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332. 109 Wh THE COMPTROLLER AND THE TRANSFORMATION OF AMERICAN BANKING, 1960-1990 Comptroller of the Currency Administrator of National Banks By EUGENE N. WHITE https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Comptroller and the Transformation of American Banking 1960-1990 The Treasury Building, Washington, D.C. The headquarters of tho Office of the Comptroller of the Currency was located here from 1863 to 1974. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Comptroller and the Transformation of American Banking 1960-1990 ugene ' . White Rutgers University October 1992 Comptroller of the Currency Washington, D. C. Contents Introduction iii One The OCC in 1960: Regulation and Supervision Under the New Deal Regime The Regulation of Competition Examination and Supervision National Banks: Safe and Sound 1 1 3 6 Two The Banking Revolution Begins, 1960-1972 7 Inflation and the Funding Problem The Battle to Keep National Banks Competitive New Powers for Banks and the Rise of the Bank Holding Company The Reorganization of the OCC Reporting, Disclosure, and Examination The Computerization of Banking Consumer Protection 7 10 12 15 18 20 21 Three Crisis Years, 1973-1975 A Recession and New Difficulties for Banks The Failure of the United States National Bank Franklin National Bank "Problem" Banks The Haskins & Sells Report 23 23 25 27 29 32 Four Revitalizing the OCC, 1975-1980 Multinational Banking New Examination and Supervision Techniques Computer Surveillance Innovations New Strategies for Rating Banks Expanded Enforcement Authority Consumer Affairs Human Resources Interagency Cooperation The Structure of Banking Branch Banking and the Computer Revolution https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 35 35 37 38 39 40 40 43 44 44 47 Five 49 The Challenge of the l 980s Deregulation New Powers for National Banks The OCC and the Restructuring of the Banking Industry The LDC Debt Problem Banks in Distress Supervision in Adversity 50 52 53 55 57 61 Epilogue 67 Notes 69 Appendix 83 Comptrollers of the Currency, 1863 to the Present Table 1: Aggregate National Bank Assets and Liabilities Table 2: National Bank Assets and Liabilities as a Percent of Total Assets Table 3: Income and Expenses of National Banks Table 4: Chartering National Banks Table 5: State Laws Governing Branch Banking Table 6: National Banks and Branches Table 7: Number of Mergers and Acquisitions by Approving Regulator Table 8: National Bank Failures Table 9: OCC Employment Table 10: Budgets of the Office of the Comptroller of the Currency Table 11: Measures of the OCC 's Examination Capacity Bibliography 86 87 88 88 89 90 91 92 93 94 95 101 Index https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 83 85 11 Introduction https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis In 1968, the Office of the Comptroller of the Currency (OCC) published Professor Ross Robertson's landmark history of the agency. In that study, Robertson traced the development of the national banks and the OCC from their common origin in 1863 through the early 1960s. A century after its creation, the national banking system, as Robertson described it, had achieved a high degree of strength and stability, thanks to the general prosperity of the U.S. economy, the New Deal's banking laws, and careful oversight by the OCC. In fact, Robertson believed that with the success of the government's macroeconomic stabilization policies since World War II, the time had come to loosen those regulations and encourage greater competition in banking. 1 Yet, even as he wrote, banking was beginning a transformation more rapid and profound than anything he envisioned. In the next two decades, this transformation would challenge the OCC's ability to fulfill its traditional mission of assuring the safety and soundness of the banking system. During the 1930s that mission had become more exacting. In the wake of thousands of bank failures during the Great Depression, federal bank regulators, including the Federal Reserve Board and the Federal Deposit Insurance Corporation, were charged with the specific objectives of guaranteeing the public's deposits and eliminating bank failures. These aims were primarily achieved by the limitation of competition through the regulation of entry, interest rates, and bank powers. Shielded by New Deal banking legislation from cutthroat competition and free from big economic shocks, national banks became highly profitable enterprises. Beginning in the 1960s, when Robertson wrote, the web of New Deal banking regulations began to unravel. Competition from other financial intermediaries and increased economic instability forced banks to seek new sources of funds and new customers. At the same time, a rising and volatile rate of inflation, punctuated by severe recessions, weakened many banks. In the mid-1970s, the nation experienced the first large bank failures since the Great Depression. To save weakened banks, more bank mergers and mergers between different types of financial institutions were permitted. New banking products and the computer revolution blurred the distinction between financial intermediaries and changed the nature of banking transactions. The 1980s saw a continued movement towards interstate banking dominated by large, diversified financial institutions. Of the first 50 banks to join the national banking system in 1863, 23 banks survived the first 100 years; only 15 of those banks survived the next 25 years. From the start of the revolution in banking, the OCC consistently favored permitting national banks to expand geographically and diversify their activities. But neither the OCC nor any other regulatory agency anticipated how rapidly banking would be transformed. Under Comptrollers James J. Saxon and William B. Camp, the OCC modified some of its policies and procedures to keep supervision up to date with banking developments. However, the agency was caught largely unprepared for the recession and large bank failures of 1973 to 1975. After the first of these failures, Comptroller James E. Smith commissioned the management consulting firm of Haskins & Sells to conduct a thorough study of the OCC. Smith's action was an astute one. The Haskins & Sells report was delivered just when Congress, responding to the same bank failures, began to question the agency's competence. By identifying problems in advance of his Congressional interrogators, Smith placated outside critics. More importantly, under Comptroller John G. Heimann, the OCC began to implement Haskins & Sells' recommendations. These reforms helped turn the OCC into a more flexible organization, iii better able to respond to the evolving character and problems of the national banks. The pace of change inside the OCC mirrored the rapid innovation in the banking system it supervised. In the 1980s, under Comptrollers C. Todd Conover and Robert L. Clarke, the agency devised new strategies and redeployed its resources to meet ever-growing challenges. This volume covers the history of the OCC, beginning where Robertson left off and continuing to 1990. The early 1960s are, however, reexamined with the advantage of hindsight Robertson lacked. Such a reexamination is necessary and appropriate, because the trends of the following two decades had their roots in these years. In writing this book, I have received extensive help and advice from many people in the Office of the Comptroller of the Currency. In addition to the written record, I gained invaluable information from interviews with Robert L. Clarke, C. Todd Conover, Gerry B. Hagar, Daniel E. Harrington, Barbara C. Healey, John G. Heimann, Paul M. Homan, Dean S. Marriott, David C. Motter, R. Julie Olson, James E. Smith, Thomas W. Taylor, and Judith A. Walter. In addition, Jesse H. Stiller, the OCC's official historian, provided me with guidance and useful suggestions. In the search for facts and numbers, the assistance of Ellen Stockdale and Thomas L. Baucom in the Communications Division was most helpful. At Rutgers University, my research assistant, Kee-ook Cho helped to ferret out most of the statistical information and track down documents. Carol Teitlebaum and Mary DeMeo provided administrative and secretarial assistance. I owe particular thanks to George Benston, Michael Bordo, and Hugh Rockoff, who read the manuscript and gave me very useful comments, and my wife Marcia Anszperger, for editorial assistance. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis iv One The OCC in 1960: Regulation and Supervision Under the New Deal Regime Surveying the national banks in 1960, his seventh year in office, Comptroller of the Currency Ray M. Gidney offered a comforting assessment: Based upon the fundamental considerations of managerial competence, asset soundness, adequacy of capital funds and reserves, and earning capacity, an excellent condition continues to characterize the national banking system with the exception of a few banks which are receiving appropriate and effective . . 1 supervisory attention. The prosperity of the national banks was, in large part, a result of both regulatory protection and the general economic stability of the period. During the Great Depression and World War II, banks replaced their riskier assets with government securities and cash assets. After 20 years of economic upheaval, the 1950s ushered in a stable environment for the conduct of the banking business. The decade was characterized by steady growth, low inflation, and modest unemployment, averaging under 4 percent. In addition, the constraints on competition imposed by New Deal banking legislation ensured a strong demand for the services of established banks as the economy expanded. 2 By taking in interest-free demand deposits and making commercial loans, banks had ample opportunity to prosper and grow. Even at the end of the 1950s, national banks' exposure to risk was limited and their portfolios were quite conservative .3 Cash, other reserves, and U.S. government securities covered 49 percent of all deposits. Thirty-two percent of assets were invested in securities, over 70 percent of which were U.S. government bonds. Although national banks had expanded their loans substantially during the previous decade, loans represented less than half of total assets in 1960. The 4,530 national banks had an aggregate capital equal to 8 percent of total assets, with another 1 percent in reserve for bad debts. Comptroller Gidney judged this cushion of capital to be sufficient protection against any losses. He had good reason to be sanguine, too, inasmuch as net loan losses totaled only 0.2 percent of all loans. Facing a buoyant demand for loans and a low cost supply of funds, national banks thrived. By one measure - net income to equity capital - the industry's rate of return was 9.4 percent in 1960. This comfortable rate of return was not, however, simply the result of good management; it was also the product of regulation that reduced competition among banks and financial intermediaries. The Regulation of Competition https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Passed in a time of crisis and economic collapse, New Deal banking legislation strictly limited the geographic expansion of banks and encouraged them to stick to narrowly defined commercial banking. Under Comptroller Gidney's long tenure from 1953 to 1961, the OCC exercised its supervisory and corporate functions in that spirit. Before his appointment, the Comptroller had spent more than 20 years in the Federal Reserve System, first in New York and later in Cleveland. Gidney' s experience as a regulator during the Great Depression convinced him of the 1 need for close adherence to New Deal banking laws. Thus, the OCC tended to regard innovation by national banks as a threat to their safety and the general stability of the system. As the primary regulator of national banks, the OCC controlled their expansion through its powers to authorize new charters, mergers, and branches. Like most aspects of commercial banking, entry was governed by restrictive New Deal legislation and the policies adopted by the federal banking regulators to enforce these statutes. The collapse of the banking system during the Great Depression had brought an end to the easy entry that had prevailed since the late 19th century. The Banking Act of 1935 required the Comptroller of the Currency to examine the prospective earnings of the bank, the adequacy of its capital structure, the general character of its management, and the convenience and needs of the community before chartering a new bank. 4 The large number of bank failures during the Depression made federal regulators wary of "excessive competition,'' and they used their authority to reduce entry into commercial banking. Although the Banking Act of 1935 established guidelines for issuing bank charters, it left the OCC with considerable discretion to interpret the law. The Comptroller's charter decisions generally focused on two factors: the convenience and needs of the community and the character of the management. Aiming to prevent "excessive competition," the OCC also examined a factor not specified in the act - the status of existing banks in the proposed service area. 5 The use of these criteria provided the OCC with the means to limit entry and protect existing institutions. Although these policies constrained competition and reduced banking services available to the public, the overriding concern of federal banking authorities, ever mindful of the disasters of the 1930s, was to protect the industry and prevent failures. The procedures to obtain a charter for a bank circa 1960 were rigorous and complex. Organizers were required to provide detailed economic and demographic data for the city and region and to forecast the proposed bank's growth for the first three years of operation following its establishment. To help the OCC independently assess the need for a new bank, applicants were obliged to identify their primary service area, defined by the OCC as the smallest geographic area from which the bank would draw 75 percent of its deposits. Aerial photographs or marked maps, identifying all nearby financial institutions, had to accompany an application. 6 After the application was filed, a national bank examiner was assigned to conduct a field investigation, talking to the organizers and possible opponents of the new bank. The examiner then made a recommendation to approve or disapprove the application, and regional OCC officials added their comments before the file was sent to Washington for a preliminary decision by the Comptroller. If the decision was favorable, the organizers would proceed to set up the management and market the bank's stock in accordance with the OCC's rules. Only when these preliminaries were completed and the bank was ready to open for business was the actual charter awarded. The restrictive entry policies pursued by the OCC between 1935 and 1960 sent a signal to prospective bank organizers. The number of national bank applications, which had averaged about 300 per year in the two decades prior to 1935, fell to 50 per year between 1936 and 1960. 7 Only 35 new charters were issued in 1960. The relatively few new banks neither changed the structure of the industry nor contributed measurably to competition. After accounting for all other factors, one early study of entry into commercial banking found that without the entry rules there would have been approximately twice as many new banks, state and national, chartered during the period 1936-1962. 8 The New Deal policies reduced competition so much that the rate of return on investment in banking may have been raised by as much as 2 percentage points through the 1960s. 9 Branch banking was also severely limited in the years after the Great Depression. The basic legislation governing branching by national banks was the McFadden Act of 1927. This act permitted a national bank to open branch offices in its home office city, but only if state banks were https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 granted this power by state authorities. The McFadden Act established the principle that national bank privileges would not be greater than those of state banks, but it did not give national banks equal privileges in states where state banks could branch outside their home office cities. The Banking Act of 1933 modified the law by giving national banks branching powers equal to those of state banks. These acts, which left branching policy for the nation in the hands of the states, represented victories for the small unit banks, which feared the development of nationwide banking chains. State boundaries thus became the established limits for geographic expansion. Although a few more states permitted statewide branching by 1960 than had been the case 20 years earlier, unit banks remained preeminent; there were only 5,296 branches for all 4,530 national banks. 10 The OCC's concern about "excessive competition" led it to carefully scrutinize applications for de novo branches.11 The agency's staff investigated each application to assess whether the community could support a new branch without threatening another bank. Given these procedures, which may have discouraged applications, its branching practice was relatively permissive. In 1960, when the OCC approved only 44 percent of the 39 charter applications on which it passed judgment, it approved 80 percent of the 438 branch applications. Banks wishing to expand their operations were, of course, not limited to the establishment of de novo branches; they could grow by acquiring or merging with another bank. In contrast to the strict regulation of entry, there were few federal controls on mergers before 1960. As expressed in the Federal Deposit Insurance Act of 1950, Congress's principal concern was that merged institutions would not be weaker in terms of capital than their original independent components. Federal regulators were not greatly worried by the disappearance of banks by merger because of the New Deal's preoccupation with "overbanking." Furthermore, the ability of banks to expand via merger and retain additional offices was limited by many states' branching restrictions. This ensured that mergers would be few in number. There were only 75 mergers and acquisitions by all commercial banks in 1960. The Comptroller approved 51 of these with combined assets of just over $1 billion. As a result of the restrictive regulatory regime and the relatively calm economic environment, the nation's banking system in 1960 was healthy, and its structure from the previous quarter century remained largely unaltered. Examination and Supervision https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Traditionally, bank examinations had been intended to reassure the public of the safety of their deposits, but since 1933 this role had been taken over by federal deposit insurance. From then on examiners, in effect, protected the insurance fund. Their job was to averf insolvency or to detect it early enough so that losses could be minimized. Like the institutions it examined, the OCC's operations in 1960 were strongly conditioned by the New Deal banking framework. The OCC depended heavily upon information generated by the banks to monitor the safety and soundness of the national banking system. This information was 12 supplied by four reports of condition, an annual report of income, and surprise bank examinations. The National Bank Act required national banks to be examined twice each year, although the Comptroller was authorized to waive one examination once every two years. In the stable banking conditions of the 1950s and 1960s, it was customary to examine each bank three times every two years. In 1960, for example, the OCC examined 6,517 banks plus 6,834 branches, 1,558 trust departments, 120 affiliates, and 25 foreign branches. To conduct these examinations, the OCC had a budget of slightly over $11 million and 1,190 employees, of whom 877 were field examiners. 3 These resources provided the agency with approximately one examiner for every five national banks and $83,000 to examine every $1 billion of assets. 13 Examinations were scheduled and conducted by the staff of the OCC's district offices. The typical bank examination team was composed of one or more commissioned national bank examiners, with one designated examiner-in-charge and several assistant examiners. The OCC's district offices had considerable independence in hiring and training examiners. Traditionally, a college education had not been necessary to become a national bank examiner. As late as 1966, 33 percent of all examiners did not have a college degree. Most of the training was on-the-job, where the neophytes could learn their craft from experienced examiners. 14 There was a fraternity among the examiners; almost all were men, often of long tenure at the OCC. Bankers rarely evinced much enthusiasm about the surprise visits that frequently kept them in the office and on the hot seat well into the night. Although a bank examination could provide managers with a useful external review, the proceedings were sometimes adversarial. In a 1970 address to the American Bankers Association, where he reflected on his happy 20 years as a bank examiner, Comptroller William B. Camp readily admitted that ''bank examiners are not always the •• most popu1ar v1s1tors wherever t hey go. ,,15 In conducting an examination, the OCC placed great importance on the element of surprise. The bank examination team made no advance hotel reservations, quietly slipped into town, met at a designated spot, and then moved in to take control of the bank and its books. 16 The examiners would then begin the time-consuming task of reconciling the bank's ledgers with the reported totals, checking loan documentation, and counting the cash. They were guided by Comptroller's Handbook of Examination Procedure and directives from the district and Washington, D.C., offices. While on the job, examiners strove to maintain the confidentiality of their communications to headquarters, and a few still used the agency's special telegraphic cipher code. 17 Although the OCC's commercial bank examinations appraised a bank's lending and investment policies, examinations were primarily intended to determine if '' a bank is solvent and operating within the framework of applicable banking laws. " 18 The examiners made a detailed verification of a bank's accounts. Once this task was complete, the examination team turned to reviewing the quality of the bank's assets. All large loans and a sample of smaller loans were scrutinized by examiners. 19 In this extensive credit review, examiners looked at documentation, collateral guarantee agreements, information on the borrower, and the performance of a loan. Investments were subjected to similar scrutiny. Based on the Handbook's guidelines and judgment born of experience, examiners placed problem items into one of four classifications: loss (uncollectible or worthless), doubtful (high probability of loss), substandard (more than normal risk), and '' other loans especially mentioned'' (those that merited more attention). This procedure not only provided the Comptroller with a snapshot of the institution's problem assets, it also gave the bank an independent external review that could be particularly valuable to institutions lacking the resources to conduct such reviews themselves. In addition to the quality of loans, the OCC 's examiners looked at the capital adequacy of a bank. Capital adequacy was measured by comparing the bank's risk assets - assets less cash and U.S. government securities - to its capital. This was a very simple tool for identifying the weakest banks. 20 At the end of an examination, the examiner-in-charge presented the findings to the bank's management and drafted a detailed report. The report was reviewed by the district office, and copies were furnished to the Washington office and the appropriate Federal Reserve bank. The nonconfidential parts were supplied to the national bank's directors. In some cases, the directors met with the examination team. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 Counting the cash: bank examination circa 1960. Today, national bank examiners spend much of their time evaluating loans, management systems, and compliance with federal law . The OCC also conducted annual trust examinations for national banks that had trust departments to ascertain whether fiduciary activities were executed in compliance with the law. Trust examiners scrutinized trust department records, reviewed procedures and controls, analyzed the quality of investments, and audited transactions and balances. Examiners assigned by the district offices carried out the initial examinations, while the Washington office staff handled any follow-up. Inasmuch as relatively few national banks engaged in fiduciary activities, the OCC economized on resources by centralizing some of the trust examination process in Washington, D.C.21 The OCC's approach to examination was quite effective in the post-New Deal banking environment. Most national banks in 1960 engaged only in limited, traditional commercial banking. Both loans and deposits originated primarily from businesses within the same city or county. Local on-the-job-training and few transfers between national bank districts ensured that examiners were well-versed in the characteristics of the local economy and could effectively monitor the condition of the area's banks. Fraud, always difficult to spot, was an important underlying cause of those bank failures that did occur. 22 Even if fraud was not involved, quick detection was vital because once a bank became nearly insolvent, there was an incentive for bankers to take more risks in an attempt to cover their losses. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 National Banks: Safe and Sound In the expanding economy of the 1950s and 1960s, few banks closed their doors. 23 In 1960, not a single national bank failed. The following year, the Comptroller declared two national banks insolvent. 24 The First National Bank of Maud, Oklahoma, and the Sheldon National Bank of Sheldon, Iowa, were typical failures of the period: small banks whose combined assets totaled only $6 million. Both insolvencies resulted from large defalcations in excess of the normal surety bond and capital of each bank. Examiners discovered the shortages, identified the culprits, and the Comptroller appointed the Federal Deposit Insurance Corporation as the receiver. 25 That bank failures were few and far between did not stop some observers from becoming alarmed. Memories of the widespread failures of the 1930s led members of Congress and the general public to view any bank's collapse with apprehension. 26 When the small First National Bank of Marlin, Texas, failed in 1964, Comptroller James J. Saxon was summoned to testify before 27 Congress, where he assured the nervous lawmakers that this failure was an isolated incident. After two slightly larger national banks with combined assets of $57 million failed in 1965, discontent with the regulators' performance led the House of Representatives to hold hearings on whether the OCC should be dissolved and the job of supervising all federally insured banks be vested in the Secretary of the Treasury. 28 This warning signified a significant expansion of the OCC's mandate. Once charged with maintaining a solvent banking system, the OCC was now expected to safeguard the solvency of individual banks. 29 Lawmakers feared that any failure might precipitate a wave of failures throughout the system. What these critics apparently forgot was that the bank failures of the 1930s had been a symptom rather than a cause of the Great Depression. 30 In the relatively stable economic environment of the 1960s, the small number of failures posed no threat to the system at large. Moreover, Comptroller Saxon and his successors correctly regarded the total prevention of bank failures as an impossible task; embezzlement and fraud, the cause of most of the era's failures, could never be entirely eliminated. Thus, although a few bank failures did occur each year, the Comptrollers could confidently write them off as isolated events of little consequence to the banking system as a whole. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6 Tw-o The Banking Revolution Begins 1960-1972 Although New Deal-era legislation contributed to the soundness of the nation's commercial banks by reducing competition, competitive pressures built up nonetheless. By 1960, commercial banks' share of assets held by all financial institutions, including credit unions and savings and loan associations, had fallen from 52 percent in 1950 to 38 percent. Bank assets grew more slowly partly because of the difficulties banks encountered in raising funds to lend during a period of rising inflation. With these troubles brewing, national banks got a new and forceful advocate. On November 16, 1961, President John F. Kennedy appointed James J. Saxon to be the 21st Comptroller of the Currency. Comptroller Saxon had spent the first 15 years of his career in the Treasury Department, where he became involved in a wide range of domestic and international affairs. He gained firsthand experience with banking beginning in 1952, when he served as assistant general counsel to the American Bankers Association and in 1956 when he worked for the First National 1 Bank of Chicago. Upon taking office, Saxon set up an advisory committee to undertake a broad inquiry into the functioning of the national banking system. In its report, National Banks and the Future (1962), the committee recommended an increase in powers of national banks. Saxon enthusiastically supported this cause. Throughout his five-year term, he used his discretionary authority to enlarge the realm of activity for national banks and pressed for relaxation of restrictive New Deal legislation. At the same time, Saxon felt it necessary to reinvigorate the OCC. As the business of banking changed, he believed, the OCC needed to devise new policies and procedures to maintain an adequate level of examination and supervision. In his 1963 Annual Report to Congress, Comptroller Saxon described his vision of a bank regulator's new, dual role . Traditionally, bank regulation sought to guarantee the payments mechanism by sustaining banks' solvency and liquidity and thus the public's confidence in the banking system. In addition to this function, Saxon wanted to ensure that banks had the discretionary power to adapt their operations sensitively and efficiently to emerging needs. A second criterion for bank regulation is thus to fashion the controls so that proper scope is allowed for the exercise of individual initiative and innovation. 