Reason The deposit insurance fund as of June 30, 1956, was $1,690,818,394, whereas, according to the 1955 Annual Report of the FDIC, its net loss of funds from the beginning of deposit insurance through 1955 is estimated at $19.7 million. In the light of these figures an increase in the assessment credit to insured banks is warranted. An increased credit will leave the banks with more earnings available to build up their capital accounts which in turn serve as a buffer to absorb losses before deposit insurance fund of the Corporation would be called upon. Furthermore, since the assessment credit is treated as taxable income, an increase in such credit would tend to offset the reduction in taxable income resulting from additions to bad debt reserves. We recommend a revised assessment base that will result in simplification and reduction in the amount of work of both the insured banks and the FDIC and which will reduce the administrative problems inherent in the present plan. 4. RESERVE FOR BAD DEBTS Banks are permitted to make pretax deductions for a reserve for bad debts under two alternative formulas authorized by the Treasury Department. The reserves permitted by these formulas are neither adequate nor satisfactory in application. They are clearly inadequate to absorb the losses of a depression period because they are based upon the banks' loss experience in an average year. They are unsatisfactory because they are too complicated for use by many of the smaller banks. A survey made in 1955 showed that only 55 percent of the banks were on the reserve method at the end of 1954. In 1953 a proposal was made to the Treasury Department for permission for banks to use an industrywide percentage loss deduction instead of one based on the individual bank's own loss experience. The Treasury Department has taken the position that it does not have the authority under the Internal Revenue Code to authorize the use by banks of such a formula. If an industrywide percentage deduction is to be made available to banks, it would have to be authorized by the Congress. It is proposed, therefore, that the Internal Revenue Code be amended to adopt an industrywide basis for reserves for bad debts under which a percentage of total loans outstanding would be permitted as a current deduction from income each year until the accumulated reserve reaches a limit also calculated as a percentage of total loans outstanding. The maximum amount so allowed should be adequate to absorb the losses that past experience demonstrates may be sustained in a period of economic recession. Reason Provision for adequate reserves out of current earnings to meet future loan losses would contribute to the safety of depositors and the availability of credit so necessary to provide employment and business activity in periods of economic recession. For these reasons all banks should be encouraged to establish and maintain such reserves. The proposal should not result in any ultimate loss of tax revenue as it amounts to a deferment of tax since all bad-debt losses on loans must be charged to the reserve. 5. CUMULATIVE VOTING Amend section 5144 of United States Revised Statutes to permit shareholders to utilize the cumulative voting procedure for election of directors of national banks only if provided for in the articles of association. Reason It eliminates the absolute right now contained in the statutes which in some cases has resulted in discord and dissension on bank boards and in upsetting public confidence. 6. CONSTRUCTION LOANS Amend section 24 of the Federal Reserve Act to permit national banks to make construction loans on industrial and commercial buildings with maturities not to exceed 18 months, provided that there is a valid takeout agreement from a financially responsible concern. 84444-56-pt. 1-7 Reason National banks now have no such authority and consequently construction loans are subject to the restrictions on loans secured by real estate. This legislation would place national banks on a competitive basis with State-chartered banks which have such authority. 7. INCREASE OF AGGREGATE OF CONSTRUCTION LOAN OUTSTANDINGS Amend section 24 of the Federal Reserve Act to increase the aggregate amount of construction loans which a national bank can hold from 50 percent of its capital to 50 percent of its combined capital and surplus. Reason Recently the maximum maturity on construction loans on residential and agricultural buildings was extended from 6 to 9 months. This has resulted in increasing the outstandings of construction loans held by national banks. The proposed legislation to authorize construction loans on industrial and commercial buildings for 18 months, if enacted into law, will have the effect of still further increasing such outstandings on all construction loans. Therefore, the proposed increase of the aggregate amount of construction loans which a national bank can hold is necessary and fully justified. 8. DEFINITION OF LEASEHOLD AS SECURITY FOR REAL ESTATE LOANS Amend section 24 of the Federal Reserve Act so that a leasehold pledged as security for a real-estate loan shall be defined as one having a maturity or a renewable provision for a period of not less than 10 years beyond the final maturity of the real-estate loan. Reason The present definition is too severe as to the length of time a leasehold has to run. The proposed change is more realistic and is related properly to the maturity date of the loan, allowing sufficient time for full liquidation of the loan even in the event of a default. 