Insured and uninsured commercial banks classified by size of bank, Oct. 1, 1934

Exclusive of 71 insured banks not reporting statistics and 31 uninsured banks for which no deposit

figures were available.

Deposits in insured and uninsured commercial banks classified by size of bank,

1 Total deposits reported to the corporation on Oct. 1, 1934 differ in some respects from those shown on published statements.

2 As reported in Rand-McNally Bankers' Directory for July 1934.

Exclusive of deposits of 71 insured banks not reporting statistics and 31 uninsured banks for which no deposit figures were available.

Mr. CROWLEY. To arrive at a practical basis for estimating the amount of funds necessary to cover the insurance liability of the Corporation, our first consideration has been the volume of losses which depositors have borne during the past.

From July 1, 1864, the beginning of the national banking system, to June 30, 1934, about 16 thousand commercial banks, which include national banks, State banks, loan and trust companies, stock savings banks, and private banks for which there are data in the reports of the Comptroller of the Currency, with deposits of nearly 9 billion dollars, are known to have suspended operations. Losses to depositors in these banks are estimated at 3 billion dollars over and above all recoveries.

The estimates of losses to depositors in suspended commercial banks are based upon available data which clearly minimize the facts. The figures for national banks are fairly complete and reliable, and are taken from reports of the Comptroller of the Currency. The figures for other commercial banks, however, are incomplete, particularly for the period prior to 1920. Since all failures have not been recorded, bank depositors have suffered losses which have not been recorded. For example, many records of voluntary liquidation by banks ignore the fact that depositors were not paid in full. Then, again, bank reorganizations, in late years, have been based upon the waiving of depositors' claims, while in other cases depositors have voluntarily reduced their claims or made contributions to capital as a means of absorbing losses.

Mr. KOPPLEMANN. Mr. Crowley, do you mean to say that even today there are banks that fail without being reported, private banks or any kind of a bank?

Mr. CROWLEY, What we are talking about is during the last few years.

Mr. KOPPLEMANN. I know, but I wondered whether that situation

still exists.

Mr. CROWLEY. I think there are some States in which banks might fail, and we cannot get the information from them.

Mr. KOPPLEMANN. There are still?

Mr. CROWLEY. Yes.

The CHAIRMAN. Inasmuch as that question has been asked, what information have you to support the statement that there have been voluntary liquidations of State institutions, in which the depositors are not paid in full? How do you get information like that?

Mr. Fox. Mr. Chairman, the source of the information is the Federal Reserve Board. They make contacts with the State authorities through their agents in the 12 Federal Reserve districts. If the State authorities inform the agents, we get the information. However, if the State authorities have no control over the banks, as is the case with some private banks, we would not get the information.

The CHAIRMAN. Would it not follow as a matter of course that when a bank became insolvent, to the extent of wiping out its capital structure, and leaving it with its depositors unprotected, there would be a liquidation in the regular way of such an institution?

Mr. CROWLEY. What we are trying to bring out, Mr. Chairman, is that there have been a lot of insolvent banks that have gone to their depositors and made private deals with them, whereby they wrote down their deposits liability in some instances as high as 40, 50, or 60 percent, and when they waived a portion of those deposits, the portion that they waived was used for capital purposes.

Mr. CROSS. Did you get that through the Internal Revenue Department?

Mr. CROWLEY. No; there would be no reason for their reporting to the Internal Revenue Department.

The CHAIRMAN. I was of the opinion that there would be no report of that kind to the Commissioner.

Mr. CROWLEY. There would be no way to have it recorded. The only place you could get it would be through the local bank commissioner, and a lot of them do not keep complete records.

Mr. HANCOCK. What is your best estimate of the losses which have occurred that are not accounted for?

Mr. CROWLEY. Have you any idea what that might amount to, Mr. Fox?

Mr. Fox. No, sir.

Mr. CROWLEY. What we have been trying to do is to find out from the various State departments how much their depositors have lost through waivers, and it has been an almost impossible thing to determine, because they have kept no records of it, but we do know it has been a very substantial sum.

Mr. REILLY. In the case of Wisconsin have you a record?

Mr. CROWLEY. We have not been able to get that as yet.

Mr. Fox. We are getting a record for the past 4 years. We already

have records from 18 States.

Mr. GOLDSBOROUGH. Have you a record from Maryland?
Mr. Fox. Yes, sir.

The CHAIRMAN. Before you leave that, do you attempt to include these estimated and unrecorded losses as a part of the total embraced in your figures?

Mr. CROWLEY. No. As I understand it, Mr. Chairman, the $3,000,000,000 of loss has been determined from the actual liquidations; is that correct, Mr. Fox?

Mr. Fox. Yes; from the actual figures.

