INVESTMENT OF FOREIGN CURRENCIES HELD BY FEDERAL RESERVE (8. 965) As a part of its efforts to safeguard the value of the dollar in international exchange markets, the Federal Reserve System has entered into reciprocal currency agreements-the so-called "swap arrangements"-with a number of central banks in other countries. Under these arrangements, the Federal Reserve can obtain a stated amount of foreign currency in exchange for a corresponding amount of dollars. In the event of a drawing-which may be initiated by either party-the balances acquired have to be repaid at the same exchange rate, thus protecting each party against any loss from currency devaluation. The currencies acquired may be sold to smooth out abrupt changes in exchange rates or to prevent fluctuations in U.S. gold reserves or dollar liabilities due to temporary forces acting in the exchange markets.

A drawing by one party under one of these arrangements puts currencies into the hands of the other party. Balances so acquired may be invested at a preagreed rate of interest (the same for both parties). Present law, however, needlessly restricts the means available to us to invest such balances. Under the Federal Reserve Act idle balances of foreign currencies held by the System may be invested in short-term commercial paper in the foreign country or placed in an interest-bearing time account with the same or some other foreign bank. In most countries, however, there is a scarcity of commercial paper for investment, and in some countries time deposit facilities are not conveniently available. Present law contains no authority for the investment of such idle funds in obligations of foreign governments, such as foreign treasury bills. On the other hand, a foreign central bank may-and generally does-invest its excess dollar balances in interest-bearing securities of the United States Government.

S. 965 would authorize the Federal Reserve to buy and sell securities of a foreign government or monetary authority that have maturities of not more than 12 months and are payable in a convertible currency. This would insure that any foreign currencies we acquire in excess of current operating needs may be safely and conveniently invested in income-producing securities. For this reason, the Board recommends enactment of this bill.

LOANS TO EXECUTIVE OFFICERS (S. 714)

Section 22(g) of the Federal Reserve Act prohibits a member bank of the Federal Reserve System from making a loan of more than $2,500 to any of its executive officers, and loans up to $2,500 may be made only with the prior approval of a majority of the bank's board of directors. The section further requires every executive officer to file a written report with his board of directors regarding any loan obtained by him from another bank.

The underlying purpose of these restrictions is unquestionably sound. However, they seem unrealistically severe in the light of changes in economic conditions that have taken place since they were enacted in 1933 and 1935. The President's Committee on Financial Institutions in 1963 recognized the desirability of increasing the $2,500 ceiling on the amount that an executive officer may borrow from his own bank. In addition, it would seem appropriate to provide a considerably higher ceiling on a mortgage loan covering the purchase of an executive officer's home. Under present, law, such an officer is compelled to obtain home mortgage financing from another financial institution.

The first section of S. 714 would amend section 22(g) so as (1) to raise the "general" loan ceiling from $2,500 to $5,000, and (2) to permit executive officers to borrow up to $30,000 from their own banks on home mortgage loans. Member banks would be prohibited from making such loans on terms more favorable than those extended to other borrowers. Instead of requiring prior approval of such loans by the board of directors of the officer's bank-a time-consuming formality that is unnecessary in view of the other safeguards provided-the bill would require only that the officer report the borrowings to his board of directors. Finally, reports of borrowings from other banks would be required only where they exceed in the aggregate the applicable ceiling ($5,000 or $30,000, depending on the purpose of the loan) on borrowing from his own bank.

The Board believes that these liberalizing amendments would be consistent with the basic purposes of present law and that such liberalization is desirable. Accordingly, the Board recommends their enactment. Since the provisions of section 2 of S. 714 do not relate to the Board's area of responsibility, we have no comments with respect to that section.

Eligible paper presented by member banks as collateral for borrowing at Federal Reserve banks, 1959–66

NOTE. Eligible paper is counted for this table only when it is initially analyzed. If paper is left at the Reserve Bank and offered as collateral again without requiring further analysis, it does not enter into these totals a second time.

Number of member banks borrowing 1 or more times during year from
Federal Reserve, 1959–66

Member banks borrowing 1 or more times during year as percent of total number of member banks, year-end 1959–66

Senator PROXMIRE. The next witness is Mr. J. Deane Gannon, Director of the Bureau of Federal Credit Unions. Mr. Gannon, it is my understanding that these three bills were unobjected to in the Senate last time. Senator Hickenlooper wisely suggested that you might, if you see fit, simply put your testimony into the record. However, if you would like to make any particular point, this is your opportunity to do so, and go right ahead and do it. Your testimony will be printed

in full.

STATEMENT OF J. DEANE GANNON, DIRECTOR, BUREAU OF FEDERAL CREDIT UNIONS

Mr. GANNON. All right.

