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Except for brief interruptions, the period since the beginning of Federal deposit insurance has been a time of business recovery from depression followed by a continuously high level of business activity. This prosperity has been reflected both in an increased output of goods and services and in a larger national income, and has been associated with an expansion of bank deposits and bank assets. In 1950 the dollar value of the output of the nation was more than four times as large as in 1934, the year the Corporation began operations. The aggregate income received by individuals, which includes wages and salaries, dividends and interest, and earnings from unincorporated enterprises, was also four times as large in 1950 as in 1934. Likewise, the deposits of operating commercial and savings banks in 1950 were about four times the reported amount in 1934.

The real economic advance from 1934 to 1950 was much less striking than is suggested by the foregoing figures. The increase in the value of output and income of the people reflects in part a larger volume of goods and services produced and purchased, and in part simply a rise in the prices at which those goods and services are sold. The real income of the people and the physical volume of output in 1950 were a little more than twice the amounts in 1934. Prices of goods and services in 1950 were about twice the prices of 1934.

The increase in prices meant that a given amount of bank deposits became less valuable in terms of goods and services. By 1950 the fixed maximum insurance of $5,000 per depositor provided only about onehalf as much real protection as in 1934. It was therefore to be expected that a demand should arise for an increase in the statutory insurance coverage in order to restore the degree of protection which bank depositors had formerly enjoyed.

Bank failures occur most frequently in times of business depression and deflation. They are generally few in number in periods of business recovery and inflation. Since 1934 the number of bank failures has been unusually low even for a period of recovery and prosperity. This is due primarily to the existence of Federal deposit insurance and the accompanying improvement in bank supervision and management. As a result of the small number of bank failures, the losses and operating expenses of the Corporation have been less than the income of the Corporation from the invested portion of the deposit insurance fund. In consequence, the full amount of the insurance assessments paid by the banks up to 1950 remained in the surplus of the Corporation. Therefore, it was believed that the insurance assessment rate could be safely reduced. Moreover, the method of calculating the assessment due to the Cor

poration, under the law as enacted in 1935, had been found to be cumbersome and expensive.

Officials of the Federal Deposit Insurance Corporation, as a result of a decade and a half of administration of the permanent insurance plan, had found that various aspects of the law could be improved. These related in part to the methods of handling insured banks which become involved in financial difficulties, in part to the examination and supervision of banks, and in part to more technical aspects of the administration of the law.

These circumstances resulted in various proposals for amending the deposit insurance law, some of which were embodied in bills introduced in one or both Houses of the Congress. In 1950 the banking and currency committees of both the House and the Senate held hearings on a bill embodying recommendations of the Corporation, and the entire deposit insurance law was revised. It was also removed from the Federal Reserve Act, and entitled the "Federal Deposit Insurance Act." This Act was approved by the President and became effective on September 21, 1950.

The new law increases the maximum insurable deposit from $5,000 to $10,000. The immediate effect of this change was to afford full protection to three million additional accounts and to increase the amount of deposits insured by $12 billion. Nearly 99 percent of all accounts in insured banks are now fully protected. Under the previous coverage less than 96 percent of the accounts were fully protected.

The Federal Deposit Insurance Corporation believes that depositors should retain some element of risk in the deposit insurance system. Shared risk is an important factor in Federal deposit insurance and its operation within the present American free enterprise dual banking system, and also in relation to bank supervision. Owners of small deposits are protected by the $10,000 maximum; owners of large deposits are more able to protect themselves by exercising a restraining influence over managerial policies. Also their personal interest as depositors is a force in encouraging participation in management.

The new law changes the base for deposit insurance assessment in two important respects: first, each semiannual assessment computation is now based on the average of deposits on two dates instead of the daily average for the six months' period; and second, certain items may be omitted or deducted from deposits in determining the assessment base, and alternative methods are provided for computing cash items. For more detail, see the Corporation's regulation on assessments, which is given on pages 190-93.

For several years the Corporation had had under study and analysis various proposals designed to simplify the computation by banks of

their assessments. Early in 1946 the Corporation commenced a program of auditing the records of insured banks relating to their assessment payments. One of the chief purposes of this program was "to assist the banks in preparing certified statements with the view to eliminating any unnecessary work and to correct any errors in interpretation of the regulations by the banks." This program contemplated an audit of 1500 banks, or approximately 10 percent of the insured banks, holding over 70 percent of the deposits in all insured banks. The response of the banks audited was evidenced by the letters from them regarding the helpful suggestions our auditors had offered. As a result of its studies and of the audit the Corporation felt that any change in the assessment should first provide relief from the large amount of work connected with the assessment base. The Corporation has not received a single complaint from the banks on their first assessment computation under the new law.

In view of the fact that the Corporation's need for funds to take care of depositors in distressed banks had never been tested by a major business depression, it was recommended that no permanent reduction in the assessment rate be made. The studies of the Corporation had not demonstrated that the accumulated fund was adequate, nor had they determined what would be an adequate fund. In judging the adequacy of the fund its relation to the Corporation's potential liability as an insurer must be given consideration. When compared with the $168 billion of deposits in insured banks, the margin of protection is not large. At the beginning of the Federal Deposit Insurance Corporation in 1934 the ratio of the Corporation's capital and surplus to deposits in insured banks was 0.73 percent, while as of December 31, 1950, the ratio was 0.74 percent. The capital accounts of insured banks must also be considered in connection with the adequacy of the deposit insurance fund. The ratio of the banks' capital funds to total assets has decreased from 14 percent in 1934 to 7 percent at the close of 1950.

