We e are in hearty support of S. 2417, having urged this premium adjustment for some years, during which time it has been three times passed by the House and once by the Senate. We hope that the committee will continue its former position and either report this as a separate bill or combine it with the amendments proposed to H. R. 2799. We were consulted on the amendments proposed to H. R. 2799, and they are all satisfactory and consistent with policies or legislative drafts that have been approved by our league.

We have no disposition nor desire to take the time of the committee to elaborately discuss matters which have been agreed upon under the leadership of Chairman Divers of the Home Loan Bank Board. I am accompanied by other officials and counsel of the league, and we will be glad to answer questions; and, if it will help the committee in its consideration of the premium question, I would like to have Mr. Russell, our counsel, who is more familiar with it than I am, take that up.

The CHAIRMAN. I should assume that this is one of those very happy occasions when every one of us agrees.

Mr. SMITH. Thank you, Mr. Chairman.

The CHAIRMAN. Mr. Russell, if I may now present him, will speak to us on this other matter.

STATEMENT OF HORACE RUSSELL, GENERAL COUNSEL, UNITED STATES SAVINGS AND LOAN LEAGUE, CHICAGO, ILL.

Mr. RUSSELL. Mr. Chairman, my name is Horace Russell. I practice law in Chicago, Ill., and, among other things, represent the United States Savings and Loan League.

As Mr. Smith has just stated, all of the bills before the committee have had the approval of the coordinating legislative committee. I shall therefore confine myself to section 4 of the Wolcott bill on premium reduction and the bill introduced by yourself and for Mr. Bricker and Mr. McGrath on the same subject.

First I want to call attention to the fact that this premium reduction question was in a piece of legislation which passed the House of Representatives May 31, 1940, and passed again in 1945 and again in 1947, and passed the Senate in 1946. The premium reduction was processed administratively to the Bureau of the Budget, came to the Congress in 1940 and again in 1946, with the statement from the then chairman of the Home Loan Bank Board or Commissioner of the Federal Home Loan Bank Administration, approving the premium reduction and stating that it was in accord with the program of the President.

In other words, this premium reduction question, which has been studied for many years, and was the subject of very extensive hearings before the House committee before it passed, in 1940, was studied not only by the Government but by the representatives of the savings and loan business and others concerned and had the approval of the administration. It was only in 1947 that the administration changed its position on the insurance premium reduction question. That is when there was a pocket veto of the bill which had unanimously passed the House and the Senate.

I want to point out to the committee that no private insurance company of any kind, under any public supervision, is permitted to

charge anything approaching the charge that is made in this case for premium. The information which was placed before the committee by other witnesses here indicates that the expenses in this case are only about 5 percent of income, and losses are only about 5 percent of income.

There has been allocated to reserves and retained in undivided profits to date for about 12 years 90 percent of the total income of this Insurance Corporation. There is no private insurance company under public regulation that I have ever heard of-and I have studied the business pretty carefully-that is permitted to charge anything approaching such a charge.

Now, there has not been submitted to the committee, I believe, anything undertaking to analyze depression experience of losses in this field of business. I want to give you this paragraph:

The loss experience of the share insurance fund of the Cooperative Central Bank of Massachusetts presents strong evidence that an insurance premium of one-eighth of 1 percent is unjustifiably high. In the record of this insurance fund these is a period of 12 years which includes the depression years of the 1920's as well as those of the post-depression. An analysis covering the years from 1934 through 1945 shows that this fund absorbed all the losses of the depression and that those losses through good years and bad amounted on an annual basis to only one-twentieth of 1 percent of the average share capital outstanding. This loss record would seem to indicate that an insurance premium of one-twelfth of 1 percent for the Federal Savings and Loan Insurance Corporation would meet all losses based upon the past depression experience and leave a very considerable margin for the accumulation of reserves. When insurance was instituted in Massachusetts, the cooperative banks had assets of more than $600,000,000 had been lending 80 percent of value from time immemorial (and the mutual savings banks with $2,000,000,000 in the State got most of the low percentage loans) and their reserves and undivided profits were 4 percent against the present 7.5 percent reserves and undivided profits of total association assets. It is clear that this one-twentieth of 1 percent loss ratio is a fair measure including a depression period and that it would be lower if spread over the longer period of a real estate cycle.

Now, to undertake to get to the committee on its merits the experience of business as a whole in the United States, I have made this analysis:

From 1920 to date, Mr. H. F. Cellarius, secretary of the United States Savings and Loan League, has reported and published the percent of loss to total resources of all savings and loan associations in the United States, as estimated by Federal and State authorities. These estimates reveal losses of 0.6299 in 1933, to no loss in 1945, and to date. The average losses to resources are approximately 0.125 percent, or one-eighth of 1 percent.

This period includes the long period from 1920 to 1935 when the great number of associations in Pennsylvania with about $1,000,000,000 of assets included substantial operation in the second mortgage field, the unregulated associations in Maryland, and numerous situations where regulation was nominal, and includes associations which operated without limit in the apartment house and commercial property field.

During most of this period, also, most associations paid out substantially all earnings as dividends and retained only nominal reserves estimated to be less than half present reserves and undivided profits. Also, during this period, associations were liquidated through receivership and the assets were sold on the auction block, which has always resulted in unnecessary and inordinate losses.

Insured institutions are a selected group of the best associations in the country. They operate under statutory and administrative law which confines them to investment in monthly amortized, first lien, home mortgage loans and government bonds, except that they are permitted to make very limited and restricted loans up to 15 percent of assets upon other improved property and in the case of a few State insured institutions, to invest in other securities eligible for savings banks. They are carefully examined and supervised by the United States They are required by law and regulation to make substantial allocations of earnings to reserves and at present, all insured associations have an average of approximately 7 percent of assets in reserves and undivided profits, which is more than the total capital cushion of capitalized banks or any type of insurance companies.

