ABSORPTION OF EXCHANGE OR COLLECTION CHARGES BY MEMBER BANKS FRIDAY, DECEMBER 15, 1944 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, Washington, D. C. The committee met at 10:30 a. m., pursuant to call, in room 301, Senate Office Building, Senator George L. Radcliffe presiding. Present: Senator Radcliffe. Senator RADCLIFFE (presiding). On December 13, 1944, when the hearings on the two bills under consideration, H. R. 3956 and S. 1642, were pending before this committee, an amendment to the crop insurance bill, H. R. 4911, identical in language with the two bills under consideration, was offered by Senator Maybank. Yesterday the proposed amendment was rejected, yeas 25, nays 45. The debate and the vote on Senator Maybank's amendment appear in the Congressional Record of Thursday, December 14, 1944, beginning at page 9516 and ending at page 9553. In view of the foregoing facts and at the request of the chairman, the hearings are now closed. (Thereupon, at 10:45 a. m., the hearings were closed.) (The following statements were later received for the record :) STATEMENT OF FRANK FERGUSON, PRESIDENT, HUDSON COUNTY NATIONAL BANK, JERSEY CITY, N. J., CONCERNING THE MAYBANK BILL This bill if enacted into law will reverse the position taken by Congress in the Banking Act of 1933 which provides among other things that: "No member bank shall directly or indirectly by any devise whatsoever pay any interest on any deposit which is payable on demand." Prior to the enactment of this law there had been developed in this country an almost universal system for the par collection of checks. There were in some sections of the country still a considerable number of banks which had continued the deduction of exchange charges, but this practice which was once very general had largely disappeared and a large majority of all banks had come to recognize it as unsound. When Congress was considering the causes which led up to the banking difficulties in the early 1930's it reached the conclusion that an important cause of such difficulties had been the excessive competition among banks for deposits, which competition had led to the payment, both directly and indirectly, of relatively high rates of interest for such deposits. These practices led to the accumulation of large deposits where they were not needed and where they would not normally have gone, and in that way made funds available for unwise use. Congress sought to correct this when writing the Banking Act of 1933 in the paragraph to which I have already referred. It is important to keep in mind that the law does not prevent the deduction of exchange charges by any bank either member or nonmember. The law does prevent member banks from making an exchange charge against the Federal Reserve bank. It also prevents the Reserve banks from paying exchange charges, so that as a practical matter banks, members of the Federal Reserve System, are prevented from deducting exchange charges when remitting for their own checks. For this reason the old method of circuitous routing has continued in practice in respect to nonpar checks, with the result that most of these checks are now handled at some point by a bank which is willing to absorb the exchange charges. The Banking Act of 1933 made it unlawful for member banks to absorb exchange charges if such absorption was in fact compensation for the maintenance of a deposit balance., It should be perfectly obvious that the absorption of exchange charges by one bank for another can only e done in consideration of a payment of some kind. The customary payment, indeed in most cases the only payment available, is the maintenance of a deposit balance with the absorbing bank. It necessarily follows, therefore, that the absorption of exchange charges is in fact a payment in lieu of interest for the use of such deposit balance. The question which this committee needs to consider is whether anything has happened since 1933 which would make it appear that the action then taken was unwise and should therefore now be reversed. I do not think the situation has changed. It was wise legislation in 1933; it is wise today. May I point out, however, that if this law is reversed it will result in class legislation for the benefit of a relatively small group. The proposed amendment provides in effect that the absorption of exchange charges shall not be considered the payment of interest upon deposits. This will not alter the fact that the payment of such exchange charges will nevertheless continue to be the payment of interest. It merely means that the now relatively small group of banks which make a practice of charging exchange will be permitted to collect interest upon the balances which they maintain, whereas other banks who would be equally well entitled to interest in some other form, will not be permitted to receive such interest. This is obviously unfair and unwise. Should this amendment to the law be adopted it is probable that a considerable number of banks which do not now charge exchange and which would prefer to continue not to charge exchange, will nevertheless feel forced to adopt that practice in part in self-defense as an offset against the exchange charges which