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Supplementary Material
to
Joint Answers Prepared Under the Direction of a Special Committee
Of Federal Reserve Bank Presidents
submitted byHugh Leach, President, Federal Reserve Bank of Richmond
to the
Subcommittee on General Credit Control and Debt Management




of the
Joint Committee on the Economic Report
82nd Congress

November 1951

CONTENTS

Page Mo.
Copy of Letter of Transmittal

1

Supplement to Joint Answer to Question 6

2

Comment on Joint Answer to Question 14

4

Comment on Joint Answer to Question 20

6

Comment on Joint Answers to Questions 30, 31

7

Complete Answer to Question 3U

8

Complete Answer to Question 35

15

Complete Answer to Question 36

27




F E D E R A L R E S E R V E B A N K OF R IC H M O N D
R

ic h m o n d

13,

V

ir g in ia

November 13, 1951

Honorable Wright Patman, Chairman,
Subcommittee on General Credit
Control and Debt Management,
Joint Committee on the Economic Report,
82nd Congress,
Congress of the United States,
Washington, D. C.
My dear Mr. Patman:
With your letter to me of October 12, 1951, you enclosed a list of
questions on general credit control and debt management and asked for answers by
November 15.
In view of the comprehensive nature of many of the questions and the
limited time available, it was thought advisable by the Presidents of the Federal
Reserve Banks to have joint answers prepared under the direction of a special com­
mittee of Presidents. This was in accord with the note at the top of the list of
questions.
I am in substantial agreement with the answers prepared by the special
committee and adopt them as my answers with the exceptions and comments noted be­
low.
With respect to question 6, I add a supplement to describe a usage
that is peculiar to the Fifth Federal Reserve District.
1 submit brief comments on certain aspects of the joint answers to
questions 14, 20, 30, and 31.
Inasmuch as questions 34, 35> and 36 apply to district rather than
country-wide conditions, I make complete answers to each of them rather than
adopt the material prepared under the direction of the special committee as
partial answers to questions 35 and 36.
It is a pleasure to submit herewith two booklets - one containing the
joint answers prepared under the direction of a special committee of Federal Reserve
Bank Presidents and the other the supplementary material referred to above.




Sincerely yours,

Hugh Leach,
President.

2
Question 6
State the qualifications required for election as class A and
class B directors of the Federal Reserve banks, and the method o f .
electing such directors. Include in your description both qualifi­
cations and procedures prescribed by statute and those established
by customary usage, distinguishing between them when necessary*
Supplement to Joint Answer
There is no distinction between the qualifications required for
election as class A and class B directors prescribed by statute and those
established by customary usage in the Fifth Federal Reserve District.
However, a procedure peculiar to the district is followed in the nomina­
tion and election of such directors by the three general groups of member
banks prescribed ty statute.
The Fifth Federal Reserve District is composed of the States of
Maryland, Virginia, North Carolina, and South Carolina, all of Vest
Virginia except six counties in the northern panhandle, and the District
of Columbia.

Since the member banks in the district had to elect six

directors prior to the opening of the bank, they arranged to hold a con­
ference in Richmond of representative bankers from these six geographical
divisions on May 18, 1914, approximately six months before the bank was
opened.

Representatives of 210 member banks were present at the conference,

at which it was decided to appoint a committee of eighteen (three from each
of the six geographical divisions) to consider the question of nominations
and the adoption of some method to insure a satisfactory distribution of
representation among the six divisions.

This committee recommended that

one director be elected from each of the six geographical divisions and
that the nominees of Group 1 banks be a class A director from Maryland
and a class B director from Virginia; of Group 2 banks, a class A director




3

from North Carolina and a class B director from South Carolina; and of
Group 3 banks, a class A director from West Virginia and a class 6
director from the District of Columbia.
The recommendations of the committee were unanimously adopted by
the conference and it was ordered that the action of the conference be
formally reported to all member banks in the district.

The agreement

thus arrived at voluntarily by member banks of the district before the
Federal Reserve Bank was opened has been adhered to continuously from
the beginning.




