The CHAIRMAN. My point is that the borrowers in these countries would be perfectly willing to pay more interest. If they paid more interest, we could build up a larger reserve of funds here to protect ourselves against losses, and thereby make, in my opinion, more loans, which is very, very much needed in all these countries. They need the loans very badly now. We are getting off the subject just a little bit. Senator SPARKMAN. Mr. Chairman, I wonder if I might ask 2 or 3 very brief questions on that point, for the benefit of the record since we are dealing with this. I am not sure that there has been placed in the record at any point any explanation as to this type of operation; in other words, we are bringing out now the matter of participation and nonparticipation. If I understood Mr. Arey correctly, the guaranteed loans now are very, very small in number or in percentage. Mr. AREY. It is only around $30 million. Senator SPARKMAN. Out of what? Mr. AREY. Out of $2,800 million. Senator SPARKMAN. So the percentage is quite small? Mr. AREY. Yes, sir. Senator SPARKMAN. Are the nonguaranteed loans made out of the capital funds of the bank itself? Mr. AREY. We have $1 billion which was furnished by the sale of stock to the United States to begin with. Then we have authority to borrow from the Treasury and make loans or to guarantee for an additional $3 billion, which gives us a total lending authority of $4 billion outstanding at any one time. Senator SPARKMAN. What is the capitalization of the bank? Does $1 billion represent it? Mr. AREY. We received $1 billion for the stock. Senator SPARKMAN. Is that the total capitalization? Mr. AREY. We have our surplus. Those funds are available to us to use. Senator SPARKMAN. The authorized capital stock is $1 billion? Senator SPARKMAN. All of that is owned by the United States Government? Mr. AREY. Yes, sir. Senator SPARKMAN. Is there any provision whereby the United States Government, or your bank, can dispose of any part of that stock to banks or lending institutions? Mr. AREY. No. Senator SPARKMAN. In other words, it must continue as a Government corporation, with stock totally owned by the Government? Mr. AREY. Yes, sir. Senator SPARKMAN. That is all. The CHAIRMAN. Are there any further questions? If not, we thank you very, very much. Do you have anything further to say? Mr. AREY. NO. The CHAIRMAN. Our next witness will be Mr. Earnest H. Meili. vice president of the Henry Schroder Banking Corp. of New York City. I understand Mr. Meili is not here. We will pass on to Mr. August Maffry, vice president of the Irving Trust Co. of New York City. Mr. Maffry, you may proceed in your own way. STATEMENT OF AUGUST MAFFRY, VICE PRESIDENT, IRVING TRUST CO., NEW YORK, N. Y. Mr. MAFFRY. Mr. Chairman, I am August Maffry, vice president of the Irving Trust Co. in New York. I was also for several years a vice president of the Export-Import Bank. If you wish, Mr. Chairman, I can read the answers of my bank to the questionnaire which was directed to us, or, if you prefer, I can discuss the issues which we believe to be involved, in a general sense. The CHAIRMAN. Why don't you proceed in your own way, in the way you think will be most helpful to us. May we put the replies in the record that you made? Do you have a copy? Mr. MAFFRY. Certainly. The CHAIRMAN. Without objection, the replies to the questionnaire will be placed in the record at this point. You can proceed to speak extemporaneously, if you desire. (The material referred to follows:) ANSWER TO QUESTIONNAIRE BY HIRAM A. MATHEWS OF THE IRVING TRUST Co. OF NEW YORK, SEPTEMBER 30, 1953 1. Has the Export-Import Bank been of assistance to clients of your bank? Answer. Yes. The credits extended by the Export-Import Bank have been of material assistance to exporters who are our customers. 2. Has it competed with private capital in your area? Answer. The Export-Import Bank has not to our knowledge competed with commercial banks. 3. Has it taken business away from your bank and, if so, how and to what degree? Answer. No. The Export-Import Bank has in no instance to our knowledge taken business away from us. 4. Can the Export-Import Bank use the services of your bank more than in the past and, if so, how? Answer. Yes. We believe so and have set forth our suggestions in our answers to questions 9 and 10 below. 5. What position has your bank taken with respect to term loans, i. e., where repayment exceeds a term of 6 months? Answer. We have made term loans to prime domestic customers and to a select few foreign clients. Considerations of liquidity strictly limit the proportion of a commercial bank's assets which can appropriately be tied up in this way. 6. Are you financing, without recourse, shipments to foreign countries payable over term periods? Answer. No. 7. In cases where you have acted for the Export-Import Bank in the operation of credits, has your cooperation been adequate, taking into consideration the risk factors involved, by the Export-Import Bank as a Federal agency? Answer. As regards commissions on letters of credit opened by us under the guaranty of the Export-Import Bank, our compensation has been received from our customers rather than from the Export-Import Bank. These commissions have been in line with established rates and in this sense adequate. On the other hand, the rate allowed us by the Export-Import Bank on funds advanced by under its guaranty has usually not been adequate. This has been especially true during recent years when the rate allowed has been considerably below our prime rate and also below the risk applied to similarly riskless loans, as, for example, demand loans secured by United States Government obligations. The rate on commercial bank advances guaranteed by the Export-Import Bank should not be compared, as has sometimes been suggested, with the rate on short-dated United States Government obligations. Funds invested by commercial banks in United States Treasury bills, for example, can be withdrawn at any time by the sale of the bills, and surplus funds can similarly be reinvested in bills at any time. Thus, from the point of view of commercial banks, Treasury bills offer advantages of liquidity which are not offered by advances at fixed terms made under Export-Import Bank guaranties. 