they are forced to pay to those banks which do exact the charge. This would lead to a gradual expansion in the making of exchange charges and would in my judgment sooner or later result in a break-down of the entire exchange-collection system, for the simple reason that if any large number of banks should adopt the practice of charging exchange on their checks, the amount of exchange charges deducted would become so large that the banking system would be unable to absorb the expense and would in self-defense be obliged to pass the charges back to be assessed against the original depositors of the checks. This would not only be very unsatisfactory to bank depositors generally, but would also add greatly to the cost of banking service due to the clerical labor and expense involved in making such charges, and at some point would result in a break-down of the system. The successful operation of the present system under which certain banks deduct exchange is really dependent upon the willingness of some other bank to absorb the exchange charges. A considerable number of banks have been willing to absorb such charges in return for balances maintained with them and in some cases at least apparently have found the business to be profitable. It should be obvious to anyone, however, that it would be impossible to develop this method of compensation as a means of absorbing exchange charges if the deduction of exchange was at all universal. It should be equally clear that if an attempt is made to do this an exceedingly unhealthy banking situation will result because deposits would be pyramided in those banks which are willing to absorb exchange charges to an extent far beyond any proper use that those banks can make of such deposits, thus completely nullifying what was the intention of the Congress in 1933. In my judgment this is dangerous legislation and should not be adopted. DECEMBER 14, 1944. Hon. ROBERT F. WAGNER, BOARD OF BANK CONTROL, Chairman, Senate Banking and Currency Committee, Senate Office Building, Washington, D. C. DEAR SENATOR WAGNER: On January 12, 1944, the Board of Bank Control for South Carolina adopted the following resolution relating to the interpretation of the Board of Governors of the Federal Reserve Bank on the enforcement of regulation Q: "Whereas the recent interpretation by the Board of Governors of the Federal Reserve System of regulation Q will materially affect the present well-ordered operation of the banking institutions in South Carolina: Now, therefore, be it Resolved, That it is the sense of this board that the Congress should immediately take the necessary action to return the matter of exchange and collection costs between banks to the status existing before the present interpretation of the Federal Reserve Board became effective, and, further, That a copy of this resolution be forwarded to the Banking and Currency Committee." This resolution was based upon the fact that more than 70 banks of this State have for the past 10 years depended upon exchange charges on services rendered to their customers as a considerable portion of their gross income to pay the cost of operation. This income has been in direct relation to the accommodation rendered them by their reserve city banks. Should these country banks be denied the service heretofore rendered to them by the city banks by the interpretation of the board of governors in the enforcement of regulation Q, these small banks must of necessity find some additional source of revenue or readjust and reduce their budget for operation, or go into liquidation. It would be greatly appreciated if you would incorporate this letter in the record of the hearing now being conducted by your committee on this matter. Very truly yours, JEFF B. BATES, Chairman. ADDITIONAL STATEMENT OF CALE W. CARSON IN BEHALF OF THE NEW MEXICO BANKERS' ASSOCIATION TO THE SENATE COMMITTEE ON BANKING AND CURRENCY IN CONNECTION WITH SENATE BILL No. 1642, KNOWN AS THE MAYBANK BILL I am Cale W. Carson, president of the First National Bank of Albuquerque. For the year which closed April 29, 1944, I was president of the New Mexico Bankers' Association. Our association held its convention for that year in Albuquerque on April 28 and 29 and at that convention passed a resolution in opposition to the Maybank bill, identified as S. 1642, reading as follows: "Be it further resolved, That the New Mexico Bankers' Association go on record as being opposed to the passage of the Brown-Maybank bill. We believe that it would be detrimental to the banking business and further that we consider it would be discriminatory and places the burden of expense involved in the absorption of exchange on the wrong parties, and that its passage would tend to bring about abuses that would have harınful effects upon the future of our banking system." This resolution passed the convention without a dissenting vote. There are 41 banks in New Mexico. Twenty-two of these are national banks and 19 of them are State banks. All of the State banks are members of the Federal Reserve System except 5, and all 41 are on the par list, paying the checks drawn on them by their depositors at par without the deduction of any so-called exchange