(The chart accompanying the statement follows:)

DISTRIBUTION OF INCOME OF FEDERAL DEPOSIT INSURANCE CORPORATION
UNDER EXISTING LAW COMPARED WITH MAYBANK BILL (S.2822)

(BASED ON DATA FOR YEAR ENDING JUNE 30, 1949)

(IN MILLIONS OF DOLLARS)

A. UNDER EXISTING LAW, BANKS PAID TOTAL ASSESSMENTS OF $119.8 MILLION: ADDITION OF OTHER INCOME AND DEDUCTION
OF LOSSES AND EXPENSES RESULTED IN AN INCREASE OF $138.3 MILLION IN SURPLUS.

8. UNDER MAYBANK BILL. BANKS WOULD RECEIVE 60% OF "NET ASSESSMENT INCOME (DIFFERENCE BETWEEN TOTAL ASSESS. MENTS AT 1/12 OF 1% AND TOTAL EXPENSES AND LOSSES) REFUND WOULD AMOUNT TO $67.9 MILLION, REDUCING ASSESS: MENT BURDEN TO $51.9 MILLION, OR 43% OF PRESENT AMOUNT: INCREASE IN SURPLUS WOULD BE $70.4 MILLION.

Senator ROBERTSON. Mr. Woollen, you say that the deposit insurance system was inaugurated to protect the great majority of the individual bank depositors. Is there a provision in the bill that the FDIC make a loan to a solvent bank?

Mr. WOOLLEN. There is a provision that the FDIC may make a loan to a bank in distress. I am not sure that the word "solvent" appears in the bill.

Senator ROBERTSON. Would one of your associates point to the language of the bill on that subject? Can you give us your opinion as to whether that language is improper?

Mr. NEEDHAM. Perhaps counsel for the FDIC should answer that question.

Senator ROBERTSON. I would like for him to explain to the witness what is in there on that subject. I asked the witness an opinion about it. Apparently attention hasn't been called to it.

Mr. OPPEGARD. What was the question?

Senator ROBERTSON. It has been reported to me that the language in here, with which you may aid a bank, is so broad that you could make loans to a solvent bank, and not the one in real distress. What is the language and what is your interpretation of its meaning?

Mr. OPPEGARD. The provision reads that we can make a loan to a bank which is in financial distress, in order to prevent it from closing. We may make a loan directly to a bank to enable it to reopen if it is closed.

Senator MAYBANK. Section 13 (b) is the section.

Mr. OPPEGARD. To prevent the closing of an insured bank.
Senator MAYBANK. Page 44.

Mr. OPPEGARD. We have made a change.

Senator ROBERTSON. Since the FDIC witnesses wish to take time to be advised of their opinion, I want to ask the witness this question:

Do you think that the language of section 13 (b) which authorizes the FDIC to step in to prevent the closing of an insured bank, is so broad that there is possibility of conflict there with the powers of the Federal Reserve Board, and if so, would it be well to word the section in such way as to permit the FDIC to carry out the purpose of this provision, that is, to assist going banks, and then at the same time avoid assumption of powers now lodged in the Federal Reserve Board? It is to be noted that that section would apply to nonmember insured banks, also.

Mr. BAKKE. If I may answer that, Senator: If I understand the question correctly, it is the same suggestion that was made by the Federal Reserve Board to the Bureau of the Budget. This language which appears on page 44 of the bill is language that is satisfactory to the Bureau of the Budget.

Senator ROBERTSON. Do you have a copy of the recommendation that the Federal Reserve Board made to the Bureau of the Budget on this bill?

Mr. BAKKE. I think I have it. I don't have it with me. We have the language. There is no

Senator ROBERTSON. I would like for you to insert that in the record at this point, so that we may know what the Federal Reserve Board said to the Bureau of the Budget when its opinion was requested on this bill.

Mr. BAKKE. Yes, sir.

(The information is as follows:)

FEDERAL DEPOSIT INSURANCE CORPORATION,
Washington, January 27, 1950.

Hon. A. WILLIS ROBERTSON,

Chairman, Subcommittee on Federal Reserve Matters,

Senate Committee on Banking and Currency, United States Senate,

Washington, D. C.

