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HOARD OF GOVERNORS OF THE FEDERAL RESERVE T^t.g To SYSTEM Daornhftr I P , IQljJ Chairman Ecclas iQtai Ralph A» Young MESSAGE: Attached are copies: (a) The Senate Banking and Currency Comm i t t e e ^ Report t o t h e Senate on S. (b) The Board's o r i g i n a l statement accompanying the recommendation f o r the repeal of 13b and amendment of 13. S p e c i a l n o t e : Remind the Subcommittee t h a t the Senate Banking and Currency Committee has a l r e a d y r e p o r t e d out S« 1*08 f a v o r a b l y . d w s a g e d e l i v e r e d by F . FRASER Digitized for R . 4 6 8 Rev. 1/47 Calendar No. 146 8 0 T H CONGRESS SENATE f REPORT ( 1st Session No. 145 GUARANTIES OF BUSINESS LOANS THROUGH T H E FEDERAL RESERVE SYSTEM APRIL Mr. 28 (legislative day, TOBEY, APRIL 21), 1947.—Ordered to be printed from the Committee on Banking and Currency, submitted the following REPORT [To accompany S. 408] The Committee on Banking and Currency, to whom was referred the bill (S. 408) to repeal section 13b of the Federal Reserve Act, to amend section 13 of the said act, and for other purposes, having considered the same, report favorably thereon with amendments and recommend that, as amended, the bill do pass. STATEMENT The bill has two principal purposes. I n order to carry out a recommendation of the President in his budget message for 1948 the bill would require the return by the Federal Reserve banks of all funds heretofore received by them from the Treasury in connection with their industrial loan operations, about $27,500,000, and would eliminate any further claim upon the Treasury for any part of the $112,000,000 which was appropriated by Congress and is now set aside on the books of the Treasury for this purpose. The committee is in agreement with the President that it is desirable that these funds, totaling about $139,000,000, be now released to the Treasury for other uses. The other principal purpose of the bill is to provide assistance i n the furnishing of necessary financing to business enterprises in times, of need through partial guaranties of loans made by banks: I t is. the view of the committee that authority for such guaranties should be provided in the law, and also that it should properly be vested in the Federal Reserve System. The Reserve banks are permanent institutions with offices throughout the country and they have had a considerable experience in the field of financing business through partial guaranties both under section 13b of the Federal Reserve Act and, during the war, in the financing of war production under the V-loan program. The bill would repeal the present restrictive industrial loan authority of the Federal Reserve banks, contained in section 13b of the 2 G U A R A N T I E S OF L O A N S B Y F E D E R A L RESERVE S Y S T E M Federal Reserve Act, and would substitute therefor a more effective authority to guarantee loans made by chartered banking institutions to business enterprises. This authority would be contained in a, new paragraph to be added to section 13 of the Federal Reserve Act. No loan guaranteed could have a maturity of more than 10 years. The percentage of the loan guaranteed in any case could not exceed 90 percent; in other words, the banking institution would be required to assume 10 percent or more of the risk in any loan. The aggregate amount of all guaranties could not exceed the combined surplus of the Federal Reserve banks; and, in order to insure the availability of guaranties for loans to smaller businesses, the aggregate amount of all guaranties which are individually in excess of $100,000 could not exceed 50 percent of the combined surplus of the Reserve banks. All operations of the Reserve banks would be subject to the regulatory supervision of the Board of Governors of the Federal Reserve System. I n this connection, the committee have adopted two amendments originally suggested by the Federal Advisory Council and recommended by the Board of Governors of the Federal Reserve System. By the first of these amendments, the words "chartered banking institutions" have