Senator HICKENLOOPER. I go on the old legal theory that many a lawyer lost his case by overtrying it.

If there is no objection, I do not see why we cannot go back and answer our mail in the office.

Mr. GANNON. I think my statement covers our position, so I am perfectly agreeable to filing my statement.

Senator PROXMIRE. Fine. You have nothing else you would like to add to that?

Mr. GANNON. No.

Senator PROXMIRE. All right, fine. Thank you very much for appearing.

(The prepared statement of Mr. Gannon follows:)

STATEMENT OF J. DEANE GANNON, DIRECTOR, BUREAU OF FEDERAL CREDIT UNIONS, SOCIAL SECURITY ADMINISTRATION, DEPARTMENT OF HEALTH, EDUCATION, AND WELFARE

Mr. Chairman and members of the subcommittee, I am J. Deane Gannon director of the Bureau of Federal Credit Unions. I appreciate very much this opportunity to appear before the subcommittee in order to comment briefly on that portion of S. 714 which would amend the Federal Credit Union Act. Section 2 of the bill would amend subsection (5) of section 8 of the Federal Credit Union Act by permitting loans to a director or member of the supervisory or credit committees in an amount not exceeding that of the statutory unsecured loan limit plus the amount of his shareholdings and any unencumbered shareholdings of a member pledged as security on the loan.

Without going into great detail, our position is that the interests of Federal credit unions would be better served if the committee were to adopt a somewhat different approach, which I shall briefly explain.

The original Federal Credit Union Act, approved in 1934, provided that "No loans to a director, officer, or member of a committee shall exceed the amount of his holdings in the Federal credit union as represented by shares thereof." The sponsors of the Act believed that the limitations on borrowing and the prohibition against the compensation of officials except the treasurer contained in Section 13 assured that the officials could not personally profit or gain undue advantage by virtue of their responsibilities. In 1959, the borrowing restriction was eased slightly to include in the amount an official could borrow the total unencumbered shareholdings of a member who would serve as a cosigner. There is no doubt that the strict requirements of the law have had the desired effect, since no significant regulatory problems have developed in this area. By far the majority of Federal credit union officials have conducted themselves in a completely responsible way. The few who have not have been dealt with properly and firmly.

We have become aware, nevertheless, that the present restrictions on borrowing by officials continues to work a hardship in certain instances. The liberalization permitted in the 1959 amendments provided an indication that Congress was aware of the difficulties some officials were encountering. The present restrictions discriminate against officials who have a genuine need to borrow. Some officials have resigned in order to become fully eligible for the borrowing privileges accorded ordinary members. Others have reluctantly declined to serve at all, knowing in advance that they will need to borrow but being unwilling to undergo the embarrassment and difficulty of obtaining a cosigner. The restriction, in sum, has had the effect of placing an impediment in the way of full member participation in the operation of Federal credit unions. Obviously such participation is a highly desirable goal in these mutual institutions.

The problem is even more pronounced in Federal credit unions serving largely low-income members, where particular attention is paid to encouraging the poor themselves to participate in the operation of the credit union. There is understandable reluctance on the part of the poor to accept official positions, because, by doing so, they lessen to a great degree their eligibility for borrowing from their credit union. There are now approximately 530 Federal credit unions defined as serving low-income groups, but nearly all Federal credit unions have significant numbers of their membership at or near the poverty level. Consequently, the restriction not only limits the chances for full member participation in low-income credit unions, but it also is a factor in credit unions whose members, on average, have higher incomes. The result, in many instances, is that board and committee positions are filled by those who can afford to sacrifice

the borrowing privilege while there may be well qualified members with lower incomes who would be willing to serve but find themselves unable to do so because of the present restriction.

The language of section 2 of S. 714 would limit borrowing by officials to the amount of the present statutory unsecured loan limit of $750, plus the amount that they may presently borrow. The additional amount allowed-$750-is relatively small and would not, in our opinion, significantly assist in meeting the problems I have cited. We feel that the solution to this problem lies rather in regulating officials' borrowing activity through disclosure of their loan activity to the board of directors, subject to an overall dollar limitation that takes into consideration the legitimate needs of the officials consistent wih the basic purposes of the Act.

We would therefore recommend that section 2 of S. 714 be amended to incorporate three desirable objectives: First, liberalization of the present restrictions on borrowing by board or committee members of Federal credit unions beyond that in the bill-perhaps patterned generally after the limits for bank officials; second, establishing adequate safeguards against self-dealing by these officials by requiring full disclosure of existing loans and delinquencies, if any, of these officials and approval of each loan by the board in addition to the credit committee; and third, providing an additional barrier against improper conduct by requiring that any board or committee member submitting a loan application would be disqualified from taking part in any actions involving the loan. Enactment of an amendment along these lines would, in our view, continue to furnish an appropriate atmosphere of fiduciary responsibility while adding a desirable degree of flexibility in Federal credit union operations.