DEAR SENATOR ROBERTSON: On January 23, 1950, during the hearings before your Subcommittee on Federal Reserve Matters on S. 2822, I stated that the language of section 13 (b) on page 44 of S. 2822 is language that is satisfactory to the Bureau of the Budget. The Bureau of the Budget has not yet expressed its views on S. 2822 or any provision therein. The Bureau of the Budget, during a discussion of the bill with me and other representatives of this Corporation, furnished us with a draft of a substitute for section 13 (b) which had been proposed by the Board of Governors of the Federal Reserve System. The proposed substitute reads as follows:

"In order to reopen a closed insured bank or, when the Corporation has determined that an insured bank is in imminent danger of closing, in order to prevent such closing, the Corporation, in the discretion of its board of directors, is authorized to make loans to, or purchase the assets of, such an insured bank upon such terms and conditions as the board of directors may prescribe."

In effect the Board of Governors of the Federal Reserve System has suggested as a qualification of our proposed authority in section 13 (b) to make loans to prevent the closing of an insured bank, the words "When the Corporation has determined that an insured bank is in imminent danger of closing."

It is the view of this Corporation that section 13 (b) of S. 2822 and the proposed substitute have the same meaning. In order for the Corporation to make a loan under section 13 (b) to prevent the closing of an insured bank, such bank must obviously be in danger of being closed. For this reason we do not recommend the proposed change in section 13 (b).

With kindest regards, I am
Sincerely yours,

NORRIS C. BAKKE. Associate General Counsel.

Senator MAYBANK. I think we ought to insert section (b) in the record, too; section 13 (b).

Senator ROBERTSON. The whole bill is in the record.

Senator MAYBANK. Yes.

Senator ROBERTSON. Following the insertion of the report of the Federal Reserve Board to the Bureau of the Budget on this bill, Chairman Maybank requests that we print at this point in the record section 13 (b) of his bill.

Without objection, that will be done.

(The section is as follows:)

SEC. 13 (b). In order to prevent the closing of an insured bank or in order to reopen a closed insured bank, the Corporation, in the discretion of its Board of Directors, is authorized to make loans to, or purchase the assets of, such an insured bank upon such terms and conditions as the Board of Directors may prescribe.

Mr. WOOLLEN. Answering the question, Senator, for the association, we had not made objection to that section, and I think there is perhaps a distinction between the proposed powers for the FDIC and the powers resting in the Federal Reserve Board, in that in the latter case it is expected that loans are to be made on sound assets, and this provision aims at the treatment of distressed assets.

Senator ROBERTSON. Are there any further questions?

We thank you, sir.

The next witness also speaks for the American Bankers Association; Mr. Harry Arthur.

Mr. Arthur, will you come around, please, and identify yourself for the record?

STATEMENT OF HARRY ARTHUR, PRESIDENT, SOUTH CAROLINA BANKERS ASSOCIATION

Mr. ARTHUR. Senator, I am Harry Arthur, president of the South Carolina Bankers Association. I am here as a representative, not as the representative, of the nonmember banks of the country. Actually, I am a member of the American Bankers Association, but when you class a small bank of my size as being a representative of the ABA today, I believe it is in error.

I want to support Senator Maybank in his bill.

Senator ROBERTSON. I believe you appeared before us last year? Mr. ARTHUR. Yes, sir.

Senator ROBERTSON. At that time you indicated you were not altogether in favor of having all State banks brought under the Federal Reserve bank.

Mr. ARTHUR. I am of that opinion. I hope we never get them in. Senator ROBERTSON. You may proceed.

Mr. ARTHUR. I approve of the bill in general. I do want to make few observations.

It is composed of three main provisions, as Mr. Harl said in his testimony. The main thing is assessments. I think they should be higher. I will probably get some questions on that. If I do, I will attempt to answer them, but if Senator Maybank thinks 60 percent is all right, we are going to go along.

I would like to see that changed in committee to a higher figure. I think it could be changed.

Senator MAYBANK. How high would you go?

Mr. ARTHUR. Seventy-five percent, probably. Seventy-five percent would decrease the amount that the Corporation would keep by only $18,000,000. The Corporation is already getting the $25,000,000 that has been referred to. The increase to 75 percent would change it only eighteen.

They would still have the $7,000,000 left over which has not been taken into consideration in the computations.

On the coverage, I am in complete agreement. I think it will meet wide public approval. I think depositors will be gratified at that. Not that so many people have $10,000 in the bank, but it will restore the law to where it was in 1934. At that time we had a 100-cent dollar. Today we have about a 50-cent dollar. At that time the bill covered about. 98 percent of the depositors, while today it covers about 96 percent.

This bill brings it back to where you were. We are merely restoring the coverage to where it was in 1934, both as to value of dollar and as to number of depositors covered.

