Senator BROWN. Before you get into that, I should like to read to you what the Treasury says, so that you can answer it:

Subsection (a) of section 13 would amend section 404 of the National Housing Act, as amended, to provide for a reduction in the annual insurance premium rate of the Federal Savings and Loan Insurance Corporation from one-eighth of 1 percent to one-twelfth of 1 percent, effective as of July 1, 1940. The Federal Savings and Loan Insurance Corporation was organized in 1934, and an analysis of the reserve it has accumulated from insurance premiums since organization would not appear to indicate that the present premium rate is excessive.

I think I raised this point the other day.

It is true that the Federal Deposit Insurance Corporation levies a premium of one-twelfth of 1 percent in connection with its insurance of bank deposits, but the risk is substantially less than that encountered by the Federal Savings and Loan Insurance Corporation. In the first place, banks are required by law to carry considerably larger reserves than are customarily carried by building and loan associations. Building and loan associations seldom maintain substantial reserves in cash, and customarily carry only a small amount of liquid securities and a small portfolio of Government securities.

He says

In the second place, the premium base in the case of insured banks, as a class, is much higher in relation to the aggregate amount of insurance in force than is the case with building and loan associations. Stated in other words, banks have a much larger proportion of uninsured funds on which they pay premiums than do building and loan associations.

In other words, all the deposits in the banks are not insured, while the basis for calculating the rate of one-twelfth of 1 percent is all deposits. It seems to me that those are rather potent arguments.

I should like to have you tell us what you have to say about that. Mr. BODFISH. Mr. Chairman, back when I was a college professor, I once made a talk in which I quoted Elbert Hubbard, who said that the trouble with college professors is that they know so many things which are not so.

I feel that way about many things said by the Treasury. In the first place, if they will take out their lead pencils, Mr. Chairman, and do a little figuring, they will find that we have about three or four times the reserves in our F. S. and L. I. C. than they have in the F. D. I. C. Our reserves and capital are about $6.50 per $1 of insured liability, while the F. D. I. C. has capital and reserves of approximately $2 per $100 of insured liability. So, in relation to insurance liability we have a very favorable comparison. Stated another way, the F. S. & L. I. C. has approximately $15.60 of risk per $100 of capital in reserves while the F. D. I. C. has over $48. I do not believe the amounts of cash or even Government securities carried by banks are very important in comparison for the reason that institutions in difficulty, or clearly insolvent, do not usually have cash or Government securities. There may be something to the point that they should not be asked to pay the insurance premium on such resources but that same subtraction could be applied as regards our institutions since we have cash ranging anywhere from 3 to 10 percent of resources, some Government securities, considerable Federal Home Loan Bank stock, and the like. I attach for the information of the committee a Confidential Memorandum of Comparison which is informative regarding the two instrumentalities. The comparison is as of December 31, 1939. See pages 66, 67.) The question that is raised about the fact that the insurance liability extends only to accounts up to $5,000 and, therefore, only to

45 percent of the deposits in banks is, I think, a confusing statement and one that does not hold up on careful analysis.

The reason I say that is this: I will admit that technically only 45 percent of the deposits of banks insured are insured under the $5,000 limitation. However, if we study the figures, Mr. Chairman, we find as a practical matter that in a closed bank the total deposits are protected, and the F. D. I. C. through segregation and in other ways really pays off on almost 100 percent, rather than 45 percent.

For example, during the year ending December 31, 1939, the 60 insured banks for which the F. D. I. Č. paid off had nearly 400,000 depositors. Every depositor except 832 was fully protected and paid off one hundred cents on the dollar. Of the total deposits, some 97.9 percent were protected; that is, of the $150,000,000 in deposits, some 97 percent was protected by the insurance.

Senator BROWN. Isn't that answered in part by Mr. Bell's other argument: That the reserves that are required by law are rather large and much larger than they are in the case

Mr. BODFISH. In the case of reserves in the individual institutions? Senator BROWN. Yes; in the case of reserves in the individual institutions.

Mr. BODFISH. I deal with that in my statement in respect to Chairman Eccles. There are about $33,000,000,000 in deposits in national banks.

Senator BROWN. I think that figure is $35,000,000,000. I got the figure yesterday.