9. PROHIBITED PRACTICES Amend section 21 (a) of the Banking Act of 1933, as amended by section 303 (b) of the Banking Act of 1935 (title 12, U. S. C., sec. 378), by adding a new paragraph at the end thereof to make it unlawful for any institution organized under the laws of the United States to represent in any manner that it is a banking institution, or to use a business or corporate name which purports to be or suggests that it is a banking institution, or to use terms in advertisements or other mediums of communication to the public which are calculated to convey the impression that it is a banking institution, unless the law under which such institution is organized expressly authorizes it to engage in the business of receiving deposits or, if not authorized to engage in such business, expressly authorizes the use of the word "bank” in its corporate or business name. Reason Institutions which are not designated as banks and are not authorized to engage in the business of receiving deposits should not be permitted to mislead the public by holding themselves out to be, or by conveying the impression that they are banking institutions or authorized to engage in the banking business. 10. LIQUIDATION OF POSTAL SAVINGS SYSTEM It is proposed that the postal savings system be liquidated in an orderly fashion at an early date. Reason This has been recommended by the Comptroller General of the United States. The system has long outserved its original purpose and now is a burden on the taxpayers. 11. COMMERCIAL LOANS-REAL ESTATE SECURITY Amend section 24 of the Federal Reserve Act to add a new paragraph which would permit national banks to make loans to industrial or commercial busi nesses, with payments expected from the operations of such businesses and with maturities of not more than 10 years, whether or not secured by a mortgage or similar lien on real estate owned by the borrower, without such loans being considered as loans secured by real estate within the meaning of such section 24. Such loans would be classified as commercial loans. Reason At the present time national banks are at a competitive disadvantage with many State-chartered banks, which can take a blanket mortgage on real estate as security for a commercial loan without the loan being subjected to the strict limitation of real-estate loans. 12. AGGREGATE ON REAL-ESTATE LOAN OUTSTANDINGS Amend paragraph 1, section 24, of the Federal Reserve Act, so that the present aggregate limitation on real-estate loans of the total of capital and surplus of the bank, or 60 percent of its time and savings deposits, whichever is the greater, be changed to the total of the capital and surplus, or 60 percent of its time and savings deposits, or 20 percent of all deposits, whichever is greatest. Reason In certain areas savings and time deposits of some banks because of competition are considerably below the national average. The proposed legislation would allow these national banks more leeway in making real-estate loans and increase the amount of available credit for real-estate loans in the community. 13. REPORTS-DIVIDENDS Repeal section 5212 of United States Revised Statutes to eliminate the requirement that national banks report declaration of dividends to the Comptroller of the Currency. Reason This would eliminate some paperwork of banks and the Comptroller's Office. This information is available to Comptroller from other sources. 14. REPORTS-CALL Amend section 5211 of United States Revised Statutes to allow national banks 10 days instead of 5 days to make call reports. Reason This would coincide with time prescribed by FDIC for making reports. In some cases 5 days have proved to be too short a time, especially if holidays and weekends intervene. 15. AUTHORITY TO UNDERWRITE REVENUE BONDS Amend section 5136 of United States Revised Statutes to broaden the authority of national banks to deal in and underwrite obligations issued by a State or political subdivision, or agency of the State or political subdivision, by adding the authority to deal in and underwrite revenue bonds with the exception of those payable solely from the proceeds of special-benefit assessments. It is proposed that national banks could hold the obligations of any one issuer as a result of such underwriting, dealing in, or purchasing up to but not exceeding 10 percent of its capital and surplus. If this proposed legislation becomes law, State member banks of the Federal Reserve System, unless otherwise restricted by State law, would have the same privilege by virtue of section 9, paragraph 19, of the Federal Reserve Act. Reason It is believed that this legislation would result in the widening of the market for such revenue bonds, lower financing costs, and permit banks to underwrite directly such bonds for their own investment within, however, the 10-percent limitation. Hon. A. WILLIS ROBERTSON, ASSOCIATION OF RESERVE CITY BANKERS, Acting Chairman for Study of Federal Statutes Governing Fnancial Institutions and Credit, Senate Banking and Currency Committee, United States Senate, Wsahington, D. C. MY DEAR SENATOR ROBERTSON: In response to your invitation, I am, on behalf of the board of directors of the Association of Reserve City Bankers, transmitting herewith such recommendations for amendments of or additions to the Federal statutes governing financial institutions as the board-in the time available for analyzing the problem and in view of existing credit conditions-deems appropriate. In developing its recommendations, the board has endeavored to focus its attention on matters of broader import, and for the most part has omitted any mention of purely technical operational matters. The fact that the board has done so does not, however, negate the importance of such technical operational matters, nor is it meant to imply that the board has taken any position regarding legislation recommended with respect thereto. We should like to express our appreciation for this opportunity of communicating to you certain of our ideas concerning legislation pertaining to financial institutions, and to commend you and your committee for undertaking this broad-scale study of American financial institutions and credit mechanisms. Very truly yours, JAMES D. ROBINSON, Jr., President. REPORT OF BOARD OF DIRECTORS OF ASSOCIATION OF RESERVE CITY BANKERS TO HON. A. WILLIS ROBERTSON, ACTING CHAIRMAN FOR STUDY OF FEDERAL STATUTES GOVERNING INSTITUTIONS AND CREDIT 1. ABSORPTION OF EXCHANGE AS CONSTITUTING PAYMENT OF INTEREST ON DEMAND DEPOSITS