EXTENSION OF TEMPORARY PLAN FOR DEPOSIT

INSURANCE

MONDAY, APRIL 23, 1934

HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C.

The committee met at 10:30 a.m., Hon. Henry B. Steagall (chairman) presiding.

The CHAIRMAN. Now, gentlemen, we have with us this morning Mr. Bennett, of the Deposit Insurance Corporation. Mr. Bennett, will you please come around, and the committee will be glad to hear

you.

STATEMENT OF E. G. BENNETT, DIRECTOR OF THE FEDERAL DEPOSIT INSURANCE CORPORATION

The CHAIRMAN. What is your home address, Mr. Bennett?
Mr. BENNETT. Wardman Park Hotel.

The CHAIRMAN. Where was your former home?

Mr. BENNETT. Ogden, Utah.

The CHAIRMAN. Mr. Bennett, we have before us the bill which passed the Senate and which was introduced by Senator Glass, providing for the postponement of the effective date of the provisions of the Deposit Insurance Corporation. The committee would like to have you discuss that bill and give us any suggestions you may see fit to submit.

Mr. BENNETT. The Corporation has been represented heretofore in this hearing by Mr. Crowley, the chairman of the board. I did not have the pleasure of attending that hearing. I have had no opportunity to read the record of the meeting, and I want to avoid as much as possible any repetition.

The CHAIRMAN. I suggest you make your own statement in just your own way, without reference to thought of that. The committee would like to hear you as fully as you desire.

Mr. BENNETT. I think the briefest and most concise manner in which I can do that is to start with the request for this legislation. First, we consulted with the President after having conferred with the Federal Reserve Board, the Secretary of the Treasury, and the Comptroller of the Currency, to get the benefit of their views on the situation.

As the result of those discussions, the following letter was addressed to the President under date of February 10, which bore my signature as acting chairman of the board.

You will recall Mr. Walter J. Cummings, the chairman of the Board, retired in January and there were some few weeks before his successor

was appointed, Mr. Crowley, succeeding him in the chairmanship. In the meantime there were these matters needing attention, and I automatically functioned as the chairman, doing the best I could, with the situation during that interval.

This letter I have referred to reads as follows:

DEAR MR. PRESIDENT: I have the honor to submit to you the attached draft of a bill embodying certain amendments to the Banking Act of 1933 recommended by this Board. These recommendations are concurred in by the Federal Reserve Board, the Secretary of the Treasury, and the Comptroller of the Currency.

The proposed amendments would do the following things:

1. Extend the life of the temporary insurance fund from June 30, 1934, to June 30, 1935, without increasing the limit of liability of the member banks to such fund.

The temporary fund provides for subscriptions if necessary up to 1 percent of the insurable portion of deposits. This would produce 160 million dollars and the Board is of the opinion that a greater potential liability should not be imposed upon the banks at this particular time. The mutual savings banks have approximately 25 percent of the insured deposits of the entire country, and it is important for the stability of the situation that these institutions remain in the temporary insurance fund until a better opportunity may be had for working out a permanent plan of insurance in which they may join. It is believed that increasing the potential liability of the temporary fund would result in many, if not practically all, of the mutual savings banks withdrawing.

2. Postpone the inauguration of the permanent insurance plan from July 1, 1934, to July 1, 1935.

This deferment is considered necessary in order to provide more time for additional legislation required in some States, to study the operations of the temporary fund as a basis for recommendations of changes, if any, that should be had in the permanent fund, and to provide adequate time to properly prepare for the operation of the permanent plan.

3. Clarify the right of the Corporation to act as receiver under the temporary fund.

4. Provide for the guarantee by the United States Government of such obligations of the Corporation issued with the approval of the Secretary of the Treasury, provide that the Treasury may purchase and sell such obligations, that the Federal Reserve banks may do likewise, and that such obligations may be rediscounted by Federal Reserve member banks with the Federal Reserve banks.

The obligations as provided under the present law are not guaranteed by the United States Government, are not eligible for purchase by the United States Treasury, and would be difficult to market. Under the present law such obligations are exempt from all taxation except estate and inheritance taxes. The attached amendment would make the guaranteed obligations exempt from all taxation except surtaxes, estate, inheritance and gift taxes.

5. Provide that banks not giving notice of withdrawal thirty days prior to July 1, 1934, continue in the fund for the extended period, and give the board power to regulate the terms which withdrawing members must meet.

The legal counsel of the Federal Reserve Board and of this corporation are of the opinion that all Federal Reserve member banks must automatically continue with the temporary fund for the extended period.

6. Provide that capital notes or debentures of the character sold by banks to the Reconstruction Finance Corporation, and which are subordinated to the claims of depositors and all other creditors, shall be considered as a part of the capital structure of such institutions.

Mr. DISNEY. Right at that point, let me ask a question.

