We respectfully request immediate favorable consideration of these four legislative proposals.

We thank you, sir.

The CHAIRMAN. Gentlemen, we thank you for coming to this committee and giving us the benefit of the views of your group with respect to these matters.

Are there any questions?

Mr. Reed.

Mr. REED. I am wondering if you could tell me, are you feeling any serious competition from the imports of these small cars?

Mr. CHAFFIN. The Chevrolet feels it some, but Buick is not in that price class.

Mr. REED. Thank you very much.

The CHAIRMAN. Åre there any further questions?

If not, we thank you, gentlemen.

Mr. CHAFFIN. Thank you, sir.

The CHAIRMAN. Our next witness is Mr. M. Monroe Kimbrel. Mr. Kimbrel, for the purposes of this record, will you please identify yourself by giving your name, address, and the capacity in which

you appear.

STATEMENT OF M. MONROE KIMBREL, MEMBER, LEGISLATIVE COMMITTEE, AMERICAN BANKERS ASSOCIATION, ACCOMPANIED BY LEE P. MILLER, VICE PRESIDENT, AMERICAN BANKERS ASSOCIATION

Mr. KIMBREL. Mr. Chairman, I have with me Mr. Lee P. Miller, the president of the Citizens Fidelity Bank & Trust Company of Louisville, Ky., and a vice president of the American Bankers Association. I would like to ask your permission to have him sit with me and be available for any questions.

The CHAIRMAN. That is perfectly agreeable.

You are recognized, sir, for 12 minutes.

Mr. KIMBREL. My name is M. Monroe Kimbrel. I am executive vice president of the First National Bank of Thomson, Ga., and chairman of the committee on Federal legislation of the American Bankers Association.

I appreciate this opportunity to present the views of the association with respect to the treatment of reserves for bad debts, as applied not only to commercial banks but also to savings and loan associations and mutual savings banks.

The administrative committee of the American Bankers Association, a policymaking body of the American Bankers Association, at its meeting in Chicago on January 18, 1958, adopted the following statement of policy:

The American Bankers Association believes in and advocates equality of Federal income taxation of savings and loan associations, mutual savings banks, and commercial banks.

Inequalities result from lack of uniformity which exists in the treatment of reserves for bad debts among the three types of institutions. The association believes that this lack of uniformity should be corrected by providing:

1. Uniformity as to the maximum percentage permitted for such reserves. 2. Uniformity as to the base and formula used in determining the re

serves.

3. Uniformity as to limitations, especially as to such items as the maximum deductible interest paid on savings and time deposits and dividends paid on repurchasable shares.

We have no doubt that the Congress intended the existing law for bad debt reserves to give reasonable and equitable tax treatment to each of the three types of institutions in relation to one another. Actually, the present law involves a sharp disparity which serves to work an injustice upon commercial banks while relieving savings and loan associations and mutual savings banks from their fair share of the Federal tax burden.

Savings and loan associations and mutual savings banks are the only business organizations given a special statutory formula for determining reasonable additions to reserves for bad debts. This formula permits these institutions to accumulate bad debt reserves equaling twelve percent of withdrawable accounts or deposits before they are required to pay Federal income taxes on retained earnings. Commercial banks, on the other hand, like all other business corporations which adopt the reserve method of treating bad debts, are subject to the general regulations of the Internal Revenue Service which allow a deduction from gross income of a reasonable addition to a bad debt reserve in lieu of a deduction for specific bad debt items, the reasonableness of the addition to be determined by the Commissioner.

The Commissioner has approved two formulas for use by commercial banks in determining a reasonable addition to a reserve for bad debts. Both formulas are based on the individual loss experience of the taxpayer on eligible loans over a period of 20 years. One formula requires the use of the latest 20 years, including the current taxable year. The other permits the taxpayer to select any 20 consecutive years after 1927. The factor derived from the formula is applied to currently outstanding eligible loans to determine the reasonable addition to the reserve for the taxable year which is allowed as a deduction from gross income. Eligible loans are determined by excluding from total loans, fully Government-guaranteed or insured loans and the guaranteed or insured portions of partially Governmentguaranteed or insured loans.

Both commercial bank formulas fix a ceiling of three times the loss experience factor on the maximum amount which may be accumulated in the reserve.