2 This double task of improving the competitiveness of national banks while maintaining adequate oversight preoccupied the OCC for the next three decades. Changes in the economic environment complicated this job, as the economy became increasingly volatile and exposed banks to greater risk. Inflation and the Funding Problem In retrospect, it is clear that the 1960s were prosperous times for the United States. Economic conditions at the beginning of the decade, however, worried contemporaries. When https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 7 James]. Saxon , Comptroller of the Currency, 1961-1966. The Saxon era saw significant strides toward the modernization of the national banking system. President Kennedy took office in 1961, real economic growth had fallen under 3 percent, unemployment had climbed to 6.7 percent and the stock market had plunged. 3 In response, the new administration soon adopted a program of fiscal expansion. 4 The boldest measure was the large Kennedy-Johnson tax cut of 1964. Coupled with rising federal spending on domestic "Great Society" programs and the Vietnam War, the tax cut boosted federal deficits and stimulated inflation. 5 Inflation made it increasingly difficult for national banks to raise the funds they needed to make loans. The 1933 and 1935 banking acts had prohibited the payment of interest on demand deposits and authorized the Federal Reserve to issue Regulation Q, which placed interest rate ceilings on banks' savings and time deposits. Congress imposed these regulations on banks, in part, because it believed that competition for deposits reduced profits, inducing banks to take greater risks. The ·legislators also wanted to encourage banks to lend to their local communities instead of holding balances with money center banks. 6 Although Regulation Q may have improved bank profits and encouraged some local lending, banks found it increasingly hard to attract deposits at the interest rates they were permitted to pay. 7 They made more long-term loans, but their corporate customers reduced their non-interest bearing demand deposits in response to rising interest rates .8 This process began in 1951 when the Treasury Accord freed the Federal Reserve from its obligation to peg the price of government bonds. One potential source of new bank funds was consumer deposits. Many banks expanded their consumer services to lure in more accounts. But, in most parts of the country, barriers to branching imposed an important constraint on banks' ability to draw in more consumer deposits. The funding squeeze was particularly acute for the large city banks. The growing need for funds led these money center banks to seek out new sources, and gradually they became quite https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 distinct from the rest of the nation's banks. The money center banks started to bid aggressively in the federal funds market for excess reserves held overnight at the Federal Reserve banks and later began to employ security repurchase agreements. 9 In the late 1950s, these same banks had already begun to obtain Eurodollar deposits - dollar-denominated time deposits from banks outside the United States. Banks used their foreign branches, mainly in London, to pay rates above the Regulation Q ceiling, then forwarded the funds to their home offices. These ''foreign'' deposits had another advantage: they were not subject to reserve requirements. In 1960 only three national banks had foreign branches; 10 years later 59 national banks did. The 85 foreign branches in 1960 had assets of $1.6 billion; by 1970, 497 branches had assets of $38.9 billion. These new sources did not, however, solve the funding squeeze, which became more intense in the mid-1960s. The Regulation Q ceiling rates on time and savings deposits had stayed above the average market rates paid by banks from 1933 to 1965. Thus, in these years, Regulation Q only restrained the more aggressive banks from offering competitive rates. But in 1966 and from 1969 to 1970, when Treasury bills and other market rates rose above the Regulation Q ceilings, there were severe credit crunches. The flow of funds into the banking system declined , forcing a reduction in lending. This disintermediation was only partially alleviated by funds borrowed from overseas offices. 10 One solution to the funding problem was innovation. The most important development was the introduction of the negotiable certificate of deposit, or CD, by the First National City Bank of New York in February 1961. 11 First issued in minimum units of $1 million, these new instruments competed for corporate funds with Treasury securities and commercial paper. Negotiable CDs allowed banks to pay a market rate of interest and attract funds from across the nation, helping banks to recapture corporate deposits. The use of the negotiable CD as a major funding device dramatically changed the operation of commercial banks. Cheap funds from demand deposits or savings deposits had previously made banking a relatively simple, safe business. If a bank had sufficient funds, it could expand its loans, and as long as these were conservatively placed, the bank could safely tum a profit. Because banks issuing CDs paid the market rate, management had to become more aggressive and cost-conscious. 12 Although the consequences of this revolution in funding were not fully apparent until the 1970s, significant changes in bank portfolios were already evident in the 1960s. Demand deposits, which had been national banks' primary source of funds, accounting for almost 61 percent of total assets in 1960, dropped to 43 percent by 1970. 13 Savings, and particularly time deposits, exhibited spectacular growth, more than trebling in size and rising from roughly 29 percent to 41 percent of total assets. With new sources of funding, national banks bought fewer securities and booked more loans, which rose from 46 percent to 52 percent of their assets. As a result, profits and dividends of national banks climbed. 14 This transformation was not without cost, as liquidity decreased and banks took on more risk. During the decade, cash assets to total assets fell from 21 percent to 17 percent, and the capital-to-asset ratio declined from 8 percent to 7 percent. Nevertheless, these changes did not herald any immediate increase in bank failures. No more than three national banks per year failed between 1960 and 1972, and all were very small banks. Comptroller Saxon and his successors were acutely aware of national banks' funding problems. They publicly criticized the regulation of interest rates. Saxon's advisory report, National Banks and the Future, stated: ... regulation of interest rates on time and savings deposits is in conflict with the principle that money rates and bond yields should be permitted to fluctuate in response to changing market conditions and that commercial banks should be free to adjust rates (paid and charged) to those conditions. Whatever function this type https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 9 of regulation may serve to discourage banks from taking undue risks can be achieved more directly and properly, and with less adverse impact upon the competitive power of member banks, through the supervisory function. 15 Comptroller Saxon fought to eliminate Regulation Q, but he felt uncomfortable about the growth of the negotiable CD. Some national banks employed a third-party money broker to obtain "brokered" deposits. Worried that banks in trouble would seek these funds and make high risk loans, Saxon issued a directive to all examining personnel that characterized the use of these deposits as an "unsafe and unsound" practice. He also required banks taking brokered deposits to disclose them to the OCC. 16 When the two national banks that failed in 1965 were discovered to have used these instruments, the Comptroller issued new guidelines for examining banks that held brokered deposits and negotiable CDs. 17 In the Comptroller's view, deposit insurance, which reduced the market's incentive to monitor banks, presented a more subtle threat to the soundness of the system. To minimize the "moral hazard" created by deposit insurance, Saxon argued for keeping it in a subordinate role, in which supervision by the OCC and the Federal Reserve would provide the primary guarantee of banks' solvency and liquidity. He saw deposit insurance as merely an additional safeguard of limited application in those occasional circumstances in which the basic regulatory and supervisory mechanism fails to provide the needed protection for depositors or where sufficient liquidity is not provided through • 18 monetary act10n. Saxon warned that increasing deposit insurance would have a deleterious effect on prudent bank management. For similar reasons, the FDIC also resisted any change in insurance limits, but neither agency's warnings were heeded. The insurance for one account was raised from $10,000, where it had stood since 1950, to $15,000 in 1966, to $20,000 in 1969, to $40,000 in 1974, and finally to $100,000 in 1980. 19 The Battle to Keep National Banks Competitive Although innovations in funding augmented national banks' ability to meet the demand for loans in the 1960s, banks faced growing competition from nonbank and nonfinancial companies. Savings and loans, mutual savings banks, and credit unions provided many similar products at a better price, thanks to preferential treatment from Congress. For example, when Regulation Q was extended to the thrifts, the interest ceiling for their deposits was higher than the ceiling on commercial banks' deposits. Another threat to national banks came from unregulated nonfinancial firms, like General Motors Corporation and Sears, Roebuck Inc., which also began offering consumer credit. By 1972, the nation's three largest banking companies provided less consumer credit than either the three biggest manufacturers or three biggest retailers. 20 In commercial lending, the revival of the commercial paper market, dominated by the General Motors Acceptance Corporation, Commercial Investment Trust, and Commercial Credit Corporation, presented another challenge. 21 Corporations were heavily dependent on borrowed funds, but commercial banks were no longer their principal lenders. Between 1960 and 1965, corporations obtained 81 percent of their external funding by borrowing, with banks supplying only 22 19 percent of their borrowing needs. By the 1960s, the national banks recognized that they were losing ground to other intermediaries and sought assistance from the Comptroller to improve their competitive position. To meet these needs and improve services to consumers, Comptroller Saxon used his discretionary authority in corporate affairs to grant more charters and branches, permit mergers, and increase bank powers. In 1962, he initiated a more liberal chartering policy, and the number of new charters approved rose swiftly. 23 The number of new firms entering the banking industry https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 10 swelled as some state regulators followed the Comptroller's lead. The Comptroller's more liberal policy apparently doubled the rate of entry for all banks. 24 The effect on the industry, as a whole, appeared to be relatively small: there was a net increase of 3 percent in the total number of banks between 1961 and 1965. Yet, the new banks helped to reinvigorate the national banking system bolstering competition, cutting bank profits, and improving interest rates for consumers. 25 Although he placed greater emphasis on competition than on bank preservation, Saxon was not an advocate of free entry, and he remained concerned about the dangers of "overbanking." Before Congress, Saxon stated that: I would not characterize ... our policy [as] being more liberal. Our policy was clearly to minimize, to reduce the image of the national banking system as being one of a closed industry. 26 The number of approvals peaked at 230 in 1963, after which concern about overbanking ended the more liberal chartering policy. In February 1965, Saxon announced that all or parts of 13 states and the District of Columbia would be closed to new entry until the local markets adjusted to the newly chartered entrants. 27 By the time Saxon had left office in 1966, the OCC had reverted to a more restrictive entry policy; in 1967, a scant nine new charters were issued. The reversion to a restrictive chartering policy did not imply a change in the OCC's broader objective of promoting competition. The Comptroller's goal to supply more banking services and increase competition was pursued instead by promoting branch banking. While the total number of national banks drifted up from 4,530 in 1960 to 4,621 in 1970, the number of national bank branches jumped from 5,296 to 12,366. By granting more branch applications rather than new charters, the agency was effectively encouraging the growth of larger, more diversified banks. This policy can best be understood from a historical perspective. In the early 1900s, branching by national banks was prohibited and branching by state banks was either forbidden or strictly limited. To meet the growing demand for banking services, thousands of very small institutions were chartered, many of which failed in the Great Depression. 28 Even in the prosperous 1960s, many new banks did not thrive. 29 If it had substantially increased the number of institutions, the OCC might have actually weakened the banking system. Mergers and acquisitions, on the other hand, resulted in stronger, larger, and more diversified banks. However, mergers raised old populist fears about a concentration of banking resources and a reduction of competition. These concerns were expressed by Representative Emmanuel Celler (D.-N.Y.). During legislative debate on what was to become the Bank Merger Act of 1960, he declared: While there [are] ... approximately 13,500 commercial banks in this country, the 100 largest control approximately 46 percent of the nation's total banks assets and more than 48 percent of the bank deposits .... Such concentration is contrary to the fundamental premise that the banking system of the United States should rely for its vitality on vigorous competition by a multitude of independent banks, locally organized, locally financed, and locally managed. 30 In the Bank Merger Act, Congress decided to delegate to the Comptroller of the Currency, the Federal Reserve, and the FDIC authority over mergers that resulted in the formation of banks for which they were the principal regulators. This act was seen as a victory for the federal regulatory agencies over the Department of Justice, which had sought to persuade Congress to subject bank mergers to strict antitrust guidelines. 31 Instead, federal regulators were authorized to consider the effects of a merger both on competition and on the soundness of the banking system. The Department of Justice was upset by the relative ease with which bank mergers were consummated under these rules. In its advisory capacity, the Office of the Attorney General frequently found that a proposed merger would adversely affect competition or tend to create a monopoly. In contrast, the OCC tended to see little threat to competition in most mergers, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 11 emphasizing instead how banking would be strengthened by improved earnings, more lending capacity, greater management depth, a better capital cushion, and the provision of more commercial and trust services to the community. The Department of Justice began a number of suits to block bank mergers. In 1963, its position was vindicated by the Supreme Court in U.S. v. Philadelphia National Bank. The justices ruled that Section 7 of the Clayton Act, which prohibited mergers that substantially lessened competition or tended to create a monopoly, applied to banks. The Supreme Court decided that for the purposes of bank merger analysis under the antitrust laws, the basic business or '' relevant line of commerce" was the cluster of services representing commercial banking. 32 In spite of the increased competition among financial institutions, the Supreme Court and the Attorney General maintained very narrow definitions of banking markets, in keeping with the spirit of the New Deal regulatory framework. The Supreme Court decision effectively overturned the Bank Merger Act. Congress accommodated the court's decision by passing the Bank Merger Act of 1966, which applied the federal antitrust standards of the Sherman Act of 1890 and the Clayton Act to banking. The three federal banking agencies were ordered to deny bank mergers deemed likely to substantially lessen competition, unless the anticompetitive effects of the transaction were clearly outweighed by the probable effect of the merger in meeting the convenience and needs of the community. Once the agency approved a merger, the Justice Department had 30 days to bring an antitrust action. 33 By creating a single set of standards for judging mergers, the Bank Merger Act of 1966 represented a distinct loss of authority for the federal bank regulators, including the OCC, to the Department of Justice and the courts. In 1968, the Department of Justice issued guidelines that assured a legal challenge to any bank with 5 percent or more of the market seeking to acquire another bank, as well as any proposed merger whose combined market share would exceed 5 percent. 34 Regardless of the OCC's favorable disposition towards mergers, the Attorney General was able to discourage any merger of consequence in a given market by threat of a suit. When banks looked for acquisitions in new markets, the Department of Justice attempted to stop them by appealing to the doctrine of ''potential competition.'' The argument formulated by the department's Antitrust Division asserted that, although the banks involved were not presently in competition, their combination could reduce competition in the affected market. In spite of several attempts by the Department of Justice to have this doctrine recognized, the Comptroller 35 prevailed in court. Although seemingly precise, the Supreme Court's 1963 decision and the Department of]ustice's 1968 guidelines precipitated many lawsuits over what constituted a market - a city, a county, or a Standard Metropolitan Statistical Area - and over the definition of commercial banks' "line of commerce. " 36 During the 1960s, the Comptrollers took a broad interpretation of "relevant rriarket" and denied fewer than 10 percent of merger applications. Even among larger banks in urban areas, the OCC tended to find that mergers were pro-competitive because they enabled banks to give bigger loans and offer more services, making them potentially more effective competitors. 37 The OCC was responsible for granting the lion's share of all federally approved bank mergers and acquisitions, both in numbers and amount of assets. 38 Between 1960 and 1969, the OCC approved 74 7 applications with $11. 6 billion of assets. 39 New Powers for Banks and the Rise of the Bank Holding Company In addition to restricting geographic expansion, New Deal banking legislation also limited the products and services commercial banks could offer. Comptroller Saxon's announced goal was to https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 12 modify any regulation that he did not deem vital to maintain the safety and soundness of the banking system. His advisory report argued that the laws governing general lending limits, loans to corporations and their subsidiaries, and installment and real estate loans were unnecessarily restrictive. 40 When possible, Saxon used his administrative discretion to ease these constraints; when bound by statute, he supported a change in legislation. 41 Saxon regarded the restricted trust powers of national banks as particularly unwarranted. Because of these rules, less than 40 percent of national banks requested trust powers, and many of these banks failed to exercise them. 42 The 1963 Annual Report unhappily concluded: The Trust Departments of banks have long been prevented by mythology, and the structure of law and regulation within which they have had to operate, from offering the full range of fiduciary services of which they were capable .... As was the case in many other potential areas of banking endeavor, functions which could best be served by the expertise of banks, with their safety assured through bank regulation, were taken up instead by competing or new types of financial institutions. 43 The Comptroller also attempted to expand national banks' underwriting powers. The Banking Act of 1933 allowed banks to underwrite general obligation bonds of states and political subdivisions because they were backed by the "full faith and credit" of the issuer. But the act prohibited them from handling revenue bonds issued by the same entities. Owing to statutory and constitutional debt limitations, revenue bonds had become an important feature of state and local finance, from which banks were excluded. The Comptroller's advisory report found that revenue bonds differed little in quality from general obligation bonds and recommended that banks be given the authority to underwrite them. 44 As a first step, Comptroller Saxon used his discretionary authority to rule in favor of broader underwriting powers whenever the right of a national bank to issue a bond was challenged. 45 Although he was ultimately unsuccessful, he supported legislation to permit national banks to underwrite municipal revenue bonds. Firms in other industries felt threatened by Comptroller Saxon's broad interpretation of the incidental powers of national banks, and they took the OCC to court. Suits by travel agencies, data processing companies, insurance agents, armored car companies, and investment advisors were initiated against national banks and the Comptroller to prevent banks from offering the services these firms provided. Legal challenges percolated through the courts for a long time. The Supreme Court took up the issue of whether such plaintiffs had a right to bring such suits when two circuit c~urts reached conflicting conclusions in similar suits brought by data processing service bureaus. In 1972, the justices ruled in ADAPSO v. Camp that the plaintiff had the right to bring suit in federal court to challenge the authority of a national bank to sell data processing services. After this 46 key ruling, lower courts determined that banks should be confined to a narrow range of activities. Frustrated by these barriers to expansion, banks turned to the bank holding company as a device to expand their permissible activities. 47 The New Deal had imposed some controls on bank holding companies, but the Bank Holding Company Act of 1956 first brought these organizations under close federal regulation. The act placed bank holding companies, defined to be organizations owning 25 percent or more of the stock of two or more banks, under the sole authority of the Federal Reserve. This represented a major departure from the standing arrangement whereby the OCC was responsible for overseeing all principal operations of natiorial banks. Now the law divided oversight over banking organizations to an unprecedented degree. The act permitted multibank holding companies to engage in certain specific activities: owning and managing company property, providing services to subsidiary banks, operating a safe deposit company, and liquidating property acquired by subsidiary banks. Beyond these limited activities, the Federal Reserve Board was empowered to determine permissible activities that were "of a https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 13 financial, fiduciary, or insurance nature," and "so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto.'' The 1956 act had one important loophole: it applied only to multibank holding companies and not to the few one-bank holding companies, which soon became the freest form of banking organization. Thus, when lawsuits by the Justice Department and nonbank competitors prevented the Comptroller from expanding the powers of national banks, many banks took the initiative themselves, forming one-bank holding companies. As Comptroller William B. Camp, Saxon's successor, later explained: Commercial banks, tiring of continual harassment from litigation brought by a variety of nonbank competitors, attemfted to devise an organizational form which might have immunity from such suits. 4 The holding company form of organization offered many advantages for banks. Holding companies were able to acquire or establish leasing companies, mortgage banks, and finance companies and provide a wide array of financial services. They also proved capable of evading the geographical restrictions placed on banks: by opening a finance company, for example, the holding company could establish a presence where it could not open a branch or acquire a new bank. 49 Holding companies could raise funds by selling the commercial paper of the parent corporation, unconstrained by Regulation Q ceilings. They gained economies of scale in data processing and other nonbanking activities. Subsidiaries were not generally operated as a portfolio of separate investments but as a single integrated entity. The parent holding company could thus offer an array of services that banks could not provide. 50 The boom in formation of one-bank holding companies received additional stimulus from the 1966 amendments to the Bank Holding Company Act, which eliminated many of the restrictions on transactions between subsidiaries of a holding company. Whereas 53 one-bank holding companies had been formed in the years 1956 to 1959, and 291 between 1960 and 1966, 891 came into 51 existence between 1966 and 1970. This wave included most of the nation's largest banks. Typically banks gave birth to their parent organization. For example, First National City Bank of New York, the forerunner of Citibank, N.A., long frustrated in its desire to push back the geographic and functional frontiers, had its stockholders exchange their stock for shares in the First National City Corporation in 1968. 52 The rapid growth and diversification of the one-bank holding companies in the late 1960s alarmed Congress, independent banks, and nonbank competitors of the holding companies' subsidiaries. When Congress took up the issue of regulating holding companies, it did not revitalize the banks. The OCC's recommendations to expand bank powers, and thereby reduce the appeal of the one-bank holding company form of organization, were ignored. Instead, the legislators were content to amend the Bank Holding Company Act in 1970 to subject the one-bank holding companies to the same regulation as multibank holding companies and put them under the authority of the Board of Governors of the Federal Reserve. The OCC held that the basic objectives of regulations could be most effectively achieved if all supervisory, examination, and regulatory authority concerning the national banks resided with the OCC. In hearings before the Senate Banking and Currency Committee, Comptroller Camp asked Congress to allow the OCC to regulate one-bank holding companies whose banking subsidiary was a national bank, but Congress failed to act. 53 Under the 1970 amendments to the Bank Holding Company Act, the Federal Reserve Board was given some discretion to determine which non banking activities were permissible. The FRB generally exercised this discretion liberally, requiring one-bank holding companies to divest themselves of only a few of their nonbanking subsidiaries. 54 Nonbank competitors responded with lawsuits. For most of the 1970s, opponents of the holding companies enjoyed a fair degree of https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 14 success in preventing banks' expansion into most new fields, particularly insurance. However, in the Board of Governors v. Investment Company Institute (1981), the Supreme Court granted the Federal Reserve Board greater discretionary authority, when the power to sponsor closed-end investment companies was ruled to be constitutional. 55 With federal regulation applicable to all bank holding companies after 1970, one-bank holding companies faded in importance. The 1970 amendments did not limit the geographical location of nonbank subsidiaries, and the Federal Reserve Board indicated that it would not constrain their expansion. There was now an incentive for holding companies to acquire banks and expand geographically wherever state law permitted, thus circumventing the restrictions on branching by banks. The geographic freedom of bank holding companies withstood other court challenges. In Lewis v. BT Investment Managers, Inc. (1980), the U.S. Supreme Court struck down a Florida law that prevented out-of-state bank holding companies from establishing an investment advisory business. 56 As bank holding companies' position as financial intermediaries solidified in the 1970s, the OCC tried to revitalize the national banks but without much success. To expand their financial services, the Comptroller had permitted banks to offer commingled agency accounts. 57 But in 1971, the Supreme Court ruled in Investment Company Institute v. Camp that offering a commingled agency account violated the Glass-Steagall Act's separation of commercial and investment banking. In testimony before Congress in 1975, Comptroller James E. Smith, who succeeded Camp, noted with irony that the law permitted banks to offer investment services to the wealthy through their trust departments but prevented the general public from obtaining similar services. 58 Virtually every effort by a national bank to move into a new field was challenged in court by its nonbank competitors. These opponents enjoyed sufficient success in their litigation to block a general product diversification by national banks, thus ensuring that bank holding companies would remain the preferred form of expansion. By the middle of the decade, bank holding companies dominated the landscape. Between 1971 and 1976, the Federal Reserve Board approved 745 applications to form holding companies and denied only 57. Acquisitions by holding companies became more important than mergers between banks. 59 By 1976, 25.8 percent of all banks were owned by one-bank or multibank holding companies. These companies controlled 50.2 percent of all bank offices and 66.1 percent of all commercial bank deposits. 60 The Reorganization of the OCC https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The evolving business of banking required the OCC to_adapt in order to carry out its mission effectively. Comptroller Saxon recognized the need to modernize the OCC' s internal management. Traditionally, the agency had been organized along geographic lines without a strong managerial hierarchy to oversee its operations. Administration was one of a number of duties performed by top-level supervisory technical personnel. This structure was at odds with management practice of most large American corporations, which had discovered that effective management required the organization of the firm along functional rather than strictly geographic or product lines. 