Mr. O'BRIEN. I have spoken of the minimum capital, and the amount the Secretary of the Treasury subscribes. Now I might speak of the types of institutions that are eligible to become members of this bank. That is spoken of in section 4 (a), beginning on page 3, line 22, and page 4 down to line 16. They are described as building and loan associations, cooperative banks, and homestead associations. Senator COUZENS. May I ask you at that point just what type of corporation would come under the laws of the United States?

Mr. O'BRIEN. District of Columbia corporations chiefly, or corporations which have special charters from the United States.

In addition to building and loan associations and similar associations; savings banks, trust companies, and other banks are authorized to become members if their time deposits and their financial condition, in the judgment of this board of which we have spoken, warrant their making whatever the board regards as long-term loans on homes.

In addition to that, there is the third class, insurance companies; but in the case of all these three classes-building and loan associations, savings banks and other banks, and insurance companies-they must be institutions which are subject to State banking laws or other laws of that character, or Federal laws, of course, in the case of those organized under the laws of the United States.

Senator COUZENS. Just what is the reason, if you know, why the Federal Government makes up any deficiency in stock subscriptions? What is the reason for having it arranged in that way, and not requiring the institutions who are beneficiaries under this bill to supply the stock?

Mr. O'BRIEN. I do not know, Senator. That is wholly a question. of policy with which, of course, I have nothing to do.

Senator WATSON. Senator, I asked that very question when they brought up this bill to me to introduce; and they told me that first, in order to get the required capital, if these various associations did not subscribe, the Government was to do so, to be sure to make it go. Senator MORRISON. In that respect it is like the Federal reserve bank originally, and the farm land bank--to expedite its organization. Senator WATSON. Yes; and then it would have the general guidance and supervision of the Government. It would be more helpful, because people would believe in it more. Those are the two general reasons assigned to me when I asked that question. In other words, I was trying to keep away from appropriating any more money out of the Treasury. We are ladling it out here, you know. Those were the two reasons assigned.

Mr. O'BRIEN. Senator Morrison's observation of course is quite correct that this bill in many particulars, and in this respect in the main, follows the Federal land banks, in the provision with respect to the United States.

Senator MORRISON. This looks to helping investment banking instead of current commercial banking which the regional bank system takes care of, as I understand.

Senator WATSON. That is it exactly.

Senator MORRISON. It supplements it.

Senator WATSON. Yes; it supplements it.

Senator MORRISON. And gives somebody else a chance besides commercial banking.

Senator COUZENS. I thought it was to help the home owner; but you say it is to help the investment banker, as I understand.

Senator MORRISON. Well, to furnish investment credit, Senator. You see, under the Federal reserve system, nothing of this sort is eligible for discount.

Senator WATSON. NO.

Senator MORRISON. I have never known exactly why commercial banking should be the only banking for which we provide any credit. Senator COUZENS. As a matter of fact, that is not the case with the Federal farm land banks.

Senator MORRISON. No; that is just like the Federal land banks. Senator TOWNSEND. Do you understand that this is in competition with commercial banking?

Senator MORRISON. I hope it is, but I do not think it is. I wish it It needs some mighty badly.

were.

Mr. O'BRIEN. I might point out this, Senator, in this connection: The way this bill is written, nothing in the bill contemplates that the banks which are established in the 12 districts would lend money to an ordinary borrower.

Senator MORRISON. NO.

Mr. O'BRIEN. They are capable only of lending money to members of the institution-that is, building and loan associations and like. associations, savings banks and trust companies, and other banks and insurance companies-and they are only capable of lending to those people with respect to their holdings of home mortgages. As collateral security for a loan which this regional bank is to make to the members of the system, home mortgages are to be deposited.

Senator MORRISON. Exactly.

Mr. O'BRIEN. As a matter of fact, there is an express prohibition against the bank going into any general banking business. The bank is expressly prohibited from transacting any business not expressly authorized in the act.

Senator MORRISON. In general principle, this furnishes a place for banks to discount mortgages on homes?

Mr. O'BRIEN. That is quite true.

Senator MORRISON. With a maximum of $15,000 in the old bill.
Senator WATSON. That is right.

