Full text of Marriner S. Eccles Papers : Prospects for American Banking, Box 19, Folder 1, Item 6

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FOR RELEASE 12 NOON
THURSDAY, MAY 26, 1938
PROSPECTS FOR AMERICAN BANKING
By Leo T* Crowley, Chairman of the Board, Federal Deposit Insurance Corporation
Address before Forty-Seventh
Anniversary Convention of
California Bankers Association
Del Monte* California, May 26, 1938
I am very happy to meet with you today*

Circumstances have prevented my

accepting any of the kind invitations to address you that were extended by your
officers in previous years*

On this occasion, therefore, there is added to the

personal pleasure of my f i r s t v i s i t in California the privilege of discussing with
you:! for the f i r s t time some problems of mutual interests
The Federal Deposit Insurance Corporation has tried at a l l times to keep
its operations and its policies matters of public interest*

We believe that an in-

formed public, particularly an informed banking public, is essential to the maintenance of a sound banking system*

I have long f e l t that bank supervisors were

far too secretive about their problems and their policies and that as a consequence
bankers either lost a l l interest in the aims of supervision or attached to supervisory moves an air of mystery*
The Corporation has tried to eliminate this tendency* We believe that bankers and the public are entitled to complete and current knowledge of our condition
and activities*

At least twice a year statements of our condition and resumes of

our operations are issued*

These supplement the detailed historical text of our

Annual Reports to Congress*
We believe further that we are responsible for keeping the public informed
as to the condition of insured banks and as to the management policies which we
advocate be followed*

Much of the difficulty our banking system encountered dur-

ing past years could have been avoided had bankers been forced currently to recognize the condition of their institutions*

The records indicate that thousands of

the banks which failed during recent years did so principally because supervisors
had white-washed undesirable aspects of these banks1 pictures and had not had the
courage to



require current elimination of losses and adherence to sound management

principles*

In the past losses following upon a bank failure f e l l f i r s t upon the

stockholders and then upon the depositors*

Today our Corporation is substituted

for these disorganized groups* We intend that the unified effort and the courage
which are required for the maintenance of a sound banking system, and which our
Corporation can supply, shall be directed consistently toward improvement of our
banks and toward elimination of the causes of bank failures and losses*
I t is only by straight-forward, open discussion of our mutual problems that
sound solutions may be found*

I believe that from our experience, which is in

reality the collective experience of a l l of the banks, can be demonstrated those
basic principles which must underlie a sound banking structure and sound standards
of banking management*
Deposit insurance came into existence because more than $3*500,000,000 of
depositors1 funds were dissipated during the years between 1865 and 1933* When
the collapse of the system in 1933 demonstrated that public confidence in financial
institutions had been destroyed, there were two alternatives open to Congress as
means to its restoration*

First, the banking function could have been taken out

of the realm of private enterprise, a l l banks nationalized, and banking made a
governmental function*

Despite the system's weakness, i t was thought inadvisable

to subject i t to such drastic revision at that time*
native was chosen*

Instead* the second alter-

Federal insurance of deposits was adopted as a legislative

measure to restore popular confidence in the banks and to maintain that reborn
confidence in the banks through progressive correction of the weaknesses in the
existing system*
Now I believe that when Government assumes responsibility for the supervision of banks and for the safety of deposits, depositors have a right to expect
that their insured claims shall be safe and liquid at a l l times*
supervisory agency, the FDIC has this responsibility*

As a governmental

As insurer of the safety of

more than $20 b i l l i o n of depositors1 funds, its responsibility is unique and unprecedented *




I believe further that Congress chose wisely betwee n the possible alternatives *

I believe that the virtues of our system of independent banking by p r i -

vate enterprise outweigh its weaknesses*

I believe that deposit insurance, proper-

ly administered and properly supported by bankers, can perpetuate that system^
And I say that i f deposit insurance does f a i l that failure w i l l be due not to anything fallacious in the idea of deposit insurance, but rather to those of the system^ weaknesses we are unable to correct*