Mr. BENNETT. Perhaps I should first explain that, in this manner. In some States banks cannot issue preferred stock necessary to receive R.F.C. capital structure aid. In such States Congress provided that capital debentures could be issued instead of preferred stock.

The Federal Reserve Board had ruled that such capital notes or debentures could not be considered a part of the capital structure for membership in the Federal Reserve System, even though these capital notes to all purposes served in that capacity, in that they were subor

dinated to depositors and all creditors. It is simply a technical way of getting at the situation that otherwise could not be reached.

After making a hurried trip through certain sections of the country where we were having the greatest difficulty in getting the nonmember banks to apply for insurance, I found that one of the great difficulties was this ruling in the States where preferred stock could not be issued. We had several conferences with the Federal Reserve Board, and finally the Board modified its ruling and permitted the proceeds of capital notes going into capital structures to be considered in the same manner as the proceeds of preferred stock going into capital structure, and, of course, that eased up the situation in those States.

There was a question in the minds of counsel for the Federal Reserve Board whether that action was legal, and it was determined at that time that as soon as Congress met, this amendment would be offered to clarify the situation.

I will read further from this letter, as follows:

The enclosed statement attached to the proposed bill briefly summarizes the purposes of the suggested amendments. All issues in connection with the permanent plan have been purposely avoided, confining the legislation here proposed to what are deemed essentials in extending the life of the temporary fund for another year. In the event Congress will not extend the temporary fund as herein recommended, some revision of the permanent plan must be had during the present session of Congress in order to avoid considerable confusion and possibly serious developments in making the permanent plan operative July 1, 1934.

Respectfully submitted.

The PRESIDENT,

The White House.

E. G. BENNETT, Acting Chairman.

The statement attached to the above letter was just an explanatory statement such as usually accompanies anything of this kind which is submitted to the President, and it reads as follows:

The section of the Banking Act of 1933, providing for the insurance of bank deposits up to $2,500, became operative January 1, 1934. About 99 percent of all banks have come under these provisions. Approximately 97 percent of all depositors some 50 million in number-are insured to the full amount of their deposits.

This action has restored public confidence in the banking structure. Fear is ended. Hoarded money is flowing back to the banks. Bank credit can once more be extended freely to agriculture and industry. This is an important step in national recovery. The aims of deposit insurance have begun to be accomplished.

A full Nation-wide functioning of the plan to insure deposits in larger amounts is not possible without legislation or constitutional amendment by some States. To provide greater opportunity for such action, and better to prepare for the administration of the enlarged insurance plan in other important respects, I suggest a further use of the present insurance by extending its operations 1 year. We can thus perpetuate the benefits now accruing to the 97 percent of bank depositors covered by the present insurance while gaining the further experience necessary for added protection of the remaining 3 percent of depositors.

I recommend also that the obligations of the Federal Deposit Insurance Corporation be given the same ready marketability that the obligations of the Reconstruction Finance Corporation now have, so that the Corporation may more readily obtain funds for use in liquidating the deposits in closed banks, and for its other purposes. This step is necessary to carry out the remedial provisions

of the act.

Mr. BROWN. Are you making recommendations there for present legislation now, or are you making recommendations for future legislation?

Mr. BENNETT. This pertains to the bill here.

Mr. BROWN. There is nothing before us regarding the guarantee of bonds.

Mr. BENNETT. That was eliminated in the Senate.

Mr. BROWN. It was in the original bill.

Mr. BENNETT. Yes.

Mr. BROWN. And eliminated by the Senate from the bill.

Mr. BENNETT. Yes; that letter was submitted to the President, and he called a meeting of some of the Members of the House and the Senate, the Governor of the Federal Reserve Board, the Secretary of the Treasury, the Comptroller of the Currency, and under date of February 14, transmitted this bill to Chairman Steagall, of the House Committee, and Chairman Fletcher, of the Senate Committee. The letter of the President, dated February 14, I presume you are familiar with. Has that letter been made a part of the record?

The CHAIRMAN. I do not know whether it has been made a part of the record, and I suggest that you incorporate it as a part of your

statement.

Mr. BENNETT. I will read the letter, as follows:

FEBRUARY 14, 1934.

MY DEAR CONGRESSMAN: I am transmitting herewith the letter of Hon. E. G. Bennett, acting chairman of the Federal Deposit Insurance Corporation, together with a proposed bill to amend the Federal Reserve Act, as amended, so as to extend for 1 year from July 1, 1934, the present plan of insurance of bank deposits up to $2,500, which became operative on January 1, 1934.

The corporation reports that approximately 99 percent of the banks have complied with the provisions of the law and, as a result, 97 percent of their depositors, some 50 million in number, are insured to the full amount of their deposits. This would indicate that insurance of bank deposits throughout the country has become a reality and that we can now afford to advance toward the more complete accomplishment of the aims of Congress in light of such further experience as a year's extension of the present insurance will afford.

