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Februazy 20, 1955 Dear Senator Fletchers Having bean out of Hie city for several dayaf I been delayed somewhat in answering your letters of February I appreciate your expressions of interest in m to the Ohio Bankers* Association, and I aa especially glad to know that your long experience in banking legislation has led you to substantially the s a w conclusions that I voiced last week in Columbus. I aa also glad to have you raise the points that you do about lank loans on real estate and about Government securities held by the Federal reserve banks and other banks* First, as to your inquiry about bank holdings of Government obligations* (insert) How as to the provisions in the proposed Banking Act of 1935 relating to real estate loans, in regard to which you refer to the editorial in the Washington POST of February 14 and to the letter of February U ttom yo ir friend in Jacksonville * I quite agree with jmx that we shall be confronted with rj&ny arguments against these real estate loan provisions* and that we should be prepared to make aiqr modifications that may be required to strengthen these provisions after due consideration of constructive suggestions having that end in view* This whole question of mortgage lending tjr banks, howeverf is one on which there has been aaich loose thinking as well as loose practice, and it is therefore not surprising that the changes now proposed have een hastily criticised and widely misinterpreted. The objections to the proposed changes fall into two main classes* There Is first the view that commercial banks should not be permitted to sake long-term investments because the liabilities of such banks are payable on demand. This is the crux of the argulaent made by the Washington POST* the second class of objections is predicated cm the assumption that to enlarge the raort£age-lending power of our banks* in the manner now proposed, would be to disregard the experience of the recent past and to invite a repetition of - 2 practiced that have proved disastrous* AJI to the segregation of short-term and long-term lending functions in distinct types of institutions, it seems to ::ie that this is ty now plainly an academic theory that is possible of practical application* Under the Federal Reserve System, our banks hare been engaged in both types of lending for twenty years with the full sanction of law* They hare also engaged, with the full sanction of lawf in savings banking as well as in commercial banting* the time deposit and the longtana investatent functions are inseparable under our economic system, and the segregation of the long—term from the short-term lending function, in distinct t&pe& of institutions, would therefor© involve also the segregation of the time and tie d mand deposit functions* I ne d not tell you that such a step would be politically impossible of acco«plish»©nt even if it were desirable on financial grounds* But as a matte' of financial policy it would be equally impossible. It would disrupt our banking systea as a whole, and would leave the vast majority ot our banks without enough business of either the 2&ort^ter« or the long-tern type alone in their communities to raake possible their continued existence* As a aatter of fact—a fact th'<t I have stressed in the statements that I have made thus far on the new banking bill—a vital practical problea now confronting our banks is that of increasing their earning assets and thereby justifying, on the one hand* their existence as business enterprises, and, on the other, their continued support tyr the communities that they are organised to mmrm-m This is the immediate reason for the proposal to enlarge their powers and to encourage their activities in a field where an abundance of sound loans is now available, but vyhere lend* ing is discouraged ty the present wn&we concern of the banks over the question of liquidity • The error that the objectors to these proposed enlarged powers fall into is that of considering only the section of the new banking bill relating to real estate loamu that section cannot be considered as standing alone• In the first plane, it must be considered in relation to the provision that would enabla the Federal Reserve Board to make any sound asset available for borrowing at the Federal reserve banks• This ia a sufficient answer to the objection . . . !•• - 5 that sound real estate mortgages become frosen assets in an emergency. In the second place, it ?aust be considered in relation to the deposit-insurance law, nhicfa is in itself an iusurance against the kind of emergenqy~*a run on the banks-— that is the chief occasion for concern over liquidity* Hie essential question, then, is whether the proposed new provisions look toward sound loans. It seeas to me plain that the present provisions do not* They limit to a period of five years a type of loan that is essentially of a long-term character* They do not look to the capacity of the borrower to liquidate the loan and do not require the loan to be regularly curtailed* They encourage the perpetuation of mortgage debt and impose cm the borrower the unwarranted costs of periodic renewals. They virtually force the borrower to resort to seeondnaortfrage financing with its prohibitive edits* These are practices that the proposed new provisions are designed to endj and I aa sure you will agree with me that they should be ended in Htm interest of banks and borrowers alike, and for the protection of the real estate and mortgage markets as a whole. I believe that the new provisions, if enacted, would go a long way toward restoring to real estate mortgages the place that they have traditionally occupied as prime investments* Tours very sincerely, JID/MI
@FedFRASER