Confidence has been restored! i t w i l l

be maintained only so long as depositors can be certain that their banks are well
managed and that they are thoroughly examined and adequately supervised by governmental authorities*
The wealmesses leading to the banking system1 s loss record and to its complete collapse during the early thirties developed most rapidly during the period
1920 to 1929*

Analysis of these factors is f a i r l y easy in retrospect, and though

such analysis w i l l do nothing to remedy the economic waste that is now part of our
history, at least i t furnishes a starting point for those of us who are determined
that such waste shall not occur again*
The number of operating banks in this country f e l l from 30,000 in 1921 to
less than 15,000 in 1933®

Many of the failures were due to economic developments

which i t was impossible to foresee*

Hundreds of other institutions, fundamentally

sound and in good condition, were pushed into insolvency by the unreasoning demands
of panic-stricken depositors at times when those demands could be met only by
liquidation at ruinous prices*

S t i l l others were banks that could be classed as

unjustified or unnecessary and that had l i t t l e chance for permanence on the basis
of either existing or prospective facts*

The moral our corporation has drawn i s ,

of course, that extreme care must be exercised in passing upon the application of
every proposed bank for a charter*

Although we actually do not have the responsi-

b i l i t y for final decision on any such applications, our power to pass upon the
qualifications of new institutions for insurance has proved in most instances to
be an effective check upon an unwarranted expansion of bank facilities.




-3-

Bank weaknesses contributed to the story of destruction*

The period of ex-

pansion of the banking structure was so rapid that i t was impossible to find trained
personnel to man more than a fraction of the new institutions*

Lack of experience*

and lack of judgment among many of those who fancied themselves adequately prepared
for the business of banking led to the acquisition of improper assets, to the unwarranted distribution of profits, and to f a i r l y complete neglect of the rights of
depository to protection in the form of capital and reserves•
A large part of the blame for the banking system's record during the past
decade must be ascribed to the unprecedented breakdown to which our whole economy
was subjected*

Banks joined heartily in the general feeling of optimism that led

to the excesses of the boom period, and they were not exempt from effects of the
deflation which followed explosion of the economic bubble*

The country was quite

without the machinery necessary to offset the vicious spiral of deflation and to
absorb or forestall the flood of forced liquidation which so completely destroyed
any semblance of true asset value during that time*
Bank supervisors themselves were not entirely without blame*

The Corpora-

tion 1 s research into bank supervision prior to the banking holiday shows that inadequate supervisory powers and lack of consistency in the application of such
powers as did exist greatly weakened the effectiveness of supervision*

The pay-

ment of dividends was permitted by supervisors in many instances where the funds
should properly have been used to eliminate known losses*

Incapable bank managers

were permitted by supervisors to continue in t heir positions to the certain detriment of the institutions involved*

Considerations of political and personal ex-

pediency frequently gave, rise to inequities in the application of supervisory
policies*

Finally, it seems evident that proper care was not exercised in many

jurisdictions with respect to the chartering of new institutions*
Deposit insurance has now been effective for more than four years*
much talk in banking circles of appraising our accomplishments so far*

There is
I am sure

that the end-product of any such appraisal w i l l demonstrate that the FDIC has done




has don© much in this short time to strengthen the banking system.

The Corporation

and the RFC were instrumental in rehabilitating the banks with more than
$1,000,000,000 of new capital*

Effective control of the banking structure has

become possible for the f i r s t time and the record bears witness to the success of
our efforts to prune the system of its dead timber*

Basic improvement in the as-

set and capital positions of thousands of banks has come about largely as the result
of the supervisors1 insistence upon remedial action*

A cooperative approach

to supervisory problems has been encouraged by the fact that the FDIC is an agency
interested in the welfare of banks of every class in every part of the country*
The National Association of Supervisors of State Banks and the Federal Deposit
Insurance Corporation have worked in close cooperation and a l l Federal and State
authorities have conscientiously attempted to raise banking standards*

Examination

practices have been improved and progress made in standardizing both State and
Federal procedure*
Perhaps the most notable feature of the current economic situation is the
excellent condition of the banking system in general as compared with its vulnerable position during previous periods of business inactivity*

