Evening Star Newspaper, June 21, 1933, Page 6

HOLDS BANK LAW - WILL REMOVE FEAR Senator Bulkley Discusses | Glass-Steagall-‘Measure in Radio Forum. ‘The Glass-Steagall banking act was described as “a most important step forward toward a thoroughly sound and sdequate banking system,” by Senator Bulkley of Ohio, in an address last night in the National Radio Forum. e Ohioan, a Democratic member of the banking subcommittee which handled this legislation in the Senate, spoke over WRC and 8 coast-to-coast xé:twurk of the National Broadcasting “As a result of the improved super- vision and sound restriction on bank operations provided by this act” he said, “the banks will actually deserve & greater measure of public confidence hereafter, while at the same time, the provision for the insurance of depoeits will tend to remove the fear which has eaused wholesale withdrawals of de- posits for hoarding.” Cites Insurance Principle. *. 'This insurance principle and the divorcement of investment banl )lrom commercial banking were poin to by Senator Bulkley as salient fea- tures of the new act. He explained that the insurance will ‘be administered by the self-sustaining Federal Deposit Insurance Corporation. It will become effective temporarily January 1, or earlier if fixed by the President, for accounts of $2,500, and on July 1, 1934, for all accounts, either whole or in part. The scale will be, Bulkley explained, full cover- age for the first $10,000, 75 per cent between $10,000 and $50,000 and 50 per cent for those above $50,000. The separation of comimercial and investment banking, Senator Bulkley described as & reform, in that it will tend to keep commercial bank funds liquid. The text of Senator Bulkley's address follows: {""As much as three years ago it was tealized that the Federal Reserve and national systems had not been operating as they should, and that, so far from venting the financial dis- aster which was then afflicting us, their operations had actually contributed the evils of the situation. The Sen- ate at that time passed a resolution directing the Banking and ‘Currency Committee to investigate these systems and report its recommendations and, pursuant to that resolution, the Glass subcommittee, consisting of five mem- ‘bers, was appointed. There were, of course, many bank to | subconscious, SENATOR THE EVENING Discusses Banking Reform BULKLEY. developed in the marketing of securi- ties was an unwholesome one for com- mercial banks. It resulted in an over- production of securities as well as an Improper interest on the part of com- mercial banks in maintaining a fa- vorable market for new flotations and in turn this interest in maintaining a favorable market had an unwholesome influence on loan policies of the banks. Loans on Securities. The vast development of loans on collateral security may fairly be at- tributed at least in part to the interest of banks engaged in securities busi- ness in keeping up market conditions capable of absorbing capital issues. ether this motive was deliberate or the fact remains that banks generllly were involved in it, and if they should be permitted to con. tinue in the investment security busi ness the same motive would be pro- vided for a tion of the same other hand, the business of originating and underwriting investment securi- closings in 1929 and 1930. Yet even vhm,‘:uly in 1931, the Glass subcom- mittee began its analytical hearings and the distribution questionnaires, it was not realized to what lengths banking embarrassment tors to their caused them to refuse new loan ac- commodations and to press for pay- ment of existing obl!tt:uoal. th:r:ll:y Testrict business enterprise an = mm,gq_he fear in the hearts of bank customers. e %o | mate field must be impaired. no .| his hi funds for hoard Merely to read the bill would take as much time as I now have to explain it and, of course, a full explanation of all of its provisions, with a state- ment of what is to be said on both sides of all the controversial matters involved would consume more time than most people would be disposed to glve to the subject. Yet it is possible very briefly to make clear those essen- tlals of the legislation which command public interest. { Protection of Depositor. | The depositor who leaves his mone! with his bank and expects to have it available at any time subject to his demand must be protected against the use of that money by the banker in such manner as to tie it up in fixed securities, and speculative transactions, and slow loans on which the banker cannot realize at the time the depositor calls for his funds. Our legislation, therefore, is intended to make it plain that resources of commercial banks are to be kept available for loans to support current business transactions ‘which clear themselves and provide for quick repayment of loans, and are not 1o be used, directly or indirectly, in fixed investments, nor to support spec- ulation of any kind. To accomplish this vital purpose it is absolutely necessary that commer- cial banks shall be subjected to addi- tional regulations as prgvided in this act, and shall also be séparated com- gletzly from the investment banking | usiness. The principle of separating these two flelds of bunkmgewu recognized many years ago in the national bank act and investment banking has never | been authorized in national bank charters. This restriction, however, has been evaded by the device of the| incorporation of afliated institutions owned and controlled by the banks.