Furthermore, all insured institutions have the protection of the Federal Home Loan Bank system which provides temporary, seasonal, and long-term loans, thereby minimizing the danger of loss, and are protected by insurance of accounts, thereby largely eliminating fear, a frequent cause of loss to financial institutions.

Finally, in the case of insured institutions, the Federal Savings and Loan Insurance Corporation is in a position to liquidate assets in an orderly manner, thereby minimizing losses. Losses in those associations which have failed to date have averaged approximately 5 percent. This is in sharp contrast to the losses through receivership and by sales on the auction block when losses were frequently 50 percent or more of the assets involved.

Any fair analysis of losses in the savings and loan business, and of the operations of Federal Savings and Loan Insurance Corporation, will indicate that a premium of one-twelfth of 1 percent of total amount paid into insurable accounts, plus creditor obligations, is fully adequate to pay all expenses, all losses and to build adequate reserves. In addition, the statute authorizes the assessment of an additional annual premium if needed, and it is proposed to retain this provision for confidence and extraordinary financial strength and stability.

Mr. Chairman, I have a memorandum here which gives some of the statistics of the Insurance Corporation. Unless you have some questions about the insurance premium question, I would like to offer a word of comment on one other subject.

The CHAIRMAN. The only question I have is: You have your point of view, and, as I understand it, Mr. Divers and Mr. Adams have another point of view?

Mr. RUSSELL. Yes, sir.

The CHAIRMAN. And you are offering this evidence today on the proposition in good faith, and they have presented us with their point of view, and the committee will have to decide.

Mr. RUSSELL. Yes, Mr. Chairman.

It was

You see, this premium was first a quarter of 1 percent. reduced, with administration approval, to an eighth of 1 percent. The administration then, for a long period of years, advocated a reduction to a twelth of 1 percent, up until 1946.

The CHAIRMAN. What caused them to have a change of heart? Mr. RUSSELL. Well, Mr. Fahey got older. I don't know why he changed. Perhaps these gentlemen are too young in the savings and loan business to know better yet.

The CHAIRMAN. That is a pretty succinct statement. I think they are old enough to vote and old enough to know something. We have great confidence in them.

Mr. RUSSELL. The other question I have, Mr. Chairman, is as a result of some questions asked this morning of some of the witnesses here with respect to the proposal in the bill to provide Treasury support to $1,000,000,000 for the Home Loan Bank System. The question was, in effect: "How do you tell how much you need?” I want to point out that the Bank System has some 3,700 members who hold home mortgages of roughly about $8,000,000,000. Those member institutions have a borrowing capacity at the home loan banks up to 50 percent of their share capital; in other words, a borrowing capacity of between 3 and 4 billion dollars. Now, the suggestion here that the Bank System have recourse to the Treasury up to a billion dollars, in view of the borrowing capacity of the members up to 3 or 4 billion dollars, does not appear to be excessive. Indeed, if it were used in full, even, it would mean, assuming that all the members of the Bank System used their credit, that they could only borrow up to about 10 to 15 percent of their mortgage assets.

So

I think it is reasonable to determine whether the billion dollars is needed or not.

Likewise, in connection with the Insurance Corporation, a similar question was asked. The bill provides for $750,000,000 of Treasury support for the Insurance Corporation. In that case, the Insurance Corporation's insured liability is about $8,000,000,000 now, between 7 and 8 billion dollars. The proposal has Treasury support only up to about 10 percent of its insured liabilities. That is, assuming that 10 percent of its insured risks were to fall into its lap, it would need substantially all of its capital resources, plus the Treasury support that is here offered; and we submit that a 10 or 15 percent need is a fair probability. And of course, these figures have been made definite in these drafts, in spite of the growth of the business.

Mr. Divers pointed out this morning before the committee that some consideration had been given to that; that the liability is gradually increasing.

And this final word on the capital requirement question: I pointed out to you that the FHA has Treasury support without limit. Farm credit has Treasury support up to $2,000,000,000. The FDIC has Treasury support comparable to what is suggested here. Indeed, it has been the practice of the Government when it creates instrumentalities of this kind of provide adequate support, primarily to stimulate confidence.

We don't think either one of these will, probably, ever have to use the Treasury support that is made available, but it will add greatly to public confidence and thereby stimulate a thrift program; which is, of course, the first thing we are interested in. The second thing is home ownership. And our people will proceed in the financing of homes, on long terms and favorable terms, more readily if they have confidence that the banking and insurance system will function in the event of stormy financial weather.

That is all that I have, Mr. Chairman, unless you have some questions.

The CHAIRMAN. Thank you very much.

75613-48- -6

Mr. Adams and Mr. Divers, I see you are both here. This is a rather democratic process. You have made your statement in this

bill, have you?

Mr. DIVERS. Yes, sir; we have.

The CHAIRMAN. And while you are here, what progress if any has been made in taking up the slack on the belated examinations that were in evidence here a while ago when you came before us?

Mr. DIVERS. The bill that you suggested, Senator, was reported out of your committee yesterday, for which we are very, very grateful.

The CHAIRMAN. You believe that will take care of the situation? Mr. DIVERS. We do, sir. It has had the hearty support of both of the leagues here today, and we are very grateful for your help on that. The CHAIRMAN. Thank you.

Are there any other witnesses? If not, this concludes the hearings on these two bills. The committee will act shortly.

(Thereupon, at 3:10 p. m. the hearings were adjourned.)