The past few years

have seen a notable improvement inihe quality of assets held by our banks*

Nearly

three and one-half b i l l i o n dollars of bad assets have been eliminated since 1933*
This house-cleaning was made possible by the injection of large amounts of new
capital into our banks by the RFC and by local investors, by the revival of values,
and by improved bank earnings*

For the most part sound and acceptable assets have

been taken into our banks to offset the growth in deposits which occurred during
the past four years*

Cash aftd due from banks at the end of 1937 constituted 28

percent of the assets of insured commercial banks of the country*
Government securities made up another 25 percent*
to be sound*

United States

Bank loans appear on the whole

Only a relatively small proportion of the securities held I>y the

banks are of low credit status*
Federal authorities and authorities in most States recognize the need for




and are now exercising close control over the chartering of new banks*

Some im-

provement in this regard is s t i l l possible* but on the whole* we have been able to
attain very satisfactory results*
Supervision of our banking system involves an appreciation of the operating
problems of a large number of small and medium-sized banks as well as of the few
big banks*

These operating problems* furthermore* vary a great deal fromiegion

to region* "When talking about the banking system we must bear in mind that of the
14*000 insured banks about 13*500 have deposits of less than $10 million each* The
13*500 banks include 5*100 national banks and 8*400 State banks located throughout
a large country.

Only 244 national banks and 187 state banks have deposits of more

than $10 million each*

Effective supervision* therefore* involves an appreciation

of the problems of a l l classes of banks and requires coordination of policies of
supervisory agencies*

I know that you w i l l be pleased to hear that substantial

progress has been made along this line*
From the Corporation's standpoint* the distribution of its responsibilities
among the large number of small and medium-sized banks results in a spreading of
risk*

In the big banks we have a concentration of risk so that when one of them

gets into difficulties the effects upon the Corporation and the general banking
system are intensified*

The 400 banks hold approximately two-thirds of the de-

posits of the insured banks while the 13*500 banks hold about one-third of the deposits*

The Corporation's l i a b i l i t y in the 13*500 banks amounts to slightly more

than $10 billion* or 75 percent of the total deposits in those banks* About twothirds of the insured commercial banks* more than 9*000 banks* are insured up to
80 percent or more*

In the banks which we paid o f f i i n 1937 a l l but 4 percexfcof

the deposits were fully protected by insurance* security, preferment, or offsetting
claims*
Our system of commercial banking, with its 15*000 constituent units* is a
good system, consistent with the principles of democracy, free enterprise, and
local initiative*




The unit bankers' courage and foresight and interest in local

development have helped to make this country great•

Our system of banking has

made possible the tremendous advances that have left our nation without an economic
peer*

A l l of our plans for the future of the banking system rest upon the fundamental proposition that neither legislation nor supervision can ever replace good
bank management* Under no circumstances do -we aspire to rim the country1 s banks*
Our function is rather one of counsellor and friendly critic; our aim is the
achievement of needed reforms by the voluntary action of enlightened bank managers*




-7-

so that exercise of our police power w i l l be necessary only in the few cases where
managers either f a i l to recognize or openly neglect their primary responsibility,
the safety of depositors funds*
I t w i l l continue to be essential that supervisors formulate their policies
on a long-range basis and that these policies be administered consistently and
courageously*

I f the Corporation is permitted to gp ahead with its program, plugg-

ing steadily away at its objectives and taking its losses as they arise, improvement of the banking system can be expected to prooeed rapidly*

The existence of

deposit insurance, the recent rehabilitation of bank capital, and the fact that
the vast majority of banks are in excellent financial condition make it desirable
to keep moving aggressively t oward our goal*
Among the principal objectives we have set with respect to "going institutions11 are the improvement of both the ability and the conscience of bank management, progressive improvement of bank assets, proper provision for depreciation
and losses, and building an adequate capital cushion*
The chief danger to consumption of our program of progressive improvement
o§ bank assets lies in the speculative tendencies of a sizable minority of bankers*
It w i l l be recalled that during the early part of 1937 the Corporation warned repeatedly against the dangers of speculation in medium and low-grade securities
with a view toward taking profits on a rising market*
events have proved the timeliness of that warning*

