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Federal Deposit insurance Corporation WASHINGTON 85 ADVANCE FOR RELEASE AFTER 10:00 A.M., M .S ,T., TUESDAY, JUNE 10, 1947 ADDRESS OF DR, ERNST A. DAUER DIVISION OF RESEARCH AND STATISTICS FEDERAL DEPOSIT INSURANCE CORPORATION B efore the ANNUAL CONVENTION AND INSTITUTE OF INDUSTRIAL BANKING OF THE AMERICAN INDUSTRIAL BANKERS ASSOCIATION DENVER, COLORADO JUNE 10, 1947 FEDERAL DEPOLIT INSURANCE CORPORATION ADDRESS OF DR. ERNST A. DAUER, DIVISION OF RESEARCH AND STATISTICS, BEFORE THE ANNUAL CONVENTION AND INSTITUTE OF INDUSTRIAL BANKING OF THE AMERICAN INDUSTRIAL BANKERS.ASSOCIATION DENVER, COLORADO JUNE 10, 1947 INSTALMENT CREDIT DEVELOPMENTS I You w i l l be in te re s te d in a b r i e f survey o f the l i g h t shed by recen t fig u r e s on the changing character o f those in d u s tr ia l banks whose d ep osits are insured by the Federal L e p o s it Insurance Corporation. Between 1941 and 1945 the a c t i v i t i e s oi insured in d u s tr ia l banks were d r a s t ic a lly a lte r e d as a r e s u lt o f (1 ) war fin a n cin g requirem ents; (2 ) the almost t o t a l absence o f production o f consumer durable goods; and (3 ) the d e s ire o f in d iv id u a l in d u s tr ia l banks to en large the scope o f th e ir a c t i v i t y . In the pre-war p eriod , th e ir a ssets had consisted predominantly o f consumer in stalment loans, and t h e ir l i a b i l i t i e s were la r g e ly in the form o f time and savings d e p o s its . During the war years t o t a l assets rose sharply, w ith almost a l l o f the in crease taking the form o f U. f . ‘Government s e c u r itie s , the character o f the loan p o r t f o lio was d r a s t ic a lly a lte r e d , and demand d ep osits became a l most as la rg e as time d e p o s its . Thus, by the end o f 1945, almost 50 percent o f the t o t a l a ssets o f insured in d u s tr ia l banks was in the form o f U. A. Government s e c u r itie s and about 30 percent in loan s. Only o n e-th ird o f the loans, or about 10 percent oi t o t a l a ssets, consisted o f consumer instalm ent loan s. This was indeed a fa r c ry from the pre-war a sset d is tr ib u tio n ! During 1946, the t o t a l assets o f the insured in d u s tr ia l banks showed a su b sta n tia l growth, in creasin g 16 p ercen t. P r a c t ic a lly a l l o f - 2 - the growth in t o t a l a ssets took the form' o f loans, which grew about 50 per cent, One—h a lf o f the loan increase was in consumer instalm ent c r e d it, one—tenth in consumer s in g le payment loans, and the oth er two—f i f t h s in r e a l esta te and commercial loan s. Thus considering the group as a whole, the insured in d u s tr ia l banks are continuing to maintain th e ir predominant in te r est in the consumer c r e d it f i e l d , and are extending th e ir len din g a c t i v i t i e s in to s o -c a lle d coxmmercial channels- a t a more con servative pace, The funds with which to in crease t o t a l assets were d erived in almost equal measure from t i c e and from demand d e p o s its , so th at the re la tio n s h ip between these forms o f l i a b i l i t i e s was p r a c t ic a lly unchanged. II L et us now consider developments in instalm ent c r e d it, f i r s t o f a consumer ch aracter, then o f a non-consumer ch a ra cter, Lince the Federal Deposit Insurance Corporation is keen ly in te re s te d in the soundness o f the assets acquired by banking- in s titu tio n s , I w i l l deal w ith these developments p rim a rily from the p oin t o f view o f soundness o f the a s s e ts . The p eriod from V—J Day to the o f f i c i a l end o f h o s t i l i t i e s vías a memorable one in the f i e l d o f consumer cred it.volume o f consumer instalm ent c r e d it doubled, In those 16 months the t o t a l t ta r tin g in September 1945 from 2 b i l l i o n d o lla r s —- which was e s s e n t ia lly the low est p oin t sin ce the 1941 peak — instalm ent c r e d it passed the 1929 peak o f 3 b i l l i o n d o lla r s by July 1946, and reached 4 b i l l i o n d o lla r s by December 1946. As ypu know, non-insta l.aent c r e d it (s in g le payment loans, charge accounts and s e rv ic e c r e d it ) began to increase