Mr. BODFISH. Their total reserve or capital accounts-that is, stock, surplus, reserves, and the like-is just about 10 percent. That is a cushion which protects the F. D. I. C. before it is called on, if it exists in the institutions which are in difficulty.

In these cooperative institutions which have a cushion in the form of reserves in excess of 7 percent, and in spite of the fact that most of them have no capital structure, we have a cushion which is rapidly increasing, which is almost equal to the cushion that exists, for example in the national banks, all of whom are insured.

I might say, in fairness, that the reserve policies of our institutions have changed a great deal in the last 10 years. That is one of the things that some of us modernists and reformers have attempted to do. In the old days they would meet every 6 months and distribute everything; and it was not mutual unless they distributed everything. Now we have them working on a program which will build up about 10 percent in all institutions we hope.

Senator BROWN. I think that the vital thing for you to show in the case of the liquidation by the Federal Deposit Insurance Corporation would be how much of the 97 percent they paid and how much the bank paid of that 97 percent. In other words, what proportion of the loss did the Federal Deposit Insurance Corporation pay and what proportion of the loss was paid by the assets of the closed banks?

Mr. BODFISH. Well, when you consider the fact that they stood, let us say, 98 percent of the deposit liability, is it not conclusive in the first place that they paid off the entire deposit liability?

Senator BROWN. Not that they did; because they used the assets of the bank itself, before they paid out any of their own money. Mr. BODFISH. That is right, of course.

Confidential memorandum-not for general circulation

SELECTED POINTS OF COMPARISON BETWEEN THE FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION AND THE FEDERAL DEPOSIT

INSURANCE CORPORATION

Senator BROWN. Although they may advance some of their own, of course.

But what their real loss was is the important thing in that matter of liquidation.

Mr. BODFISH. Well, that boils down to the question of here is a busted bank and here is a busted savings and loan association; and when you liquidate them, which one is going to liquidate out the best? On the record, that is a matter of opinion. We have had a lot of experience, in my State of Illinois, in liquidating such banks and savings and loan institutions; and when we come to liquidation of banks, usually they have some speculative bonds, defaulted notes to insolvent borrowers, and some mortgage loans which were usually taken as distress loans after a borrower got badly in trouble and then they just grabbed everything he had-which is not improper-and the like. But when one of our institutions goes into liquidation, we have mortgages and real estate; and our experience has been that we liquidate out better than the closed banks.

Senator BROWN. I am not going to ask you to look into it thoroughly; but if you would look into the liquidation of the largest bank in the United States which closed, I think it would not bear out the argument which you are just making. I am referring to the First National Bank of Detroit; because I am very intimate with it and have been working with the comptroller on it; and the cats and dogs that they have left are nothing but real estate mortgages.

Mr. BODFISH. Of course, I do not think that bank should have closed; but that is history.

Senator BROWN. I do; I think it should have been closed.

Senator RADCLIFFE. Mr. Bodfish, a little while ago you gave some figures in regard to the liquidation of banks and the payments to the depositors; and you said something about 97 percent. Can you restate that, and especially insofar as it had reference to the payments of the amounts in excess of the guaranty?

Mr. BODFISH. The F. D. I. C., on the basis of its reports and published statements, liquidated in 1939 or paid off 60 insured banks, that involved about 400,000 depositors. Every depositor except 832 was fully protected and paid off one hundred cents on the dollar. Of the total deposits-coming at it from the point of view of the dollars in the accounts some 97.9 percent were protected; that is really 98 percent. That is, of the $150,000,000 in deposits, 98 percent was protected by the insurance.

That leads me to the generalization or conclusion that as a practical matter the 45 percent figure of insurance liability to total deposits does not indicate what sort of settlements are going to be required when the insurance becomes operative in closing institutions. The F. D. I. C., the same as our operation, is involved in practically a 100-percent pay-off of depositors. I do not think there is anything objectionable in that; I think it is all right. But I do think it raises the question of whether the F. D. I. C.'s liability is 45 percent of deposits and ours is 80 percent or 90 percent. Based on experience, I think that both are going to pay off 100 percent.

Senator RADCLIFFE. Of course, there is a bit of indirect backing to the depositors over $5,000, in that efforts are going to be made to keep