And again in 1950-51, the Korean war period In 1952, when we again experienced a brief recession In my opinion, we may expect to experience again similar periods of demonstrated need for section 13 (b) credit. Whether or not such circumstances were or were not in keeping with congressional intent when these provisions were enacted is a matter of speculation. There can be no argument that these powers have and can continue to be used. The committee's and Mr. Robertson's justification for discarding the authority because "it was little used in recent years" overlooks: (a) An important and increased use during the recent years 1951 and 1952. (b) The presence of peak prosperity years as the obvious cause of little use in the more recent years 1954-56. With this must be coupled the obvious fact (which may be borne out by a questionnaire sent the 600 banks in the 10th Federal Reserve District) that the banking industry's lack of knowledge of these lending powers and the absence of pressing need contribute substantially to their lack of use at this time. References to section 13 (b) on the Senate floor contained in the Congressional Record of March 21, 1957, page 3644, state that section 13 (b) was passed prior to the passage of the RFC. The further implication was that direct lending by a Government agency supplanted the private lending functions of the commercial banks in conjunction with the Federal Reserve banks. The facts are that RFC commenced making loans in 1930 and its liquidation was commenced several years ago. It was not Congress' thought that the RFC was a substitute for section 13 (b). Senatorial comment when the bill was being debated included a statement that section 13 (b) was only used four times in 1956, which was correct. The statement was also made that "in the course of 25 or 26 years, it has rarely been used." This was obviously in error. The bill was passed 23 years ago and over 3,700 commitments were made, comprising three-quarters of a billion dollars of loans. Such is hardly "rare use." From the floor discussion it was also suggested that a "disaster fund" in the Department of Agriculture and loans available by the present Small Business Administration would handle any lack of credit otherwise available to business through its local bank with a 13 (b) Federal Reserve bank participation. This thinking is deplorable and tends to confuse direct grants for disaster relief and subsidy payments by the Federal Government with the extension of sound loans by the private banking mechanism in the absence of the usual sources of credit to businesses whose continued operation is vital to the economic life of a community. The committee's attention is invited to several other most vital and significant "qualities" of Federal Reserve banks section 13 (b) credit. Please refer to exhibits B which sets forth loan data in the 10th district during the period 1946-56. 1.The nine loans made were to relatively small businesses, measured in terms of number of people employed by the borrower. 2. Measured in the terms of size of credit, only 2 of the 9 loans made were under $250,000 and thus classified in the so-called small business category. 3. Your committee's attention is again invited to both exhibits A-1 and B-1 as evidence of the fact that the commercial-bank participants in 13 (b) commitments were not ducking the risk. Further investigation will undoubtedly prove that losses sustained have been small. This is confirmation of the fact that each 13 (b) recipient of credit had to demonstrate that it was creditworthy and his proposition sound. 4. Measured in terms of potential economic hardship to which the employees, their families, and the communities would have been exposed had these loans not been made, the story is quite different; losses to society would have been substantial. If the reserve bank is required to submit to your committee the flesh and blood statistics on a national scale reflecting the number of employees and size of the town to which the borrower were located, I am confident that you gentlemen will approve this proposal to amend S. 1451 and provide for continuance and extension of loan-guaranty authorities of the Federal Reserve banks of this country. 5. Inflation has cut the lending limits of all individual banks in this country and thus increased the need for commercial bank loan participation outlets. 6. National and member banks are at a further disadvantage in Kansas and in other States in that their cash reserves by law are lodged with Federal Reserve banks and therefore unavailable as a source of profit to correspondent banks. Consequently, these banks have a limited leverage when it comes to placing with a correspondent the excess portion of a somewhat risky or problem loan to a company whose continued existence is dependent upon bank credit and whose continuance in business in your hometown may be vital to your bank and to your community. Thus the need for access to credit participations with the Federal Reserve banks. The third reference above held that section 13 (b) "appears to be inconsistent with central banking functions" Frankly, gentlemen, I do not know what these are. But may I again quote from the Federal Reserve Board's letter of December 18, 1944, which was in respect to the Wagner-Spence bill. This bill embodies principles which the Board considers sound. It abolishes the direct lending features of section 13 (b) of the Federal Reserve Act and, without additional congressional appropriation, extends and makes more workable a loan-guaranty mechanism by which the private banking system could meet more fully the credit needs of business and industry. "Arguments in behalf of this bill have already been presented by Chairman Eccles to the Senate and House Committees on Banking and Currency. The arguments in favor of the bill, as changed by three limiting amendments suggested by the chairman in the hearings, may be summarized as follows: "The bill would encourage a greater flow of funds from the private banking and credit system into those marginal credit risks which banks would not assume without a guaranty. "All loans would originate with banks or other private financing institutions. Amounts, terms, collateral, and other details of proposed loans would be worked out between the borrower and the financing institution to which he applies. Thus the operation of the plan would be decentralized throughout the United States. "Credit extensions in the marginal area of risk would be encouraged by guaranties up to 90 percent of those loans on which banks may desire guaranties. The lender would share in the risk to the extent of 10 percent or more, which would be a sufficient exposure to prevent lending institutions from involving the guaranty fund in careless or excessive credit hazards. "No new appropriation would be required. An appropriation made by Congress in 1934, amounting to $139 million would be adequate to guarantee a total of more than $500 million of loans outstanding