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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*