interest payments, Federal income taxes paid by commercial banks declined steadily from 1961 to 1965, dropping by 30 per cent over the entire five-year period. At the same time, their current operating earnings increased by over 50 per cent. While commercial bank taxes were declining, it may be noted, profits tax accruals of all corporations in the nation increased by one-third. Savings bank tax payments also increased after enactment of the Revenue Act of 1962 and are expected to rise further as increasing numbers of savings banks shift from the 3 per cent bad debt reserve formula to the alternative 60 per cent provision.

Further supporting evidence is provided by comparisons of taxes paid by commercial banks with varying proportions of their total deposits in time and savings accounts. Thus, in 1965 Federal Reserve member banks with over 50 per cent of their deposits in time and savings accounts paid about one-half as much tax (both Federal and state income taxes) relative to gross income as those with less than 25 per cent in time and savings deposits. For banks with total deposits exceeding $25 million-which represent the bulk of commercial bank resources-the difference was even greater. In this group, banks with over 50 per cent of deposits in time money paid only one-third as much tax relative to income as banks with under 25 per cent in time deposits.

Thus, as the commercial bank deposit structure has come to resemble that of savings banks more closely, their tax position has changed markedly. This bears directly on a suggestion I made at a similar ABA forum seven years ago. I indicated that in order to test the truth of their tax arguments, commercial banks should segregate their thrift activities and properly allocate investments and interest payments properly attributable to this side of their business, thereby permitting a comparison of like functions performed by the two industries. If this were done, I was convinced, we would find that commercial banks pay very little federal income tax on their savings business. The evidence appearing since then has provided new support for this view. In short, the commercial bank tax arguments have neither relevance from the standpoint of Federal savings bank legislation, nor validity from the standpoint of just and equitable taxation. They are ill-suited to an industry that already has a more generous bad debt reserve provision than the bulk of corporate taxpayers and is continually seeking to liberalize this provision. They are ill-suited, moreover, to an industry that, according to a 1965 report by the Joint Economic Committee of the Congress, is the beneficiary of substantial subsidies and subsidy-like programs of the U.S. Government. These shopworn tax arguments should be laid to rest if the commercial bank industry is to take a constructive approach to proposals for needed long-range structural changes in our financial system.

A constructive approach to the subject we are discussing this morning requires an examination of the public's need for financial services. These needs generally fall into three broad categories: (1) a safe and profitable place to accumulate savings; (2) a reliable place to obtain credit; and (3) an economical and convenient mechanism for transferring funds. In tomorrow's financial world, deposit-type institutions must be able to provide services in all of these categories if they choose.

No one accurately can forecast, of course, the specific nature of tomorrow's financial needs. At the very least thrift institutions must increase their powers of flexibility in order to adjust more readily to changing conditions and to maintain a steady flow of savings to finance noninflationary economic growth. The achievement of greater investment flexibility for thrift institutions would not mean the abandonment of their traditional mortgage orientation. It is significant that savings banks, for example, with considerably broader powers than savings and loan associations, have channeled 98 per cent of their postwar asset growth into mortgage loans, compared with 87 per cent for savings and loan associations. In 1966 savings banks increased their net mortgage loans by $2.8 billion which was 108 per cent of their savings gain.

Moreover, broad lending and investment powers would greatly increase the usefulness of savings institutions to American families. To the extent that more families could be served by a more complete financial package, saving flows and the supply of mortgage credit would be increased. Thrift institutions, in sum, must become the nation's complete family financial service centers, capable of providing for all of the changing thrift and credit needs of the individual and his family over their entire economic life cycle.

This proposition deserves close examination and study by the best brains in government, academic and financial institutions. This is the kind of construc tive effort that I would urge upon all of us, rather than negative obstructionism to deny the progressive development of competitive institutions in serving the public interest. For myself and for the mutual savings bank industry, I can promise wholehearted cooperation.

Mr. COAN. Dr. Ensley, I wonder if, in view of the late hour, you would like to submit additional data for the record.

The question arises-Mr. McNeill expressed it-as to what extent mutual savings banks now have broad investment powers outside the field of mortgage finance. In what States are investment powers for mutual savings banks equivalent to that which you are asking under the Federal charter bill? And in those particular States, what is the actual experience? This State group would be a microcosm, if that's the word you use-representing what might happen nationwide under the same conditions. You don't have to answer it right now, but I think you ought to submit it for the record. If you have a few States which have short-term investment powers as well as mortgage investment authority, what in fact, is the experience? Do the banks drop out of the mortgage lending business in such cases? I think this is something that would be excellent for the record if you have the data.

Dr. ENSLEY. Yes, I would like to submit the supporting data for the record, for the States of New Hampshire and Massachusetts. The data will show that even though savings banks in these States have fairly liberal consumer lending powers the institutions there put a very small percent of their resources into consumer loans, varying from 0 to 8 percent. The data further shows-and this is particularly important that those banks with the largest percentage of their resources in consumer loans (and in our figures these include passbook loans, education loans, property improvement loans, not just regular consumer credit loans) have as large a proportion of assets in mortgages as banks with the smallest involvement in consumer loans. In other words consumer loans are more a substitute for other types of investments, such as bonds, not for mortgages. In other words, savings banks are clearly mortgage-oriented institutions. And by attracting young people, through providing consumer credit, you get them accustomed to savings bank services and they continue to come to our mortgageoriented institutions when they need housing credit. Then as they move into that stage of life when they are savers, they continue to bring their funds to us, and thus we get more of the savings within the community, which with our mortgage orientation, we channel into housing credit, assuring a greater aggregate volume of savings available for mortgage credit than if the savings are channeled into nonmortgage-oriented commercial banks.