A
Question 1A
Describe the mechanism by vhich a general tightening or easing
of credit, and the changes in interest rates vhich may result, is ex­
pected to counteract inflation or deflation. Discuss the impact on
borrowers and lenders in both the short-term and long-term credit
markets and on spending and savings. Indicate the effect on each of
the broad categories of spending entering into gross national product.
What are the (actual or potential) capital losses or gains that would
be brought about by changes in interest rates? To what extent is the
effectiveness of a program of credit restraint affected by or dependent
upon expectations with respect to subsequent changes in interest rates?
Distinguish in your discussion between small changes in rates and large
changes in rates.
Comment on Joint Answer
As indicated in the joint answer, open market operations can be the
most flexible and effective instrument of general credit control for use in
tightening or easing bank credit.

However, it should not be overlooked that

the other quantitative credit control instruments - reserve requirements and
discount rates - are an integral part of System policy.

Even though changes

in reserve requirements are admittedly a clumsy tool to be used sparingly
and the effect of discount rate changes is now largely psychological, these
instruments can be of considerable value under certain circumstances.
It is true, of course, that an increase in requirements at a time when
member banks have few loans and heavy investments in Government securities
selling above cost will have little restraining effect on most banks beyond
reducing potential expansion on a given amount of excess reserves, because
they can sell securities (at a profit) to the Federal Reserve System.

However,

the situation would be quite different if the volume of outstanding loans was
so large that many member banks would find it difficult or impossible to adjust
their reserve positions to additional requirements by offsetting sales of
Government securities.

Under such conditions an increase in reserve requirements

would undoubtedly be restrictive.




The restrictive effect would be increased

5
at times when banks could sell government securities only at a loss.
Granting the current effect of discount rate changes as largely
"psychological", it has been clearly demonstrated in the postwar period
that discount rate increases do have an immediate effect (apart from open
market operations) on the credit climate and short-term money rates.




6
Question 20
What do you believe to be the role of bank examination and super­
vision in furthering the objectives of the Employment Act?
Comment on Joint Answer
The first of the three objectives of bank supervision given on page 76
of the joint answer - "To see that the public is provided with adequate bank­
ing services'1 - is interpreted as meaning that supervisory authorities give
considerable weight to adequacy and availability of banking services when
considering applications for permission to open new banks or to establish
additional branches of existing banks.

This should not be considered as

implying that supervisory authorities do or should look upon themselves as
"prime movers" in the organization of new banks or branches.




7
Question 30
Discuss the advantages and disadvantages of requiring addi­
tional reserves vhich might be held in vhole or in part in the
fora of Government securities. Illustrate vith a specific plan or
plans.
Question 31
Discuss the advantages and disadvantages of requiring during
the national defense emergency a supplementary reserve to be main­
tained against increases in either loans and investments or deposits.
Illustrate with a specific plan or plans.
Comment on Joint Answers
While the inequities and administrative and other difficulties inherent
in these proposals are fully recognized, it is conceivable that a situation
might arise in which consideration of individual equities and administrative
feasibility should be subordinated to the immediate national interest.

If a

situation developed in which existing general and selective controls proved
inadequate, it would be necessary to explore further these and other plans
tailored to the need of the specific emergency, despite the important short­
comings of such proposals as have been suggested.

Just as we feel that addi­

tional selective credit controls are undesirable but might have to be con­
sidered under seme circumstances, we would not rule out the possible need for
exploring other types of reserve requirements.




8

Question 3A
Will you please subnit a memorandum discussing the adequacy
of banking facilities in your District? For this purpose, take
as your standard of adequacy the ideal of bringing banking faci­
lities within convenient reach of all persons having need of them,
and, so far as practicable, giving all persons the opportunity of
choosing between two or more competing banks. Distinguish between
deposit facilities and loan facilities.
The Fifth Federal Reserve District, comprised of Maryland, District
of Columbia, Virginia, West Virginia (excluding the six-county panhandle),
and North and South Carolina, has 7.9 per cent of the banks and branches
in the United States, 5 per cent of the land area of the continental United
States, 9*6 per cent of the population, and 7.7 per cent of the nation's
income payments to individuals (1950).

