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Seventy-five years ago the capital accounts in all commercial banks amounted to about one-third of total assets, Today the corresponding ratio is one-fourteenth of total assets. During this period the average commercial bank has li ultiplied almost fivefold, the extent of its trading on the equity. Not so many years ago a ratio of 10 percent was considered a minimum. Today the average ratio throughout the Nation is 7 percent. You can very well appreciate our concern for depositors as well as for the banking system when we view this shrinkage in the margin of protection afforded by bank capital along with proposals to drastically reduce the assessments.

The following chart entitled “Banks Grouped by Capital Ratios” gives a vivid picture of the situation today. Banks are grouped by the size of their capital ratios and the national average is indicated as a point of reference. As might be expected, the bulk of the banks are concentrated around the average. Nevertheless, there are a substantial number of institutions whose ratios are ridiculously low. On June 30, 1949, 312 banks had a capital ratio of less than 4 percent. Many of these banks have resources ranging between $1,000,000 and $10,000,000, but three of them have assets of more than $100,000,000. Clearly the ownerequity in these banks is to think that it could easily be wiped out in a period of adversity. This is a serious weakness in what should be an element of strength in the banking system, namely, capital ratio.

I don't think he or any of the people on that subject have been practical or have been logical or perhaps I won't say "wanted to be logical”—but the thing is completely changed.

Why go back 75 years? In the last few days we have heard what has happened in the last 50 years. Go back 50 years if you want to be practical; yes, 75 years &igo they were lenders. In my bank, in 1866, they had less deposits than capital. They were lending their own funds.

They argue the ratio of bank capital to the total assets has been sharply down. Capital funds have been doubled since the Corporation was formed; operating earnings now are about three times what they were.

The argument overlooks many facts. During this period from 1934 to the present most banks have written down their investments tied up in fixed assets, and have more of their capital funds available to meet losses. They have sold off their real estate. They marked down their buildings, for tax reasons, they have taken every bit of depreciation possible on their fixtures and every bit of depreciation allowed on the buildings.

As a result, there are much more capital funds, liquid funds, rather, tied up in fixed assets.

The major change is the composition of bank assets today. Bank assets today are made up of what? The major part is United States Government bonds, notes, and certificates. The amount of cash in vaults; that has increased. Banks today on the average have 15 to 30 percent of the total funds in cash. That is not a risk asset. The type of loans—here is an important point—the type of loans now carried by most banks have almost entirely changed their character. Those that are partly and fully insured. 'We have in the portfolios todaypractically every bank in South Carolina and in the Nation—a vast amount of 100 percent FHA loans, which are 100 percent guaranteed by the Government. They are not risk assets. You have GI loans. Our bank made our legal limit. They are in no sense of the word a risk asset. They are 50 percent guaranteed.

We have Federal crop production loans. That is important in the West. It is particularly important in South Carolina. We take every one we can get on cotton. That is classed as a loan. It is call money. We can phone to Atlanta and tell them to sell our certificates, and the cash will be put to our credit that same day. That is 100 percent guaranteed by the Government.

Then you have another major thing today: In the old days a bank would loan you $10,000 on a building for 6 percent. You would come back a year later and they were glad to see you and to renew. All of a sudden you had bank trouble. That has changed today, too. No banks make anything but amortized loans. Every month that passes, the collateral gets better, and the risk goes down. That is true on personal loans; automobiles. Every month that passes the risk goes down.

There is still another type of loan. You have your RFC participation loans. We go to the RFC to get the additional protection. They take on 75 percent of the risk. We take on 25 percent of the riskwhatever the proportion might be, at this time; they change the regulations so fast nobody can keep up with them—that is included in the total. If you cut out all those risk assets, those ratios fall apart.

I took the two little banks I happen to be president of. One has $1,895,000 in assets, the other $4,152,000. I broke those down. Taking the $1,800,000 bank, Woodruff State Bank: Cash, $291,000; Government's, $1,178,000; insured loans, $50,000 approximately; total assets, $1,857,000.

Deduct those nonrisk assets and it leaves $343,000. If you take Mr. Harl's example, or comparison, we have only 6 percent-we have a 6 percent ratio.

You deduct those and see what happens. The risk, total actual risk, is 33 percent; instead of 6 percent it becomes 33 percent.