8. Have you participated with the Export-Import Bank in any of its loans without the latter's guaranty? If so, was your experience satisfactory? Answer. Yes. We participated with the Export-Import Bank, but without its guaranty, in a 2-year loan to the Netherlands in 1946 and in a short-term cotton credit to Italian banks in the same year. Our experience in these instances was satisfactory. We made commitments to participate with the bank, again without its guaranty, in several other credits but the business did not materialize. 9. Do you consider continuation of the Export-Import Bank's loaning facilities essential in the interest of international trade? and; 10. Has the Export-Import Bank facilitated the expansion of international trade in the past and, if so, how can it more adequately expand it in the future? Answer. We believe that the Export-Import Bank has facilitated the expansion of international trade in the past. We consider that a continuation of at least some of its loaning facilities is desirable from the point of view of exporters and their banks, as well as from the point of view of public policy, as set forth in what follows. We also believe, with reference to question 4, that the commercial banks could participate in a more significant way in the operations of the Export-Import Bank as suggested below. We distinguish three major types of loan operations by the Export-Import Bank and comment on each in turn: (a) Long-term development loans to foreign governments and others: We believe that practically all such loans should be made in the future by the International Bank for Reconstruction and Development insofar as its members are concerned. We favor this especially because the International Bank obtains its funds from the private capital market and because its operations therefore do not burden the United States Treasury or the Federal budget. However, there remains the problem of development loans to friendly countries which are not members of the International Bank and which, therefore, have no access to its facilities. In the past there existed an international capital market, including an important market in New York, to which foreign governments and other foreign borrowers could come and obtain long-term financing by offering their obligations to the public. This market no longer exists, and there is no prospect of its revival in the near future. There is, as a result, a gap in private financing facilities which is being partly filled by the International Bank but only insofar as its members are concerned. Until an international capital market is reestablished, the Export-Import Bank should continue to be a source of longterm development loans to the relatively few countries which are not members of the International Bank, with due regard always to the restrictions laid down in its statute and with due regard also to the consequent burden on the Federal budget. (b) Loans to foreign governments based in important degree on political consideration: The United States Government should continue to have a permanent lending institution of its own as a financial arm of foreign policy. This is now more than ever desirable in view of the prospective decline in emergency financial aid to friendly foreign countries. Circumstances will undoubtedly arise in the future, as they have in the past, where political considerations make it desirable to give financial aid on a loan basis to foreign_countries. In some instances the countries involved may be members of the International Bank but, for one reason or another, not eligible for loans from that source or for the purpose required. Where loans of this type are indicated, an institution such as the Export-Import Bank can put them on the soundest possible economic footing with the best possible prospects of repayment. Needless to say, it is our view that loans of this character should be kept to an absolute minimum consistent with the foreign policy objectives of the Unired States. (c) So-called exporter loans made on application and with the participation of individual exporters: These loans are needed to finance exports of American products at extended term in competition often with exporters of other countries enabled by their governments to offer credit terms. We believe that the Export-Import Bank should continue to operate in respect of these exporter loans but we believe that it can do so to a considerable extent by the use of private funds made available by commercial banks with a consequent reduction, or possibly even the elimination, of the burden on the Federal budget. We suggest that commercial banks, acting individually, would be willing to extend a considerable aggregate amount of credit to exporters on a nonrecourse basis under the protection of a guaranty against nonpayment of principal for any reason to be extended by the Export-Import Bank. We assume that the ExportImport Bank would require the exporter in each case to take for his own account a percentage of the risk which would be related to his gross profit margin on the transaction being financed. This approach would have several advantages. First, it would permit each bank to extend credit to its own customers to the extent dictated by its own loan policy. Second, the United States Government would be relieved of the necessity of finding public funds to finance exports which it believes desirable to promote in the national interest, and would assume only a contingent obligation to pay in the event of a default by the foreign obligor. The United States Government would nevertheless have full control of the use of its credit through its decision, in accordance with established criteria, to extend or to withhold its guaranty. Third, under this approach the rate of interest to be applied to export financing would be determined by money market conditions and competition among banks. If exporters are obliged to go to their own banks, as here suggested, the banks will undertake the financing sought by exporters only at rates which make the business attractive in the light of prevailing money market conditions. Such rates would probably compare favorably with the cost of long-term export financing in other countries with whose exporters American exporters must compete. We assume that