The average density of population

per square mile in the Fifth District is 96*4- as compared to 50.6 for the
nation.

The relatively high figure for the District is in large part a

consequence of the large population concentrations in three metropolitan
areas:

Baltimore, the District of Columbia, and Hampton Roads.

These

three areas account for almost one-fourth of the total population of the
Fifth District.
Almost one-fourth of the 319 counties in the District, arbitrarily
counting the District of Columbia as a county, have one banking office for
each 5,000 persons or less.

This is a low ratio when compared with 13,567

for the city of Baltimore, 9> 596 for the city of Richmond, and 8,378 for
the city of Charlotte.
7,000.




The national average is, incidentally, just over

9

Four out of five counties in the Fifth District have two or more
banks and branches.

In 62 per cent of the counties there is one banking

office for each 10,000 population or less.

Thirty-one per cent of the

counties have a ratio of population to number of banks and branches be­
tween 10,000 and 20,000, the majority of which are found in North and
South Carolina.

Only 16 counties in the entire District have only one

banking office per 20,000 population or more and only five counties out
of the total of 319 have no banks.
It would appear that, as indicated on the accompanying maps, banking
facilities are adequately distributed throughout most of the District to
meet the needs of individuals and business enterprises.

Similarly, there

is throughout most of the five-state District reasonable opportunity for
depositors and borrowers to choose between two or more banks.
In some instances misleading impressions may arise from the pre­
sentation of data by county.

Frequently people living in counties with

high ratios of population to banking offices have access to banking faci­
lities across county lines.

This is particularly true when we consider

contiguous counties comprising an area of homogeneous economic character­
istics.
Less than 2 per cent of the counties embraced in the Fifth Federal
Reserve District are "no bank" counties— New Kent, Charles City, King and
Queen, and Cumberland counties in Virginia, and Camden County, North
Carolina.

Despite the absence of within-county banking facilities, analysis

of these counties indicates that competing facilities are reasonably con­
venient, (for the purpose of this memorandum, facilities within 20 miles are




10

regarded as reasonably convenient) across county lines to depositors and
borrowers throughout each of the five counties.

Supporting this con­

clusion are the following characteristics common to all five counties:
(1) sparse population; (2) no urban areas; (3) virtually no manufactur­
ing activity; (4.) low per capita income; (5) "shoe-string" shape (maxi­
mum width 12 miles); and (6) reasonable proximity to competing banking
facilities in adjoining counties.
There are 54 one-bank counties in the Fifth District, but only 13 of
than do not have competing banking facilities within reasonably convenient
reach of all parts of the counties.

These counties are Floyd in Virginia;

Calhoun, Morgan, Pendleton and Webster in West Virginia; Alleghany, Currituck,
Dare, Graham, Pender, Tyrrell, and Washington in North Carolina; and Mc­
Cormick in South Carolina.
In eveiy one of the 13 counties there is a low density of population
per square mile (average— 26.2; range 12.7-39.2), and every one of the
comities has a relatively low ratio of population to banking offices
(average 9»997; range 5*048-18,423).

In the majority of these cases it is

extremely doubtful that the sparse population and slender economic resources
could support the additional banking facilities necessary to put all portions
of the counties within convenient reach of more than one banking office.

Only

relatively small areas within each county are without reasonably convenient
competing banking facilities, and in two cases the deficiency is corrected by
crossing state lines.

Manufacturing activity is nil or insignificant in every

county; the average number of Census-classified manufacturing establishments




11
for the group Is 12, with a range from 2 to 25.
There are in the Fifth District only 16 counties (5 per cent of the
total) with ratios of population to banking offices of 20,000 or over.
In most of these cases, however, banking facilities appear reasonably
adequate and individuals and businesses do have access to competing banks.
The basic factors considered in arriving at this conclusion were availa­
bility of banking facilities in adjacent counties, economic environment,
urban concentrations, and supplementary bank-type services such as those
provided by large coal companies.
Three of these counties— Buchanan in Virginia, Logan in Vest Virginia,
and Henderson in North Carolina— do not appear to provide individuals and
businesses with a choice between two or more competing banks.

