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TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE:

To

Mr. Eccles.

FROM

August 9, 1954.

Mr. Viner.




Attached hereto is a revised copy
of the report of the meeting of the
banking committee held on August 2d, containing corrections and emendations sent
in by those present at the meeting.
Please destroy the original copy of report
sent you.

CORRECTED REPORT

Report on meeting held August 2, 1934, in the Board Room of the
Federal Reserve Board*
A.

Agencies represented:
Comptroller of the Currency
Mr. Await
Mr* Folger
Federal
Mr.
Mr,
Mr.
Mr.

Deposit Insurance Corporation
Crowley
Fox
Milford
Nichols

Federal Reserve Board
Mr. Morrill
Mr. Paulger
Reconstruction Finance Corporation
Mr. Sheehan
Treasury
Mr. Viner (Presiding)
B»

The Purpose of the meeting was to consider the questions noted

below, raised in a meeting called fry the Secretary of the Treasury,
August Is 1934>
C»

(1) The extent of duplication and lack of coordination in bank

examinations, and the possible remedies.

Mr. Await- There is very little duplication in actual practice in
making bank examinations. TOiile the law gives the Comptroller of ttye Currency
power to make not less than two examinations a year of all Federal Reserve
member banks he actually examines only national bariks# The Comptroller
regularly makes two examinations annually and frequently makes additional
examinations if the affairs of the bank are such that they appear to need




~ 2 close supervision. The Comptroller is also charged with examination of all
affiliates of national banksf including both banking and non-banking institutions*
Attention is called to the fact thatf while under the law the Federal
Reserve Board and the Federal reserve banks may examine all member banks,
in actual practice these agencies exercise the privilege only to a limited
extent. In order to pass upon applications for membership in tho Federal
reserve system, examiners of.tho Federal reserve banks make examinations
of the applicant State banks. Later, under the general policy of oxamina^
tion of State member banks, tho endeavor is made to arrange for an examination of each Stato member bank at least once a year, cither with the State
banking authorities, when their cooperation is obtainable, or independently
of them when necessary. Ordinarily the examiners of the Federal reserve
banks do not examine national banks in connection with applications for
trust powers, except when it is desirable to do so in order to get special
information or as a matter of expediting the consideration of the applies^
tion. In all such cases the entrance of any representative of the Federal
Reserve bank is through a cooperative arrangement with the national bank
examiners.

Mr. Faulger** In the oarly days tho Federal reserve banks usually ac~
cepted examinations made by the various State banking commissions, but of
late the Federal reserve banks have been enlarging and strengthening their
bank examination departments with the view to participating more frequently
a&d to a greater extent in the examinations of all State member banks. The
general policy followed by all the Federal reserve banks is to participate
with the Stato baiiking departments in the examinations of Stato member banks,




- 3 ~
Such a participation on tho part of the Federal reserve bank may be in the
nature of a credit investigation or a complete balance sheet examination. On
occasion, howevor, and if the existing circumstances warrant, an independent
exan&nation or credit investigation is made by the Federal reserve "bank*
By arrangement with the banking authorities of two small states which have
inadequate banking departments, examinations of all State member banks in
such states are conducted by examiners for the Federal reserve banks with
the assistance of examiners from the respective State banking departments.
All but one of the Federal reserve banks have appointed trust examiners,
who examine the trust departments of State member banks in connection with
examinations or credit investigations made by the Federal reserve banks,
and who on occasion (such as an application for fiduciary powers), in
cooperation with or at the suggestion of the comptrollers department,
examine or assist in the examination of trust departments of national banks
or of trust departments of other banks whose trust business is to be taken
over by national banks.

Mr. Crowley- The Federal Deposit Insurance Corporation examines only
State non-member banks. All State non-member banks applying for membership in
the Tenrporary Fond were examined prior to January 1, 1934, and out of approximately 7600 applications only 141 were rejected. The present plan is that the
Federal Deposit Insurance Corporation and the appropriate State banking department will each make one examination annually of each of the State nonmember banks admitted to membership.




- 4 Mr.. Sheehan- Except in rare instances, the Reconstruction finance
Corporation does not examine national and State member banks after their
programs of refinancing either through loans and/or the purchase of preferred
stock are completed. While the law does not specify an examination by the
Reconstruction Finance Corporation of banks where preferred stock has been
purchased by the Corporation, the contract between the issuing bank and the
Corporation permits such examination*

However, the Corporation generally

accepts examinations of national banks, State member banks, and State nonmember barks as made by the Comptroller of the Currency, the Federal reserve
banks, and the Federal Deposit Insurance Corporation, respectively, unless
a situation exists where it appears that a special examination is necessary*

Mr* Viner- The discussion indicates that there is at present no
duplication, in actual practice, in examination of banks by Federal agencies
ajid that there appears to be ample machinery for the interchange of
information developed through examination and that there will be continued
cooperation with a view to preventing such duplication from developing*
The question is raised as to whether all agencies are getting, under
the present set-up, the information they w^nt.

