I thought before starting I would like to tell you a little about the association. It was founded in 1912. The membership consists of 437. They have a top membership of 450. There are 215 banks represented in that membership, and they come from 53 cities. As of September 30, 1949, the deposits represented by the members in the association were just under $57,000,000,000. In other words, approximately one-third of the deposits in the country.

The membership requirements are that the individuals taken in have to be top executives in their respective banks. There are no glad-hand artists in that group.

The members have to be located in a Reserve city, and the banks in question have to be correspondent banks. I hope I have made myself clear.

The Federal Reserve Board designates the cities which are termed "Reserve cities."

Senator ROBERTSON. You remind me of the Republican slogan in 1896 when in the last 3 weeks of the campaign they put $10,000,000 behind McKinley and said "$10,000,000 can't be wrong.'

Mr. POTTS. Very good.

Mr. Chairman, I have no printed statement. I thought I would come here informally, as an individual, to give you my ideas, which I think mirror at least a percentage of the membership in the Association of Reserve City Bankers, and then will expose myself to any questions you may have.

To my way of thinking, the idea of the Federal Deposit Insurance Corporation is basically sound. It protects the individual deposits, and at the same time it also makes for stability in the economy as a whole. It eliminates panic shifting of funds, and conceivably it actually eliminates the withdrawal of funds from the monetary supply, itself.

If the FDIC continues to maintain public confidence as it has in our monetary system, I think that the FDIC will truly have achieved its purpose. Up to the present the public has never questioned the adequacy of the FDIC fund.

I am substantially in accord with this viewpoint.

As the Secretary of the Treasury testified this morning, I think it was in reply to your question, Mr. Chairman, he said that he thought that a billion plus the call on the Treasury for an additional $3,000,000,000 certainly ought to take care of the situation, except during panic times such as the 1930-33 era.

I subscribe to that, also. Some people, though, seem to feel that the size of the fund, percentagewise, to total deposits, is not large enough. In other words, there is about seven-tenths of 1 percent covered at the present time. However, here I am just going to briefly repeat a little bit of what Mr. Arthur so ably presented this morning, which is to the effect that when you consider what are exposures, you will find the situation is quite different today than it was heretofore. There are only $50,000,000,000 of risk assets in the entire deposit structure. That deposit structure is now $153,000,000,000. Substandard assets out of those risk assets are only one-half of 1 percent, which is a small figure, you will agree.

Those substandard assets in 1939 were 5 percent. Government securities in the banking structure today are 40 percent of the total

assets, and that compares with only 8 percent back in 1929. Likewise, loans are only 28 percent of our total bank assets, and that compares with 55 percent in 1939. That whole situation has changed relatively, and the banking structure today is in a pretty strong spot. Losses, of course, are a matter of record. I won't go into that.

We know that during the 1930-33 period actually one-half of all the losses took place at that time. During 1948 I think there were only $368,000 of losses during the entire year.

I think, philosophically, what should be considered is that the ultimate liquidity of deposits, that is 100-percent coverage, is basically not properly the task of an insurance fund. Sometimes I feel that we forget that, and what with the figures and the details, we overlook the fact that fundamentally an insurance fund is not a fund to take care of 100-percent coverage.

From my standpoint, the time is definitely propitious for a reduction in the assessment. As to the amount, many formulas have been proposed. The ABA, had one. There have been several others. Federal Reserve, likewise. But I will certainly go along with what is now included in Senator Maybank's bill, with this one exception: I feel that interest income or the income from investments should be included in that base. It is a figure of $25,000,000 or $26,000,000, and I can't see any real reason why that should be excluded.

In the annual report of the FDIC for '48, which Judge Bakke didn't have with him this morning, it is stated that the surplus of the Corporation is now a mutual fund. Checking back I have found outthis goes over 100 years-that the mutual savings banks have always included investment income in their figure from which they declare their dividends or pay their interest to depositors. With a 40-60 formula as included in the bill now, and including the investment income of $25,000,000 or $26,000,000, the increase in the FDIC fund for the year would be $67,000,000, not including losses.

So, if you are working, or if it seems feasible to work up to a fund of 1 percent of total deposits, it wouldn't take too long to reach that figure.

Senator MAYBANK. How long do you figure it will take?

