THE COMMERCIAL APPEAL

A Scripps-Howard Newspaper

GORDON HANNA, Editor

Published by The Memphis Publishing Co., 495 Union, Memphis, Tenn. 38101
W.FRANK AYCOCK JR., Business Manager

Consolidated July 1, 1894

Page 6

Tuesday, June 4, 1974

Banks In A Bind

INFLATION OF THE sort being experienced around the world today was not within the vision of the framers of Tennessee's 1870 Constitution. The 10 per cent ceiling they put on interest rates stood the test of more than a century, even so. But in 1974 it has put Tennessee's bankers in a bind.

In simple terms, interest rates on corporate borrowing in most of the states today have been pushed 'close to 12 per cent. When Tennessee banks have to go out of the state to "buy" money to loan to their corporate customers, they lose money. In their present financial condition, few banks are in a position to absorb the loss. So they curtail loans.

The situation has come to a head within the weeks since the 88th General Assembly ended its 1974 working session. In the eyes of the bankers, it is serious enough to get them out hustling for a special legislative session in hope of breaking through the interest ceiling.

THE CHANGE SOUGHT by the bankers makes sense under current market conditions. But it's no small quest.

One hindrance is that this is an election year. There are races for governor and for most legislative seats. A special summer session that would interrupt legislative contests would not be popular. There also is the danger that it might spill over into other issues.

At this early stage, we have seen how quickly demogoguery can rear its ugly head in the interest rate question. Just a day after bankers had met with legislators across the state last week, Ray Blanton, one of several Democratic candidates for governor, fired a blunderbuss charge. Raising interest rates, he said, would be "rather foolish." First of all, he ignored the fact that legislation would not,

could not, raise rates, but that it
would waive the right to claim
usury if a loan customer agreed to
pay above 10 per cent, as he would
if he went out of Tennessee to bor-
row. Nor did he mention that this
would affect only corporations that
borrow money, not individuals
seeking money for a down payment
on a house, or money for a new car,
or any other purpose.

A fast whistle should be blown
on every candidate who tries to
politicize this economic problem.
But it is nevertheless a fact of life
that the bankers must expect diffi-
culties from those who put a demo-
gogic twist on the facts.

Even without the obstacle of an election and misleading statements by candidates, the bankers have a tough job. They must convince Gov. Winfield Dunn that a special legislative session would be advisable. They must show legislators it is imperative to act without delay. Otherwise, it would seem to make sense to take up the problem at the 1975 session beginning in January.

If this 10 per cent ceiling is actually holding down development in Tennessee, if it is costing the state jobs, if over the long run we are going to suffer lasting economic damage, these things must be clearly demonstrated by both the bankers and the businesses which claim they are hurting because money is not available at their nearest bank.

Whether a waiver law would hold up under the state Constitution cannot be established without a full court test. But the negative opinion issued by former state Atty. Gen. David Pack need not be regarded as final.

IF TENNESSEE IS being placed at a serious economic disadvantage, there is no question about the need for trying to correct that through legislation. The question is how soon it must be done - or can be done.

Bankers' Plight Is Public Problem

If money can be thought of as just another product bought and sold on a competitive market, one begins to understand the predicament of Tennessee bankers.

They have to go into the big financial centers and "buy" money at an interest rate of 11 or 111⁄2 pèr cent, but are prohibited by an ancient constitutional clause from "selling" it to their own borrowers at a rate greater than 10 per cent.

The effect is obvious. They cannot afford to take the losses for long on the huge sums needed to serve corporate customers. Money will simply flow into other states where it can command a "better price" in terms of interest, and the supply in Tennessee will tend to dry up. Plant expansions will be put off, inventories reduced, production slowed, employment curtailed for the lack of readily available funds.

This is why the bankers are asking legislators to consider passage of an act permitting corporate borrowers to contract for the payment of interest rates

higher than the constitutional ceiling of 10
per cent. The measure obviously would
have to be tested promptly in the courts
to make sure such willing agreements
would be fully enforceable.

If such a plan were considered in a
vacuum, it should be opposed as pure sub-
terfuge to get around a constitutional limi-
tation. Given the present nationwide con-
ditions of inflation and the readiness of
large corporations to pay what they must
for needed financing, it can be rational-
ized as necessary to meet an emergency.
Tennessee cannot be made an island of
low interest rates in a sea running at a
high tide of money charges. The state's
restriction, imposed a century ago, will
have no effect on the general economy.
Instead, the state and its people will be
penalized by an artificial barrier against
adjusting to conditions as they are.

The legislature would do well to grant the banking industry this degree of flexibility with full recognition it still may be declared invalid under an outmoded restriction.