The new law retains the previous assessment rate of 1/12 of 1 percent of deposits per year, but provides credits to insured banks in years in which the Corporation's assessment income exceeds its losses and expenses. The law provides that operating costs and expenses, insurance losses and expenses, and additions to reserves for losses after adjustments applicable to prior periods, shall be deducted from the assessment becoming due each calendar year at the rate of 1/12 of 1 percent of deposits. The Corporation retains 40 percent of the net assessment income, and the balance is to be credited pro rata to insured banks to be applied toward payment of their assessment next becoming due. If this credit is larger for any bank than the next assessment, the excess is applied to the payment of succeeding assessments. The assessment income for the calendar year 1950, the deductions therefrom, and the division of the

net assessment income between the Corporation and the banks, are shown in Table 11, page 24.

As a result of the coverage and assessment provisions of the new law the amount of deposits insured is increased about 15 percent and the premium is in effect decreased by approximately 50 percent. That this can be done without disturbing the confidence of depositors is a tribute to the effectiveness of deposit insurance and the improvement in management and bank supervision which has taken place during the seventeen years the Corporation has been in existence.

One of the principal changes introduced into the new Act, designed to improve the administration of deposit insurance, is an authorization for the Corporation, in the discretion of its Board of Directors, to make loans to, purchase assets from, or make deposits in any insured bank in danger of closing, if continued operation of the bank is essential to provide adequate banking facilities for the community [Section 13 (c)]. Under the old law the Corporation could make loans to or purchase assets from a bank in financial difficulties only when such action would facilitate a merger with or assumption of liabilities by another insured bank. This section further provides that such loans and deposits may be in subordination to the rights of other depositors and creditors. It is the intent of the Corporation to exercise this discretionary authority sparingly and only in special situations and in so doing to surround such advances with appropriate safeguards to protect the best interests of the Corporation. This change provides more flexibility in the handling of banks in financial difficulties.

The Corporation is authorized by the new law to make special examinations of national banks and State banks members of the Federal Reserve System when such action is deemed advisable by the Board of Directors to determine the insurance risk. This gives the Corporation for the first time the authority to make its own appraisal of its risks in providing deposit insurance for those banks. Under the previous law over half of the insured banks, holding about 80 percent of the deposits of all insured banks, could not be examined by the Corporation without the written consent either of the Comptroller of the Currency or of the Board of Governors of the Federal Reserve System.

The new law includes a provision designed to help insured banks avoid weakening their financial structures in connection with voluntary mergers and consolidations. Withdrawal of capital and surplus in such cases is prohibited except with the consent of the Comptroller of the Currency if the continuing or succeeding bank is a national bank, the Board of Governors of the Federal Reserve System if a State bank member of the Federal Reserve System, and the Federal Deposit Insurance Corporation if an insured State bank not a member of the Federal Reserve System.

The new law contains a provision that requires the Corporation to pay to the United States Treasury interest at the rate of 2 percent per year for the amounts advanced to the Corporation by the Federal Reserve banks and the Treasury for its original capital, for the time such funds remained in the Corporation's capital account. This interest, computed for the period covered, amounts to $81 million. One-half of this amount was paid on December 30, 1950, and the balance will be paid prior to July 1, 1951.

Another provision of the new law prohibits the use of such phrases as "Federally insured" in advertisements by insured banks and other financial institutions. For the exact provisions, see pages 131-132.

The Board of Directors recommended to the Congress that the new Federal Deposit Insurance Act contain authority for the audit of the Corporation's financial transactions by the General Accounting Office. The Board of Directors of the Corporation is proud of the opinion expressed by the auditors regarding the quality of management of the Corporation, and with minor exceptions the Corporation's relations with this independent Government auditing agency have been most pleasant. The Board of Directors has always recognized that audits made by an independent outside agency serve not only to inform the public and the Congress of the Corporation's financial operations but also are of assistance to the Board of Directors in its management functions. For five years prior to the Federal Deposit Insurance Act of 1950, authority for the audit of the financial transactions of the Corporation had been incorporated in the Government Corporation Control Act. However, the Board of Directors was of the opinion that the audit authority should be part of the organic law of the Corporation and should not be set forth in a law applicable to government corporations generally since the fiscal affairs of the Federal Deposit Insurance Corporation have little, if anything, in common with those of other government corporations. Congress adopted the recommendation of the Corporation; and authority for the audit of its financial transactions by the General Accounting Office is set forth in Section 17 of the Act. In addition to the audit report to the Congress, the Corporation also receives a short form report from the General Accounting Office, which is utilized in connection with the assessment credits to banks under Section 7(d) of the Act.

PARTICIPATION IN DEPOSIT INSURANCE

The proportion of all banks participating in Federal deposit insurance continued its upward trend during 1950. At the end of the year over 93 percent of all banks of deposit in the United States and possessions, holding over 95 percent of total deposits, were insured.

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