61 Saxon's objective was to establish new administrative positions with specific authority and responsibility for general administration, freeing technical specialists to devote their attention to bank examination and supervision. Efforts by the OCC to modernize were, however, initially constrained by budgetary problems. Between 1957 and 1961, a lagging economy caused the OCC's income to drop below the level of its expenditures. The shortfall was offset by dipping into the agency's reserves. Most of 15 the OCC's income came from examination assessments based on a bank's total assets. 62 By tying the OCC's funding to bank assets, the agency's budget was subject to cyclical fluctuations. This arrangement created a potential problem for the agency: its resources would be restricted at the very times when increased supervision was required. The budgetary squeeze eased after 1962, when renewed general economic growth increased the number and assets of national banks. OCC revenues more than trebled between 1960 and 1970; real expenditures, employees, and examiners approximately doubled. 63 This growth did not, however, reflect an appreciable increase in supervisory capacity. The national banking system was growing at least as fast as the agency charged with its supervision. Real, inflation-adjusted national bank assets per examiner and the ratio of OCC expenditures to bank assets remained relatively constant. 64 Comptroller Camp later acknowledged that the increase in the number of field examiners merely compensated for the growing size of banks. 65 The improved fiscal condition of the agency enabled Comptroller Saxon to initiate a major reorganization in 1963. The field organization of the OCC was overhauled, and the 12 districts were changed to 14 regions to accommodate the growth of the Northwest, Rocky Mountain, and Southern states. To head each region, the former regional chief national bank examiners were designated regional comptrollers to convey the broader and more administrative scope of their activities. A substantial amount of time and money was saved by delegating some of the Comptroller's discretionary authority to the 14 regional comptrollers. As their managerial tasks increased, the regional comptrollers were assigned deputies and staff attorneys. 66 Comptroller Saxon believed that research and analysis had an important role to play in OCC decision making. In 1962, he created the Banking and Economic Research Division and hired professional economists to staff it. The economists advised the Comptroller and provided the OCC with analysis for litigation and its charter, branch, and merger decisions. To promote an open discussion of banking issues, Saxon initiated the publication by the OCC of the National Banking Review in 1963. He emphasized that he did not want a mouthpiece for the agency but rather a scholarly journal to serve as a vehicle for a real exchange of ideas among the academic world, the banking community, and the public regulatory agencies. In addition to articles by the OCC's staff, there were essays by leading economists including Paul Samuelson, Milton Friedman, John Kenneth Galbraith, Robert Mundell, and Allan Meltzer. The Review was widely respected; its inclusion of dissenting opinions distinguished it from other government journals. 67 In 1964, the OCC established an International Operations Division, headed by the Deputy Comptroller for International Banking and Finance, to help the OCC monitor national banks' increased overseas operations. National bank examiners attached to this department received specialized training. In 1970, 43 examiners went overseas to examine national bank branches. They cooperated closely with the Federal Reserve Board and the Department of State, conducting examinations as local law permitted. National banks' growing presence in London convinced the OCC to establish a permanent office there in 1972. The three London examiners devoted their attention to British branches, where most of the foreign assets of national banks were concentrated. 68 Although he initiated sweeping changes, Saxon did not complete the task of reorganizing and reshaping the OCC. William B. Camp picked up Saxon's unfinished work when he was named Comptroller of the Currency by President Lyndon B. Johnson in 1966. Camp had spent his entire career at the OCC, having joined the agency fresh out of Baylor University in 1937. Popular with bank examiners, Camp's arrival in office boosted the morale of the field examiners, who were delighted to see one of their own in charge. In his quest to shake up the banking industry, Saxon had ruffled many feathers. In contrast, Camp shied away from controversy and worked to improve https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 16 OFFICE CF THE COMPTROLLER OF THE CURRENCY Chart: af Drganlzat:lan 1968 aw a.«~ - r..=. llt:J:it o.,wc, Mailblr~AIII. __. Mallll,11111.. Ant. flu .._.,..1111 111,tdef ..,..., .......... . .. c!:!f.., lrnh Dlrtdlr, 1,ia.,....., fDIC AlllnJ 011,f ~ ~.L, c-..1 let DhlllM ---:i s,.clal Aunt.t ~-:-' s,«111 Qltf Auht ... .. "t--«111 lmll ,-wlcU.inl u,....... M,,,l,naiMntl llllleMI I . . . - ....., ~~ ......... ....... t. \ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ... ADVISORS J\ EXAMINING I \ CORPORATE M,ai,,1,1, ..... ~ - SeNl«I Dl•h'-" Diwis- Dlrtcltr laltrllliWt Olwllleoo J '--A□MINISTRATIVE.; the OCC 's relations with the other federal regulatory agencies. Camp also had the singular distinction of being appointed by a Democrat and reappointed by a Republican. 69 Camp's tenure saw few of his predecessor's bold political and policy maneuvers. Saxon was an outsider who pushed the OCC in a new direction. Camp was an insider, devoted primarily to improving the efficacy of the agency's central tasks of examination and supervision. Camp began modernizing the headquarters' operations in Washington. Cash management was automated and tightened. OCC recruiters focused their efforts on the nation's campuses, seeking a new corps of college-educated, highly motivated examiner candidates. Supplementing traditional on-the-job training, OCC classroom instruction and self-study programs were expanded and upgraded for veterans and neophytes alike. Camp's OCC also revised its compensation and promotion policies to provide greater incentives and equity. Reporting, Disclosure, and Examination As the character of banking changed, the OCC needed more than ever to ensure that reports from national banks provided a meaningful flow of information and that examinations produced accurate assessments. From the outset of his term, Comptroller Saxon was concerned about the reliability of the reporting system. Congress had intended that reports of condition be made on surprise dates that would be jointly set by the three federal bank regulators. However, in the previous 25 years, calls had been made 21 times on the last business day ofJune and 24 times on the last business day of December. Comptroller Saxon believed that this regularity had reduced the value of the call report, allowing banks to engage in ''window dressing'' - last minute transactions designed to improve the appearance of their balance sheets. 70 Eager to improve the value of reports by restoring the element of surprise, Comptroller Saxon convinced the Federal Reserve and FDIC to make the first year-end surprise call since 1916 on December 28, 1962. Deposits on this date were 2.6 percent lower than those reported three days later on December 31 in the annual reports. This difference confirmed Saxon's suspicions of window dressing. Even so, the other agencies were not enthusiastic about the surprise call. Economists and statisticians at the Federal Reserve and elsewhere strongly opposed surprise call dates because of the need for a consistent series of data. When the Federal Reserve and the FDIC refused to agree to another surprise call in June, the Comptroller publicly protested in a letter sent to all national bank presidents and many newspapers. Comptroller Saxon's strong stand induced the other agencies to agree to a surprise call date in December 1963. Eventually the three regulators compromised. Beginning with the fourth call report of 1965, banks were required to supply the average deposits and loans for the 15 calendar days prior to the call date, and the middle and end-of-year calls were set for the last business days of June and December. 71 Although this public battle led to better reporting, it annoyed President Johnson who, on March 2, 1964, directed the Secretary of the Treasury to establish procedures to ensure that future disputes among the banking agencies were resolved quietly. Secretary Douglas Dillon responded by organizing the Interagency Coordinating Committee, composed of the heads of the OCC, the Federal Reserve Board, and the FDIC. Later, the Federal Home Loan Bank Board was added to the group, and the Deputy Secretary of the Treasury became chairman. The purpose of this consulting committee was to establish an informal forum, initially on a monthly basis, for discussion of policy issues. All members agreed to give 10 days notice before taking any action that would affect banks under the others' jurisdiction. 72 In 1967, the OCC required national banks to begin switching from cash to accrual accounting for reporting purposes. 73 This change produced a more accurate picture of bank operations by https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 18 recording income and expenses when the transaction took place rather than when the cash was actually received or disbursed. Accrual accounting was especially important for installment loans, which had become a mainstay of consumer lending in the postwar period. Throughout the 1960s and 1970s, the OCC sought better ways to measure national banks' capital adequacy and liquidity. The examination report was revised twice, in 1963-1964 and 196 7-1968, to produce more detailed and complete analyses of assets, earnings, and expenses. 74 A new report form was adopted in 1968 for the examination of operating subsidiaries in order to obtain a more general picture of their operations and relationship to the parent bank. 75 When it revised examination procedures in 1962, the OCC abandoned its own simple risk asset ratio and employed eight factors to evaluate capital adequacy. 76 The OCC continued to watch financial ratios and shared with the Federal Reserve a common system that rated a bank's capital adequacy. 77 Nevertheless, the agency relied heavily on its instincts and remained skeptical about the use of financial ratios. As First Deputy Comptroller Justin T. Watson explained: The Comptroller's Office does not want to be wedded to any inflexible mathematical computations. We believe management is the key to a well-run institution. Therefore, we believe a well-managed bank, free of asset problems, is entitled to operate on a higher leveraged capital base than one which has asset problems. 78 One serious problem faced by the OCC was its lack of enforcement powers. Until Congress enacted the Financial Institutions Supervisory Act in 1966, the only enforcement tool that the OCC had to back its criticisms was the revocation of a bank's charter, which was inappropriate except for the most serious transgressions. The 1966 act gave all federal banking agencies powers to issue cease-and-desist orders against banks and to suspend or remove directors, officers, and other officials. 79 -.i"~U.!!IWJ:.1•,•1np,.;;r.~ ·~~ William B. Camp, Comptroller of the Currency, 1966-1973. Camp worked to consolidate Saxon's gains and strengthen the examination function. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 19 Comptroller Saxon also believed that the market could play an important role in monitoring the performance of national banks. He was particularly concerned that banks were hiding unwelcome information and their true financial status from their stockholders. In 1962, the OCC became the first federal banking agency to adopt minimum standards for disclosure of financial information to investors. National banks with $25 million or more in deposits were required to supply stockholders with proxy statements, annual financial reports, and notices of major changes in ownership. In 1964, Congress adopted the OCC's regulations for all insured banks. 80 The Computerization of Banking https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The OCC's examination techniques, which had slowly evolved over a century, were forced to rapidly adjust to the new computer technology. An information-intensive business, banking quickly adopted the cost-saving technology offered by computers. Within two years after the Bureau of the Census installed the first commercial computer in 1953, Bank of America purchased one. By the early 1960s, most of the large banks had fully automated their check processing and demand deposit accounting. The reduction in clerical costs resulting from electronic data processing (EDP) was applied to other operations, including savings deposits, installment loans, and mortgages. Banks soon began offering computer time for sale. Computers also spurred the growth of credit cards. In 1966, when Bank of America decided to offer other banks a license to issue the BankAmericard, creating a national network, bank credit cards became a hot, profitable product. 81 A group of rival banks responded by forming a second national card system, Interbank Card Association, renamed MasterCharge in 1969. By 1968, banks were the nation's largest users of commercial EDP on-line 82 computer services, employing 20 percent of the nation's programmers and systems analysts. Banks' use of computers forced a change in the OCC's examination techniques. Previously, when examiners visited a bank, they took control of the ledgers and totaled the individual entries on an adding machine to reconcile the totals to the bank's general ledger. When banks computerized their operations, the OCC received printed reports generated by the bank's computer. By accepting computer output not produced under its control, the OCC feared that its examinations would become less effective. The OCC's first response, in 1967, was to place two specialized electronic data processing examiners in each of the 14 regions and to add an EDP section to the standard report of examination. 83 The OCC also added credit card items to its examination reports and established procedures to account for delinquent credit card loans. 84 A year later, the regional EDP staffs were doubled. In 1969, an EDP committee was formed to standardize procedures for EDP examinations and reports. 85 But computerization was not a phenomenon which could be dealt with simply by hiring a few specialists. As banks increased their use of computers, most of the work force had to be educated in the new information technology. The OCC tackled this problem by developing a short EDP seminar which all bank examiners were required to take. In 1974, the OCC began testing an automated retrieval system for commercial and trust examinations. The idea was to extract selected data from a bank's magnetic tape files and print a report to the agency's specifications. The numerous incompatible computer systems employed by national banks, however, limited this initiative's success. The agency was also afraid that automated processing of commercial loans reduced the information that had been available on the history of loans, creating potential problems for both the bank and the OCC. The OCC tried to convince banks to design systems that would make storage and retrieval of this type of information 20 easy. 86 As the computer revolution progressed, these basic problems remained an important concern to successive Comptrollers. Consumer Protection https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis On top of the mounting burden of conducting examinations in a rapidly changing environment, the Comptroller of the Currency was given the new task of protecting the consumers of national bank services. Consumer activists claimed that unscrupulous financial institutions and retailers were taking advantage of an unsophisticated public by misrepresenting and hiding the actual cost of borrowing. These and other consumerist causes gained little support in Washington until the early 1960s. They received a big boost when President Kennedy established the Consumer Advisory Council. The consumers' greatest advocate in the Senate against alleged abuses by the financial industry was Senator Paul H. Douglas (D.-Ill.). In 1960, he introduced the first truth-in-lending bill, requiring disclosure of credit costs in dollars and as a simple annual rate. Financial institutions claimed that this legislation would impose high costs on them and yield few benefits for the public. Their opposition blocked legislation for seven years in spite of support from the White House. President Johnson's Economic Report of the President for 1966 strongly recommended the adoption of truth-in-lending legislation: While the growth of consumer credit has contributed to our rising standard of living, confusing practices in disclosing credit rates and cost of financing have made it difficult for consumers to shop for the best buy in credit. 87 After Senator Douglas's electoral defeat, the cause was taken up by Senator William Proxmire (D.-Wisc.). Finally, after extensive hearings in 1968, Congress passed the Consumer Credit Protection Act, commonly known as the Truth-in-Lending Act. The act required banks to state the annual rate of finance charges, including interest and non-interest items, on all consumer loans and all commercial and industrial loans below $25,000. 88 The OCC was obligated to examine national banks for violations, enforce compliance, and handle all consumer complaints covered by the law. In 1970, Congress passed another consumer protection law, the Fair Credit Reporting Act, which required banks to provide individuals and firms with information from their credit files so that errors could be corrected. Initially, the OCC had no personnel specializing in consumer issues. In conjunction with the Federal Reserve Board, the OCC adopted a truth-in-lending checklist for its examiners and added a special page to the examination report. Violations discovered during an examination were brought to the attention of bank management and reported to the OCC's Washington office. In the few cases where the violations were "willful," the matter was referred to the Department ofJustice. Monitoring truth-in-lending placed a significant burden on OCC resources. The education of examiners and establishment of procedures were costly; the many variations in loan terms made the application of the new regulations "complicated and legalistic. " 89 Comptroller Camp supported the 1968 act, although he pointed out that truth-in-lending complaints against national banks were few. 90 Some OCC officials came to believe that the legislation did more harm than good. In 1974, First Deputy Comptroller Justin T. Watson remarked that: Consumer activists are running around the country literally trying to tear down banks and business. Those activists have, for the most part, maintained complete silence on the loss of purchasing power experienced by the small saver who, by the way, also is a consumer. It seems to me that those activities define a consumer as a borrower and a saver as a capitalist. 91 21 These complaints of an overburdened agency reflected the growing mountain of paperwork required of both banks and their regulators. 92 Although financial innovation, the computer revolution, and new consumer regulation made the agency's job more difficult in the 1960s and early 1970s, there were no apparent signs that the soundness of national banks had been compromised. By the measures Congress used, the OCC continued to fulfill its mission. Bank failures were rare; the few banks that failed were small. The national banking system appeared to be sound. Neither the OCC nor the rest of the country was prepared for the economic crisis and banking problems of the next few years. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 22 Three Crisis Years 1973-1975 The years 1973 through 1975 were a time of turmoil for the American economy and the Comptroller of the Currency. Shortly after his reappointment, Comptroller Camp fell ill. He resigned in March 1973. Camp had directed the agency's attention and resources to its basic business of bank supervision; his term, unlike Saxon's, was not marked by broad new policy initiatives. The job of continuing the revitalization of the agency fell to the 23rd Comptroller of the Currency, James E. Smith, who was appointed by President Richard Nixon and took office on July 5, 1973. When he accepted the appointment, Comptroller Smith could not have foreseen the problems that would soon engulf the agency. But his experience with politics and banking helped him steer the agency through the troubled middle years of the 1970s. After finishing law school, he had served as an aide to Senator Karl Mundt (R.-S.D.) before taking a job as a lobbyist with the American Bankers Association in 1963. This experience won him the post of Deputy Under Secretary of the Treasury for Legislative Affairs in the first Nixon administration. One of Smith's vital assets was his wry sense of humor, which served him especially well in times of crisis. Shortly after the largest bank failure of his tenure, the Comptroller remarked that he should have sensed troubles ahead when the first bank he closed turned out to be in his mother's home town of Eldora, Iowa. 1 A Recession and New Difficulties for Banks https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis When Richard Nixon won the presidential election of 1968, the economy was in high gear with unemployment at only 3.6 percent. Inflation, which had reached 4. 7 percent, was the number one economic issue. To slow the rise in prices, the Federal Reserve's monetary policy had turned restrictive, helping to push interest rates to new heights. 2 Fiscal policy was also tight, and the federal government ran a budget surplus in 1969. These contractionary policies contributed to the 1970 recession. When unemployment climbed to 5.9 percent in 1971, the White House became alarmed. The administration wanted to bring inflation down further, but it felt it could not stand any significant increase in unemployment. 3 Added to this domestic dilemma was the United States' balance of payments problem. Under the Bretton Woods fixed exchange rate system established at the end of World War II, the dollar served as an international means of payment and a reserve currency for other nations. In tum, the United States promised to convert dollars into gold on demand at $35 an ounce. For years, foreign treasuries and central banks had been accumulating dollar claims created by American balance of payments deficits. These deficits were, in part, the product of the growing world economy, stimulated after 1964 by America's inflationary policies. Continued deficits would have ultimately drained the United States's gold reserves. Recognizing this eventuality, in August 1971 the U.S. government abandoned convertibility. In so doing it acknowledged that its policies had been overly expansionary and indicated that it 23 James E. Smith, Comptroller of the Currency, 1973-1976. Under Smith, the OCC improved its examination capability, to better deal with changes in the financial services industry. would no longer be constrained by fixed exchange rates. The Nixon administration felt that leaving convertibility would be more politically palatable if it were accompanied by a strong anti-inflationary regimen. But for a variety of political and economic reasons, restrictive monetary and fiscal policies were not adopted. Instead, when convertibility ended, mandatory wage and price controls were imposed. The administration was attempting to squeeze out inflationary expectations, even though it maintained an expansionary policy. Inflation was reduced to 3.4 percent in 1972, but unemployment declined very little. To spur the economy, the Federal Reserve boosted the growth of the money supply. In 1972 and 1973, real growth once again exceeded 5 percent and unemployment finally fell below 5 percent. Wage and price controls, which treated the symptoms not the disease, were powerless to halt the effects of the monetary stimulus. Controls were gradually abandoned, allowing prices to continue their rise. Despite cooperative €fforts by the major economic powers to restore the Bretton Woods system at sustainable fixed exchange rates, continued worldwide inflation helped to push the Wes tern industrialized nations to a system of 4 flexible exchange rates by mid-1973. The Nixon administration responded to this new bout of inflation by cutting federal expenditures. As fiscal policy tightened in 1973, the Arab oil embargo began, driving up the price of this key commodity. Higher oil prices increased payments to foreigners, thereby reducing consumer and investment spending. In 1974, President Gerald Ford inherited an economy that was in a recession and had an inflation rate of 12 .2 percent. The economy entered a second year of recession in 1975 with unemployment at 8.5 percent, even though inflation continued at 7.0 percent. 5 This novel and seemingly contradictory combination of economic ills was given a new name: stagflation. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 24 Stagflation created two problems for the banks. First, bank earnings fell as troubled borrowers failed to make payments. Loan losses rose sharply, although earnings were sufficient to cover them. Secondly, the cost of borrowed funds soared. Inflation helped to drive interest rates higher, and the federal funds rate averaged over 10 percent in 1974. As the gap widened between market rates of interest and Regulation Q ceilings, customers drew down their demand deposits. National banks' demand deposits fell from 36 percent of total assets in 1972 to 28 percent in 1975, while time and savings deposits climbed from 49 percent to 55 percent. In the aggregate, national banks' solvency was not threatened by the recession. However, the unexpected economic decline and rise in the cost of funds pushed overly aggressive banks to the brink of failure. By 1975, the twelve largest national banks had $13.5 billion of questionable or "classified" assets, representing 102 percent of gross capital funds. Real estate loans were a major source of their woes. Problems in real estate lending arose largely from loans made to real estate investment trusts (REITs). 6 REITs had grown slowly until the credit crunch of 1969-70, when thrift institutions found it difficult to raise funds. Unconstrained by interest rate ceilings imposed on banks and thrifts, the REITs obtained funds by selling shares and commercial paper and borrowing from banks. During the 1974-75 recession, the REITs found it difficult to turn over their commercial paper and, instead, increased their borrowing from commercial banks. Many large banks had also sponsored REITs. Unwilling to see their reputations tarnished, they tried to keep these REITs afloat. 7 As a result, some large banks suffered heavy losses. Chase Manhattan, for example, had charge-offs in excess of $600 million in 1975-75 from its REIT entanglements. 8 Big banks faced another problem from loans made to non-oil-producing developing countries. The worldwide recession raised the cost of their imports and lowered the demand for their exports. By 1975, the top 20 national banks had $2.3 billion of classified foreign loans. Together, the REIT and foreign loan problems dramatically weakened the money center banks. 9 In its efforts to monitor and supervise the weakened national banking system, the OCC was hindered by the Nixon administration's drive to trim the federal budget. The administration pressed the agency to cut costs even though the OCC received no appropriations from Congress. Nevertheless, the Comptroller's office was placed under an employment ceiling in 1969, which left the OCC with fewer examiners than Comptroller Camp felt were necessary to carry out the 1970-1971 examination cycle. 10 The Office of Management and Budget then requested that the OCC comply with the government's goal of a reduction in its staff's average employment grade by one-tenth before June 30, 1972.11 The total number of examiners in the early 1970s remained roughly constant. However, in relative terms, the resources available to the agency declined: the ratio of total OCC expenditures to total national bank assets dropped significantly. In hindsight, this reduction in the OCC' s examination capacity was penny wise and pound foolish. Although the OCC probably could not have prevented the bank failures that followed, the losses they entailed might have been less if the OCC had a full complement of examiners to sound early warnings of trouble. The Failure of the United States National Bank https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis On October 18, 1973, Comptroller Smith declared the United States National Bank (USNB) of San Diego, California to be insolvent and appointed the FDIC as receiver. The failure of this bank - the biggest collapse since the Great Depression - was an unpleasant surprise for regulators, Congress, and the public. The USNB had been the 86th largest bank in the United States, with assets of $1.2 billion, 335,000 depositors, 62 branches, and 1,600 employees. The bank was closed dramatically in a carefully coordinated sweep by 165 national bank examiners and 292 FDIC officials 25 who took possession of the bank and its branches. The FDIC arranged a competitive bidding for an assumption of the bank. The Crocker National Bank of San Francisco won with a bid of $89.5 million. The bank opened USNB's offices the next morning without interrupting service to customers. Taking over $1.1 billion of liabilities and accepting $853 million of assets, Crocker received a $126 million advance from the FDIC' s insurance fund. 12 This costly failure raised concern about why it had occurred and whether regulators had performed their jobs. The USNB had been dominated by C. Arnholt Smith, San Diego's "Man of the Century" and a big Republican campaign contributor, who enjoyed a reputation as a successful banker. Beginning in 1958 and continuing until 1963, bank examiners discoverd and criticized a pattern of heavy loans to Westgate California Corporation and other businesses associated with C. Arnholt Smith. In 1962 the Westgate Corporation was found to hold 50 percent of the bank's stock, putting the bank in violation of lending rules to affiliated firms. In accordance with an order from Comptroller Saxon, C. Arnholt Smith bought the stock from Westgate Corporation, and subsequently, whenever a violation was uncovered, the USNB seemed to correct it promptly. In 1967 the USNB resumed heavy lending to Westgate, which in turn invested the funds in real estate. Loans were made directly and indirectly to Westgate affiliates, which lent the funds back to the parent, thus disguising the true purpose of loans. National bank examiners saw the tip of the iceberg during a 1969 examination when they found that $56 million or 22 percent of total loans were without sufficient credit information. However, as late as the September 1971 examination, classified loans equaled only 25 percent of capital. Comptroller Smith later admitted that these examinations missed many of the weak loans and loans with insufficient information. One reason for the examiners' failure was the deception perpetrated by C. Arnholt Smith, who kept some bank records at his home to hide his manipulations. After the bank's failure, the OCC's examiners reviewed the September 1971 exam and listed an additional $133 million of assets that lacked credit information and classified another $214 million in loans as substandard. They discovered that the ratio of classified loans to capital should have been 486 percent, not 25 percent. 