21

22

Tennessee's Larger Banks Are Rationing Credit

THE NASHVILLE BANNER. Thursday, June 27, 1971

By JIM BENNETT Tennessee's larger banks are rationing credit rather than take losses because of the gap between the 13 per cent cost of money and the 10 per cent interest rate ceiling.

"Credit rationning is certainly taking place." said Robert Seaver, associate manager of the Tennessee Bankers Association here.

"The state's large and medium-sized banks simply can't afford to do anything else," he added.

Tennessee is one of three states where the banking industry has been caught in a pinch because of the high price of money as opposed to the interest it can earn. Tennessee's constitution sets the maximum interest rate at 10 per cent, however, state bankers must pay up to 13 per cent for money bought through the Federal Reserve System.

Seaver said one Nashville bank, identified only as one of the three largest in the city, reports that its construction loan portfolio has been reduced 20 per cent compared with the same

period one year ago.

The same bank has not made any new committments for construction loans during the first quarter of this year, Seaver said.

Another Nashville bank has turned down applications for commercial loans during the past two months amounting to $38 million.

"This was not because of credit worthiness but because of the shortage of loan money." Seaver said. "This points out very vividly the problem that has developed."

Earlier this week, W.A. Mitchell, president of the TBA. said that since April, one of the state's largest lending institutions has cut by more than $100 the average amount of funds borrowed at high cost.

Mitchell said the institution reported it could not afford to continue loaning money purchased at a higher rate in the national market.

Mitchell and Seaver both said Tennessee's banking industry plans to continue its effort to pursuade the state legislature to act quickly to remove the in

terest rate ceiling on cor-
porate loans.

Such a bill is pending in
the legislature. It allows
corporations to waive their
constitutional guarantee
that they will not be charged
more than 10 per cent inter-
est for borrowed money.

Scaver and Mitchell said there was no substance to reports that the banking industry wasn't pushing as hard now for the legislation.

"That's just not the case and we regret that this has been implied in some news reports," Seaver said. "If anything we have intensified our efforts to educate the public on the seriousness of the problem."

23

Kingsport Times Loan Money Drying Up, Bank Reports

July 11, 1974

By LEE OLESON Times-News Staff Writer

Tennessee's so-called "usury law" is drying up the assets of local lending istitutions and threatening growth around Kingsport, a Kingsport banker says.

For months local bankers have been saying that the state law that puts a 10 per cent limit on loans has threatened their business, and now First National Bank of Sullivan County has facts to support that

view.

The county's biggest bank is a

sound financial condition, but during the first six months of 1974 loans rose at a much faster rate than deposits, according to the bank's statement of condition released last week.

Loans and discounts rose from $65 million to $87 million, over 30 per cent, during those six months. Deposits only rose about 12 per cent, from $120 million to $136 million in the same time.

As a result, a spokesman said, the bank will soon be faced with the prospect of denying loans to potential borrowers. One of those potential

borrowers is requesting money for
construction of the Fort Henry Mall.
"I don't know if we can make the
loan now," said bank president John
W. Andersen.

Most of First National's loans are
for under $100,000 loans for
medium-sized local businesses, car
loans, home improvement loans, and
the bank must now tighten its "lines
of credit" to many of these
borrowers, Andersen said.

Andersen said that in the last two weeks one dépositer has withdrawn a total of $600,000 in time certificates for this simple reason: he can get

higher interests in any other state.
A century old constitutional
provision puts a 10 per cent
maximum on interest rates, and
since early this year the so-called
"prime rate" has been much higher
than 10 per cent: 11, 112, 113% and
now 12 per cent.

Thus a person or corporation can
borrow money at the 10 per cent
maximum in Kingsport and, theore-
tically, loan the same money in
another state at a higher interest
rate.

The prospect isn't far-fetched.
Recently Andersen had a request for

a large loan from a local company with out-of-state connections. And when he checked other banks in Bristol and Johnson City, he found that they had received identical letters for identical loans, Andersen said.

And Upper East Tennessee is a convenient place from which to find higher out-of-state interest: Virginia has no interest limit, North Carolina has a 10 per cent limit on loans of from $50,000 to $100,000 but a 12 per cent limit on loans from $100,000 to $300,000 and no lilmit above that. Kentucky has no interest limit

either, and Georgia has no limit on loans over $2,500.

In order to find more cash, the bank has sold millions of dollars in U. S. government bonds, and other bonds and securities.

Monday First National Bank of ficials renewed a call for a constituto the raise tional convention interest ceiling. One propos would give the legislature the authority to change the interest ceiling, so a constitutional change won't be neces sary every time the prime rate goes too high.

Home loans ‘available'

Commercial Loan
Money Tightens

24

24