been substituted for "financing institution," so that in effect loans may be guaranteed under the bill only if made by incorporated banks. The second amendment would authorize a Federal Reserve bank to guarantee a loan only when it appears to the satisfaction of the Reserve bank that the business enterprise is unable to obtain requisite financial assistance on a reasonable basis from the usual sources. The committee believe that guaranties should not ordinarily be made available to banks in cases in which the amount of the loan is beyond their legal limit, if the loan is of such quality that it may be made without the guaranty by giving participations to other banks to which it would be natural for the smaller banks to turn for assistance in such cases. I t is also the view of the committee that the authority provided by the bill should be limited initially to a period of 5 years and, accordingly, it has approved an amendment terminating the authority oil June 30, 1952. At that time, of course, Congress may deem it desirable to extend the authority or place it on a permanent basis. . No Government appropriations or drain on the Federal Budget would be involved in operations under the bill. The Reserve banks would use their own surplus funds in carrying out their authority to make guaranties; and any losses sustained would first come out of the fund created from the receipt of fees charged for guaranties. I f that fund should not be adequate, losses would be met out of the net earnings or surplus funds of the Reserve banks. This bill would not place the Federal Reserve banks in competition with the private banking system. They would not have authority, as under present law, to make direct loans to business enterprises. Credit judgment and responsibility would remain primarily with the lending bank. Loans guaranteed would originate with local banks dealing with local concerns with which they would be familiar. A Federal Reserve bank could not guarantee any loan unless requested to do so by the local bank; but when approved by the Reserve bank, the guaranty would be made promptly available without referring the matter to any agency in Washington. o STATEMENT IN CONNECTION WITH PROPOSED BILL TO REPEAL SECTION 13b AND AMEND SECTION 13 OF THE FEDERAL RESERVE ACT The Board o f Governors o f the Federal Reserve System recommends f o r t h e f a v o r a b l e c o n s i d e r a t i o n o f t h e Committee on Banking and Currency t h e attached d r a f t o f a b i l l which has f o r i t s purpose the r e v i s i o n o f t h e a u t h o r i t y o f the Federal Reserve Banks t o guarantee f i n a n c i n g i n s t i t u t i o n s a g a i n s t l o s s on loans made t o business e n t e r p r i s e s . Such guarantees by the Reserve Banks would r e q u i r e no approp r i a t i o n s by Congress. The Federal Reserve Banks are e s p e c i a l l y q u a l i f i e d f o r p r o v i d i n g f i n a n c i a l assistance t o business e n t e r p r i s e s through commercial banking channels• They h o l d the reserves o f member banks, they provide d i s c o u n t i n g f a c i l i t i e s f o r member banks, t h e y c o l l e c t t h e i r checks, and they a d m i n i s t e r many of the governmental r e g u l a t i o n s a f f e c t i n g banks* I n numerous ways t h e Reserve Banks have l o n g been i n close contact w i t h commercial banks and business e n t e r p r i s e s i n t h e i r d i s t r i c t s and are f u l l y acquainted w i t h t h e i r problems. Since t h e Federal Reserve Banks are permanent i n s t i t u t i o n s w i t h experienced personnel, the Board f e e l s t h a t whatever f i n a n c i a l assistance i s t o be provided under governmental a u t h o r i t y f o r business e n t e r p r i s e s through commercial banks should be extended by the Reserve Banks. D u r i n g the war, the Federal Reserve Banks gained v a l u a b l e experience i n the a d m i n i s t r a t i o n o f the W and T - l o a n programs f o r guaranteeing war p r o d u c t i o n and contract t e r m i n a t i o n l o a n s . Under those programs, the Reserve Banks, as o