are three of you who were here when this thing started and that we are beginning the seventh year without a bank failure or the receivership of an insured bank.

Therefore, we are very happy to be able to come up here this morning to discuss with you this bill. As I said before, my Associate Director, Mr. Cook, has been chairman of the committee through all these considerations and has consulted with bankers, with Government authorities, with members of your staff, and so forth; and I should like at the proper time for you to get Mr. Cook's viewpoint.

Mr. PATMAN. Mr. Chairman, before Mr. Cook starts his testimony, the Chairman said something about the FDIC having been referred to as a socialistic enterprise at one time. I remember that it was announced as being socialistic.

We have another program with which this committee has had a lot to do, and that is to encourage the building and ownership of homes, which has been branded as a socialistic program.

I want to invite the attention of the committee to a statement by the president of the National Association of Real Estate Boards which shows that it is not socialistic; that most of the people will own their own homes in this country and certainly, when people are home owners, they are not going to be Socialists and want to divide their homes with somebody else. This statement reads in part as follows:

An expanding market-growing with a rising standard of living-will make home owners of three-fourths of American families.

This is the prediction of Robert P. Gerholz, president of the National Association of Real Estate Boards. In making it, he urged the housing industry to "move into the unreached market of 45 percent of American families."

The potential market by 1956, according to the official, is for 12,000,000 new homes. Even now, he observed, a majority of American families are home owners for the first time on record.

Writing in the current issue of NAREB's news letter, Gerholz viewed optimistically the outlook for home ownership over the Nation.

"Public taste and esteem for home ownership is at a new high," he declared. "We should never forget that the proportion of American families who owned their homes was in almost steady decline from 1890 to 1940. Since the war this trend has been dramatically reversed *

In other words, the socialistic period in this country was from 1896 to 1940. That was the period when there was a trend toward socialism, if we ever had it. But now the trend is in the opposite direction and is against socialism.

The CHAIRMAN. I think we should continue consideration of this FDIC bill and while I thoroughly agree with the gentleman's statement, I think we had better confine our testimony to the bill.

Mr. DEANE. Mr. Chairman, may I make this observation? What impresses me about this legislation and the FDIC is the fact that it is not costing the depositors or the taxpayers anything whatsoever. I wonder what percentage of the depositors in the banks throughout the country realize that this is a charge that the local banks are assuming. I wonder if they have been properly advised on who is carrying the ball.

Mr. HARL. We have endeavored through pamphlets, and so forth, which we supplied the banks, to advise the depositors that this is being paid for by the banks, and that it is not costing the depositor anything. Furthermore, there is no tax money in the organization. There are no taxes levied to perpetute the FDIC. The bankers themselves have carried the ball in this FDIC program which the bankers did like

wise during the war in the rationing program and in the bond drives. The banks have carried the ball in all of these cases.

Mr. DEANE. My observation has been that few of the local depositors fully appreciate just who is making possible this protection. It occurs to me that additional educational propaganda, if I may use that term, should be distributed to the depositors so that they may really understand and I think with the inauguration of increased insurance it would seem to me that it would be a good opportunity to do that.

Mr. HARL. Thank you, sir.

The CHAIRMAN. What would be the increase in the total insurance liability if the coverage on individual deposits were made $10,000? Mr. HARL. About $12,000,000,000.

The CHAIRMAN. How many individual depositors would be fully covered?

Mr. HARL. We would take care, roughly, of 98 percent of all the depositors on the $10,000 basis.

The CHAIRMAN. How many are now taken care of?

Mr. HARL. At the present time about 95.7 percent.

Mr. O'HARA. Mr. Chairman, I did not wish this opportunity to go by without calling attention, in connection with Chairman Harl's contribution to the Nation, to the fact that he is a graduate of the University of Chicago.

Mr. HARL. Thank you, Mr. Congressman.

Mr. BROWN. But he has not been there of late, has he?

Mr. HARL. I will say for the Congressman that I think he was there just a week or two ago, but not for instruction.

Mr. WOLCOTT. What is the present rate of the premium?

Mr. HARL. One-twelfth of 1 percent, Mr. Congressman.

Mr. WOLCOTT. If this bill is passed, do you think it might decrease the premium rate?

Mr. HARL. If this bill is passed, and we hope it will be, the banks will receive back in earned income credits 60 percent of the net each year, and, based on the present income of the Corporation, it will, in effect, make the assessment about one twenty-seventh of 1 percent.

