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Mr. CRAVENS. I understand. Maybe I should make my question a little bit different: Shouldn't it be a condition of membership?

Mr. ROBERTSON. I am not sufficiently experiencd to know.

Mr. DIXON. If the Congress should so determine. As you know, Mr. Cravens, there are many of the States that feel that that is a question that should be determined by the boards of directors and the officers of the association, that we should not deny credit simply because the association is in an area where we feel that there are already as many insured institutions as there should be. We would be reluctant to grant insurance to additional institutions in those areas.

Mr. CRAVENS. It would still be optional whether they wanted to be a member of the Federal home loan bank.

Mr. DIXON. Not necessarily optional. In other words, we also could control that and do.

Mr. CRAVENS. Is the situation similar to that of the Federal Reserve? You don't have to belong to the Federal Reserve, but when you do you have to be insured.

Mr. DIXON. We have just the opposite.

Mr. CRAVENS. Is the situation similar? Does the same logic apply? That is what I am asking.

Mr. DIXON. As far as I am concerned, I would think it could well be said that the same logic should be applied.

Mr. CRAVENS. Should the authority be continued to make advances to nonmember borrowers of the Federal home loan bank? I assume you are not using it now, are you?

Mr. ROBERTSON. They say not to any great extent.
Mr. CRAVENS. Should it be continued or discontinued?

Mr. DIXON. I would beg to have a little time to consider that. I wouldn't want to answer that off the cuff, because there are a number of elements involved. I think that ought to be given study.

Mr. CRAVENS. Do you require annual audits from Federal savings and loan associations?

Mr. DIXON. Pardon?

Mr. CRAVENS. Does the Board require annual audits of the savings and loan associations?

Mr. DIXON. Yes, sir.

Mr. CRAVENS. Is that in lieu of an examination?

Mr. DIXON. It is in addition to.

Mr. CRAVENS. In addition to.

Mr. ROGERS. Mr. Dixon, do you have a copy of that regulation providing for annual audits?

Mr. DIXON. Yes; we have it here.

Mr. ROGERS. I wonder if we could have it for the record.

(The regulation referred to follows:)

Resolved, That, pursuant to part 108 of the General Regulations of the Federal Home Loan Bank Board (24 CFR, pt. 108) and section 167.1 of the Rules and Regulations for Insurance of Accounts (24 CFR 167.1), section 163.17 of the Rules and Regulations for Insurance of Accounts (24 CFR 163.17) is hereby amended to read as follows:

For the pro

"163.17 Examinations; examination and audit; cost of same. tection of its insured members and other insured institutions each insured institution shall maintain safe and sound management, pursue financial policies that are safe and consistent with economical home financing and the purposes of insurance of accounts, and shall be examined periodically by the Corporation, with appraisals when deemed advisable, in accordance with general policies from time

to time established by resolution of the Board. Each insured institution shall be audited periodically by auditors and in a manner satisfactory to the Corporation, and may be audited at any time by the Corporation. The insured institution shall promptly file with the Corporation, through the Chief Examiner of the Federal home loan bank district in which it is located, a copy of every report of its independent audit, which reports must be certified by the independent auditors. If the association has neither been audited by independent auditors within the 12-month period immediately preceding the date of such examination or within the period that has elapsed since such last preceding examination, whichever is greater, nor adopted and maintained an internal audit program acceptable to the Corporation, the examination by the Corporation shall include an audit. The cost, as computed by the Corporation, of any such audit or examination, or both, including office analysis thereof, and appraisals made in connection therewith, overhead, per diem, and travel expenses, shall be paid by the institution examined or audited. The Corporation may obtain at any time, at its expense, such appraisals of any of the assets of an insured institution as it deems appropriate." Resolved further, That, since this amendment relates to procedure and practice, it is found that it is not necessary to issue such amended regulation with notice and public procedure thereon under the provisions of section 4 of the Administrative Procedure Act.

(Sec. 402, 48 Stat. 1256, as amended, 12 U. S. C. 1725; sec. 17, 47 Stat. 736, as amended, 12 U. S. C. 1437.)

This amendment shall be effective 30 days after the date of its publication in the Federal Register.

Mr. CRAVENS. What is the reasonable comparison between your assessment rate and that of the FDIC? I am speaking now of the savings and loan corporations?

Mr. ROBERTSON. I would like to ask Mr. Husband to answer that. Mr. HUSBAND. Our rate is one-twelfth of the withdrawable shares plus the creditor obligations, as compared with the FDIC, which is, as you know, one-twelfth less the credit of 60 percent, and I understand that further reduction is being requested.