e a r lie r than instalm ent c r e d it . Over the same 16—month p erio d , such non*-ins taimen t c r e d it rose from 4 to 6 b i l l i o n d o lla r s . Thus by the end o f 1946, t o t a l consumer c r e d it (in stalm en t and non-instalm ent combined) had p r a c t ic a lly r e -a tta in e d the 1941 peak o f 10 b i l l i o n d o lla r s « Ihe v e r y r a p id it y o f the increase in consumer c r e d it has caused some question with resp ect to i t s d e s ir a b ilit y , were lim ite d by R egu lation W. throughout th is p eriod , terms With that lim it a t io n on down payments and re payment p eriod s, w ith the high l e v e l o f business a c t i v i t y and employment, and with reasonable judgment in s e le c tio n oi c r e d it ris k s , i t is c le a r th a t the c r e d its were destin ed to be promptly and p ro p e rly repaid* o f view , no unsoundness is in vo lved . to , from th at p oin t However, from the p oin t o f view o f the nation as a whole, such a rapid and la r g e growth in consumer c r e d it — or in any c r e d it — wras u ndesirable, to the ex ten t th at i t provided purchasing power which exerted upward pressure on p ric e s , p a r t ic u la r ly those o f tem p orarily scarce goods, i ith the passage o f tim e, we may expect the volume of consumer in stalment c r e d it to continue to grow, f o r the present t o t a l is small in r e la t io n to' our post-war l e v e l o f n a tio n a l income. He—attainm ent o f the pre-war r e la tio n s h ip , which may be a n tic ip a te d fo r a number of reasons, w i l l req u ire consumer instalm ent c r e d it to grow e v e n tu a lly to two or three times i t s present l e v e l , even w ith l i t t l e or no fu rth e r increase in the n a tio n a l income. Then those durable goods, fo r which consumers have been w a itin g , become a v a il able in ample q u a n titie s and a t sound p r ic e s , a su b sta n tia l in crease in con sumer c r e d it w i l l not be unreasonable. That in crease w i l l place a resp on si b i l i t y on you, as bankers, to see th at the in d iv id u a l c r e d its granted are sound L et us proceed to our discussion o f your consumer len din g a c t i v i t i e s , I shall r e f e r f i r s t to d ir e c t len din g to consumers — the t r a d it io n a l f i e l d o f indu strial banks in which you o r ig in a lly made your rep u ta tion , to t e l l you th a t you have done e x c e lle n t work in th is f i e l d . I do not need Your assets have been sound, your c h a rg e -o ffs have been n e g lig ib le , and p r o fit s have been s a tis fa c to ry . Ih is has been true because over the years i t has been your para mount con sid eration to in s is t th at the borrower have a s a t is fa c t o r y c r e d it standing, and a b i l i t y and w illin g n e s s to pay. would have taken a genius to sustain lo s s e s . Luring the recent war years, i t Our records show th at f o r the country as a whole r e c o v e rie s on loans were g re a te r than c h a rg e -o ffs on loans in insured commercial banks in each o f the l a s t fou r years, 1943, 1944, 1945, and 1946, f.uch a lon g p eriod w ithout n et lo s s e s has never occurred b e fo r e . I t may never happen again, The continued high ra te o f n a tion a l incone and f u l l employment have kept c h a rg e -o ffs a t a minimum. T h erefore, you should ask your s e lf, whether p r o s p e r ity has caused you to become lax? your c r e d it f i l e s in proper shape? Do you s t i l l maintain Are you s t i l l as c a re fu l in determ ining the c r e d it standing o f the borrower and h is a b i l i t y and w illin g n e s s to pay even under adverse con dition s? I f the p r o s p e r ity o f recen t years has lu lle d you into a fa ls e sense o f s e c u rity , you may have a-rude awakening one o f these days. I t is no news to you that banker in te r e s t in the f i e l d o f consumer credit is b ein g more and more focused on instalm ent sa le c r e d it , which in the past flu ctu a ted the most w id e ly , and which accounted fo r tw o-th ird s o f the consumer instalm ent c r e d it outstanding a t the peak in 1941. On V-J Day bankers expected sa le c r e d it , p a r t ic u la r