Mr. HAWES. That is correct, and that is the reason I asked the question, how are subsidiaries to be defined?

Senator MORRISON. The definition of "affiliate" is described at the last by saying "or a corporation" without any modification. whatever.

Mr. HAWES. I agree with you, Mr. Senator. I want to thank you gentlemen for your courtesy.

Senator BROOKHART. Mr. Wolfe.

STATEMENT OF EDMUND S. WOLFE, PRESIDENT FIRST NATIONAL BANK, BRIDGEPORT, CONN.

Senator BROOKHART. You may proceed.

Mr. WOLFE. Mr. Chairman and gentlemen of the committee, as former president of the national-bank division of the American Banking Association, and as president of a bank in Bridgeport, Conn., in a manufacturing community, and as representing a State in which we have, unfortunately, but few members of the Federal reserve system, we have been somewhat concerned with the general effect that the bill has had. Not only are we afraid that we shall have further deflations-deflation from the system, but any opportunity we had of adding State member banks to the system has almost passed. There are three main objections that banks of our type find to the bill, and I am going to confine my remarks, first, in the form of a written statement, to those three sections.

The sections are: first, section 8, relating to collateral loan limitations; section 13, dealing with reserve requirements; and section 14, providing for segregation of time deposits.

I feel that section 8 confers too much power on the Federal Reserve Board in that it appears from the language that the board may restrict, within its discretion, all loans made by member banks which may be secured by any type of collateral. If the bill were specific, naming the percentage of capital and surplus that could be so invested, the banks would feel more assured regarding the wording of this section, which now seems dangerous and uncertain. If, in naming a specific percentage, it were low it would have the same objection as naming no percentage. The power thus given the board. is not of a specific nature. Quite a number of banks have legitimate commercial and individual loans secure by collateral, which would be affected by this provision; and in order to comply with the section it might result in these banks having to withdraw from the Federal reserve system.

Senator COUZENS. What percentage would you suggest not to make it too low and at the same time not to make it too high?

Mr. WOLFE. Senator, not under 500 per cent of capital and surplus. Senator COUZENS. What percentage of the deposits?

Mr. WOLFE. Well, the limitation has been with reference to capital and surplus. It has not been with reference to deposits.

Senator CouZENS. It occurs to me it would be better to have the percentage on deposits rather than on capital and surplus. Mr. WOLFE. That may be true.

Senator COUZENS. If so, what percentage would you say?

Mr. WOLFE. That would be difficult to say, except at the present time, unfortunately, a large percentage of our loans have drifted

into just that collateral loan because of lack of eligibility loans and other exorbitiant types.

Senator COUZENS. Would you say 10 per cent was a reasonable percentage of the deposits?

Mr. WOLFE. That is entirely too low, I would say.

Senator COUZENS. If that is entirely too low, what would you say would be right?

Mr. WOLFE. There is no intention to evade entirely. To be helpful in answering your question direct, I could answer it more by saying what I thought was too low rather than expressing an opinion as to what I think would be the proper percentage. At the present time, as much as 50 per cent.

Senator COUZENS. Is not that too high?

Mr. WOLFE. Under some circumstances, yes; depending on the type of bank. I think the type of bank and the management of the bank would have a lot to do with it and the character of the loans.

Senator COUZENS. We can not write into the law specifying the type of management, can we?

Mr. WOLFE. Well, you are trying to get authority for the Federal Reserve Board to control the management so the management has but little discretion. That is what rather alarms us.

Senator COUZENS. I rather object to that myself. I was trying to get at some reasonable method whereby we could take that control out of the board.

Senator GLASS. You see, the section relates itself wholly to the carrying of speculative securities; that is, stock-exchange securities, and then places that under the discretion of the membership of the board, defining what they shall be. I have been a little puzzled sitting here, Mr. Wolfe, hearing objections to giving the Federal Reserve Board authority in these matters. I pick up the existing law-the provision as to national bank collection in the Federal reserve act and note in scores of instances, where just as much power is given the board in other matters, and the bank itself, as decided by the courts, has unlimited right to refuse to rediscount for a member bank altogether if it pleases. This power is conservatively comparable, I think, to many other powers of the board by the existing act, and this particular provision, subsection M of section 8 of the bill, relates itself altogether to carrying speculative securities.