f September 30, 1946, had processed 8 , 7 7 1 guarantees, aggregating n e a r l y 10-1/2 b i l l i o n d o l l a r s , losses being r e l a t i v e l y s m a l l and s u b s t a n t i a l l y l e s s than t h e guarantee fees c o l l e c t e d . The proposed b i l l f o l l o w s t h e guarantee p r i n c i p l e which was applied under those programs; and f i n a n c i n g i n s t i t u t i o n s are already f a m i l i a r w i t h t h e s e r v i c e s o f t h e Reserve Banks i n t h a t f i e l d . Accordi n g l y , t h e b i l l would not i n v o l v e the establishment o f any new governmental agency o r the a p p l i c a t i o n o f u n t r i e d p r i n c i p l e s * Even though business and c r e d i t c o n d i t i o n s a t time may n o t be such as t o r e q u i r e extensive use o f the a u t h o r i t y which the Reserve Banks would have under t h i s d e s i r a b l e t h a t such a u t h o r i t y be made a p a r t o f the law i t may be promptly a v a i l a b l e i n periods when c o n d i t i o n s the need may be g r e a t e r . any p a r t i c u l a r guarantee b i l l , i t is i n order t h a t are such t h a t Provisions o f the B i l l The proposed b i l l contains two s e c t i o n s . The f i r s t s e c t i o n would r e p e a l s e c t i o n 13b o f the Federal Reserve Act which contains the present a u t h o r i t y o f t h e Federal Reserve Banks t o make and guarantee i n d u s t r i a l l o a n s . I n doing so f i t would r e q u i r e the r e t u r n by the -2Federal Reserve Banks o f a l l funds h e r e t o f o r e r e c e i v e d by them from t h e Treasury i n connection w i t h t h e i r i n d u s t r i a l l o a n o p e r a t i o n s and would e l i m i n a t e any f u r t h e r c l a i m upon the Treasury f o r any p a r t o f t h e $139,000,000 which was a p p r o p r i a t e d f o r t h i s purpose. The second s e c t i o n o f the b i l l would add a new paragraph t o s e c t i o n 13 o f the Federal Reserve A c t i n o r d e r t o continue the a u t h o r i t y o f the Federal Reserve Banks to guarantee f i n a n c i n g i n s t i t u t i o n s a g a i n s t l o s 3 on loans made to business e n t e r p r i s e s o r t o make coiamitments to purchase such l o a n s , but on a more e f f e c t i v e basis than a t p r e s e n t . I n c a r r y i n g out o p e r a t i o n s under such a u t h o r i t y , the Federal Reserve Banks would u t i l i z e t h e i r own funds and no use o f Treasury funds o r any a p p r o p r i a t i o n by Congress would be r e q u i r e d . I t w i l l be r e c a l l e d t h a t when s e c t i o n 13b o f the Federal Reserve Act was enacted i n 1934, about 139 m i l l i o n d o l l a r s was app r o p r i a t e d out o f the miscellaneous r e c e i p t s created by the increment r e s u l t i n g from the r e d u c t i o n i n the weight o f the g o l d d o l l a r , i n order t h a t t h e S e c r e t a r y o f the Treasury might make advances to the Reserve Banks f o r the purposes o f i n d u s t r i a l l o a n s . About 27 m i l l i o n d o l l a r s has been r e c e i v e d by the Reserve Banks from the Treasury under t h i s a u t h o r i t y . Under the proposed b i l l , the funds r e c e i v e d would be r e t u r n e d to the Treasury and the a p p r o p r i a t i o n would be r e pealed. Thus, 139 m i l l i o n d o l l a r s would no l o n g e r be earmarked f o r payment to the Reserve Banks and would t h e r e f o r e be a v a i l a b l e f o r o t h e r governmental purposes. R e v i s i o n o f E x i s t i n g A u t h o r i t y o f Reserve Banks The Board recommends the r e p e a l o f s e c t i o n 13b o f the Fede r a l Reserve Act because t h a t s e c t i o n contains r e s t r i c t i v e p r o v i s i o n s which s e r i o u s l y i m p a i r the a u t h o r i t y o f the Federal Reserve Banks t o l e n d the assistance t o business which i t i s b e l i e v e d the Act was i n tended t o p r o v i d e . These r e s t r i c t i o n s r e q u i r e t h a t l o a n s be made f o r working c a p i t a l purposes, t h a t they be made o n l y t o e s t a b l i s h e d e