The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
•v Form F. R. 131 BOARD OF GOVERNORS I, OF THE FEDERAL RESERVE SYSTEM Office Correspondence \ pate March 15, 1940 Subject: Mr. Carpenter There is attached a copy of the memorandum prepared in response to the request made at the meeting of the Board on March 12 with respect to bill H.R.-S638 which was introduced in the House of Representatives by Congressman Steagall on February 23, 194-0, and which would amend the law with respect to the Federal Deposit Insurance Corporation and its operations. A copy of the letter to the Presidents of the Federal Reserve banks enclosing a copy of the memorandum for their consideration at the forthcoming Presidents* Conference is also attached. Attachments COPY March 14, 1940 % . H. A. Young, President, federal Reserve Bank of Boston, Boston, Massachusetts. Dear Mr. Young: •\ In response to a request from Mr. Kimball, Secretary of the Presidents1 Conference, that he be advised of any topics that the Board would like to suggest for consideration at the Presidents1 Conference to be held on March 13, the Board requested that the presidents discuss bill H.R.-8638, introduced in the House of Representatives by Congressman Steagall on February 25, 1940. Mr. Kimball was advised that a memorandum v/ith respect to the bill was in course of preparation and that, as soon as completed, copies thereof would be sent direct to each president viho could be reached by regular or air mail before he leaves for Washington. A copy of the memorandum end copies of the two bills referred to therein are enclosed for your information. 1'he memorandum was prepared at the request of the Board but has not yet been considered by it. Very truly yours, (Signed) L. P. Bethea £>. P. Bethea, Assistant Secretary. Enclosures 5 - [ TIG! OTEACALL JTDIC BILL AKD THE BYRNES INTERBAM: DEPOSIT BILL On February 23, 1940, Mr. Steaga.ll, Chairman of the Banking and Currency Committee of the House of Representatives, introduced a bill containing a number of amendments to the law with respect to the Federal Deposit Insurance Corporation and its operations. The bill would eliminate the Comptroller of the Currency from the board Of directors of the Federal Deposit Insurance Corporation, would increase the amount of insurance for any one depositor from $5,000 to $10,000| would reduce the rate of assessment of deposits of insured banks from one-twelfth of one per cent to ono-fourteenth of one per cent, and would authorize the Corporation to construct a building for its use in the District of Columbia at a cost not exceeding £•£,000,000. A detailed analysis of the provisions of the bill is contained in the statement attached hereto. In connection with the proposed Stcagoll bill, consideration should be given to S. 1318, introduced by Senator Byrnes, which would exclude from deposit insurance assessments balances owed by one insured bank to another* This bill was passed by the Senate in June 1939, and. is now pending in the I^ouse of Representatives. ^.->. Mr. A. L. M. Wiggins, Chairman cf the Committee on Federal Legislation of who American Bankers Association, in an address before the Eastern Regional Conference of the American Bankers Association on Larch 8, 1940, suggested the possibility that the Steagall Bill might bo handled as an amendment to the Byrnes Bill, if this should happen and the amended bill should bo passed by the House, it would then go directly to Conference without an opportunity for consideration of the Steagall Bill provisions by the Senate Banking and Currency Committee* In view of this possibility, this memorandum discusses the previsions of both of these bills* Aa a first point it should be recalled that the entire field of banking and monetary legislation has been assigned under the Wagner Resolution to the Senate Banking and Currency Committee for study and recommendation* As a result of the adoption of this resolution it was hoped that banking legislation would bo considered as a whole and that the enactment of piecemeal legislation, as would be exemplified by notion on these bills, might be avoided. Those two bills ore not of such a character as to require immediate consideration, and in the circumstances it would socan desirable to defer action on tkosQ until they can be considered as a part of the general stuay by the Senate Committee* Action on these bills at this tixao would serve to make more difficult the adoption of a rounded program of legislative reform based on the Committee's study. -2- t N One of the broad issues of banking policy which the Senate Committee probably would want to consider is the extent to which deposit insurance may be expected to support itself by assessment income. If deposit insurance is to be self-supporting, the assessment income needs to be ample not only for the present but also for the future when banking losses may be larger. This issue is involved in a consideration of either of these bills. The Steagall Bill involves two major issues of banking policy, the increase in the insurance coverage of deposit accounts and the reduction of the assessment rote. ~ The Dasic facts bearing on the size of assessments and deposit insurance coverage are as follows: The Federal Deposit Insurance Corporation has collected about .