The alternative congressional course of reducing reserves allowed mutual savings banks and savings and loan associations would not appear to be in the public interest as the reserve ratios, at least in relation to loans, would not appear excessive in relation to possible losses in any future depression. The allowance of a 10-percent reserve to commercial banks would not only serve the public interest directly, it would also eliminate the cause of much of the acrimony which has developed in the relationships between the various groups within our financial fraternity as a result of the present unjustified discrimination. 5. CONCLUSION A. Recommendation On the basis of our analysis of the public interest, the extent of possible future losses, and the reserves allowed by congressional action to other financial institutions, this Advisory Committee recommends the adoption of legislation which would allow the commercial banks to build maximum aggregate reserves equal to 10 percent of loans. We further recommend that the maximum amount that may be deducted from taxable income and set aside as an addition to reserves for bad debt in any one year be limited to 1 percent of loans. 36 B. Possible objections In making these recommendations we are not unmindful of three objections which might be raised: (i) that such a provision would reduce the Federal income tax revenue, (ii) that it would represent a departure from the relation of reserves to the experience of the individual banks, and (iii) that the allowance of such reserves would constitute an unwarranted advantage to the banks. In passing we will note our answers to each of these three possible objections. (i) The loss of revenue Any increase in allowable deductions as additions to reserves for bad debts will, at least temporarily, reduce revenue. The amount of the annual reduction which will result from the adoption of our recommendation is not precisely calculable. We cannot accurately estimate the number of additional banks that will adopt the reserve method or the extent to which they will avail themselves of the opportunity to deduct the full amount each year. However, despite the loss of revenue, in our opinion, it is in the public interest to encourage as many banks as possible to adopt the reserve method and to build up their reserves as rapidly as they may be permitted to do so. While the loss of annual revenue may be substantial, the maximum annual deduction cannot exceed by more than one-quarter the amount which might be deducted under the present formula. We have seen the present regulation permits an average annual deduction of eight-tenths of 1 percent of loans. Our proposal is merely to increase that annual deduction to an even 1 percent. This is an increase of only two-tenths of 1 percent or an increase of only 25 percent in the amount of the present maximum deduction. Our proposal would also continue the maximum deduction beyond the present period of 3 years to an extended period of 10 years. However, if the increase in reserves achieves its purpose of reducing the severity of future depressions, the total Federal revenue will be saved far more than the small reduction resulting from the requested reserves. Committed as our country is to a high level of annual expenditures, no reduction in Federal revenue should be made without good cause. But there are few causes better than the prevention of a recurrence of the national paralysis which resulted from depositor losses and the unavailability of credit in the last de deposits requiring greater liquidity in their investments. In any case, the investment of funds in real estate today is not a sign of insecurity in view of the fact that an important segment of such loans are backed by the Federal Government. Table 9 indicates, in the case of federally insured mutual savings banks for which statistics are available, that, as of June 30, 1950, about 33 percent of the real-estate loans held by these banks were either insured by the Federal Housing Administration, or guaranteed by the Veterans' Administration. Moreover, even the other real-estate loans are more secure than formerly was the case because of the present general use of 'declining balance' loans in lieu of the older 'fixed amount' loans." U. S. Code Congressional and Administrative Service, 82d Cong., 1st sess., 1951, vol. 2, p. 1991. 36 Excluding, as the present regulation excludes, those loans subject to 100 percent U. S. Government insurance. pression. The avoidance of a recurrence of such evils more than justifies the modest increase in maximum deductible additions to reserves of two-tenths of 1 percent of loans and the continuation of such deductions over the extended period. (ii) The adoption of an industrywide formula for commercial banks While fully recognizing the Treasury's hesitation to depart administratively from the individual experience formula, we see no valid reason for continuing to relate reserves to the prior experience of an individual bank in any new legislative provision. Congress has rejected this prior-experience concept in favor of an industrywide formula in authorizing reserves