where they will eventually be entirely free from Government ownership and Government control, except as such control may be specified in the legislation.

It might well be that the subcommittee or the full committee or the Senate would want to impose some restrictions on the investment of reserve or surplus somewhat comparable to that which prevails in the case of national banks and other institutions of that kind.

I wonder if you would look into that so we will be advised of it before the termination of the hearing.

Mr. BAGWELL. All right, sir.

(The information is as follows:)

FARM CREDIT ADMINISTRATION,
Washington, D. C., April 27, 1956.

Hon. SPESSARD L. HOLLAND,

Chairman, Subcommittee on Agricultural Credit,

Committee on Agriculture and Forestry, United States Senate.

DEAR CHAIRMAN HOLLAND: During the hearings on S. 3564, you requested information concerning limitations and restrictions placed upon national banks with respect to the investment of their reserve funds, and also inquired whether our proposed legislation should include similar provisions governing the investment of reserves of the Federal intermediate credit banks.

As a member of the Federal Reserve System, each national bank is required to subscribe to the capital stock of the Federal Reserve bank of the district in an amount equal to 6 percent of its capital and surplus, but only half of this amount must be paid in, the other half being subject to call (12 U. S. C. 282). While this requirement applies to all national banks and to State banks that become members of the Federal Reserve System, it is not actually a required investment of reserves, capital, or surplus, as such, and there is no comparable requirement applicable to the Federal intermediate credit banks.

Before declaring a dividend on its common stock a national bank must, semiannually, carry not less than one-tenth part of its net profits for the preceding half year to what is called a surplus fund until such fund equals the amount of its common stock (12 U. S. C. 60), but there is no specific provision as to how such fund is to be invested. In a general way, for the present inquiry at least, the surplus of the Federal intermediate credit banks (12 U. S. C. 1072) would seem to be comparable to the surplus funds of national banks.

Every national bank and every other member of the Federal Reserve System is required to maintain on deposit with the Federal Reserve bank of its district a reserve against its time and demand deposits (12 U. S. C. 462, 462b). The current requirements are 5 percent of time deposits and, depending on where the bank is located, 12 or 18 or 20 percent of its net demand deposits (12 C. F. R., Supp., 204.5). Since the Federal intermediate credit banks are not banks of deposit, they have no need for reserves which would be comparable to the reserve balances which national banks and other member banks maintain with the Federal Reserve banks.

There is no statutory provision as to how other reserves of national banks, such as reserves for contingencies or for bad debts, are to be held, and they may be used as are any other funds of the banks. Similar reserves are also maintained by the Federal intermediate credit banks, and it is thought that such reserves of the credit banks should also be available for use as are any other funds of the credit banks.

Aside from using its funds to carry on the business of banking, a national bank may purchase for its own account investment securities as authorized under regulations prescribed by the Comptroller of the Currency (12 C. F. R., Pt. 1). With some exceptions specified in the law, including United States Government obligations, consolidated Federal farm loan bonds, and consolidated Federal intermediate credit bank debentures, a national bank may not hold, for its own account, investment securities of any 1 obligor or maker in excess of 10 percent of the paid-in capital stock and unimpaired surplus fund of the bank (12 U. S. C. 24, 7th). The Farm Credit Administration by administrative action has consistently required that credit bank investments in securities be limited to United States Government bonds and Federal Farm Mortgage Corporation bonds.

Within the Federal farm credit system, the legal reserves of the Federal land banks are required to be invested in accordance with rules and regulations prescribed by the Farm Credit Administration (sec. 306 (a), 69 Stat. 665) and, under present law, the surplus of the production credit corporations is required to be invested as the Governor of the Farm Credit Administration shall prescribe in direct obligations of the United States or in class A stock of production credit associations, or both (12 U. S. C. 1131c (c)). There is no specific statutory provision as to the investment of the surplus account or contingency reserves maintained by the banks for cooperatives (sec. 103 (a), 69 Stat. 658), or the surplus account or contingency reserves of the Federal intermediate credit banks (12 U. S. C. 1072). As already noted, however, intermediate credit bank investments in securities have been limited by administrative action to United States Government bonds and Federal Farm Mortgage Corporation bonds which under the law may be used as collateral for the debentures issued by the credit banks.

It is our view that the legislation now under consideration need not include any specific requirement that the reserves of the Federal intermediate credit banks be invested in securities different from those in which their other funds may be invested. We think it should be permissible for the credit banks to use such reserves in their discounting and lending operations to such extent as may be deemed advisable, or to hold them in cash or Government obligations, without any separate statutory provision as to how much of such reserves shall be invested or in what securities.

