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To the bank who conceives its fundamental obligation to be that of funneling the community's accumulated deposits back to the people for their common improvement, and then for the expansion and general betterment of the community, every dollar of additional operating income, every dollar of economy, is not just a dollar of profit but a dollar whose proportionate share will go toward strengthening the capital structure of the bank and for further reinforcing the security of its depositors.

We accept the credit dividend without further quibbling.

There is another important clause in this bill which the membership of our association believes to be imperative as well as logical and equitable. That is the permissive authority for the Federal Deposit Insurance Corporation to examine State banks who are members of the Federal Reserve System.

Only a few of the banks in the Consumer Bankers Association, although they are located in 31 States and the District of Columbia, are members of the Federal Reserve. Naturally, they are vigorous defenders of the dual banking system and all that such an independent system signifies.

We, who are chartered as State banks, are therefore subject to examination both by the State supervisory authorities and the Federal Deposit Insurance Corporation. In our experience this has not resuulted in duplication. The FDIC has developed arrangements for joint or alternate examinations. The one complements the other and the efficiency, thoroughness, and ultimately the constructive recommendations of the Federal Deposit Insurance examining officials is a necessary supplement to the State examination.

We can see no valid or strongly defensible reason why a State bank, which is a member of the Federal Reserve, should not be subject to the same examining processes of the Federal Deposit Insurance Corporation as the State bank which is not a member-if the Federal Deposit Insurance Corporation should deem it necessary.

The mere fact that examination reports by Federal Reserve authorities and those of the Federal Deposit Insurance Corporation are interchangeable is, in our opinion, insufficient reason to deprive the Federal Deposit Insurance Corporation of the authority to examine its own member banks without the express permission of another Federal agency.

There is already enough power reposed in the Federal Reserve, and as any examining authority will acknowledge, an adequate examination often and properly goes beyond these statistical factors and ratios which may appear on a balance sheet.

It is not drawing upon the imagination to conceive of situations where certain competitive advantages could accrue to the State bank not subject to the regulations and the judgment of the examining authorities of the Federal Deposit Insurance Corporation.

We had a specific instance in our bank in New York, not of great operating importance in itself, but certainly of importance as an illustration of the principle involved, when the chief examiner of the Federal Deposit Insurance Corporation gave it as his opinion that we were in violation of a certain interpretation of the insurance act.

A competing bank directly across the street, as a member of the Federal Reserve and therefore not subject to Federal Deposit Insurance Corporation examination without special dispensation, was carrying on the same practice for which we were questioned.

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While we suspended our procedure pending a further hearing and ruling by the Federal Deposit Insurance Corporation, the competing bank continued without interruption, although we have reason to believe the Federal Reserve had been apprised of the matter.

This was not an issue to jar loose the cornerstone of the bank, but it did definitely bring into focus the fundamental inconsistency of a situation whereby two banks, both members of the Insurance Corporation, were subject to separate examining authorities.

New York State has an insurance commissioner whose examining officials supervise all insurance companies and their adjuncts. It would be just as consistent to segregate that examining authority among several other departments of the State as it is in this instance. Yet the State would consider it slightly on the ridiculous side if its insurance examining authority was to be so diluted and so diffused.

If my remarks appear to bear an excessive devotion to conditions in New York City, and the affairs of my own bank in particular, it is only because I am more factually familiar with my local terrain. However, our association as a whole is aware that, to a greater or lesser degree, these conditions prevail in many localities. .

In conclusion, I again want to thank the chairman of this committee, and its members, for their patience and their courtesy; it has indeed been a privilege to appear before you.

Senator ROBERTSON. Are there any questions?
Senator MAYBANK. I would like to ask this question:

As to the increase: you think this bill is sufficient to care for that?

Mr. DUBOIS. I do.

Senator MAYBANK. You don't think the bill needs to have any more?

Mr. Dubois. So far as we can see into the future, in our best judgment we think it is adequate. Particularly with the borrowing authority which the Corporation now has. Senator MAYBANK. Thank you. Senator ROBERTSON. Are there any further questions? We thank you. That ends the hearings for the day.

Senator MAYBANK. We might put in the record the final report of FDIC on December 31, 1948. If I understood the FDIC representative this morning, it would be another month before the 1949 report is out.

That is, insert only a part of the report; just this part signed by Mr. Harl, with the statement of assets and liabilities.

Senator ROBERTSON. Without objection, it is so ordered. (The information is as follows:)

DECEMBER 31, 1948, REPORT TO INSURED BANKS--FEDERAL DEPOSIT INSURANCE

CORPORATION

[Reading time: 14 minutes)

To banks insured by the Federal Deposit Insurance Corporation:

The Board of Directors of the Federal Deposit Insurance Corporation is pleased to submit a report relating to the activities of the Corporation for the 6 months ended December 1, 1948, and for its 15 years of operation. The report also includes a statement of the assets and liabilities of the Corporation as

61105-507

of December 31, 1948, and of changes in the number of operating insured banks and branches during the past year.

