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CONFIDENTIAL
Preliminary draft - subject to revision

INVESTMENTS IN CAPITAL STRUCTURE OF BANKS AND LOANS TO BANKS
AND OTHERS BY THE RECONSTRUCTION FINANCE CORPORATION
P^e
Summary

1
PART I - INVESTMENTS

Terms of Investment
Total Invested
Retirement of Investment
Investment by Geographic Areas and " y Types of Banks
b
Retirement of Investment, " y Geographic Areas
b
Relation of Investment to Bank Earnings

3
5
5
7
13
13

PART II - LOANS
Summary of Loans
Loans to Banks
Repayment of Loans to Closed Banks by Geographic Areas
Loans to Other Pinancial Institutions and on Agricultural
Commodities
Loans to Mortgage Loan Companies
Loans to Insurance Companies and to Building and
Loan Associations
Loans to Agricultural Financing Institutions
Loans to Commodity Credit Corporation
Preferred Stock of the Export-Import Banks
Loans on Agricultural Commodities
Other Classes of Loans
Loans to Industry
Loans to Railroads
Loans for Self-liquidating Projects
Securities Purchased from PWA
Loans to Drainage, Levee and Irrigation Districts
Other Loans

August 19, 1956.




18
20
23
26
26
2/
28
.
28
28
29
29
31
32
32
32

Summary
Reconstruction Finance Corporation investments in over 6,000 banks through,
purchase of their preferred, stock, capital notes and debentures and through
loans on their preferred stock totalled $1,$+7,000,000 through June 30, 193&.
Repayments, including large amounts from a few very large banks, amounted to
$3^1,000,000 through July 31, 1936, reducing outstandings to about $700,000,000.
About UOO banks had completely retired the RFC's investment.
Investments we re made by the RFC under terms which provide for amortization
generally within periods of from 10 to 20 years. Dividends now required, or
interest charged, are at the rate of 3j percent per annum. Unless banking profits
show considerable additional improvement carrying charges on the RFC investment
may create problems in many cases in which RFC holdings constitute

a large

proportion of the capital funds of a bank. At the end of 1935 the HFC investment
outstanding in insured commercial "banks was equal to lH percent of total capital
funds of all such banks; in the east north central states it was equal to 25 percent of total capital funds, 4o percent, by number, of all insured commercial
banks held RFC capital at that time; the proportion in the east north central
states was V4 percent.
RFC loans made to active banks in the sun of $1,000,000,000, and made to
receivers or through mortgage loan companies to aid in liquidation of closed
banks in the amount of $500,000,000, had been reduced by June 30, 193°, to
$155,000,000 and $1^+2,000,000, respectively. Disbursements in the first half
of 1936 of l?2o,000,000 to closed banks included only a negligible amount going
to new borrowers. Repayments of loans to closed banks appear to have been slower
in southern states than in other regions.




Other types of loans which continue to " e made to new "borrowers include
b
loans to mortgage loan companies, especially to the RFC Mortgage Company which
in turn lends directly on certain types of mortgages, working capital loans to
industrial and commercial "businesses, and loans to drainage, levee and irrigation districts to refinance indebtedness®
Disbursements are also being made on earlier commitments to railroads
and to self-liquidating public works projects, and the ETC is acting as distributor for bonds taken by the FWA#

In dealing with railroads the R F has
IC

been directly interested in reorganization and similar proceedings. Lending
programs of the Commodity Credit Corporation have been discontinued currently and part of the indebtedness of the Corporation has been transferred from
the ETC to commercial banks•
Total outstanding loans and investments of the Corporation on July 31»
1936, aggregated $2,156,000,000 against $2,527,000,000 a year earlier. A
surplus of about $130,000,000 has been accumulated, while the Corporation
pays a rate of 2 g percent on its debentures to the Treasury the proceeds of
which are used to make loans and investments.




PART I - INVESTMENTS
Teg^s of Investment
The program of Government contributions to the capital structure of
"banks through Reconstruction Finance Corporation purchases of preferred
stock, capital notes and debentures.was undertaken in the spring of 1933
in connection with the relicensing of banks after the March closing.

The

Emergency Banking and Bank Conservation Act, approved March 9j 1933* authorized the Secretary of the Treasury to request the Reconstruction Finance
Corporation to subscribe to preferred stock in banks which he found to be
in need of capital funds.

Provision was made for the issuance of non-

assessable preferred stock by national "banks which would pay cumulative
dividends of not more than 6 percent; an amendment permitted the purchase
of capital notes or debentures of State banks in States whose laws did
not permit the issuance of nonassessable preferred stock or permitted
the issuance of such stock only by unanimous consent of stockholders, l/
An intragovernmental committee, drawing for assistance on the examination staffs of the Comptroller's Office, the Board of Governors of
the Federal Reserve System and the Reconstruct ion Finance Corporation,
performed the task of laying the basis for recommendations to the Secretary of the Treasury after October 1933*

Every effort was made to obtain

l[ Capital notes and debentures were sold to the RFC by banks in 2S
states and the District of Columbia. Investments were made in
State banks in every State, either through purchases of preferred
stock, capital notes or debentures or through loans on preferred

istock®




local assistance for "banks "before recommending RFC subscriptions, and the
Corporation required that there be some unimpaired capital represented by
common stock cr junior preferred obligations.

Such local assistance was

made in various forms, including contributions, subscriptions to common
or preferred^ stock, agreements to reduce par value of outstanding stock,
purchases of assets by directors with or without repurchase agreements, loans
of collateral ts replace depreciated securities.
<>

Some of this assistance

was temporary and some in the nature of a permanent investment; some
brought in actual cash and some did not. In many cases local subscriptions to stock were equal to those of the RFC.

In some cases the RFC

investment was made indirectly, through loans to local interests which
actually became the preferred stockholders.

In some cases the Corpora-

tion also made loans on a reopened bank!s assets to increase its liquidity.
Preferred stock purchases were generally made subject to amended
articles cf association providing for retirement out of earnings, Ho
percent of earnings after preferred stock dividends, but not necessarily
more than 5 percent of the preferred issue, to be applied annually to
amortization.