for mutual savings banks. Congress has rejected this prior-experience concept in favor of an industrywide formula in authorizing reserves for savings and loan associations. It is clear that Congress should similarly reject the unrealistic prior-experience concept in favor of an industrywide formula in authorizing adequate reserves for commercial banks. (iii) An advantage to the commercial banks A bank could not divert (without first paying the deferred tax) to its stockholders any part of its reserve for bad debts. It could, however, "use" those funds, for the funds set aside as a reserve become a part of the general assets and are held in cash, Government securities, and loans in the same proportion as other assets. Thus the bank does get some interim benefit from such funds. That, however, is not objectionable. The same is just as true of reserves set aside under the present formula as it would be under the provision we propose. It is just as true of the reserves allowed mutual savings banks, savings and loan associations, or the myriad business concerns that set aside reserves for credit losses of one kind or another. In short it is not a valid objection. C. Conclusion We We have analyzed the problem here discussed in considerable detail. have come to the conclusion that it is imperative that present administrative provisions for reserves for bad debts be superseded by a legislative enactment providing the means by which the commercial banks may set aside reserves roughly four times as great as the average amount permitted at present. This recommendation has not been captiously made but is advanced with great respect for what has been accomplished administratively in the past, but with even greater respect for the first responsibility which faces our banking system and those who work in it, or legislate for it. That responsibility is to protect the public interest by enabling the commercial banks to build up reserves for bad debts in an amount sufficient to absorb all of the losses which may be experienced-without impairing the safety or availability of the citizens' deposits or the availability of that credit which is our first line of defense against economic disaster. (The above was also submitted by the Association of Reserve City Bankers.) STATEMENT OF THE UNITED STATES SAVINGS AND LOAN LEAGUE The United States Savings and Loan League, comprised of 4,200 savings-andloan associations, building-and-loan associations, and cooperative banks throughout the country, expresses its appreciation to the Senate Banking Committee for the committee's deep interest in sound financial legislation, as evidenced by the current study and proposed recodification of all banking laws. The three basic savings-and-loan statutes have not been completely rewritten since enactment during the early 1930's, and it is appropriate and timely to undertake a thorough study and review with a view toward strengthening and modernizing the statutes. On the basis of legislative positions and policies previously adopted, the league can now submit comments on the major proposals by the Federal Home Loan Bank Board as well as certain additional recommendations regarding savingsand-loan legislation. The league's annual convention is November 12 to 16, in Philadelphia, at which time the league will adopt specific positions on each of the 60 recommendations of the Board. I. THE REMOVAL OF OBSOLETE PROVISIONS FROM SAVINGS-AND-LOAN LAW The Federal Home Loan Bank Board's submitted recommendations include a substantial number of amendments which are clearly dictated as necessary to remove obsolete and outdated provisions. It appears that the Board has carefully and painstakingly reviewed the present law, and the United States League supports all of the Board recommendations which deal solely with the removal of obsolete material. The elimination of this material would simplify the reading and understanding of the law, and thus is a very desirable objective. II. TECHNICAL REVISIONS AND CLARIFICATIONS The Federal Home Loan Bank Board has submitted a series of technical and clarifying amendments which, in general, have the support of the United States League. However, it appears that some of the apparently technical changes do have substantive significance to which the league might take exception. This is particularly true in connection with the major rewriting of sections dealing with conservators and receivers which, while largely technical in nature, could have substantial effect on important phases of savings-and-loan operation. In addition to the matters submitted by the Board, the United States League has some additional suggestions for technical approval that are included later in this statement. III. SUBSTANTIVE PROPOSALS BY THE FEDERAL HOME LOAN BANK BOARD The Federal Home Loan Bank Board has, in addition to those technical revisions, submitted either in suggestion form or in actual draft form a number of substantive policy-type amendments. The more important of these substantive proposals by the Board are listed below, followed by the comment of the United States League. 