Thus, it is apparent that a disparity exists between commercial banks, on the one hand, and savings and loan associations and mutual savings banks, on the other hand, with respect to the maximum allowable reserve, and the base and formula for determining reasonable additions to reserves. In the case of commercial banks both the maximum allowable reserve and the annual additions to reserves are measured by a percentage of eligible loans.

The maximum allowable reserves of savings and loan associations and mutual savings banks are measured by a percentage of withdrawable accounts or deposits and the amounts of annual additions to the reserve are in the discretion of the taxpayer until the maximum is reached. Commercial banks are limited to only a portion of their annual earnings as a deductible addition to bad debt reserves, whereas savings and loan associations and mutual savings banks may transfer

all their retained net earnings to a bad debt reserve without payment of tax until their reserve ceiling is reached.

Also, under the present formulas prescribed for use by commercial banks, the average ceiling on the amount which may be accumulated in reserves is 2.43 percent of eligible loans, whereas savings and loan associations and mutual savings banks may accumulate bad debt reserves equaling 12 percent of withdrawable accounts or deposits. The resulting disparity is readily apparent in terms of Federal taxes actually paid.

During the year 1956, according to the annual report of the Federal Deposit Insurance Corporation, all insured commercial banks paid in Federal taxes $769,843,000, or 38 percent of their net income before taxes.

During the same year, according to the Federal Home Loan Bank Board report entitled, "Members' Combined Financial Statements, all FHLB member savings and loan associations, having 96 percent of the industry's assets, paid in Federal taxes $5,070,000, or 1.3 percent of their net income after deduction of all dividends paid on share accounts. This tax amounted to thirty-six one-hundredths of 1 percent of net income before dividend payments.

In other words, on the basis of net income before taxes, commercial banks paid an amount 29 times greater than that paid by savings and loan associations.

Our association is cognizant of the useful services rendered the economy by savings and loan associations and mutual savings banks. These institutions, in our view, fill an important community need. We believe, however, that their highly preferential tax treatment is neither consistent with the revenue requirements of the nation nor necessary for their own future well-being.

Uniform tax treatment of reserves for bad debts for commercial banks, savings and loan associations and mutual savings banks is also indicated by the relative risks in the loan activities of the respective institutions. Today, mortgage loans, which comprise most of the lending activities of savings and loan associations and mutual savings banks, have fewer elements of risk than they did in years past. Many mortgages are federally insured or guaranteed. Most conventional mortgage loans are made on a fully amortized basis rather than on a demand or fixed maturity basis. Conversely, commercial banks, both small and large, are expanding their lending activities into new types of loans with longer maturities and greater risks, such as loans for farm machinery and equipment, consumer durable goods loans, and term loans to small business.

Accordingly, to achieve uniformity in the treatment of reserves for bad debts of commercial banks, mutual savings banks, and savings and loan associations, the association recommends that H. R. 8737 be amended to provide that the maximum amount of the accumulated reserves and the base and formulas for determining annual additions to the reserves should be uniform for all three types of institutions. Also, in accord with the association's statement of policy set forth earlier in this statement, any limitation which Congress may impose on the amount of deductible interest on savings and time deposits and dividends on withdrawal accounts should be the same for all three types of institutions.

The bill as introduced reduces the maximum bad debt reserve percentage of withdrawable accounts or deposits which savings and loan

associations and mutual savings banks may accumulate without payment of Federal income tax. We urge, in the interest of uniformity, that such maximum percentage be based realistically upon loans rather than on withdrawable accounts and deposits and that a sound maximum percentage, as determined by your committee and the Congress, be applied uniformly to the bad debt reserves of all three types of institutions.

We are presenting in exhibit A as a part of our statement to the committee a table of statistical material derived from the call reports of June 6, 1957, received by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency. We hope this information will assist your committee in determining such a sound maximum percentage. It should be clear, we believe, that under present lending practices, commercial banks do not need as much as a 12 percent reserve against their loans nor is that amount needed by either savings and loan associations or mutual savings banks against mortgages which make up the bulk of their loans. On the other hand, sound banking practice and the interests of our economy require a reserve for bad debts for all commercial banks materially greater than the 2.43 percent average ceiling of the commercial banks now on the reserve method.

