Senator FULBRIGHT. It seems like the same reason. little confused.

I am just a Senator O'MAHONEY. Well, do you not see, the case of an applicant who does not have a short-term loan and who asks for a long-term loan and is declined for that reason is very different from the case of an applicant who already has a short-term loan. Do I make that clear?

Senator FULBRIGHT. Yes. But he asked for a long-term loan and he is turned down.

Senator O'MAHONEY. Yes.

Senator FULBRIGHT. It is for the same reason that the first crowd is turned down.

Senator O'MAHONEY. Yes; but they are listed separately because of the fact that in some of the cases the applicants had not received loans while in others they had received short-term loans. I can explain it this way by saying that it would have been perfectly simple to say, and I say it now, that in 46.5 percent of the cases the applications were turned down because the credit sought was for too long a period.

Senator FULBRIGHT. Well, that is what it seemed to me.

Senator O'MAHONEY. That is true. But I wanted to emphasize the fact that in 5.8 percent of the cases the applicant was already receiving short-term credit.

Senator FULBRIGHT. However, the 45 percent on that question, the term of the loan refers to your argument about a gap, because it seems to me that is the main gap, that is caused by this area of long-term loans to small businesses.

Senator O'MAHONEY. Well, I do not think there is any doubt about it, that and the lack of equity capital, which I shall discuss in just a

moment.

In 4.3 percent of the cases the applicant's business was located outside of the area serviced by the bank.

In 3.6 percent the loan requested exceeded the bank's legal limit to one borrower.

In 2.2 percent the bank was already "loaned up" or low on lendable funds.

Senator FULBRIGHT. What was that first percentage, I missed it. Senator O'MAHONEY. 3.6.

In 2 percent of the cases the loan requested was a special type which the bank did not care to make.

In 1.8 percent the policy of the bank was not to lend to the type of business in which the applicant was engaged, and there were miscellaneous reasons for 1.8 percent additional, making a total of 72.8 percent declinations of these applications for institutional reasons which can reasonably be called arising from the existence of a credit gap.

Senator BENTON. That is a terribly interesting table, Senator O'Mahoney. I wonder whose judgment would now be best on whether these 300 cases have proved to be sound loans?

Senator O'MAHONEY. I shall ask the staff of the joint committee to make a study of that and prepare a report.

The information referred to follows:

STATUS MARCH 31, 1951, OF THE 300 LOANS INCLUDED IN SAMPLE

A follow-up, as of March 31, 1951, of loan experience with this sample group of 300 loans authorized during 1948 and 1949 shows only 8 loans delinquent over 3 months, including 4 delinquent over 6 months; 61, or approximately 20 percent, of the loans authorized were not actually disbursed by the RFC but were canceled in full because the borrowers succeeded in obtaining funds elsewhere, or rearranged their plans so that the money, even though obtainable, was not needed. Of the 239 loans actually made, 47-or 20 percent-had been repaid in full or by refunding into new loans. 160, or 66% percent, were current and in good standing. Eleven loans were in liquidation status for technical or administrative reasons but most of these loans, it was expected, would be paid off without recourse to the collateral, which amounts, however, to 150 percent of the outstanding balances.

Summarized, the status of the sample group of loans as of March 31, 1951, is as follows:

Senator BENTON. I think it would be interesting to put that in evidence in line with the previous testimony that sound applicants, if the loan is sound, can now get money from the commercial banks. That is the testimony we listened to from witnesses yesterday. The thing that is lacking on this table is the evidence that these were sound loans, and I assume most of them were sound loans, and I think it would add to the record

Senator O'MAHONEY. Not having examined them all, I do not want to make this specific, until the joint committee staff completes its study on the current status of these 300 loans.

The following reasons were given which evidence concern about the risk involved:

In 5.4 percent of the cases the bank felt that the applicant's financial condition did not warrant the loan.

In 2 percent the collateral was insufficient, I mean really insufficient.