In addition, all the banks in the United States today have set up reserves of their own under the Government formula for losses. It was $500,000,000 as of June 1949. Most banks don't set that


until December 31, 1949. That figure must have grown. This bank has about $7,000 of it. That does not appear in the capital account; it is deducted from loans. That does not appear. It is definitely a reserve; it should be taken into consideration.

Senator ROBERTSON. The banks hold a good many more Government bonds than they did in 1869 ?

Mr. ARTHUR. Yes; they certainly do. The capital increase of this particular bank has gone up in 31/2 years 85 percent.

This other bank has had 1 to 10 percent.

Senator MAYBANK. The banks have State and municipal bonds and notes now that they didn't have, either.

Mr. ARTHUR. That is included. They do hold them, too—a vast amount of them. They don't run to any great percentage. This particular bank, it has cash of $823,000; Governments, $1,500,000; insured loans, $300,000; total, $2,634,000.' They have total assets of $4,152,000; risk assets, $1,529,000; capital account, $345,000. Instead of being 1 to 10 that the statistics would say we have, we have 1 to 423 percent.

Senator ROBERTSON. Will you turn to the bill? What is your viewpoint about the provision in the bill that the FDIC shall have the privilege of examining nonmember banks at any time?

Mr. ARTHUR. I am not a member, but I think that is a matter to be straightened out among themselves. I don't think it is a matter for two bureaucratic agencies.

From the questions here, I gather somebody has refused the FDIC to make an examination. I got that from the questioning. I think they should have some chance to look at the risk. I am not getting into their fight. I don't think the Federal Reserve will let them

do it. Once a bureaucrat gets power, he seldom gives it up. They seem to be grasping for more power.

One other thing: In addition, $30,000 of this reserve set-up is not reflected, and its capital account is drawn on 100 percent.

Banks are very anxious to set up reserves. We are building our reserves at a tremendous rate. We are going to build our reserves high enough so we won't have to call on them.

Most of the deposits in the country are not covered by FDIC. They are relying on the capital account of the bank, and the management. We will continue to build our reserve. South Carolina will not let us pay a dividend of over a certain size. We are building

our reserves.

One other thing, and I am through: Assets clearly reflect the crue situation today. During the excess-profits-tax days, during the present very high tax days, most banks are very, very quickly marking off any loss that looks like a loss to save taxes. We have had closer supervision. The State banks come in at one time; the FDIC comes in at a separate time. We are glad to have them come in. Those two examinations a year act as an audit.

I would prefer to have them come at two separate times. I see no objection to two examinations a year. These assets are definitely better. We have closer supervision. We have eliminated all these substandard bonds today, for tax reasons. We have gotten rid of our old losses.

The reserve picture is anything else than what is shown here. If 1 to 10 was a good thing in the past, 1 to 7 now on this would actually work out to 1 to 10. You take the Central Hanover Bank in New York. That is considered the southerner's bank. We have also considered it that way. They have roughly 1 to 10 on their statement. If you break this down and remove the cash and the Government bonds, they would probably have 1 to 30.

Senator ROBERTSON. Any questions?

Senator FREAR. I gathered from Mr. Arthur that he was in favor of the increased coverage?

Mr. ARTHUR. Yes.

Senator FREAR. And you said that at the end of 4 years the FDIC would probably have reserves of 1.5 billion dollars. I assume you were taking those figures from the losses that have accumulated to date of approximately $26,000,000.

If the coverage is increased from $5,000 to $10,000, do you anticipate that the losses of FDIC will increase proportionately?

Mr. ARTHUR. If they did, it would be 2.4 percent. It would be so little

Senator FREAR. The question was, Do you think they would increase proportionately?

Mr. ARTHUR. No, sir; I do not.

Here is a chart, if you want it in the record. We have figured it out. It will come in in 1955, instead of 15 years.

Senator ROBERTSON. Are there any further questions? We thank you.

The next witness is Mr. Henry A. Kingman, of the National Association of Mutual Savings Banks.



Mr. KINGMAN. Mr. Chairman and members of the committee, my name is Henry S. Kingman. I am president of the Farmers and Mechanics Savings Bank of Minneapolis. I am appearing here on behalf of the National Association of Mutual Savings Banks, of which association I am president during the current year. I wish to thank you on behalf

of the mutual savings banks for the opportunity to appear and state our views on this legislation. I shall cover two or three of the more important features of the bill in my statement, and I will ask my colleague, Major Oliver, to comment on other features of the bill. There will be no duplication in our testimony.