Senator MORRISON. Just as the Federal reserve system furnishes discounts for the eligible paper mentioned therein.

Mr. O'BRIEN. That is quite the case.

Senator MORRISON. It is just extending that principle to the home owners of the country.

Mr. O'BRIEN. Extending the principle to the building and loan people who have dealt with the home owners.

Senator MORRISON. Or banks.

Mr. O'BRIEN. Yes; of course.

Senator COUZENS. Is there any provision in here requiring the indorsement of the bank or the building and loan association? They are required to guarantee these, are they not?

Mr. O'BRIEN. Oh, yes; they must deposit collateral security for their advances.

Senator COUZENS. I mean, they guarantee the securities that they deposit?

Mr. O'BRIEN. Yes; the members promise to pay their advances and deposit collateral to make the promise good. As a matter of fact,

the bank is given the authority, I think, with the approval of the board, to require additional security in any case in which it looks as if the advance is not going to be repaid.

Senator WATSON. I think it is pretty well safeguarded in that respect, Senator.

Now you may proceed.

Mr. O'BRIEN. I think the next important thing is the question of how much the institutions eligible to subscribe will have to put up, in section 4, subsection (c).

Senator WATSON. Do you mean by way of collateral?
Mr. O'BRIEN. No; subscription to stock.

Senator ToWNSEND. What page are you referring to?

Mr. O'BRIEN. Page 5, lines 6 to 15-subsection (c) of section 5. We have spoken of the institutions eligible to subscribe. They must, in order to become members, put up $2,500 plus 1 per cent of the aggregate of the unpaid principal of the home mortgages which they own.

On page 2, subsection (6) of section 2, lines 11 to 18, a home mortgage is defined to mean

A first mortgage upon real estate upon which there is located a dwelling for not more than three families, and shall include such classes of first liens other than mortgages as are commonly given to secure advances on real estate by institutions authorized under this act to become members.

So that in calculating the amount of stock subscription which must be put in by a cooperative bank for the purpose of becoming a member, you first take $2,500, then find the amount of the mortgages on 3-family or less dwelling houses, find the unpaid principal on those mortgages, and take 1 per cent of the unpaid principal on those home mortgages held by the institution; and that, plus $2,500, becomes the original stock subscription, the minimum stock subscription.

Senator COUZENS. For example, if an institution had $100,000 of the type of mortgages that qualified, it would be required to put up $2,500 plus $1,000 for stock?

Mr. O'BRIEN. Yes; if the unpaid amount of those mortgages was $100,000.

Senator Couzens. Yes; that is what I mean.

Senator MORRISON. Is there any provision here for retiring the Government stock?

Mr. O'BRIEN. There is.

Senator MORRISON. There is some way to get that money back? Mr. O'BRIEN. There are several ways.

Senator MORRISON. You need not go into that now. I supposed there was.

Senator COUZENS. But I assume that it is under the same provision as applied in the case of the farm land banks-that the Government gets no return on its investment over the period of time that its capital is still put up.

Mr. O'BRIEN. That is quite true. No dividends are to be paid to the United States.

Senator COUZENS. In other words, the Government furnishes the capital without any compensation for as long a period as it is necessary before subscriptions are made. Is that correct?

Senator WATSON. That is the way it is.

Senator MORRISON. Is that any different than the capital furnished for the Federal reserve system and the land banks?

Senator COUZENS. Yes; it is different so far as the Federal reserve system is concerned, because the Federal reserve system participates in the earnings.

Senator MORRISON. But that is not true, as I understand, of the Federal farm land banks. The Government participates in the earnings here, too; does it not?

Mr. O'BRIEN. No; the Federal Government does not participate in any earnings.

Senator TOWNSEND. The Government does not furnish any capital for the Federal reserve system, does it?

Senator MORRISON. It did at the beginning, and it is making an almost scandalous amount of money on it now.

Senator WATSON. Too much.

Senator COUZENS. But the Federal land bank act, as I understand, does not provide for any compensation for the Government's capital, no matter how long it remains in the service of the banks.

Senator WATSON. No; it does not.