In 1.6 percent of the cases the applicant's enterprise was newly formed and the credit and earnings record had not yet been established. The bank is unwilling to do it. It was perfectly sound reasoning from the point of view of the bank, a perfectly poor reason from the point of view of anybody who wants to see sound business expanded, emphasizing the need for risk capital, and that is a need which will be supplied by this capital bank plan.

Finally, 16.4 percent of these declinations were made in general terms, the brush-off, as the borrower would say, and 1.8 percent gave miscellaneous reasons, making a total of 27.2 percent.

Special attention should be paid to the following reasons given by local banks as to why credit was not extended in the community of the borrower, and why, therefore, the borrower was compelled to turn to the Government through the Reconstruction Finance Corporation for financing. I have already discussed the large number of cases in which needed long-term credit was not available even though in many cases the bank was already extending short-term credit to the applicant. It is especially significant, it seems to me, that in

many cases the bank declined the loan because the applicant's business embraced an area greater than that serviced by the bank, that the loan requested was greater than the legal limit which could be extended to a single borrower, that the available funds of the bank were already exhausted, and, finally, that the applicant's enterprise was a new one without an earnings record. In each one of these categories it is clear that the nature of the request in itself was evidence of the existence of a demand for credit greater than the local bank is presently able to extend. In other words, expansion of business in local communities is failing because the private credit system is not adequate to do the job. Obviously, the failure of Congress to create a private credit system that can do the job will only strengthen the pressure for Government loans.

Modern technology, the improved means of transportation and communication, the scientific advances which distinguish this era from all that have preceded it, necessarily create openings for business because new demands for goods and services are created by this development. When the new enterpriser is unable for lack of risk capital, or loan capital, to enter the field, the inevitable result is that the field will be occupied by big business. Thus it is clear that unless we act to provide a capital bank system to channel private savings into new local and regional business, the inevitable tendency will be to increase the domain of centralized big business, and, if that trend continues, the trend toward big government will likewise continue. So I say in all earnestness that this capital bank bill points to the pattern by which we can save the free competitive enterprise system.

Mr. Chairman, may I insert the table I have been referring to at this point in the record?

The CHAIRMAN. Without objection that will be placed in the record at this point.

Reasons why banks decline small-business loans

Bank was extending short-term credit but would not make long-term loan _ _

5.8

Applicant's business located outside of area serviced by bank.
Loan requested exceeds bank's legal limit to one borrower.

4. 3

3. 6

Bank "loaned up" or low on lendable funds___

2. 2

Loan requested was a special type not made by bank

2. 0

Policy not to lend to type of business in which applicant engaged.
Miscellaneous reasons_

1. 8

1. 8

Subtotal...

72. 8

Reasons evidencing concern about the risk involved:

Bank felt applicant's financial condition did not warrant a loan.
Collateral considered insufficient__

5. 4

2. 0

Applicant's enterprise newly formed; credit and earnings records not established___

1. 6

Source: Grouped by the staff of the Joint Committee on the Economic Report from a study by the Reconstruction Finance Corporation.

The CHAIRMAN. Is the Senator familiar with the RFC investigation under Senate Resolution 132 by the so-called Buck subcommittee? Senator O'MAHONEY: Yes; that was in 1948.

The CHAIRMAN. On page 520 of that report that committee of the Eightieth Congress bears out exactly what you say, and there are direct answers from the bank. For instance, question A:

What is the reason or reasons why you refuse such applications? (Check the appropriate box or boxes.)

And we had a reply here that I remember at the time, and it just comes back to me now, for instance, the banks themselves said 2,635 loans were too large for bank's loan limitations, and it goes on down. So I am going to have placed in the record, without objection, exhibit 38-B.

SENATOR O'MAHONEY. I am very grateful for that information and I would like to have it follow the table which I inserted in the record. (The matter referred to by the chairman is as follows:)

Instructions: In answering the questions in this second part, do not take into consideration Veterans' Administration guaranteed home-loan mortgages.