Based on

population alone, Logan County in Vest Virginia, with one bank and a
population of 77,000, does not appear to have adequate banking facilities.
Yet, rugged topography, scattered population, and coal mining emphasis,
with company stores and credit, seem to give a reasonably common-sense
answer to the possible queiy as to why there are no more banks.
Note on Deposit— Lending Facilities
The appended map showing location of Fifth District banks includes
23 depositories in South Carolina.

These depositories accept demand de­

posits, but may only make loans to the extent of their surplus or as
brokers for individual depositors.
Also included are all tellers' windows licensed as branches.




These

12
may or may not make loans though all accept deposits.

As a general rule,

they also accept payment on loans and receive credit applications for
processing at the head office, so that in effect loan facilities are
available at many of these tellers' windows.

To our knowledge, there

is only one branch in the District which handles loans but does not
accept deposits; this branch is included on the map.
Tellers' windows not licensed as branches and deposit facilities
at military installations (unless licensed as branches) are not in­
cluded . Data indicating the number of such facilities and tellers'
windows are not available.







-13-

FIFTH FEDERAL RESERVE DISTRICT
RATIO OF POPULATION TO BANKS AND BRANCHES




-H -

15
Question 35
On the basis of information available about your dis­
trict, discuss the changes which have occurred during the last
25 years in the ease or difficulty with which small-business
men have been able to raise capital or to borrow. What in your
opinion are the reasons for such changes as you find to have
occurred? Do you believe that a more liberal supply of capital
and credit to small business would contribute to the diffusion
of economic power and to the dynamic character of the economy?
What steps could be taken to bring about a more liberal supply
of capital and credit to small business? Do you believe that
any of these steps would be desirable? Distinguish between the
longer-term aspects of the problem and those of particular
importance today during the current national defense emergency.
In considering the question of changes during the last 25 years in
the capital or credit position of small business in the Fifth Federal
Reserve District, it should be noted that adequate information is not
available to provide a categorical answer.

However, in general terms,

(a) short- and long-term credit appear to be more readily available due
principally to the leadership of commercial banks in developing new lend­
ing practices and techniques, but in part reflecting improvements in smallbusiness accounting, inventory, and other operating policies which have
improved their credit position; and (b) equity capital may be less readily
accessible to small businesses, possibly because of changes in the tax
structure which have adversely affected individual venture capital and
retained earnings as sources of funds.
With more specific reference to the Fifth District, the following
changes relating to the ease or difficulty with which small-business men
are able to raise capital or to borrow have occurred:




16
1.

There has been an absolute and relative growth in the
financial resources of this area, reflected in such basic
factors as bank reserves and life insurance company
assets*

2.

Batiks and other financial institutions in this area have
tended increasingly to adopt new and more liberal lending
techniques which in turn adapt these resources more suc­
cessfully to the credit needs of small business.

3.

The Federal Government has in some instances supplemented
existing facilities for longer-term credit to small busi­
ness in this area through credit guarantees and direct
loans by the Federal Reserve Banks and the Reconstruction
Finance Corporation and other governmental lending agencies.

4-. Community industrial development corporations have merged
in scattered areas throughout the District, though their
activity has to date been limited.
Commercial bank resources constitute one of the major sources of
short-term working capital funds and, increasingly, of intermediate-tem
capital funds of small business.

In this connection, bank reserves are

a significant measure of the credit potential of any given region since
regionally, as well as nationally, bank reserves control the expansion of
earning assets by the commercial banking system.

Data on bank reserves

reveal an absolute and relative growth in the Fifth Federal Reserve Dis­
trict during the past 25 years.