| The law we have now enacted provides for the complete divorcement of se- curity affiliates from all member banks of the Federal Reserve System and for the termination of investment banking business by all incorporated banks and private bankers receiving | deposits, within one year aftar ~pproval ore, the investment security business is attended with certain risks, | Subscription by the Federal Reserve since market conditions may change after the making of an underwriting commitment in such a way as to cause considerable loss to the underwriter. This risk be undertaken by institutions responsi- ble for the safety of depositors’ money. If depositors believe t such risks are being taken it is natural that their confidence should be impaired. And if investors are subject to losses through depreciation of securities which they have purchased from bankers, the reputation of the banks must suffer, and their usefulness in their legiti- Disinterested Advice Needed. ‘The banker ought to be the disin- terested adviser of his cusotmers, and when the banker has no securities to sell to his depositors on which the bank makes a profit he is much bettey advise disinterestedly, and to give diligent regard to the safety of his customer. The long-established rule of law that a trustee is not per- mitted to profit by dealing with his estate does not imply any reflec- tion upon the honesty of trustees as a class. It is but the recognition of th‘t It is & good rule also with respect to bankers. The banker’s advice to his depositor seeking an investment, or to country correspondent bank, is tainted when he makes a profit by selling investment securities. If we | want banking service to be real bank- ing service, without any expectation of additional profits through selling some- ng to bank customers, we must keep the banks out of the investment secur- ity business. Take the other side of the picture: A corporation, having carried its ac- count with a bank, having borrowed | from that bank for its ordinary com- mercial requirements, is confronted with the question of raising long-time funds by the issuance of securities, If it is to have the advice of its banker untainted by the prospect of obtain- ing an originating or underwriting profit, we must keep the banks out of unfortunate developments which are | now so much regretted. If, on the | ties is confined to houses not engaged | Deposit Insurance Corporation. mem- in deposit banking, then the desira- | Dership bility of new issues of securities will | banks, whether members of the Fed- be subject to an independent and im- | eral Reserve System or not, will be cap- 1 check. 15 one which ought mot. o | Of 1 Der cent of the total deposit lia- ‘1934. the permanent insurance by the iFederu Bank Deposit Insurance Cor- | poration will be effective, and all de- | posit accounts will be fully insured up | to $10,000. Accounts in excess of $10,- 1000 will be insured to the extent of |75 per cent of the excess over $10,000, up to $50,000, and will be insured to | the extent of 50 per cent on all ex- | cess over $50.000. It will be noticed that the small de- | positor has a relative advantage over { the larger depositor, but it must be | remembered that the large depositor usually has better facilities for analyz- ing the condition of his bank and ar- riving at a correct conclusion as to its soundness. Then there is a social | reason for protecting in full the small account, and again, as a practical mat- ter. it is very likely to be the aggre- gate of withdrawals by small depos- | itors which causes a disastrous run_on a banking institution, and that is what we want to avoid. Insurance Method Stated. In order to provide funds to pay the depositors of closed banks, the Federal in which is open to all sound italized by a subscription of $150,000,~ 000 by the United States Treasury; a anks in an amount equal to one-half wof the surplus of such banks, which will bring in another $150,000,000 or more, and an assessment of one-half bilities of all banks joining in the in- surance system. Inasmuch as all mem- ber banks of the Federal Reserve Sys- tem are required to join, it is certain that the capital to be raised from this source will approximate another $150,- 000,000, and it is probable that it will be considerably more than that. The original capital of the institution will, therefore, be in the neighborhood of $500,000,000. It is authorized to sell its obligations in an amount equal to three times its capital, and so this corporation has potential resources of nearly $2,000,000,000. It is authorized to buy assets of cfdsed banks or to lend on the security of such assets, and so to aid in the reorganization and reopening