View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Confidential

February 10,
A Pjlan To Improve Federal Banking Supervision.*

A consolidation of the functions and personnel of the multiple
governmental agencies now attempting to supervise the commercial banking
system is essential, not only for the banks but, more importantly, in
the public interest. It is doubted if there is a single governmental
undertaking in which there are more overlappings, duplications, and conflictiiig jurisdictions than will be found in the fantastic arrangement
of agencies and authorities now charged with responsibilities over the
banking system. Much of this could be corrected by reorganization and,
while it is unnecessary to direct attention to all of the numerous reorganizations, consolidations, and transfers brought about among other
governmental agencies during this Administration, "The Farm Credit Administration" and ftThe Home Loan Bank System" are typical examples of the
improved structural organization which could be expected from action along
similar lines in the case of the banking agencies.
The President has stated that "The Farm Credit Administration was
organized to eliminate overlapping, prevent duplication, settle conflicting
jurisdictions - in short, to provide a more efficient, logical and consolidated credit service for farmers at a low cost." The Executive Order
creating it consolidated "the functions of all present Federal organizations
v/hich deal primarily with agricultural credit; namely the Federal Farm
Board, the Federal Farm Loan Board, the functions of the Secretary of Agriculture with respect to loans in aid of agriculture, and those of the Reconstruction Finance Corporation pertaining to the management of the Regional
Agricultural Credit Corporations."
* If, in extending the effective date of the Reorganization Act, Congress
should see fit to eliminate some*of the present exemptions, substantial
changes in the proposed plan would be in order.




In the case of the Home Loan Bank System, the Home Owners1 Loan
Corporation, which did the salvage work in the home mortgage field, the
Federal Home Loan Bank Board, which supervises the Federal Home Loan banks
and their members, and the Federal Savings and Loan Insurance Corporation,
which insures the shares of Federal Savings and Loan Associations and other
members of the Federal Home Loan banks, all have been brought under common
management•
In sharp contrast, the number of Government agencies dealing with
the commercial banking system has increased. The salvage job in the banking
field corresponding to that done by the Home Owners1 Loan Corporation in the
home mortgage field was done in the first instance by the Reconstruction
Finance Corporation and the function is now divided between it and the Federal Deposit Insurance Corporation. The latter Corporation insures deposits.
Monetary and credit powers arc divided between the Federal Reserve System
and the Treasury. Supervisory functions are even more widely scattered
with a variety of powers in the hands of one or more of all of the aforementioned agencies and with the Federal Deposit Insurance Corporation in
practice supervising nonmember insured banks, the Board of Governors Federal
Reserve Banks and member State banks, and the Comptroller of the Currency
national banks.
Nor is it believed possible to work out at this time any comprehensive and effective plan for consolidation through legislation. With the
many different groups in the banking fraternity and Government and with as
many panaceas as there are groups, nothing but conflict could come from
an attempted solution by legislation. Therefore, with the expectation
that the Congress will be asked to renew the power of the President to
reorganize the administrative agencies of the Government and that the




-3*
power vdll be renewed in the identioal form in which i t wr.s last granted,
i t is suggested that the functions of the several bank supervisory
agencies be consolidated in the manner and along the general lines
which the following plan suggests*
The commercial banking system numbers about ll|., 500 banks of
which 5#2OO are Federally chartered national banking associations and
9t3°°

a r e

State chartered institutions*

ally supervised*

All national banks are Feder-

In addition, Federal supervision extends to a great

many State banks because of their membership in the Federal Reserve
System, the insuranoe of their deposits by the Federal Deposit Instflv*
ance Corporation, or contractual relationships with the Reconstruction
Finance Corporation*

Furthermore, a l l State banks are subject to some

Federal regulation such as imposed by the Securities Exchange Act of
193^ with respect to brokers* loans and loens for the purchase or carrying of registered stocks and by the Emergency Banking Act and Proclamations and Regulations thereunder.