Mr. WOLFE. Senator, in that

Senator GLASS. Other people call them speculative. I sometimes, unhappily, use the term "gambling." Maybe that is not that. But is there any good reason to suppose that we could be wiser in fixing legislatively the percentages better than the Federal Reserve Board may do it? The whole implication of this provision is that the board may not do it except when circumstances themselves require that it should do it; and that provision requires that there shall be concurrence of at least six of the seven members of the board to do it.

Mr. WOLFE. That is perfectly true, Senator Glass; but I know we in Connecticut rather view with alarm the unfortunate tendency to lowering of our holding of eligible paper, and the banks can not

escape the large holding they have as security loans. So to say what the percentage is to be is to say that our section would be the same as any other section of the country and to have the Federal Reserve Board say a particular percentage would apply right straight through, and it does not work out that way.

Senator GLASS. No; it does not necessarily imply, and certainly does not require, that the board shall pass a general regulation. It says "for any member bank." In other words, the situation would present itself that here is a member bank carrying such a high percentage of speculative loans that it might be that six of the seven members of the Federal Reserve Board would deem it desirable to call upon that bank to change the percentage of its speculative loans. Mr. WOLFE. I think the banks as they view the regulation as now drawn would feel far safer if some percentage were put in there, and, as previously remarked, that percentage not seemingly too low as to work a hardship. That might withdraw any objection to that particular section. But as it is now, it is left so open that even though it might be applied to only one member bank, conceivably it could be applied to all member banks and voting for it would make that possible.

Senator GLASS. It could be that the member banks were making extensive speculative loans, yes, and it might be that the board would enact a general regulation based upon its intimate observation and experience with the member banking business that would put a safe limitation upon it; and it occurred to the subcommittee that we could better rely upon the board to do that intelligently than by the committee or by the act itself.

Mr. WOLFE. Taking our own specific bank and answering Senator Couzens direct: Our collateral loans at the present time are 50 per cent of our total loan portfolio. They were, at that figure, about two and a half times our capital and surplus.

Senator COUZENS. What is it of your aggregate deposits? What percentage of your deposits?

Mr. WOLFE. About 35 per cent of our deposits. Our deposits are about $17,000,000. About $6,000,000 collateral loans.

Senator COUZENS. Do you consider the Federal Reserve Board has functioned properly up to date?

Mr. WOLFE. That is a rather broad question. I would rather not

answer.

Senator COUZENS. I understand that the reason some of these restrictions are placed in the bill is because there is a conviction in some parts of Congress, at least, that the Federal Reserve Board has not functioned properly. I assume that you are afraid you might be penalized if you would answer in the affirmative.

Mr. WOLFE. Not at all.

Senator GLASS. I think Mr. Wolfe has given us a sufficient answer. Senator COUZENS. I think he has, too.

Senator BLAINE. Does not the Federal Reserve Board claim that it has not certain powers it seems to have?

Senator GLASS. The Federal Reserve Board claims that under existing law-I do not agree with it, I may say-but it does claim that under existing law its powers in this respect are not definite enough, and the board itself asks us to make them definite.

Senator BLAINE. That is my understanding.

Senator COUZENS. There is plenty of authority in the bill that has not been exercised.

Mr. WOLFE. That may be true of the authority under the present bill.

Senator COUZENS. I say, under the present bill it has not been exercised, and we had a distinguished witness here yesterday or the day before yesterday who thought it ought not to be exercised, that the law should not be enforced.

Senator BROOKHART. Proceed.

Mr. WOLFE. Quite a number of banks have legitimate commercial individual loans secured by collateral which would be affected by this provision, and in order to comply with this section it might result in these banks having to withdraw from the Federal reserve system. The effect on the banks not borrowing from the system is practically the same as that on the banks who do borrow, for they must keep in condition to use the rediscount privileges. I believe that section 8 gives the Federal Reserve Board unnecessary power of control over the policy management of member banks which are nonborrowers.