Mr. CRAVENS. What does that come out? To what would it be comparable?

Mr. HUSBAND. Our present rate is more than twice as great as the net charge made by the FDIC. We were charging one-twelfth straight, and they are charging one-twelfth minus that credit.

Mr. CRAVENS. Yes, but they are paying it on total deposits and your individual deposits would more nearly come within the $10,000 insured.

Mr. HUSBAND. Our charge is on the total, but our insured accounts amount to about 98 percent of the total.

Mr. CRAVENS. That is what I meant.

Mr. HUSBAND. Plus the credit obligations, as I mentioned before. Mr. CRAVENS. Should legislation be enacted to regulate the establishment of branch offices of Federal savings and loan associations? That is, I am asking they be put, for example, on a par with national banks to be permitted branches only if the States permit them?

Mr. ROBERTSON. That is substantially what the savings and loan associations are doing. The variation would be in some States such as Florida where they have group banking in some other States. The savings and loan associations are not authorized to have branches where there isn't some State precedent.

Mr. CRAVENS. They do in Missouri.

MR. ROBERTSON. Is there any special reason that is so in Missouri? Mr. ROGERS. Mr. Cravens, I wonder if I could help the Chairman clarify the record on that.

Under your regulations you can establish a branch for a savings and loan in any State regardless of whether the State banks may have a branch-if State savings and loans may have a branch or mutual savings may have a branch or if you have a bank company operating. So the parallel is not to the national bank system which is limited to States specifically authorizing branches for State banks. Mr. CRAVENS. I see.

Mr. ROBERTSON. Thank you for clearing that up for me.

Mr. CRAVENS. I suspect that the ones I referred to in Missouri were State chartered rather than Federal.

Mr. DIXON. In Missouri, State chartered associations, as I remember it, can have branches.

Mr. CRAVENS. Yes; I think that is right.

You mentioned that you required audits in addition to examinations. How often do you examine an association?

Mr. ROBERTSON. I would like Mr. Bonesteel to answer that.

Mr. BONESTEEL. We are now on an annual basis, approximately; about a 12-month average between examinations.

Mr. CRAVENS. So that you do get an audit from each association and examine them almost once a year then?

Mr. BONESTEEL. That is right. If you want me to explain that briefly, I can do it. You see, the regulation provides that they have three options. They can have an audit by an independent certified public accountant, or they can have an audit combined with the examination we refer to it as an extension of the examining procedures to test the integrity of accounts-or, third, they can have an internal audit established on a very sound basis, and we have quite a number of tests and ways of determining whether it is acceptable or not, with an auditor who does not have anything to do with operating functions. So they have those three options, and every association has to be audited once a year.

Mr. CRAVENS. Should the matter of conflict of interest be included in your legislation? Should you have specific legislative authority with respect to the protection against conflict of interest, or do you have that problem?

Mr. ROBERTSON. Of course, we have it. We are trying to bring it out through some of this legislation we are asking for now; the right to examine affiliates, and things of that sort. You can call it what you want. It is to avoid and prevent improper self-dealing.

Mr. CRAVENS. I was thinking more in terms of your own examiners having a conflict of interest and going with an association, and so forth.

Mr. ROBERTSON. We don't have. We don't have that problem. Mr. CRAVENS. Is there any prohibition against members of the Home Loan Bank Board owning stock in a Federal savings-and-loan association?

Mr. ROBERTSON. None that I know of.

Mr. CRAVENS. Well then, I guess I should properly ask, Should there be then?

Mr. ROBERTSON. I Wouldn't know. I shouldn't think so. The amount involved is so small.

Mr. CRAVENS. I understand. I think we would like to have in the record whether or not Federal savings-and-loan associations are permitted to make political contributions out of their funds.

Mr. ROBERTSON. No; they are not.

Mr. CRAVENS. I am sure if I don't ask it Senator Douglas will.
Mr. ROBERTSON. No; they are definitely prohibited.

Mr. CRAVENS. They are definitely prohibited.

Mr. ROBERTSON. Yes. By Federal statute.

Senator DOUGLAS. Do you have any record of the statute having been violated by Federal savings-and-loan institutions?

Mr. ROBERTSON. I don't know of any.

Mr. CREIGHTON. No, sir.

Senator DOUGLAS. Would you make a search to find out?

Mr. ROBERTSON. Mr. Bonesteel says they review all the reports. Senator DOUGLAS. Will you ask your examiners to make a special search on this question?