17
Fifth District Member Bank Reserves as Per Cent of 0. S.
Selected Dates, 1925-1951
Amount
(* million)
End of year 1925
1929 .
1932
1939
1945
1950
March 28
1951
June 30
1951

68.0
64.7
52.0
283.0
727.2
695.0
748.0
811.3

Per Cent
of U. S.
3.07
2.75
2.07
2.43
4.57
A.05
3.93
4.26

Similarly, life Insurance companies In this area have experienced a
sharp growth in assets over the past 25 years; a recent study on the Eco­
nomic Resources and Policies of the South by Calvin B. Hoover and B. U.
Ratchford reports:
Although southern companies are relatively quite small,
they had a considerably greater growth between 1929 and 1946
than did nonsouthern companies. Southern companies increased
their admitted assets by 308 per cent against 172 per cent
for nonsouthern companies; for insurance in force the figures
were 153 per cent and 57 per cent; and for premium income,
southern companies were ahead by 247 per cent to 57 per cent.
In the postwar period, commercial banks in the Fifth District have
been actively engaged in using their expanded financial resources to meet
the short- and intermediate-term credit needs of small business.

This is

reflected in the postwar growth in Fifth District bank loans (both abso­
lutely and relatively) and, more particularly, in the so-called "business
loans," including term loans.

It is generally accepted that smaller busi­

ness concerns account for a substantial proportion of such loans in this
District.
From June 30, 194-5* to June 30, 1951, total loans of all active banks
in the District almost tripled and rose from 3.9 per cent to A.7 per cent




18
of the U. S. total.

"Business loans" (commercial and industrial) of Dis­

trict member banks in this same period expanded even faster; on June 30,
1945, they accounted for 20 per cent of the $1.1 billion total loans of all
active banks in the District; by June 30, 1951» they accounted for 25 per
cent of total loans of $3.0 billion.

Although comparative data are not

available, a special survey of business loans of Fifth District member
banks as of November 20, 1946, revealed that more than 85 per cent of the
business borrowers on that date had total assets of less than $250,000
and accounted for almost 45 per cent of the total commercial and indus­
trial loans outstanding on that date.

(See attached Table 1.)

This same

survey revealed that nearly 11,000 loans, or 26 per cent of the total, were
outstanding to businesses f o m e d since 1942.

These loans were made prin­

cipally to unincorporated businesses with assets of less than $250,000 and
amounted to $65 million, or 13 per cent of the total business loans.

(See

attached Table 2.)
This recent absolute and relative growth in the extension of business
credit (and, as indicated, mainly small-business credit) reflects the
increased effort of financial institutions in this area to adapt their
resources to the needs of small business.

Developments in banks' lending

practices in recent years, including the increased use of term loans,
field warehouse loans, loans secured by accounts receivable or chattel
mortgages, and consumer installment loans, all appear to represent a bet­
ter adaptation of short- and intermediate-term credit facilities to the
needs of small business.

Furthermore, increased availability of accounts

receivable and consumer installment financing has enabled the small-business
man to shift the financing of his customers to the banks and, therefore, to
utilize more fully his own capital and credit resources.




19
Evidence of these developments In the Fifth District may be found in
the previously noted survey (November 20, 1946) of Fifth District member
bank loans which revealed that term loans (defined as loans of more than
one-year maturity) amounted to more than 20 per cent of total commercial
and industrial loans outstanding on that date.

Loans of longer than five-

year maturity constituted nearly 10 per cent of total commercial and indus­
trial loans outstanding on that date.

(See attached Table 3.)

Additional evidence as to the efforts being made by financing insti­
tutions in this area to develop and utilize a wide range of different
financing arrangements adapted to the special needs of prospective business
borrowers may be found in the results of last year1s poll of Virginia banks
by the Advisory Council on the Virginia Econony.

In response to the ques­

tion, "Has your bank ever handled business loans of the following types?",
answers indicated a very high proportion of banks making term loans and
actually utilizing a large number of different financing arrangements as
follows.