13 On November 9, 1972, after an examination found classified assets equal to 371 percent of capital, the OCC concluded that USNB was a "serious problem" bank. Eighty-six percent of the weak assets and $113 million in standby letters of credit were obligations of C. Arnholt Smith and his associates. The 1972 examination also downgraded the bank's management rating from satisfactory to poor. The examiner-in-charge had actually concluded that the bank was near insolvency, but the OCC remained skeptical that so large and prominent an institution could be in deep trouble. The next examination, begun in January 1973 and completed in June, reviewed the work of the previous exam and discovered further deterioration in the quality of USNB 's portfolio. The bank's liquidity problems worsened in June, and the Federal Reserve Bank of San Francisco supplied it with funds. When Comptroller Smith took office in July, he was unaware of the mounting problems of USNB. After reviewing the situation, the Comptroller and the agency's senior officials decided that the bank would become insolvent in the near future and began to plan for its closure. 14 Although the failure of USNB was 14 times larger than previous post-Great Depression failures, it resembled smaller closed banks in that self-dealing was a key factor. Comptroller Smith described the failure as the result of "a total corruption of sound and honest credit administration principles. " 15 What was unusual was that so large a bank had so few internal controls that it could be dominated by a single individual. 16 Comptroller Smith acknowledged that the OCC had failed to recognize what set the USNB apart from other large banks, but he also warned that: There is no procedure or group of procedures which could completely eliminate the chances of a bank becoming insolvent because of self-dealing by the bank's https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 26 management. Banks are run by human beings who may be clever and deceitful enough to defeat the restraints built into any system. 17 Although most banking experts would certainly have agreed with the Comptroller, the failure of the USNB brought the OCC under intense scrutiny. The Boston Globe alleged that all the problems of the bank "had been known by the Comptroller's Office for more than ten years," and some newspapers speculated that bank examiners had been bribed. The Comptroller ordered a complete internal investigation and found that examiners had not been corrupted and that all information had been transmitted expeditiously to Washington. In testimony before Congress, Comptroller Smith did, however, concede that the examinations of USNB for 1969 to 1971 were not as thorough as they should have been in evaluating loans to Smith-related companies and did not make use of Westgate's public financial statements. Furthermore, he acknowledged that the agency did not follow up the unfavorable 1972 report quickly enough. 18 Comptroller Smith seized the initiative in this hour of adversity. He believed that the USNB affair pointed out the need for a comprehensive reexamination of the agency's structure and procedures. Although the OCC had made numerous changes under Saxon and Camp, more were needed to keep pace with the developments in the banking industry. Smith and his senior managers quickly put together a proposal for an external review. Fifteen management consulting firms submitted bids for the review. In May 1974, Haskins & Sells was selected to carry out the study with the participation of Carter H. Golembe of Golembe Associates and Drs. Jack Guttentag and Samuel Sapienza of the Wharton School in an advisory capacity. As the study progressed, the staff of the OCC, stimulated by the review, contributed many ideas. In the meantime, Comptroller Smith took measures to improve examination procedures and increase the flow of information to prevent future USNBs. To ferret out self-dealing, the Comptroller issued new regulations in 1974 requiring every director and principal officer of a national bank to make available to the bank's own lending officers and to national bank examiners a current statement of their business interests. 19 The Comptroller also instructed examiners to prepare a schedule of violations of lending limits and limits on loans to affiliates that included comparisons to previous examinations. In addition, a bimonthly past-due loan report for all national banks was introduced. Together with the Federal Reserve and the FDIC, the Comptroller issued a regulation that required standby letters of credit to be treated as ordinary loans for the purpose of determining the statutory limits on loans to borrowers. 20 The OCC began to revise some of its other practices. Loans with two or more participating banks had become common. The agency was concerned that the same loan, analyzed by different examination teams, was being treated differently. To establish a uniform evaluation of such loans, the agency created the Shared National Credits Program, consisting of teams of senior examiners from various regions. These teams visited the "lead" banks to review loans of $20 million or more in order to develop a common classification for all banks participating in the loan. A copy of the classification of these loans was to be provided to all regional administrators and the Conference of State Bank Supervisors. To monitor the liquidity problems of large banks, the OCC requested that the 200 largest banks include a new maturity schedule of assets and liabilities in their report of condition. 21 Franklin National Bank https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis While the agency was tightening its procedures and awaiting the Haskins & Sells report, a bank even larger than USNB failed. The Franklin National Bank of New York, once the nation's 20th largest bank, with $5 billion of assets, was declared insolvent by the Comptroller on October 8, 1974. Closure of the bank required 110 national bank examiners, 640 FDIC examiners and 27 liquidators, and additional attorneys, accountants, and computer specialists. The FDIC arranged for a deposit assumption by the European-American Bank and Trust Company, which paid $125 million for the bank and its 104 branches. Fraud had played a key role in the failure of USNB and smaller bank failures. Franklin's collapse, however, was qualitatively different. Franklin had begun as a Long Island bank whose strength was in retail banking. In 1961, the state of New York passed a law that permitted banks to branch in contiguous counties. Franklin had lobbied against the bill and now faced potential competition from the big New York City banks. Under its aggressive chairman, Arthur Roth, Franklin decided to respond to the challenge by entering the New York market. The bank's application to open a branch in Manhattan was approved by Comptroller Saxon in 1964. 22 In New York City, Franklin sought to compete for wholesale business with the nation's largest banks. The bank took the risky step of giving credit at prime or near prime rates to higher-than-prime-rate-risk companies. Franklin grew fast but built a portfolio of poor quality loans. Roth wanted to follow Franklin's larger New York City rivals to London. Concerned by the bank's weak portfolio, the OCC refused permission until management offered assurances that problems would be corrected. 23 Opening its office in London in 1972, Franklin embarked on an international expansion, paying a premium above the London Interbank Offered Rate (LIBOR) to attract Eurodollar deposits. The bank also participated in Eurodollar loans and began speculating in foreign exchange. By the end of 1973, Franklin had $1 billion in deposits at its London branch. These policies increased the bank's size and prominence, but it was operating on a very thin margin and its profits were low. 24 Between 1970 and 1973, the bank's net income fell from $21 million to $12 million, of which $7.7 million was from foreign exchange trading. 25 Comptroller Smith later summarized Franklin's failure to match its assets and liabilities as the ''first encounter of LIB OR funding and Long Island pricing." At the same time as it entered European markets, Michele Sidona, an Italian financier, acquired a 21.6 percent stake in the bank through his company, Fasco International Holding, S.A. 26 Although he did not have a majority of shares, Sidona wielded considerable influence. Sidona convinced the Federal Reserve that Fasco was not operating as a bank holding company, and thus Franklin avoided the Federal Reserve's oversight. When the recession hit, the bank's performance deteriorated. Interest rates rose sharply, raising the cost of the federal funds on which the bank depended. A member of the board of directors, Sidona encouraged foreign exchange speculation to improve the bank's performance. He instructed his foreign exchange managers to bypass the bank's president and report directly to the board of directors. 27 Gambling on a rise in the dollar, Franklin's London office lost millions and tried to conceal the disaster through Sidona's network of European companies. 28 The OCC discovered Franklin's mounting problems in a four-month-long examination that ended on March 9, 1974. Since the previous examination, Franklin had expanded by 29 percent with borrowed funds. Comptroller Smith instructed the regional administrator and the examiner-in-charge to meet with Franklin's Executive Committee and obtain a written plan to reduce short-term borrowing and improve the bank's condition. The public had little idea of the severity of Franklin's problems until May 1, 1974 when the Federal Reserve Board denied a bid by Franklin's holding company, Franklin New York Corporation, to acquire Talcott National Corporation, the holding company for Talcott National Bank. This was an unusual decision, and it triggered rumors about the bank's solvency. Losing deposits, the bank was forced to borrow $110 million from the Federal Reserve Bank of New York. On May 10, 1974, Franklin New York Corporation announced that it would miss its regular quarterly dividend - an unprecedented act for a large bank - and that Franklin had lost $14 million https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 28 in unauthorized foreign exchange transactions. By the end of June, Franklin had lost both over $1 billion in deposits and access to the federal funds market. The bank turned to the Federal Reserve Bank of New York and increased its borrowing to $780 million. 29 When Comptroller Smith looked to the private sector for help, he received a promise from Sidona to infuse additional capital into the firm. 30 This assistance did not materialize, because Franklin's collapse had led to runs on Sidona's Italian banks. Although Franklin was not yet insolvent - its assets still exceeded its liabilities - the Comptroller decided to close the bank because of its liquidity. In a carefully orchestrated sequence of events, the Federal Reserve demanded repayment of its loans, Franklin failed to comply, and Comptroller Smith declared the bank insolvent. The collapse of Franklin was controversial. The Comptroller and the other regulatory agencies were criticized for waiting too long to close the bank, for the subsidy provided by the • Federal Reserve, and for the time it took for the FDIC to arrange a deposit assumption. Early closure would have avoided the need for a below-market loan from the Federal Reserve - a subsidy that in this case was estimated to be worth over $20 million. What led the federal agencies to delay closing the bank was their concern that a failure by a bank of Franklin's size might cause a general scramble for liquidity. 31 In addition, the deposit assumption process turned out to be complicated because the FDIC had to package the bank to make it a more attractive acquisition. Furthermore, there were few banks large enough to acquire Franklin. Antitrust concerns eventually led to the acceptance of the unprecedented foreign takeover. 32 The collapse of Franklin reinforced Comptroller Smith's determination to change the OCC. Shortly after closing Franklin, he candidly told a reporter: We haven't been as sensitive as we should have been to large institutions. Maybe we were unduly secure that a major bank that had prospered for many years couldn't develop big problems. 33 "Problem" Banks https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The failures of USNB and Franklin National Bank put the OCC on the front pages. As the 1974-1975 recession weakened many banks, concern grew that more failures would follow. These concerns proved largely unfounded. Two national banks failed in 1975 and two more in 1976. The larger two were assumed by other banks, and the depositors of the two smaller institutions were paid off by the FDIC. 34 But USNB and Franklin had excited the public and Congress, which clamored to know more about the growing number of ''problem'' banks. The identification of weak or "problem" banks was central to the OCC's supervisory process and the prevention of costly failures. To identify weak banks, the OCC examined banks' loans, capital, and management. A national bank was graded on a scale from A to D, depending on whether its loans classified as substandard, doubtful, or loss totaled less than 20 percent, 20 to 40 percent, 40 to 80 percent, or over 80 percent of gross capital funds. 35 Examiners rated capital adequacy on a scale of 1 to 4, comparing a bank's capital to its liquidity, earnings, expenses, and deposit structure. Bank management was graded strong, fair, or poor. After these three factors were scored, examiners assigned a composite score of 1 to 4 to· the bank. Banks in Group 1 were considered to have good capital, competent management, efficient operations, and high liquidity. In Group 4 were banks believed to be in immediate danger of insolvency, requiring either more capital or new management. Banks in Groups 3 and 4 were listed by the OCC as needing '' special attention.' ' 36 29 Historically, national banks rated 3 and 4 had been small and few in number. In December 1970, there were 104 banks in Group 3 and 8 banks in Group 4, whose combined assets represented only 1 percent of all national bank assets. The adverse economic conditions of the early 1970s doubled the number of banks in these groups. For the first time, they included some of the largest institutions. By 1974, 169 banks with 38.8 percent of national banks' assets were assigned to Group 3 and 17 banks with 0.4 percent of assets to Group 4. 37 Although these increases reflected the gravity of the economic downturn, Comptroller Smith did not believe that all the banks in Group 3 were in imminent danger of failure. In January 1974, Comptroller Smith held meetings with senior examining and legal staff to discuss the difficulty of identifying and tracking ''problem'' banks. The Comptroller was particularly disturbed by the time and resources devoted to banks whose problems did not seriously affect their viability. To better identify and track weak banks, the Comptroller, in a November 1974 memo sent to all examiners, outlined the ''Victor'' program. 38 Initially, the Victor program focused on all banks rated 3 or 4 and any other which an examiner, regional administrator, or the Washington office felt deserved special attention. 39 It established procedures for swift and regular communication of information about troubled banks to ensure that problems were identified and corrective measures were taken. The Victor program was intended only as a first step towards improving the agency's identification and handling of weak banks. To find potentially weak banks, the OCC devised a new measure to aid its screening procedures. If the ratio of a bank's classified loans to adjusted capital exceeded 65 percent, it would automatically receive special attention. 40 Such banks were reported to the regional administrator, and they were closely monitored on the regional and national level with remedies being devised as needed. In early 1976, the OCC judged 28 banks to be in serious difficulty. Only seven of these had grave liquidity or solvency problems. Additional attention was given to 57 banks, but only some of these were selected by the 65 percent ratio, reflecting the continued importance of discretion in the agency. 41 Under Comptroller Smith's leadership, the agency toughened its enforcement practices. The OCC had traditionally relied heavily on persuasion to convince banks to correct their deficiencies. The presumption was that bankers were honest and could be trusted to take remedial action. In the cases of USNB and Franklin, bankers seem to have made false promises and used delaying tactics to keep examiners at arms' length while the banks doubled their bets in vain attempt to escape impending disaster. Comptroller Smith made increased use of cease and desist orders, authorized in 1966, and stepped up informal pressures. At his insistence, examiners also began to meet banks' boards of directors when problems were uncovered. While the OCC was making these adjustments, both the public and Congress feared that a greater crisis was ready to happen. The rating of banks had always been an internal, secret activity. Now, much to the Comptroller's horror, the Washington Post obtained the "super secret list of problem banks'' - the banks whose criticized assets exceeded 65 percent of their capital. In a dramatic post-Watergate expose, the newspaper revealed that Citibank and Chase Manhattan Bank were on the list. 42 Not only were the big banks weaker than they seemed, but the Comptroller appeared to be their active accomplice, concealing the true condition of the banking system. 43 In the press and in Congress, Comptroller Smith was criticized for lax regulation. The Washington Post report prompted Senator William Proxmire (D.-Wisc.) to summon Comptroller Smith to testify why he had failed to do '' a vigorous enough job on bank regulation.' ' 44 Proxmire not only castigated the OCC for its alleged performance failures, he also took it to task for administrative laxity. He blasted the OCC as the top "junketeer" among federal regulatory agencies, citing its high travel costs, and introduced a bill to consolidate the three federal banking agencies. Representative Henry Reuss, chairman of the House Banking Committee, also proposed https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 30 to abolish the OCC. 45 Arthur Bums, chairman of the Federal Reserve, urged Congress to let his agency take over the OCC. But the Ford administration refused to consider any hasty restructuring of the regulatory agencies, arguing that there was no compelling reason to do so. 46 Although the administration rose to the OCC's defense, it could not protect Comptroller Smith, who came in for more than his share of Congressional attack. Representative Wright Patman, former chairman of the House Banking Committee, suggested that Comptroller Smith resign and stated: ''I do not feel that the public can have confidence in the Comptroller's office so long as it is manned by a former bank lobbyist.'' The Comptroller responded philosophically: ''It's an attack upon the institutions, the process. So I get to be a target. " 47 A sober Wall Street journal noted that in the rush to "do something" about bank regulation, the OCC was an easy target, having only one administrator and suffering from two big bank failures in two years. 48 In testimony before Congress, First Deputy Comptroller Robert Bloom attempted to place the ''problem bank'' list into perspective. He explained that the 65 percent rule was only one of the agency's tools to identify banks in need of further analysis, not banks likely to fail. He described in great detail the OCC's rating systems and supervisory procedures. Bloom emphasized that ''labeling every bank with a ratio of criticized assets to capital of 65 percent or more as a problem bank is a misstatement and oversimplification.' ' 49 His clear exposition of the OCC 's methods did not, however, persuade Congress that the agency was fulfilling its mission. On February 5, 1976, the Senate Banking Committee held a hearing on "Problem Banks." The chairman of the committee, Senator Proxmire, pointed to a chart showing the decline in the capital to assets ratio of commercial banks from 1960 to 1973, cited the rise in the number of problem banks, and asked: "Where have the regulators been? Why haven't they been quick to utilize the authority given to them to abate unsafe or unsound practices?'' 50 Rising to the challenge from Congress and the press, Comptroller Smith reminded his critics that the country had just come through a recession: If the problems of the U.S. economy, businesses and U.S. borrowers were not reflected in the loan losses of America's largest banks, then we would have a remarkable event, one deserving of the most searching inquiry and the most indignant editorials from our Nation's major dailies. 51 Smith then told the Senate Banking Committee that although the loan portfolios of some giant American banks had deteriorated, they had experienced modest losses that were unlikely to increase. In 1975, he pointed out, the top 10 national banks had net loan losses of $1. 1 billion or 0. 7 percent of their total loans. These losses were amply covered by $1.3 billion already set aside and earnings of $2 .2 billion. 52 He informed the committee that there were only a handful of banks - 28 - that the OCC currently regarded as problem banks, ''for want of a better term,'' with assets of $1. 7 billion. In conclusion, Comptroller Smith reminded the senators that the agency was in the process of revising and improving its procedures and operations in accordance with the recently delivered recommendations of Haskins & Sells. 53 The OCC's position on Capitol Hill and in the nation's press was not enhanced by the recent opening of its new Washington headquarters. The agency had been dispersed in three separate buildings; the new location brought its operations under one roof. After long planning and preparation, the Washington offices finally began to move to the L'Enfant Plaza building in the summer of 1974. The building was described by the Wall Street journal as "dazzling. The furniture is sleek and modem.... A richly carpeted staircase joins the two main floors used by the agency." 54 The consolidation at L' Enfant Plaza had been expected to improve the efficiency of Washington's operations. It had accomplished this goal, but the building, which made other government offices look spartan, also caused Senator Proxmire to bestow the sobriquet of ''King Farouk of the Potomac'' on Comptroller Smith. 55 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 31 Meanwhile, in the House of Representatives, the Consumer Affairs Subcommittee considered issuing subpoenas to obtain the confidential examination reports on the largest banks . Federal Reserve Chairman Burns adamantly opposed turning over information to Congress, but Comptroller Smith, preferring cooperation to confrontation, found the idea of Congressional oversight less objectionable. He pointed out that these reports were already distributed to banks' outside counsel and auditors. In a carefully crafted compromise with the subcommittee ' s parent, the Government Operations Committee, Smith agreed to deliver the reports to the General Accounting Office. 56 The GAO found nothing alarming in these examination reports. However, its general study of federal banking S!Jpervision, also requested by Congress, was more critical. The GAO ' s review of all three agencies criticized regulators for relying too heavily on persuasion to correct poor bank management practices and delaying formal action until problems became severe. It recommended that agencies cooperate to develop uniform criteria for identifying problem banks and classifying country risk, to jointly analyze shared national credits, and to combine their examiner training efforts. While the report criticized many current supervisory practices, it singled out the OCC's new computerized surveillance system for praise, recommending it to the FDIC and the Federal Reserve. 57 The OCC promised to comply with the GAO's recommendations and keep Congress informed of the national banking system's condition. 58 The Haskins & Sells Report https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis When Comptroller Smith commissioned the Haskins & Sells study, he could not have forecast the failure of Franklin National Bank, the emergence of large problem banks, and the ensuing criticism of the OCC. The recommendations for reform contained in the Haskins & Sells report represented both an acknowledgment by the OCC that problems existed and a blueprint for correcting them. The report, delivered in May 1975, was comprehensive. It examined all of the agency ' s technical and administrative practices. All personnel in the OCC were surveyed, and selected employees at all levels in Washington and the regional offices were interviewed. In addition, the firm sent questionnaires to the chief executives of all national banks , soliciting their views on the OCC's performance. Although critical of many aspects of the OCC's operations, the report emphasized that the agency had fulfilled its basic objective of maintaining a sound banking system for the convenience of the public. The report concluded that the great majority of its recommendations could be implemented by the OCC within its existing legal authority. Haskins & Sells identified five areas where the effectiveness of the OCC could be improved: examination procedures, a computer-based surveillance system, accounting and reporting rules, corporate functions, and the organization and management of the agency itself. The first and most critical finding of the Haskins & Sells report concerned examinations: OCC examination procedures have not kept pace with the technological advances in the area of professional examination techniques, such as the use of efficient methods of testing in contrast to detailed and complete verification. 59 The consulting firm felt that the OCC could do a better job of judging the soundness of banks if its examinations put less emphasis on detailed, mechanical verification and more on analysis and interpretation of financial data. To improve monitoring procedures, the report encouraged greater reliance on a bank's own internal controls , the work of internal and external auditors, and statistical sampling methods for verification. This approach to examination from the ''top down' ' would free up time for more examination of a bank's collection practices, portfolio management, senior management, internal controls, recruiting and training of personnel, accounting, and forecasting. 32 490 L 'Enfant Plaza, headquarters of the Office of the Comptroller of the Currency from 1974 to 1991. Haskins & Sells found that there was considerable variation in examination procedures from region to region and from examiner to examiner. Part of this variation was attributed to the fact that regional offices developed and administered their own commissioning tests. The quality of bank examinations also varied, Haskins & Sells believed, because examiners were constrained by tight schedules and narrowly prescribed procedures. The review recommended more flexible examinations and a formal examination review process to ensure more uniform standards. Haskins & Sells also found that the annual EDP examinations, consisting of interviews with bank personnel and a review of internal controls, were not coordinated with other examinations. The review proposed coordinating them with commercial examinations to ensure that they were more effective. 6 Changes in assessments levied against banks for examinations were also suggested to better reflect the true costs of conducting them. 61 ° Haskins & Sells' second principal recommendation was that the OCC should adopt a computer-based surveillance system - a National Bank Surveillance System - employing financial data to quickly identify banks in difficulty. Any bank identified by the system could then be assigned to an examiner, who would be responsible for monitoring its progress. The consulting firm believed that this type of early warning system would substantially enhance the agency's ability to oversee national banks. 62 To carry out this proposal and improve examinations, Haskins & Sells made their third principal recommendation: that the OCC require all national banks to report selected financial data more frequently and ensure that the data reported conformed to a uniform set of accounting and reporting rules . Haskins & Sells' fourth major focus was the OCC 's exercise of its corporate functions. Haskins & Sells did not challenge the underlying premise governing the regulation of entry and competition. They reaffirmed the OCC' s policy that these regulations were necessary to prevent https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 33 bank failures. However, the report did urge a greater emphasis on competition, arguing that mature, poorly managed banks should not be protected. Haskins & Sells' particular concern, rather, was with the absence of well-defined guidelines for making corporate decisions. In the case of chartering, the consulting firm pointed out that OCC procedures had the effect of creating uncertainty for organizers, making it difficult for banks to recruit senior managers. The agency was also criticized for unstructured and irregular contacts with applicants and for the long and complex process by which applications were reviewed. The report suggested that more authority for corporate functions be delegated to regional administrators. 