Mr. SNYDER. And there is one added feature to it, Senator. There would be a more orderly liquidation of assets, because under the old system banks were pushed to liquidate rapidly to get the dividends back to the depositor. Under this system, with the FDIC paying off the depositors, there would be a more orderly liquidation of the assets, and thereby probably bringing in a larger return.

Senator FLANDERS. That seems reasonable. Nevertheless, I asked the FDIC representatives at that time whether they had any percentage of deposits in mind as a maximum to which they might be looking forward. As I remember, the suggestion was made that a maximum of 1 percent of deposits might be a reasonable thing to look forward to.

I then asked how long, with the favorable history of this procedure of 40-60-how long it might take to reach that 1 percent, considering that deposits, presumably, with the growth of business, productive capacity of the country, presuming that there would be an increase in deposits. As I remember it, the statement was made more or less offhand that the point might be arrived at in 5 or 10 years.

That led me to question as to whether the 60-40 subdivision was necessarily the best one; whether the arriving at 1 percent, if that is a reasonable feature, might not be speeded up a little. And so I have questioned in my own mind this 60-40 formula, and wondered whether 50-50, or something of the sort, might not be better in building up to the optimum protection.

Mr. SNYDER. Well, I have no strong feelings about those particular percentages. They look fair and reasonable. When we went over the bill it struck me that that would give an opportunity of maintaining a level of reserves, and that as the FDIC had losses exceeding the total that the assessment would go back up. Therefore, whether it was 40-60 or 50–50, I did not think it made a great deal of difference.

Senator FLANDERS. That was the train of thought that went through my mind in response to that questioning. I think I would be inclined to favor retaining a little bit larger sum in the reserves of the FDIC. That is the only question I have. There is a question, which I think we have already discussed, taking out the provision for the building.

Senator MAYBANK. I suggested on Friday telling legislative counsel to draw a proper bill in connection with the building. And by the way, Mr. Harl sent me all the information that I asked him to put in the record. It shows, of course, they are divided all over town in different buildings. They would save money by it. It would save money.

Senator FLANDERS. The need for it does appear.

Senator TOBEY. Mr. Secretary, perhaps I should not address this to you, but, if not, you will correct me. I saw in either the Wall Street Journal, or the New York Times financial section, a statement about the Manufacturers Trust Co. of New York, looking into the future as to earnings, and so forth; that if certain changes went into effect-I assume referring to this bill-and they got back to 60 percent, that it would increase their figures for last year by $600,000,000. Is that figure outrageously wrong? Did I misread the article, or what is the story?

Mr. SNYDER. I cannot see how it could possibly be any such figure.

Senator TOBEY. What would it be?

Mr. SNYDER. I do not know about the Manufacturers Trust. Senator TOBEY. Does anybody have the figures on the Manufacturers Trust?

Mr. SNYDER. They could not reveal it at an open meeting if they did. It would have to be given to you privately.

Senator TOBEY. Has there ever been published a statement of the amount of assessments on the banks of the country in detail? Where does that appear?

Mr. OPPEGARD. You have it in your annual report.

Senator TOBEY. That data I just asked for would be in there, would it not?

Mr. BAKKE. Not the specific dollar amount of $600,000,000 you mentioned.

Senator TOBEY. That $600,000,000 is the amount to be returned to them. What I was asking, where

Mr. SNYDER. The total dividend would not be much over $60,000,000 would it?

Senator TOBEY. It may have been a printer's error. It amazed me. Mr. SNYDER. They may have been talking about the banking system as a whole, and it would be about $60,000,000, and they threw an extra nought for size.

Senator TOBEY. Where is there published a statement that members of this committee can see showing in detail or in accurate figures the amount of assesments on the banks under the existing FDIC law? Mr. BAKKE. That is furnished to the Congress in an annual state

ment.

Senator TOBEY. When do we get it?

Mr. OPPEGARD. 1948 is available now. The report is not completed

for the

year

1949.

Senator TOBEY. When will it be?

Mr. BAKKE. I will ask Dr. Warburton. I suppose that would be about a month.

Senator TOBEY. Will you send me down a copy of the 1948 figures so I get it in the morning?