Capital notes were taken on a serial basis, with final

maturity typically after about 10 years, and debentures on a long-term
basis with a 15-year or longer maturity.

It was required that antici-

pated net earnings be adequate to provide dividends.
Before final approval of subscriptions, banks in many instances were
requested to nominate and install new management which would be satisfactory to the RFC. Assurance was also required that salaries would be satisfactory.

The right was also reserved to require future changes in management,

1j Figures released by the Comptroller of the Currency on August 7> 193^t
indicated that preferred stock sold by national banks to others than
the RFC amounted to about $^5,000,000.




i-

Total Invested.
To March 31» 193^, capital investments " y the RFC in banks and trust
b
companies (including a small amount of loans on preferred stock) had been
authorized to b?S00 — ' institutions in the aggregate amount of $1, 21S,<
000,000• Additional authorizations of $3,000,000 were made in the seccnd
quarter of 193^t

Approximately four-fifths of these authorizations were

made in the nine months from October 1933 to June 193^ > chiefly during
the period when banks were qualifying for membership in the FDIC. By
far the larger part of the RFCrs investment has been made in active banks®
It has been estimated ^

that something like $125,000,000 was subscribed

to reopen closed institutions or to establish new banks to replace those
which had failed; the bulk of this amount was authorized in the second
and third quarters of 1933*

Actual disbursements to 6,0^5 institutions

totalled $1,0^,000,000 37 through March 31, 1936» with an additional
$3,000,000 disbursed to July 31. Of the amount disbursed through March,
$517,000,000 went to national banks, $263,000,000 to state member banks
and $264,000,000 to nonmember banks.
Retirement of Investment
The rate of recoveries on assets and the increase in bank earnings
have permitted some banks to anticipate their repayment instalments. In
some cases it has been possible to raise additional capital locally;
1J This, and all other figures cited, are adjusted to exclude the Export-Import banks.
2/ IJpham and Larake, Closed and Distressed Banks, Washington, I93U, p. 19S.
This estimate was based on the fact that authorizations through September 1933 amounted to $70,000,000, practically all of which was for the
purpose of recapitalizing closed institutions.
37 Of the undisbursed authorizations $110,000,000 had been withdrawn or
cancelled, and $98,000,000 remained authorized but undisbursed, including $59,000,000 in New York chiefly for capital notes and debentures.




in general the Reconstruction Finance Corporation, and the Comptroller
in the case of national banks, have not permitted the retirement of the
Corporation's investment without a corresponding increase in common stock
either through new financing or through the capitalization of reserves
created out of earnings and recoveries. News stories appearing from time
to time have given the impression that the Comptroller has encouraged retirement of HFC capital, while the RFC, at least by contrast, has seemed
to counsel caution and delay.
Retirements through July 31, 1936, totalled $3^1,000,000, including in the months of June and July the repayment of $49,000,000 by the
National City Bank, $46,000,000 by the Chase National Bank, $24,000,000
by the Manufacturers Trust Co. and $15,000,000 by the First National Bank
of Chicago.
Detailed figures are available for retirements up to March yi9 193^•
Of the total of $177,000,000, $66,000,000 had come from state member
banks in New York, including several large New York City banks. Fiftytwo million dollars was repaid by national banks in the entire country,
$24,000,000 by state member banks other than in New York State, and
$36,000,000 by nonmember banks. Three hundred and eighty-six institutions had completely retired the RFC1s investment.
The RFC!s investment not yet retired as of March 31, 1936, was distributed as follows:

national banks, $466,000,000 (reduced by July 31 to

less than $350,000,000); state member banks, $174,000,000 (reduced by
July 31 to less than $150,000,000); and nonmember banks, $229,000,000;
total, $868,000,000.

By July 31 the total amount outstanding was re-

duced to $706,000,000.




t
»

The only very large "bank which has preferred stock still oustanding
in the RFCfs hands is the Continental Illinois National Bank and Trust
Company, with $^5iOOOfOOO remaining after a 10 percent reduction on
August 1.
Although 32#6 percent or nearly a third of the RFC's aggregate investment had been retired by July 31* this proportion becomes somewhat
smaller when a dozen or so very large banks are taken out of the picture*
For other banks the outstanding amount was roughly $650,000,000 out of
disbursements of about $800,000,000.

This represents repayments of less

than 20 percent. The number of banks which had completely retired 1 h
)e
HFC's investment by March 31 was only 6.4 percent of the number to which
disbursements had been made.
Investment by Geographic Areas and by. Types of Banks
Table | summarizes by geographical regions and by class of banks
(a) the number of the insured banks in which the Reconstruction Finance
Corporation held an investment on December 31» 1535 > an d the ratio to
tota number of insured banks, and (b) the aggregate outstanding investment in these banks and the ratio to total capital account of all insured
banks (including those in which investments were not made). —/

The data

are based on the Federal Deposit Insurance Corporation call report and
apply to all insured banks in the continental United States other than

1/ The table does not show original amounts of investment since the HFC
report in which a state and supervisory authority breakdown is given
for December 31, 1935, shows only amounts outstanding on that date.
Retirements to December 31, 13351 w e r e n o t large and the remaining
amounts were perhaps more representative of the real need for RFC
capital than original disbursements. The restriction of the analysis to insured commercial banks is not serious, since outstanding
RFC investment in SI uninsured banks and insured mutual savings
banks in the continental United States totalled only $21f000,000*




I

Table / - REC Investment and Deposit—Capital Ratios, Insured Commercial Banks, by Regions, Dec. 31, I935
—

Region

.Percent or
Ratio of total
Number Number of banks Percent of Amount of investment
total
deposits to total
of in which invest- all "banks (thousands of dollars) capital accapital account,
ment made
States
count of
all "banks l/
all "banks

New England
Member
Nonmember
Massachusetts
Except Massachusetts

6

Middle Atlantic
New York State Member
National and nonmember
New Jersey Member
Nonmember
Pennsylvania Member
Nonmember