It is also important to note that savings banks with higher ratios of consumer loans to assets-even though still quite small-have the highest gross earnings. This permits them to pay savings deposit rates more in line with competition and thereby compete effectively for savings.

(Supporting data referred to previously is as follows:)

TABLE 1.-Loans to individuals for personal expenditures: Holdings of mutual savings banks in States authorizing general-purpose consumer loans, Dec. 31, 1966

NOTE Loans to indivudals for personal expenditures include education loans, home improvement loans, as well as other installment and single-payment loans to individuals.

Source: State banking departments and National Association of Mutual Savings Banks.

TABLE 2.-Relationship of mortgage holdings and earnings to personal loan holdings in New Hampshire mutual savings banks, 1966

NOTE--Data on personal loans, mortgages and assets are as of June 30, 1966 while data on earnings are for the calendar year 1966. Simple averages are used so that data will not be dominated by large institutions. Source: Bank Commissioner of the State of New Hampshire.

81-082 0-67-15

TABLE 3.-Relationship of mortgage holdings and earnings to personal loan holdings in Massachusetts mutual savings banks, 1965

NOTE. Data on personal loans and assets used in compiling ratios of personal loans and gross earnings to assets are as of Oct. 31, 1965. Data on mortgage loans and asset data used in compiling mortgage to asset ratios are as of Dec. 31, 1965. Data on earnings are for the fiscal year ending Oct. 31, 1965. Simple averages are used so that data will not be dominated by large institutions.

Source: Commissioner of banks, the Commonwealth of Massachusetts, and National Association of Mutual Savings Banks.

Mr. COAN. Let me just make one final comment here relative to bills that are now pending before the subcommittee. Senator Sparkman says this time and again. He says, "We in Congress are ready, willing, and able to move on these bills once industry gets together." You cannot expect Congress to approve these bills when there is such wide diversion of opinion in the industry.

If those of you who are trying to get together will continue working along those lines, you will have a much better chance of getting

action.

Dr. ROGG. I had one final comment. I was reserving the right of final comment. I think it is maybe a little presumptuous of me to speak for the entire group, but I am going to take it on myself to express our regret that the Senators have found themselves unable to be here, but we express our appreciation that the staff has very ably given us a chance to keep this going in a very lively manner. I think you did an excellent job, and I think the whole panel agrees.

Mr. WEINER. Hear, hear.

Mr. COAN I appreciate those kind sentiments. This is a blue ribbon panel and I wish that Senator Sparkman and other members of the subcommittee could have been present to talk with you. Unfortunately, this was a very difficult time to get attendance from the members. The Senate is meeting and voting on important legislation and unless we were to postpone the meeting to the middle of July we had no alternative but to continue under these difficult circumstances. I hope you did not mind. Senator Sparkman, I am sure would want me to express his appreciation for your papers and your attendance and the opinions expressed here this afternoon.

The record will stay open for a short while and any pertinent material you want to send in will be included in the record.

(Whereupon, at 4.35 p.m., the hearing was adjourned.)

(The following letter was received by the committee after the hearings ended:)

FEDERAL HOUSING ADMINISTRATION,
Washington, D.C., July 14, 1967.

Mr. CARL A. S. COAN,

Subcommittee on Housing and Urban Affairs,

Committee on Banking and Currency,

U.S. Senate, Washington, D.C.

DEAR CARL: I am replying to your letter of July 7, 1967, concerning Mr. P. C. Jackson's comments about the impact of tight money on FHA insurance applications for proposed and for existing homes.

The attached table shows the seasonally adjusted annual rates of proposed and existing weekly home mortgage applications for the period January to June 1967. These figures support Mr. Jackson's preliminary information that the rate of existing home applications has declined since May 11, with the exception of the week ending June 8. The rate declined to 622,000 in the week ending June 22 and again to 600,000 for the week ending June 29. The weekly rate of proposed home applications pursued a more vigorous, though erratic, course in this same period. After May 11, this rate declined four times and rose three times. The rate of 174,000 cases in the week ending June 22 constituted a 14 percent advance from the previous week and the highest level reached so far in 1967. In the following week, a 6 percent decline to 164,000 cases took place.

In order to provide a more stable long-range perspective for your analysis, our Research and Statistics staff have calculated seasonally adjusted annual rates by months for the period January 1965 through May 1967, as shown on the attached table. These monthly rates indicate that existing construction was making a stronger recovery than proposed in 1967 prior to the month of June. The seasonally adjusted annual rate of 174,000 existing cases in May 1967 was the highest since January 1966. However, existing applications experienced during calendar 1966 a deeper recession from which to recover. An average of these monthly rates for the years 1955, 1966, and January-May 1967, indicates that the tight money market prevailing for most of 1966 hurt existing applications more than proposed. To illustrate, the average of the monthly rates for 1965, when the mortgage money market presented no major problem, yields an existing rate of 836,667 cases, which declines by 37 percent to 528,250 in 1966. The same average for proposed construction shows only a 19 percent decline from 188,250 cases in 1965 to 152,333 in 1966. The average of the first five months of 1967 of 596.800 existing applications is a decrease of 12 percent from 1966, while the proposed average rate decreased by 10 percent to 153,200 cases. It may be seen also that the monthly reported annual rates decline more for existing than for proposed by 60 percent from the April 1965 peak of 945,000 to an October 1966 low of 375,000 for existing units, compared with 47 percent for proposed homes from a peak of 222,000 in November 1965 to a low of 117,000 in July 1966. I hope that this provides the data required for the Subcommittee's Study of Mortgage Credit.

Sincerely yours,

P. N. BROWNSTEIN, Assistant Secretary-Commissioner.