Of the 9#3OO State chartered banks

the deposits of a l l but about 1,000 are insured by the Federal Deposit
Insurance Corporation and while only 1,200 of these 8,300 insured State
banks are members of the Federal Reserve System, 85 per cent of total
deposits at commercial banks are held by member banks of the System,
that is to say by the 5*200 national associations and the 1,200 member
State banks*
Including the Secretary of the Treasury and the Reconstruction
Finance Corporation there are five Federal agencies which exercise supervision over the commercial banking system*




The bank su^rvisory pavers

of the Secretary of the Treasury and the Reconstruction Finance Corporation are by no means minor but in relation to the other functions
which they perform and in comparison with the supervisory functions
of the three other agencies they occupy a relatively minor position*
The other three agencies are (1) the Federal Deposit Insurance Corporation, a Government corporation, (2) the Board of Governors of the
Federal Reserve System, an independent establishment of the Government,
and (3) the Office of the Comptroller of the Currency*

The last named

office is a bureau of the Treasury but curiously enough the Comptroller
is appointed by the President for a term of five years whereas the
Deputy Comptrollers are appointed by the Secretary of thq Treasury,
who also exercises certain authority with respect to other personnel
of the office*
National Banking Associations are chartered by the Comptroller
of the Currency but they are obliged to become members of the Federal
Reserve System and their deposits must be insured by the Federal Deposit
Insurance Corporation*

The deposits of State banks becoming members of

the Federal Reserve System must be insured by the Federal Deposit Insurance Corporation and State banks whether or not members of the Federal Reserve System may have their deposits insured by the Federal Deposit Insurance Corporation*

All banks are subject to the regulatory

powers of the Secretary of the Treasury arising out of the Emergency Banking Act and the Proclamation of the President and all may have relations
with the Reconstruction Finance Corporation arising out of loans from




-5 *
the Steconstruction Finance Corporation or sale to it of capital obligations. The result is Federal supervision of some sort over practically all banks with a complete absence of uniformity in the supervision to which the several different classes of banks are subjected.
Moreover, the present system is not the result of orderly
development under a comprehensive plan but, on the contrary* is the
consequence of unrelated actions taken during periods of emergency
and of piecemeal development over a period of many years. It is not
surprising, therefore, to find the final product to be a conglomeration of agencies with diffused responsibility, divided and conflicting
powers and gaps and overlaps in authority.

Such divided responsibility

cannot but materially weaken if not finally break down efforts to
supervise the banking system in any effective manner, all of which is
developed in more detail in the Boards Annual Report of 1938, pages
1 to 12,
As each agency has been created or given new responsibilities
appropriate personnel arrangements have followed, to the end that in
each agency there are now divisions whose work is identical or parallel
to the work carried on by corresponding divisions in the other agencies.
Thus, supervision by the Federal Reserve System in the 12 Federal Reserve districts is carried on through the 12 Federal Reserve Banks and
their 2k branches. At the same time, the Comptroller of the Currency
operates through 12 chief national bank examiners each of whom is in
charge of a district and the Federal Deposit Insurance Corporation




- 6-

operates through 12 supervising examiners»

Each Federal Reserve Bank,

each chief national bank examiner, and each supervising examiner of the
Federal Deposit Insurance Corporation has a staff of examiners. In
Washington each agency has its own corps of supervising examiners; its
own corps of lawyers; its own divisions of research and statistics and
its own secretarial staff. Simple and fundamental principles of good
organization dictate the need for eliminating such wholly unnecessary
duplications in the personnel and work of these agencies*
There are other compelling reasons why there should be consolidation. In addition to the impact of supervision upon the individual
bank it has collective consequences which spread over the entire economy
and directly affect national credit conditions.
An important function of bank supervision is the examination
of banks. "While there has been progress in the direction of improving
examining methods (see Board's Annual Report for 1938* P&ge 37)* there is
still room for improvement both in the methods under which examining ^policy
is determined and in the methods under which examinations ai*e made.
Since it is the supervisor who has the authority and the responsibility,
the examiner should be his agent to collect data and lay the facts before
him from which he could make his findings and deliver his criticisms,
recommendations or requests for corrective measures to the bank.

In

practice it usually happens that the first criticism of any banking practice or asset brought to the attention of the bank is set out in the copy




-7 of the examiner's report of examination which is furnished to it at
about the same time that it is furnished to the supervisor. The supervisor then follows up the report with a letter to the bank, setting out
any criticisms, recommendations and requests for corrective measures
that he may wish to make. Obviously, the supervisor, under this procedure, is handicapped in raising objections which the examiner has not
seen fit to raise. Conversely, failure to support the criticisms made
by the examiner in his report may impair the effectiveness of the examiner with the bank.

So it is that with respect to the individual bank

the pattern for it to follow too often is cut by the subordinate examiner rather than by the responsible authority*
Of even greater importance is the influence which examining
policy exerts collectively on the banking system as a whole.

It is a

fact that many examiners are inclined to look to market quotations to
ascertain the allowed value of a security, yet the market quotation
may be influenced by many factors beside*thfr obligorfs solvency.