"
5

South Atlantic
National
State member
Nonmember

9

South Central
National
State member
Nonmember

S

East North Central
National
State member
Nonmember

5




179

34.8

909

4o.6
56

8.8

39,1^5
25.5
59-2
30.5
37-5

95
gU
61
11s

22,620
16,525
15,237
23,90S
333,356

6.2

6.1
6-3
4.8

20.1
5.6
13.5

6.3
5.8

6.2

10.9

^7-1

65,800

5-7

6.5

375

57. S

154,910
48,154

207

44.0
26.4

18.8
28.0
32.0

6.8
7-2
5-1
5-3
3-5

55.^

160

22.5

67

13s
22
U03
1*0*57

37-6

29.3
22.2

31.9
J+7.1

6.8

10.3

8.0

8,001

9.8
13-9
20.1

5.1

7.1

7.9

22.9

6.2
5-2

23.I

24.9
135,307
44,192
52,855

8.1
6.2

18.7

58,797
6,499
27,153
232,354

4i.i

9-8

19,292

30.4
33-7
46.1

44.2

H.3

15,624

92,449

39-6

355
so
932

42,917 .

1+3-5

30S
33
716

1,367

20,437
29,095
14,960

8.6
26.6

22.9
22.9

9-7

9.1

5-7

Table /

- RFC Investment and Deposit—Capital Ratios, Insured Commercial Eanks, "by Regions, Dec. 31, 1935 (Cont.)

Region

Percent of
Ratio of total deHrunber Number of banks
total
posits to total
Percent of Amount of investment
in which investof
capital accapital account,
all "banks (thousands of dollars)
ment made
States
count of
all "banks 1/
all "banks

West North Central
National
State member
Nonmember

7

Mountain
National
State member
Nonmember

g

Pacific
National
State member
Nonmember

3

Total Continental
United States

1,13s
31s
723
212
25

k).o

Hs.3

Hg.g

5.67H

55,0Hl

23.032

5H.0

Ho.2

1/ Ratio derived by dividing deposits by capital account.
Source: FDIC Call Report.




867,265

7.0

10.1

9 .6

12.4

17.197
lU,S12

U5.S

9.2
9-9
7-7

7>

23.2

2U.9

1H.0

9.2
9-2

17.2
21.1
17.9

2.793

HH.o

99
22
12s

.0
9.

Q.2
/ •

12.1
9.619
3,656

37-9

20
99

16.9
7-5
15.H

16,267

16,062

U2.5

2H9

35.0SO
H.5S3

37-2
26. H
37-1

37

1H.9

55,935

36.7

7.0

mutual savings "banks. Ratios to aggregate capital account are unsatisfactory indexes since they are influenced not only by the relative numbers of banks in which investments were made but also by the relative
sizes of those banks in which investments were and were not made. ^
Forty percent of the insured commercial banks in the entire country
had capital investments of the RFC outstanding at the end of 1935>
the RFC's aggregate investment was

an

&

percent of the aggregate capital

account of all insured commercial banks*

This investment amounted to

26 percent of all outstanding capital issues.
The proportion of all banks in a given state indebted to the RFC
on capital account was over one-half in l4 states;

the highest pro-

portion was in Mississippi where it was over "JO percent>

The amount

of Reconstruction Finance Corporation investment exceeded 30 percent
of the aggregate capital account in two states, Mississippi and Michigan, and exceeded 20 percent in thirteen other states, including New
Jersey, Ohio, Illinois, and Wisconsin. 3/ ^

the other extreme, there

were five states in which this proportion was less than 6 percent; these
were New Hampshire, Massachusetts, Rhode Island, Pennsylvania, and
Delaware.
Among member banks in New England and among banks of each group
in the important state of Pennsylvania only about one-quarter of the
banks had preferred stock and other capital liabilities outstanding
held by the RFC. On the other hand, between 50

60 percent of banks

were indebted to the RFC on capital account among the nonmenber banks of New
1/ Data by size of bank as well as the ratio of RFC investment to total
capital funds in those banks in which investments were made can be
derived from some basic schedules now available.
2/ These states were New York, New Jersey, North Carolina, Mississippi,
Arkansas, Louisiana, Indiana, Wisconsin, North Dakota, South Dakota,
Colorado, Utah, Oregon, and Washington.
3/ The other nine states were Maine, Vermont, Alabama, Louisiana, Nebraska,
North Dakota, South Dakota, Idaho, and Arizona*




t
a

England and among the national "banks of Hew York, liew Jersey, Michigan
and three other states; and over JO percent among the nonmember "banks
of New York and four other states. ^
Significant differences do not appear among "broad regions in the
relative numbers of banks with RFC investment at the end of 1935• I1*10
highest proportion was in the Pacific Coast states,
smallest in New England, 35 percent®

percent, and the

Except in the 3 Miadle Atlantic

states, the proportion of nonmember banks in each region indebted on
capital account to the RFC was greater than the corresponding proportion of member banks«
The RFC's aggregate investment in banks and trust companies was,
as stated above, only lU percent of total capital account of all insured banks. This percentage, however, was weighted downward by certain important regions and groups of bani:s with ratios lower than 10
percent.