I believe that subsequent

We have likewise es^hasized

on many occasions that trading in and out of the securities market is absolutely
inconsistent with the investment function of a bank*

I should like here to stress

that this rule applies just as much to large institutions as i t does to small banks*
No matter what the size of an institution its securities should be bought from the
investment point of view, to be held to maturity*

The basic principle of any in-

vestment policy should be that safety of principal and certainty of income

are t$0

factors to be sought* We maintain that shifts in bank security holdings should be
made for one purpose only; namely:




To improve the quality of the bank's portfolio*
-8-

Fortunately, most bankers realize the necessity for conservative management
at their portfolios*

These men, who have been guided by the accepted principles

of institutional investment, should find no causl for alarm in temporary market
drops*

Most of the current concern about the effect upon banks or recent drops in

bond prices is unwarranged*

The Corporation is not concerned about and does not

criticize market depreciation in securities of investment quality*

Market depreciation

of securities bought for investment, withaa credit standing that indicates
payment at par at maturity and continuity of interest payments, is of no practical
significance in a well-run bank*
I t should not be necessary to remind backers of the necessity f o r current
provision against depreciation andllosses*

Unfortunately, this basic principle of

bank management is either unknown or ignored in some banks*

I mentioned earlier

the important part played by accumulated losses and depreciation in precipitating
bank failures.

This fact makes understandable the Corporation's insistence upon

regular and reasonable allowances for depreciation of fixed assets, upon the necessity for eliminating known losses as they arise, and, particularly, upon the shortsightedness of considering as earnings available for dividends profits which are
realized through the sale of assets*

There can be no quarrel with those principles*

They are among the very fundamentals of business and banking management and they
must be observed*
The Corporation's campaign for an adequate capital cushion in each insured
bank has been opposed on a number of varied grounds*

This objective from the

Corporation's point of view is inseparable from our primary concern, the safety of
depositors' funds*

I f depositors, and in their stead, the Corporation are to be

assured payment at pep* of the banks' contractual obligations, the banks' capital
accounts must represent cushions sufficiently large to abiorbefluctuations in value
which are likely t o occur during the normal run of the business cycle*

As of a

given aoment some allowances can be made for the quality of assets of an individual
institution in measuring the adequacy of its capital*




Quality, however, is subject

to change* The Corporation cannot ignore the fact that the make-up of a bank's
assets can readily and rapidly be changed*

Considerations of safety require that

quality be used as a complement of adequate capital rather than as a substitute*
The Corporation has so far been called upon to aid the depositors fef 213
insolvent insured banks*

More than $110,000,000 or 92 percent, of the $119,000,000

of deposits in these banks was made almost immediately available to depositors, and
only 675, or one-sixth of one percent of the 413,000 depositors were not f u l l y
protected*
The Corporation has over $289 million of capital stock and its surplus has
now passed the $100,000,000 mark*

Our annual income is now about $49,000,000 of

which about $40,000,000 was carried to surplus in 1937*
As a matter of fact, the financial aspects of the Corporation must be viewed
in the light of its functions*

Congress has given us a job to do

losses to depositors of insured banks*

preventing

Fulfillment of that t%sk w i l l depend upon

our success in strengthening the banking system through elimination of hazardous
units and through improvement of going banks*

Neither the accomplishment of the

job nor the means to its accomplishment can properly be measured in dollars and
cents*

I f we can do our work and do i t in an orderly fashion, taking our losses

currently, deposit insurance w i l l succeed, and at a nominal cost*
It is true that accomplishment of our purpose w i l l require adequate powers
of control and supervision over insured institutions as well as capable administration of those powers*

There can be no quarrel, however, with granting the

requisite powers, since they are indispensable to a permanently sound banking
system.

