Mr. BUBB. Do the Federal home-loan banks have a right to deny credit to associations applying for it? Mr. ROBERTSON. Yes; they do. It is not, however, quite as simple The Home Loan Bank Act provides that a board of directors shall administer the affairs of the bank fairly and impartially without discrimination, but it can deny credit if it thinks the situation is such that credit is not justified. Mr. BUBB. Then, in effect, if the Federal home-loan bank finds that an institution is unsafely managed, it could deny credit to that institution? Mr. ROBERTSON. Yes. Mr. BUBB. Thank you. Since the liquidity section was originally added in 1951, the Board, as I understand it, has had the authority to raise and lower the liquidity requirement between 4 and 8 percent, and to establish different classes for various member institutions. Has the Board ever established such classes? Mr. ROBERTSON. I understand that it has not. Mr. BUBB. Under the Board's proposal made today, what would be the maximum gross liquidity that could be required? Mr. ROBERTSON. I don't know that I understand the question. Mr. BUBB. Under the liquidity proposal you made today, we can't quite figure out Mr. ROBERTSON. Oh, I understand. We don't know. Mr. BUBB. In other words, you don't know how much liquidity they might have? Mr. ROBERTSON. The gross liquidity is a matter that could be determined only after the formula was applied to the institution concerned. Mr. BUBB. What is meant by the phrase "specified liabilities or portions thereof"? I am still talking about item 121. Mr. ROBERTSON. Those are liabilities to be specified. For example, trust funds or funds that were set aside that didn't belong to the institution. They might be in the form of cash or Government bonds, but they would be deductible; a portion or perhaps all of the loans in process; and other liabilities or portions thereof. Mr. BUBB. To help my cohorts here, I want to ask some questions regarding recommendation No. 144. On page 182 of the committee print, as part of the proposed revision of the present section 5 (d) of the Home Owners Loan Act, the Board asked for power to define by regulation or otherwise what constitutes unsafe or unsound practice. Do you think the Board would be unduly impeded in enforcement if it is not granted such power to define? Mr. ROBERTSON. I think it would be helpful to have it defined. Mr. BUBв. In a substantial or serious incident, do you not think the court on review could be trusted to decide whether the acts approved constituted an unsafe or unsound practice or method of operation? Mr. ROBERTSON. I think so if we had a clean-cut, clearly determined case. But there are a great many borderline cases that would not be so easy to decide. Mr. BUBB. What do you have in mind there by the words "or otherwise"? Mr. ROBERTSON. I shall have to ask counsel that question. Mr. CREIGHTON. We need that in order to deal with borderline cases. We feel if we were able to define what the Board would consider unsafe and unsound operations that we could avoid a lot of supervisory problems that do arise at the present time. It is not clear in every case what constitutes unsafe, unsound practice. I realize that the courts have said that unsafe and unsound practices for financial institutions have been pretty well spelled out over a period of years. However, we think if we had the power to regulate and define it that it would be helpful to us in our supervisory problems and would, to a great extent, do away with self-dealing and conflict-of-interest cases. Mr. BUBB. Thank you. Mr. Robertson, let's note that in recommendation 84, the Board of Governors of the Federal Reserve System do not ask that that Board's power to remove an officer or director include the power to define unsafe practices. Do you think you could get along with it as the Federal Reserve is able to do? Mr. ROBERTSON. I think we could get along with it; yes. Mr. BUBB. Could you also give a warning and an opportunity to desist or to correct as they do in every case? Mr. DIXON. As a practical matter, I think the Board concluded that a person who was inclined to self-dealing or other unsafe or unsound practices once is very likely to repeat, and that was the reason that the Board feels that asking them to desist does not necessarily solve the question. Mr. BUBB. I don't agree with you on that, Mr. Dixon. I am only asking if you don't think the savings and loan people are as honorable as the bankers are. Mr. DIXON. I wouldn't comment on the bankers. I am just saying that my experience has been that a person who has that turn of mind is inclined to repeat the offense and if you leave him in and just say "desist," he may desist for a year and then may be right back in. That is my own thinking, and I think it was what the Board concluded and the reason it was put in that way. Mr. BUBB. But you still feel that you could operate under the same law concerning that as the Federal Reserve Board does? Mr. DIXON. Of course, we will operate under any law that the committee here and the Congress decides is best for us to operate with. Mr. BUBB. All right. Mr. Robertson, are you familiar with the bill introduced by Representative Brent