Indeed,

there is the classic example of the bank being required to write down
railroad equipment trust certificates which happened to be quoted
below par because of the rate of interest which the issue bore
in relation to the current market rate, when at the same time it
was being permitted to carry the railroad's unsecured open obligation
at par*

Furthermore, constant pressure to liquidate because of

market decline may in itself serve further to depress market quotations as was very well proven in the period from 1929 to 19J3* And,
as a not too happy commentary on the other side of the picture, it will




- 8 -

be recalled that not a small part of the banking trouble during that period came from the so-called "secondary reserve11 of bonds and securities
built up during the hey-days of the f20fs with the approval and encouragement of examiners.
The relation between supervisory and credit policies must have
been known to the Congress because, in enacting the Federal Reserve Act,
one of the declared purposes was Mto establish a more effective supervision of banking in the United States•" In these circumstances, it
would appear only logical that control of examining functions now exercised by the Comptroller of the Currency be lodged in an agency charged
also with the responsibility of national monetary and credit policies as
well as with the solvency of the banking system and the interests of all
depositors.
The Federal Deposit Insurance Corporation is not such an agency*
It has no functions and no responsibility in the broad field of credit
control.

It was created to insure bank deposits - not to supervise banks

and its interest properly should be that of an insurer. Furthermore, it
insures only the first $5*000 of a deposit and while this coverage may include in nuiriber the great bulk of depositors it is not all inclusive. Indeed, its interest in the assets of a closed insured bank conflicts with the
interest of a depositor having more than $5*000 on deposit. As an insurer
it should be entitled to rates comparable with the risk and with means of
protecting itself by relieving itself of an improper risk; but it should not
be permitted to supervise its assuredfs business any more than the ordinary
insurance company would attempt to supervise the business of one of its
customer s•




Since the Board of Governors is a body with responsibilities

• 9for national credit and monetary policies and also with responsibilities
with respect to bank supervision, logically, it would seem that the
control of examinations and the determination of examining policy
should be in its hands* As was stated by Dr. Jacob Viner in an article
entitled "Recent Legislation and the Banking Situation11 appearing in
the American Economic Review, Vol. XXVI, No. 1, Supplement, March 193&:
ft

* * * The examiners, through the qualitative credit
standards which they impose on banks, directly influence
the quantity of bank credit. When business is prosperous
and optimism prevails, examiners, like the bankers themselves, must tend to appraise credit risks in terms of the
favorable conditions of the moment. The bankers, and especially the small bonkers, confident that what is good
enough to pass the scrutiny of the examiners should be good
enough to meet their standards, persist on their career of
credit expansion. Later, when the tide of business turns,
when banks begin to fail and loans which were passed without criticism during the boom days have to be written off
as bad debts, the examiners are blamed. Reacting in a
perfectly natural manner, they become stricter and more
exactiijg in the standards they apply, and they press the
banks to liquidate loans and investments which the banks,
if left to their own devices, would be happy to keep in
their portfolios. The process of bank examination thus
tends to encourage credit expansion during the upswing of
the business cycle and, more seriously, to intensify credit
contraction during the dovmswing.
n

Tliere is an obvious cure for this perverse effect of
bank examination, requiring three innovations in the administration of the examinations| unified control of bank supervision and examination: coordination of examination policy
with credit control policy; and systematic and continuous
supervision and instruction of the examiners in terms of a
uniform and flexible policy. Fully to attain all of these
objectives would require the centralization of all bank
examining functions under the direction of the Federal Reserve Board.n
If under a new Reorganizc.tion Act present exemptions were
eliminated, it would be possible, in addition to transferring the examining functions of the Comptroller of the Currency, also to transfer the




present examining functions of the Federal Deposit Insurance Corporation to the Board, but under a simple reenactment or extension of the
present Reorganization Act the latter step would not be possible.
Nevertheless, it would still be possible substantially to unify the
present system through an Executive Order accompanied by administrative
rearrangements which together would result in the two agencies being
operated substantially as one. Specifically it would*
1* Combine all of the statistical and research work
of the Comptroller of the Currency, the Federal Deposit Insure
ance Corporation, and the Board of Governors, including the
collection of reports of condition, etc. in one division;
combine the supervising examiner3 of each agency into one
group; combine in one legal department all legal work with
appropriate sections for the various activities; and effect
such other oombinations as might prove to be desirable. Each
division might have employees paid by the Board of Governors
and employees paid by the Federal Deposit Insurance Corporati o n but the work of the division would be done as a unit*
Determining the employees who should be on the Federal Deposit Insurance Corporation payroll and the employees who
should be on the Board of Governors1 payroll would be a
matter of administrative judgment and could be worked out
over a period of time*
2. Combine in the office of the vice president in
charge of examinations in each Federal Reserve Bank, the
duties now performed by such vice president, the chief
national bank examiner, and the supervising examiner of the
Federal Deposit Insurance Corporation and conbine their re-,
spective staffs into one staff. These steps also could be
worked out over a period of time to the end that eventually
the duties of the vice president of the Federal Reserve Bank
in charge of examinations and the duties of the Supervising
Examiner of the Federal Deposit Insurance Corporation would
be performed by one person with one staff and with the cost
allocated between the Federal Reserve System and the Federal
Deposit Insurance Corporation by administrative adjustment.
The purpose of the Executive Order would be to merge as nearly
as possible the three principal Federal agencies into one authority.