At the hearings there may have been some thought that there should be a limitation on the authority of a Federal intermediate credit bank to lend any temporarily idle funds to other intermediate credit banks, to the Federal land banks, or to the banks for cooperatives. However, any loans to such other banks would, under the pending bill (sec. 104 (b)), be "upon terms and at rates. of interest or discount approved by the Farm Credit Administration." Further, since all these banks have access to the money markets, it is anticipated that borrowing from the credit banks by the land banks and banks for cooperatives will be resorted to only for brief periods when the credit banks have funds on hand in excess of their immediate needs, and such funds can be employed by another bank to the mutual advantage of the borrowing and lending banks. It is our thought that authority in the credit banks to make temporary loans of their idle funds to the other banks of the farm credit system would make for a desired flexibility and efficiency of operation. Certainly, no bank desiring to borrow would be able to compel another bank of the system to make any such loan.

Very truly yours,

R. B. TOOTELL, Governor.

Senator HOLLAND. All right, proceed, sir. Mr. TOOTELL. Another provision to which I would like to call your attention as we go along is one which would, together with the present legal authority, make it possible for a complete system of interbank borrowings between the land banks, the intermediate credit banks, and the banks for cooperatives. There are periods of time from a week, ordinarily, to a month in which one of these institutions may have surplus funds and another one be short. By being able to borrow from each other on a negotiated loan basis, ordinarily the terms are more favorable at which they can borrow, and it is an aid to the institution that lends the money to have that short-term investment outlet.

Senator HOLLAND. The same remarks, I have just made would apply to that, also, the question of interbank borrowings.

All right, go ahead.

Mr. TOOTELL. Yes. Mr. Chairman, I would next like to go into this matter of the OFI's or the other institutions with which the intermediate credit banks do business. I mentioned this morning that in total last year the OFI's accounted for about 9 percent of the business done by the intermediate credit banks. And that varied from 11⁄2

percent in your district, Mr. Scott, to 25 percent in the Berkeley Farm Credit District.

The next highest to Berkeley would be the Houston District where the OFI's normally account for something more than 20 percent of the business done by the credit bank.

Some of the OFI's have expressed an objection to this proposed legislation on the grounds that they would not be permitted to acquire ownership in the credit banks in the same manner that the PCA's are. Of course, they have no ownership rights at the present time, any more than the PCA's do.

We feel that it would be a mistake to give the OFI's, any of them, the opportunity to acquire ownership interests in the intermediate credit banks. We feel that the PCA's which are cooperative in nature and which form a federally chartered system that blankets the United States, and which is under the supervision of a Government agency, the Farm Credit Administration, can very logically be given the opportunity to purchase the banks of discount. Also that these banks of discount may very properly continue to provide discount privileges to the OFI's, distinctly a minority group, in the same manner that farmer cooperative associations do a certain amount of business with non-members.

That is an established principle. The non-members in some instances, even get patronage refunds, but they still remain non-members and do not have voting rights, unless they do those things which are necessary to acquire membership.

The OFI's are chartered ordinarily under State laws, except the national banks and Federal credit unions. They have no responsibility whatsoever so far as supervisory responsibility is concerned to the farm credit system. They do not have the same restrictions as to territory that the PCA's have. They may get their lending funds wherever they choose, while the PCA's may get them only from the intermediate credit banks.

Our PCA's, we emphasize right along, are charged with a public responsibility. Congress set them up as part of this system and said, "We want the services of the credit banks to be made available to every farmer who has a reasonable basis for credit."

And yet, the OFI's, which come into being in an entirely different way, which are privately capitalized and financed and ordinarily are operated for profit, although there are a few coop OFI's, do not have the same public responsibility at all.

A few of them do make loans to small operators, in about the same manner that a PCA would. The majority of them are not restricted as to territory the same as PCA's. Often they can operate within an entire State. And they are in a position where they may skim off the cream of the business, taking large loans that are profitable loans, making differentials in their interest rate in order to get large and very satisfactory and profitable loans.

A PCA is restricted to one rate of interest to all of its members, it is restricted to a cerain territory, being charged with a public interest and supervised by a Government agency-it has an obligation to make loans which it feels can be repaid but which may not be profitable loans at all.

We believe, Mr. Chairman and members of the committee, that it would be entirely inconsistent to bring into participation in the owner

ship of a very important unit of this cooperative credit system a group of users who are chartered under State law, who by and large operate for profit, and who are not subject to the jurisdiction of the Farm Credit Administration as are the PCA's. We believe that it would be a very unsatisfactory arrangement, and the Farm Credit Administration urges against any such arrangement.

We have given a great deal of thought and consideration to the operations of the OFI's and to making the services of the credit banks forever available to them, and on a very equitable basis.

Senator HOLLAND. Let me ask you this question: Is there any indication that the OFI's want to become stockholders?