Mr. ROBERTSON. Yes, sir.

Senator DOUGLAS. And report to this committee what your findings

are.

Mr. ROBERTSON. Yes, sir.

Mr. CRAVENS. Do you have any standard pattern of reserves that you require savings-and-loan companies to carry against their loans? They are permitted to carry a substantial amount before they pay taxes, but I wondered what the Board policy was.

Mr. ROBERTSON. Dr. Husband will answer that.

Mr. HUSBAND. Pursuant to statute, all insured members must accumulate a loss reserve restricted for loss purposes of 5 percent in 20

years.

Mr. CRAVENS. Five percent in 20 years.

Mr. HUSBAND. By regulation. The Board further provides that all insured members will continue to allocate at least 10 percent of their net income to reserves until the reserves are equal to 12 percent of the savings accounts; and if they ever fall below the 5 percent they must allocate 25 percent of their income.

Mr. CRAVENS. There is such a wide pattern of, we will call it, dividend rates. It seems to me I have seen some as high as 434 percent out West. Does this represent an inherent danger to the system or should they be controlled?

Mr. ROBERTSON. They could only be controlled by law. The Board doesn't have authority to control them now.

Mr. CRAVENS. Should you have that authority?

Mr. ROBERTSON. That is a question, I think, of philosophy. When the system was set up, the provision was that net earnings, after allocation to reserves and certain other accounts, should be distributed to the shareholders. Some of them obviously can earn more than others. Mr. CRAVENS. In other words, you don't think that they are able to do that because they are not retaining their proper reserves or the proper quality of assets?

Mr. ROBERTSON. I am sure there are a great many reasons for it. Mr. CRAVENS. I would assume to pay that you would have to make some investments that would be reasonably doubtful; to get that high a yield.

Mr. ROBERTSON. Certainly the high yield could be obtained 2 or 3 ways by a loose lending policy and high rates. It could also be done through efficient management. In other words, no two associations would necessarily have identical earnings. But I think the practical

answer is that the Board does not have at present the authority to control those dividends whether or not it should.

Mr. CRAVENS. Your approach to that, I assume, was that you do have the authority to appraise the quality of their assets, though. Mr. ROBERTSON. That is right.

Mr. CRAVENS. And if you have been paying out such high dividends that create poor assets, you can correct the situation?

Mr. ROBERTSON. That is correct, but that is a slow process.

Mr. CRAVENS. I understand. Do you think you should have the authority to deal with it?

Mr. ROBERTSON. I can't answer that question. I think that is a question for the Congress to decide.

Mr. CRAVENS. There is one other: You have at times today, in your opening statement, or your general statement in the committee print, or in this print, referred to unsound practices with respect to affiliates. Do they exist? I will ask you if they exist where, for example, you can't get a loan unless you get your insurance from an affiliate that the president of the savings and loan might own, or things of that nature? Is this a real problem?

Mr. DIXON. That, of course, has been specifically dealt with by the Department of Justice. There may be violations, but certainly every association is definitely instructed, and agrees when it is insured that it will not use coercion in the manner.

Mr. CRAVENS. Can an officer of the savings and loan borrow from his own savings and loan?

Mr. DIXON. Just for his own personal home.

Mr. CRAVENS. He can do that?

Mr. DIXON. He can borrow for his home.

Mr. CRAVENS. I have no further questions.

Senator DOUGLAS. One general question, Mr. Robertson, that I should like to ask:

Banks are sometimes classified into 2 groups, divided into 2 classes, investment banking and commercial banking. In investment banking, as I understand it, the banks later lend out only the amounts of money which have previously been deposited with them by depositors and, therefore, the deposit comes first and the loan comes second.

In commercial banking, the bankers now, I think, generally admit that it is the loan which comes first and which is made and the credit is given in the form of a deposit and that, therefore, the banking system creates monetary purchasing power.

The amount of this monetary purchasing power in this country is limited by the Federal Reserve requirements and the policies of the Federal Reserve Board, and the Government in effect becomes a partner in the creation of monetary purchasing power, getting about 18 percent, I think, of the profits from the creation of this purchasing power, and it is this which forms the chief revenue of the Federal Reserve System.

What I would like to ask you is this question about savings and loan instituions: Do they lend out only those precise amounts minus cash reserves which have previously been deposited in them by individual depositors and stockholders, or is there an additional amount of purchasing power which is created from the Federal Home Loan Bank System?

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