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ARTHUR H . VANDENBERG, MICH., CHAIRMAN ARTHUR CAPPER, K A N S . TOM CONNALLY, T E X . WALLACE H» WHITE, JR., MAINE WALTER F. GEORGE, GA. ALEXANDER W I L E Y , W I S . ROBERT F . WAGNER, N . Y . H . ALEXANDER SMITH, N . J. ELBERT D . THOMAS, UTAH EOURKE B. HICKENLOOPER, IOWA ALBEN W . BARKLEY, KY. HENRY CABOT LODGE, J R . , M A S S . CARL A . HATCH, N . M E X . FRANCIS O. WILCOX, CHIEF OF STAFF C . C . O ' D A Y , CLERK mtnileb ^£>icties Senate C O M M I T T E E O N FOREIGN RELATIONS February 9 , 1949 Honorable Marrlner S, E c c l e s , Board o f Governors o f the Federal Reserve Board, Washington, D* C. My dear Marrlner: I read a news report in the Mew York World Telegram which says that "the Federal Reserve Board w i l l seek authority to absorb the Federal Deposit Insurance Corporation". I f any information i s available on t h i s s u b j e c t , I should l i k e to know "what f s cooking". With warm personal regards and b e s t wishes, Cordially and f a i t h f u l l y ' U This article is protected by copyright and has been removed. The citation for the original is: New York World Telegram, “Reserve Board Reported Anxious to Absorb FDIC: Hopeful Such a Step Would Widen Control Over Non-Members,” February 3, 1949, p. 31. TOM CONNALLY. T E X . , CHAIRMAN W A L T E R F . GEORGE, O A . ELBERT D . THOMAS UTAH MILLARD E. TYDINGS, M D . CLAUDE PEPPER, FLA. THEODORE FRANCIS GREEN, R. I. BRIEN MC MAHON, CONN. J . W . FULBRIGHT, ARK. ARTHUR H. VANDENBERG, MICH. ALEXANDER WILEY, W I S . H. ALEXANDER SMITH, N . J. BOURKE B. H1CKENLOOPER, IOWA HENRY CABOT LODGE, JR., MASS. Itttrnleb Ubieties J&enctle FRANCIS O . WILCOX. CHIEF OF STAFF C O M M I T T E E O N FOREIGN RELATIONS March 2 , 1949 PERSONAL AND CONFIDENTIAL Honorable Marriner S. E c c l e s , Board o f Governors o f the Federal Reserve System, Washington, D. C. My dear Marriner: I suppose i t i s sheer hereby f o r me to ask a member of the Federal Reserve Board y/hat he thinks about an FDIC problem. But I should very much l i k e your c o n f i d e n t i a l comment on FDIC premiums. Heretofore, I have c o n s i s t e n t l y (and s u c c e s s f u l l y ) prevented a reduction o f these premiums. Now that the Government has been paid o f f and the FDIC has a b i l l i o n surplus o f i t s own, I think perhaps the time has come when i t i s f a i r to consider a premium reduction. I should l i k e t o know what you think and I should l i k e t o have the b e n e f i t o f your s p e c i f i c recommendation. With warm personal regards and b e s t v/ishes, Cordially and f a i t h f u l ^ , R This article is protected by copyright and has been removed. The citation for the original is: Washington Post, “Deposit Insurance,” March 11, 1949. PERSONAL AND CONFIDENTIAL March 11, 19i#* Honorable Arthur H* Tandenberg, United States Senate, Washington, D* C# Dear Senators I d o n ' t think i t i a "heresy1* to ask a Federal Reserve Board member about an F.D*I«C* problem, but i t might be "sheer heresy* to ask the F.D*I.0* about a Federal Reserve problem. In any c a s e , I deeply appreciate your confidence* The s u b j e c t o f d e p o s i t insurance premiums i s one to which we have given conaiderable thought because 85 per c s n t of the deposits in insured banks are held by banks which ar© members o f the Federal Reserve System* I f e e l that the time has arrived when there should be a suspension o f the assessments* Like you, we have h e r e t o f o r e opposed a reduction o f these premiums* We f e l t , during the p e r i o d when d e p o s i t l i a b i l i t i e s were r i s i n g and bank earnings were increasing s u b s t a n t i a l l y as a r e s u l t o f war financing, and the c a p i t a l and surplus o f the Corporation had n o t reached a b i l l i o n d o l l a r s , that there was no basis f o r a reduction* How, however, the p i c t u r e has changed. Hie c a p i t a l o r i g i n a l l y paid in by the Treasury and the Federal Reserve has been retired* The remaining surplus o f the Corpora* tion i s w e l l over the b i l l i o n d o l l a r s s p e c i f i e d by Congress and i s increasing* Although the r a t i o o f bank c a p i t a l to deposit l i a b i l i t i e s has decreased, the d o l l a r amount o f c a p i t a l funds o f banks has increased a t l e a s t two-thirds since 1933* l a r g e l y through the r e t e n t i o n o f undistributed net earnings* More than two-thirds o f the d e p o s i t l i a b i l i t i e s o f the banking system are o f f s e t i y cash a s s e t s and Government s e c u r i t i e s which are the equivalent o f cash* Fven though t h i s leaves a large d o l l a r amount o f what might be r e