ly automobile sale c r e d it , to show the g re a te s t increase in the then succeeding p erio d . However, outstanding sa le c r e d it fo r - 5 - autos and other durable goods is s t i l l w e ll below the 1941 peak, even though cash loans and re p a ir and m odernization loans have exceeded th a t peak. That disappoin tin g showing made by automobile s a le c r e d it can be a ttrib u te d to the u n s a tis fa c to ry increase in automobile production, and to the ch an n ellin g o f a r e l a t i v e l y su b stan tial p roportion o f automobiles to f l e e t purchasers and others f o r cash, Ihose events have been matters o f considerable importance to most banks# In common w ith the sa les finance companies, most banks had expected automobile production to increase more r a p id ly , and many had geared themselves to do a h igh er volume o f business than a c tu a lly m a te ria liz e d , With overhead spread over a small volume, high operatin g costs were the r e s u lt , That in turn brought ra te c u ttin g in an e f f o r t to gain a com petitive advantage# It is c le a r th at those who began that r a te —c u ttin g f a i l e d t o recogn ize th a t a reduction in s e llin g p ric e s ( in th is case, in te r e s t r a t e s ) is sound on ly i f predicated on an a c tu a lly r e a liz e d high volume o f business, When based on the hope o f a higher volume, ra te —c u ttin g is a gamble; when r e t a lia t io n occurs, there is r a r e ly any s h ift in business, and the on ly r e s u lt is a sm aller gross income f o r everyone, When the p roportion o f cars financed and the volume o f cars pro duced in crea se, those circumstances which have ch a ra cterized the recen t p eriod w i l l tend to reverse them selves. With more tran saction s, op eratin g co sts, per u n it, o f consumer c r e d it departments should d e c lin e , even though there may be some increase in in v e s tig a tio n costs and in p re d it lo s s e s . In December o f 1946 the scope o f R egu lation W was m a te r ia lly de creased. Some people have been pressin g fo r i t s fu rth e r re la x a tio n or abandonment, I f that occurs, you may expect to experience considerable - 6 - pressure fo r a reduction in down payments and a lengthening o f Repayment periods* as a r e s u lt o f two in flu en ces* com petition among s e lle r s and com petition among c r e d it agen cies. We a l l reco gn ize th at w ith present automobile p rices* a o n e-th ird down payment* and a 15—month term re s u lts in monthly payments beyond the reach o f a la r g e p roportion o f p ro sp ective purchasers. The lon ger l i f e Which' cars have demonstrated during the war may w e ll j u s t i f y lon ger terms* ju st as the h igh er p ric e s may requ ire them. From the p oin t o f view o f sound ness o f len d in g p o lic y , a re la x a tio n which takes the form o f a reduction in down payments* is much more dangerous than a lengthening o f the repayment period# n reduction in the down payment decreases the purchaser’ s equ ity* and th is increases the lik e lih o o d ot d e fa u lt and the r a te o f lo s s when de fa u lt occurs, By way o f contrast* the c h ie f e f f e c t o f a moderate len gth en in g of the repayment period is to in crease the expense o f handling a given loa n . Throughout most o f the war p eriod , used car p ric e s were h ig h ly in fla ted # W ith increased a v a i l a b i l i t y o f new cars* the so ften in g in used car p rices which has a lrea d y become apparent- w i l l be more s tro n g ly e v id e n t. If down payments and monthly payments on new cars are reduced* used car p ric e s w i l l be fu rth e r a ife c te d * I f instalm ent c r e d it-te r n s fo r used cars are unduly rela xed a t the same time, used car p ric e s may be tem p orarily sustained at unreasonable l e v e l s , j\s a r e s u lt, when the pressure becomes too g re a t, severe lo s s e s on repossessions may r e s u lt , Insured r e p a ir and ¿modernization loans more than doubled between V-J Day and December of 1946; by October o f 1946 they had exceeded the 1941 peak, With t o t a l expenditures io r re p a ir and modernization work in 1947 estim ated a t 5 b i l l i o n d