUILDING AND LOAN INSURANCE PROGRAM

Memorandum for Hon. John H. Fahey

In this memorandum the adequacy of the premium income is based on two different assumptions: First, that the assets of associations whose accounts are to be insured total $2,400,000,000, or approximately those in the Federal home-loan bank system; and, second, that associations having total assets of $6,000,000,000 are insured based on the idea that building and loan assets are now about $7,500,000,000, and that 80 percent of these are eligible for membership in the home-loan bank system.

The financial reports of several hundred associations were studied as a basis for estimating the proportion of assets in the savings and loan business which are in associations having a surplus of more than 5 percent", more than 2 percent and not more than 5 percent", or "not more than 2 percent." These associations were chosen at random in 10 different States. Approximately 20 percent of the assets were in associations having more than 5 percent surplus; approximately 30 percent were in associations of the 2-to-5 percent surplus class, and approximately 50 percent in the “not more than 2 percent” class.

ADEQUACY OF INCOME WITH $2,400,000,000 ASSETS INSURED

This survey indicates that, of the $2,400,000,000 building and loan assets now in the Federal home-loan bank system, $480,000,000 will pay a premium of one fifth of 1 percent per year; $720,000,000 a premium of two fifths of 1 percent per year, and $1,200,000,000 a premium of three fifths of 1 percent per year.

The premium income would be as follows:
Class 1, paying one fifth of 1 percent.
Class 2, paying two fifths of 1 percent.---
Class 3, paying three fifths of 1 percent--

$960, 000 2, 880,000 7, 200, 000

Total income.

11, 040,000 Based on losses in failed building and loan associations, this premium income would be more than sufficient to meet all expected losses and would permit of a transfer of a substantial amount to a loss reserve.

The following table gives a summary of building and loan association failures and losses in the 13-year period, 1920–1932. The 1932 figures are the latest so far available.

Summary of building and loan association failures and estimated losses,

1920–32

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1920. 1921. 1922 1923 1924 1925. 1926. 1927 1928 1929 1930 1931 1932.

8,633 $2, 519, 914, 971 9, 255 2, 890, 764, 621 10, 009 3, 342, 530, 953 10, 744 3, 942, 939, 880 11, 844 4, 765, 937, 197 12, 403 5, 509, 176, 154 12, 626

6, 334, 103, 807 12, 804 7, 178, 562, 451 12, 666 8, 016, 034, 327 12, 343 8, 695, 154, 220 11, 777 8,828, 611, 925 11, 442 8,417, 375, 605 10, 997 7, 750, 491, 084

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The largest percent of losses to total resources was in 1930, when 0.2795 of 1 percent of the assets of building and loan associations were lost. The percentage of loss in both 1931 and 1932 was lower.

Taking the year in which the loss ratio was the largest, this would indicate that of $2,400,000,000 of assets, the expected loss would be $6,708,000, leaving a margin of $4,332,000 of premium income over expected losses. This margin is more than 60 percent of the loss which might reasonably be anticipated.

ADEQUACY OF INCOME WITH $6,000,000,000 INSURED

Using the same basic data, the expected income if assets of insured associations were $6,000,000,000 would be: Class 1, paying one fifth of 1 percent--

$2,400,000 Class 2, paying two fifths of 1 percent.

7, 200,000 Class 3, paying three fifths of 1 percent-

18,000,000

Total---

27,600,000 Again using the worst year so far experienced as a criterion of what might be expected, the losses in associations of $6,000,000,000 of assets would be $16,770,000.

In this case the margin of income over losses would be $10,830,000 per year.

SUMMARY

These calculations are probably conservative from the point of view of the solvency of the insurance fund. The year with the greatest percentage loss is used as a basis for the calculation. When the losses in that year are compared with those over the rest of the 13-year period, it is reasonable to expect that over a period of years the average annual loss would be substantially less than is here calculated.

Again, the percentage of loss in 1930 included the experience of all associations, good, bad, and indifferent. It is considered that the poor 20 percent of building and loan associations, where losses are most likely to occur, will not be eligible to join the Federal home-loan bank system, so that the experience of the other 80 percent who are or might become members should be substantially better than the entire group. It may reasonably be expected that this factor will add another very significant element of safety.

It therefore seems reasonably certain that the premium schedule in the proposed bill for the creation of a Federal Savings & Loan Insurance Corporation will yield a premium income more than sufficient to pay probable losses and, in fact, large enough to make substantial additions each year to the reserves of the corporation.

It should be noted that, since the greater proportion of building and loan assets will be in associations paying the highest premium rate, the average premium rate will be more than two fifths of 1 percent per year. On the basis of the figures gathered as indicated above, it would be 0.46 percent. If an assessment of 0.25 percent has been deemed by Congress to be sufficient to insure liquidity and losses in banks, 0.46 of 1 percent should be ample to insure only solvency of thrift institutions.

In any insurance plan, as has been pointed out by the Commission on Banking Law and Practice of the Association of Reserve City Bankers, the payment should be “determined according to the quality of the risks insured.” Again quoting from the commission's study, “ the essence of insurance is the payment by the insured of premiums in actuarial relation to the risk involved.” As that study pointed out, under a flat premium plan “there is no penalty for bad management.” The graduated premium plan in the proposed bill does place a penalty on bad management, as such management can be judged by failure to create an adequate surplus by chrging a higher premium rate.

This study would seem to indicate that, so far as the facts can be ascertained, the premium plan and rate is based on actuarial practice since the premium is more than sufficient to meet losses experienced over a considerable number of years and bears a direct relationship to the risk involved in insuring institutions of varying qualities.

Senator GORE. How many building and loan concerns were there in the country in 1929 ? I have forgotten.

Mr. BODFISH. About 11,500.
Senator GORE. I thought it was about 12,000.

The CHAIRMAN. What has been the amount of the demand for withdrawals and for deposits?

Mr. BODFISH. You mean, Senator, the amount we have paid out to shareholders in past years!

The CHAIRMAN. Yes.

Mr. BODFISH. These are just rough estimates, because the only figures available are in the annual reports of the State supervising authorities; but as I recall, last year, 1933, our associations paid out to thrifty savers that had accumulated a fund more than 34 billion dollars.

Senator GORE. During what time?
Mr. BODFISH. Last year.
Senator GORE. Could you give it for each year since 1929 ?

Mr. BODFISH. Well, it has wavered between a billion and a billion and a quarter.

The CHAIRMAN. What was the amount of the unpaid withdrawals?

Mr. BODFISH. I would say that the unpaid withdrawals would be today less than 7 percent of our total assets, taking the country as a whole. In other words, that would be five hundred million dollars. A lot of that is normal, Senator. In many localities they do not pretend to pay the money right out on the nose. If a man wants to withdraw his funds that he has saved, he puts a notice on file, and when the money is available we pay him. It is for that reason that we have been able to keep all of our capital loaned out. Today

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