Senator COUZENS. Very well. Mr. CROWLEY. It is probably true that after the period of adjustment has been completed, the banks' earnings will enable them to pay an assessment adequate to cover losses at the rate shown for the past 70 years. To ask them to do so, however, without making some effort to reduce the burden of losses seems to me to be unfair to the banks and to the public which must ultimately bear the cost. This factor prompts us to ask for specific powers which will reduce these losses so that the insurance plan can be operated upon a reasonable assessment basis. The following table compares annual averages of earnings, expenses, losses, and profits of the national banks for the years 1918 to 1930 with similar figures for the 6 months' period ending December 31, 1933. If charge-offs during the last half of 1933 had been no heavier than the average for the years 1918 to 1930, the national banks would have shown net profits of more than $1 for each $100 of total deposits or more than $7 for each $100 of invested capital. Earnings, expenses, losses, and profits of national banks' averages for 1918–30, compared with 6 months ending Dec. 31, 1933 1 The figures for the 6 months have been adjusted to show a rate per year, rather than for 6 months only. ? Deficit. Source: Federal Deposit Insurance Corporation, Division of Research and Statistics. It will be noted that the expenses of operating national banks were considerably lower in 1933 than during the period 1918 to 1930. Most of this reduction was due to a decline in the average rate of interest paid on deposits. About two-thirds of this reduction in interest occurred before the Banking Act of 1933 became effective and reflected the general decline in money rates. One-third of the reduction took place after the passage of the act, reflecting almost entirely the prohibition against the payment of interest on demand deposits. The savings in interest on account of this change in the law amounted to 26 cents for each $100 of total deposits or more than the premium necessary to cover losses on deposits insured up to $5,000, as indicated by the experience of the past 70 years. The cost of insurance will not be disproportionately heavy in relation to earning power if paid by banks in proportion to their total deposits. If insurance be limited to $5,000 for each depositor and the cost is distributed among the banks in proportion to their insured deposits, the payments by smaller banks would be nearly double the assessments distributed on the basis of total deposits. Reserve for losses: We have recommended not only that subscriptions by insured banks to capital stock of the Corporation be eliminated, but also that the Corporation be given the right to allocate to surplus any portion of the some $300,000,000 paid to it by the Treasury and the Federal Reserve banks. If the amounts paid in subscriptions to stock were to be carried in full on the books of the Corporation as capital stock, the Corporation would be unable to pay any losses except out of income, over and above operating expenses, without impairment of its capital. The Corporation would have no surplus and while it might legally be permitted to spend its capital in meeting its obligations, a substantial capital impairment shown in its published reports would have a most adverse effect upon public confidence. We are, therefore, recommending that the stock issued by the Corporation to the Federal Reserve Banks and the Treasury, be without par value and that the balance be placed in a surplus or reserve account. Until such time as the resources of the Corporation may be adequate to handle the volume of anticipated losses, it would be very unwise for the Corporation to pay dividends. We, therefore, recommend that the payment of dividends be eliminated. It is important that the Corporation be given adequate means for increasing the funds at its disposal during critical periods. It is doubtful, however, if at such times the Corporation could borrow from private sources. The United States Treasury is the logical purchaser of these obligations. The Government is vitally interested in the maintenance of the country's banking system. We recommend that the obligations of the Corporation be issued only with the approval of the Secretary of the Treasury so that any credit which the Corporation may require shall not conflict with the financial policies of the Government. Standards of membership: During the past year the activities of the Corporation have been chiefly concerned with the problem of rebuilding the capital structures of insured banks. In the future, the Corporation should devote a large part of its efforts to the maintenance of sound conditions among the insured institutions. To maintain sound conditions among all insured banks it is essential that the Corporation have the power to control the admission of banks to the insurance fund. We cannot return to the overbanked condition of 1920 if we wish to have a sound banking structure. The growth of excessive banking facilities was one of the most destructive influences which existed prior to the banking holiday of 1933. Since the banking holiday much effort has been expended in reorganizing and relicensing banks in order that the frozen funds of the depositors might be released. The accompanying table indicates that more than 2,000 banks have been added to those which withstood the shock of the banking crisis. Newly licensed1 banks grouped according to volume of total deposits by class of bank-July 1, 1933, to Dec. 31, 1934 1 By "newly licensed" is meant existing banks reopened, banks reorganized, and primary organizations. Under present conditions the Corporation insures all newly licensed banks which apply for insurance if they are found to be solvent. Approximately 90 percent of the newly licensed institutions have become insured. The Corporation should be granted the specific power to refuse the admission of new banks into the insurance fund where such admission would weaken the banking system. The Corporation should also be given the specific right to require a higher standard than mere solvency for admission to the insurance fund. It is my firm belief that every community which can produce a sufficient volume of deposits to support a bank should receive the advantages of such facilities. There are many localities throughout the United States, however, which can support only one or two banks. To establish a second or third bank in such communities