With regard to section 13, I believe that the increase in reserve requirements on time deposits as provided in the bill is an unnecessary burden on the banks. Experience has shown that the Federal reserve banks have had ample funds to meet all member-bank requirements, and this additional reserve burden draws from the working funds of the member banks and transfers unneeded deposits to the Federal reserve banks. This section, if enacted into law, would work a particular hardship upon the banks located in the cities where there is not a Federal reserve bank or a branch bank, particularly in the rural sections. It could not result otherwise than in a withdrawal from membership of this type of banks through its inability to compete with nonmember banks whose reserve requirements are not so burdensome. Consideration should be given to the use of till cash as reserves.

Senator GLASS. Do you think, really, that the reserve requirements of the existing law are very burdensome?

Mr. WOLFE. Not the existing law. I think they may prove to be in the proposed bill, that increases them.

Senator GLASS. Were they so regarded before we made this one alteration as to time deposits? You know, since the enactment, or beginning with the enactment of the Federal reserve act, we have constantly reduced the reserves of the banks. We have never increased them. This rejection of reserves held behind time deposits to 3 per cent was made, not because it was generally thought that a reserve was burdensome, but more to encourage time deposits; and instead of doing just exactly that the information that we have got from our questionnaires and from our previous hearing and inquiries was to the effect that the demand deposits and reserve deposits had been so manipulated as to take advantage of the 3 per cent for demand deposits.

Mr. WOLFE. Is that true? A deliberate shifting to time and segregated deposits.

Senator GLASS. Yes, sir.

Mr. WOLFE. I would like to report I do not believe that has been the practice in my section of the country. We are only fearful as to

just what else may be behind the increase in reserve on segregated savings funds; whether putting them all on the same basis with regard to reserves is not, after all, a merging, a gradual doing away with the type of deposits which banks in communities such as ours can not escape. We have a lot of funds that, owing to customers requirements, have drifted into time deposits. The bank tries to avoid that because it means increased interest rate paid on them, and the loss in that respect is much higher than the additional reserve requirement on demand deposits.

Senator GLASS. Have you considered the question, and would you like us to incorporate in this bill immediately the proposed velocity method of computing reserves?

Mr. WOLFE. We were rather impressed with the report that that special committee made. We think that is the scientific way of establishing reserves the activity of deposits or reserves as against deposits, in relation to their activity.

Senator GLASS. You think it would readily be preferred by the banking community generally throughout the United States and would create no confusion?

Mr. WOLFE. I think there has been a very favorable reception to that report, particularly among those who are technically informed of the reasons for that form of computation.

Senator GLASS. You would think the New York banks should be technically informed, would you not? The reaction there was very antagonistic. I did not mean to interrupt you.

Mr. WOLFE. You did not. Consideration should be given to the use of till cash as reserves. This principle is recognized in the report of the committee on reserves, which provides that in case of banks not located in cities where there is a Federal reserve bank or branch bank a fair percentage of their legal reserve might be carried in currency on hand.

The other subsections of section 13 do not concern the type of bank that I referred to, and consequently I will not refer to them. With regard to section 14, I believe there will be much hardship worked on banks in the rural districts having time deposits, and restriction on the investment of these funds has been so narrowed that it can not help but hinder the bank in its work. While the national banks are the backbone of our commercial activity, nevertheless in the rural sections there does come the necessity of making real estate loans. Under the bill the investment in bank premises and the attempt to define unsecured loans whose eventual safety depends upon real estate value and reserve against time deposits, all classified as real estate loans, will absorb much of the funds that otherwise might go into legitimate real estate loans for the account of customers. The requirement that the Comptroller of the Currency revise and reappraise real estate loans at each examination seems impossible of satisfactory administration, for no asset of a bank is more difficult of appraisal than a real estate loan. It is fair to assume that large amount of funds now in commercial use in our banks will be transferred to time deposits because of the security afforded and also time deposits in excess of real estate collateral, which deposits are now in commercial use and must be diverted to eligible securities.

Senator BROOKHART. Have you any questions?