20
Types of Financing Offered Virginia Business by Virginia Banks

Has your bank ever handled business loans of the
following types?
a. Assignment of accounts receivable?
b. Pledge of notes receivable?
c. Public varehouse receipts?
d. Field varehouse receipts?
e. Floor plan or trust receipts?
f. Factor's liens?
g- Unsecured term loans under special loan agree­
ments?
h. Term loans against plant liens or other security?
i. Liens on machinery, motor vehicles, or other
equipment?
j. Assignment of contracts?
k. Assignment of property leases?
1. Assignment of life insurance?
m. Monthly or other regular installment payment
loans?
n. Construction advances on individual or group
housing projects?
o. Subordination of existing debts owing to prin­
cipals or others?
P* Assignment of Government contracts under Assign­
ment of Claims Act of 1940?
q* Participations with R.F.C.?
r. Participations with Federal Reserve Bank?
8 • Loans with final maturities as long as:
Two years?
Five years?
Ten years?

Per cent of total
banks reporting
No
Yes No answer
42
70
37
17
41
5

57
29
61
81
58
91

1
1
2
2
1
4

50 48
48 50

2
2

1
99
55 44
39 60
96
3

0
1
1
1

98

1

1

70

30

0

20

77

3

17
37
8

81
62
88

2
1
4

80
71
65

9
18
28

U
11
7

On balance, it appears that commercial banks in this area, as else­
where, have taken the initiative in developing different forns of lending
vhich have enabled small-business men to finance over longer periods neces­
sary purchases of facilities, equipment, and machinery, and to obtain
credit on the basis of assets formerly considered unacceptable as collateral.
These lending activities have been supplemented by the direct lending and
guaranteeing activities of the Federal Government and the Federal Reserve
Banks.

The record of 13b loans in this District indicates that in large




21
part these loans and commitments have been used to finance small, rather
than large, business.

Likewise, a large proportion of V-loans currently

being made may be considered as relatively "small business."

(See attached

Table U.)
For the most part, then, the credit needs of small business are being
handled effectively by existing financial institutions and agencies.
Attempting to expand this over-all supply of credit would be particularly
inappropriate under the current emergency; the expanding business credit
is in fact one of the major factors contributing to underlying inflationary
pressures at the present time.

The Federal Reserve Banks and commercial

banks working together on the Voluntary Credit Restraint Program are trying
to curb extensions of business credit, especially to new businesses not
contributing commensurately to the defense effort.
The equity capital position of small business is not as clear-cut.
Claims of capital shortages undoubtedly have exaggerated the role of "cap­
ital" in the success or failure of new business.

The management factor

is probably most important, and inability to obtain capital or use it
effectively may simply be a reflection on management.

From the demand-

for-funds side, another factor which may superficially indicate a shortage
of capital is the fact that small-business men traditionally do not like to
give up the control necessarily incident to obtaining additional capital.
It may be that existing sources of funds do not meet all of the
demands of deserving enterprisers.

But, again, where shortages of capital

actually do exist, our present system of taxation may be an important
deterrent to availability of funds.

Significantly, under present personal

income tax rates, net yields do not provide sufficient incentive for risk




22
investment by those individuals who, in terns of income, are normally best
able to assume such risks.

Also, corporate tax laws which do not dis­

tinguish sufficiently between small newly-established enterprises and large
established concerns may reduce the possible use of retained earnings,
which in the past has been one of the major sources of funds for growing
enterprises.
Within the last 25 years, a number of community industrial develop­
ment corporations have been formed in the Fifth District for the purposes
of raising money to build new plants to ba lea sed to individual concerns
desiring to locate in the area, providing space in older plants, making
loans, providing capital, and making grants to encourage a business to
erect a plant in the vicinity.

One of the oldest and most frequently

cited examples of the successful community development corporation is the
Industrial Corporation of Baltimore City, originally organized in 1915 to
facilitate the making of investigations and appraisals of applicant enter­
prises, the maintenance of engineering and related facilities for counsel­
ing, and arranging financing from outside sources.

Community industrial

financing plans of various types have been adopted by a number of other
localities in this District, but the aggregate amount of capital provided
to small business to date has not been significant.
Recognizing that to the extent additional capital can be made avail­
able to meritorious small business,this would in turn contribute to the
alreacfy dynamic character of the econony; nevertheless, we do not believe
that the establishment of additional governmental agencies on a national
level to provide capital or loan guarantees for small business is either
necessary or desirable.




It is our view that such shortages of capital as

23
may exist are primarily local problems and can best be dealt with locally
rather than nationally.