Further, the self interest of banks, based upon their sizable financial

investment i f not upon more social considerations, w i l l lead them to insist upon
proper administration of the Corporation's duties and privileges*
There has been no attempt by the Corporation to usurp States' rights in
furthering any aspect of its program* lhat has been achieved by way of strengthening the banking system has come about as the result of thorough cooperation between




-10-

the Federal agencies and State supervisors and between these agencies and bankers*
State supervisors and State bankers realize that we favor continuation of the dual
system, and these men have done much to pur State banking systems on a sounder
basis*

Revision of State laws has been undertaken to raise the operating standards

of 8tate banks*

Supervisors and bankers have joined in the development of uniform

examination and report policies and procedures*

The working out of problem cases

has been the joint task of the corporation and the supervisor concerned* The
greatly strengthened position of most banks and the progressive elimination of
weakened institutions show what can be accomplished by cooperative effort*
The prospects for American banking, then* seem to me to depend entirely
upon our faithful adherence to a few fundamental concepts*

I f preservation of a

strong unit system is our goal, let the nex£ step be definition of our responsibilities*

These

I summarized earlier -when I said that the confidence of our people

in the soundness of the banks depended upon their certainty that the banks were
competently managed and thoroughly and consistently supervised*
The bankers responsibility is only partly met by adequate handling of the
problems of his Institution*
starting point*

That is* of course, the logical and the indispensable

But the soundness of the system requires an awareness of the inter-

dependence of the thousands of units and the cooperative application <©f individual
abilities to the problems of a l l banks*

^Come, let us counsel together,11 has been

the keynote of many recent bankers* meetings and in that phrase is expressed what
I believe to be the proper approach to fulfillment of the bankers1 communal responsibility.
My v iews on what supervisory authorities must do to meet their share of the
responsibility for preservation of our banking system have been stated on many
occasions*

Thoroughness, impartiality, and consistency — these are and must always

be the ingredients of effective supervision*

I have stated that nothing revolu-

tionary is embodied in the Corporation f3supervisory program* We ask nothing but
the observance of basic banking axioms*




There has been developed, as the indispensable fact-finding tool of supervision, the procedure known as bank examination*

The Corporation's examining

policies have been framed with a view to obtaining a complete and an a courate picture of the condition of each bank, its management and its prospects*
give due regard to the rights of a l l interested parties:
and borrowers*

The policies

depositors, stockholders,

They have been designed to apply in a l l banks, in a l l parts of the

country, at any stage of the business cycle*

3ft is my belief that examination policies

and standards should characterize every rgport of examination, no matter what its
date nor to whom it is addressed*
From time to time during my remarks this morning I have drawn certain distinctions between large banks and small banks* May I here point

out that a l l of

my distinctions had to do with immediate rather than with ultimate problems*
Basically, and from the long-range point of view, what holds for banks of one size
is equally true for those of any other size*

There have been countless evidences

of the inter-dependence of our rural and urban institutions*

The well defined

pabb of failures from rural areas to Tfall Street during previous periods of crisis
w i l l serve as an example*

Possibly, as has been claimed upon occasion, the metro-

politan banks are not their country cousins1 keepers*

Experience has demonstrated,

howerrefr, $hat the converse is true and that the health of large banks depends in
astonishing measure upon the well-being of country banks* We a l l would benefit
from a more gtaersil realization of this fact*

We must look past the four w$21s

of our own bank and admit that the problems of a l l banks are our problems and that
the combined effort of a l l concerned w i l l be required for their satisfactory
solution*
I know that our operating record and the rate at which the

Corporation's

resources are growing leads bankers to ask when they can expect adjustments of
some of the items now making up our assessment base, and perhaps, a reduction in
the rate of assessment*




I think i t likely that certain of the moot points, such as

duplicate payment upon deposits of certain types, can be eliminated in the very
near future.

As to a reduction in rate, however, an answer interns of months or

years cannot be given as yet*

I f the Corporation can proceed steadily with the pro-

gram I have outlined and i f bankers w i l l support our efforts and continue to improve the position of their own institutions, I believe that our reserves w i l l ,
within a few years, have reached a point where a reduced annual assessment w i l l
permit us to take care of current requirements*
There can be no retreat — no compromise with conscience or responsibilities
on the part of bankers and no slackening of the supervisory standards which have
been so instrumental in building the sound
stands*

foundation upon which the system now

I offer to you my assurance that the Federal Deposit Insurance Corporation

w i l l continue to build for the future*

I ask in return a continuance of your

efforts to make materialize the truly golden prospects for American banking*