There are a number of reasons why the 2.43 percentage is grossly inadequate. Each bank's bad debt reserve ceiling is based upon 20 years' consecutive experience averaging many good years with a few bad ones. Even in the bad years, it only takes into account the loss experience of those banks which are still in existence, giving no weight to the loss experience of closed banks.

From 1912 until 1945, when the Federal Deposit Insurance Corporation took over the liquidation of closed banks, the Comptroller of the Currency completed liquidation of 2,505 insolvent national banks having total deposits of $2,210 million. The depositors received an average payment of 84 percent, a total of $1,863 million. However, examination of 2,171 of these receiverships covering banks of every size and in every State except Delaware established an average loss of 31.8 percent of total loans, and we are informed that if a few large receiverships with unusually favorable experience were eliminated, the average loss amounted to 36 percent. The extent of losses in closed State banks is not known, but we believe they were at least as high as the losses in closed national banks.

Even among those national banks which continued through the depression years, the average loss experience exceeded 2.43 percent in each of 3 successive years. In 1932 the net loan losses of such national banks amounted to 2.48 percent of outstanding loans at the end of the year; in 1933, 3.53 percent; in 1934, 3.57 percent. Thus, in the course of 3 years, they sustained aggregate losses of 10.58 percent of outstanding loans. Further, losses in this period were undoubtedly higher because officers, directors, or stockholders of some banks took over distressed loans in order to enable the banks to continue to operate.

The need for a substantially higher industrywide maximum percentage formula for commercial banks may be further demonstrated if we assume that a 5-percent ceiling had been authorized and had been reached by operating Federal Reserve member banks at the end of 1929. At the start of 1930 those banks would have had bad debt

reserves totaling $1,308 million. By the start of 1935, in 5 years' time, the reserves would have been reduced to zero, and would have remained at zero for 3 full years.

This projection is presented in exhibit B attached which again does not take into consideration banks which closed.

One salutary effect of a statutory authorization for an industrywide bad debt reserve for commercial banks would be to permit and encourage more commercial banks to set up sound bad debt reserves. Because of the difficulties involved in determining the 20-year average experience percentage needed to figure the reserve authorized under present procedures, many banks, particularly the smaller ones, have not established such reserves. Of 13,216 insured commercial banks, 6,504 have no bad debt reserves. Since these 6.504 banks have only 10 percent of the loans of all insured commercial banks, it is apparent that a large proportion of the smaller banks do not have the protection of a bad debt reserve. Encouragement to these banks to set up bad debt reserves would be of benefit to the banking system, and the economy as a whole, while not having any material effect on tax

revenues.

Moreover, existing reserves are often inadequate. There are 2,778 banks operating under a ceiling of less than 2 percent of eligible loans. The present regulations in effect penalize a bank for having had good and successful management 25 years ago. This inequity is demonstrated by the fact that one group of banks with 39 percent of eligible loans has only 24 percent of authorized reserves, while another group having 24 percent of eligible loans has 412 percent of the authorized reserves.

The association recognizes the importance which is attached to maintaining the level of income taxes accruing to the Treasury. We believe that H. R. 8737, amended as we propose, would increase the tax receipts of the Treasury if provision were made for some reasonable limitation on annual additions to bad-debt reserves to require the accumulation of reserves over a period of years. In our judgment this could be done consistently with the principle of uniformity of treatment which we are urging.

Furthermore, the establishment of bad-debt reserves will tend to maintain the level of income taxes accruing to the Treasury. Since bad debts resulting from losses on loans must be charged to the reserve, and cannot be deducted from current income, if in later years substantial losses should be experienced such losses could not be used to offset taxable income in those years.

Enactment of legislation embracing the provisions of H. R. 8737 with our recommended amendments would assure fairness and realism in the tax treatment of reserves for bad debts of commercial banks, savings and loan associations, and mutual savings banks. Existing inequities, while creating an unhealthy imbalance in the tax burden. borne by the three types of institutions, pose an even more significant obstacle to the raising of needed Federal revenue. We hope that your committee will act favorably on our recommendations.

Now, Mr. Chairman, we would like very much to have your permission to include in the record the two charts attached to our statement. The CHAIRMAN. Without objection, the charts will be made a part of the record at this point.

(The charts referred to are as follows:)