Local individuals and institutions are better

acquainted with the persons and problems involved and are in a better
position to consider the merits of these individual cases.

Across-the-

board financial aid by Government subsidy could lead to uneconomic develop­
ment of new businesses with consequent damage to sound enterprises and to
normal competition which is the most dynamic force in our economy.
To whatever extent there can be shown a real need for additional
facilities to supply capital to promising enterprises, this need should
be met, first of all, by basic changes in our tax structure— changes
designed to reduce or eliminate obstacles to private financing.

Revision

of tax laws to encourage individual risk investment would go far towards
solving any problem of capital shortage.

In addition, further preferential

treatment to small and newly-established enterprises could be considered.
If further need should then be demonstrated, assistance by public and
semi-public institutions to privately-managed local or regional institu­
tions organized to seek out sound opportunities for the employment of
capital in small enterprises would be far preferable to direct Government
financing.




24

Table 1
Commercial and Industrial Loans by Size of Borrower
Member Banks, Fifth Federal Reserve District
Estimated— November 20, 1946
Total assets
of borrowers
(ft thousands)

Number
of
loans

Per cent
of total
number

Amount of
loans
(ft thousands)

Per cent
of total
amount

Over 5,000
750 - 5,000
250 - 750
50 - 250
Under 50
Unclassified
All borrowers

655
1,269
3,056
12,013

1.5
3.0
7.2
28.3

17.4
17.8
18.6

814
42,497

100.0

86,619
88,532
92,158
144,300
74,418
10.867
496,894

24,690

58.1
1-9

29.0
15.0
2.2
100.0

Table 2
Commercial and Industrial Loans to Firms Organized Since 1942
Member Banks, Fifth Federal Reserve District
Estimated— November 20, 1946
Total assets
of borrowers
(ft thousands)
Over 5,000
750 - 5,000
250 - 750
50-250
Under 50
Unclassified
All borrowers




Amount of loans
(ft thousands)
Corporate Other
Total
350
6,948

8,206

23,071
25,385
711
64,671

350

6,506
5,626

7,788
5,819

??2

26,641

442
2,580
15,283
19,566
159
38,030

Total

Number of loans
Corporate Other

14
51

14
43
80

1,390
9,079
81
10,817

1,129

202

- __r

8
122

418

972
7,950

12
1,696

9,121

69

25

Table 3
Commercial and Industrial Loans by Maturities
Member Banks, Fifth Federal Reserve District
Estimated— November 20, 1946
Maturity
Demand
Less than 90 days
90 days to 6 months
6 months 1 day to 9 months
9 months 1 day to 1 year
1 year 1 day to 2 years
2 years 1 day to 3 years
3 years 1 day to U years
U years 1 day to 5 years
5 years 1 day to 10 years
Over 10 years
Total




Amount
(# millions)

Per "cent
of total

87.1
118.8
136.0
26.6
12.2
22.6
15.2
9.2
21.2
45.0

17.5
23.9
27.4
5.4
2.4
4.6
3.1
1.8
4.3
9.0
0.6
100.0

2.9

496.9




26

Table 4
Percentage Distribution of V-Loans
Federal Reserve Bank of Richmond
September 1950 to October 1951
Size of Guaranteed Loans Authorized
Dollar amount
of loans

Per cent of
total number
of loans

Under 25,000
25.000 to 49,999
50.000 to 99,999
100.000 to 249,999
250.000 to 499,999
500.000 to 999,999
1.000.000 to 4,999,999
5.000.000 to 9,999,999
10.000.000 and over

22.9
17.1
8.6
17.1
20.0

5.7
8.6
0.0
0.0
100.0

Siae of Borrower Receiving Loans
Assets of
borrowers
Under 25,000
25.000 to 49,999
50.000 to 99,999
100.000 to 249,999
250.000 to 499,999
500.000 to 999,999
1.000.000 to 9,999,999
10.000.000 to 49,999,999
50.000.000 and over

Per cent of
total number
of loans
0.0
17.1
14.3
34.3
8.6
. 14-3
11.4
0.0
0.0
100.0

27
Question 36
Discuss the effects of bank examinations on the lending policies
of banks in your district, particularly as they apply to loans to
small-business men. Distinguish if necessary between examinations by
different authorities.
It might be well to preface the answer to this question by mentioning
the close relationship between supervisory authorities and bankers in the
development of credit policies and techniques.