garded as risk assets* the Corporation, in i t s l a t e s t Annual Report, f o r 19h7» says t h a t examinations show that l e s s than one per cent o f the a s s e t s o f insured commercial banks were below the standards f o r bank investment* This, o f course, does n o t mean that any substantial part o f that amount would be a l o s s , nor would the l o s s e s a l l oocur in one year* I r e c o g n i s e that a l l backs are n o t in equally good condition* Probably -foere w i l l be an increasing volume o f losses* A s l i g h t down Honorable Arthur H. Vandenberg -2~ turn i n n e t earnings has already appeared. Seme banks w i l l re<juire c l o s e r supervisory attention than others* However, the growth o f r i s k assets and the estimation o f p r o s p e c t i v e l o s s e s are r e f l e c t e d currently in the existing reporting and examination procedures o f the supervisory a u t h o r i t i e s • fids should enable the supervisory a u t h o r i t i e s to take precautionary steps in individual bank s i t u a tions b e f o r e l o s s e s accumulate t o an extent s u f f i c i e n t to endanger d e p o s i t o r s . In addition, the Federal Reserve i s in much b e t t e r p o s i t i o n than ever before through i t s discounting, supervisory and c r e d i t oontrol powers to p r o t e c t the s i t u a t i o n among member banks* Since the reserves o f the Corporation are nearing 1 . 1 b i l l i o n , i t i s reasonable t o expect an annual in cane o f 25 m i l l i o n d o l l a r s or more from investments in Government s e c u r i t i e s alone, and sinoe i t s current expenses are around 5 ~ l / 2 m i l l i o n , i t eea&s l i k e l y -feat there would be a t l e a s t 20 m i l l i o n d o l l a r s a year with which to meet current l o s s e s . 2his would be almost equal t o the n e t l o s s of the Corporation during the fourteen years from i t s i n ception through 1914?, the period covered ty i t s l a t e s t Annual Report, which was only 26 m i l l i o n d o l l a r s . In these circumstances, as I have said b e f o r e , I would now favor the complete suspension o f the assessments, with the understanding that the assessments would be restored, up t o the annual rate h e r e t o f o r e authorised by Congress, whenever t h a t might be neoessary t o maintain the reserves of the Corporation a t an amount in excess of one b i l l i m d o l l a r s . She suspension o f the assessments would add a substantial percentage t o the n e t earnings o f the insured banks, this in turn would increase the cushion b e tween the Corporation and p o s s i b l e l o s s e s . An a l t e r n a t i v e suggestion which was indicated e d i t o r i a l l y in She Washington Post this morning ( a copy o f which i s enclosed) and which has a great deal o f m e r i t would be to deduct fro© the t o t a l amount o f d e p o s i t l i a b i l i t i e s o f each insured bank the amount o f cash a s s e t s and Government s e c u r i t i e s held by the bank and t o apply the regular assessment rate against the balance, so that, i n e f f e c t , the assessment would be against an amount equivalent to the risk assets. Ihe reason f o r t h i s suggestion l i e s in the obvious f a c t that cash a s s e t s and Governments would not be the source o f l o s s , and that t h e insurance premiums, t h e r e f o r e , should be in d i r e c t r e l a t i o n t o the other a s s e t s which might produce l o s s e s . If t h i s suggestion were adopted, i t would reduce the aggregate a s s e s s ments by something l i k e tiro-thirds. Ihe proportion o f the reduction would vary among the insured banks according t o the amount o f risk Honorable Arthur H. Vandenberg -3- a s s e t s which they hold and i t would -therefore be muoh more e q u i t a b l e than the present systeeu I f n e i t h e r o f the above two suggestions should be a c c e p t a b l e a t t h i s tiffie, the l i m i t on insured d e p o s i t l i a b i l i t y * as a matter o f equity* should e i t h e r be removed e n t i r e l y o r i t should a t l e a s t be doubled, as $10*000 at t h i s time would be no more than $5*000 was when the insurance system was established^ With wamest regards* Sincerely* U. S* E c o l e s . Civ: :am M) f V L TOM CONNALLY, T E X . , CHAIRMAN W A L T E R F . GEORGE, GA. ELBERT D . THOMAS. UTAH MILLARD E. TYD1NGS, M D . CLAUDE PEPPER, FLA. THEODORE FRANCIS GREEN, R . I. BRtEN MC MAHON, CONN. J . W . FULBRIGHT, A R K . ARTHUR H. VANDENBERG, MICH. ALEXANDER WILEY, W I S . H. ALEXANDER SMITH, N . J. BOURKE B. H1CKENLOGPER, IOWA HENRY CAEOT LODGE, JR., MASS. FRANCIS O . WILCOX, CHIEF OF STAFF "SCroieb staless JJbencile C O M M I T T E E O N FOREIGN RELATIONS March 