Groups with especially low ratios of investment to aggregate

capital account included member banks along the Atlantic seaboard (excluding national and State member banks in Hew Jersey and national banks
in He?/ York), and national banks along the Pacific Coast. In the other
regions the ratio of aggregate RFC investment to total capital account of
all banks ranged from 15 percent in West North Central states to 25 percent in one large region, the East North Central. Reconstruction Finance
Corporation investments were also about a quarter of aggregate capital
account in state banks, both member and nonmember, in the three Pacific
Coast states*
The relative investment in the capital account of nonmember banks
was considerably greater than in member banks in almost every state in
the Eastern and South Atlantic regions, while in the roajority of Southern
1/ In 19 states 50 percent or more of the nonmember banks had RFC investments outstanding*



and Pacific Coast states aggregate investments in state "banks, both member and nonmember, were proportionately greater than in national banks
(especially on the Pacific Coast). In Middle Western and Western states,
on the other hand, there were no such consistent differences in the proportion of RFC investment to total capital account as among banks supervised by the various authorities*
Reference to the ratios of aggregate deposits to aggregate capital
account for the various regional groups and subgroups, which are shown
in the last column of Table I, does not help much in explaining the variations described above. These figures demonstrate only the well-known
fact that deposits relative to capital funds are generally higher in
the west than in the east, and that nonmember banks though smaller
are generally so capitalized as to have less deposits relative to
capital funds than member banks. They do show that the especially
small RFC investment in Pennsylvania is explained by strong capitalization in that state. It is also true that as among regions east of
the Mississippi and in the south the more heavily capitalized in relation to deposits the banks of a region were in the aggregate, the smaller
the relative RFC investment was in that region. On the other hand, within any one region deposits relative to capital funds were usually highest
for national banks and lowest for nonmember banks, while there is no consistent order with respect to relative volume of RFC investment.
These variations in outstanding volume of aggregate RFC investment
relative to total capital account would have to be explained if possible,
by regional and local differences in the sizes of banks which required
RFC investment, by accidental or significant facts that seriously undercapitalized banks happened to be under one supervision or another, and




by variations in the relative amount of investment in individual banks.
Retirement of Investment, by Geographic Areas
(It is hoped to introduce a section in later drafts analyzing repayments up to June 30» 1936» by states and regions.

These data will

become available in an RFC report which will appear in September.)
Relation . f Investment to Bank Earnings
o
A question closely connectcd with that of retirement of the Reconstruction Finance Corporation's investment is the effect on bank
earnings of the dividend or interest requirements on this investment.
The dividend rate is now 3"! percent.

In the summer of 1933 the

dividend rate for new stock subscriptions was reduced from 6 percent,
the maximum authorized by law, to 5 percent, and in January 193^ this
reduction was made to apply retroactively to authorizations originally
made with the 6 percent rate.

The next reduction was to k percent,

which rate was to be in effect for five years from April 1, 193^> with
a permanent rate of 5 percent applying to periods before and after this
interval.

In October 193** the dividends to be paid from February 1,

1935t over a period of 5 years were set at
rate is to revert permanently to b percent.

percent.

In 19^0 the

Interest rates for capital

notes and debentures and for loans on preferred stock have been the
same as the dividend rates for preferred stock.
In the case of a bank in which the Reconstruction Finance Corporation investment amounts to say a half of total capital funds, annual
dividend and amortization requirements amounting to

percent of the

investment make it necessary for the net profits of the bank to exceed
k porccnt of capital funds in order that these obligations may be met




without reducing its surplus and reserves.
The average earnings experience of national and state member "banks
in recent years is summarized in Table 5

Table X

- Member and Nonmember Insured Commercial Bank
Earnings, Percent of Capital Funds
mmmt „zr.

1933

1934

1935

State N j i
-fNaNaState NonState
Namember member
tional member tional member member tional
Net earnings from
current operations

7.04

8.42

-9.89

Net profit

8.16

-3.49

-5.18

4.91

7.95

6.36

b.25

-3.4o --10.45

5.14

2.63

-0.46

6.94

It appears that for the average national bank the increase in recoveries relative to losses produced net profits of 5 percent of capital funds in 1935*

State member banks showed a smaller margin of net

gain, and insured nonmember commercial banks none at all.

For many

banks these averages are of no significance whatever, and many of them
must continue to suffer net losses.

Net earnings from current opera-

tions of nonmember banks in 1935 of 6.25 percent of capital funds
showed a considerable improvement over the previous year, and the
improvement in recoveries and losses was striking, the excess of
losses over recoveries declining from 15^ percent of capital funds to
percent.

Continued improvement must clearly come from further re-

ductions of losses, and it is not too much to expect that in the next
two or three years such reductions will occur on a widespread scale,




ui.

although there will doubtless " e problems in particular cases* Doubtb
less, many banks in which the RFC has an investment will have difficulty
for many years in showing returns available for dividends.
If the annual dividend charges of

percent are compared not with

the overall earnings of the bank but with the income to be obtained by
investing the proceeds of preferred stock, say in Government bonds, it
is evident that a bank must lose about 1 percent on the transaction.
But it could also be said that a bank ordinarily makes only a small
margin of profit on the investment of its other capital funds, the
bulk of earnings growing out of the lending and investment of deposits.
It is always an advantage to one group of stockholders, from the
point of view of their earnings, if the stockholdings of others can be
retired.

The HFC investment, moreover, has special characteristics.

First, the stock is preferred as to dividends so that it has the character of debt rather than of equity liability if a bankfs net profit
is small. Second, no identification of interest exists between bank
management responsible primarily to other permanent stockholders and
the Government as a temporary stockholder. Third, the idea that outside capital funds should pay for themselves in the narrow sense becomes
plausible to the permanent stockholders when excess reserves are large
and retirement of the RFC investment might not impair liquidity.
These considerations contribute to a feeling among bankers that
they should be either permitted to retire the RFC's investment, even if
that involved reducing capital funds, or that the dividend charges should
be cut further. Nevertheless, adequate capitalization is necessary, and
if it cannot be obtained out of earnings or from private investors, govern-




mental authorities have a responsibility of seeing that it is provided
in some other way.
The seriousness of the problem of maintaining adequate capitalization of the "banking system in the face of rapidly mounting deposits is
roughly indicated in Tabled . In the year and a half up to December 31,
1935> deposits of the banking system increased more than enough to offset increased capitalization.
Table 3 - Ratio of Total Deposits to Total Capital Account
and to Capital Issues Outstanding, All Insured
Commercial Banks, June 30, I93U - Dec. 31, 1935
Eatio of deposits to total Eatio of deposits to capital
issues outstanding 1/
capital account 1/
Including BFC Excluding RFC Including RFC Excluding RFC
investment
investment
investment
investment
June
Dec.
June
Dec.