The association represents the mutual savings banks of this country. Substantially all of the savings banks of the country are members of the association. My recollection is that the membership represents between 98 and 99 percent of the deposit liability of these banks. Mutual savings banks, as their name indicates, are mutual institutions; they have no capital stock; all of the assets belong to their depositors; the banks are operated solely for their depositors; the earnings available for distribution are paid to the depositors either in the form of interest or dividends.

Most of them are old institutions, some having been organized as early as 1816. They are traditionally known as repositories for small savers, accepting for safekeeping their savings and for investment to produce income to them giving primary consideration to the safety of the investment. Their investments, with the exception of one or two States, are regulated by State law in order to provide assurance of maximum safety for the funds of small savers which are being held for a rainy day or for some specific purpose.

There are 531 mutual savings banks doing business in 17 States, but the majority of them are located in the New England States, New York, New Jersey, Maryland, and Pennsylvania, with a few located in the States of Ohio, Indiana, Minnesota, Wisconsin, Washington, and Oregon. These banks had on November 30, 1949, deposits in the aggregate amount of $19,065,000,000, with 18,510,000 deposit accounts as of June 30, 1949. The average deposit per account for all the savings banks amounts to $987.58. The average account varies in some of the States.

For example, in New Hampshire the total deposits as of November 30, 1949, amounted to $274,202,000, with total deposit accounts of 322,000 and an average deposit per account on June 30, 1949, of $813.25. In Vermont the total deposits aggregated $83,962,000, with 108,000 deposit accounts, and an average deposit per account on June 30, 1949, of $768.30.

The above statistics indicate the great number of small savers served by the mutual savings banks and the importance of these institutions to the average small saver. I neglected to say that the aggregate assets of the mutual savings banks is over $21,000,000,000 as of November 30, 1949. I believe my own bank is typical. The Farmers

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and Mechanics Savings Bank of Minneapolis was founded in 1874. It had deposits as of January 1, 1949, of $150,772,068, with 184,243 depositors, with assets of $163,339,704. The average deposit per account was a little over $818.

The bill here under consideration has been carefully studied and reviewed by representative savings bankers. It was studied by a special committee of savings bankers, known as our committee on Federal deposit insurance, and subsequently by the executive committee of our association, both of which committees unanimously instructed me as the head of the association to appear and support the program as sponsored by the Federal Deposit Insurance Corporation as reflected in S. 2822. We think the bill as a whole should be enacted. It represents a constructive approach to one of our most important problems.

The most important features of the bill are those provisions with reference to assessments and the method of adjusting the assessment which would result in a substantial reduction in the contributions required of the insured banks. As representatives of small savers, we certainly do not want the insurance fund reduced to the point where it does not provide reasonable protection to our depositors. My understanding is that the fund now amounts to substantially 1.2 billion dollars, and the earnings alone from this fund are at the rate of around $25,000,000 annually, which will obviously increase as the fund increases. Thus, from that source alone, the fund is being built up each year by the addition of the earnings.

The present deposit liability of the banks is,. I understand, around $150,000,000,000. The present assessment rate of one-twelfth of 1 percent will produce aggregate assessments on this deposit liability of $120,000,000. After making allowance of approximately $10,000,000 for cost of operation, losses, and so forth, there remains $110,000,000 annually, and 40 percent of this amount, or around $45,000,000, is retained to increase the fund. At this rate, the fund would increase at least $70,000,000 a year, and would

build up the fund during the next 5 years by the addition of $350,000,000 as a minimum.

"The question of whether or not the present fund is adequate is one of judgment. We rely, in part, at least, on the mature judgment of the officials of the Corporation. But among our people there has been a feeling that the present fund is large enough, and that perhaps the amount which could be made in the way of an adjustment on the assessment might very well be increased from 60 percent to some higher percentage, perhaps 75 percent.

Senator ROBERTSON. Will you yield for a suggestion there?

Senator ROBERTSON. You have credited total assets all of the income, but you make no allowance for the possibility that we may run into a bad period in which some of those assets would be taken to meet liabilities.

That is correct; is it not?
Mr. KINGMAN. Yes; but this is supposed to be a net figure.

Senator ROBERTSON. I know, but it is based on a very favorable past record.

Mr. KINGMAN. That is right.

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