Mr. POTTS. 1954.

Senator MAYBANK. The statement was made it would take 15 years. Mr. POTTS. I wouldn't go along with that. I feel very strongly that we would achieve the 1.5 billion dollars in 1954 with this 40-60 formula, including investment income in that picture.

Senator ROBERTSON. Would you recommend we change the language to include the interest on their assets as a part of this? Mr. POTTS. I would, sir; yes.

Other features of the bill, I think, are very fine, indeed.

The various definitions have been set forth with clarity. Perhaps I might make one suggestion: That has to do with section 1, the "B. B." end of it, it is on pages 11 and 12 of S. 2822, and that is when the Board of Directors of the FDIC sits down to define the terms, "cash items," "process of collection," "uncontrolled items," that at that time they ask several of the operating men of the banks to sit down with them and come to a definite decision on the various definitions.

I think it would be very constructive, myself.

Then on page 15, No. 2, there is a certain amount of ambiguity from my standpoint. It says:

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 reserve shall be added.

I think the question mark is, What are these additions to reserve to be? In other words, who decides them? It strikes me that the FDIC could pick any figure, including that as reserve, and in that way up or down the various types, which the banks do pay into the fund per se. The increase in coverage from five to ten thousand is quite in line with increased deposits, with cost-of-living increases, and also in line with the present trend of our economy, in general.

I would, however, deplore the possibility of a precedent being established that would permit the juggling of this coverage figure according to trends. I think once you move out of a certain situation, that it seems easier the second time so to do. And if there is any caution that I have, it is with or in connection with that increase in the coverage of deposits.

Primarily, the function of the FDIC is to protect the small depositors. Any covearge over the $10,000, of course, would help to mitigate today's premium on what I would call good bank management.

Senator ROBERTSON. If we move from $5,000 to $10,000 it ought to be known that that is the ultimate to which we are going.

Mr. POTTS. That is right. My fear is having gone that far, it will be a trading basis, and they will say "Why not go up to $25,000?" Under 10 you have total depositors covered to the extent of 98.4 percent.

Senator ROBERTSON. So far as the chairman is concerned, he hopes the committee will join with him in covering that in our report, that in recommending this change, it is, as far as we can anticipate, the final move, and not have bills introduced each year asking us to get it up to $15,000, another to get it up to $20,000, and so on.

Mr. POTTS. That is right. That really ends my statement, Mr. Chairman, or thoughts, that I had regarding the matter.

This morning you asked some questions which I would be glad to try to answer.

Senator ROBERTSON. I would like for you to do so.

Mr. POTTS. In other words, you mentioned as to whether or not we thought the Federal Reserve bank should be mutually liable for insurance, the same as the FDIC, and to that I answer definitely no.

I think it would be a mistake. It is not the function of the Central Bank to at the same time insure deposits.

Senator ROBERTSON. Well, I got a little confused, myself, on the question. What I really intended to ask was whether we separate these functions, having the Federal Reserve Board take care of the banks under them, and the FDIC take care of the other.

Mr. Ports. I see.

Senator ROBERTSON. But I just threw that out without indicating any opinion. You think it should be handled as now under one agoncy? Mr. Ports. I do.

Senator ROBERTSON. All right.

Mr. POTTS. I think it would be dangerous to do it otherwise. With respect to the examination of the State member banks, I represent a national bank, and a great percentage of the members of the association are likewise national banks.

My thought is that it is a matter for the Federal Reserve and the FDIC to decide for themselves, but I do think that wherever we can, shall I say, minimize the Government agencies coming into banks, either in the way of examinations or in the way of other types of activities; that it would be advisable to minimize that fact.

Senator ROBERTSON. Now, may I ask this question: Is it true that banks now have to make three call reports?

Mr. POTTS. Generally speaking, Mr. Chairman, we do have three call reports.

The Federal Deposit Insurance Corporation has usually taken or has accepted as their figures the call reports of the Comptroller of the Currency. It has been only within recent years that the FDIC has sent in their own auditors and examined banks individually.

Senator ROBERTSON. It wouldn't be necessary to put that subject in legislation, but would it be helpful if those three agencies got together on a unified call?