30,
31,
30,
31,

I93U
I93U
1935
1935

5.7

6.3

6.5
7.1

6.5
7.3
7.5
3-3

10.g
11.6
12.0
13.^

ib.i

15.4

16.1
18.1

1/ Ratio obtained by dividing dejjosits by capital.
Many banks are in no position to sell common stock. They must
therefore retain the RFC as a stockholder until its investment can be
retired out of profits. Although the Government should realize a reasonable return on its investment, the rate on preferred stock, capital notes
and debentures might well be reduced to a minimum and no effort made to
cover other expenses of the RFC by earnings from this source.
The Treasury has recently been borrowing at

percent on long term,

and the average annual interest charge on the entire Federal interest-bear-




lio

ing debt was 2.56 percent as of July 31,
Treasury held

On June 30, 1935» the

,030,000,000 of RFC notes; on the portion of this bor-

rowed against the RFC!s own loans and investments a rate of
is being paid. ^

percent

No dividends are paid by the RFC on its $500,000,000

capital stock. Approximately $250,000,000 of the RFCfs preferred stock
investments are financed by its fully guaranteed notes outstanding in
the hands of private investors. No disclosure has been made of rates
paid on these notes, which have been issued to refund notes bearing
rates ranging from 2 to 3 percent originally sold to banks from which
preferred stock, capital notes, or debentures were purchased. The RFC
on June 3^1 193^> reported an accumulated surplus account of over $130,000,000.

1/ Statutory allocations for relief and capital funds of other Government
institutions amounted to about $2,600,000,000. On money borrowed from
the Treasury for these purposes the RFC is paying l/g percent.




Part II - Loans
Summary of Loans
Table ^ gives a summary of the changes which occurred, in the first half of
1936 in the outstanding loans and undisbursed commitments of the RFC under various
classifications, and also of the total amounts disbursed prior to 1936.

Commit-

ments shown in the table include contingent authorizations. The table includes
loans to certain United States Government agencies as well as to private borrowers, and stock purchases in three agencies which are to be considered in some
sense subsidiaries of the RFC. Relief advances to states and municipalities and
allocations to other Government departments are not included.

Since no data axe

available on the numbers of borrowers who have repaid their loans or who still
have loans outstanding, numbers of borrowers to whom loans were authorized, which
are available are not shown.
The following sections contain comments on each type of loan which should be
read in connection with Table f . (See page




)

/5
f

Table ^ - Reconstruction Finance Corporation Loans and Investments
(Otiier than Purchases of or Loans on Preferred Stock, Capital l T t s and Debentures of Banks and Trust Companies)
>oe
(in thousands of dollars)

Advanced
through

Dec. 31,
1935

Commitments Advances 1 EePafOutj ment s standing
undisbursed
Jan. 1, 1936Dec. 31, 1935
June 30,
June 30, 1936

Outstanding

Commitments
undisbursed

1936

7
24,549 147,227 259,763
Banks and trust companies 1/
76,728
1,931,075 )82,44l 117,163
Mortgage loan companies
306,24o 123,M9U 113S,7^6
7,737 17,221 114,010
b}
RFC Mortgage Company—stock and loans
14,721 1^,721
19,165 126,35^
Insurance companies 2]
1,448 35,195
H.ooo
4,o4o
119,894
36,6)43
ll6,44l
Building and loan associations
82
3,415
ill
4,G26
787
7,359
34,474
Agricultural financing institutions—Private
916
3,128
U.oU-3
—U.S.
3il,70g
11,536 33,53S
5,oib
Commodity Credit Corp.—Loans and stock (net)
555,632 267,5^1 2^9,352 46,103
54,364 259,280 191,553
Export-Import Banks—Preferred stock
12,500
7,000
25,000
17,000
18,000
10,000
On Agricultural commodities
39.9^1 22,246 10,733
1,987
1,409
6,265
22,73^
4-8,616
Industrial and commercial businesses 4/
^3,927 Hi,51s
l6,4ig
46,128
3,991 53,9^5
487,217 396,250 175,968 10,664 18,482 388,432
Railroads (direct loans)
146,542
192,609 147,563
Self-liquidating projects ^J
76,6^7 30.59S
105,400
7,393 170,269
293,948 154,001
50,700 126,44I 146,272 13^,170
Securities purchased from PWA
65,053
66,987
Drainage, levee and irrigation districts
50,104 50,025
6,205
65,3Sl
115 56,114
Other loans
2,122
50,856
2,300
1,285
33.679
1,107
4,6l4,1101,704,026 964,063 284,528 436,8991,551,656
903,047
Total
e
1/ Including loans on assets of closed "banks under Section 5 • (Outstanding June 30, 1936, $1,476,000)
2/ Including purchases of and loans on preferred stock.
Adjusted to exclude the refinancing of loans to Federal Land Banks by redistribution among the 12 Banks.
4/ Including loans to fishing and mining industries.
5/ Including loans for repair and reconstruction of property damaged by earthquake; fire and tornado.
(Outstanding June 30, 1936, $9,5^5,000).




Loans to Banks
The EPC's loans to "banks before the bank holiday were made primarily to
open banks and after the bank holiday chiefly to closed banks. In the later
period investments in preferred stock and debentures were utilized to carry out
in a more positive way the earlier purpose of supporting weak institutions; and
loans made in the later period were largely advanced to receivers or mortgage
loan companies to expedite the payment of dividends to depositors of closed
banks. Table i" should be consulted along with the first two lines of Table
for loans to closed banks.