of insti- tutions now closed, and to provide for the liquidation of frozen t ac- counts. Its more important function is to make good the deposit liabllities | olf“ edbunh which may hereafter be closed. Continuance of Service. Immediately upon the closing of a bank which is a member of the deposit insurance system, the Insurance Cor- poration will establish & new banking unit which will be ready at once to function with respect to checking ac- counts. This new unit will assume the net deposit liabilities of the closed bank up to the limit of the amounts insured, and as soon as the amount of depos- itors' net claims, after offsets, can be | determined, each depositor will be cred- ited with the amount of his approved insured claim in the form of a deposit in the new banking unit, subject to his check. The new unit will be au- thorized to accept new deposits, so that depositors may proceed almost without interruption to transact with the new unit their daily business of drawing and depositing checks, just as they had previously conducted it with the old bank. The Deposit Insurance Corpora- tion will be obligated to the new bank- ing unit in an amount equal to the net insured liabilities of the closed bank. It wjll provide the new unit with such cash as may be required to the investment security business. If| we are to relieve the banker of the| tmptation to put pressure upon his commercial borrower to put out a se-| curity issues on which the banker will | make either an originating or an un- derwriting profit, we must keep the banks out of the security business. Curb on Bad Loans. It the public is to be protected | against the possibility of bad bank loans being set up into bond issues to| be sold to savings depositors of the same banks, or even to trust accounts| administered by the banks, without the exacting scrutiny of an independ- ent underwriter, interested primarily in the soundness of the securities he | is about to sell, we must prohibit the | banks from engaging in the security business. If we are to keep banks from being tempted to make security loans in order to help make a market, or to finance the purchase of securities on | which the lending bank is making an | originating or underwriting commis- sion, we must keep banks out of the| investment security business. And if we are to save banks from the em- barrassment of having to appraise, as collateral security offered by prospec- tive borrowers, the very securities which their own afliates have sold to those | customers, we must keep the banks out of the investment security business. It is not, of course, contended that the abuses here intimated are never avoided by the good conscience of the bankers. On the contrary, 1 believe they are avoided generally by good bankers. Certainly they are avaided much more often than they occur. Yet the danger is always there, and must be there as long as human nature re- mains what it is. And just as we be- lieve in the strictest rules for the conduct of trusts, just as we believe in of the act. | examination and audits of institutions Separation of Banking. The separation of commercial and savings banking from investment bank- ing is one of the most important pro- visions in the legislation and, on ac- count of the large interests involved, it provoked for some time a very lively controversy. There is a general public impression that the separation of commercial and dnvestment ought to be made, ‘and ought to be made promptly. Democratic national platform, adopted last year, specifically promised this separation. Yet it is doubtful whether there is a general understanding of just how many inconsistencies are in- volved in the combination of commer- eial with investment banking. As commercial banks _entered _the | the fleld of investment banking, com tion among them brought on intensive development of securities departments and when these departments were once in existence it was necessary to keep | whose officers are worthy of the high- est confidence as to honor and ability we must surround the banking business with sound rules which recognize the imperfection of human nature, that our bankers may not be led into temp- tation, the evil effect of which is some. times so subtle as not to be easily recognized by the most honorable man Confidence Seen Returning. The fact that this bill absolutely completes the separation of commer- cial banking from the investment se- curities business will have a great ef- fect toward accomplishing the much- needed restoration of public confidence in banking institutions. The other out- standing provision of this bill looking to that much-desired result is that fo. insurance of bank deposits. Because of the limit of time I shall not undertake to discuss the tempo- rary insurance which begins next Jan- uary 1, or at an earlier date if fixed lamation of the President. and 1t]; tting O gpcuritas, 2q. the okerest e proc] which covers only the first $2,600 of Commencing | same extent as they would have re- | been no suspicion of insolvency. | as the circumstances in each case may carry on its business, and