1. Give the Board the power to define, examine, and require reports from affiliates of savings-and-loan associations. The United States League feels that the relationships between officers and directors and the association are and should be governed by the principles of trusteeship. The request for additional authority by the Board appears unnecessary. The complexity of this question is underscored by the fact that the Board has submitted no specific language and has commented that "the specific form which such amendment might take is a matter which deserves careful and mature consideration." The league is agreeable to working with the Board to review this whole question, but is opposed to any broad new grant of power to the Board. 2. Give the Board the power to examine and regulate noninsured Federal Home Loan Bank member savings and loan associations. (There are approximately 850 institutions which are members of the Federal Home Loan Bank System but not members of the Federal Savings and Loan Insurance Corporation.) The league is opposed to this recommendation which would bring about a change in the fundamental concept of the Federal Home Loan Bank System. The Bank System is a credit reservoir rather than a supervisory mechanism. Indicative of this is the fact that 25 savings banks and 2 insurance companies maintain membership in the Federal Home Loan Bank System although clearly it is not intended that these institutions be supervised by the Federal Home Loan Bank Board. This request appears to be an attempt to extend Federal power into what is appropriately a State function. The league does recommend that the Board adopt suitable restrictions on the use of the Federal Home Loan Bank emblem and the Federal Home Loan Bank advertising legend, particularly in advertising not predominantly local, so as to avoid the possibility that the public may erroneously assume that such institutions have insurance of accounts. 3. Give the Board the power to remove an officer or director of a Federal savings and loan association. The league is vigorously opposed to this extreme grant of power which would permit the Board to suspend and remove any officer or director of a Federal association upon grounds which are so broad as to be, in effect, completely at the discretion of the Board. No adequate protection is provided the accused, and no opportunity to cease or correct the alleged practice. This provision is far more drastic than any power now provided in any financial statute. 4. Express in the statute the authority for Federal associations to make loan charges to the same extent permitted local thrift and home-financing institutions. The United States League concurs in recommendation No. 4 to permit Federal associations to make charges on loans similar to those permitted local institutions. This is a technical change and is similar to the provision whereby national banks may charge rates permitted for State banks. 5. Amend the statutory liquidity requirement for Federal Home Loan Bank member savings and loan associations. The league is opposed to this recommendation changing the statutory liquidity requirements for bank member institutions. The league favors increased liquidity for savings and loan associations, but has recommended that it be accomplished through credit policies of regional Federal Home Loan banks which would reward institutions maintaining adequate liquidity. No change in the law is needed to adopt the league's recommendation. 6. Remove the Federal Home Loan Bank Board and Federal Savings and Loan Insurance Corporation from congressional budgetary procedures. The league supports this recommendation because it would permit the Board, which operates without any tax funds, the same flexibility in budget control which has previously been provided for the Federal Reserve and Federal Deposit Insurance Corporation. 7. Establish statutory powers of the Federal Savings and Loan Insurance Corporation over mergers. The league believes that the Insurance Corporation has already assumed the power over mergers. The league recommends that the Corporation's authority over mergers, whether by law or regulation, be limited to those mergers which (a) involve an increase in assets of 25 percent or more, or (b) involve an increase in assets of 10 percent or more, or $1 million, whichever is lesser, and involve the extension of the surviving institution's lending area, or result in the establishment of an office beyond the association's previous lending area. 8. Establish statutory powers of the Federal Savings and Loan Insurance Corporation over pension plans. The league believes that the Corporation's authority over pension plans should be limited to a provision that in the case of default of the institution involved, the Insurance Corporation's claims on the assets shall be superior to the claims under any pension plan or deferred compensation contract. 