Since both the Federal Deposit Insurance Corporation and the Board are
exempt under the Reorganization Act it would be impossible to merge
then technically - but inter-relationships could be established
vhioh, together with appropriate administrative rearrangements vrhich
could follow, would reasonably assure the cooperative conduct of the
work of both agencies in substantially the same manner as if they were
one.

The Order would contemplate the elimination of the Office of the

Comptroller of the Currency and the transfer of the functions of that
office in such manner as best to accomplish the foregoing objective*
Specifically it wouldt




1* Transfer to the Chairman of the Board of Governors,
or to some other member of the Board of Governors, the function of the Comptroller of the Currency as an ex officio mem*
ber of the board of directors of the Federal Deposit Insurance
Corporation* The establishment of this inter-relationship
would facilitate the necessary administrative rearrangements
already mentioned* As an essential element in the plan, however, it would be necessary that one member of the board of
the Federal Deposit Insurance Corporation in addition to the
ex-officio member from the Board of Governors be a person
completely in sympathy with the whole program*
2* Transfer to the Board of Governors the functions
of the Comptroller of the Currency relating to the chartering
of national banks, the approval of their branches and changes
of their capital structure* These functions would then be
combined with those relating to the admission of State member
banks to the System, the approval of their branches, and
changes in their capital structure*
3« Transfer the authority of the Comptroller of the
Currency to call for reports of condition, etc* of national
banks to the Board of Governors* These functions would then
be combined with those of the Board of Governors relating to
reports of condition of State member banks,. Transfer personnel engaged in banking statistical matters to the Board
of Governors*

- 12 -

l±. Transfer to the Board of Governors the power of
the Comptroller of the Currency to make regulations defining
investment securities. Besides being closely related to
national credit policies these regulations affect State member banks as well as national banks*
£• Transfer the function of the Comptroller of the
Currency under section 30 of the Banking Act of 1933 *° ^ e
Board of Governors to be performed in each Federal Reserve
district by its agent* Udder section 30 this function,
with respect to member State banks, is performed by the Federal Reserve agent and this would combine the functions in
one person.
6. Transfer all examining and other supervisory functions of the Comptroller of the Currency to the Board of
Governors. Transfer the power to make assessments upon national banks to defray expenses of making examinations to the
Board of Governors. Transfer all personnel of the office of
the Comptroller of the Currency engaged in the performance of
examining and other related functions to the Board of Governors
with the understanding chat such transfer would not prevent,
by mutual agreement, transfer of any part of such personnel
to the Federal Deposit Insurance Corporation. Tihile this
provision would give the control of these functions to the
Board of Governors, it would not prohibit an arrangement
whereby the physical work of examining could be done by
employees of the Federal Deposit Insurance Corporation commissioned also as National Bank end Federal Reserve examiners,
if that action appeared to be desirable.
7. Transfer the authority of the Comptroller of the
Currency to appoint receivers or conservators to the Board
of Governors.
8. Transfer all functions of the office of the Comptroller of the Currency in the liquidation of national banks
to the Federal Deposit Insurance Corporation. These latter
functions would be combined with the existing receivership
functions in the Federal Deposit Insurance Corporation.
9« (a) Terminate the authority of the Secretary of the
Treasury to license member banks or (b) transfer such authority to the Board of Governors.
10. (a) Transfer the authority of the Reconstruction
Finance Corporation to subscribe to preferred stock, notes