I. Do you ever refuse to make business loans which appear to be sound from the standpoint of risk and probabilities of repayment, but which are unsuitable to your bank for reasons not directly affecting the risk and probabilities of repayment?

Yes

3, 965

No..

3, 945

(For examples of such "reasons," see the factors listed in question II, A.) (If your answer is "No," skip to question V.)

II. If the answer to question I is "Yes," then answer these questions:

A. What is the reason or reasons why you refuse such applications? 1. Loan too large for bank's loan limitations..

2, 635

13. State banking laws and policies of State bank examiners_

2. Loan too small_ _

3. Type of loan requested not handled by the bank...

4. Lack of experience in handling type of loan requested

5. Type (not quality) of collateral offered.

6. Requested maturity too long, but 5 years or less_

7. Requested maturity too long, over 5 years and up to 10 years.

8. Requested maturity too long, over 10 years.

9. Loan duration of 5 to 10 years for the purpose of providing permanent fixed capital__

10. Applicant a new enterprise_

11. Applicant too small an enterprise_

12. Applicant's enterprise located at too great a distance from bank

14. Federal banking laws and policies of Federal bank examiners

15. Other_---

B. During the past 2 years have such refusals been

1. Frequent.

2. In isolated cases only..

44

970

543

781

562

1, 132

1, 042

813

903

79

950

605

792

147

339

3, 462

85072-51-21

Senator O'MAHONEY. It seems to me, Mr. Chairman, that the table which I presented, when taken in connection with the table from the hearings of 1948 to which the Senator has just alluded, definitely establishes

The CHAIRMAN. Of course, Senator Fulbright and myself were on the same committee at that time. There were Senator Buck, Senator Tobey, Senator Capehart, and Senator Bricker and myself; is that right?

Senator FULBRIGHT. That is right.

Senator O'MAHONEY. In connection with the point that the chairman just raised, I want to call your attention to the fact that the first testimony presented to our committee on December 6, 1949, when we held these hearings on the volume and stability of private investment, was given under the auspices of the Small Business Advisory Committee of the Department of Commerce.

The principal witness was a banker from Phoenix, Ariz., Mr. Walter Bimson. His testimony appears in part 2 of our hearing, beginning on page 118. I cite it as the testimony of a banker representing a large group of bankers who were urging upon the Congress the enactment of legislation to provide a means of filling this credit gap.

Senator Kem, in his presentation a few moments ago, called to the fact that three-fourths in volume of the money loaned by the RFC has gone to large applicants. That is not at all unusual. That same record is to be found in the regular banking and credit system. Our committee learned, when we held this hearing, from the insurance companies, that 17 of the major insurance companies with assets of more than $42 billion, assets which were built up by the savings of little people throughout the United States, in 1948 made only three loans to industrial corporations with assets of less than $500,000.

Senator FULBRIGHT. Three loans?

Senator O'MAHONEY. Three. More than that, out of $1,900,000,000 loaned in 1948 to 505 borrowers, only $173 million-plus was loaned to industrial corporations with assets less than $10 million; in other words, of these 505 loans totaling $1.9 billion, only 8 percent was granted corporations with assets less than $10 million; showing conclusively that under the system, as it has developed, the savings of the people are now channeled to big business. This is the primary reason why little business is constantly hammering upon the door of the Federal Treasury for public money.

It all arises out of the simple fact that we have not changed the pattern of the private credit system to meet the needs of a changed economy.

Senator FULBRIGHT. I wonder if the Senator would agree with me that perhaps the growing Federal taxes has had a great deal to do with the lack of risk capital in smaller businesses.

Senator O'MAHONEY. Unquestionably. There are several pages in our subcommittee report which I placed in your hands devoted to that very subject, and that is the reason why in this bill we have provided a 15-year exemption from the taxation on the profits to be gained from a capital bank system.

Senator FULBRIGHT. That is what I was going to ask you. Is that tax exemption only for these credit banks? It is not to the applicant; is it?