arrangements such as those just described would be preferable from the point of view of the United States Government to the past practice of loaning public funds through the Export-Import Bank. Under the former system, the Government took the risk and also supplied the funds. Under the proposed system, the Government would take the risk but would be obliged to raise public funds only in the event of a default. If the Government were prepared to go further and not only extend its guaranty against nonpayment to export financing provided by commercial banks but also give to the banks a "take-out" agreement under which it would purchase the relevant paper on demand, then the possibilities of attracting private funds into medium and long-term export financing would be greatly increased. Under such arrangements, the commercial banks would have much less hesitancy about tying up their funds, and would presumably be willing to do so at the prime rate. The disadvantage to the Government would be the tendency on the part of the banks to demand takeouts in the event of a substantial hardening of interest rates. However, it should be recognized that there are other considerations, including particularly the factor of customer relations, which would induce banks in many instances to hold the paper themselves even in the face of some increase in money rates. There are additional types of operations by the Export-Import Bank on which we offer no detailed comments. These include (a) relatively short-term credits to finance the export of agricultural products; (b) loans to finance the production in foreign countries of strategic materials under the terms of section 302 of the Defense Production Act of 1950; and (c) loans to foreign governments for the purpose of liquidating commercial arrears to United States exporters and United States banks. The first of these additional types of loans has been useful at times in the past in maintaining foreign markets, especially for cotton. The second, which is for the purpose of expediting the production and delivery from foreign sources of strategic materials, is not at issue in the questionnaire to which we are addressing ourselves. The third we believe to represent a highly questionable use of public credit. Senator ROBERTSON. What is the capitalization of your bank? Mr. MAFFRY. Capital and surplus, about $120 million; $50 million of capital and the rest is surplus and undivided profits. First, we believe the Export-Import Bank has done a good job. We think it has been of great assistance to clients of our bank. We do not believe it has competed with our bank or other commercial banks in any true sense. The CHAIRMAN. Why do you make that statement? Is it because the loans were such that you just as a banker would not have made them, or just could not have made them? Mr. MAFFRY. That is the fact. We make that statement because the bank has through its operations enabled many of our clients to find markets abroad that they would otherwise have been unable to find. The CHAIRMAN. Was it due to the fact that the New York State laws would not permit you to make that kind of loan, or that you just do not want that kind of loan, or you do not have sufficient capital to make that kind of loan? Why is it that your bank could not handle that type of loan for your particular customers? You handle all of their domestic requirements, do you not? Mr. MAFFRY. Of course. The CHAIRMAN. Why, if you can handle their domestic requirements, can't you handle their foreign requirements? Mr. MAFFRY. It is partly a matter of banking law. It is partly a matter of banking supervision. It is even more, I should say, a matter of banking practice. Many of the transactions which have been financed by the ExportImport Bank involved loans to foreign borrowers. Often they involved loans which extended over a period of years. This is a type of transaction which commercial banks do not undertake and, I should say, should not undertake. They are not suited for commercial banks. The CHAIRMAN. Then, if we are going to have an expanded world trade, or export business, and do business other than on a cash basis, are you saying that our banking system in the United States is just not geared to the point of handling it at the moment? Mr. MAFFRY. I do say this, sir, because there is a great gap in our banking system. Unfortunately, we do not have in the United States a type of banking which exists in Europe, known as merchant banking. It has never developed in the United States. It is the type of banking that would undertake to finance transactions of this sort. But even in Europe, where merchant banking does exist and where it is a vigorous type of banking, there are various types of government facilities available to the exporters of the European countries, just as the facilities of the Export-Import Bank have been available to the exporters of the United States. So, even in European countries there. is an apparent gap which has been filled by a government facility. The CHAIRMAN. Would you say to a greater degree than the ExportImport Bank has acted in the United States? Mr. MAFFRY. I think that is a very difficult question to answer. In some instances, yes; in other instances, no. I think no general answer is possible. You would have to specify countries and periods of time to give a meaningful answer to your question, sir. The CHAIRMAN. You feel definitely that there is needed in this country a type of bank or banking institution that is set up under the proper laws and set up properly to handle the financing of export business in the United States? Mr. MAFFRY. We do, because there is a type of export, particularly exports of equipment, which requires in many instances financing at extended term. This is a type of financing which is not available in the United States at this time from private sources. The CHAIRMAN. Isn't it a fact that there are possibly 20 or more countries of the world today who are pretty much guaranteeing their exporters that they will receive payment for their exports? Mr. MAFFRY. I have not counted them. I am not sure there are 20. There are a good many. There are a number of the European countries. Japan is an interesting example. The CHAIRMAN. It is primarily handled by the central banks? |