Mr. ToOTELL. Well, Senator Holland, some of them do. There is no unanimity at all. Some of the OFI's do want to become stockholders. Others do not. Their views as to opposing, I think, are somewhat different, and perhaps later on in testimony before this committee that will become evident.

Our board had Mr. P. O. Wilson, who is spokesman for a number of the OFI's, meet with it on two occasions, at which the interests of the OFI's were discussed in some detail. After giving it a great deal of thought the board included in the draft of this bill a number of provisions which in its judgment will safeguard the interests of the OFI's.

First, in the declaration of policy itself, is a statement that the OFI's shall continue to be given access to the services of the credit bank on terms equitable with those of the PCA's.

Then in the body of the bill itself, there are specific provisions. Then, secondly, each district board of 7 has on it only 2 PCA-elected representatives. We feel, and we were confident that the district boards will all feel an obligation to seeing to it that the OFI's are given fair treatment by the credit bank.

And then our own board and our own Farm Credit Administration would be falling down in their duty, in fact, not complying with the law unless they also saw to that.

So we feel there is no justification for a fear, even after the Government capital is all retired from the intermediate credit banks, that there will be discrimination against the OFI's and we pledge ourselves to see that that would not happen.

Senator HOLLAND. What are the provisions in the bill-you say there are several-that make it certain that the OFI's will have the same facilities continuing?

Mr. TOOTELL. Yes; it is specifically provided in the legislation.
Senator HOLLAND. What section?

Mr. TOOTELL. Well, in the preamble there is

Senator HOLLAND. I saw that in the preamble.

Mr. TOOTELL. And I am going to call upon Mr. Bagwell to indicate the specific pages on which others are listed.

Mr. BAGWELL. In section 104, on page 13, I believe it is-I do not have Senate bill 3564-do you have a copy of that?

Mr. ToOTELL. Here it is.

Senator HOLLAND. On page 13?

Mr. BAGWELL. It is on page 13, section 104 (a)—it is an amendment to section 202 (a) of the Federal Farm Loan Act.

And then later, on page 15, which is in the same section of the bill, section 104 (d). It is an amendment to section 204 (a) of the Federal

Farm Loan Act which provides that the interest rates charged the OFI's shall be the same as the rates charged the PCA's.

In other words, the early part of that section provides for the facilities of the intermediate credit bank being available to them and a later section provides that they shall be charged the same rates of interest. Those two provisions, coupled with the declaration of policy which has a requirement that the entire law shall be interpreted consistent with that declaration, we think adequately protects them.

Senator HOLLAND. What are the provisions in existing law by which these independent outside borrowers are served?

Mr. BAGWELL. There is only one provision.
Senator HOLLAND. In the existing law?

Mr. BAGWELL. It says that the intermediate credit banks shall have the power to discount paper for these agricultural credit corporations and similar institutions. There is nothing in the law about what discount rate or rate of interest they shall be charged, and neither is there any provision in the present law which, you might say, gives them a statutory right to discount with the Federal intermediate credit banks.

And then another important section is on page 11, relating to the distribution of earnings, which provides specifically that the OFI's shall participate in the net earnings of the credit banks on the same basis as PCA's, that is, on the basis of their patronage.

That actually starts on page 9. It is section 103 of the bill, relating to the application of earnings, and runs over into page 12.

There is another section of the bill which provides that if dividends are paid on class B stock, a like dividend must be paid on participation certificates. You will find that in section 102, actually it is at the bottom of page 6, line 16:

Whenever a bank has no class A stock outstanding it may pay like dividends on Class B stock and participation certificates in an amount not to exceed 5 percent in any year as declared by the board of directors.

In other words, they are to be treated the same in the payment of dividends.

Senator HOLLAND. What is the provision with reference to the reserve and surplus, set up from January 1, 1957, on?

Mr. BAGWELL. That you will find at the bottom of page 12, and it provides that in the event of dissolution or liquidation, after payment of all debts, the surplus on hand on the effective date of the legislation shall be paid to the holders of class A and class B stock pro rata.

The holder of class A, you will recall, is the Government. And the holders of class B would be the PCA's.

Senator HOLLAND. What I was asking for, I think is found in lines 21, the bottom of page 12, through line 2 to the top of page 13:

and any surpluses established pursuant to subsection A of this section shall be paid to the holders of class A and class B stock pro rata and any remaining assets will be distributed to the holders of class B stock and holders of participation certificates.

Mr. BAGWELL. That is right.

Senator HOLLAND. Our OFI borrowers would hold participation certificates?

Mr. BAGWELL. That is correct.

Senator HOLLAND. So that if there were any distribution of a surplus created after January 1, 1957, they would be recognized ratably?