charges. The New Mexico Bankers' Association asked me to present the foregoing resolution to the committee having the bill in charge, if an opportunity could be obtained to do that. I have appeared before your committee, therefore, in behalf of all of the banks of New Mexico. Most of the New Mexico banks are small, country banks, a number of them having total resources of less than $2,000,000. It is the opinion of the New Mexico banks that: 1. The passage of the Maybank bill would reopen the question of the payment of interest on demand deposits now prohibited by section 19 of the Federal Reserve Act. 2. We have come a long way, during the last 30 years, on the road to par clearance, which is certainly the goal that thoughtful people are working toward; and, in our judgment, the passage of this bill would do much to destroy that progress. 3. The real question involved in this bill, it seems to us, is whether the advantages accruing to the 2,100 banks in the United States, by reason of the fact that they are still able to assess "exchange charges" against the people to whom their depositors issue checks, is worth not only the money they receive, but the consequent annoyance and inconvenience that will be suffered by many of the other 11,400 banks, as well as by the people of the entire country. 4. We think the Federal Reserve Banking System is of vital importance to our country today. Certainly we do not see how our requirements in this war would be financed without it. We think the passage of this bill would unquestionably have a tendency to weaken the Federal Reserve System. If the Congress of the United States should encourage the practice of making exchange charges, which can be made only by nonmember banks, we expect to see a tendency on the part of banks throughout the country to withdraw from the National Banking System and from membership in the Federal Reserve System, in order to protect themselves from the discriminatory effects of this legislation. It is the opinion of the bankers of New Mexico that the provisions of this bill involve no controversy between the so-called small, independent country banks and the so-called large, city banks. For all of the foregoing reasons we recommend very strongly that the question of the payment of interest on demand deposits, which has already been disposed of by section 19 of the Federal Reserve Act, not be reopened by the passage of S. 1642, known as the Maybank bill. The proper way, in our judgment, to stop paying interest on demand deposits, as required by existing law, is to discontinue the practice altogether and not to encourage it as do the provisions of this bill. Hon. BURTON K. WHEELER, CALE W. CARSON. HELENA, MONT., December 5, 1944. United States Senate, Washington, D. C.: Referring to Maybank bill, S. 1642, wish to advise that Montana Bankers Association, at July convention, unanimously opposed passage of the bill. Previously, at the bankers group meetings throughout the State, where the matter was discussed and explained, and where practically every bank in each district was represented and record votes were made, all bankers were opposed to the bill with the exception of one bank, possibly two. Even our nonpar banks are opposed to the bill. With possible exception of the one, or maybe two, bankers previously referred to. In the interests of good and sound banking, and satisfactory relationships between banks and their customers in Montana, it is very necessary and most desirable that the bill be defeated. We respectfully urge your assistance in bringing this about. Several State bankers had planned on attending the hearing to protest, but we were only advised today that it would be held Thursday, December 7, which precludes the possibility of their attending. Thanks. BEN R. DRAPER, Secretary Montana Bankers Association. THE CONTINENTAL NATIONAL BANK, Hon. B. K. WHEELER, United States Senate, Washington, D. C. DEAR SENATOR: I enclose a letter from Montana Bankers Association secretary which explains the suggestions the American Bankers Association has made regarding the Brown-Maybank bills. If the correspondent banks of the small banks are to be allowed to absorb exchange of the small banks, then a lot of small sunshine banks will spring up again and we will have a lot of poor banks with a lot of sharp practices which will reflect on the whole system. Then, too, if the State banks are to be able to charge their own customers exchange and have their correspondent banks absorb it, then it will not hurt their business, because the customers will never know about it and, if they do, it will not make any difference, because it will not cost them anything. However, it is self-evident that it will accomplish the same thing for the small banks as if they were getting interest on their balances from their correspondent banks only it will make them more money. Naturally that being the case the small national banks will take advantage of that and take out State charters which, of course, will hurt the Federal Reserve bank and it will again bring banking down to a lower level where graft and irregularities will grow and prosper. If it is desirable to again make the small banks get |