Senator MORRISON. That should be amended.

Senator WATSON. I have tried to have it amended in the other one, and I could not get it.

Senator COUZENS. You will not in this case, if it goes through. Senator MORRISON. It will get its interest in increased benefits, I guess.

Mr. O'BRIEN. We have established the minimum stock subscription which must be made by a member. In the same subsection we have been talking about, section 5 (c), it is also provided that as long as an institution remains a member of the system there shall be from time to time a constant readjustment of its stock subscription, so that as its assets in home mortgages diminish or increase its stock subscription in the bank will accordingly diminish or increase.

Senator MORRISON. That is on the same principle that to become a member, and to be entitled to these benefits, they have to put this much in it, just as a member of the Federal reserve system has to keep its reserves up in order to have the benefits of it.

Mr. O'BRIEN. Yes.

Senator COUZENS. But there is this difference, I think, in that: If its assets that qualify under the law decrease, the institution is enabled to withdraw its stock subscription.

Mr. O'BRIEN. Oh, yes; you can withdraw from this system, and if the institution's assets decrease the amount of stock which it is obliged to hold will decrease, too.

Senator COUZENS. I mean, if a member liquidates its assets, and puts its investments in a class of mortgages that do not qualify under this bill, then it can withdraw its entire capital subscription.

Senator MORRISON. And get out.

Mr. O'BRIEN. Yes; after settling up its obligations.

Senator COUZENS. I do not think the institution can draw out its $2,500, can it?

Mr. O'BRIEN. Yes, it can.

Senator COUZENS. I think that is a very shaky foundation for capital.

Senator MORRISON. Can not a member of the Federal reserve bank withdraw, Senator, and get out of the system altogether, if it wants to? Senator COUZENS. I think it can resign; yes. They do that now when they change their charters.

Senator MORRISON. I thought so.

Senator WATSON. All right. You may proceed.

Mr. O'BRIEN. The manner of payment for stock subscriptions is taken care of in subsection (d), page 5, lines 16 to 23.

Senator COUZENS. In that connection, as I understand, there is a provision here whereby a financial institution qualifying under this act may get the benefits of the act without any stock subscription at all until its State legislature enacts legislation permitting it to subscribe. Is that correct?

Mr. O'BRIEN. That is true.

Senator CouZENS. What about that feature?

Mr. O'BRIEN. In the meantime, it must put up cash, Government bonds, or the short-term debentures which are contemplated to be issued by the bank.

Senator WATSON. They can not just start right in at once.

Mr. O'BRIEN. And the amount of those things is calculated in the same manner as the stock subscription would be calculated in the case in which the institution was capable of subscribing. That provision, however, is temporary in its nature. It is provided that when State legislation is enacted authorizing this person (who is not under the State law now authorized to invest in the stock of this Federal home loan bank), to make such investment, stock equal to the amount which this institution has put up shall be issued to him. If at the end of 42 months the State legislature has not seen fit to authorize institutions in that State

Senator WATSON. How many months?

Mr. O'BRIEN. Forty-two months.

Senator TOWNSEND. Three and a half years.

Mr. O'BRIEN. Three and a half years after the enactment of this act-if at the end of that time the State legislature has not authorized these institutions to subscribe for stock, then that institution has to retire from the system, and its business with the Federal home loan bank is liquidated, and it gets out, and everything is settled up. Senator TOWNSEND. Have you any idea of what per cent of the States now have such laws?

Mr. O'BRIEN. I do not know.

Senator MORRISON. It would have to be negation, because in the absence of laws forbidding it they could invest in it if they wanted to. Some of them have it about savings accounts.

Senator WATSON. A mere negation might not be enough, Senator, under these provisions. What do you think about that?

Senator COUZENS. I doubt if they can invest in any common stock in any bank. I mean, I doubt if any State permits the banks to invest in common stock.

Senator MORRISON. In our State I believe they allow 25 per cent of their assets to be invested in that way.

Senator COUZENS. In common stock?

Senator MORRISON. In securities approved by the boards of the banks. There is no restraint at all on them as to the 25 per cent of their assets. In a great many States it is done in that way.