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A-"*- CHAIRl&N ECClESt PROPOSAL FOR HEETIHG THE HEED FOR ADDITIONAL FACILITIES TO StJPPLT CREDIT AHD CAPITAL TO EffiUSTEI The uncovered field There are two groups of business enterprises whose needs are not adequately met by existing financial laachineryj 1* Those who need short and intermedi ate credit but whose credit standing at the present level of business activity does not Bake them acceptable risks for banks • These are not misconceived or mismanaged or insolvent businesses* but businesses ufaose prospects of success are dimmed by the current economic situation* 2m Small and xaedium, size businesses which need loan or equity capital for an intermediate or long period* The growth of natioa>«ide business units, the discontinuance of bank affiliates and of underwirting by banks, tfee increased cost of security issues^, and the disappearance of local underwriters have Bade it difficult for this type of business concern to find long^tisa credit except at prohibitive cost* The Head bill It is not likely that this bill will greatly increase the voluxas of loans Bade, for these reasons: 1* The insurance provisions are such as require the lending bank to take a 10 per cent loss on each loan before the insurance becomes effective for the remaining 90 per cent. 2* The rate of interest provided, 4 per cent, is so low for the type of loan contemplated that banks would be reluctant to xaake them, particularly as this would appear to givs a preference to these borrowers over regular established customers* 3# The Reconstruction Finance Corporation has authority under existing law to do substantially all that the Bead bill proposes, except that the present law is interpreted as requiring the Corporation to pass on each individual loan* This could easily be changed* Other undesirable features of the Ifead bill are: (1) the creation of an unlimited contingent liability for the Government, and (2) authority to rediscount insured paper with unlimited laaturities at the Reserro banks* In so far as aeraber banks are concerned, they can now obtain advances on any satisfactory security, and in so far as nonraetiber banks are concerned, they should not be given the asm privileges as those enjoyed by members withoxtfc being subject to the laws applicable to laember banks* teeri^ge of ^ g Ft RtfraBfcsTito iMystrial towa The Reserve banks have approved consnitments and advances to business of about #180,000,(XX) under section 13(b) of the Federal Beserve Act, but owing to limitations in the law that loans mast be for working capital, must be Bade to established institutions, and mist be for not more than five years, this arrangement does not aeet the situation and the lair should be repealed* The proposal It is proposed that funds in the Treasury now set aside or used for industrial loans - about #339*000,000 - be turned over to an Industrial Loan Corporation* This will involve no additional appropriation* The Board of Governors would be the Board of Directors of this corporation^ and the twelve Federal Beserve banks with their twenty-four branches would be the field agents to pass on applications* In this way prospt and economical action would be assured by utilising existing machinery and experienced personnel* The corporation would make loans or commitments or acquire preferred stock; not more than $1,000,000 to one borrower* Intermediate or long-term loans could be made by private lenders, insured banks, protected by eorndtzsents of the corporation* The corporation would have #100,000,000 of capital and $39*000,000 of surplus* It would have power to issue $500,000,000 of Government guaranteed debentures* Upon liquidation all remaining assets would go to United States Government* It would set aside out of its surplus $25,000,000 for an insurance fund for small loans not exceeding $25,000 - on the basis of guaranteeing 10 per cent of any lender's aggregate insured loans, so that the loss on any loan even up to 100 per cent would be absorbed by the Corporation, so long as aggregate losses did not exceed one-tenth of the lender*s insured loans* This is the saiae plan as in Title One of F*H*A* The corporations possible losses on insured loans would be limited to the #25,000,000 set aside as an insurance fund* Aggregate cost to borrower, including insurance and service charges would not exceed 6 per cent* The purpose of the proposal is to xoeet adequately the existing need; the Federal Reserve System is proposed as agency because of the mide distribution of its existing offices, its close contacts ^ith banks* and the experience of its personnel in this field, but any other arrangement that Congress may -wish to zaake full be entirely agreeable*