RETIREMENT OF CAPITAL STOCK

In 1945 and again in 1946 the Corporation recommended the enactment of legislation which would provide for the retirement of its capital stock. The Congress accepted this recommendation and approved on August 5, 1947, Public Law 363, which directed the Corporation to retire its capital stock by paying to the Secretary of the Treasury the amount originally received in the form of capital subscriptions. This program, which was initiated in the last half of 1947, was completed on August 30, 1948, when the directors of the Corporation made the final payment to the Secretary of the Treasury. The capital stock of the Corporation was retired and canceled as follows: Payments into miscellaneous receipts of the Treasury, fiscal year 1948, pursuant to Public Law 363_--.

$266, 695, 250. 41 Payments into miscellaneous receipts of the reasur fiscal year 1949, pursuant to Public Law 363_--

20, 677, 589. 31 Credit allowed (cancellation of stock), fiscal year 1949, pursuant to Public Law 813_

1, 926, 717.27

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Total, capital stock originally issued_

289, 299, 556.99 In retiring its capital stock the Corporation was given credit for expenses it had incurred in connection with administration of Federal credit unions. This was provided in Public Law 813, approved June 29, 1948. Under that law supervision of Federal credit unions, which had been the responsibility of the Corporation since May 16, 1942, was transferred from the Corporation to the Federal Security Agency. The credit received by the Corporation included $1.3 million expended in excess of fees collected for administration of Federal credit unions throughout the period and the unexpended balance of $0.6 million on July 28, 1948, of funds allotted to administering the Federal credit union activities for the fiscal year ending June 30, 1949.

INCOME AND EXPENSE

Total income of the Corporation for the 6 months ended December 31, 1948, amounted to $73.8 million. All net administrative expenses and other charges for the period totaled $3.0 million, leaving net income of $70.8 million. During this period income consisted of assessments of $59.6 million, interest earned on securities of $11.6 million, and income from other sources of $2.6 million, including the recovery of the cost of administration of the Federal credit unions.

Figures covering the income and expenses for the year ended December 31, 1948, and for the entire 15 years of operation are summarized in the accompany. ing table.

Income and expense Federal Deposit Insurance Corporation Jan. 1, 1934–

Dec. 31, 1948

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During the period Jan. 1 to June 30, 1948, there was a credit of $10,690.02 arising from adjustment of reserves on assets purchased from closed insured banks. This amount, subtracted from deposit insuranc osses and expenses during the period July 1 to Dec. 31, 1948, $373,338.79, leaves a balance of $362,648.77 foe the calendar year ended Dec. 31, 1948.

CLOSED INSURED BANKS

During the latter half of 1948, three insured banks, with total deposits of $11 million, required the financial aid of the Federal Deposit Insurance Corporation. These banks were merged with other insured banks in their localities or were reorganized. All the depositors were fully protected from loss and there was no interruption to banking services in any community. These were the only insured banks which required financial aid during the year.

Throughout the 15 years of Federal deposit insurance, 407 insured banks became involved in financial difficulties serious enough to require receivership proceedings or merging with another insured bank through the facilities of the Corporation. Estimated deposit insurance losses resulting from advances to protect depositors in these banks were $24.3 million and nonrecoverable expenses incident thereto were $1.6 million. It is estimated that depositors' losses will be less than $2 million on the $523 million of deposits in the 407 banks closed during the past 15 years.

The disbursements of the Corporation in connection with closed banks have been, of course, much larger that its losses. Total disbursements amounted to $311.2 million. Of this amount $87.1 million represented payments made or pending to 300,000 depositors in 245 insured banks placed in receivership

with deposits protected to a maximum of $5,000 ; $1.2 million, purchases from receivers of 68 of these banks to facilitate the termination of the receivership; and $222.9 million, disbursements for loans or purchases of assets to assist in the merger of 162 weak or insolvent insured banks with about 1,000,000 depositors.

NUMBER OF OPERATING INSURED BANKS

At the close of 1948 the deposits of 13,612 banks were insured by the Federal Deposit Insurance Corporation. This represented a net increase of 15 during the year, all of which occurred during the first 6 months. In fact, the number of insured banks at the end of the year was smaller by one than at the middle of the year. During the year 62 new banks and 33 operating noninsured banks were admitted to insurance. Mergers and absorptions resulted in a decrease of 72 banks. Eight banks were placed in voluntary liquidation.