The CHAIRMAN. You are not in favor of the discontinuance of the payment of the premium?

Mr. HARL. No, sir. I think we should always have some payment. The CHAIRMAN. If there are no further questions, thank you, Mr. Harl. We shall hear Mr. Cook at this time.

STATEMENT OF H. EARL COOK, DIRECTOR, FEDERAL DEPOSIT INSURANCE CORPORATION

Mr. Cook. Mr. Chairman and members of the committee, I only wish that I possessed the facility and the command of the English language to be able to present this case as fluently as our Chairman, Mr. Harl, has done.

May I reiterate Chairman Harl's thanks for the privilege of appearing before you today. This bill, S. 2822, represents the results of several years of study by the Corporation and many bankers and others who have graciously and unselfishly given of their views, advice, and counsel. It is a revision of the entire FDIC law. For a number of

years it has been the opinion of many associated with the Corporation and interested in deposit-insurance protection that our law should be, not a part of the Federal Reserve Act, but should be a separate code which contains all the laws relating to the FDIC. In its present form, as a part of the Federal Reserve Act, it is often confusing to many people who are not familiar with the arrangement of the law. A separate code will eliminate this confusion and emphasize the independent status of the FDIC.

To assist you in your deliberations, we have prepared a detailed statement analyzing the proposed legislation. Copies of this analysis now, I believe, are in the hands of all of the committee members. In this analysis you will find answers to some of the questions that may occur to you about the bill.

An important change in the Federal deposit insurance law proposed by S. 2822 is the increase in insurance coverage from $5,000 to $10,000. You questioned the chairman concerning that. I might add that one of the reasons we feel it is sound is this. The Treasury figures indicate that there are some $27,000,000,000 of currency in circulation. It is felt that much of this is in safety deposit boxes. In the case of many depositors when their account has reached $5,000, the rest of the money goes into safety deposit boxes. We feel the increases might be an incentive to draw some of that money out of the safety deposit boxes into the channels of trade.

This change vitally affects the more than 104,000,000 depositors in the 13,600 insured banks. As indicated by your committee when the Federal Deposit Insurance Corporation was created, its primary purpose was to protect the small depositor. In 1935, the $5,000 maximum provided full insurance protection for about 98 percent of the depositors. Now, however, owing to the general rise in the price level, it is necessary to increase the limitation to $10,000 in order to fully protect the same percentage of depositors as were covered in 1935 under the $5,000 maximum.

According to our study of insured deposits, based upon a survey as of September 30, 1949, 95.7 percent of the accounts and 48.8 percent of the amount of deposits are fully protected with the $5,000 maximum. These fully insured accounts are about 99,000,000 in number and total insured liability is 74.5 billion dollars. Under the $10,000 limitation, 102,000,000 accounts and $86,000,000,000 will be insured in full. centagewise, 98.6 percent of the accounts and 56.5 percent of the deposits will be entirely protected. It should be noted that the proposed increase in coverage will add about $12,000,000,000 to the Corporation's insured deposit liability.

Per

This increase in coverage will benefit many small banks. It will remove the incentive to shift deposits from the small community banks and thus make available more funds for local credit needs.

The question was asked of the Chairman if it would make any difference in the correspondent bank accounts. The Chairman answered that question that in the natural flow of business we feel it would be a comparatively short time before that change would be reflected in increased balances of these smaller banks with their correspondent bank accounts. No one would be hurt but the local communities would be helped.

Closely related to the proposed increase in insurance coverage is the second important feature of the bill, namely, the new assessment

formula. When the Congress was considering the bill to authorize the retirement of this Corporation's stock in July 1947 questions were raised regarding the reduction in the assessment paid by insured banks. It was agreed at that time that consideration of the matter would be deferred until the capital had been fully retired. Since final payment on the retirement of capital was made to the Treasury August 30, 1948, our studies relative to the revision of the law included the question of the assessment reduction.

The assessment reduction provided by S. 2822 is in the nature of a dividend credit plan. No change is made in the assessment rate of one-twelth of 1 percent of the deposits in the insured banks. However, the bill provides that at the end of each year the Corporation will deduct from the assessments paid by the banks in that year its operating costs, insurance losses, and certain other items, such as additions to reserves for losses. The resulting figure is designated as the net assessment income. The Corporation will add 40 percent of this net assessment income to the insurance fund, and 60 percent will be available for a pro rata distribution among the insured banks as a dividend credit to be applied on future assessments. Basically, this plan for assessment reduction corresponds to the pattern followed by mutual insurance enterprises for more than 110 years.