15, 1949 PERSONAL Honorable Marriner S . E c c l e s Board o f Governors Federal Reserve System Washington, D. C. My dear Mr, Governor: Thanks f o r your f i n e l e t t e r o f March 11 i n response t o my i n q u i r y o f March 2 regarding F . D . I . C . premium r a t e s . I am glad t o have your thoroughly persuasive statement regarding the f i s c a l i n t e g r i t y o f F . D . I . C . and your b e l i e f that premiums might now be completely suspended ( s u b j e c t t o r e s t o r a t i o n i n the event o f f u t u r e d i f f i c u l t i e s ) , I do not b e l i e v e that I would want t o suspend premiums entirely. There i s something about the psychology o f complete suspension 7/hich I do not seem t o l i k e * I think i t would be p r e f e r a b l e t o maintain a t l e a s t nominal assessments, X a l s o would p r e f e r t h i s s o r t o f a c t i o n r a t h e r than the maintenance o f e x i s t i n g premium r a t e s against a p o r t i o n o f bank a s s e t s other than cash i n Government s e c u r i t i e s , I was q u i t e wedded t o t h i s l a t t e r idea a t one time; but I came t o the c o n c l u s i o n t h a t i t would be b e t t e r n o t t o i n j e c t t h i s c o m p l i c a t i o n i n t o F . D . I . C , a r i t h m e t i c . I have been h e s i t a n t t o consent t o any r e d u c t i o n i n premiums up t o now. l o u r l e t t e r r a t h e r convinces me, however, that there would be j u s t i f i c a t i o n f o r a current r e d u c t i o n i n premiums. Thanks f o r your h e l p f u l n e s s . With warm personal regards and b e s t wishes, C o r d i a l l y and f a i t h f u l l y PEltSOh/iL i^D oujMIDEWTIAL hlhrch IT, 19^9* Dear Senator; Referring t o your l e t t e r of March 15, I m glad t o have your insprassion regarding the problem of F . D . I . C , premiuia xates. I should l i k e t o suggest that you give some f u r t h e r consideration t o the question whether a reduction would be advisable rather than a complete suspension. I t seeice t o £ie that the important question t o determine f i r s t i s the adequacy o f the surplus accujaulated by the F. 0* I . C. I f i t i s adequate, there would seem t o be no occasion f o r continuing the process o f accumulation tarough a s s e s s ments, e s p e c i a l l y men current net income i s s u b s t a n t i a l l y in excess o f l o s s e s . On the other hand, i f t h e ' s u r p l u s i s not adequate then there should be no reduction* I f we assume that the surplus i s s u f f i c i e n t , there w i l l be great d i f f i c u l t y in determining the reason f o r continuing the assessment, even at a reduced r a t e . The induction isould have t o be stated in the law o r authority given t o the F^D.I.C., in the law t o the reduction, &nd i n e i t h e r event so&e fornaiia mould h^ve t o be worked out. In the circumstances, any such formula ^ould be debated and isould be very l i k e l y t o arouse an adverse reaction on the ground that the banKs were being s u b j e c t ed t o an unnecessary> as w e l l as inequitable expense. I w i l l not burden you ^ith a discussion of t h e points that mi^ht be r a i s e d , but they would c e r t a i n l y include the f a c t thai the r i s x s were very unevenly d i s t r i b u t e d among the banks. I cannot help but f e e l in the l i ^ h t of the a v a i l a b l e information that t h e surplus has reached an adequate aisount, although I am aware of the arguments t o the contrary, fcith a view t o allowing something more, however, t h e e f f e c t i v e date of the suspension of the assessment might be deferred u n t i l January I , 1950, when, on the biusis o f current experience, i t seeius l i k e l y that the surplus w i l l be around ,^1,^00,000,000. The F. D.I«C. could then be authorised t o r e s t o r e the as&easment in wnole o r in part t o such extent as might be necessary t o maintain t h i s amount, whenever new developments i n d i c a t e d that the surplus migfau d e c l i n e t o the amount on hand on January 1 , 1950. I t seems t o j&e t h « t ^ M s would be an approach t o the j i t t e r wnich could e a s i l y be understood and should be acceptable t o a l l concerned. M t h warmest personal regards. S i n c e r e l y yours, The Honorable Arthur H. Vandenberg, United States Senate, iiashington, D# C* Cdd:aai/r& M. S . X c c l e s . This article is protected by copyright and has been removed. The citation for the original is: Wall Street Journal, “FDIC Chairman Hints Agency May Face ‘Test’ as Business Levels Off: Says Relatively Small Demands on Its Resources Since 1934 Reflected Economic Expansion,” March 28, 1949.
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