On the third item, the base of assessment, we are enthusiastic. The little banks are in agreement with that. We don't have auditors. We don't have certified public accountants to make up these reports. They are the doggondest things to make out. They are beyond comprehension.

This clarifies it; makes it a simple matter. We are delighted with that one thing. For that reason I am delighted to back the Senator's bill on those three main points.

Senator MAYBANK. How many small banks are in the United States? Mr. ARTHUR. Over 7,000. In South Carolina with the exception of one or two, we have no big banks.

Senator MAYBANK. How about the West?

Mr. ARTHUR. The West has turned to the chain banks, the far West. There are plenty of little banks in the West and Southwest.

Senator ROBERTSON. Would you say these 7,000 would classify under the general heading of small business?

Mr. ARTHUR. Yes. These 7,000 have only 15 percent of the total depositors of the United States.

Senator ROBERTSON. I understand the President will send a message to Congress soon in which he outlines plans to help small business. What in your opinion would be the best help to small business? Mr. ARTHUR. The greatest help would be to lower taxes.

Senator ROBERTSON. When the President recommends the tax rate be increased, you don't think that will help?

Mr. ARTHUR. Not if he wants to help little business. If he does, he should change that system where we have to pay 53 percent between $25,000 and $50,000. Most of the little corporations in the United States come into that classification.

Senator ROBERTSON. The Constitution requires uniformity. It would be strange if the clear meaning of the Congress greatly decreased the tax on what might be called an arbitrary selection while they increased taxes on somebody else.

Senator TOBEY. The Constitution says "to establish justice."
Mr. ARTHUR. Yes. That is right. If they reduce

Senator TOBEY. Sometimes we forget that; we talk about the general welfare. Let's talk about establishing justice.

Mr. ARTHUR. If they reduce it in the $25,000 to $50,000 class, it would be equitable and not arbitrary, because the big corporation would get the same reduction out of his first $25,000 to $50,000.

Senator ROBERTSON. So you favor increasing it on the big corporation?

Mr. ARTHUR. Not unless you cut expenses. You can't hire a bank clerk in my bank for $3,700 and let him spend $4,200 and expect him to stay solvent. He will be in trouble, and I will be afraid he will abscond, and I will get another man. You must cut expenses; that is one man's opinion and experience.

Senator ROBERTSON. Far be it from me to challenge that philosophy. Mr. ARTHUR. I am in agreement with the statement that when we build the capital funds to where they equal 1 percent of the over-all deposits, when we reach that point, there should be a revision. Some one said-I believe Senator Flanders-that some witness had testified it would take 15 years to reach this 1 billion, 500 million. I am not an auditor, but if I can figure it, we will reach it in 4 years, at the present rate.

If the Corporation keeps 40 percent, 40 percent of $120,000,000 is roughly $47,000,000, you add $25,000,000 not included, which is roughly $70,000,000; you multiply $70,000,000 by 4, and you have $280,000,000, and in 4 years you will have 1.5 billion dollars.

Senator ROBERTSON. They have to take the operating expenses. Mr. ARTHUR. That is after the operating expenses have come out. Senator MAYBANK. Somebody testified to that. Who was it? Senator ROBERTSON. Mr. Harl.

Mr. ARTHUR. I do think there should be some rebuttal put into the record on a statement made here. I won't take much time. I quote from Mr. Harl's testimony before this committee.

To eliminate or drastically reduce the contribution of banks to the insurance fund would be a departure from the concept of self-help which is a fundamental feature of the Federal Deposit Insurance System. Increased reliance on Government help is inevitable if the bankers' contribution is reduced beyond reasonable levels. This will invite Government domination of the banking business. It boils down to this-if free enterprise in banking is to continue, deposit insurance must remain predominantly an instrument of self-aid and the banks must be willing to foot the bill. The cost of maintaining a strong mutual insurance fund is indeed a small price to pay for bank solvency, stability, depositors' safety, as well as the historical privilege of freedom on banking enterprise.

The Federal deposit insurance fund is one of the main buttresses of the American system of banking. Adequate capital funds for insured banks are its second line of defense. However, the downward trend in the amount of bank capital is one which cannot be ignored in any discussion of the adequacy of the insurance fund. Over the years the ratio of capital funds to total assets has declined progressively as is shown by the accompanying chart titled, "Bank Capital Ratio, All Commercial Banks, 1875-1949."

On this chart, reproduced on the board here, gentlemen, we have endeavored to show you the declining bank capital for the period 1875 to 1949, or a 74-year period.