Existing law Under existing law and regulations, all banks which are members of the Federal Reserve System are subject to the rule that the absorption of exchange constitutes the unlawful payment of interest on demand deposits. See: Title 12, United States Code Annotated, sections 371a, 371b, and 461 and Regulation Q of the Board of Governors of the Federal Reserve System. On the other hand, nonmember banks, the deposits of which are insured by FDIC, are subject to the contrary rule as promulgated by the FDIC. See: Title 12, United States Code Annotated, section 1828 (g) and footnote 6 to section 329.2 of FDIC Regulations. Recommendations As it appears that there is no possibility of a reconcilement of the conflicting rules absent action by the Congress, we recommend that changes in the FDIC Act and the Federal Reserve Act be made in whatever manner required in order: 1. That all member banks and all nonmember insured banks will be subject to the same rule in regard to what does or does not constitute the unlawful payment of interest on demand deposits. 2. That the rulemaking power in this regard applicable to both classes of banks be lodged with the Board of Governors of the Federal Reserve System. 3. That the absorption of exchange will be unlawful for both classes of banks. Reasons There is no valid reason for the existence of different views at the Federal level as a result of which one class of banks (nonmember insured banks) is by statutory or regulatory sanction granted a competive advantage over another class of banks (member banks of the Federal Reserve System) particularly when the latter class the one discriminated against-is just as much a part of the FDIC picture as is the other class. There can be no question but that the nonmember bank does have a competitive advantage in this regard over a member bank-an advantage which we are constrained to feel that the Congress really never intended. Existing law 2. REMITTANCE AT PAR BY DRAWEE BANK 1. Under existing law the Federal Reserve banks are required to exercise the functions of a clearinghouse for member banks and are permitted to receive deposits from any nonmember bank solely for the purposes of exchange or collection, provided the nonmember bank depositor maintains a balance sufficient to offset the items in transit held for its account. See: Title 12 United States Code Annotated, sections 360 and 342 and Regulation J of the Board of Governors of the Federal Reserve System. 2. Federal Reserve banks will accept from both member and nonmember banks only items which are collectible at par in funds acceptable to the Federal Reserve bank. See: Section 3 of Regulation J of the Board of Governors of the Federal Reserve System. 3. There are statutes in a number of States (perhaps as many as 10, and the custom prevails in others) which permit a drawee bank to remit to a collecting bank less than the face amount of the item presented to the drawee for payment. See: Volume II, Paton's Digest (142), page 1356 and Farmers and Merchants Bank v. Federal Reserve Bank (262 U. S. 649 (1923) 67 L. Ed 1157). Recommendation The problem involved here is the so-called par-no-par controversy. As it appears that it cannot be resolved at the State level consistent with the policy of the Federal Congress as exemplified by the provisions of the Federal Reserve Act above referred to, we recommend that changes in the Federal laws be made in whatever manner required in order: 1. That all banks, the deposits of which are insured by the FDIC, shall be required to remit at par for all checks drawn against them which are presented for payment by any Federal Reserve bank, anything in the law of the State of the domicile of the particular drawee bank to the contrary notwithstanding. 2. That the penalty for failure to observe the mandate of the par-remittance statute be the forfeiture of FDIC insurance. Reasons 1. The modern concept of banking and the use of checks in the flow of domestic (both intrastate and interstate) and foreign commerce demands that banks pay checks drawn on them at par even when presented for payment by mail rather than over the counter. 2. The cost of the transaction, e. g., the payment by the drawer giving his check to the payee rather than cash, should in all fairness fall upon the drawer rather than upon either the payee, his collecting agent, or the drawee. 3. Present law and regulation on the one hand requires the Federal Reserve banks to act as clearinghouses and on the other prevents such banks from accepting for collection any item which cannot be collected at par. A number of drawee banks accepting the shield of a State statute (and in some cases accepting only local custom) refuse to remit at par. As a result the free flow of checks as a medium of exchange is retarded and the complete fulfillment of one of the primary functions which Congress has imposed by law upon the Federal Reserve banks is thwarted, Existing law 3. ACQUISITION OF BANK STOCK Under existing law national banks and State member banks are prohibited from purchasing and holding stocks, including bank stocks, except in certain limited cases. The exceptions do not include the case where the bank stock is to be acquired and held only temporarily pending disposition through merger, absorption or otherwise See: Title 12 United States Code Annotated, sections 24 (seventh) and 335 and Public Law No. 511 of the 84th Congress approved May 9, 1956 (the Bank Holding Company Act of 1956). Recommendations It is recommended that a new section be enacted reading as follows: "The provisions of title 12 United States Code, sections 24 and 335 and of the Bank Holding Company Act of 1956 shall not be deemed to prohibit the acquisition and temporary holding by any national banking associations or by any State member bank of the Federal Reserve System of all or any part of the capital stock of any national bank or of any State bank or trust company of, approved by the Board of Governors of the Federal Reserve System, or to have prohibited the |