9. Revise and extend powers to appoint conservators and receivers for Federal associations. The league believes that provisions regarding the appointment of conservators and receivers must clearly provide for intermediate actions under section (d) (1) of the law and recommends that the existing language be amended in this manner and that the Board recommendation not be adopted. IV. ADDITIONAL LEGISLATIVE SUGGESTIONS The current United States Savings and Loan League legislative program includes a number of proposals not covered by the Federal Home Loan Bank Board recommendations. This includes proposals both with respect to existing savings and loan law as well as subjects on which no current law exists. The league recommends: 1. A broadening of investment powers for Federal associations to permit a limited right to invest in municipal securities and other securities approved by the Federal Home Loan Bank Board. 2. A limited right of Federal associations to invest in other insured savings and loan associations. 3. A clarification of lending authority of Federal associations, either by the law or regulations, to permit such associations to finance the preparation and improvement of home sites. 4. A clarifying amendment to title IV of the National Housing Act to make certain that married savers in certain community-property States are provided insurance coverage on an equal basis with savers in other States. 5. Increase from 20 to 25 percent the portion of the assets of Federal associations that may be invested in certain special classifications of loans (as now defined in the law and regulations). In addition to these amendments to savings and loan law, the United States Savings and Loan League recommends: 1. Legislation restricting the establishment and operation of holding companies in the savings and loan business. In this connection the league has specifically endorsed H. R. 10811 introduced in the House of Representatives by Representative Brent Spence, chairman of the House Banking and Currency Committee. 2. An amendment to section 2410 of the Judicial Code to eliminate Federal redemption rights and to provide nonjudicial sales which affect the rights of the United States as provided by local law. 3. Legislation which would make the accounts issued by insured institutions, up to $10,000, lawful investments for all public funds of the United States, fiduciary and trust funds under the authority or control of the United States or any officer or officers thereof, and for funds of all corporations organized under laws of the United States. 4. An amendment to section 13 of the Federal Reserve Act to make shortterm Federal home-loan bank obligations eligible for rediscount at Federal Reserve banks and eligible for purchase in the market by the Federal Reserve banks. The league further recommends that the Federal Savings and Loan Insurance Corporation be permitted to purchase obligations of the Federal homeloan banks. 5. Legislation directing the Federal Deposit Insurance Corporation to cease the practice of designating savings accounts in insured savings and loan associations as "defaulted securities" in its examination reports. Mr. DONALD L. ROGERS, CREDIT UNION NATIONAL ASSOCIATION, INC., Counsel, Committee on Banking and Currency, United States Senate, Washington, D. C. DEAR MR. ROGERS: Thank you for your letter of September 12, 1956, and for the copy of the press release announcing the appointment of the Advisory Committee for the study by the Senate Banking Committee of Federal statutes governing financial institutions and credit. Subsequently we received a copy of the recommendations made by the Bureau of Federal Credit Unions with respect to possible amendments to the Federal Credit Union Act. In response to your suggestion, our organization is submitting herewith a statement relative to the proposals made by the Bureau of Federal Credit Unions. Also, we should like to submit another statement containing recommendations offered by the credit-union people for amendments to the Federal Credit Union Act. The executive committee of the Credit Union National Association is meeting this week and as soon as it can review and complete approval of these proposals they will be forwarded to you. We shall have them to you not later than Saturday. Sincerely yours, HUBERT M. RHODES, Manager, Washington Office. "SEC. 8, bylaws." COMMENTS ON RECOMMENDATIONS OF AGENCY 167. REMOVAL OF OBSOLETE DATE IN SECTION 8 We concur with the proposed deletion of “on June 26, 1934.” 168. MEMBERSHIP OF SUPERVISORY COMMITTEE "SEC. 11, Management.-(a) Generally." We do not concur with the proposal to eliimnate the overlap of supervisory committee membership with the board of directors or credit committee. However, we are of the opinion that the section should be modified to provide that the treasurer may not serve on the supervisory committee. Reason We believe that there are many cases where it is advantageous to have directors serve as members of the credit and supervisory committee in credit unions having a small potential membership. Also, a member of the board on this com 1 Numbers correspond to those contained in the committee print of legislative recommendations of the Federal supervisory agencies to the Committee on Banking and Currency of the United States Senate, dated October 12, 1956, and entitled "Study of Banking Laws." |