The development of new types

of loan outlets, the changing needs of commerce and industry, and constant
study by lending officers have given rise to many changes in lending policies
during the past 15-20 years.

As a consequence, many loans are made now

that in earlier times would have been unsatisfactory or even unsound.

It

should be emphasized that new credit developments have evolved without re­
stricting credit to any class of borrower and without any line of distinction
being drawn in bank examinations between loans to large and small businesses
or between one type of loan and another.

In the development of these im­

provements bankers and examiners have learned much from each other, with
the latter serving also as a medium for the dissemination— particularly to
smaller banks— of new and improved methods of credit extension.
If specific faulty lending practices are observed by examiners, an
effort is made to influence the bank's lending policies by suggesting that
it be more analytical of credits applied for and granted and adopt sounder
credit administrative policies.

Some of the principal practices urged are

the following:
1.

The bank should obtain borrowers' agreements to repayments prior
to credit extensions.

2.

As a general policy, loans should be paid seasonally, at the con­
clusion of the specific need, or reduced regularly at intervals
designated by the particular circumstances.




28

3.

Detailed information should be obtained that will disclose the
source, dependability, and adequacy of borrowers' funds available
for debt retirement.
Risks inherent in concentrations of credit extended to the same or
related interests should be weighed carefully; such concentrations
should be avoided to the extent deemed appropriate after thorough
analysis.

Experience shows that capable bankers obtain necessary credit data
from small as well as large enterprises and that failure to secure such
information is a consequence of the attitude of the bank management rather
than non-availability of the information.

It is generally true, however,

that large businesses maintain more complete records of operations and are
better equipped to furnish full credit information than are small concerns.
Examiners' appraisals of loans made by the great majority of member banks
in the Fifth District do not disclose a significant number characterized ty
an unwarranted degree of risk.

Well-calculated risks are taken readily, ad­

ministered carefully, and in such circumstances the banks' exposure is not
considered unduly high.

Where this is the case there is little or no need

for conscious influencing of lending policies, end examinations of such
banks have no particular effect in this respect.

In the absence of ex­

aminations of such banks, however, it is probable that legal regulations
would not be observed as carefully as they now are and that competitive
pressures might result in unsound credit policies*
In a relatively small number of banks, examinations have disclosed
substantial amounts of loans involving a very high degree of risk.

Here

bank examination and supervision do have a direct impact on lending policies
in pointing out unsound loans and in suggesting desirable changes in credit
pollcy.

Frequently loans regarded as unsatisfactory would he proper and

sound if made on suitable bases and terms.

It is the purpose of bank exami­

nation and supervision to promote lending policies that will serve best
the interests of both borrowers and lenders.



29
The examiner's principal concern is the quality of individual loans,
but there are times when he must question the aggregate loans of a bank in
relation to prospective demand from depositors and the capital protection
available.

Instances of this sort are relatively few and ordinarily rise

in banks whose portfolios include a high volume of substandard credits.
In such cases, there is frequently an excessive risk in relation to capital
protection, a general lack of flexibility in asset distribution, and a
consequent danger of serious loss.

These conditions are usually found in

small banks whose management is not as alert, experienced, or as capable
as desired.

It is the responsibility of examinations and supervision to

encourage such banks to pursue sound lending policies, to reduce the ex­
posure resulting from unsound credits, and to gear the total loan volume
to the ability of the bank to assume normal risks and maintain a sound and
flexible asset position.
Ho supervisory authority with whom we have contact criticizes or dis­
courages a small loan or a loan to a small-business man per se.

In fact,

these authorities prefer a wide distribution of loans to concentrations of
credit to a few borrowers or to a limited number of industries.
We have not observed any differences in the practices of the various
examining authorities with respect to loans to small business.