63 Haskins & Sells' last group of recommendations concerned the reorganization of the OCC and a strategy for raising the quality and motivation of personnel. The review argued that the OCC should be reorganized more completely along functional rather than geographic lines. Levels of authority and responsibility also needed to be more clearly defined for both headquarters and the regions. Haskins & Sells recommended the formation of a senior policy group to determine the agency's priorities. Finally, the report urged the development of a comprehensive work force program that would cover recruitment, career development, education, and salaries. 64 This thorough report gave the Comptroller a plan for revitalizing the agency. It was the inspiration for many of the changes that would take place in the OCC over the next decade. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 34 Four Revitalizing the OCC, 1975-1980 When Haskins & Sells delivered its report to the OCC in 1975, the agency was absorbed by the task of managing the recession-weakened national banking system. Some of the report's recommendations were quickly adopted, but others could not be implemented until the recession ended in 1976. As economic conditions improved, the threat of multiple large bank failures faded, and the OCC could tum its attention to internal reform. Comptroller Smith had only begun to implement the Haskins & Sells recommendations when, harassed by Congress and troubled by personal financial problems, he resigned on July 31, 1976, two years before his term expired. President Gerald Ford nominated Stanley E. Shirk, a distinguished bank auditor, to replace him. But with presidential elections nearing, the Democrat-controlled Congress refused to act on the nomination. In the absence of a new Comptroller, Robert Bloom served as Acting Comptroller until after the 1976 election. President Jimmy Carter thus had the opportunity to appoint the 24th Comptroller of the Currency. He chose John G. Heimann, an investment banker, former New York state bank superintendant, and, most recently, head of that state's division of housing and community renewal. 1 Comptroller Heimann took office on July 21, 1977. His immediate priority was to oversee the OCC's investigation of Bert Lance, a Georgia banker whom President Carter had appointed director of the Office of Management and Budget. The OCC 's intensive investigation supported allegations of irregularities in Lance's business affairs, and Lance later resigned. 2 The impartial investigation helped to restore the OCC's reputation with Congress and the public, boosted morale inside the agency, and enabled Heimann to proceed with the agency's reorganization. Haskins & Sells' s central organizational recommendation was that OCC operations should be conducted more along functional lines. A comparison of the 1968 and 1981 organization charts show the extent to which the OCC took Haskins & Sells' advice to heart. The post-1976 reforms provided the Comptroller with new staff to develop policy and strategy and to evaluate the performance of the operating divisions. To assist him with the formulation of policy, Heimann created the OCC Policy Group to discuss and debate important issues. This executive council included all the senior deputy comptrollers and the chief counsel. 3 In 1979, the Office of the Senior Advisor was established to provide assistance and counsel to the Comptroller. The ·comptroller's Division of Inspections and Audits was created that same year. This division gave the Comptroller a continuous and independent evaluation of the agency's financial, accounting, and operational activities and investigated all questions of legality or propriety. 4 This reorganization of the OCC's management structure was far-reaching. It was, however, only a reflection of the broader reform of examination and supervision whose purpose was to keep pace with new developments in banking. Multinational Banking https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Comptroller Heimann and his staff started the reform of supervision for the biggest national banks by creating the Multinational Banking Department in 1978. 5 The dozen or so top banks, 35 john G. Heimann, Comptroller of the Currency, 1977-1981. Consumer issues and continued internal refonn highlighted Heimann's tenn. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis holding about 40 percent of national bank assets, had evolved into institutions qualitatively different from smaller banks. This new department was assigned the task of overseeing national banks initially 11 in number - with more than $10 billion in assets and, additionally, the international activities of all other banks. The biggest banks had always had lengthy examinations - so lengthy, in fact, that by the late 1970s they were carried out by what amounted to de facto resident examiners. Examinations abroad were conducted by traveling examiners on temporary assignments and by the permanent London staff. Complementing its supervisory job, the Multinational Banking Department took responsibility for monitoring country risk within the national banking system. 6 In addition, the coordination of the OCC 's surveillance of international banking with other domestic and foreign agencies was usually handled through this department. 7 Banks with extensive international operations became an object of particular concern in the late 1970s because of their loans to less developed countries (LDCs). After the oil price hikes of 1973, commercial banks increased their international business. Members of the Organization of Petroleum Exporting Countries (OPEC) cartel began investing heavily in the international banking system, especially the Eurocurrency market. Banks recycled these funds to oil-importing countries, who desperately needed them to finance their balance of payments deficits. Gradually OPEC countries' current account surpluses diminished. Over time, OPEC funds were supplanted, in part, by funds from industrial nations where low economic growth had reduced loan demand. 36 American banks played a central role in these events, dramatically expanding their foreign lending. Between 1975 and 1980, foreign loans by American banks climbed from $167 billion to $350 billion. By 1980, the share of loans to non-OPEC developing countries was $77 billion, or 68 percent of the U.S. commercial banking system's aggregate capital. 8 Washington was, however, more concerned about facilitating the flow of petrodollars through the international economy than about the mounting debt burden of LDCs. Thus, there was even some support for American banks to increase lending. Also, large-scale bank lending to foreign governments was a relatively new development with which the bank regulatory agencies had little experience. Ambiguities in the law abounded: it was unclear, for example, whether the statutory lending limit to individuals applied to loans to governments and their commercial enterprises. In a key 1978 interpretation, the OCC ruled that foreign governments were "individuals" under the law and thus that loans to them could not exceed 10 percent of capital. To answer the related question of whether loans to government-owned agencies and companies should be counted against this limit, the OCC devised the "means and purpose" test. If the purpose of a loan was to enhance a business enterprise and the firm had an independent means of payment, the entity was assigned a separate lending limit. This rule seemed reasonable, but it paradoxically opened the door to greater foreign exposure by American banks because no aggregate limit was placed on country lending. 9 The OCC cooperated closely with the other bank regulatory agencies to revamp examination and supervision procedures to monitor foreign lending. 10 In 1977, the OCC joined the Federal Reserve and the FDIC in requiring a joint, semiannual Consolidated Country Exposure Report that could monitor the cross-country currency exposures of U.S. banks and bank holding companies. The banking agencies also adopted common examination procedures for foreign exchange and international operations. A coordinating body, the Interagency Country Exposure Review Committee (ICERC) was set up in 1979 to evaluate country risk and incorporate it into bank supervision. 11 As their experience with foreign lending grew, regulators became more vocal and active in calling attention to its pitfalls. In a 1979 speech to the Reserve City Bankers, a trade group whose members were prominent in international lending, Comptroller Heimann urged that banks take account of the riskiness of foreign loans. Despite such exhortations and actions, these risks were not fully recognized by bankers or politicians until the 1980s, when LDCs began defaulting on their obligations. New Examination and Supervision Techniques https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Haskins & Sells report had been sharply critical of the OCC 's practice of conducting frequent on-site bank examinations, which focused primarily on detailed audit and verification procedures. In addition, banking industry analysts found that OCC examinations were only marginally useful in identifying loans that would perform poorly. 12 One study showed that only 64 percent of loans that banks wrote off had been previously criticized by national bank examiners. 13 Although loan classifications prepared by examiners did well at predicting future loan losses, similarly accurate forecasts could be produced using readily available public information on past loan losses. 14 In response to these criticisms, the OCC embarked upon fundamental changes in its examination procedures. The OCC had traditionally examined banks from the ''bottom up,'' concentrating on verification and an extensive credit review. Three of Haskins & Sells' recommendations - increase the flow of financial data from banks to the OCC, establish a 37 computer-based surveillance system, and concentrate examinations on weaker banks - formed the basis for the OCC's new approach. Examinations were now conducted from the "top down" focusing on a bank's planning and control measures . The "top down" approach meant that, instead of reviewing nearly all assets, the OCC selectively checked the quality of banks' own loan classifications. The element of surprise became less important, and examiners increased their contact with bank managers and board members. Banks were encouraged to police themselves more thoroughly. Under the "top down" approach, examiners investigated banks' policies, practices, and controls to discover managerial weaknesses that could lead to problems. The OCC looked for internal loan reviews performed by loan officers, a committee of the board, or an outside consultant and then evaluated their work. Many large banks had already developed their own systems of review, but smaller banks that had relied upon the OCC's credit reviews had to adopt new measures. The post-Haskins & Sells reforms swept away the standard three examinations every two years. Under the old regime, in 1976 the 4,737 national banks were subjected to 5,426 on-site commercial examinations. In the following year, 4,665 banks received only 2,886 visits. Separate trust examinations declined from 1,453 to 838, affiliate examinations from 261 to 96, and special examinations from 318 to 61. 15 Examinations of branches, which had numbered 11,357 in 1976, were no longer conducted separately. The OCC set an examination schedule wherein banks with assets in excess of $300 million were visited every 12 months, while smaller banks were examined every 18 months. These changes allowed the agency greater flexibility to reallocate its resources. Examinations became less routine, and additional resources were devoted to more in-depth examinations. When Comptroller Heimann reported these reforms in the examination process to Congress, the Senate Banking Committee welcomed them. 16 Nonmultinational domestic bank examinations were still conducted by the regional offices, monitored by the office of the Senior Deputy Comptroller for Operations. However, following the Haskins & Sells recommendation for functional reorganization, the Office of the Chief National Bank Examiner centralized and coordinated policies and procedures governing examinations. The Commercial Examinations Division of the chief's office took over the primary task of reviewing and developing examination and supervisory policies and procedures. The division also revised and updated the Comptroller's Handbook for National Bank Examiners. The regular semiannual assessment rates were also changed to distribute the costs of the new examination system more equitably. In 1969, banks had been assessed $200 plus 4 1/2 cents per $1,000 in total assets plus $50 for each branch. This assessment schedule did not reflect the higher costs of examining small banks, and, as a result, bigger banks effectively subsidized all examinations. A sliding scale was introduced in 1976, with the marginal rate declining with the size of the bank. The first $1 million of assets was assessed at 0.1 percent, the next $9 million at 0.0125 percent, and thereafter the scale fell less rapidly until it reached the lowest marginal rate of 0.0021 percent for assets over $20 billion. Big banks still effectively subsidized the cost of examining smaller banks, but less than before .17 Computer Surveillance Innovations https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis As on-site examinations were no longer comprehensive asset reviews, more of the work of identifying a bank's general weaknesses was performed off-site. The effectiveness of monitoring was maintained by the increased reporting and, in particular, by the new National Bank Surveillance System (NBSS). In September 1975, Comptroller Smith ordered the development and implementation of the NBSS in accordance with Haskins & Sells' recommendations. The system 38 embraced data collection, monitoring, evaluation, and administrative actions to respond to any identified problems. To start the project, the OCC prepared new formats for the reports of condition and income and instructed all national banks to employ them for the March 31, 1976, call report. After training NBSS specialists for all regional offices and after some initial tests, the first complete report was produced for December 31, 1976. The basic product of the NBSS was the Bank Performance Report (BPR), a 20-page quarterly computerized report on the performance of every national bank in terms of financial ratios. This report involved a peer group analysis that compared ratios for each bank to those of a group of similar banks. Nineteen peer groups were created using a variety of factors, including whether a bank was in a rural or urban area or in a unit or branch banking state. The BPR was supplied to all national banks and was available to all bank examiners, along with a user's guide to help interpret the ratios. Distribution of these reports allowed each bank to compare itself to its peers and discover any weak points that might require corrective action. Responding to Haskins & Sells' criticism of the varying quality of examinations, the BPR provided the agency with a uniform method of comparing each bank to its peers and to its own previous record. The BPR was used by regional administrators to schedule examinations based on an assessment of the risk to the national banking system posed by a particular bank. To identify problems more accurately, the regional administrators also received the Anomaly Severity Ranking report (ASR), which screened the BPR ratios to produce a quarterly list of banks showing unusual conditions of interest or concern. Specially trained examiners reviewed the BPRs and additional information in the ASR report. The ASR did not identify "problem" banks - only those whose characteristics differed from their peers. Even "below average" banks might still be healthy. 18 Rather, these screening mechanisms served primarily to identify banks in need of more investigation, discussions with management, or special examinations. The NBSS division was placed under the deputy comptroller for Special Surveillance. This Deputy also oversaw the Special Projects Division - formerly the Victor program - which handled all banks with a composite rating of 3 or 4 and any other bank that merited special attention. 19 A total of 186 banks with assets of $228 billion were originally included in the program. 20 The division conducted a comprehensive program of independent research collection, analysis, and coordination, employing bank examination and NBSS reports and filings under federal securities laws. New Strategies for Rating Banks https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Concern about ''problem'' banks focused Congressional attention on the question of how many weak banks there actually were. Given the multiple dimensions - including liquidity, capital adequacy, and the quality of management - for assessing whether a bank was sound, each federal banking agency employed its own measure of bank characteristics and its own composite scoring system to classify banks. After the General Accounting Office's 1977 study criticized the agencies' divergent systems, the OCC, the Federal Reserve, and the FDIC adopted the Uniform Interagency Bank Rating System (UIBRS) in 1978. 21 The UIBRS was given the acronym CAMEL for the five factors it rated: capital adequacy, asset quality, management, earnings, and liquidity. Together, the five factors produced a composite rating from 1 to 5. This was not a simple average but represented an independent judgment of the overall condition of a bank. 22 Banks rated 1 were regarded as sound in every respect. A bank in Group 2 was fundamentally sound but had some weaknesses. Banks in Group 3 exhibited a combination of weaknesses that, if not corrected, would increase the likelihood of failure. Banks in Group 4 had severe problems that required prompt correction and additional 39 supervisory attention. The probability of failure was highest for banks in Group 5. They required immediate assistance and constant supervision. To provide a baseline for purposes of comparison, the OCC retrospectively ranked national banks back to 1975, when there was a total of 85 banks in Groups 3, 4, and 5. The number of institutions in these groups rose rapidly to 306 in 1978, even as the country moved out of a recession. Thereafter their number stabilized and then fell to a low of 251 in 1981. 23 Expanded Enforcement Authority While the OCC was developing systems to identify troubled banks, it was also attempting to acquire more enforcement powers to remedy the problems its new systems discovered. The agency felt that its range of enforcement options - including the revocation of a bank's charter, cease and desist orders, and civil fines against a bank - were too limited to effectively supervise problem institutions. In particular, the agency wanted greater discretionary authority to deal with dishonest or incompetent bank officials. Unless actually indicted, a bank official could be removed only if the agency could establish inter alia his ''personal dishonesty'' - a standard the Comptroller regarded as ''vague and difficult" to prove. 24 Furthermore, there was no remedy for incompetence. Under the law, the only enforcement procedure available to the OCC for a violation of a cease and desist order was an injunction from a federal court. Civil money penalties were applicable only to national banks that failed to provide reports or make information available to a national bank examiner. 25 Congress recognized the need for enhanced enforcement powers when it enacted the Financial Institutions Regulatory and Interest Rate Control Act of 1978. This statute gave federal bank regulators the power to dismiss a bank's directors, officers, employees, or agents and fine them or the bank up to a maximum of $1,000 per day for violations of laws, regulations, or cease and desist orders . Consumer Affairs https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The OCC also began to devote more attention to consumer issues. Consumer groups attacked banking practices, lobbied Congress for tough new laws, and challenged regulators to vigorously pursue banks that violated the law. 26 Created in March 1974, the Consumer Affairs Division consolidated all responsibility for consumer protection. 27 Previously, compliance with consumer protection laws had been monitored during the course of regular commercial examinations. Beginning in 1976, all national banks became subject to a separate examination for consumer protection every 12 months. 28 To train examiners in consumer procedures, the OCC established an intensive two-week course. During 1976, 250 examiners took the course. These newly trained examiners were supported by regional consumer specialists in each national bank region. The consumer examination reports reviewed banks' compliance with consumer laws. The reports summarized deficiencies, recommended corrections, described actions taken, and listed possible discriminatory activities. When noncompliance was discovered, the OCC directed the bank to correct the problem and reimburse consumers after estimating the monetary damages. In 1976, it issued six such administrative actions to enforce the law. Consumer complaints also played an important role in determining banks' compliance. In 1977, for example, the Consumer Affairs Division received 8,224 written complaints. The division 40 staff was responsible for investigating each complaint, which sometimes required that an examiner be dispatched to the bank in question. Complaints resolved in favor of the customer in 1977 resulted in restitutions of $371,563. To cope with this burgeoning caseload, the OCC established a computerized Consumer Complaint Information System in 1976. To identify banks in violation of the law, this system allowed the OCC to determine which banks had a disproportionate number of complaints. 29 Under the Nixon, Ford, and, especially, the Carter administrations, the scope of consumer protection was expanded. The Real Estate Settlement Procedures Act of 1974 and the Consumer Leasing Act of 1976 imposed disclosure requirements for federally related residential mortgage transactions and personal property leases. In 1975, the Federal Trade Commission Improvement Act required the federal banking agencies to establish procedures for investigating consumer complaints. The development of electronic banking raised new questions about the rights, liabilities, and responsibilities of banks and their customers. To resolve some of these issues, the Electronic Funds Transfer Act of 1978 set terms of disclosure, documentation, and consumer and bank liability. 30 Congress also enacted laws designed to eliminate discrimination and promote the development of low- to moderate-income areas. The Fair Housing Act of 1968 had prohibited discrimination in many credit-related housing transactions, but enforcement of the law was left to the Justice Department and to individuals. In 1972, the National Commission on Consumer Finance and subsequent hearings in the House of Representatives heard substantial anecdotal evidence about discrimination against women. 31 The Consumer Federation of America, Common Cause, and other consumer groups organized letter writing campaigns and successfully pressed Congress to pass the Equal Credit Opportunity Act of 1974. 32 This act allowed the award of actual and punitive damages of up to $10,000 in an individual action. The federal banking agencies were required to assure that financial institutions did not discriminate in lending on the basis of race, color, religion, national origin, sex, marital status, or age. The Community Reinvestment Act (CRA) of 1977 was passsed after consumer activists charged that banks unfairly discriminated against individuals and communities by ''redlining.'' Banks were said to be depriving certain urban areas of credit, thus hastening the economic decline of inner cities. Consumer advocate Ralph Nader testified that the CRA would "moderate neighborhood disinvestment by depository institutions. " 33 Nader did not spare the banking agencies, which, he claimed, "narrowly construed the community convenience and needs factor" when granting a bank charter or permission for a branch, and ignored a bank's lending record. Bankers responded that they served their depositors and their communities best by following their unfettered business judgment. 34 Under CRA, banks were required to adopt a CRA statement delineating the community served and the principal types of credit offered. Banks were also required to maintain CRA files and to post their CRA lending policies in their lobbies. The OCC and the other federal agencies were required to assess regularly how well banks were meeting the needs of the local communities. A special evaluation was made when a bank applied for a new branch or the acquisition of another bank. In 1979, all federal banking agencies adopted a uniform CRA_performance rating system for corporate applications. The CRA also established the public's right to challenge a bank's performance while an application was pending. Most challenges, which related to credit to low-income housing, came from community organizations, although about one-third were filed by competitors. 35 Inside the OCC, Comptroller Heimann, who had long been interested in the financing and promotion of housing, established the Community Development Division in 1979. This new office https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 41 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis EQUAL HOUSING LENDER We Do Business in Accordance With Federal Fair Lending Laws UNDER THE FEDERAL FAIR HOUSING ACT, IT IS ILLEGAL, ON THE BASIS OF RACE, COLOR, NATIONAL ORIGIN, RELIGtON, SEX, HANDICAP, OR FAMILIAL STATUS (HAVING CHILDREN UNDER THE AGE OF 18), TO: □ Deny a loan for the purpose of purchasing, constructing, improving, repairing or maintaining a dwelling, or deny any loan secured by a dwelling; or □ Discriminate in fixing the amount, interest rate, duration, application procedures or other terms or conditions of such a loan, or in appraising property. IF YOU BELIEVE YOU HAVE BEEN DISCRIMINATED AGAINST, YOU SHOULD SEND A COMPLAINT TO: Assistant Secretary for Fair Housing and Equal Opportunity Department of Housing & Urban Development Washington , D.C. 2041 O For processing under the Federal Fair Housing Act, and to: Consumer Activities Division Comptroller of the Currency Washington , D.C . 2021 9 For processing under Comptroller of the Currency regulations. UNDER THE EQUAL CREDIT OPPORTUNITY ACT, IT IS ILLEGAL TO DISC RI MINA TE IN ANY CREDIT TRANSACTION: □ On the basis of race, color, national origin, religion, sex, marital status, or age, □ Because income is from public assistance, or □ Because a right was exercised under the Consumer Credit Protection Act. IF YOU BELIEVE YOU HAVE BEEN DISCRIMINATED AGAINST, YOU SHOULD SEND A COMPLAINT TO: Consumer Activities Division Comptroller of the Currency Washington, D.C. 20219 42 HOME MORTGAGE DISCLOSURE ACT NOTICE Our annual Home Mortgage Disclosure Act statement is available for inspection. This statement shows the geographic distribution of our residential mortgage and home improvement loans. For information on how you may inspect the statement inquire at this office. was designed to encourage banks to participate in programs for revitalizing local neighborhoods and economies and to help them satisfy the new regulatory requirements. 36 The new consumer protection laws placed a strain on the OCC. The number of consumer examinations rose quickly from 1,767 in 1978 to 3,389 in 1980, while commercial examinations climbed only from 3,432 to 3,973. 37 By shifting personnel to conduct special consumer examinations, fewer resources for safety and soundness examinations were available. Human Resources https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The OCC 's response to the new demands upon its resources was to attempt to make those resources go further. This strategy entailed a renewed emphasis on training. Following the recommendations of Haskins & Sells, the OCC radically revised its training program for national bank examiners . Although on-the-job training was by no means abandoned, the OCC introduced a regimented and centralized program of training with clearly defined career paths for examiners , culminating with an examination administered nationally - the Uniform Commissioning Examination (UCE). Although the regional offices continued to recruit college graduates, their training increasingly took place in Washington, D.C. As they progressed through the training regimen, examiners had to complete a set of courses in the required sequence. This approach promoted greater uniformity within the examiner corps. 38 Expenditures on training and training-related travel rose proportionately. 39 43 The Haskins & Sells' study also found that the OCC 's senior professionals were undercompensated compared to their counterparts in financial institutions. As a result, talented personnel were being hired away by the industry they supervised. The primary problem was the federal government's standard general schedule, with its rigid salary ladder that rewarded length of service more than performance. In 1977, recognizing the need to maintain the integrity and professionalism of the OCC's examination force, the Treasury approved the OCC's proposal to devise its own compensation scheme. Over the next three years, the agency developed a comprehensive plan to evaluate jobs and performance, using as benchmarks 12 existing public and private compensation systems. Merit pay adjustments were to replace longevity and cost-of-living increases. In 1980, the Treasury Department approved Comptroller Heimann's proposed pay plan, with the important exception of the provision that would have removed the federal pay ceiling for OCC employees. Final resolution of that issue would come later. 