The number of offices operated by insured banks increased much more rapidly than the number of banks. At the close of the year insured banks were operating 18,027 offices, an increase of 210 over the number at the beginning of the year. Increases in the number of offices occurred in about three-fourths of the States. The largest increases were: 23 in California, 14 in Ohio, 13 in North Carolina, 12 in New York, 11 in Massachusets, and 10 in Utah. In three States, New Jersey, North Dakota, and Wisconsin, the number of offices decreased by one or two, while there was no change in 10 States.

FIFTEEN YEARS OF DEPOSIT INSURANCE

While the number of insured banks has varied but little during the 15 years of deposit insurance, their total assets and deposits have increased fourfold. Most of this increase occurred during the war years, for it was not until 1939 that bank totals recovered their predepression peak. During the three postwar years deposits have declined slightly and at the end of 1948 amounted to a little over $150 billion. However, in the postwar years deposits of business and individuals continued to grow; the decline in the total was almost entirely due to the drop in deposits of the United States Government. These trends are indicated in the chart on the inside back cover.

The expansion in bank assets and deposits during this period was a necessary instrument in the Nation's economic development. Since most of this growth occurred under wartime conditions, which required an unusual degree of public financing, the increase in bank assets was accompanied by a notable shift in their composition. United States Government securities comprised about onefourth of bank assets during the 1930's. This proportion rose sharply during World War II, and at the end of the war United States Government securities constituted well over one-half of total bank assets. They still made up about 40 percent of banks assets at the end of 1948.

The steady improvement in the quality of bank assets represents one of the most significant advances of the 15-year period. During the mid and late thirties, banks improved their portfolios under the prodding of supervisory authorities. Even so, substandard assets amounted to about 5 percent of total assets in 1939 ; thereafter they declined steadily during the war. In the last 2 years substandard

assets have increased slightly, but in 1948 they comprised only about one-half of 1 percent of total assets.

The single factor most responsible for the improvement in the over-all quality of bank assets has been the growth in bank holdings of United States Government securities. Improvement in the quality of assets was also fostered by more effective cooperation between the banks and the supervisory authorities and the general up-trend in business during the period. At the same time, the closing of weak and insolvent banks has served to improve the quality of the assets of banks generally.

The increase in bank deposits and deposits between 1943 and 1948 has far outdistanced the growth in bank capital. While deposits quadrupled, capital doubled, rising to a little over $11 billion at the end of 1948. The ratio of capital to total assets consequently declined, from 14 percent in 1934 to 7 percent at the end of 1948. Similarly the ratio of capital to risk assets has declined over the period from 26 percent in 1934 to 20 percent at the end of 1948. Retention of earnings, practically the sole source of increase in bank capital in recent years, does not promise any rapid strengthening of the banks' capital position.

As a result of these developments, the potential burden upon the Federal Deposit Insurance Corporation has been greatly enlarged in recent years. The resources of the Corporation have not, however, been proportionately strengthened. Indeed, at the end of 1934 capital and surplus of the Corporation amounted to 0.73 percent of deposits, and at the end of 1948, 0.70 percent.

While bank capital is essential as a margin to absorb ultimate losses, it is not in a form readily available to protect depositors. Through the Federal Deposit Insurance Corporation the banks are able to bring their mutual resources to bear where and when needed. The Corporation has power to borrow up to $3 billion from the United States Treasury to meet extraordinary demands. It hopes, however, that all demands can be met by the funds mutually paid in by insured banks.

The relatively small demands made upon the resources of the Corporation during its 15 years of operation cannot be regarded as indicative of future requirements. Throughout this period, only 407 banks had financial difficulties serious enough to require receivership proceedings or a forced merger with another insured bank through the facilities of the Corporation. It is estimated that ultimate losses on the $523 million of deposits in these closed banks will be about $26 million. Although the improvement in bank management and the underlying support to banking afforded by this Corporation contributed to this remarkable record, the primary factor was the expansion in the Nation's economy during the period.

The major contribution of the Corporation during the past 15 years has been its share in raising banking standards. The Banking Act of 1935 defined the factors to be considered in admitting a bank to insurance and these have been explored carefully before the approval an application for insurance. Most bank supervisory authorities have been equally careful in granting bank charters. The Corporation, in conjunction with other Federal and State banking authorities, has sought to discourage unsafe and unsound banking practices and violations of the law by operating banks.

The Corporation has not, however, merely followed a negative course. It has worked with banking associations and individual bankers to encourage sound policies and practices. In periods of economic recovery and high business activity it has demonstrated its ability to protect depositors from losses and to liquidate the assets of closed banks with maximum recovery to the Corporation. It has been effective in preventing runs on neighboring banks in instances in which the financial difficulties of a bank have become generally known while it continued in operation. It has been aided during the 15 years of its existence by rising values; there has been no period of business depression severe enough to test the resources of the Corporation. By the order of the Board of Directors:

MAPLE T. HARL, Chairman. WASHINGTON, D. C., February 23, 1949.

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