Next question: Up in my State of New Hampshire, possessed of the rare quality of New England independence and thrift, when the FDIC came along, we did not go along. The savings banks up there formed their own association and insured themselves. What other State than New Hampshire has used that same modus operandi? Mr. OPPEGARD. Massachusetts, New Hampshire, and Connecticut. Senator TOBEY. Three New England States.

Senator ROBERTSON. Any further questions?

We thank you.

Mr. SNYDER. Thank you, Mr. Chairman and gentlemen.

STATEMENT OF EVANS WOOLLEN, JR., ACCOMPANIED BY EUGENE C. ZORN, JR., SECRETARY, RESEARCH COUNCIL; C. E. BENNETT, CHAIRMAN, COMMITTEE ON FDIC STUDY; AND D. J. NEEDHAM, GENERAL COUNSEL, AMERICAN BANKERS ASSOCIATION

Mr. WOOLLEN. Mr. Chairman, my name is Evans Woollen, Jr. I am chairman of the board of the Fletcher Trust Co. and a member of the subcommittee on Federal deposit insurance study of the Fed

eral legislative committee of the American Bankers Association. I am testifying in behalf of that association.

The American Bankers Association appreciates the invitation of the committee to make known its views on the legislative proposals regarding deposit insurance which are now under consideration by the committee.

For many years the association has had a subcommittee on Federal deposit insurance study. It has had the opportunity to work closely with the Federal Deposit Insurance Corporation on questions concerning the operations of the Corporation. The association appreciates the assistance and cooperation which the officials of the Corporation have extended in dealing with problems of deposit insurance, as well as other banking problems.

The interest of the association in the legislation before this committee naturally arises out of the importance of deposit insurance to the many banks which comprise its membership. All banks are aware that any legislation on deposit insurance must have one basic objective the protection of public confidence in the chartered banking system. It is in terms of this objective that the association is pleased to present its views on the proposals now under consideration.

Prior to treating the specific proposals, however, we would like to set forth a brief summary of the general principles which we believe should guide legislative policy regarding deposit insurance:

1. Any changes in assessments should be equitable for all classes of banks, whether commercial or mutual savings, or city or country banks.

2. The cost of deposit insurance to the banks should be related to the actual loss experience of the fund, except that banks should always pay at least some, if only nominal, amount of assessments.

3. Under no circumstances should the original function of deposit insurance in protecting the great mass of depositors be altered in the direction of total guaranty of bank credit, instead of deposits. In other words, deposit insurance is primarily for the benefit of small bank depositors.

4. Any changes in the deposit insurance system must be examined in terms of their effects upon both the depositors who require the services of banks, and also the banks which must give those services.

In the 16 years of its operation, the Corporation has been able to build up a surplus fund of $1,200,000,000. During this time it has had losses of only $26,000,000. This surplus is far in excess of the amount contemplated when the deposit insurance system was inaugurated. It is a source of great encouragement to know that the growth of the surplus has been such that the Corporation has testified in favor of this legislation which would alter the basis of deposit insurance assessments, and thus provide a means whereby the cost of deposit insurance to the banks can be reduced when the Corporations' loss experience is favorable.

As to specific aspects of S. 2822, as introduced by Senator Maybank on January 10, 1950, the Association submits the following recommendations:

1. Computation of the deposit insurance assessment base. Section 7 (a) greatly facilitates the determination of the amount of deposits

upon which deposit insurance assessments are to be paid. We recommend enactment of this provision because the present complicated and laborious method of computation has been a source of unnecessary difficulty for insured banks. It is our understanding that the proposed change reflects the results of long and careful study by the Corporation. The adoption of such a provision will result in simplification and clarification of the amount on which assessments are computed.

2. Determination of net assessment income: Section 7 (d) provides for a change in the method of deposit insurance assessments on banks. The basic existing rate of one-twelfth of 1 percent on deposits is retained, but with favorable experience, insured banks are to receive credits against subsequent assessment payments. Such credits are limited to 60 percent of "net assessment income" defined as:

the total assessments which become due during the calendar year less (1) the operating costs and expenses of the Corporation for the calendar year; (2) additions to reserve to provide for insurance losses during the calendar year, except that any adjustments to reserve which result in a reduction of such reserves shall be added; and (3) the insurance losses sustained in said calendar year plus losses from any preceding years in excess of such reserves. If such losses exceed the net assessment income in any year, such excess losses shall be restored by deduction made in subsequent year.