40 Interagency Cooperation In the early 1970s, strong personal rivalries among the top bank regulators - Comptroller Smith, the Chairman of the Federal Reserve Arthur Burns, and the Chairman of the FDIC Frank Wille - obstructed attempts to coordinate supervisory efforts. Cooperation improved substantially when Heimann became Comptroller. He repaired relations with Burns, and, when FDIC Chairman George A. LaMaistre resigned, Heimann served as acting chairman for six months. FDIC fears that Heimann would seize this opportunity to settle old scores on the OCC' s behalf were quickly laid to rest; his evenhanded performance as interim FDIC chairman earned him goodwill for the rest of his Comptrollership. Relations between the OCC and the Federal Reserve improved further when Paul A. Volcker, who had known Heimann in New York when Volcker was president of the New York Federal Reserve, took over as chairman of the Federal Reserve Board. Interagency cooperation was also enhanced when Congress enacted the Financial Institutions Regulatory and Interest Rate Control Act of 1978. This law established the Federal Financial Institutions Examination Council (FFIEC), a body composed of the Comptroller of the Currency, the chairman of the FDIC, a governor of the Federal Reserve Board, the chairman of the Federal Home Loan Bank Board, and the chairman of the National Credit Union Administration. 41 As was the case with its predecessor, the Interagency Coordinating Committee, the FFIEC was designed to promote uniformity in the supervision and examination of financial institutions. The FFIEC 's first tasks were to create uniform examination report forms and reporting systems, organize formal training for examiners, and establish liaisons with state agencies. Perhaps the council's most notable accomplishment was the creation of the Uniform Interagency Bank Rating System. The council also took steps to encourage a more efficient division of labor between the OCC and the Federal Reserve in regulating bank holding companies. Although the OCC was the principal regulator of national banks, oversight for holding companies owning national banks fell to the Federal Reserve. To remedy this problem, the FFIEC recommended coordinated inspections and examinations of holding companies and their lead banks. 42 The Structure of Banking https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Haskins & Sells' survey of the OCC 's corporate functions did not challenge the underlying premise governing the regulation of entry and competition. The report simply recommended better-defined guidelines for decision-making and less protection from competition for mature, poorly managed banks. 43 The OCC followed up by issuing a policy statement on its corporate 44 functions, prompted not only by Haskins & Sells but also by the rising number of lawsuits brought by opponents of new bank charter applications, competitors objecting to increased bank powers, and organizers whose charter or corporate applications had been denied. The OCC established a new office of director for corporate activities to review the chartering process at the regional level and to formalize many of the agency's procedures. 44 Previously, there was an informal policy that new banks would be afforded some immunity from competition for one to three years, until the OCC determined that they had established themselves. In 1976, that policy was formalized and narrowed to apply to new independent banks - those not part of a holding company - for a period of one year only. In the years following Comptroller Saxon's 1965 order limiting charters, the OCC approved relatively few applications. Early in the 1970s, the OCC once again began to grant more national bank charters. 45 In granting charters and exercising its other corporate functions, the big issue facing the OCC was how to respond to bank holding companies. 46 Although the OCC did not have an explicit policy favoring applications sponsored by holding companies, it tended to respond positively. This tilt reflected a belief that widespread branching, or its substitute - multibank holding companies - would provide greater stability and safety for the national banking system. All things being equal, the OCC favored experienced managers over newcomers. After 1975, when there was a sharp decrease in the number of banks added to multibank holding companies, the number of new national bank charters quickly fell. 47 This development did not reflect any change in the OCC 's policy - approval rates for charters remained high - but rather a lack of private sector interest in starting new banks after the deep recession. Although the OCC played an important role in expanding the number of banks in the early 1970s, its involvement in merger activity diminished as more acquisitions proceeded through holding companies regulated by the Federal Reserve Board. When the advantages in choosing a one-bank holding company disappeared, multibank holding companies began to expand through acquisitions and mergers. The relative importance of mergers by independent national banks declined sharply. Between the years 1970 and 1979, the OCC approved 428 acquisitions by national banks with assets of $10. 7 billion. The Federal Reserve Board, by then the dominant merger authority, approved 1,334 or 65 percent of the acquisitions of banks with assets of $55.6 billion, or 75 percent of the total banking assets. Antitrust policy continued to play a key role in shaping the structure of the banking industry. The definition of the market and competing institutions remained central to the determination of what constituted a permissible merger. The OCC had pressed for the broadest definition; the courts took a narrower view. However, in 1974 the Supreme Court moved closer to the OCC's position, ruling in U.S. v. Connecticut National Bank (1974) that thrifts might be considered as competitors of commercial banks. Unfortunately it also concluded that savings and loans remained a business distinct from commercial banking. 48 By excluding thrifts from measures of competition in a market, many potential commercial bank mergers appeared anticompetitive and possibly illegal. Most of the mergers and acquisitions thus took place between banks in different markets. 49 The Department ofJustice was not, however, happy with the large number of mergers and acquisitions, even if they were between banks in different markets. To halt these mergers, the Attorney General continued his attempts to apply the doctrine of potential competition, but without success. 50 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 45 OFRCE OF THE COMPTROLLER OF THE CURRENCY ORGANIZATIONAL CHART COMPTROl.lER Of THE CURIIUICY I I DIIIICIOII -.:All)IIS ___ ASSISI . . ! Dllf https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis . . . oatCIOII 1-..1e>11S DIIIICIOII _ _ ,SIS MUtl-llOIIAl &IIOSUPt•- OMICIU. 1111""-'IIOOIAI ........, ACIIVllt 1....... , _ OIIIICIU. .. u ..... ,--. -,-(;ACflV11Y ·- tl~flOlfS SPICIAI ASSISIAIIIS SPICIAI ASSISIAIII alllGAISSIOUL AIIAIIIS . SIll)VIS{)IIIO l'llla.f'l-ll• I I SENIOR DEPUTY COMl'TROllER FOR POllCY CHIH COUNSEL I ,. 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IIGISUIIIVI . . cou■ Sll OIIICIU. 1111,atlOllf •tt•• ,u....,,,_ -•II l ·- coi.5HISI Branch Banking and the Computer Revolution https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis While national banks continued to acquire new branches by merger and to establish de nova offices, geographic expansion remained a slow process. State branching laws remained quite restrictive. Only a few more states had liberalized their laws by 1978. 51 These laws were rigorously policed by existing banks, who were quick to bring suit against what they perceived to be violations of the antibranching laws. Given these constraints, it was not surprising that geographic expansion in banking developed through the less constrained nonbank subsidiaries of banks and bank holding companies. Branching policy became an even more important issue as the computer revolution swept through the banking industry. The question of whether electronic banking facilities constituted branches was debated intensely. Inclined to favor an expansion of banking services, Comptroller Smith first ruled, on December 12, 1974, that unstaffed off-premise sites for electronic funds transfer, termed customer-bank communication terminals (CBCTs), were not branches as defined by the National Bank Act. 52 Although national banks were required to notify the OCC at least 30 days in advance of a CBCT's installation, they were allowed to deploy CBCTs without regard for the branching restrictions. The Department of Justice supported this ruling, finding no evidence that CBCTs would require additional regulations or threaten the viability of smaller banks, even if the CBCTs were outside the geographical boundaries set for branches. 53 The Comptroller's ruling disturbed small banks, which feared that these technological changes would allow large banks to circumvent the restrictions on brick-and-mortar branches. The Independent Bankers Association petitioned the Comptroller to suspend his ruling and hold hearings. Smith responded by delaying the effective date of his ruling until July 1975 and by holding a hearing to allow bankers to present their views. In the meantime, Smith vigorously defended the right of banks to freely establish CBCTs. Before the Senate, he stated: Our own history teaches us that the public interest is best served when consumers can express their powers of choice, selecting products or services offered by competing institutions. Those competitors, in turn must have the opportunity to innovate and to employ technology as it becomes available in anticipating and meeting consumer needs. 54 In the Comptroller's hearings, representatives of the smaller banks attacked the ruling and, by implication, banking expansion. The president of the Independent Bankers Association of Texas took a very narrow view of the Comptroller's mandate: The proliferation of CBCTs pursuant to your ruling will disrupt and eventually destroy the dual banking system established by Congress and will competitively prejudice not only state banks but smaller national banks .... We view these developments with great concern, not because we fear a new technology, or are opposed to progress, but because you have unilaterally undertaken to revise the entire banking structure ..... [which is] beyond the scope of the authority granted to you by Congress. In contrast, Citibank's representative at the hearings claimed that CBCTs only served existing customers and it was not profitable to operate them far from staffed offices. 55 Although the smaller independent banks were unable to get the Comptroller to reverse his ruling, they were victorious in court. In 1976, the U.S. Court of Appeals in the District of Columbia ruled in Independent Bankers Association of America v. Smith that wholly owned or rented CBCTs were branches within the meaning of the McFadden Act of 1927, which had set forth the rules for branching. The appeals court decided that wholly owned or rented CBCTs were branches, but it did not explicitly subject facilities shared by several banks to the same regulations. Joint-use 47 CBCTs thus became a vehicle for increasing customer access to banking services, even across state lines. True to its original interpretation of the law, the OCC took the position that there was no need to make a formal application if the terminal was not owned or rented by the bank but only used by its customers. Banks quickly began to set up multiple institution electronic funds transfer systems, charging on a transaction fee basis. By March 1981, 100 such multi-institution networks existed. 56 The pattern of ownership and use of computers by banks for delivery of services continued to be largely determined by the 1976 appeals court's decision. Electronic banking was still in its infancy in the 1970s. Yet even then its vast potential was evident. The new technologies being adopted by banks contrasted with the Depression-era regulations under which the industry still operated. Computers transformed some banking activities, but what was needed to restore the competitiveness of the nation's commercial banks was overall deregulation and reform. This process began in earnest in the 1980s. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 48 Five The Challenge of the 1980s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis At the outset of the 1980s, the American banking system was buffeted by severe economic disturbances. Rising inflation, reaching double digits in 1979, convinced both the Carter administration and the Federal Reserve that decisive action was needed. On October 6, 1979, the Federal Reserve announced a change in operating procedures that allowed interest rates to rise. 1 As a result the Federal Reserve gained more control over inflation; by 1982, the rate of inflation had tumbled to 3.2 percent. Real interest rates soared as the federal funds rate nominally averaged 12.3 percent and the prime rate reached 14.9 percent. The Federal Reserve's unexpected anti-inflationary policy, coupled with the second oil price shock of the decade, plunged the country into a recession, which saw unemployment rise to 9. 7 percent. The Federal Reserve's tough monetary policy wrung out inflation and set the stage for the nation's longest postwar period of expansion to date. Between 1983 and 1989, the real gross national product grew at an average annual rate of 3.9 percent. At the same time, inflation averaged 3. 7 percent and unemployment declined to 5.3 percent by 1989. The stock market took off, fueled by economic growth and optimism. Even when the market crashed in October 1987, overall growth was not seriously dampened until 1990. Many banks did not, however, share in this prosperity. International debt problems, falling energy prices, and collapsing real estate values drove up the number and size of national bank failures. Two Comptrollers, C. Todd Conover and Robert L. Clarke, shared the tough task of supervising the national banking system for most of this tumultuous decade. Conover was named the Comptroller of the Currency by President Ronald Reagan on December 16, 1981. After receiving a B.A. from Yale and an M.B.A. from the University of California at Berkeley, he worked at the consulting firm of McKinsey & Co, U.S. Bancorp in Portland, and Touche, Ross & Co. In 1978 he helped to found the general consulting firm of Edgar, Dunn & Conover, Inc. 2 Conover was a committed advocate of the free market and pushed hard to deregulate the banking industry. He told the Wall Street journal that ''when I took this job, I told people that I had no intention to just administer day to day.'' ''Deregulation,'' Conover emphasized, ''was at the top of the agenda.' ' 3 When Conover resigned before the end of his term, President Reagan appointed Robert L. Clarke to succeed him on December 2, 1985. Clarke graduated from Rice University and Harvard Law School before joining the Houston law firm of Bracewell and Patterson. Head of the firm's banking section since 1968, he was especially familiar with Texas banks, whose problems loomed large during his early years as Comptroller. Clarke also grew increasingly alarmed about the future of the entire national banking system. In hearings before the House Subcommittee on Financial Institutions Supervision in 1990, Clarke pointed out that only 10 years earlier the largest American bank - Citibank - was also the world's largest. Now it ranked 24th in total assets. Deregulation, he believed, was the key to halting this decline. Clarke told the subcommittee that: If the U.S. banks and the U.S. economy are to remain competitive in international markets, it is essential to avoid encumbering them with costly restrictions on activities that are not needed to assure the safety and soundness of the U.S. banking system and the deposit insurance system. 4 49 Deregulation By 1980, after 10 years of inflation and financial innovation, pressure for at least some minimal reform of New Deal-era banking legislation had become irresistible. Commercial banks, constrained by Regulation Q, had lost ground to competitors who offered customers market rates of interest on deposits. The Glass-Steagall Act and other legislation prevented banks from developing new financial services to offset the declining demand for many traditional banking products and services. Furthermore, higher reserve requirements and other costs relative to state banks and thrifts placed national banks at an even greater disadvantage. Comptroller Conover put the problem bluntly: "The public wants financial services, but it couldn't care less whether it gets them from banks.'' 5 Throughout the 1980s, the OCC argued that the national banking system would continue to decline unless Congress undertook a comprehensive renovation of the anachronistic regulatory framework within which it operated. In 1981, Comptroller Heimann posed the rhetorical question: Should households and/or companies be able to satisfy their needs for financial services at one stop, or should we continue to require specialization and define financial products through government fiat? 6 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis C. Todd Conover, Comptroller of the Currency, 1981-1985. Conover promoted the deregulation of national banking. 50 Robert L. Clarke, Comptroller of the Currency, 1985-1992. Clarke shepherded the national banking system through one of its most difficult periods. Continuing the call for a thorough deregulation, Comptroller Conover criticized existing regulation as creating a safe, sound - but stagnating - banking system. Worse than that, the current system of regulation has produced serious distortions in the market that have hurt both the public and the banks. 7 Congress began to respond to the problem, albeit cautiously. In 1978, it had authorized banks to sell $10,000 6-month money market certificates. The following year, it permitted the issue of 2 1/2 year "small saver" certificates, with yields indexed to those of government securities. 8 Despite these small steps, Regulation Q remained in force. When inflation surged in 1979, banks experienced a disastrous decline in deposits. The assets of competing money market mutual funds (MMMFs), which offered depositors market rates of interest, grew from $3. 7 billion in 1977 to $206 billion in 1982. 9 Congress finally responded to this disintermediation by passing the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). DIDMCA authorized all depository institutions to offer interest-bearing checking (NOW) accounts and established a plan for a gradual phaseout of interest rate ceilings on savings and time deposits by 1986. DIDMCA also established the same reserve requirements for all depository institutions. This action redressed the competitive disadvantage of national banks and other members of the Federal Reserve System, which had operated under generally higher requirements than were imposed on state-chartered nonmember banks and S&Ls. DIDMCA instituted wide-ranging changes in other regulations and practices. The act required more uniform reporting by banks and charged member banks for the Federal Reserve's services. DIDMCA also raised federal deposit insurance coverage on individual accounts from $40,000 to $100,000. 10 The federal bank regulators had opposed this increase in coverage, fearing https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 51 that it would induce some institutions to take more risks, but effective lobbying, especially by the thrift industry, swayed Congress. DIDMCA alleviated some of the commercial banks' most pressing problems. However, even expanded deposit insurance did little to help the thrift industry, whose condition continued to deteriorate. The thrifts held long-term, low-yield mortgages, and the dramatic rise in the cost of funds in 1979 produced large losses for them. Congress's response was the Garn-St Germain Act of 1982, which gave thrifts new powers to invest in a wider variety of assets, including commercial loans. The FDIC and Federal Savings and Loan Insurance Corporation (FSLIC) were provided more emergency powers to assist troubled institutions by purchasing assets, making loans, and arranging for mergers across previous geographic and institutional barriers. Garn-St Germain granted all depository institutions, including commercial banks, the authority to offer money market deposit accounts (MMD As) .11 Together, DIDMCA and Garn-St Germain eased the commercial banks' funding problem. By 1983, MMDA accounts had climbed from zero to $375 billion, and MMMFs had shrunk by $66 billion. 12 This nonbank competition was not eliminated, but banks now had equal powers. At the end of the decade in 1989, the MMMFs, with some $400 billion in assets, were viable competitors for the banks' MMDAs, which held $473 billion. 13 New Powers for National Banks https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Although DIDMCA and Garn-St Germain enabled national banks to better compete for funds, their ability to provide a competitive variety of financial services continued to be shackled by Glass-Steagall restrictions. As there was little immediate prospect for revision, Comptrollers Heimann, Conover, and Clarke relied upon the OCC's broad corporate authority to improve the competitive position of national banks. The OCC's long-term program for strengthening the national banks was contained in the Strategic Plan of 1981. This plan proposed ways by which the OCC might exercise its regulatory and supervisory authority to enable banks to provide a fuller array of financial services to the public. To highlight this goal, the OCC added the promotion of "competitiveness, efficiency, integrity and stability of the financial services marketplace'' to the traditional safety and soundness goal in its Statement of Mission. The emphasis throughout was on free and equal competition in the public interest: the plan declared that if nonbanks could provide services at lower costs, the agency would not stand in their way. 14 Even before the Strategic Plan was published, the OCC had initiated the Corporate Activities Review and Evaluation (CARE) project in October 1980. CARE was a comprehensive study of the OCC's policies and procedures in the corporate activities area. The program's purpose was to modify or eliminate unnecessary policies, regulations, or procedures. To this end, the OCC began a major simplification of the corporate applications process. Paperwork for all types of applications was reduced and decisions were expedited. The internal deregulatory effort intensified when a new phase, CARE II, began in July 1982. This second stage was intended to be a comprehensive "zero-based" review of corporate procedures, aimed at eliminating all but the essential practices of the OCC. The agency granted new powers to national banks and their subsidiaries, often in advance of other regulators. In 1982, for example, Comptroller Conover permitted national banks to act as discount brokerages and futures commission merchants, before these powers were granted to bank holding companies by the Federal Reserve Board. 15 In other areas, the OCC gave banks approval to establish 52 subsidiaries that sold many new services and products in the 1980s, but the securities industry and other national bank rivals enjoyed considerable success in challenging these rulings in court. 16 Over time the courts became somewhat more favorably disposed to the OCC's efforts to increase national banks' powers. In 1980, the district court in Washington, D.C. gave banks the same geographic freedom that bank holding companies enjoyed, by ruling in Independent Bankers Association v. Heimann that banks' loan production offices were not branches. This decision thus reduced one incentive to shift activities out of national banks to their parent holding companies. Nevertheless, the freedom allowed by the courts was not as broad as that granted to the bank holding companies. When Citibank's data processing services were challenged in court by a group of data processing companies, the bank decided to avoid a protracted legal battle and petitioned the Federal Reserve Board to permit this activity to be transferred to a nonbanking subsidiary of Citicorp, its parent holding company. 17 Bank holding companies thus retained advantages over national banks as a form of corporate organization. The OCC was repeatedly frustrated in its attempts to alter the Glass-Steagall Act's strict separation of commercial and investment banking. National banks chafed at their inability to match their nonbank competitors in offering customers a combination of investment banking, brokerage, and commercial bank services. 18 Like his predecessors, Comptroller Clarke argued that Glass-Steagall constituted a major obstacle to bank profitablity and stability. He testified before Congress that: Although the Glass-Steagall repeal will not be a panacea for the banking industry's problems, we can ill afford to delay this reform .... Permitting banks to compete in those markets from which they are now prohibited would create new income opportunities for banks and expand their opportunities for diversification. The survival of all banks will not be assured by Glass-Steagall repeal, but the successful competitors in the new market would make a stronger banking industry .19 Senator William Proxmire (D.-Wisc.), chairman of the Senate Committee on Banking, Housing and Urban Affairs, had previously characterized the Glass-Steagall Act as a ''protectionist dinosaur." He, too, was eager to repeal this law and had held hearings on the need to modernize bank regulation, but Congress did not respond. 20 Although DIDMCA, the Garn-St Germain Act, and the OCC's administrative rulings eased some regulatory constraints, important parts of the New Deal regulatory framework remained in place at the end of the decade. In 1985, Comptroller Conover pointed to ''a number of formidable opponents, both in special interest groups and Congress" who stood in the way of change. 21 The playing field for competing financial institutions was far from level. The OCC and the Restructuring of the Banking Industry https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Since the mid-1970s, the Comptroller's office had pursued a general policy of limiting the entry of new banks and fostering the expansion of large banks, with a view to increasing stability within the industry and permitting successful competition with nonbank intermediaries. This policy drew criticism from many quarters. In 1980, the OCC's chartering practices were criticized in a majority staff study conducted for the Senate Banking Committee·. Looking at chartering policy alone to the exclusion of other policies and regulatory constraints, the study characterized the Comptroller's decisions as excessively restrictive. The report declared that the agency was more interested in protecting existing banks than in promoting competition and meeting the banking needs of the public. 22 53 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis In October 1980, Comptroller Heimann, responding to this criticism, announced a major policy shift. Henceforth, he said, in reviewing charter applications, the OCC would emphasize the quality of the proposed bank's organizing group and its operating plan instead of the ability of a community to support another bank. The new policy sparked a rapid increase in the formation of national banks. New charters rose from 41 in 1979 to 268 in 1983. By the middle of the decade, however, the number of charters granted began to fall off. Economic conditions made the organizing of new banks less attractive, and the OCC, concerned about the survival of new banks, began to tighten its rules. 23 Despite the OCC' s consistent policy promoting maximum freedom for national banks to branch, barriers to intrastate branching had fallen very slowly in the 1960s and 1970s. As late as 1983, unit banking was still protected in many states. But by the end of the decade, increased competition had pushed a large majority of states to switch to unrestricted intrastate branching. 24 Increased legal freedom to branch did not, however, result in a more rapid growth of new brick-and-mortar, full service offices. The steady increase in the number of full service branches had been partly a consequence of the banking industry's low profits. By limiting interest rate competition, Regulation Q had encouraged non-price competition through the provision of extra services and conveniences. 25 After the elimination of Regulation Q, additional branches became less important than higher rates for many bank customers. The computer revolution further reduced the need to establish full service branches. The number of branches grew little during the decade, but automatic teller machines (ATMs) became commonplace. In 1980, there were few shared ATM networks. Three years later, 200 regional networks had been formed, providing more than 16,000 ATMs for 9,000 member banks and other participating institutions. These shared networks had issued 50 million access cards to the public by 1983. 26 While shared ATMs allowed banks to creep into new markets and across state borders, banks and bank holding companies leaped over these old boundaries in the 1980s through acquisitions and mergers. Under the Reagan administration, the Department of Justice eased its general opposition to horizontal mergers. In 1982 and 1984, the department issued new merger guidelines to advise potential acquirers when the Attorney General would be likely to challenge an acquisition. 27 No new legal decisions were handed down, but the federal banking agencies and the Department of Justice eased the criteria for a merger. The regulators began to consider the effects of new financial instruments and competition from thrifts in their merger decisions. The relaxation of state anti-branch banking legislation coupled with the more liberal approach of the Department of Justice led to a merger wave in the 1980s. In 1980, 188 mergers and acquisitions involving $9.3 billion of assets occurred. Less than a decade later, in 1987, there were 710 mergers and acquisitions bringing together $131.4 billion of assets. 28 Although the number of mergers resulting in a national bank rose sharply, the Federal Reserve Board, with its authority over bank holding companies, rather than the OCC, remained the dominant player in deciding merger and acquisition activity. The merger wave of the 1980s marked the beginning of a true interstate banking system operated by bank holding companies. Holding companies first attempted to use nonbank banks limited-service or consumer banks - to move across state lines. These institutions gained their oxymoronic name because they either did not accept demand deposits or did not make commercial loans and thus did not meet the definition of a bank under the Bank Holding Company Act. 29 States also fostered this peculiar form of banking. Uncomfortable with entry by full service out-of-state banks, some states passed legislation to promote limited-service institutions. For example, Citicorp took advantage of South Dakota's elimination of usury rates on its consumer loans to open Citibank South Dakota, N.A., which handled its national credit card operations. 