We have been advised informally by the Bureau of the Budget that it interposes no objection to the presentation of this statement from the standpoint of the Administration's program.

Senator PROXMIRE. Our next witness is Mr. L. A. Jennings, chairman of the board of the Riggs National Bank and chairman of the Federal Legislative Committee of the American Bankers Association.

Mr. Jennings, the same suggestion applies to you, and, once again, we are happy to have you handle this any way you wish, but it would be convenient if you would simply like to file your statement and make any observation you would like to make.

STATEMENT OF L. A. JENNINGS, CHAIRMAN OF THE BOARD OF RIGGS NATIONAL BANK AND CHAIRMAN, FEDERAL LEGISLA TIVE COMMITTEE OF THE AMERICAN BANKERS ASSOCIATION Mr. JENNINGS. Mr. Chairman, I would be delighted to file my

statement.

Senator PROXMIRE. Fine.

Mr. JENNINGS. I would like to make one comment. It pertains to loans to executive officers of Federal Reserve member banks.

The bill would authorize home mortgage loans to officers up to $30,000 and we support that. However, we would recommend that language be inserted to make it clear that in no case shall the amount loaned be in excess of the legal lending limit of any bank.

We have in this country, of course, a situation where the lending limits of banks depend on their size-in the case of national banks section 5200 of the Revised Statutes sets a limit of 10 percent of capital and surplus. The limits vary from let us say $10,000 for very small institutions all the way up to the largest banks with perhaps $50-million lending limits. $30,000 to many banks is a very reasonable and acceptable figure, but not if a bank has a legal lending limit of $15,000 or $20,000. I do not believe that the proposed bill would

authorize violating section 5200 or any similar statute. However, it might be just as well to have it crystal clear that the bill means that mortgage loans may be made up to $30,000 only if the bank's legal lending limit will permit it.

Senator PROXMIRE. Mr. Jennings, that is a fine suggestion. I discused this briefly with Mr. Hale and he agreed we could make that explicit in the bill. We will check it with the Federal Reserve, but I think this is a fine suggestion and is very much appreciated.

Senator HICKENLOOPER. It has been called to my attention that in the hearings last year the $30,000 figure was arbitrarily put as a limit because that was the FHA limit and that was the yardstick which they used for some reason.

Mr. JENNINGS. May I say this: My lawyers tell me that the way the bill is presently written, it provides for the $30,000 maximum amount to a bank officer against a mortgage on his home but it would be looked upon as not superseding the 10 percent of capital and surplus limitation placed on national banks, for example, under section 5200 and if the 10-percent limitation on a small bank happened to be $10,000 or $15,000 or $20,000, the bank would have to stay within that legal lending limit.

On the other hand, it is always easier, it seems to me, to have it crystal clear in the bill that there was no intention to supersede another statute. That would be, of course, a big loan for some banks, particularly a mortgage loan on a home in a very small community$30,000-it is unlikely, of course, that they would make such a loan. Senator PROXMIRE. Thank you again very much. Was there something else you wanted to add?

Mr. JENNINGS. No. I just want to say we are wholeheartedly back of all three bills. We think there is not any question about their soundness and that it would act to the benefit of the banking community and business community generally to have them enacted into law. Thank you very much.

Senator PROXMIRE. Thank you.

(The prepared statement of Mr. Jennings follows:)

STATEMENT OF LEWELLYN A. JENNINGS ON BEHALF OF THE AMERICAN

BANKERS ASSOCIATION

Mr. Chairman, members of the Subcommittee, I am Lewellyn A. Jennings, Chairman of the Board of The Riggs National Bank of Washington, D. C. I am appearing before your Subcommittee on behalf of The American Bankers Association. At the outset I want to say that The American Bankers Association favors enactment of S. 714, S. 965, and S. 966. I would like to make a brief statement on each issue.

ELIGIBLE PAPER (8. 966)

S. 966 is similar to S. 1559, which our Association supported and which passed the Senate in the 89th Congress. It would permit member banks of the Federal Reserve System to borrow from the Federal Reserve banks on the security of any sound asset without paying a "penalty" rate of interest. Under present law, only U. S. Government obligations and short-term, self-liquidating commercial loans of up to 90 days, or agricultural loans of up to 9 months, are eligible as security against advances obtained at regular discount rates from Federal Reserve banks. Most other loans, including such a major category as real estate loans, regardless of their maturity, are ineligible for discount under present law. The difficulties which this bill is designed to correct stem from practices and economic theories prevailing prior to, and at the time of, the enactment of the