£165,000,000 of assessment income since it was organized, while meeting estimated insurance losses of only about £40,000,000. If the reduced assessment provided in the Steagall Bill had been in effect in 1939, the income from assessments in that year, which was $'40,000,000, would have been about #6,000,000 less; and, if the Byrnes Bill, discussed below, had also been in effect, the 1939 assessment income would have been further reduced by about 15,000,000. If the insurance coverage had been |10,000 for each depositor, as is proposed by the Steagall Bill, the estimated losses to the Federal Deposit Insurance Corporation in 1939, which were about $17,000,000, would have? been about £-2,000,000 greater. Although on the basis of experience since 1933 when the Federal Deposit Insurance Corporation was established, the losses from suspensions of insured banks would be amply covered even after giving effect to the Changes which would be made by these two bills as above outlined, it is questionable whether or not this experience is a satisfactory guide for future- policy. Deposit insurance was initiated when the banking structure had been recently purged by the banking holiday. The number of suspensions is small in comparison with the number occurring prior to that time. The prospects for future banking losses can not be appraised or even estimated and the amount of such losses is only a matter of opinion. Practically all of the assessment exemption on balances owed to insured banks, provided in the Byrnes bill, would inure to the benefit of banks in the financial centers and other principal cities which act as correspondents for other brinks. Practically none of it would benefit small banks or tanks located outside of the principal financial and commercial cities, because these banks have practically no balances "due to" other banks and, therefore, would not be affected by the proposed exemption. -3It has been claimed that if a person deposits money in one bank and the bank r"deposits the funds in another bank, the payment of assessments by both banks on such funds constitutes duplication. This is not a valid statement since if either bank failed, the Federal Deposit Insurance Corporation would have to pay its deposit liabilities up to ^5,000. Consequently, the Corporation assumes a risk at both banks* There is little more justification for exempting interbank deposits from assessments than there would be for exempting any other Class of large deposits. On broader grounds, it should be stated that the elimination of assessments on balances "due to" other banks, would tend toward further concentration of interbank balances in the financial centers. Thio would be contrary to one of the purposes of the original Federal Reserve Act and of the Banking Act of 1933, which was to discourage the concentration of funds in the money markets and to encourage their retention in the regions in which they originate. If any legislation is to be adopted at this time reducing the assessments for deposit insurance, it would appear that a more equitable plan would be to exempt from assessment an amount of deposits equal to the balances carried with Federal Reserve banks. Such an exemption would be distributed among all banks wherever located and whether large or small. The banks would have an incentive tc dope sit surplus funds with the Reserve banks rather than with correspondent banks and the plan would thus act as a brake rather than a stimulus on the concentration of funds in financial centers. L-675 ANALYSIS Qj Tl;E STIAGJJJLJ bl.LL, H.R. 8638 This bill, which was introduced by Mr. Steagall under date of February 23, 1940, is entitled "A Bill to amend section 12B of the Federal Reserve Act, as amended, and for other purposes". It contains a number of amendments to the law with respect to the Federal Deposit Insurance Corporation and its operations but does not contain any amendment affecting the Board of Governors of the Federal Reserve System or its members. The principal matters affected by the bill relate to the composition of the board of directors of the Corporation, the amount of insurance, the reduction in th? assessment and charging the same to the depositors, and the authorization for a building. COxvlPOSITTQN 0* fiGARL Oi ^i Coirrotroller of Currency. - The bill would eliminate the ComptrolleT of the Currency from the board of directors of the Federal Deposit Insurance Corporation and make the board consist of three citizens of the United States appointed by the President with the advice and consent of the Senate. The effect would be to substitute an appointive member for the Comptroller of the Currency. Chairman and Vice Chairman. - Whereas the present law provides for a chairman of the board of directors of the Corporation, the bill would provide that the President shall designate one member as chairman and another as vice chairman. These designations could not be changed more frequently than once in two years except in the case of vacancies. The chairman of the board, subject to its supervision, would be the executive officer of the board. This provision does rot appear in the present law. Service after Expiration of Term. - Another new provision is that which states that upon the expiration of their terms of office the directors continue to serve until their successors are appointed and qualify. This is identical with the provision in section 10 of the Federal Reserve Act with regard to members of the Board of Governors of the Federal Reserve System. Vacancies. - Another provision which is new but which is of a customary character provides that a vacancy on the board of directors shall be filled by appointment by the President (with the Senate's