Mr. Crowley- Under the existing system of examinations similar information is obtained by the Federal agencies. There is considerable difference in the information obtained by the various State banking departments
and efforts are being made to have them adopt uniform examinations. The priiw
cipal problem faced by the Federal Deposit Insurance Corporation is that it
has no control over the management of banks. Legislation is needed that will
give the Corporation power to reject application for admission, and to pass



~ 5 on mergers and the issuance of new charters* If such legislation is obtained,
the problem, so far as State non-member banks are concerned, will be coxw
siderably improved*
In reply to a question from Mrf Viner as to whether banks can satisfactorily live outside of the Fund, the opinion was expressed that they can
only do so if they are situated in an isolated location* Information will be
given to the Committee at the next meeting as to the experience of banks outside
the Fund*

The extent of duplication and lack of coordination in reporting
of banks to Federal agencies, and possible remedies*
Mr* Sheehan- The Reconstruction Finance Corporation made a special call of
its own as of J-une 30 because it wanted certain information that was not
available through the Comptroller's call.

Mr* Awalt~ Agreed to work with the Corporation with a view to including in
the Comptroller^ call any special information that might be required by the
Reconstruction Finance Corporation, in order that this duplication of calls
might be eliminated*

Mr* Crowley- The Federal Deposit Insurance Corporation has only made one
callf as of June 30 f 1934, and this call was made on State non-member banks*
Information pertaining to national banks and to State member banks was ob*»
tained through, the calls of the Comptroller and the Federal Reserve Board#
The Corporation contemplates, at present, making only one call a year, coi>finod to State non-member banks*




«. 6 ~
Mr. Vinor~ One phase of reporting, on the part of banks, that should be
considered is whether all banks should not report on a monthly basis to a
central agency, which can distribute the information to the interested

g

The matter of having call reports as of dates not known in advance, in order
to avoid window dressing, appears to be no longer necessary.

Certain highly

important information pertaining to the seasonal operations of banks cannot
be satisfactorily obtained from the present three calls and two examinations
a year.

Mr. Sheehan** The Reconstruction Finance Corporation attempted monthly calls,
for a few months, from banks in which it was interested, but gave up the
practice because it appeared to be too burdensome on the banks.

Mr. Crowley~ It is suggested that considerable difficulty will be experienced
in obtaining monthly reports, due to the inadequacy of the systems being used
by numerous non-member banks. Approximately 7,500 calls were sent out to
non~mombor batiks on June 30 and about 300 have not yet come in. The Federal
Deposit Insurance Corporation has no means of forcing replies to the callf
whereas the Comptroller can levy a penalty if the report is delayed.

(3) Coordination of the activities of the loans-to-industry committees




of the Reconstruction Finance Corporation and the Federal Reserve.
Board.

~ 7 ~
Mr» Await** The Federal reserve "banks and the Reconstruction Finance Corporati o n engage in many activities and institute vario-us programs that affect or
have a close relation to the activities of.the Comptroller's officef without
informing the Comptroller in these matters. This practice frequently leads
to conflicting administrative policies. The Comptroller has already worked
out a program with the Housing Commission and will be glad to cooperate with
the Federal Reserve Board and the Reconstruction Finance Corporation with the
object of bringing about coordination in the various programs.

Mr* Paulger and Mr, Sheehan- The Federal Reserve Board and the Reconstruction
Finance Corporation are working together on the loans-to-industty

program,

and will be glad also to consult with the Comptroller of the Currency.

Mr. Crowley*- We should have in Washington a cooperative Board to harmonize
the policies of the various Federal credit agencies. The board should also
study the proposed legislation of its member bodies.in order that conflicting
proposals might be eliminated and confusion avoided.

Mr. Await*- Such a committee or board may be composed of men who have several
different interests, with the result that you would not get the direct participation of the operating men of the various organizations.




~ 8 Mr, Viner~ It is possible to have a committee, made up of the operating men
of the various organizations, that will actually function* Similar committees
in other fields are accomplishing excellent results at present.

(4) Planning for an inquiry into possible existence of undue deflationary
pressure by bank examiners with respect to (a) existing loans and
security investments»

(b) new loans and investments»

Mr, Crowley~ In reply to a question from Mr, Viner as to the percentage of
deflationary pressure that was due to bank examiners, stated that he thought
only about 10$, The attitude of all government agencies, since the bank
holiday, has been to put all banks in a sound position. The authorities may
possibly have leaned too far over in bringing pressure to bear to obtain
soundness.