• 13 -

and debentures of banks or make loans to banks to the Federal
Deposit Insurance Corporation and (b) transfer the authority
of the Secretary of the Treasury to request and the functions
of the President to approve purchases of preferred stock by
the Reconstruction Finance Corporation to the Federal Deposit
Insurance Corporation so as to merge these functions completely
in the Federal Deposit Insurance Corporation. Making this the
responsibility of the authority charged with the responsibility
for the liquidation or rehabilitation of the bank would serve
the ends of good organization, promote greater flexibility in
correlating retirements of preferred eapital and payment of
interest and dividends thereon with the capital needs of the
individual banks, reduce the number of agencies#with which the
banks have to deal and should reduce administrative expenses•
With respect to transferring authority to make loans to banks,
it is to be noted that the Federal Deposit Insurance Corporation
has power to make loans and to purchase assets to aid in rehabilitation of banks and it would not seem necessary for more than
one agency to operate in this field.
11• Transfer the currency functions of the Comptroller
of the Currency to the appropriate bureau of the Treasury*
12. Transfer the functions of the Comptroller of the
Currency relating to the supervision of credit unions in
the District of Columbia to the Farm Credit Administration.
13• Transfer the functions of the Comptroller of the
Currency relating to the supervision of building and loan
associations in the District of Columbia to the appropriate
authority in the Home Loan Bank System.
i l . Transfer any funds related specifically to a partil.
cular function to the agency to which the function is transferred.
15« Abolish the Bureau of the Comptroller of the Cur*rency, the Office of the Comptroller of the Currency, and the
Office of the Deputy Comptroller of the Currency and terminate
all authority of the Secretary of the Treasury relating thereto
except as to currency functions.

an Order along the foregoing lines as a foundation
the necessary administrative steps could follow in due course• Very
few changes in personnel and salaries rould be necessary at the beginning and the question of hov.r rraich oxponso should continue to be borne
by the Federal Reserve System and hear imxoh should continue to be borne
by the Federal Deposit Insurance Corporation could be studied carefully
before making any major change in the distribution of expenses. In
short, the plan could be worked out as a long-term over-all program
thereby avoiding the chaos and confusion vhich might result from making
drastic and imrediate changes under the mandate of an all-inclusive
Executive Order* At the same ti*ne, the broad final purpose of merging
and consolidating the personnel and work tinder common control could be
fulfilled. Nominally the trro agencies would continue as two separate
entities, but practically they i?ould be operated as one*
Further to implement the program, the 3oard of Governors could
arrange for the erection of an addition to the Board*s building, for the
joint occupancy of the expanded quarters by the staffs of the two agencies, and for the occupancy of private offices in the quarters of the
Board of Governors by the directors of tho Federal Deposit Insurance
Corporation. There is at present a vacancy in tho membership of the
Board of Governors which could be filled as an incident to the program.
As to the matter of savings to the Govorijaaent, it is to be
noted that the Federal Reserve System is supported by its investments,
the Federal Deposit Insurance Corporation is supported by its invest-




- 15 -

ments and assessments upon insured banks, and the Comptroller of the
Currency, -with the exception of approximately $250,000 of appropriated
money, is supported by assessments upon going and insolvent national
banks • Consequently, the initial savings in dollars to the Government
might seem negligible but it is quite obvious that ultimately reduce
tions in general administrative expense would be very substantial.
Furthermore, there would be substantial savings to the banking system
but the real value of the program should be measured in terms of the
increased efficiency and effectiveness of Federal banking supervision
-which Y<rould result.




Poor Management 1. Bottlenecks - Will not delegate authority or responsibility.
Wants all work of any importance to clear over his desk.
(Examples: Memoranda circulated from time to time reminding lawyers to "keep him informed11, last being
about three weeks ago. Memo to division heads occasioned by Pollard asking Bauraan to meet visitor in
his office. Complaint to Dreibelbis about not being
informed of Knokefs and Loganfs visit for informal
discussion witii Treasury. Memo to Gov. Hansom about
participation in conference on procedure to enforce
Regulation W.)
2.

Suspicious and jealous of men doing any work.

3«

Unnecessary paper work.

l±* Loses temper and is overbearing with employees.
(Example: Envious when Regulation W was being rewritten. Also Pollard incident referred to above.)
5»

Lodges unnecessary discretion in Miss Pyer, with result that
her attitude toward men in office is bad.

Poor Judgment 1.

Cannot appraise importance of question. Exaggerates importance of minor questions.
(Example;

ff

Rushft memos and "Urgentw memos.)

Poor Public Relations 1.




Offends representatives of other agencies.




0 A RD

k

d
hO
o *ri •H
C
-p 3 O

C
O

"p

* (D

© a*

3

-P O

O -H
•H O • H
> < CO
D

iH C
O
C5 - P

* a
g

O C
D

« • CO

General
Counsel

«
g

CO - H

<$ o

Advice

General
Attorney

Assistant
General
Attorney
Assistant
General .
Attorney
Assistant Attorneys