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Statement of
Chairman K. A. Randall
Federal Deposit Insurance Corporation
before the
Committee on Ways and Means
House of Representatives
March 24, 1969

I appreciate this opportunity to appear today before the Committee
on Ways and Means of the House of Representatives to discuss with the
Committee some aspects of mutual savings banking that are relevant to
the Committee's consideration of the tax reform studies and proposals
prepared by the U.S. Treasury Department staff, pursuant to the Revenue
and Expenditure Control Act of 1968.
The Corporation's immediate interest in discussing taxation of
mutual savings banks with the Committee stems from our impression that
implementation of proposals similar to those advanced in the Treasury
staff study could eliminate the necessary degree of flexibility now
incorporated in mutual savings bank portfolio powers.

Such a result

would be wholly contrary to the portfolio diversification increasingly
permitted mutual savings banks over the years and would increase the
problems of both the institutions and their supervisors in dealing with
ever-changing economic and financial conditions.
As the Corporation understands the Treasury staff proposal, tax
policy will in effect be used to penalize mutual savings banks for
failure to maintain a certain proportion of their assets in residential




So, to the extent that mutual savings banks are forced by

tax considerations to make heavier commitments in real estate mortgages
than they might have without the tax penalty, they would become much
like savings and loan associations.

Savers would then be disadvantaged

because they would lose the services of mutual savings banks that are
primarily thrift-oriented institutions.

Such a tax policy, moreover,

would produce the highly undesirable effect of reducing the present
flexibility of savings bank portfolio policies and would further con­
stitute a major contradiction of the basic principles of mutual savings
At this time, since there is no specific legislative proposal
before Congress for changes in the taxation of mutual savings banks,
the Corporation wishes only to bring to the attention of Congress
some fundamental considerations that should be taken into account
when specific legislation is being drafted.

The Corporation will

be glad to furnish its comments to the Committee on specific legis­
lation when it is introduced and to appraise its consequences for
the banking system.

Accordingly, my statement today will seek only

to give the Committee an abbreviated description of the origins and
evolution of mutual savings banking in this country and point up the
implications that this background and recent experience hold for
mutual savings banking in the present environment.


In addition to purely fiscal considerations, tax policy and practices
can constitute a powerful instrument whereby the direction and purpose of
the economy can be influenced.

A thorough understanding of the many factors

that can be affected by particular tax policies within even a small sector
of the economy is essential in order to formulate a rational tax program
for a rapidly changing economy.
As the only supervisor at the Federal level for mutual savings banks,
the Corporation is in a position to view broadly the industry and its role
in the financial mechanism.

The Corporation also is concerned with the

overall development of the nation’s banking system and its ability to meet
the financial requirements of the economy in the most efficient and effec­
tive manner.

Tax policies that would help to achieve these goals are thus

obviously of interest to us.

It is in this context that the following

comments are offered.
The first mutual savings bank was started in the United States just
about 150 years ago -- a counterpart of the mutual savings bank concept
developed earlier in Scotland and England.

These banks were formed by

public-spirited members of a community to encourage thrift and to provide
a depository for the savings of the small wage earner in the newly emerging
industrial society.

The other financial institutions of that period did

not serve the needs of this wage earner group.
The objectives of the founders of these early mutual savings banks
were to provide safety, liquidity, and an attractive, though often small,
rate of return for funds left with the bank.

These funds in turn were


placed at first mainly in legally permissible Federal or State obligations
and then in an ever-widening range of investments as the legal lending
powers of the savings institutions were broadened.
As time passed, mutual savings banks were empowered by state legis­
lation to undertake the financing of residential and nonresidential

But, unlike savings and loan associations, mutual savings

banks were not established for the primary purpose of home mortgage

The increase in the proportion of mortgages in mutual savings

bank portfolios came about in part because yields on mortgages became
relatively more attractive than the returns from alternative investment

A strong demand for housing pushed up the interest rate

on mortgages and made them desirable investments for mutual savings
The higher yields available on mortgages —

as compared to other

types of investments -- have thus enabled mutual savings banks to satisfy
two major objectives simultaneously -- to assist in financing needed
housing and other construction in an expanding economy and to encourage
thrift by providing attractive yields as well as safety for the funds of
the individual saver.

Nevertheless, the attractiveness of yield does

not override investment fundamentals -- such as diversification of risk
and maintenance of balance -- in the management of mutual savings bank
Mutual savings banks are among the strongest thrift institutions
in the financial community today.

Their strength has been attained


importantly through their ability to invest in a diversified range of
assets and to vary the composition of these assets in accordance with
changing economic and financial conditions.

This flexibility is

essential if mutual savings banks are to achieve their major purpose,
which is to safeguard the funds of the smaller saver and encourage

A sacrifice of this flexibility in order to facilitate some

particular type of financing would amount to a significant departure
from the basic purpose of mutual savings banking.
The need for mutual savings banks to remain flexible and adaptable
when rapid and sharp changes occur in the environment in which they
operate was clearly demonstrated during the "credit crunch" of 1966.
Owing to the flexibility inherent in their investment portfolios,
mutual savings banks as a group were prepared to withstand the pressure
of that period and were therefore able to tolerate sharp declines in
deposit inflows.

In this respect they differed substantially from

other specialized thrift institutions that because of their very nature
cannot have the advantage of this flexibility.
Nonetheless, the resultant depressing impact of this period on
housing and on the mortgage markets is one that we do not want to see

Perhaps the best way to prevent the recurrence of such a

situation is to encourage saving and thus assure a steadily growing
movement of funds into mortgage financing.

The benefits to the nation

would accrue from a larger volume of savings generated by the economy
rather than from an arbitrary channeling of a given volume of savings




into particular outlets through punitive taxation designed to reshape
the portfolio policies of particular financial institutions or particular
groups of savers, irrespective of the possible side-effects.
The nature of mortgage financing -- its relatively long maturities
and large average size -- makes it especially advisable that mutual
savings banks, for example, protect themselves against excessive commit­
ments in mortgages in a volume that would interfere with their ability
to adjust to external financial pressures.

It would be particularly

unfortunate if such a result were brought about inadvertently through
inappropriate tax treatment; this would negate the major purpose of the
savings bank -- to provide for the welfare of the saver.
Viewing the 1960’s in retrospect, events of the past two years
probably give us a better preview of the future than the early years
of the decade.

As a consequence, we must take into account the

increased interest sensitivity and consciousness of savers to changes
in rates of return or in rate differentials between alternative invest­
ment opportunities.

Policies which affect rates payable by mutual savings

banks and other thrift institutions or yields on competitive market
instruments can have a much more immediate and concentrated impact than
similar policies might have had several years ago.

And depositors in

mutual savings banks appear to be somewhat more sensitive than savers
in other thrift institutions to interest rate differentials.


are some of the realities that must be taken into consideration today.


To sum up, the Corporation believes that the strength and resiliency
of the mutual savings banks have been due not only to the high quality of
their management but to the industry’s ability to maintain diversification
in its portfolio policies.

These advantages should not be diminished or

dissipated by inappropriate tax policies that may not even achieve the
objectives for which they are supposedly designed.

Tax policy should

ideally be neutral in its institutional impact -- unless the deliberate
decision is made that the tax policy should be used to bring about
institutional changes.

In that event, it is essential that such an

intent be fully recognized and the consequences weighed.

And it goes

without saying that the change should be in "the right direction” and
should be permitted to proceed in an evolutionary manner.