o lla rs * i t is probable th at such c r e d its w i l l in - - crease m a te r ia lly as tin e goes on« 7 - Since the average s iz e o f such paper is su b sta n tia l, and the terms long, the income in d o lla r s is s u f f i c i e n t l y high so ^.hat th is paper— even w ith low volume— -can be p r o fita b le * Although banks can p a r tic ip a te through d ir e c t len d in g , the bulk o f th is paper is o rig in a te d by con tractors and b u ild e rs , so th a t banks acqu ire i t in d ir e c t ly * On loans insured under T i t l e I of' the F ederal Housing A ct, an unknown contingent lo s s has been rep laced by a fix e d expense. paper, lo s s e s have been abnormally low in recen t years. as p o s s ib le , On uninsured To keep them as low i t is important on t h is — more then on any other type o f — consumer c r e d it paper to recogn ize that the i n t e g r it y o f the d ea ler or in s t a llin g con tra c to r i s paramount in determ ining the q u a lity o f these in d ir e c t ly acquired loans. The borrowers on a l l re p a ir a nd m odernization loans are home owners: that v e ry fa c t is evidence o f industry, t h r i f t , and s t a b i l i t y . However, poor workmanship or chicanery on the part o f the con tra ctor may m a te r ia lly impair what is norm ally a v e ry sound type o f c r e d it . I t is im perative, th e re fo re , that banks thoroughly in v e s tig a te the d ea lers or con tractors from whom they expect to acqu ire such paper. A n tic ip a te d sales o f ra d io s, r e fr ig e r a t o r s , and other e l e c t r i c a l and gas appliances in d ic a te th a t th ere may be a s ig n ific a n t increase in the volume o f such instalm ent sa les c r e d it . As in the case o f autom obiles, r e moval or re la x a tio n o f R egu lation W w i l l probably be the s ig n a l f o r a r e duction in down payments and a lengthening o f repayment terms. the redu ction in down payments which is the more dangerous. Again, i t is In th is connec tio n , the slogan a ttr ib u te d to a Grand Rapids fu rn itu re s to re is a tempting one: '‘Feather your nest w ith a l i t t l e down and |1 when you catch met" down,“ 3ut the cartoon which reads: c le a r ly emphasizes, that a redu ction in - 8 - down payments q u ic k ly reaches the p oin t of unsoundness* On the other hand, with s ig n ific a n t down payments, a lengthening o f terms is dangerous on ly i f ca rried to the p oin t a t which the e q u ity valu e does not equal the unpaid balance» In a d d itio n , the appliance f i e l d has i t s own set o f problems. In view o f cu rrent high p r ic e s , th ere is a high degree o f v u ln e r a b ilit y to the in trodu ction o f low p riced economy models w ithout ’’ f r i l l s '* and gadgets; such in trod u ction w i l l in crease the danger o f repossessions on higher p riced lin e s , with re s u ltin g lo s s e s upon d is p o s a l. In the appliance f i e l d , th ere is the added danger of f a ilu r e o f manufacturers o f o ff-b ra n d merchandise, which when repossessed w i l l have l i t t l e sa les va lu e, In concluding my remarks on consumer c r e d it, l e t me r e - s t a t e a few fundamentals. The determ ination o f the c r e d it standing, a b i l i t y , and w i l l i n g ness to pay o f the borrower, or o f the purchaser o f goods, in the paramount con sideration ; everyth in g e ls e is secondary, Down payments and repayment periods should always be judged w ith th a t in mind, in the in d iv id u a l case* Th erefore, i t is h ig h ly im portant: good order; (£ ) (1 ) That you keep your c r e d it f i l e s in th a t you place the necessary.emphasis on determ ining the borrower’ s w illin g n e s s and a b i l i t y to pay; and, (3 ) th at the requ ired s e r v ic e - in te r e s t and am ortization — on the borrow er’ s o b lig a tio n s o f a l l kinds be not too la r g e a p o rtio n o f h is regu la r income. I f c re d its are not up to standard on a l l counts, I hope you have a v e r y stron g, e n e rg e tic c o lle c t io n department in your bank which c o n s is te n tly fo llo w s up on a l l delinqu ent c o lle c t io n s . Otherwise, you are r e ly in g , in fa c t , on recourse to the