Mr. POTTS. It would be, indeed, because again it follows along my trend of thinking, where we can minimize the nuisance value, why, it would help a great deal. I can't see any reason for increasing that nuisance value here, either.

Senator ROBERTSON. Senator Frear.

Senator FREAR. On that, why are the FDIC examiners now examining your banks; you say they hadn't been up until now, within the last few years, and are now coming in. They had been previously taking the statement from the Comptroller.

Why aren't they now taking it?

Mr. Ports. I have never asked Mr. Harl that question, Senator Frear. It is a statement of fact, however.

I think the reason is that there has been some misunderstanding regarding terms in the authority. In other words, what constitutes a deposit liability, and also it concerns the matter of float between banks.

Senator FREAR. Misunderstanding between who?

Mr. POTTS. Between how the FDIC advisers hold a certain definition or authority should be interpreted, and what the banks have interpreted it to be.

Senator FREAR. I see.

Back in the early part of your testimony you were talking about the one-half of 1 percent loss. Was that on the $50,000,000,000, or the $153,000,000,000?

Mr. Porrs. That would be on the $50,000,000,000 of risk assets. Senator FREAR. You also stated some fear of what might happen to the Government banking system if we go above the coverage of $10,000. Did I understand you correctly?

Mr. POTTS. When I say "fear," I mean I said there would be a fear in my mind, certainly, that the premium on good bank management today would be cut down.

In other words, a very good reason for bank management to keep up on their toes is the fact that their large depositors watch them pretty closely. If, let's say, the coverage increases from there on and there is insurance from zero up, or from $1 to $25,000, then they are not going to be bothered with watching the accounts.

Senator FREAR. Yes.

Mr. Porrs. I call it a premium on good banking.

Senator FREAR. Yet you do not express fear of increasing it from $5,000 to $10,000. When the over-all coverage is from 5 to 30 percent, why not leave it at $5,000?

Mr. POTTS. I would go along with that. If I had a choice, I would say why not keep it where it is.

However, there are certain factors in the economy that I did mention. Loans have expanded, cost of living has increased. Those factors when taken in connection with insurance coverage conceivably might mean that insurance coverage ought to be increased by 50 percent, too.

Senator ROBERTSON. It is true, isn't it, that in terms of the dollar we had in 1933 when this law was first adopted, we are now dealing with 50-cent dollars?

Mr. Ports. I have heard we are dealing in 60-cent dollars, but I think 50 cents is more accurate.

Senator ROBERTSON. Well, 60-cent dollars represented the average period from 1935 to 1939, before the war. I was speaking about 1933. Mr. POTTS. Yes; that is right.

Senator ROBERTSON. Any other questions?

Mr. POTTS. Mr. Chairman, if there are no other questions, I wish to thank you for giving me the opportunity to come here and testify before you.

Senator ROBERTSON. I can understand why the board of directors of your bank selected a young man to head it.

Mr. POTTS. Thank you.

Senator ROBERTSON. The next witness is Mr. Ben Dubois, of the Independent Bankers' Association.

STATEMENT OF BEN DUBOIS, SECRETARY, INDEPENDENT

BANKERS ASSOCIATION

Mr. DUBOIS. Mr. Chairman and gentlemen of the committee, my name is Ben Dubois and I live in Sauk Center, Minn. I am president of the First State Bank of Sauk Center. Sinclair Lewis in his Main Street referred to our town as Gopher Prairie. Frankly, it isn't a large place. I am secretary of the Independent Bankers Association. I am here representing the association. The Independent Bankers' Association is an organization of country banks, therefore, the small banks. The association operates in the first 11 of the 12 Federal Reserve districts, and its membership extends into 40 States. Our total membership is in excess of 2,800. It is a grass-root organization, and it came into being in hopes that an organization of its kind would be helpful in preserving our old system of independent banking.

The Federal Deposit Insurance Corporation has been a powerful instrument in the perpetuation of independent banking. It has put the small bank on a par with the large bank in the eyes of the average depositor. Its psychological effect has been tremendous. It has stabilized banking in a marked degree. The act that brought the Corporation into existence was probably the most important bank act ever legislated. The Corporation has been helpful indeed in establishing independent bank to continue in spite of the trend toward small independent bank to continue in spite of the trend toward banking concentration.