It should be pointed out that many of the banks

which received loans while still open have gone into receivership, l/ On
March H, 1936* only three licensed member banks owed the RFC money, the amounts
aggregating less than $500,000.
Out of loans disbursed to banks or receivers through June 30> 1936,
$1*9555624,000, more than $800,000,000 or about Hi percent were made to receivers. 2/ Repayments of loans to receivers had reached approximately $685*000,000
or 65 percent of disbursements, of which over $110,000,000 was received in the
first half of 1936 (including final repayment of $36,000,000 by the receiver of
the First National Bank of Detroit), leaving about $125,000,000 still outstanding. A number of loans to national bank receivers have recently been refinanced
by other banks at reduced interest rates. 3/
if As of December 31» 1935 > loans had been authorized to H,950 banks "which were
open when the loans were made. Loans to 1,170 of these banks that closed
after the loans were made, have been paid in full."~~RFC: Summary of Activities
as of December 31, 1935.
2/ Or, "on assets of closed banks," under Section 5e of the RFC Act.
3/ On July 13, 1936, the RFC reduced interest rates on a number of classes of its
loans. The rate for banks was cut from H percent to 3 percent.




Tabled - Reconstruction Finance Corporation
Loans to Aid in the Liquidation or Reorganization of Closed Banks
(in thousands of dollars)
CommitAdvanced
Outments Advances Repaythrough standing undisments
Dec. 31>
Jan. 1, 1936bursed
1335
Dec. 31, 1935
June 30, 1936
Loans to hanks and trust companies (receivers)
Loans on assets of closed "banks (Section 5©)
Loans to mortgage loan companies

776,

11,797
87, 640

Total

876,125

Loans advanced to National "banks
Loans advanced to State "banks

485781?




390,311

Commitments
undisbursed
June 3D, 1935

Outstanding

2lU,203
1,235
30,287

103,23,559
Hr
952
116
1,533

122,60s
171
6,821

115,155
1,476
25,000

6U,i3g
6,122
5g

2^5,725

10^,903

129,599

141,631

70,31s

25,505

HFC funds were also made available for distribution to depositors of closed
banks through loans to mortgage loan companies. Out of total disbursements of
about $90,000,000 for this purpose approximately $75,000,000 had been repaid
leaving about $15,000,000 outstanding on June 30, 1935*
3y June 30, 193^» repayments of loans made originally to active banks had
exceeded $1,000,000,000, or S7 percent of disbursements. The proportion repaid
is only slightly higher than for loans to receivers despite the fact that these
loans were largely made at earlier dates. By the end of 1932 disbursements of
loans to banks had reached a total of $9^9,000,000 and of this figure less than
$^3>000,000 l/ was made to closed banks. Repayments have in many cases been
made possible by RFC purchases of preferred stock. 2/ Daring the first half of
1936 repayments were relatively slow and amounted only to about $35,000,000,
leaving outstanding about $1355000,000.

This included a considerable part of the

loan of $90,000,000, made in 1932 to the Central Republic Bank and Trust Company
of Chicago.
RFC loans to banks are practically at an end. There is still a demand for
loans to bank receivers but many of these are additional advances to earlier
borrowers; only 5 out of 199 banks receiving new authorizations in the first
quarter of 1936 were new borrowers. During the first half of 1935, $2^,000,000
was disbursed on loans to bank receivers.
l/ Upham and Lamke, Closed and Distressed Banks, p. 173• T^e figure cited includes some loans through mortgage loan companies.
a
2/ See, for instance, New York Times, August S, 1935»
report made by the
manager of the RFC New York loan agency to the Assistant to the Secretary
of the Treasury on RFC operations in northern New Jersey.




The Comptroller of the Currency has been successful in transferring a considerable amount of outstanding national bank receivers1 borrowings from the RFC
to other banks as lender.

The problem of disposing of the remainder, a large

number of which are probably small loans to small institutions appears to be a
difficult one.
Repayments of Loans to Closed Banks
by geographic Areas
Although in general figures are not available on repayments to the RFC by
states, such figures have been published for loans made either to bank receivers
or to mortgage loan companies to aid in bank liquidations, as of December 31,
193*+»

December 31> 1935*

(See Table

). These indicate that aggregate

repayments in southern states were relatively smaller than in other regions both
over the entire period up to the end of 1935 (50 percent as compared with "J2 percent for the United States) and especially when repayments during 1935 a r e compared
with amounts outstanding at the end of 193^ (37 percent as compared with 70 percent).

Eastern states showed the next poorest record of repayments.

The results

are fairly consistent when taken state by state within the regions.
These comparisons may of course be affected by differences prevailing in
periods elapsed since loans were originally made in the various states. However,
new advances during 1935 were relatively snail in the South, furnishing a presumption that the bulk of the loans prior to 1935

probably not been made any

later than in other regions. A further indication that this was so is given by
the comparison in Table J of disbursements to banks, open or closed, up to June 30,
193^ (the earliest date for which any state breakdowns of dollar amounts has been
given by the RFC) and up to December 31» 1935*

Ekis shows that the proportion of

all loans made in the earlier period in the South was greater than in any region
but the Far West. This is, of course, not entirely conclusive as to the timing
of loans to closed banks alone.



Table t - HFC Loans to Aid in the Liquidation or Reorganization
>
of Closed Banks.—Rate of Repayments, by Regions
(.Amounts in thousands of dollars)
1
Hogion

Number
of
States

East
South
Middle West
West
Par West

16

2
9
9
7

United States

negion

Disbursements

Ratio
(percent)

Repayments

Cumulated through 1935

506,44o
11,
35,447

162,356
36,279

67.2
^9-7

329,776

9.21S
26,169

77.0
77.0
73.S

376,125

630,400

72.0

242,042
74,221

Percentage of outstanding
Dec. 31, 1934
Outstand- Repay- Disburse- OutstandNet dements
ing Dec. Repay- Disburseing Dec. ments
crease
ments
ments
31.1935
31.193^
1935
1935

123,067
East
77,075
South
^7.193 17,67^
Middle We st 256,1+27 203,520
West
£.557
4,736
Far West
9,251
11.955
United
States




33.700
79,692
7,518
37,3^2
63 , 757 116,664
2,571
2,750
6.57*
9.27S

^3.381 312,077 1 1 M 2 1

245,725

1935

1935

62.6

27.^
16.6
24.9
54.3
55.0

35.2

25.2

44.6

37.^

79.^
96.2
77.^

70.H

20.2

54.5
41.9
22.4

Table 7 . RFC Loans to Banks and Trust Comi->anies—
Comparison of Disbursements Cumulated through
June 30, 193H, and through December 3 1 , 1935,
by Regions
(Amounts in thousands of dollars)