d e a le r; i f th at is so, you w i l l wrant to s a t is fy y o u rs e lf as to the value of the - 9 d e a le r ’ s endorsement. I f you acquire paper w ithout recou rse, or i f the d e a le r ’ s endorsement does not add valu e, then you are r e ly in g upon repossession o f the merchandise, ’ Such r e lia n c e is illu s o r y . Repossession and sa le are c o s tly ; they place the bank in the merchandising business where i t does not belong; when re s o rte d to fre q u e n tly , th ey d estro y g o o d -w ill in the community, IV L et us now consider, b r i e f l y , the cen tra l problem in connection with the f l o o r fin a n cin g o f r e t a i l in v e n to rie s , th at Siamese twin o f the a c q u is itio n o f d e a le r paper, One p oin t req u ires continual emphasis; I t is e s s e n tia l to the s a t is fa c t o r y operation o f the bank and o f the d e a le r , th at the l a t t e r not become overloaded w ith inventory# I have no d es ire ' to make a fo r e c a s t o f the business ou tlook . How ever, whether we have a “ readjustm ent” ,- a “ recessio n ” , a ’’depression” , .or a “ boom” , one th in g is c e rta in ; A t no time since December 7, 1941 has i t been so e s s e n tia l as In recen t months and in the months ahead to e x e rc is e caution in making loans which are in any way dependent f o r repayment upon in ven tory valu es. In the la s t year, we have seen a s e l l e r s ’ market somersault in to a buyers’ market in more than one commodity* 5o long as an unbalanced inven to ry s itu a tio n , and a d is to rte d p ric e stru ctu re e x is t , we must expect that to continue to occur. To be most c e rta in of avoidin g lo s s , a bank engaged in the f l o o r fin a n c in g o f in v e n to rie s must know each separate in d u stry in volved , the character o f flo w o f i t s commodities, trade trends, p ric e flu c tu a tio n s , and the c r e d it p o s itio n o f the manufacturers concerned. That is a b ig order fo r a b ig bank, and a sta ggerin g order f o r a small bank. But i f Tie do not help the d ea ler to become overloaded on h ig h priced in ven tory, the danger o f lo s s is m a te r ia lly reduced. Let us be s p e d - - f i c w ith resp ect to a few products* 10 - In automobiles we s t i l l have a s e l l e r s 1 market, so th at overloa d in g is not an immediate problem in the case o f standard ca rs. But there i s a d e fin it e danger today th at d ea lers may become overloaded w ith slow moving deep fr e e z e u n its, de luxe r e fr ig e r a t o r s , ra d io s, and other e l e c t r i c a l ap p lian ces. In the appliance f i e l d , p a r tic u la r ly , bankers must proceed w ith caution w ith resp ect to merchandise o f l i t t l e fa c tu re rs . known manu They may w e ll fin d , i f the time comes to take possession, that re s a le p o s s i b i l i t i e s are d is t in c t ly lim ite d . That w i l l be e s p e c ia lly true o f "orphan11 merchandise, namely, the products o f manufacturers who have fa ile d * V In the time a t our d is p o s a l, i t is im possible even to scratch the surface w ith resp ect to a l l types o f instalm ent loans to business. C u rren tly, there is evidence o f a g re a t deal o f in te r e s t among bankers, g e n e ra lly , in equipment fin a n c in g . The t i t l e o f the ABA Conference a t S t, Louis, s i g n i f i can tly, was Consumer - Instalm ent C re d it Conference, One-half or more o f i t s sessions were devoted to the fin a n cin g o f producers’ durable goods* There are a number o f reasons why in d u s tria l banks are in te re s te d in such fin a n c in g . I t is most c lo s e ly r e la te d to consumer instalm ent c r e d it . To the ex ten t th at i t in v o lv e s d i f f i c u l t fin a n cin g problems, i t is a "n a tu ra l" fo r you. With your long experience in instalm ent len d in g, you have been accustomed to making loans which the average commercial bank, through in experience, would have refu sed to accept u n t il recen t yea rs, I t seems ap p ro p ria te , th e r e fo r e , f o r us to review' b r i e f l y the fundamental problems in volved in the fin a n cin g o f the purchase of equipment f o r business e n te rp ris