I therefore bespeak the earnest attention of your committee to the proposals and recommendations of the Federal Deposit Insurance Corporation.

Very sincerely yours,

Hon. HENRY B. STEAGALL,

(Signed) FRANKLIN D. ROOSEVELT.

Chairman Committee on Banking and Currency, House of Representatives. A letter was also addressed by myself to Chairman Steagall and Chairman Fletcher under date of February 20, dealing in some detail with this legislation. I hardly see the necessity of putting that in the record, as I imagine the things I have covered in the letter will come up today. Have you any suggestion on that, Mr. Chairman?

The CHAIRMAN. I think it might be well enough to let the letter go in, but I will leave that entirely with you.

Mr. BENNETT. I will read the letter into the record. This letter is dated February 20 and reads as follows:

DEAR Mr. CHAIRMAN. In accordance with our conversation, I am enclosing, in triplicate, two statistical reports showing extent of insurance liability of this Corporation as of February 15, 1934. The first report (schedule A) shows the insurance of all banks by States, with a further breakdown by list of States showing segregation of insurance as to national banks, Federal Reserve member State banks, and nonmember State banks.

The second report (schedule B) contains the same data, but segregated in the order of the States, rather than in the order of the respective banking systems as in schedule A.

You will observe that the total number of insured banks as of February 15, 1934, was 13,529. Total deposit liability of these institutions aggregated $37,900,000,000, of which $15,482,000,000 or about 40.83 percent of the total deposít liability-consisted of insured deposits under the $2,500 limit. The deposit

accounts numbered 54,682,000 and we estimate that over 50 million of these deposit accounts come within the $2,500 limit, or to be more exact, about 96.5 percent of the total depositors.

The amendments to the Banking Act of 1933 referred to in the communication you received from the President, and which amendments have been recommended by the Secretary of the Treasury, the Federal Reserve Board, the Comptroller of the Currency, and the Board of this Corporation, would do the following things.

Mr. BROWN. Mr. Bennett, would you care, right now, to consider the provisions of the present law with respect to that statement; I am not sure I understand that. On page 20 of the print we have of Public No. 6366, which is the Glass-Steagall bill

The CHAIRMAN. Let me make a suggestion, Mr. Brown, would you not make a note, and then come back to that part later after the reading of the letter is completed?

Mr. BROWN. Yes, I will be glad to do that.

The CHAIRMAN. You may continue with the letter, Mr. Bennett. Mr. BENNETT. Reading further, the letter is as follows:

1. Extend the life of the temporary insurance fund from June 30, 1934, to June 30, 1935, without increasing the limit of liability of the member banks to such fund.

The temporary fund provides for subscriptions if necessary up to 1 percent of the insurable portion of deposits. This would produce 160 million dollars and the board is of the opinion that a greater potential liability should not be imposed upon the banks at this particular time. The mutual-savings banks have approximately 25 percent of the insured deposits of the entire country and it is important for the stability of the situation that these institutions remain in the temporary insurance fund until a better opportunity may be had for working out a permanent plan of insurance in which they may join. It is believed that increasing the potential liability of the temporary fund would result in many, if not practically all, of the mutual-savings banks withdrawing.

As a class, the deposits of country banks in volume are better than 70 percent insured under the $2,500 limit. On a basis of "1 to 10 ratio of capital to deposits" the present potential liability of 1 percent under the temporary fund would be equivalent to 7 percent of the capital stock of such institutions. To further increase this would work a severe hardship upon that portion of the banking structure that is now having the greatest difficulty in creating earnings.

2. Postpone the inauguration of the permanent insurance plan from July 1, 1934, to July 1, 1935.

This deferment is considered necessary in order to provide more time for additional legislation required in some States, to study the operations of the temporary fund as a basis for recommendations of changes, if any, that should be had in the permanent fund, and to provide adequate time to properly prepare for the operation of the permanent plan.

Considerable additional State legislation is badly needed for the proper functioning of the permanent insurance fund. In the State of Connecticut the attorney general has ruled that incorporated State banks cannot under the present laws become members of the permanent fund, but may in the temporary fund. The position has been taken in Connecticut and Rhode Island, and a doubt has been expressed as to Massachusetts, that mutual-savings banks under the present laws cannot become members of either the temporary or the permanent insurance fund. Serious doubts have been raised in other States as to whether mutual-savings banks can participate in the permanent fund without change in legislation. As herein before indicated, the mutual-savings banks that are now insured represent better than 25 percent of the insured deposit liability of the entire country. Very thorough and mature consideration should naturally ensue in reaching a solution of the problem that would develop with the inauguration of the permanent insurance plan.

Mr. SISSON. Is New York State one of those States you refer to? Mr. BENNETT. New York has in the last few days passed a bill, which has not been signed by the Governor, but I presume he will sign it, which will permit savings banks to purchase class A stock.

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