Mr, Morrill~ In making bank examinations there are two questions involvedf
a matter of administrative policy and action on the part of the examiner. It
appears that many unfair criticisms have been made of examiners*

Mr* Cx-owley- Recommended that the Comptroller of the Currency, the Federal
Reserve Board and the Federal Deposit Insurance Corporation take all call
reports, in the District selected for special study, as of December 31, 1933
and June 30, 1934f and determine from them the decrease that has occurred in
loans and discounts. It will be possible to get from the Farm Credit




•• 9 -*
>
Administration information as to the home loans and farm loans, which have
been jmde t deduct these loans from the total decrease that has occurred, and
detemine the amount of liquidation that has not been voluntary on the part of
the debtors to the banks*

It was suggested that the large banks have put

pressure on their loaning officers and that this has been a big factor in
restricting bank credit*

Mr+ Crowley** Out of 3,756 State non-member banks who needed commitments from
the Reconstruction Finance Corporation, there are only 607t involving about
49 million dollars, who are not yet taken care of* Now that the situation is
about cleaned up, the authorities should become lenient with regard to bank
assets*

Every effort should be made to clean the situation up as quickly as

possible*

Then the President can go to the country and demand increased

activity and easing of credit conditions*

Mr» Sheehan** The principal trouble in clearing up the present situation is
that, in the attempts of the Reconstruction Finance Corporation to deal with
individual cases, efforts have been made to have local capital put in and
these cases are dragging*

Mr* Jones recently requested a complete report of

the bank cases pending before the Corporation and as soon as the information
is completed it will be submitted*

Mr* Await** The Comptrollers office has not attempted to bring undue pressure
on banks*



It has discussed many times the problem of liquidity with a view

~ 10 ~
to determine some forniala which might " e applied generally and which would
b
have the effect of decreasing the liquidity of banks, but due to the various
situations which exist in different localities has not arrived at any solution*

Mr, Viner- Liquidity is not the standard to use*

Examining authorities should

consider primarily the matter of the soundness of the assets and depend on rediscount privileges for liquidity.

Mr* Await and Mr» Morrill- The Comptroller of the Currency and the Federal
Reserve Board agree to make available their examiners1 reports to be used for
a survey, on a sampling basis, of examiners1 reports for several dates, with
the object of determining the examiners1 attitude in these cases, A recoup
mondation is made ta tho Secretary that this survey bo undertaken*

(5) To consider ways and means of determining the local credit situation
in a sample aroa from the point of view of tho borrowor as distii>»
guished from that of the lender*

A newspaper clipping referring to a questionnaire that was being sent to
representative business concerns from the Department of Commerce was read*
The question was raised whether additional information might not be obtained
from these questionnaires to supplement the information obtained from the contemplated survey of the 5th Federal Reserve District*




- 11 ~
Mr. Crowley~ We should select a group of 400 business men in the 5th District
and have a man canvas them, determining what has happened in connection with
their bank loanst whether they have made new loans, and if not, was this due
to refusal of the banks to make loans. Another person should then canvas the
banks to determine the bankers1 story in connection with these cases*

Mr. Folger~ The 5th District is fairly representative of conditions existing
throughout the co-untry and should satisfactorily serve for the purpose of the
survey. Mr. Sheehan felt that the 5th District would not be representative
in view of the unsettled banking conditions in Baltimore and Richmond and the
antagonistic attitude toward the Reconstruction Finance Corporation.
It was agreed that a siib-committee be appointed;

to get a copy of the

questionnaire being sent out by the Department of Commerce; to determine if
the information requested could be made to serve tho purposes of the survey
and whether the Department of Commerce would segregate the returns from a
selected district; to consider the selection of a district that wouLd be most
representative; and to plan the survey. Dr. Goldenweiser, Mr, Fox, and Mr.
Mulroney were suggested as a sub-conmittee to act with Mr. Viner.

(6) To discuss the adequacy of existing procedures whereby knowledge as
to national policy with respept to credit is transmitted to the field
agents of Tederal banking authorities.

Mr. Awalt~ The Controller of the Currency looks to the twelve District Chief
National Bank Examiners as being his representatives on the examining force.
All instructions from the Conrptroller go directly to these representatives,



- 12 either on their visits to Washington "by telephone conversation, or by circular
letters* No,regular conferences are held between the Comptroller and the district chiefs. There is no trouble in distributing instructions; the only
trouble is with individual examiners who occasionally attempt to act indepen^
dently of instruction*

Mr* Morrill** Prom time to time conferences of Federal reserve agents are held in
Washington, there having been several meetings during the past two years, at
which the policies and procedure in connection with the examination of State
member banks were among the most prominent subjects to which great consideration has been given* It is expected that in September a meeting of chief
examiners and assistant Federal reserve agents in charge of examination de~
partments, together with trust examiners located at the Federal reserve banks,
will be in Washington for the purpose of engaging in a detailed discussion of
policy and procedure* During tho past year individual examiners have been
brought in from all of the Federal reserve banks for temporary duty, assisting
the Division of Examinations of the Federal Reserve Board for periods of two
or throe months, and those examiners have returned to tho banks from which they
came whore they have been able to familiarize the 'examination departments of
their respective banks with the Washington policies and viewpoints and consequently an improved coordination in the examination work of the 12 Federal
reserve banks has been brought about*
Mr* Await-* The Comptroller's office will take under consideration the desira^
bility of establishing a similar practice* Since the next conference of the
Federal Reserve examiners is set for some time in September, the Comptroller
may decide to call in his district chiefs at the same time, in order that
there may be a joint conference*



~ 13 ~

D»




^Representatives of the agencies represented at this mooting were
asked to reserve next Tuesday, at one o* clock, for another meeting
with Secretary Morgenthatu