30 54 Comptroller Conover helped to invent and spread the nonbank banks as a means of prodding Congress to address the basic question of the legal definition of a bank and the powers to which it was entitled. 31 Not surprisingly, the Federal Reserve did not share this favorable view of nonbank banks, which were beyond its control. The Federal Reserve Board resisted attempts by holding companies to engage in interstate banking and deplored the mixing of commerce and banking activities. 32 The board tried to rein in the non bank banks by broadening the definitions of demand deposits and commercial loans but failed when the Supreme Court ruled against it in Board of Governors v. Dimension Financial Corporation in 1986. The Court also turned down an attempt by the Independent Bankers Association to block the U.S. Trust Corporation's application to open a subsidiary in Florida. 33 Congress finally settled the issue in the Federal Reserve's favor, closing the nonbank loophole in the Competitive Equality Banking Act of 1987. Although Congress had shut the nonbank bank door for interstate expansion at the federal level, the states began to compete more vigorously with one another for capital and jobs by allowing banks to slip across their borders. In 1975, Maine became the first state to use the 1957 Douglas Amendment to the Bank Holding Company Act to permit the entry of out-of-state bank holding companies. 34 Out-of-state holding companies were allowed to establish new banks or purchase existing banks, provided reciprocal privileges were given to Maine banks. 35 In 1982, both New York and Massachusetts adopted legislation to permit reciprocal interstate banking. New York's offer of free entry with reciprocity was not taken up by other states, whose bankers feared they would be overwhelmed by the Empire State's money-center banks. The Massachusetts law - which became the model for other states - permitted reciprocal entry only by bank holding companies or banks whose headquarters were within the New England region. Three New York banks attempted to block New England mergers in court by challenging the Federal Reserve Board, which had permitted the acquisitions. 36 This challenge was dismissed by the Supreme Court in Northeast Bancorp v. Board of Governors of the Federal Reserve System (1985), which unanimously upheld the right of states to control entry into their banking markets. The Northeast Bancorp decision empowered states to enter into regional interstate banking compacts. At the federal level, the Garn-St Germain Act, the Competitive Equality Banking Act, and Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989 permitted out-of-state entry to take over failing commercial and savings banks. 37 Interstate banking received another stimulus when the collapse of oil prices weakened many banks in the Southwest. Hoping to attract non-Texas banks to take over weak or failing institutions, the Texas state legislature voted to permit entry by out-of-state bank holding companies without reciprocity in 1986. 38 The abandonment of reciprocity requirements soon spread to other states. However, some barriers to interstate remained at the end of the decade. The LDC Debt Problem https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis As the OCC worked to deregulate banking, it also began to face new threats to the national banking system. Four sources of trouble appeared: loans to less developed countries (LDCs), loans to the energy industry, loans to farmers, and real estate loans. These problems, individually and in combination, weakened banks and produced widespread failures in the 1980s. The LDC debt crises, which had been brewing since the late 1970s, exploded in August 1982 when Mexico, one of the largest debtors, announced that it would be unable to meet its obligations. Mexico and other LDCs found it increasingly difficult to service their debts because of rising interest rates and low prices for their exports. Large government deficits and inflationary monetary 55 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis policies exacerbated external debt problems. After Mexico's announcement, more than 40 developing countries sought to reschedule debts with commercial banks. The LDC debt crisis hit the biggest banks the hardest. As discussed in the previous chapter, the OCC had attempted to limit banks' exposure to foreign debt by ruling that loan limits applied to foreign governments and establishing the means and purpose test in 1978. However, banks still enjoyed considerable discretion and no aggregate limit on country lending. 39 As a result, LDC loans by the nine largest U.S. banks and holding companies equaled 288 percent of their capital by 1982. For all other banks, these loans totaled 116 percent of bank capital. 40 Even before Mexico defaulted, the three federal regulatory agencies had demonstrated their concern by establishing minimum capital ratios in December 1981. Until this time, minimum capital requirements only governed the dollar amounts needed to open new banks. 41 The OCC and the Federal Reserve jointly set new capital adequacy ratios for banks and bank holding companies on the basis of size. 42 Community banks were required to keep a minimum primary capital-to-asset ratio of 6 percent. A 5 percent ratio was set for regional banks of $1 billion or more. However, the 17 largest banking organizations were not subjected to any requirements until 1983, when a 5 percent rule was applied to them. 43 These banks had very low ratios, and the delay permitted them some time to increase their capital accounts. 44 Alarmed by the outbreak of the LDC debt crisis, Congress passed the International Lending Supervision Act in 1983. This act provided federal banking agencies with the statutory mandate to set minimum levels of capital and gave them new compliance powers. Regulators could now issue a directive that required banks to submit a plan to achieve a required capital level. As the number of problem banks increased, the bank regulators tightened their standards, raising the minimum ratio for all banks to 5.5 percent and then to 6 percent. 45 The Federal Reserve's concern extended beyond the solvency of individual banks. It worried that the collapse of a big American bank could trigger a national or even a worldwide liquidity crisis. The Federal Reserve worked to persuade debtor countries to remain current on their interest payments to banks, banks not to withdraw credit from these countries, and uninsured depositors to keep their funds in the banks. The hope was that, given time, the LDCs economies would recover. They could then repay their loans, and there would be no need for any explicit debt forgiveness. The OCC and FDIC deviated from the Federal Reserve's LDC debt policy only to the extent of criticizing third world loans while allowing the banks that held them to carry those loans - which the market heavily discounted - at face value. 46 The problem was that the market was correct: most LDC loans were fundamentally bad. These loans had been used to finance consumption, investments in inefficient state-owned enterprises, capital flight, and corruption, rather than to create projects that would increase the borrowers' capacity to repay. 4 7 Given the Federal Reserve's strategy, American banks were slow to reduce their LDC debt exposure.· Even three years after Mexico's default, they had written down less than 2 percent of their loans to that country and had accumulated no significant loan loss reserves. Eventually some adjustments were made. Between 1982 and 1986, the ratio of LDC loans to all banks' capital dropped from 187 percent to 95 percent. 48 Yet, the largest banks remained dangerously exposed. The inability of most LDCs to repay these loans was confirmed in 1987 when Mexico concluded a debt rescheduling plan. In May 1987, Citicorp became the first American bank to acknowledge the likelihood of losses on its Latin American loans and increased its loan loss reserves by $3 billion. When other banks followed Citicorp's lead, overall bank earnings dropped. 49 Although the LDC debt crisis weakened many of the largest national banks, none failed as a direct result of bad international loans. Instead, numerous bank failures, including some large banks, arose out of the domestic economy's fluctuations in the early 1980s. 56 Banks in Distress https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A series of headline-making bank failures and near failures in the late 1970s and 1980s tested the OCC's supervisory capability and crisis management. In 1980, the first major federal bailout of a national bank took place when regulators stepped in to rescue the First Pennsylvania Bank, N .A., of Philadelphia. 50 Once a sedate regional bank, First Pennsylvania attempted to become a major national bank in the early 1970s. Under a new, aggressive chief executive officer, John Bunting, the bank tripled in size to $6 billion between 1967 and 1974. To attract the business it needed to accomplish this rapid expansion, the bank made many high-risk loans. Gambling that then-record high interest rates would fall, the bank bought a huge portfolio of long-term U.S. government bonds, using short-term borrowed funds. When interest rates surged to new heights in late 1979, First Pennsylvania was stuck with bonds whose prices had tumbled and with an even higher cost of funding. As the bank's earnings evaporated, the board of directors, under pressure from the OCC and the Federal Reserve, replaced Bunting in July 1979. This change in management could not, however, resolve the bank's fundamental problems. On March 21, 1980, an independent research firm reduced the rating on the bank's debt to the "speculative" category. Three days after the rating announcement, Comptroller Heimann alerted the other federal regulators to the likelihood of the bank's failure. First Pennsylvania had $328 million in problem loans - $16 million more than its capital - and it was about to report a large quarterly loss. The certificate of deposit (CD) market for First Pennsylvania had dried up, and the bank was forced to borrow $340 million from the Federal Reserve. A merger with the Mellon Bank, N .A., the only Pennsylvania bank with the will and the resources to absorb First Pennsylvania, was proposed, but the presumption of antitrust objections closed this option. Pennsylvania law did not permit interstate mergers. 51 The OCC and the Federal Reserve feared that if First Pennsylvania collapsed slowly, in the manner of Franklin National, it might provoke a crisis of confidence in the banking system. 52 These two agencies persuaded the FDIC to exercise its authority under the Federal Deposit Insurance Act to declare that the bank was '' essential to provide adequate banking service to its community.'' This action gave federal regulators legal grounds to save First Pennsylvania. The rescue package, announced on April 28, 1980, provided the bank with a $325 million loan from the FDIC plus $175 million in loans from major banks. These funds added to the bank's capital and allowed it to sell off its government securities at a loss. In return for their assistance, the lenders received $20 million worth of warrants to purchase First Pennsylvania stock. The bank's gradual recovery led the federal agencies to consider the rescue a success. By 1985, First Pennsylvania had repaid the loans and bought the warrants with funds from a new public stock offering. The apparent success of this first large scale bailout served as a prototype for later government rescues. While the regulators could view the rescue of First Penn~ylvania with some satisfaction, graver threats to the banking system arose when the price of oil and the economic boom in the Southwest collapsed. One bank, Penn Square Bank, N.A., of Oklahoma City played a central role in this drama. Until it was taken over by Bill "Beep" Jennings, Penn Square had been a modest suburban bank in a shopping center, making small business, consumer, and real estate and construction loans. 53 As the bank's new chairman, Jennings announced that the bank would start an oil and gas 57 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis loan department. The late 1970s were an opportune time to move into this business. Penn Square flourished as oil prices rose, growing from a $62 million bank in 1977 to a $520 million bank in 1982. Penn Square also sold more than $2 .1 billion in oil and gas participations to other banks - a fact that gave it importance out of proportion to its size. Although it was not uncommon for a bank to sell loan participations for a fee, they were essential to Penn Square's rapid growth. The bank made a veritable art of reckless lending, offering loans when there was little or no prospect of repayment and accepting grossly inadequate collateral. Control procedures and loan documentation were often missing or incomplete. 54 These defects did not go unnoticed. The OCC had devoted special supervisory attention to the bank after an examination ending in April 1980 found insufficient liquidity, inadequate capital, increased classified assets, and violations of banking laws. These problems earned the bank a CAMEL rating of 3. 55 The OCC's regional administrator in Texas and his staff followed up by meeting with the bank's board of directors, which signed a formal agreement requiring specific remedial actions. Although many problems persisted, close monitoring through special supervisory examinations and periodic reports submitted by Penn Square led the OCC to conclude that all substantial areas of concern were being addressed. In fact, Penn Square not only ignored the OCC's directives but also began a new rapid expansion of activity, ·originating another $800 million in loans between a September 1981 examination and the bank's closing in July 1982. These credits raised the ratio of poor quality assets to the bank's capital from 54 percent to 300 percent. 56 The true nature of Penn Square's condition was discovered in an examination that began in April 1982. When management failed to comply with the OCC's demand to obtain new equity, the agency asked the FDIC to assess the prospects for an FDIC-assisted assumption or payout. The FDIC wanted to close the bank, take the bad loans, cover the insured deposits, and sell the bank. The problem was that the FDIC had to indemnify the new owner for any unknown contingent liabilities. In previous cases, these had been minimal, but the OCC examiners discovered huge loan commitments and letters of credit. This made the cost of a merger unattractive, and the OCC closed the bank on July 5, 1982, delivering it to the FDIC to pay off insured depositors. 57 After this failure, the OCC was criticized for lax examination and supervision. Congressional hearings documented the outrageous irresponsibility of Penn Square's officers. 58 Before the Senate Banking Committee, Comptroller Conover explained that the bank had some strengths when it received a 3 rating, but it failed because: The management of Penn Square failed or refused to adhere fully to the agreement which likely would have prevented the failure. We received repeated assurances from management and the board of directors that the bank would fully comply with the agreement. 59 In his defense, the Comptroller emphasized that "the role of OCC may be defined as supervisory. We do not take over and manage institutions." 60 The OCC had promptly and correctly identified Penn Square as a problem bank. It had, however, treated management as honest and well-meaning. As it turned out, dishonest management disregarded the OCC 's demands and was able to quickly increase loans and sell off classified ones between visits from examiners. Although the problem of recognizing dishonest bank officials remained, the OCC was able to resolve another problem. New guidelines required participating banks to obtain information on the ultimate borrower and perform an independent credit analysis to curtail the abuses of Penn Square-style loan participations. Penn Square's failure had ripple effects, as the banks that had participated in its loans tallied their liabilities. Seafirst Corporation was the first victim. The largest bank holding company in the Pacific Northwest, Seafirst had $9.6 billion in assets. Seafirst's lead bank, Seattle First National 58 Bank, had bought $400 million in loan participations from Penn Square. Thus exposed, Seafirst was forced by the Penn Square failure into a merger with BankAmerica Corporation in 1983. The next victim was Penn Square's largest customer, the Continental Illinois National Bank and Trust Company of Chicago. Since the Great Depression, the bank had been conservative in its loans and investments. In 1973, the bank named a new chairman, Roger Anderson, . who was determined to make Continental Illinois the largest bank in Chicago and the peer of Citibank and Bank of America. Under his leadership, Continental Illinois grew from the nation's eighth largest bank in 1974 to the sixth largest in 1981. Its aggressive program of expansion produced impressive results. At the height of the bank's success, Dun's Review described Continental Illinois as one of the five best-managed companies in America. 61 In hindsight, Continental Illinois' success was the product of a dangerous increase in high-risk loans. These loans were funded by negotiable CDs, federal funds, and foreign deposits. Obtaining more stable retail deposits was virtually impossible because Illinois prohibited branch banking. As it grew, Continental Illinois decentralized lending authority and removed control procedures. Furthermore, the bank's capital failed to keep pace with the increase in assets. When the OCC's examiners first discovered these control problems and inadequate capital in 1980, management promised to take remedial actions. 62 Energy loans were central to Continental's rapid growth after 1980. Traditionally, the bank had bought oil and gas loans but only from the biggest Texas banks. This cautious policy changed when a new manager, John Lytle, took over Continental's midcontinent oil and gas division. Lytle was eager to see his part of the bank grow quickly, and he found a willing partner in "Beep" Jennings of Penn Square. During 1980, Continental took $250 million, or two-thirds, of the loans originated by Penn Square. 63 Although Continental's energy loans totaled 47 percent of its commercial and industry loans by 1981, they did not appear to threaten the bank, for the oil and gas industry was still prospering. But in the next year and a half, even as the energy industry began to weaken, Continental Illinois took almost $1 billion more in Penn Square loan participations. Senior management overlooked Lytle's problems, especially in loan documentation, because of the hefty interest rate spread between what Penn Square's borrowers offered to pay and Continental's cost of funds. 64 In April 1982, OCC examiners at Penn Square classified over $20 million of loans as likely losses within two months. Aware that many bad loans had been sold to Continental Illinois, they notified their colleagues working on an examination there. The Continental examiners discovered that the energy loans purchased from Penn Square violated Continental' s own standards and internal controls. 65 Following the failure of Penn Square, the domestic money market's confidence in Continental Illinois began to erode. By the end of 1982, the bank had lost 40 percent of its purchased domestic funding. Continental was forced to shift to the international interbank market for funding. Foreign funds soon comprised almost 50 percent of its liability structure. 66 Meanwhile, in March 1983, the OCC obtained a formal agreement forcing the bank to improve its asset and liability management. However, the worsening troubles of the energy industry exacerbated the bank's nonperforming assets and loan losses. In an examination beginning in March 1984, examiners found that conditions had deteriorated further. When mistaken rumors of imminent failure began to spread, large, uninsured depositors began to withdraw their funds from Continental Illinois. A massive run on the bank started in May 1984; in 10 days the bank lost $6 billion, which it replenished with borrowings from the Federal Reserve Bank of Chicago. Worried about an international financial crisis, federal regulators used the "essentiality" doctrine tested in the First Pennsylvania case to provide Continental Illinois with a $2 billion loan. 67 During late May and early June, regulators tried to find a merger partner for the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 59 bank, but after looking at its books, no domestic or foreign bank showed any interest. As the process dragged out, uninsured depositors, uncertain about the exact nature of the FDIC's commitment, withdrew more funds, forcing the bank to become even more dependent on the Federal Reserve' s discount window. Regulators considered a takeover and insured depositor payout, but a large number of banks held uninsured deposits at Continental. The regulators feared that the losses these banks would incur might cause their failure as well. Although Franklin, USNB, and Penn Square had been allowed to fail, the OCC and the other regulators had become concerned about the liquidity threat to the whole banking system. Continental, regulators feared, was ''too big to fail''; consequently, all depositors were protected under an agreement in which the FDIC purchased $4.5 billion of the bank's problem loans in return for assuming its $3.5 billion debt to the Federal Reserve. The agency then recapitalized the bank by acquiring an 80 percent ownership of the bank for $1 billion. By 1988, Continental Illinois had recovered so well that the FDIC was able to sell off shares to reduce its stake in the bank to 40 percent. 68 The demise of Continental Illinois demonstrated some of the limits of bank supervision. Comptroller Conover explained to Congress that the OCC 's primary function was to identify weaknesses and ensure that corrective measures were taken. The OCC, Conover said, did not attempt to directly intervene because: We do not take over and manage institutions; we cannot substitute for private management in making lending or any other decisions. The primary responsibility for any bank's performance rests with its management and board of directors. 69 While Penn Square's failure could be attributed to a pervasive and blatant disregard for sound banking practices and the law, Continental Illinois' demise was more the result of a lax and imprudent management, which failed to heed its regulators' recommendations. The OCC had confidence in Continental's managers because they had previously proven their ability to revitalize the bank after the REIT problems of the 1970s. Although Comptroller Conover doubted that Continental' s collapse could have been prevented, he accepted some responsibility for being swayed by management's record. One lesson the OCC drew from the Continental Illinois debacle was that banks' internal controls must be more carefully monitored and standards more strictly enforced. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis OCC examiners testifying before Congress on the failure of Continental Illinois Bank in 1984. 60 The collapse in energy prices that destroyed Continental Illinois hit the Southwest and its banks hard. When oil prices soared in the 1970s, Texas banks hastened to provide credit to the industry. Between 1980 and 1982, the banks were rewarded with record profits. The slow decline in oil prices between 1981 and 1985 led these banks to shift lending into the still booming commercial real estate market. This last phase of bank expansion was halted by a sudden 45 percent decline in oil prices in 1986, which induced a punishing regional recession. In the once-flourishing cities of Austin, Dallas, Houston, and San Antonio, the combined office vacancy rate climbed to 30 percent by 1987. The banks of the Southwest were devastated. Texas institutions accounted for the lion's share of the increase in national bank failures, which rose from 9 in 1983 to 110 in 1989. 70 The most prominent failures in the Southwest involved large multibank holding companies - the preferred form of bank organization because of Texas's prohibition on branch banking. Between 1987 and 1990, seven of that state's largest holding companies failed: Interfirst Corporation, RepublicBank Corporation, Texas American Bancshares, Inc., National Bancshares Corporation of Texas, MCorp, BancTEXAS Group, Inc., and First City Bancorporation of Texas. As big bank failures mounted, federal regulators tried to encourage mergers with FDIC assistance. They often used the new, timely option provided by the Texas legislature of merging them with out-of-state firms. For example, MCorp's 20 national banks were declared insolvent and merged into the Deposit Insurance Bridge Bank, N.A. in March 1989, which was then acquired with FDIC assistance by Banc One Corporation of Columbus, Ohio in June. Even banks that did not fail sought strong merger partners. For example, Texas Commerce Bancshares and Allied Bancshares, Inc. were acquired by Chemical Bank Corporation and First Interstate Bancorp, respectively. 71 The gravity of the region's economic problems slowed the recovery of banking in the Southwest. Of the 346 banks with 4 and 5 CAMEL ratings in 1989, 251 were based in the OCC's Southwestern District. In testimony before Congress, Comptroller Clarke reported that equity capital in Texas national banks was 3.9 percent at the end of 1989 and predicted that failures in this region would be above average for several more years. 72 Yet, as the Texas banking crisis drew to a close, new problem regions loomed on the horizon. Banks in New England and the Mid-Atlantic region, burdened by nonperforming real estate loans, began to overshadow the Texas banks as the most troubled institutions in the national banking system. Supervision in Adversity https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis As the number of problem and failed banks rose, the OCC's ability to provide adequate supervision was hampered by new budgetary constraints. The early 1980s were particularly lean years for the OCC. Under pressure from the Reagan administration to reduce the role and size of government, the OCC saw a real decline in its expenditures. The OCC's work force shrank accordingly. From a high in 1979 of 3,282 employees, of whom 2,282 were examiners, the OCC was reduced to 2,702 employees and 1,835 examiners at the end of 1982. 73 The decline in regulatory resources hit just as the crisis in ~he Southwest set in. All three federal bank regulatory agencies conducted fewer examinations in 1984 and 1985 because of hiring freezes and increased workloads for examiners. The median exam interval for nonproblem banks rose from 393 days in 1981 to 466 days in 1986. 74 The reduction in supervision was particularly acute in Texas, where the median exam interval in 1986 was more than 700 days for banks that subsequently failed or needed assistance. Bank 61 examiners were still able to identify troubled institutions but were unable to provide the additional supervision required, ultimately increasing the costs of bank failures. Unable to do the whole job, the OCC advised banks to obtain their own external audits. As Comptroller Conover candidly admitted, The OCC no longer has the resources to act as business consultants to banks, nor do we have the resources to examine every bank annually ... Nevertheless, we still believe that an annual review by an independent third party is very • 75 important. Comptroller Clarke emphasized the need for bankers to conduct their own internal reviews as part of the OCC 's threefold supervisory approach: One, we ensure that banks adopt and adhere to sound credit practices. Two, we ensure that their books accurately reflect the value of their assets and liabilities. And, three, we ensure that national banks establish management systems capable of tracking bank activities and reasonably anticipating and adjusting to changing market conditions. 76 To economize on the use of its human and fiscal resources, the OCC began an 18-month reorganization of its field operations in January 1983. This new arrangement consolidated the 14 regions into six districts, each headed by a deputy comptroller. These district headquarters were located in New York, Chicago, Atlanta, Dallas, Kansas City, and San Francisco. 77 The problem of bare bones supervision led to some significant departures from established practices, especially in the management of human resources. The Texas crisis created new staffing demands. Examiners around the country were offered a variety of incentives to encourage them to accept transfers to the Southwestern District. At the same time, the OCC launched a novel initiative to recruit bank officers who could be quickly retrained as examiners. But the OCC was handicapped by its inability to match the salaries offered not only by employers in banking and finance but also by the other regulatory agencies. At the behest of Comptroller Clarke, Congress finally eliminated the Civil Service limits on OCC pay when it passed Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) in 1989. This act permitted the OCC to develop a compensation program comparable to other financial institution regulatory agencies. Banking's troubles made a convincing case for restoring the budget cuts made in the early 1980s. By the end of the decade, the OCC's supervisory resources were substantially increased. More than 500 employees, mostly examiners, were added to the work force. Between 1982 and 1989, expenditures in constant dollars rose 50 percent. Relative to the total assets of the national banking system, the agency's expenditures rose 25 percent. 78 The other federal banking agencies experienced a similar recovery, and surveillance improved as the median examination interval fell from 466 days in 1986 to 366 days in 1988. 79 Even with additional resources, supervision in the 1980s was a daunting task. The OCC restructured its examination and supervision activities to mirror the general divisions between banks whose operations were primarily global or domestic and between institutions that were healthy or weak. Created in 1978, the OCC's Multinational Department continued to exercise supervisory responsibility for the national bank subsidiaries of the largest bank holding companies. 