e s * I t w i l l be h e lp fu l a t the ou tset to consider the operation o f the r a ilr o a d equipment tr u s t — the proto—type o f a l l equipment fin an cin g* Under - l i the s o -c a lle d P h ilad elp h ia Plan, as o r i g i n a l l y developed, a r a ilr o a d •wishing to purchase cars and locom otives enters in to an agreement w ith the manufacturer who bu ilds the equipment according to s p e c ific a tio n s , Ihen completed, t i t l e to the p ro p erty is tra n s fe rre d from the manufacturer to a th ird p a rty, a tru stee, who acts as the re p re s e n ta tiv e o f the purchasers o f equipment tru s t c e r tific a te s . This tru stee lea s e s the equipment to the r a ilr o a d , fo r a p eriod as long as 10 to 15 yea rs. Over th is p eriod the r a ilr o a d makes re n ta l payments in an amount s u ffic ie n t to cover in t e r e s t , plus a m ortization a t a ra te some what in excess o f the d ep recia tio n r a t e . To provide a margin o f s a fe ty , the ra ilro a d makes an o r ig in a l down payment o f 15 to 25 p ercen t. Equipment tru s t c e r t if ic a t e s have enjoyed an unusually fin e record, in s p ite o f the checkered h is t o r y o f r a ilr o a d fin a n c in g . v ery few lo s s e s have occurred. In over 50 years, In fa c t , the h olders o f o n ly one issu e^ su ffered a lo s s o f p rin c ip a l in the p erio d between 1951 and 1938, when 21 bankrupt r a i l roads had 120 equipment tr u s t issues outstanding. This extrem ely strong p o s itio n may be explained as fo llo w s : (1 ) The equipment is e s s e n tia l to the op eration o f the r a ilr o a d ; (2 ) Even i f the r a ilr o a d f a i l s , i t u su a lly continues operation and is reorgan ized rath er than liq u id a te d ; (3 ) R ailroad s u su a lly do not have a surplus of equ ip. ment, a nd connot operate without the leased equipment; and (4 ) I t is more expensive to secure equipment from any other source than to continue payments on the leased equipment. I ~ If, 12 - in s p ite o f those fa c ts , d e fa u lt does occur, the tru stee can take posses sion o f the equipment and le a s e or s e l l i t to another road» The con d ition s we have ju s t described produce a p r a c t ic a lly p e r fe c t type o f investment s e c u rity , or a p r a c t ic a lly p e r fe c t loan » For th is reason, by using equipment tru s t c e r t if ic a t e s , even weak r a ilr o a d s have been a b le to secure funds a t r e l a t i v e l y low in t e r e s t ra te s a t a time when they had to pay a high er ra te o f in t e r e s t on underlying mortgage lie n s . To what ex ten t do equipment instalm ent loans by banks f u l f i l l the necessary con d ition s fo r a '‘p e r fe c t loan "? I f we are honest w ith ou rselves, we regogn ize that th ere is p r a c t ic a lly no instance in which they do. t e have a c lo s e approach in the case o f loans to fin an ce the a c q u is itio n o f s tre e tc a rs and buses by c i t y t r a n s it systems; i t is true to a le s s e r exten t o f in te r —urban systems or cross-cou n try bus lin e s . each in d iv id u a l case, however, i t is necessary to determ ine: In (1 ) whether the continued operation o f the c a r r ie r is e s s e n tia l to the community, and (2 ) whether a surplus o f equipment might d evelop» A weaker s itu a tio n a lso e x is ts in the case o f instalm ent loans to finance the a c q u is itio n o f a i r c r a f t by passenger a i r l i n e s . We have not yet seen whether the C i v i l Aeronautics Board w i l l f a c i l i t a t e the re o rg a n iza tio n and continued operation o f a la rg e or a small a i r l i n e ; or whether the fra n chise w i l l be tra n s fe rre d to a competing lin e in the case o f a f a i l u r e . I t is a ls o p o ssib le th a t more than one a ir lin e w i l l fin d i t s e l f w ith a sur plus o f equipment, in view o f the heavy purchases which have been contracted fo r . As you knowr, the op eratin g re s u lts fo r 1946 and the f i r s t qu arter o f 1947 have been d isap p oin tin g to a number o f the c a r r ie r s . - 15 - Now we could, in turn, discuss trucks financed fo r tru ckers, r e fr ig e r a t io n equipment f o r food sto res, a ir