Region

East
South
Middle West
West
Far West
U.S., incl.
possessions

Through
June 30, 193U

Through
Dec. 31, 1935

Percent
disbursed in
earlier period

USS,1S9
218,790

590,009
235,127

S2.S
93-0

718,ISH
31,021
li+8,696

S97,6i3
35,777
15S,972

so.i
s6.s
93-6

1,606,571

1,919,272

83.8

Returning to the analysis of repayments of loans for bank liquidation, it
is shown in Table ^ that in the West and Far West loans continued to be made in
1935 l n amounts relatively large in comparison with earlier loans or with repayments which were being made in 1935*

However, the aggregate amount of loans

made at any time to closed banks in these regions was relatively small, in comparison for instance with all loans to banks in these regions.

In 7 middle

western states, on the other hand, where the repayment record was good, the amount
of loans advanced to aid closed banks was extremely large, and in 1935 continued
large in absolute volume although not in relation to loans made earlier.

Out-

standing loans to aid in bank liquidation in the Middle West formed 58 percent
of all such outstanding in the United States at the end of 193^,

still

accounted for US percent on December 31, 1935*
Additional repayments during the first half of 1936 totalled $130,000,000
as shown in Table jf , but the distribution by states is not available.




Loans to other Financial Institutions
and on Agricultural Commodities
Loans to financial institutions other than banks and on agricultural conmodities are also practically at an end, except in the case of mortgage loan
companies.

In making these loans the HFC performed a function which even during

normal times would have been assumed only in part by the banks.

During the

emergency these loans were of importance to banks largely because they relieved
pressure on the entire credit structure.
Interest rates to private borrowers on these classes of loans were reduced
on July 131

from 4 percent to 3i percent, except that 0 1 loans to "building
:

and loan associations, the rate is now 3i percent "unless the Home Loan Bank
rate is higher."
For the purposes of this study it is necessary to review these loans only
briefly.
Loans to Mort gage Loan Companies;

About (0 percent of the loans made to

private mortgage loan companies were made otherwise than in connection with baric
liquidations or reorganizations; total disbursements of such loans not made to
aid banks through June 1936 were $225,000,000. The bulk of these loans were made
to tide over institutions whose mortgage assets had become frozen. As compared
with total disbursements to private mortgage loan companies through June 193&
of $314,000,000, disbursements through June 193U amounted to $266,000,000, threequarters of which was loaned in six states, Massachusetts, Hew York, Maryland,
Ohio, Terns and California.
Some of the loans made since October 193^ have been made to active companies,
in an effort to furnish additional funds to the mortgage market rather than to
extend relief to the companies to whom the loans are made*




The corporation was also authorized by the Act of January 31, 1935 >
purchase non-assessable stock of mortgage loan companies. The only such purchases
consummated have been for the RFC Mortgage Company, formed in March 1935*

Through

this subsidiary the RFC endeavors to complement the activities of other lenders
on mortgages, both in refinancing and for new construction. Mortgages insured
by the FHA are purchased. Loans are also made to distressed holders of fundamentally sound mortgage bonds or certificates.

Industrial loans are not made, if

By June 30, 1936, the RFC had advanced $19,000,000 through this subsidiary, and
in July this was increased to $30,000,000.
Forty percent of the RFC!s advances to or through mortgage loan companies
remained outstanding on June 30* 193^* Undisbursed commitments and agreements
were almost as large as loans outstanding, amounting to $120,000,000.

Commit-

ments on the books have amounted to more than $110,000,000 ever since October
1933;

of

more than $75,000,000 has been in New York State, gj

Loans to Insurance Companies and to Building and Loan Associations:
Advances to insurance companies and to building and loan associations were made
largely before March 1933

have been almost completely retired. Of the

$39,000,000 outstanding on June 30, I936, $22,000,000 were loans on preferred
stock of insurance companies in Maryland made in 193^«
1/ RFC Mortgage Co. Circular No. 1 (Revised), April 19352/ At least since June 30, 193^, the first date for which state data were
published. Unfortunately the report to Congress for October 1933 which
would show to what companies the authorizations of that month, totalling
$90,000,000, were made has not yet been obtained.




Loans to Agricultural Financing Institutions:

Loans to joint-stock land

"banks and to agricultural and livestock credit corporations were made j^rincipally
in 1932 and 1933. Only $3,000,000 remained outstanding 011 June 30, 1936. No
loans have teen made to Federal agricultural agencies since November 193^ when
the HFC ceased discounting for the Regional Agricultural Credit Corporations*
Outstanding loans to the Federal Land Banks were $3^,000,000«
Loans to Commodit:/ Credit Corporation:

The operations of the Commodity

Credit Corporation are discussed elsewhere. By substituting a capital subscription of $97,000,000 for loans of an equal amount in accordance with the Act of
April 10, 193^1 the RFC enabled the CCC to go into the market on July 13 with an
issue of 6-month collateral trust notes at \ percent secured by collateral giving
a margin of more than Uo percent. By August 5 the CCC had received subscriptions
from 105 banks and trust companies for $71,HU0,000 of the $150,000,000. This
permitted reduction of the RFC's loans to $92,000,000 by the end of July. The
purchase of stock will incidentally allow the RFC eventually to show 100 percent
repayment of its loans to the CCC, though not of its stock subscription.
Preferred Stock of the Export-Import Banks:

The RFC purchased preferred

stock of the two Export-Import banks in February and March 193^»

in

amounts equal

to ten times their appropriated capital. The Second Bank, which was finally
liquidated in July 1936 retired its preferred stock of $2,500,000 in June 1935.
The preferred stock of the other bank was increased from $10,000,000 to $17,000,000
in April 1936 and to $20,000,000 in August. This enabled the bank to take over
the RFC1 s loan to the Chinese Government on which a balance of $13,537*000 remained unpaid.