The CHAIRMAN. Then there are no figures based on that, so it is not so material.

Mr. CROWLEY. The charts which I will later file show, by years from 1864 to 1934, the percentage of national and other commercial banks suspending and the ratio of deposits in suspended banks to deposits in active banks. The ratio of deposits in suspended banks to total deposits in all active banks is smaller for national than for other commercial institutions.

In other words, the loss from 1864 to 1934 was considerably less in the national system than it was in the State system.

Our estimates indicate that about 1 billion dollars of the 9 billion dollars which was on deposit in commercial banks that failed during the 70-year period were secured by pledge of collateral or otherwise. Of the remainder, some 6 billion dollars were in accounts of less than $5,000 or constituted the first $5,000 of large accounts. In other words, 6 billion dollars were within the $5,000 limit. Two billion dollars represents the volume of these deposits which were in accounts with balances above $5,000. The estimates of the amount of funds representing balances in excess of $5,000 were made on the basis of figures showing deposits classified by size of accounts in national banks in 1918, in member banks of the Federal Reserve System as of May 13, 1933, and in all insured commercial banks as of October 1, 1934.

For every $100 of deposits in the entire commercial banking system, about 32 cents a year was lost. Of this figure, it is estimated that 24 cents represents losses to depositors with balances not in excess of $5,000, while the remaining 8 cents represents losses to depositors having balances in excess of $5,000. For every $100 of deposits in the national banking system, 21 cents per year was lost as against 42 cents per $100 per year in the State system. The following table summarizes the estimates of losses to depositors in suspended national and other commercial banks during the 70 years ending June 30, 1934.

(The table referred to is as follows:)

Losses to depositors in suspended commercial banks July 1, 1864-June 30, 1934

Mr. CROWLEY. Losses to depositors have been most severe during the periods of business depression. Two-thirds of the losses during this entire 70-year period resulted from bank suspensions occurring during the 4 years ending June 30, 1934. In other words, two-thirds of the losses in the banking system in this country took place from 1929 to June 30, 1934. For these 4 years losses to depositors are estimated at $1.32 per year for each $100 of deposits in the commercial banking system. Comparable losses during the depression of the 1870's amounted to 35 cents, and during the depression of the 1890's amounted to 23 cents. The figures for the early periods understate the losses, but it is apparent that the losses in these earlier periods were not as great in proportion to total deposits as during the past 4 years. The data are summarized on the following tables. The first shows the losses in commercial banks which suspended and did not reopen during the three depression periods; the second compares losses during the 14 years included by the three critical periods, with the other 56 years since 1864.

(The tables referred to are as follows:)

Losses to depositors in commercial banks suspending during periods of crisis, banks which did not reopen

[Federal Deposit Insurance Corporation, Division of Research and Statistics]

Losses to depositors in suspended banks, July 1, 1864-June 30, 1934, 3 crisis periods contrasted with the remaining years, all commercial banks

[Federal Deposit Insurance Corporation, Division of Research and Statistics]

1 Includes figures for banks suspending during period July 1, 1930, to Mar. 15, 1933, which subsequently reopened.

Mr. CROWLEY. The experience of the past 70 years indicates that to repay losses suffered by all depositors in our suspended commercial banks, an assessment of 33 cents per $100 of total deposits, or onethird of 1 percent of total deposits in all open commercial banks, would have been necessary. Excluding the losses incurred during the three depression periods-1873-78, 1892-97, and 1931-34-and confining ourselves to losses occurring during the balance of the 70 years, an assessment of one-eighth of 1 percent would have been necessary.

In the past, the number, timing, and geographic concentrations of bank suspensions have been chiefly due to fundamental weaknesses in banking structure and the course of economic events. Suspension of individual banks within the areas affected has reflected, in the main, the quality of bank management. In the future, the magnitude of losses which will result from bank failures will also depend upon the trend of economic events, the changes which may occur in the structure and functions of the commercial banking system, the caliber of the individual bank management, the extent to which the system is reinsured against defalcations, and the quality of the supervision exercised over these banking institutions.

Of course, the future trend of economic events cannot be fore

cast.

Changing tendencies are now apparent in the structure and functions of commercial banking. On the one hand, the drastic reduction in the number of banks during the past 14 years has greatly relieved the overbanked condition in many communities. On the other hand, new financial agencies, serving specialized needs, have been created, and will compete, to some extent, with commercial banks. The types of credit which may be extended by commercial banks may be subject to varying degrees of risk.

The extent to which the caliber of bank management will improve in the future, over what it has been in the past, cannot be estimated. While it is hoped that a better quality of personnel will develop, it must be recognized that there will continue to be poorly managed banks and that such institutions will eventually succumb. We cannot foretell the extent to which the existence of deposit insurance will influence bank management.