con d ition in g f o r gen eral s to re s , a g r ic u ltu r a l equipment f o r farm ers, and/or any one o f the endless v a r ie t y o f equipment or machinery which small or la r g e businesses may wish to acquire# In each in d iv id u a l case, we could examine the exten t to which the con dition s e s s e n tia l to a ’’ p e r fe c t loan ” are present# g e n e ra lize * In stead, l e t us R a rely does an economic monopoly e x is t in which continued operation even a f t e r f a ilu r e is assured; most businesses which f a i l are liq u id a te d . You must th e re fo re s a t is f y y o u r s e lf in any given case, w ith resp ect to two qu estion s; F ir s t , w i l l the purchaser in a l l p r o b a b ility pay h is con tract to m aturity? second, what w i l l the consequences be i f the purchaser f a i l s to perform? The answers to the fo llo w in g questions w i l l h elp you, the banker, determine whether the purchaser w i l l pay out h is con tract to m atu rity; (1 ) How e s s e n tia l is the continued operation o f the e n te r p r is e to the community? In other words, what is i t s p ro sp ective earning power? (2 ) flow e s s e n tia l is the equipment -to the fu n ctio n in g o f the business? Rtated d if f e r e n t ly , what e f f e c t w i l l i t s absence or removal have on the a p p lic a n t’ s earning power? (3 ) Is the-down payment enough to e s ta b lis h an adequate e q u ity on the p a rt o f the a p p lica n t? (4 ) TYhat is the probable s e rv ic e l i f e o f the equipment? That depends, o f course, upon the exten t and character o f the use to which i t w i l l be su bjected. 14 - (5 ) Is the length o f the repayment p eriod commensurate w ith th a t s e rv ic e l i f e ? I f the p eriod is too lon g, the pur c h a s e r^ e q u ity in the equipment yri!fl be d is s ip a te d . I f i t is too sh ort, the necessary payments w i l l be a drain on the p u rc h a s e rs working c a p it a l. I f the purchaser does not pay h is con tract to m aturity, the bank *s p o s itio n w i l l depend on the answers to the fu rth er qu estion s: (6 ) L id the bank acqu ire c le a r t i t l e to the equipment d i r e c t l y from the manufacturer or d is tr ib u to r , so th at i t can secure possession w ithout d i f f i c u l t y ? T it le tra n s fe rre d from the purchaser, as through a c h a tte l mortgage, may be no p ro te c tio n i f the purchaser be comes bankrupt, (7 ) la s the o r ig in a l tran saction made w ith recourse? If so, the burden o f d isp o sin g o f the p ro p erty f a l l s upon the manufacturer or d is tr ib u to r where i t belongs; i f not, the bank is in the merchandising business, (8 ) I f the bank has to repossess the equipment, is i t a standard product? Row broad is tp© r e s a le market? A g r ic u ltu r a l equipment is the o n ly form o f equipment which has a r e s a le market comparable in breadth and scope to th a t o f the used car market* VI In conclusion, I wish to 'mention th at I have emphasized the problems connected with recen t developments in instalm ent len d in g, be cause those are the m atters which I b e liv e you want discussed. That does - 15 - does not mean th a t I am opposed in any way to g re a te r p a r tic ip a tio n in th is f i e l d by adequately equipped banks, but I think i t is d e s ira b le that they do so w ith t h e ir eyes open. The o p p o rtu n ities fo r p r o f i t , f o r s e r v ic e , r e la tio n s to consumers a re u n lim ited . fo r sound p u b lic I f banks are to continue to hold th e ir fra n ch ise to serve the p u b lic, th ey must provide a banking s e rv ic e re la te d to the needs o f the masses businesses and consumers a lik e# fa ilu r e to do so has re s u lte d in n a tio n a liz a tio n o f banks in some fo r e ig n cou n tries. But i f loans are not made soundly, then the day o f reckoning w i l l come s u re ly and. s w ift ly , and that day w i l l fin d some banks "h old in g the b ag". The FDIC does not wish to see banks l e f t "h old in g the bag" as a re s u lt o f unsound loan s, l/vre know, th a t the b ig g e r the bankas bag, the g re a te r the lik e lih o o d that e v e n tu a lly we w i l l take over the lo a d .
@FedFRASER