n t e r p r i s e s , t h a t they have m a t u r i t i e s o f f i v e years o r l e s s , and t h a t t h e p o r t i o n o f the l o a n guaranteed may not exceed 80 per cent. When sect i o n 13b was added to t h e Federal Reserve A c t i n 1934, the need was v e r y l a r g e l y f o r working c a p i t a l f i n a n c i n g . However, experience has shown t h a t many o f the l o a n s a p p l i e d f o r i n v o l v e d the use o f the proceeds f o r both working c a p i t a l purposes and the a c q u i s i t i o n o f f i x e d assets and the r e p a i r i n g and modernising o f p l a n t s . I n l i e u o f the r e s t r i c t e d a u t h o r i t y contained i n the present law, the second s e c t i o n o f the proposed b i l l ?jould a u t h o r i z e the Federal Reserve Banks t o guarantee loans made by f i n a n c i n g i n s t i t u t i o n s to b u s i ness e n t e r p r i s e s . T h i s a u t h o r i t y would be s u b j e c t t o a p p r o p r i a t e l i m i t a t i o n s . No l o a n guaranteed could have a m a t u r i t y o f more than t e n y e a r s . While the percentage o f the lotin guaranteed by a Federal Reserve Bank would vary x f i t h s p e c i f i c cases, i t could not exceed 90 per cent i n any i n s t a n c e ; i n o t h e r words, the commercial bank would be r e q u i r e d t o assume a t l e a s t 10 per cent o f the r i s k i n v o l v e d i n any l o a n . The -3aggregate amount o f a l l guarantees and commitments could not exceed the combined s u r p l u s o f the Federal Reserve Banks; and, i n o r d e r t o i n s u r e t h e a v a i l a b i l i t y o f guar^mtees f o r l o a n s t o smaller businesses, t h e aggregate amount o f a l l guarantees which are i n d i v i d u a l l y i n excess o f $100,000. could n o t exceed 50 per cent o f the combined surplus o f t h e Reserve Banks. A l l o p e r a t i o n s o f t h e F e d e r a l Reserve Banks under t h i s s e c t i o n would be s u b j e c t t o t h e r e g u l a t o r y s u p e r v i s i o n o f the Board o f Governors. D i r e c t Lending E l i m i n a t e d A u t h o r i t y f o r t h e making o f d i r e c t loans by the F e d e r a l Reserve Banks, now contained i n s e c t i o n 13b o f t h e F e d e r a l Reserve A c t , would be e l i m i n a t e d under t h i s b i l l . The basic purpose o f the proposed l e g i s l a t i o n i s t o assure an adequate f l o w o f p r i v a t e c r e d i t t o s m a l l businesses i n times o f need. The Federal Reserve Banks would n o t be placed i n comp e t i t i o n w i t h the p r i v a t e banking system. Under the b i l l , the loans would be made by l o c a l banks d e a l i n g w i t h l o c a l people whom t h e y know and w i t h whose c h a r a c t e r , c a p a b i l i t y and c a p a c i t y they would be f a m i l i a r . To the extent t h a t the banks might make such loans w i t h o u t r e l i a n c e upon a guarantee, so much the b e t t e r . However, i f f o r any reason t h e l o c a l bank should d e s i r e a guarantee, the support o f t h e F e d e r a l Reserve Bank would be promptly a v a i l a b l e i n s u i t a b l e cases w i t h o u t t h e n e c e s s i t y o f r e f e r r i n g the m a t t e r t o any agency i n Washington f o r approval* The Board f e e l s s t r o n g l y t h a t any governmental assistance i n t h e f i n a n c i n g o f small business should be extended by means o f guarantees through t h e r e g u l a r banking channels i n t h e manner p r o v i d e d by t h i s b i l l r a t h e r than through d i r e c t loans by governmental agencies. Moreover, under t h i s b i l l the F e d e r a l Reserve Banks, w h i c h are permanent i n s t i t u t i o n s , would use t h e i r own f u n d s , r a t h e r t h a n funds d e r i v e d from t ^ a g a t i t t i o r governmental borrowing, f o r the purpose o f a i d i n g i n t h e f i n a n c i n g o f business e n t e r p r i s e s , and t h e r e would appear tc be no n e c e s s i t y o r j u s t i f i c a t i o n f o r p e r m i t t i n g any agency o f the Government t o use governmental funds f o r t h i s purpose*