We believe that you will recognize the soundness of the mutual life insurance companies on this plan which follows that pattern subtantially.

The adequacy of the insurance fund is the central question which is raised by the two principal features of S. 2822; namely, the increase in the insurance protection from $5,000 to $10,000, and the reduction of assessment income received from the insured banks which will approximate 55 percent. The adequacy of the fund is not a matter to be decided by the Federal Deposit Insurance Corporation. Only the members of this committee and the Congress can decide that question. However, we would like to offer a few comments which may be helpful to your committee in arriving at this decision.

In the first place, our studies do not demonstrate that the fund is adequate. May I say here that this Corporation is only 15 or 16 years old and some matters which we will discuss in executive session with you may throw further light on that particular phase. Nor are we aware of studies completed by others which prove with any degree of certainty that the present deposit insurance fund will be able to withstand all future periods of adversity. The insurance fund now amounts to more than $1,200,000,000. It represents an insurance reserve accumulated by the Corporation after making full provision for losses in connections with banking troubles. Furthermore, the Corporation has repaid the $289,000,000 advanced by the Treasury and the Federal Reserve. That payment was authorized by Public Law 363 with which you gentlemen are so familiar. However, when the insurance fund is compared with the $157,000,000,000 of deposits in insured banks, the margin of protection for the 104,000,000 depositors appears to be very modest.

To be considered also is the fact that, since the Corporation was established, our economy has been in an expanding phase. This has helped to solve many of the problems which otherwise would have entailed costly expenditures.

There are many other facets of the problem of sufficiency of the FDIC fund. Fundamentally, these center about such basic considerations as public confidence in the American system of insuring deposits. Accordingly, the chairman of your committee has kindly consented to permit us to present a fully detailed discussion of certain technical aspects of this problem in executive session at the close of the public hearings. The problem cannot be dealt with appropriately in generalities. It is absolutely necessary to develop detailed information of a highly confidential nature. That information has been obtained by our Division of Examination in trust and confidence and cannot be spread on the public record. But that, gentlemen, will be available to your committee in executive session. If you will defer any questions regarding the adequacy of the fund until the executive session, it will be possible to furnish the members of this committee with a much clearer picture of our problem.

Another portion of this bill which we deem to be of great importance is section 17, relating to the audit of this Corporation's financial transactions by the General Accounting Office. This section is found on pages 50, 51, and 52 of the copy of the bill which is before

you.

The Board of Directors of the Corporation has always believed that its financial transactions should be audited by the General Accounting Office so that the Congress and our Board of Directors could have an independent appraisal of our financial activities. As early as 1943, the Honorable Leo T. Crowley, then Chairman of the Board, requested the Comptroller General to make a commercial audit of the Corporation. However, because of the war, this proposal was not developed further.

When the Government Corporation Control Act was enacted, the Corporation was included in title II which provided for a commercialtype audit of "mixed-ownership" corporations. In 1948 when we retired all of the Corporation's capital stock of $289,000,000, the FDIC, by express provision of the Government Corporation Control Act, became no longer subject to audit by the General Accounting Office. Nevertheless, pursuant to our policy of favoring an audit by the General Accounting Office, our Board requested the Comptroller General to continue to make a commercial audit pending restoration of the audit authority in this bill.

The General Accounting Office is now auditing the Corporation under the terms of a voluntary agreement. With a few minor exceptions we have enjoyed a most pleasant relationship with the Honorable Lindsay Warren, the Comptroller General, and his splendid staff. We are very proud of the opinion they have expressed in all of their audit reports to the effect that the Corporation is well managed and conducted. It is our most sincere hope that we shall continue to merit this high praise. Our one major difference of opinion with the General Accounting Office stems from their tendency to extend their audit activities into the field of management policies. We have voiced our conviction that policy determinations are the responsibility of our Board and that the auditors should concern themselves with the financial operations of the Corporation. In that field they are of great assistance to us. The audit provisions of this bill have been discussed with the Comptroller General and we have arrived at what appears to be a satisfactory understanding.