will allow a low rate of interest on the balance of its obligation. The new banking unit will thus be 100 per cent liquid, and its depositors, having nothing to fear,| vill have no motive to withdraw their ccounts, but will undoubtedly retain their balances in the new unit to the ained them in the old bank had there This will make it possible to protect he safety and convenience of the de- | ositors without any necessity for the Insurance Corporation to advance in cash the entire amount of the insured claims of depositors. This new bank- ing unit may be provided with new capital by subscription and so go for- vard as an independent bank, or it may be taken over by an existing bank- ing institution, or it may be liquidated, Justify. Prompt Estimate Required. Ordinarily the Insurance Corporation will act as receiver of the closed bank and will thus have an earning capacity based on its services as receiver. When- ever it is required to assume the lia- bilities of a closed bank it will be subrogated to the rights of the depos- itors whose claims it pays, and will to that extent have an interest in the assets of the closed bank. The law Feel Tired, Lack Energy? You need a good tonic to stimulate your ap- petite and increase your vitality. than a quarter of a century Nutraven has N helped thousands of rundown people to regain a strong, healthy body. A tonic of recognized value in building up the system. Pleasant to take. Contains only purest in- gredients. Don't trifie with your health. Get a generous bottle of Nutraven for §1 today at P Drug Stores. NUTRAVEN, a Nutritive Tonic BEER BOXES For more | FORDRAUGHTS BOTTLED BEER/ ALL STYLES v PR/ICEDRIGHT /MMED/ATE DELIVERIES FPRIQH | oo "TERAS. T ative—Wyp, Beckzih STAR, WASHINGTON requires that an estimate shall be g:ompluly made of the amount likely to real zed by the liquidation of these| t assets of the closed bank, and the dif- ference between that estimated amount and the amount of insured claims for which the corporation is liable will be set up at once ‘as-a loss and charged | to a deposit insurance account which | will be replenished from time to time by assessments levied against insured member banks, one-fourth of 1 per cent of their total deposit liability being assessed against the members as often | as required to replenish the treasury of the Deposit Insurance Corporation. and to offset its losses on account of insuranee payments. It will thus be seen that the Deposit Insurance Corporation will be a profit- making institution, because it will have | income derived from its services in re- ceiverships and from the investment of its funds, and its payments on account of losses will all be restored to it by assessments against its member banks. Federal Reserve Policy. As the Federal Reserve Bank System is required to make a large contribu- D. holding company affiliates of Federal Reserve member banks and subjecting ation by the Federal Re- (d) Strengthening the capital of na- tional banks. (e) Providi closer and stronger supervision and more careful restric- tion of investments of member banks. Other Provisions Technical. Numerous other provisions of a more or less technical character are obvious- ly not within the scope of a brief |l explanation of this legislation. The final enactment of the banking act of 1933 conciudes the work of the Glass subcommittee. I have counted it a distinct privilege to serve under Senator Glass in that great work and I recall ‘with interest and extreme pleasure my service under him 20 years ago when, as chairman of the House Committee on Banking and Currency, he played a commanding part in the enactment of the Federal Reserve act. against the active and energetic oppo sition of leading bankers and of a large part of the ing community. The tion to the original capital of the De- osit Insurance Corporation, it has| en considered fair to require that, | after July 1, 1936, two years later than | the commencement of the insurance deposit system, no bank may remain & | member of that system without becom- ing a member of the FedeTal Reserve System. This requirement gives all banks which are not now members of | the Federal Reserve System ample time for consideration looking to a wise de- termination of their future course, but the sponsors of the legisiation believe that the result will be that all banks which become members of the insur- ance system will ultimately become members of the Federal Reserve Sys- . This will tend to a greater uni- fication of banking practice, and will eliminate in the future a certain com- petition in laxity that has existed in the past as between Pederal and State authorities having supervisory respon- sibility over banking institutions. Other important provisicns in the bill | are: (a) Permitting national banks to es- tablish branches in States which give the same right to State banks. (b) Prohibiting the payment of inter- est on demand deposits and providing for the regulation of interest on time deposits by the Federal Reserve Board. (c) Limiting the voting power of ! 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