consent) for the remainder of the term vacated; or, if the vacancy exists during a recess of the Senate, by appointment to expire with the next session of the Senate. -2- L-675 Entire Time. - The bill provides that each member shall devote his" entire time to the business of the Corporation. This provision, wnich is also new, is similar to that in the law with respect to the members of the Board of Governors of the Federal Reserve System. Coiapensation. - Each member of the board of directors, like its present appointive members, would receive compensation at the rate of $10,000 per annum; but the bill, unlike existing law, also provides for "actual necessary traveling expenses" for the members. Tno bill provides that neither "tho uerrn or -:moluments" of the present directors arc in any v/ay affected, and it is not clear whether this would prevent the present directors from receiving "actual necessary traveling expenses"; but presumably this is not the intention. RestrictJons after Rosi-yiin^. - The provision in the present law making the members of the- board of directors of the Corporation ineligible while in office and for two years thereafter to hold office or position in any insured bans, except where the member has served his full term, would be eliminated from the law. Connection with Banks. - While the bill retains the provision of the present lav; prohibiting a member of the board of directors from being an officer, director or stockholder of any bark or trust company, it is made inapplicable to axiy member of the board serving on the date the bill is passed. In other words, members of the board serving on the date the bill is passed would not be prevented from being officers, directors or stockholders of any bank or trust company. This is similar to the provision placed in tho law by the Banking Act of 1955 to the effect that members then serving were not prevented from being bank officers, directors or stockholders until the expiration of their then existing terms. AMOUNT OF INSURANCfi Increase. - The term "insured deposit" is so defined as to increase the amount of insurance for any cne depositor (and for -my trust estate) from $5,000 to $10,000. (A like increase is made in the maximum amount which a "new bank11, organized by the Corporation to assume deposits of closed banks, may receive from one depositor.) When Effective. - The increase in insurance from $5,000 to $10,000 is effective only with respect to banks closing after the date on which the bill is enacted. 1-675 Public Funds. - It is also provided that funds of the United States or any State or political subdivision in the hands of separate custodians are protected by insurance up to $10,000 for each such custodian. This provision is identical (except as to amount) with the bill introduced by Senator George last Juno. Regulations. - A new provision would authorize the beard of directors of the Corporation to prescribe regulations to facilitate proof and determination of claims. Offsets. - As in the case of the present lav;, the bill would insure only the net amount or deposits due any depositor "after deducting offsets". This means that c. depositor having a deposit of $5,000 but owing the bank $2,000 would be protected by insurance up to $3,000. This is not the same as the provision in the so-called Byrnes "Interbank Deposit Bill*, which would eliminate assessments on an insured bank based on deposits made by another insured bank. No provision of this kind appears in the Steagall Bill in its present form. ASSESSMENTS Rate. - The rate of assessment on the deposits of insured banks is reduced from 1/12 of 1 per cent to 1/14 of 1 per cent. This means that if the bill were enacted, u bunk with deposits of $1,200,0001 which has heretofore paid an assessment of $1,000, v\rould have to pay an assessment of about $857. Passing Back to Depositors. - A new provision is that which prohibits an insured tank from charging to or collecting from its depositors, directly or indirectly, amounts paid to the Federal Deposit Insurance Corporation a?> assessments. The apparent intention of this provision is to prevent a bank .from passing on to its depositors as Q charge against them any amount which it has to pay to the Corporation by reason of an assessment on its deposits for insurance purposes. Any contracts authorizing such charges are declared to be against public policy and void. HJILDIKG Authorisation. - The Federal Deposit Insurance Corporation is authorized to acquire a site in the District of Columbia and construct a building thereon for its use, the selection of the site and -4- L-675 the design o? the building to be subject to the approval of the National Park and Planning Commission and the Fine Arts Commission, respectively. Cost. - The total limit of cost is set, at #5,000,000. The language is slightly ambiguous as to whether this is the coct of the construction alone or includes both the cost of the site and the construction, but apparently the latter is the intention. The $5,000,000 is to come from funds available to the Corporation under existing law — in other words, from its present assots. Federal Works Agency. - It is provided that the facilities of the Federal V.'orks Agency muct be utilised in the c-.cq.ui sit ion of the site and preparation of plans, the making of contracts, and the supervision of construction. It does not require that the work be done by W.P.A. labor. Taxation. - The land and building mould be exempt from any and all taxation.
@FedFRASER