Spence to restrict holding companies in the savings and loan business? Mr. ROBERTSON. I only know that there was such a bill. Mr. BUBB. Would your Board, the Federal Home Loan Bank Board, be opposed to such legislation? Mr. ROBERTSON. From what conversations I have heard and other comments, I would say not. Mr. BUBB. I think the industry is very much for it. That is why I brought out that point, Mr. Chairman. Two years ago, the Federal Home Loan Bank Board endorsed a proposal to permit Federal associations a limited right to acquire land in the assistance of slum-clearance projects and the preparation of home-building sites. As far as you know, would the Federal Home Loan Bank Board still be agreeable to that amendment? Mr. ROBERTSON. I will have to ask Mr. Dixon to answer that. Mr. DIXON. Yes. The Federal Home Loan Bank Board would be, depending upon the limitations. Mr. BUBB. Senator Douglas, that is all I have right now. like to ask 1 or 2 later, if that is agreeable. Senator DOUGLAS. Mr. Cravens. I might Mr. CRAVENS. Mr. Robertson, subsection (a) of section 4 of the Federal Home Loan Bank Act, I notice, includes insurance companies, and you stated it did have two such members. Should they be members? Mr. ROBERTSON. That I can't answer. How long have they been members, Mr. Dixon? Mr. Dixon. It is my understanding, Mr. Cravens, they have been members since the early days. I can see no particular reason or advantage to them, but they still retain membership. They have a line of credit, of course. Mr. CRAVENS. That is what I was thinking. Have they ever used their right to borrow, or Mr. DIXON. I suppose at one time they did. I don't think they have in recent years. Mr. CRAVENS. Do you think it is a sound provision? Mr. DIXON. I can't answer that question. I had better say, I don't know. Mr. CRAVENS. Is there a logical reason why they should be permitted to be members? Mr. DIXON. Only to the extent that Congress thought that there was an advantage in permitting them to have membership in the system. Mr. REESE. Mr. Cravens, wouldn't this be a good time to clarify the field of the Home Loan Bank Board and recommend that any extraneous institutions be taken out? They might be a source of terrific difficulty in case of troubled times where you would be called upon for additional memberships and help. Wouldn't this be the opportunity to make the Federal Home Loan Bank System just for savings. and loan associations? Mr. ROBERTSON. It might be. I don't know the history, nor reason. for those two insurance companies being members. Mr. REESE. It isn't the two. It is the field, having the field wide open in case they want membership in the Home Loan Bank System. Mr. ROBERTSON. Well, there are, of course, also savings banks in the system. They would be in a different category and different position from the insurance companies. I, like Mr. Dixon, don't see why the insurance companies were in, but they are. Mr. CRAVENS. It hasn't had very much appeal, so we will proceed with only two being members. A technical question: Should the provisions of the Reorganization Plan No. 3 of 1947 be written into the statutory authority or not? They would still be operating in either case. Mr. ROBERTSON. Will you answer that, Mr. Creighton? Mr. CREIGHTON. I can see no direct advantage in writing it in. Mr. CRAVENS. You have a recommendation 146 with respect to conversion of a mutual association into a stock company. Are you concerned about any further language to protect the mutual owners upon conversion? Mr. ROBERTSON. We have just published a regulation which we hope will completely protect the mutual shareholders. Mr. CRAVENS. You have ample authority for that regulation, I assume? Mr. ROBERTSON. Yes, sir. Mr. DIXON. With respect to Federal associations, Senator, we do. I say there isn't any question in my mind that we have the authority with respect to Federals. There may be a question with regard to State-insured mutuals. Senator DOUGLAS. What have you done in your regulation? Mr. ROBERTSON. I will submit it for the record. Mr. DIXON. Do you want it read? The Senator would like to have it read? Senator DOUGLAS. No; I don't necessarily want to have it read. What do you do so far as Federal savings and loan institutions are concerned, and what, if anything, do you do on State savings and loans which are federally insured? (The regulation referred to follows:) PROPOSED AMENDMENT RELATING TO CONVERSION, MERGER, OR REORGANIZATION OF FEDERAL SAVINGS AND LOAN ASSOCIATIONS Resolved, That, pursuant to Part 108 of the General Regulations of the Federal Home Loan Bank Board (24 CFR Part 108) and section 142.1 of the Rules and Regulations for the Federal Savings and Loan System (24 CFFR 142.1), it is hereby proposed that, pursuant to section 5, 48 Stat. 132, as amended (12 U. S. C. 1464), Part 146 of the Rules and Regulations for the Federal Savings and Loan System (24 CFR Part 146) be amended by an amendment the substance of which is as follows: "Part 146 of the Rules and Regulations for the Federal Savings and Loan System is hereby amended by amending the heading of said Part to read 'MERGER, DISSOLUTION, REORGANIZATION, AND CONVERSION' and by adding to