leads to speculative and destructive practices in an effort to earn sufficient income to pay expenses. For the protection of the insured institutions, the Corporation, and the public welfare, the admission of banks to the insurance fund should be carefully supervised. It is for these reasons that we have recommended that the legislation incorporate specific standards to be met by future applicants before admission to the benefits of deposit insurance. These standards have already been recognized by Congress in other legislation. Capital rehabilitation: In the latter part of 1933 banks were admitted to membership in the insurance fund under exceptional conditions. The situation existing at the close of 1933 was critical. The lack of real public confidence in banks was unsettling. Congress, therefore, provided that all solvent banks should be admitted to the insurance fund, even though their capital was impaired in a number of instances. However, the Corporation immediately undertook to assist all banks which needed it in rebuilding their capital structures and correcting capital impairments which our examinations had. disclosed. The capital rehabilitation of banks was to be effected either through local contributions or through the facilities of the Reconstruction Finance Corporation. The Insurance Corporation assisted State nonmember banks to rebuild their capital structure. The responsibility for the condition of National and State member banks rests with the Comptroller of the Currency and the Federal Reserve Board, respectively. The Comptroller of the Currency and the Federal Reserve Board had the right to insist that banks under their jurisdiction. accept necessary aid. The Corporation, however, had no such power. To accomplish the task of rebuilding the capital of nonmember State banks which had been admitted to the benefits of insurance, the Corporation could only use the power of rational appeal to the board of directors or to the State banking authorities. Without the cooperation of the State banking authorities the capital structure of nonmember banks would not have been rebuilt. State nonmember banks which could not obtain local capital contributions were assisted in securing aid from the Reconstruction Finance Corporation. Banks which had already made application were assisted in complying with the conditions laid down by the Reconstruction Finance Corporation. The accompanying table reveals the extent of the aid extended by the Reconstruction Finance Corporation to the various classes of banks in this country. While it is true that by the close of 1934 Federal Reserve member banks (State and national) had received almost three times as much Reconstruction' Finance Corporation aid as had nonmember banks, in proportion to total deposit liability the aid given State nonmember banks was twice as great as the assistance extended member banks. Reconstruction Finance Corporation'purchases of capital obligations of insured Source: Federal Deposit Insurance Corporation, Division of Research and Statistics. In some instances the necessary capital reconstruction had hardly been accomplished when applications were made by the banks to retire the preferred stock or debentures purchased from the Reconstruction Finance Corporation. As has been indicated, the capital reconstruction program was carried out for the purpose of protecting not only the banks but the Insurance Corporation. The capital and surplus of banks constitute a guaranty fund to depositors. They represent a cushion for the liability of the Corporation. When this capital and surplus are exhausted through losses, the depositor must turn to the Insurance Corporation for the payment of his deposits. The Corporation is vitally concerned, therefore, with the amount and condition of the capital and surplus of insured institutions. The reduction of this cushion of safety should be permitted only after obtaining the approval of the Corporation. If banks are allowed to retire this new capital, the rehabilitation, which has been so tediously accomplished, would be of no avail. The Corporation should have the right to control any future reductions in capital by insured banks. Mergers and consolidations: The Corporation should have the right to review all mergers and consolidations affecting insured banks. It is possible that banks which have been refused admission to the insurance fund may be absorbed by insured institutions, thus extending the liability of the Corporation to depositors of the absorbed bank. Under the existing conditions, there is no way by which such a subterfuge could be prevented. In the interests of the depositor the Corporation should have the right to refuse to give its stamp of approval to inequitable or unsound reorganizations. Last year the Corporation was called upon to review more than 700 such plans. Many of those which we have seen are inequitable. The Corporation should have the right to pass upon the justice and soundness of reorganization plans. Depositors have often made tremendous sacrifices without the comparable sacrifice by stockholders and other special groups. The Corporation now has the right to buy assets of closed Federal Reserve member banks. We have recommended that this right to purchase be extended to operating insured banks until July 1936 whenever such action will avert an impending loss and facilitate a merger or consolidation. It will be to the best interests of both depositors and the Corporation if, through the absorption by the Corporation of a comparatively small loss, a more serious loss will be averted. Furthermore, such a procedure will offer both an incentive and a method for completing the rehabilitation of all insured banks prior to July 1, 1936. The right to purchase assets from operating banks should not be exercised unless in conjunction with a merger or consolidation and only for the purpose of averting loss. Fidelity and other protection: Bank failures are frequently precipitated by defalcations. We, therefore, recommend that the Corporation be given the right to require adequate fidelity and other insurance. Such insurance provides protection to depositors, to bank executives, and to the Corporation. Where a given institution does not carry sufficient insurance, the Corporation should be given the right to contract for such insurance and charge the bank therefor. Termination of insurance: A method whereby nonmember banks may withdraw from the insurance fund should be included in the |