at any one time. "The benefits of the guaranty would go primarily to the smaller units of business and industry. For the small businesses that are regarded by bankers as marginal or debatable credit risks, the guaranty would be the deciding factor in establishing their credit. Term lending, in which the risk factor is generally higher, would be especially encouraged. "The plan would be administered by experienced personnel in the Federal Reserve banks who are administering the V-loan and T-loan programs, a similar credit mechanism. Financing institutions are already familiar with services of the Federal Reserve banks in this field. Thus no new personnel, controls over banking, or untried activities or principles, are involved. "Finally, no competition between direct Government lending and the private credit system would be involved. On the contrary, the guaranty plan would encourage the existing private system to extend credit which otherwise might be furnished by the Government or not at all. The trend toward multiplication of Government credit agencies, if continued, may threaten the destruction of the private banking system." Other recommended amendments to Financial Institutions Act of 1957, S. 1451 and H. R. 7026, which will aid commercial banks in the extension of credit to small business are: (a) Increase the lending limit of national and Federal Reserve member banks from 10 percent of capital and surplus to 15 percent of capital and surplus by amending section 34 (a) of title I. (b) Eliminate the provision of section 42 (f) of title II, which requires that member banks maintain reserves against public funds. The State bank law in Kansas and a number of other States imposes no such requirement on State banks and consequently places them in a better position profitwise or permits these banks to maintain larger deposits with correspondent banks. (c) Eliminate the prohibition contained in section 45 (c) of national banks in cities over 5,000 from receiving premium income from the sale of insurance on the lives of borrowers or policies protecting loan collateral. This provision places these banks at a competitive disadvantage with local finance companies and savings and loan associations. The public now demands insurance protection of its loans. The loss of future profits from this business will prove to be very harmful to many banks. III. As a final suggestion to your committee, let me urge that it undertake as a separate project a study of the problems of small business-commercial banks. A continuance of the prevailing corporate tax structure and other banking laws is slowly but surely destroying their earning power and competitive position. A serious problem of continuity of ownership and management exists. The shift of population from rural areas to cities and from large urban centers to suburbs has disturbing overtones. The consequences of either more inflation or deflation will have serious effect on the banks, their small business customers, and on the economy. The regulatory agencies are in sorry shape in a number of respects. An audit of their mission and performance is a must. The availability of detailed facts and figures concerning banks and banking will permit conclusive research. The conduct of regional hearings will permit Congress to come to closer grips with the need for further constructive legislation. EXHIBIT A-1 Industrial loans and commitments by Federal Reserve banks under sec. 13b of the Federal Reserve Act, June 19, 1934, to Dec. 31, 1956 1 In case of a revolving line of credit the "number" includes only the original application but the “amount" includes all disbursements made under the loan. * Includes applications approved conditionally by the Federal Reserve banks and under consideration by applicant. *Includes industrial loans past due 3 months or more, which are not included in industrial loans outstanding in weekly statement of condition of Federal Reserve banks. Not covered by Federal Reserve bank commitment to purchase or discount. NOTE.-The difference between amount of applications approved and the sum of the following 4 columns represents repayments of advances, and applications for loans and commitments withdrawn or expired. EXHIBIT A-2 Applications for industrial loans and commitments approved by Federal Reserve banks, by years, for period 1934-56 NOTE.-In case of a revolving line of credit the "number" includes only the original application, but the "amount" includes all disbursements made under the loan. EXHIBIT B Federal Reserve Bank of Kansas City-13b activity, 1946-56 United States Senate, Washington, D. C. DEAR SENATOR CLARK: First, I wish to thank you for according a most unprofessional witness extreme consideration and for your helpful questioning. This week I will mail a questionnaire to the 600 member banks of the 10th Federal Reserve District. Their views will be asked in respect to: (a) Continuance and extension of SBA lending authority and appropriations. Each will be provided with unit and dollar volume of SBA loan figures broken down by States and by congressional districts, which I obtained from House hearing testimony. The record certainly impresses me, and suggests a job well done. (b) Continuance and extension of Federal Reserve section 13 (b) lending powers which neither supplant nor duplicate SBA authorities. (e) The use of: Federal Reserve section 13 (b) surplus or a portion of future Federal Re serve earnings as a source of capital for national investment companies and State development corporations. The attached summary of replies to my original questionnaire, a copy of which is enclosed, confirms the overwhelming desire of the banks in the 10th Federal Reserve District: (a) Not to pay Federal Reserve earnings to the Treasury as a 90 percent franchise tax. (b) To accumulate future Federal Reserve earnings into sinking fund to remove the FDIC's $3 billion call on the Treasury. It would seem to me that a strong case could be made for use of Federal Reserve earnings for expanded research into the problems of small business and of area economic development. John Horn, administrative assistant to Senator Sparkman, assured me yesterday that he would invite to the Senator's attention the possibility of achieving his national investment company objectives without killing section 13 (b). It was with knowledge of their remarkable shyness and lack of desire for publicity that I did not extoll the virtues and outstanding position of my close friends, the senior Solomon Smith and his two sons, Solomon B. and Ed, of Northern Trust, a unique bank and one of the finest in the country. I was tempted, and it would have been apropos in light of Dr. Kaplan's testimony, to mention that Northern is perhaps the sole remaining large bank in this country still owned by and with actual control vested in one family, the direct heirs of a founder. It was a pleasant surprise to know that we had mutual friends. Again, thank you for your courtesy. Sincerely yours, JOHN A. ADAIR, |