said Part a new section to be numbered 146.5 and to read as follows: "SECTION 146.5 Conversion from Federal to State charter under last paragraph of subsection (i) of section 5 of the Home Owners' Loan Act of 1933. The following minimum requirements are hereby prescribed for approvals pursuant to the last paragraph of subsection (i) of section 5 of the Home Owners' Loan Act of 1933, as amended: "1. The conversion shall be effected in accordance with a plan approved by the Board. ""2. The plan shall be submitted to the Board prior to the giving of notice as hereinafter provided. "3. The association shall give formal notice of a special meeting called to vote on the plan, which notice shall set forth the terms of the plan, the rights of the members, and such other matters as the Board may require. "4. The plan shall be approved by a vote of not less than two-thirds in withdrawal value of the outstanding shares of the association and not less than twothirds in number of the vote cast at the meeting aforesaid, and by the Federal Home Loan Bank Board. "5. The entire amount of guaranty or permanent stock or other similar stock, if any, shall be issued, without payment, pro rata to all shareholders of record at such date as the Board shall fix: Provided, That scrip for fractional shares shall be issued to such extent and in such manner as the Board may require, with such provision for redemption, liquidation, or other disposition of such scrip as the Board may require: Provided further, That if the Board determines that it is not feasible to issue the entire amount of such stock as hereinbefore provided, all or such part thereof as may be specified in the plan may be is sued otherwise than as hereinbefore required, provided the issuance thereof is in accordance with provisions of the plan. The amount of such stock shall be as required by the Board and shall be at least equal to the minimum amount required by the laws of the State. In the event that guaranty or permanent stock or other similar stock is provided for in the plan, the plan shall contain provisions which, in the judgment of the Board, are adequate to assure that each shareholder of record at said date will be entitled to receive, in the form of (a) a withdrawable account or accounts of the converted association, (b) such stock or scrip, or (c) cash, or such combination of all or any thereof as may be provided for in the plan, the full equivalent of his interest in the converting association. "6. The plan shall include appropriate provisions to prevent reduction of the Federal insurance reserve as a result of action under the plan.' Resolved further, That all interested persons are hereby given the opportunity to submit written data, views, or arguments on the following subjects and issues: (1) Whether said proposed amendment should be adopted as proposed; (2) whether said proposed amendment should be modified and adopted as modified; (3) whether said proposed amendment should be rejected. All such written data, views, or arguments must be received through the mail or otherwise at the office of the Secretary, Federal Home Loan Bank Board, Federal Home Loan Bank Board Building, 101 Indiana Avenue NW., Washington 25, D. C., not later than December 11, 1956, to be entitled to be considered, but any received later may be considered in the discretion of the Federal Home Loan Bank Board. Mr. DIXON. One of the legislative proposals is that through the Insurance Corporation we be given clearer authority to control conversions of State-chartered insurance associations. Senator DOUGLAS. But you don't feel that you have authority to do it by regulation? Mr. DIXON. There is a question about it, Senator. Senator DOUGLAS. But you have not exercised that authority? Mr. DIXON. We have tried to exercise it. We have exercised it, and I think have had a salutary effect, but we would like it clarified by the Congress. We would like our authority Senator DOUGLAS. Could you tell us in brief what you have done so far as you have done this at all? Mr. DIXON. We just simply refused to approve applications. However, the statute says that the Insurance Corporation shall approve security forms. On that basis, we have refused to approve, pending working out of an equitable formula. Senator DOUGLAS. So that so far as you are concerned and to the degree which you think you have powers, you are now checking the conversion of mutual savings and loan institutions into stock institutions; is that correct? Mr. DIXON. We are. Senator DOUGLAS. Excuse me. Mr. CRAVENS. Certainly. We have asked almost everyone, we will ask you the same question: Should an officer or a director of a Federal savings and loan association be permitted to serve on the board of a bank or vice versa? Mr. ROBERTSON. I shouldn't think it would make any difference. Mr. CRAVENS. You don't see any area of conflict? Mr. ROBERTSON. No. Mr. CRAVENS. You mentioned 744 members of your system that are noninsured. Is there any logical reason why a member should have the privileges of the Federal home loan bank and not be insured? Mr. ROBERTSON. Except that they are different functions. The membership gives a credit facility, while the insurance is |