Loans on Agricultural Commodities;

Loans on agricultural corxiodities, other

than those made to the Commodity Credit Corporation, were made under Section
201 (c) of the Emergency Relief and Construction Act of 1932; to 5 borrowers,
including the Secretary of Agriculture and the Government of China, and under
Section 201 (d) to 97 "borrowers, many of which were agricultural cooperatives.
Loans authorized to the Secretary of Agriculture under Section 5 of the Agricultural Adjustment Act of 1933 to finance the AAA cotton pool were largely
undisbursed, since the pool was able to borrow from banks. The largest number
of loans was made in 1933-

The total advanced under these sections of law, other

than to China, amounted by June 30, 1936, only to $25,300,000 of which $1,500,000
was still outstanding.
Other Classes of Loans
The remaining classes of loans all continue to be relatively active.
Through its emergency loans to railroads the RFC has actively entered the
field of investment banking with no far-reaching effects.

In making industrial

loans, as well as some loans to mortgage loan companies discussed in the preceding
section, the RFC is active in fields normally occupied by commercial banking, but
in general has so conducted its operations as to offer no competition to private
institutions.
The RFC has been called on by Congress to make a number of types of relief
loans, including loans to finance repair of earthquake, tornado and flood damage
and loans to finance debt of agricultural improvement districts. Only in the
latter category do outstanding balances and current advances amount to any
considerable sums of money. The RFC has also served as agent for the Government
in financing public works, at first as an administrative authority and then as
underwriter and distributor.

It is questionable whether private enterprises

would have undertaken this financing.




Loans to Industry:

Loans to industry actually disbursed by June 30, 193^1

totalled $60,000,000 (including $2,000,000 to fishing and mining concerns) of
which $5^,000,000 remained outstanding.

Commitments exclusive of a small svm

of conditional agreements amounted to $44,000,000 (including $8,000,000 for
mining companies.) The larger part of this was for direct loans; undisbursed
authorizations of loans in which the HFC was participating or had agreed to
participate with a bank were only $6,000,000 on March 31» 193^*

Loans were

authorized to l6l new borrowers in the first quarter of 1936. bringing the total
number by then to 1,482. l/
On July 13, 1936, the interest rate charged on these loans was reduced from
a uniform 5 percent to a 4-5 percent scale depending on the character of the
loan and the circumstances of the borrower.
Loans to Railroads:

Loans had been made to 73 railroads by June 30, 193^>

and loans to 52 railroads were still outstanding. Loans to l4 railroads still
exceeded $10,000,000 out of 15 to which loans at least that large had been advanced. The total amount outstanding was $388,000,000 out of $493,000,000
advanced.

During July three large loans were completely retired by repayments

of $46,000,000. An undisbursed commitment of $99,000,000 was outstanding to the
Great Northern, \7hich represented the only large loan authorized during 193^«
Through provisions of law requiring Interstate Commerce Commission approval
in certain cases Congress has attempted to guard against Government support of
l/ 1,919 loans had been authorized by the end of 1935> from a total of 4,699
applications acted 011 at Washington and 6,952 received at loan agencies.




30

untenable financial positions of railroads.

The RFC on its part, to judge from

occasional newspaper reports, has in a number of cases exerted the influence
resulting from its creditor position so as to require reductions in interest
rates charged railroads by creditor banks.

It has also taken care to safeguard

its own position in cases of refinancing or renewals of loans.

In some cases it

has taken an active part in proposing reorganization schemes.
The HFC railroad loan situation remains active in the sense that the RFC
is engaged in large-scale financial operations, but because the railroad situation in general is improving it may be expected that eventually many of the
RFC!s debtors will be able to refund their loans through capital flotations as
the Southern Pacific recently did.
Loans for Self-liquidating Projects:

The RFC furnished public works funds,

on advances with long maturities, directly to local Government bodies, regulated
housing corporations, private corporations for public works such as bridges,
railroads (with the approval of the Interstate Commerce Commission), and regulated
forestation projects, before the PWA was set up. Loans were made to 176 borrowers before June 30, 1933»

authorizations since then have been entirely for

additional loans to some of these borrowers, if Disbursements of loans have
been made as needed, at a rate of from 50 to 60 million dollars a year continuing
up to the present. By June 30. 193&» total disbursements were $223>000,000,
outstanding balances $170,000,000, and outstanding commitments $105*000,000.
l/ Aside from a few loans to finance repair of earthquake and tornado damage
and a considerable number of very small flood damage loans, which were not
required to be self-liquidating.




3/

No provision is contained in the lav/ for the resale to other investors by
the HFC of securities received by it in connection with these advances.
Securities Purchased from PWA;

The HFC was authorized in 193^ to purchase

and resell to the public securities acquired by the PWA and to have invested at
any one time not more than $250,000,000.

To the end of June 1936 the RFC had

purchased and resold, in many cases at a premium, securities of par value of
$260,000,000. Other securities totalling $30,000,000 were held and subsequently
collected, and $130,000,000 were held by the RFC 011 June 30.
Loans to Drainage, Levee and Irrigation Districts:

Loans to agricultural

improvement districts have been made since the latter part of 1933 to refinance
indebtedness, New authorizations continue to be made at a rate of about $50,000,000 a year; by June 30, 1936, loans of $56,000,000 were outstanding and
outstanding commitments were $65,000,000. The number of borrowers by March 31,
1936, was 5S7. These loans are made for long maturities, and borrowers are
required to reduce their taxes and assessments with the result that their capacity
to pay is in no way improved.
Other Loans:

Loans have also been made to the Chicago Board of Education,

to the Board of Deposits of Wisconsin, to credit unions, $600,000; and to
finance processing tax payments, $15,000. The RFC was authorized by the Act of
May 20, 1936, to lend up to $50,000,000 to the Rural Electrification Administration; no loans have been made to date.







Appendix material on the subject matter in
the above paragraphs is being prepared to cover
RFC investments in banks and retirements of investments, by States and by classes of banks,
and historical data on authorizations, disbursements, and repayments of certain types of loans•

33