In general, the proposed change would seem to be sound because deposit insurance assessments would be predicated upon the loss experience of the Corporation. The language of the bill, however, might be clarified to define the terms "reserve" and "insurance losses."

Senator MAYBANK. Have you any suggestion as to how to clarify it? Mr. WOOLLEN. Yes, sir. It follows.

Current policy of the Corporation is to set up a reserve of one-third against the assets it is required to take over, even though the proportion of annual losses may have been very much smaller. Since the proposed bill does not define reserve or insurance losses, the deductions might be affected drastically by a change in the accounting policy of the Corporation under some future management. In determining "net assessment income," the Corporation should not be permitted to deduct reserves to cover hypothetical losses.

The terms used should be carefully defined by law, so that the words "reserve" and "insurance losses" as contemplated in this section would be specifically related to deposit insurance obligations assumed by the Corporation during the calendar year in connection with banks in which deposit insurance financial aid is provided.

3. Adjustment of deposit insurance assessment credits: In his testimony before this committee on January 11, the Chairman of the Corporation stated:

We would like to build our capital funds up to where they equal 1 percent of the over-all bank deposits.

It is recommended, therefore, that when the surplus of the Corporation reaches 1.5 billion dollars, an amount which approximates the 1-percent goal sought by the Corporation, provision should be made for adjustment of the percentage of "net assessment income" to be credited to the banks.

We earnestly believe that the deposit insurance fund should not be permitted to grow indefinitely at more than a nominal rate. It

should be observed that the Corporation currently receives $25,000,000 of investment income annually which the bill does not take into consideration in the computation of "net assessment income," upon which dividend credits are to be made.

We believe that the banks should always pay some assessments, but that they should be restricted to a nominal amount when assessments are not needed. The first line of defense for the protection of bank deposits is the capital investment in our banks. A moderation of assessments will help to build up bank capital funds.

4. Time of initiation of deposit insurance assessment credits: The wording of section 7 (d) of the proposed bill, S. 2822, as written, leaves some doubt as to when the first assessment credits will be applied. It is presumed that the intention is to initiate such credits during the second half of 1950, based on the Corporation's income, losses, and expenses for 1949.

This section might be clarified as follows:

As of December 31 each year, the Corporation shall transfer 40 percent of its net assessment income to its capital account and the balance of the net assessment income shall be credited pro rata to the insured banks based upon the assessments of each bank during said calendar year. Such credits shall be applied by the Corporation toward the payment of the total assessments becoming due for the semiannual assessment period beginning the next ensuing July 1. The first such credits shall be based on net assessment income earned in the calendar year 1949, and shall be applied by the Corporation against the semiannual assessment due on or before July 15, 1950.

5. Deposit insurance coverage: Section 3 (m) of the proposed bill provides for an increase in the maximum amount of insurance for each depositor to $10,000 from the present limit of $5,000.

As indicated by the Chairman of the Corporation before this committee on January 11, the change would only increase the proportion of accounts fully covered from 96 to 98.4 percent. The practical effect of this change from the viewpoint of depositors is definitely limited. We do not oppose this limited extension of coverage.

We desire to emphasize most strongly, however, that Congress should not authorize any further extension of coverage beyond $10,000. The deposit insurance system was inaugurated to protect the great majority of individual bank depositors, and not to guarantee bank credit.

6. Penalty for employing a convicted person: We subscribe to the principle that banks should exercise due precautions regarding employment of their personnel, but they should not be held responsible for having employed a convicted person without knowledge of such conviction.

Accordingly, it is recommended that section 19 should be amended to provide that without the written consent of the Corporation, no insured bank shall knowingly employ any person convicted of a criminal offense involving dishonesty or a breach of trust.

7. Advertising limitations: We are in accord with the amendment to section 609, title 18, of the United States Code, as proposed in the bill, which would restrict Federal deposit insurance advertisements to banks insured by the Corporation.