80 As before, the department's responsibilities included conducting international examinations, running the London office, and administering the Shared National Credits program. However, the banks under its jurisdiction -the so-called multinationals- changed in size and number during the 1980s. In 1981, this group of banks held $462 billion in assets, 43 percent of all national bank assets. 81 By the end of 1990, the banks designated "multinational" controlled $608 billion, or 31 percent of total assets. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 62 This shift reflected changes both in the OCC' s multinational program and in the fortunes of the banks the Multinational Department monitored. Many of the largest national banks had been weakened by persistent international debt problems. More importantly, perhaps, regional banking compacts had largely cut New York and California banks out of the interstate merger wave of the late 1980s. As the regional banks merged and expanded, they became more like the multinationals. In recognition of this fact, responsibility for regional bank supervision was rolled into the Multinational Department late in 1982.At the outset of the decade, multinational banks received customized comprehensive examinations once a year, plus quarterly on-site visits to gather information and assess performance. The on-site examiners tested the integrity of the bank's own internal controls and management information systems. Over time, these examinations had become so lengthy and involved that those conducting them became defacto resident examiners. Finally, in 1986, the OCC officially assigned permanent examiners to the 11 largest national banks .82 The OCC 's examination strategy for these institutions was revised annually and tailored specifically for each bank. With the history of the LDC debt crisis and Continental Illinois' collapse in mind, the OCC also emphasized frequent communication with the bank's top officers. The job of examining and supervising the community national banks, banks with less than $1 billion in assets, was carried out under the direction of the six districts. Although there was no substantial change in the post-Haskins & Sells' philosophy of supervising these banks, methods evolved as the computer revolution provided regulators with new tools. The ongoing supervisory process, which had replaced the calendar-driven schedule of periodic examinations, made extensive use of computer-based data files of information on every national bank. The deputy comptroller for Supervisory Systems oversaw the design, development and maintenance of the OCC's supervisory information systems. One important tool was the Supervisory Monitoring System, which employed portable microcomputers and allowed examiners to enter information on an electronic file that became readily available to the rest of the agency. 83 This system was used to record and update the supervisory history of all national banks. In the 1970s, Congress had provided the federal banking regulators with new enforcement powers to help protect the safety and soundness of the banking system and consumers rights. The OCC gained substantial powers to issue cease-and-desist orders, impose civil money penalties, suspend or remove bank officials, and revoke charters. Yet, the problems of the 1980s exemplified by the Penn Square and Continental Illinois episodes underlined the need for even tougher penalties, especially in dealing with recalcitrant management. FIRREA partially answered this need by authorizing federal regulatory agencies to issue cease-and-desist orders to compel the correction of poor banking practices and violations of the law. Regulators also received expanded powers for suspending or removing bank officers and directors. Lastly, FIRREA set up a three-tier structure of violations and corresponding civil money penalties. 84 Better supervision and enforcement also required greater interagency cooperation. The Federal Financial Institutions Examination Council, the principal vehicle for coordination, helped to develop more uniform procedures and policies for sharing confidential supervisory information. 85 However, given the proliferation of banks with extensive multinational activities, the OCC found itself working more and more with the bank regulators of other governments. Adoption of new capital standards was perhaps the most important accomplishment in international cooperation during the 1980s. Although the minimum capital ratio in the United States had been raised from 5.5 percent to 6 percent in 1986, this still seemed to offer insufficient protection. The same capital cushion applied to all banks, regardless of the quality of their assets. Federal regulators had unified their standards, but major discrepancies existed across international boundaries. To bring the capital requirements of the major Western economies into alignment, the Basle Committee on Banking Supervision recommended new risk-based capital standards. In 1991, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 63 participating nations began the transition to the new rules, which would become effective at the end of 1992. The Basle guidelines carefully defined capital and established standards by assigning assets to one of four risk categories, each of which required progressively more capital. 86 Even though U.S. national banks increased their capital in the late 1980s, the OCC estimated that approximately 350 banks, including many of the largest institutions, would have to increase their capital still further to satisfy the new guidelines. 87 In the last half of the 1980s, the OCC recovered from the problems that had plagued it at the beginning of the decade. The agency gained more resources and personnel. Combined with new computerized technology and closer cooperation with other national and international bank regulators, the OCC enhanced its supervisory capability. Although these improvements allowed the OCC to keep pace with the rapidly changing world of banking, they could not stop the growing number of bank failures. The agency's best strategy was to deploy its increased resources and new techniques to contain the cost of these failures, which were driven by dramatic and unexpected swings in the economy. One Independence Square. The Office of the Comptroller of the Currency moved its headquarters to this building in 1991. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 64 OFFICE OF THE COMPTROLLER OF THE CURRENCY COMPTROLLER Of THE CURRENCY SENIOR DEPUTY COMPTROUER FOR LEOISlATIVE & PUBLIC AFFAIRS SENIOR ADVISOR TO COMPTROI.LER SPECIAL ASSISTANTS DEPUTY COMPTAOU.EA co..-,IUNICA TIONS DIAECTOR co..-,IUNICA TIONS OIAECTOR BANKING RELATIONS DIRECTOR CUSTOMEAI INDUSTRY AFFAIRS DIRECTOR <X>NORESSIONAI. LIAISON SENIOR DEPUTY COMPTROLLER FOR CORPORATE I ECONOMIC PROGRAMS SENIOR DEPUTY COMPTROLLER FOR BANK SUPERVISION OPERATIONS SENIOR DEPUTY COMPTROLLER FOR BANK SUPERVISION POllCY SENIOR DEPUTY COMPTROUER FOR ADMINISTRATION CHIEF COUNSEL O'> c.n CHIEF NATIOIW. BAN( EXAMINER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis DEPUTY OOMPmOUEJI COMPLIAHCl DEPUTY COMP'TROUEA WTERNATIONAl IWll(INO I FINANCE DEPUTY COMPTAOU.EA SPECIAL SUPERVISION DEPUTY COMPTROl.LEA BANK ORO. & STRUCTURE DEPUTY C0MPTR()UEA ECON _ _I STRAT Pl.NC DEPUTY COMPTAOU.ER RESOURCE MANAGEMENT DEPUTY COMPTROU.EA 8YS. IFW MANAGEMENT DEPUTY C0MPTAOU.ER IIUPERV1SORY SYSTEMS DEPUTY OitEF DEPUTY CHIEF COUNSEL (OPERATIONS) COUNSEL (POI.ICY) December 1990 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Epilogue https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis In his 1968 history of the OCC, Ross Robertson concluded that the bank regulatory agencies - the OCC, the Federal Reserve, and the FDIC - had done a good job protecting the solvency of the nation's banks. The regulators' success, he observed, was in part attributable to the relatively stable post-World War II economic environment and the cartel-like protection offered by New Deal banking legislation. Given the changes in the business of banking and the numerous bank failures in the years since Robertson wrote, the federal authorities' tasks have become increasingly difficult, and their public image has suffered. Economic fluctuations have presented many unpleasant surprises to bankers and their regulators; the central problem, however, has been the increasingly outdated legislation governing banking. In response to banking developments since 1960, Congress has eliminated some of the New Deal's regulations, but it has only begun to debate a more complete reform and restructuring of the regulatory agencies. Some studies have called for the absorption of the OCC into the Federal Reserve, the FDIC, or some new agency. Nothing has come of these initiatives. Perhaps, given the inertia of politics and the weight of vested interests, it will require another crisis on the order of the savings and loan debacle to produce a complete reorganization of the regulatory system. With a view to such a reorganization, or at least the prospect of further debate, it is worthwhile to assess the OCC's evolution over the past three decades. New Deal banking legislation attempted to narrowly define the business of banking and to minimize competition among banks in order to revive the industry and keep it strong. By limiting the activities of banks, this legislation simplified the job of the OCC, which was able to continue to examine and supervise banks in the agency's time-honored fashion. Post-New Deal banking was a safe, conservative business, whose future did not appear to be in question. In this environment, both bankers and regulators grew complacent. Yet, slowly and steadily, banks, protected and limited by regulation, became less important as financial intermediaries. Recognizing the seriousness of this development, Comptroller James Saxon tried to revitalize both the industry and its principal regulator. However, special interest groups, inside and outside of banking, successfully fought his efforts to strengthen and diversify national banks. After Saxon's aggressive approach, Comptroller William B. Camp took the OCC out of the limelight. Although he updated some of the agency's operations and procedures, its basic strategy of examination and supervision remained unchanged during his tenure. The failures of the United States National Bank in 1973 and Franklin National Bank in 1974 shook the OCC out of its lethargy. Under Comptroller James Smith, the agency preempted Congressional intervention and began its own housecleaning, taking to heart the criticism and recommendations contained in Haskins & Sells' review. The result of careful analysis and deliberation, the Haskins & Sells' reforms specifically addressed the OCC's shortcomings. In response, the OCC abandoned its traditional procedures and geographic organization. The Haskins & Sells' reforms gave the OCC the capacity to handle new responsibilities, such as consumer protection, which Congress added to its traditional tasks. These improvements in the quality of the agency's surveillance and supervision of banks were impaired when the Reagan administration imposed budgetary and personnel constraints upon the OCC in the early 1980s. 67 Although examination and supervision were overhauled, they retained their fundamental role: to ensure that banks obeyed the law and the dictates of sound business practice. The OCC recognized that it could not prevent bank failures any more than it could eliminate all bank fraud and economic recession. The agency aimed to catch banks with problems before those problems snowballed out of control. This task was vital in the 1980s, when bankers faced novel challenges to their survival and new temptations to take extraordinary risks. Those who succumbed to imprudence and incurred major losses had to be stopped before they took on additional risks in an attempt to recoup their losses. As Continental Illinois, Penn Square, and the ailing banks of the Southwest demonstrated, those losses could become large indeed. New financial instruments helped to integrate national and international markets, but now banks could reach out and rapidly obtain costly new deposits, which became potential liabilities of the FDIC. To handle the increasingly troubled banking industry, Congress equipped the OCC with a variety of additional disciplinary tools to secure the compliance of bank management. However, while the OCC may identify a bank with problems and demand changes, it is not, as virtually every Comptroller during the period had occasion to tell Congress, in the business of running banks. By design, the agency must rely upon bankers to rectify their own problems, intervening only when those problems are clearly not being addressed. Both Congress and the public still tend to view all bank failures as preventable and to hold federal banking regulators responsible when failures take place. Although several recent Comptrollers have publicly admitted that the OCC has not done a perfect job, the OCC, the Federal Reserve, and the FDIC cannot - singly or jointly - be wholly blamed for the rapid rise of bank failures in the 1980s nor can they take full credit for the low level of bank failures before the 1970s. The bank regulators would, however, have been less harried had there been a thorough and complete banking reform instead of the piecemeal changes, which at times exacerbated the banking system's problems. Over the past 30 years, the OCC has consistently sought a broad revision in regulations that have prevented the banking industry from keeping pace with the development of the economy and financial markets. In the tradition of James J. Saxon, Comptrollers William B. Camp, James E. Smith, John G. Heimann, C.Todd Conover, and Robert L. Clarke have been forceful advocates for improving and maintaining the competitiveness of the banks vis-a-vis other domestic financial intermediaries and foreign banks. They fought to abolish Regulation Q, to expand banking powers, and to permit more mergers and branching. Although the Comptrollers enjoyed some success, Congress has been more effectively lobbied by special interests, which claimed that they and the public would be injured by reform. Consequently, the OCC 's pleas and warnings to liberalize banking regulation and build stronger institutions have been largely ignored. In a banking system with many legislatively induced weaknesses, the OCC and the other bank regulators cannot be held accountable for all problems. A complete reform of the banking system is thus a necessary prelude to any serious reorganization of bank supervision in the United States. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 68 Notes Introduction 1 Ross M. Robertson, The Comptroller and Bank Supervision: A Historical Appraisal (Washington, D. C.: Office of the Comptroller of the Currency, 1968), 161-162, 187-188. One 1 Comptroller of the Currency, Annual Report (1960), 2 2 The most important legislation was the Banking Act of 1933, usually referred to as the Glass-Steagall Act, and the Banking Act of 1935. 3 Comptroller of the Currency, Annual Report (1960), 2. 4 Similar standards for entry were set for all banks. Sam Peltzman, ''Entry in Commercial Banking,' 'Journal of Law and Economics (October 1965), 12. 5 Permanent Subcommittee on Investigations of the Senate Committee on Government Operations, Investigation in Federally Insured Banks, 89th Cong., 1st Sess. (1965), Part 1, 16, 29. 6 Senate Committee On Banking, Housing and Urban Affairs, Majority Staff Study on Chartering of National Banks: 1970-1977, 96th Cong., 2nd Sess. (October 1980), 155-185. 7 Gerald C. Fisher, American Banking Structure (New York: Columbia University Press, 1968), 196, 215. 8 Peltzman (1965), 47-49. See also Linda N. Edwards and Franklin R. Edwards, "Measuring the Effectiveness of Regulation: The Case of Bank Entry Regulation," Journal of Law and Economics (October 1974), 455-456. 9 Gerald P. Dwyer, Jr., "The Effects of the Banking Acts of 1933 and 1935 on Capital Investment in Commercial Banking,'' Journal of Money, Credit and Banking (May 1981), 200-201. 10 See Tables 5 and 6 in the appendix for the number of states permitting branching and the number of national bank branches. 11 De novo branches are new offices offering banking services for the first time at their specific sites. 12 The reports of condition (call reports) provided data on the assets and liabilities of banks on selected dates in each quarter. Banks subject to the Securities Exchange Act of 1934 were also required to submit quarterly reports of income and an annual report to the OCC. 13 The budgets, staff, and examining capacity of the OCC are presented in Tables 9, 10, and 11 in the appendix. 14 David C. Motter, "OCC History as Part of Treasury History Project," (Washington, D.C.: Comptroller of the Currency, 1968), 29-30. Typescript. 15 Comptroller of the Currency, Annual Report (1970), 258. 16 Comptroller of the Currency, The Comptroller's Handbook of Exa,mination Procedure (1969), 1-4. 17 Comptroller of the Currency, Cipher Code (n.d.). 18 Comptroller of the Currency, Annual Report (1969), 13. 19 George Benston and John Tepper Marlin, ''Bank Examiners' Evaluation of Credit: An Analysis of the Usefulness of Substandard Loan Data," Journal of Money, Credit and Banking (February 1974), 23. 20 Comptroller of the Currency, National Banks and the Future (U.S. Government Printing Office, 1962), 63-68. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 69 21 George J. Benston, "Bank Examination," The Bulletin, Nos. 89-90, (New York: New York University Graduate School of Business Administration, 1973), and Paul M. Horvitz, "A Reconsideration of the Role of Bank Examination,'' journal of Money, Credit and Banking (November 1980). 22 Benston (1973) found that fraud was the primary cause of 66 percent of bank failures in the period 1959-1971. Another study attributed most failures between 1960 and 1974 to fraud. George W. Hill, Why 67 Insured Banks Failed 1960-1974 (Washington, D.C.: Federal Deposit Insurance Corporation, 1976). 23 The number of failed national banks and their assets are given in Table 8 in the appendix. 24 In 1961, examiners judged only 49 of the 4,153 banks to be in poor or serious condition. 25 Comptroller of the Currency, Annual Report (1961), 19-20. 26 Few experts believed that bank failures should be permitted. One notable exception was A. Dale Tussing, ''The Case for Bank Failures,'' journal of Law and Economics (October 1967), 129-14 7. 27 Comptroller of the Currency, Annual Report (1964), 244. Testimony of James J. Saxon before the Permanent Subcommittee on Investigations of the Senate Committee on Government Operations, March 9, 1965. 28 Subcommittee on Bank Supervision and Insurance of the House Committee on Banking and Currency, Consolidation of Banking Examining and Supervisory Functions, 89th Cong., 1st Sess. (April 11, 12, 14, 28, 29, and 30; June 29 and 30, 1965). 29 Motter (1968), 5-7. 30 Milton Friedman and AnnaJ. Schwartz, A Monetary History of the United States, 1867-1960 (Princeton: Princeton University Press, 1963), Chapter 7. Two 1 Current Biography (Bronx, N.Y.: H.W. Wilson, 1963), 372-374. 2 Comptroller of the Currency, Annual Report (1963), 1. 3 All figures are from the Economic Report of the President (Washington, D.C.: U.S. Government Printing Office, 1990). 4 In the early 1960s, the ideas of John Maynard Keynes and his followers that manipulation of government expenditures and taxation could limit economic fluctuations had gained acceptance among American economists and policy makers. See Herbert Stein, The Fiscal Revolution in America (Chicago: University of Chicago Press, 1969). 5 Herbert Stein, Presidential Economics (Washington, D.C.: American Enterprise Institute, 1984), Chapter 4, and Anthony S. Campagna, U.S. National Economic Policy, 1917-1985 (New York: Praeger, 1987), Chapters 9 and 10. 6 There was also a concern that seasonal and cyclical fluctuations in these interbank balances created liquidity problems for the banking system. R. Alton Gilbert, "Requiem for Regulation Q: What It Did and Why It Passed Away," Federal Reserve Bank of St. Louis Review (February 1986), 22-24. 7 There is, however, no a priori reason for interest rate ceilings to increase bank profits. See Gilbert (1986), 24. 8 This process began in 1951 when the Treasury Accord freed the Federal Reserve from its obligation to peg the price of government bonds. 9 Security repurchase agreements arise when a bank borrows from a large corporation or financial institution, using Treasury bills as collateral. They were first used in 1969. Frederic S. Mishkin, The Economics of Money, Banking and Financial Markets (Glenview, Ill.: Scott, Foresman and Company, 1989), 57. 10 In real terms, national banks' demand deposits stagnated in 1966 and actually declined in 1969-1970. 11 This innovation had the approval of the Federal Reserve. Harold B. van Cleveland and Thomas F. Huertas, Citibank, 1812-1970 (Cambridge: Harvard University Press, 1985), 251-254. 12 van Cleveland and Huertas (1985), 254-257. 13 See Tables 1, 2, and 3 in the appendix. 14 See Table 3 in the appendix. 15 Comptroller of the Currency, National Banks and the Future (1962), 126-127. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 70 16 Comptroller of the Currency, Annual Report (1964), 300. Directive to all examining personnel, March 22, 1965. 17 When CDs exceeded 10 percent of total deposits, a schedule of CDs was to be compiled and analyzed as part of the examination report. This limit was raised to 20 percent in 1967. Motter (1968), 39-41. 18 Comptroller of the Currency, Annual Report (1963), 333-334. Remarks of James J. Saxon, Comptroller of the Currency, Fort Worth, Texas, February 22, 1963. 19 These increases raised coverage in real terms. Federal Deposit Insurance Corporation, The First Fifty Years: A History of the FDIC, 1933-1983 (1984), 69. 20 Harvey Rosenblum, Diane Siegel, and Christine Pavel, "Banks and Nonbanks: A Run for the Money," Federal Reserve Bank of Chicago: Economic Perspectives (May/June 1983), 3-5. 21 Nevins D. Baxter, The Commercial Paper Market (Boston: Bankers Publishing Company, 1966), 23-27. 22 U.S. Department of Commerce, Historical Statistics of the United States (U.S. Government Printing Office, 1976), Vol. 2, 981. 23 Fisher (1968), 218-219. 24 Mark E. Ladenson and Kenneth}. Bombara, "Entry in Commercial Banking: 1962-1978," journal of Money, Credit and Banking (May 1984), 169. 25 26 Alan S. McCall and Manfred 0. Peterson, "The Impact of De Novo Commercial Bank Entry," journal of Finance (December 1977), 1587-1604. Permanent Subcommittee on Investigations of the Senate Committee on Government Operations, Investigation in Federally Insured Banks, 89th Cong., 1st Sess. (March 9, 10, 11, and 16, 1965), Part 1, 16. 27 Motter (1968), 8-9. 28 See Eugene Nelson White, The Regulation and Reform of the American Banking System, 1900-1929 (Princeton: Princeton University Press, 1983). 29 David A. Alhadeff and Charlotte Alhadeff, "Growth and Survival Patterns of New Banks, 1948-1970," journal of Money, Credit and Banking (May 1976), 199-208. 30 Comptroller of the Currency, Annual Report (1960), 37. 31 Carter H. Golembe and David S. Holland, Federal Regulation of Banking, 1986-87 (Washington, D.C.: Golembe Associates, Inc., 1987), 151. 32 The Court claimed that some products, such as checking accounts, were so distinctive that they were free of effective competition from other intermediaries. Although there were other products and services for which there were substitutes, the Court found that commercial banks enjoyed either distinct cost advantages or settled consumer preferences that insulated them from competition. Fisher (1968), 163-164, and Golembe and Holland (1987), 151. 33 Carter H. Golembe and David S. Holland, Federal Regulation of Banking (Washington, D.C.: Golembe Associates, Inc., 1981), 102-103. 34 Furthermore, the Department of Justice cautioned that even acquisitions that passed this test could be challenged if they were judged to reduce competition significantly. 35 W. Stephen Smith, ''The History of Potential Competition in Banking Mergers and Acquisitions,'' Federal Reserve Bank of Chicago: Economic Perspectives Ouly/August 1980), 16. 36 Golembe and Holland (1981), 106-107. 37 Roberta G. Carey, ''Evaluation under the Bank Merger Act of 1960 of the Competitive Factors Involved in Bank Mergers: The Regulatory Agencies' Compared,'' Journal of Monetary Economics 1 (1975), 275-308, and Robert Eisenbeis, ''Differences in Federal Regulatory Agencies Bank Merger Policies,'' Journal of Money, Credit and Banking (February 1975), 93-104. 38 See Table 7 in the appendix. 39 These mergers are measured as "meaningful" acquisitions as defined by Stephen A. Rhoades, "Mergers and Acquisitions by Commercial Banks, 1960-1983,'' Board of Governors of the Federal Reserve System Staff Paper No. 142 Ganuary 1985). 40 Comptroller of the Currency, National Banks and the Future (1962), 18-20. 41 Comptroller of the Currency, Annual Report (1963), 4-12. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 71 42 Only large banks found trust departments very profitable. In 1967, the largest 95 banks had total trust assets of $5.2 billion out of a total of $8.3 billion for all national banks. Comptroller of the Currency, Annual Report (1969), 302-303. 43 Comptroller of the Currency, Annual Report (1963), 13. 44 Comptroller of the Currency, National Banks and the Future (1962), 26-30. 45 Comptroller of the Currency, Annual Report (1963), 17. 46 Comptroller of the Currency, Annual Report (1970), 14. In 1972, the decision in Arnold Tours, Inc. v. Camp (1972) blocked national banks from operating travel agencies. 47 Holding companies were well developed when the first survey in 1930 found 287 group and chain banks controlling 2,103 banks. Donald T. Savage, "A History of the Bank Holding Company Movement, 1900-78," in Board of Governors of the Federal Reserve System, The Bank Holding Company Movement to 1978: A Compendium (1978), 26. 48 Comptroller of the Currency, Annual Report (1970), 255-257. Statement by William B. Camp, Comptroller of the Currency, before the Senate Banking and Currency Committee on one-bank holding company legislation. 49 Bank holding companies were effectively prohibited from making interstate acquisitions by the Douglas Amendment of 1957 by leaving legal authority over such expansion to the states. Golembe and Holland (1987), 154. 50 John T. Rose, ''Bank Holding Companies as Operational Single Entities,'' in Board of Governors of the Federal Reserve System, The Bank Holding Company Movement to 1978; A Compendium (1978), 89-90. 51 Savage (1978), 56-57. Multibank holding companies continued to expand, but more slowly. By 1970, 111 multibank holding companies controlled 895 banks with 16.2 percent of deposits. Savage, 54-55. 52 van Cleveland and Huertas (1985), 249-251, 295-297. 53 Comptroller of the Currency, Annual Report (1970), 257. 54 Consistent with previous legislation, these amendments required that nonbanking activities had to be ''so closely related to banking or managing or controlling banks as to be a proper incident thereto." Savage (1978), 57-61. 55 Those activities which had survived court challenges by the end of the 1970s included: making and servicing loans, operating an industrial bank, conducting fiduciary activities, acting as an investment advisor, leasing property, providing data processing services, acting as an insurance agent and underwriting for credit life insurance, providing courier services and management consulting advice, trading bullion, issuing travelers checks, acting as a futures commission merchant, underwriting certain state and municipal securities, and making real estate appraisals. Golembe and Holland (1981), 119-122. 56 Golembe and Holland (1981), 114-118. 57 A commingled agency account is similar to a mutual fund. They both enable funds of investors to be pooled together to buy stocks and bonds. Mishkin (1989), 53. 58 Comptroller of the Currency, Annual Report (1975), 209-210. Remarks of]ames E. Smith, Comptroller of the Currency, before the Securities Subcommittee of the Senate Committee on Banking, Housing and Urb~n Affairs, December 9, 1975. 59 This is reflected in the number and value of mergers and acquisitions under the authority of the Federal Reserve after 1969. See Table 7 in the appendix. 60 Savage (1978), 62-63. 61 See Alfred D. Chandler, The Visible Hand: The Managerial Revolution in American Business (Cambridge: Harvard University Press, 1977), and Alfred D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge: Harvard University Press, 1990), 31-36. 62 Not only did this form of raising money impose an additional cost for all national banks, but some banks with high quality assets complained that they bore an unequal share of the examination burden. Comptroller of the Currency, National Banks and the Future (1962), 141-146. 63 The OCC's employees, budgets, and supervisory capacity are presented in Tables 9, 10, and 11 in the appendix. 64 As the national banking system expanded by banks growing larger rather than increasing in number, the number of banks per examiner declined rapidly. See Table 11 in the appendix. 65 Comptroller of the Currency, Annual Report (1968), 14. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 72 66 Comptroller of the Currency, Annual Report (1965-1966), 31, 56. 67 Robertson (1968), 178-179. The Review was terminated in 1967 by Comptroller Camp. 68 Comptroller of the Currency, Annual Report (1970, 1971, 1972, 1973). 69 Appointed by President Johnson, Camp's chances for reappointment under a Republican administration seemed slim until President Nixon selected John B. Connally, a·former Democrat and Johnson intimate, as Secretary of the Treasury. Connally requested and secured the reappointment of his fellow Texan. '' Camp Named by Nixon to 2nd Term," American Banker (February 1, 1972), 1. 70 Comptroller of the Currency, Annual Report (1962), 14. 71 Motter (1968), 47-49. 72 The Interagency Coordinating Committee continued to operate until 1979, when it was superseded by the Federal Financial Institutions Examination Council. David C. Motter, ''Interagency Coordination among the Federal Regulators of U.S. Depository Institutions," (Washington, D.C.: Comptroller of the Currency, 1987), 7-8, and Motter (1968), 71-80. 73 All national banks with resources of $25 million or more were ordered to make the transition by 1970. 74 Motter (1968), 38. 75 Comptroller of the Currency, Annual Report (1968), 14, 252. 76 These eight items were the quality of management, liquidity of assets, history of earnings, quality and character of ownership, burden of occupancy expenses, volatility of deposit structure, internal controls, and local economic conditions. Comptroller of the Currency, National Banks and the Future (1962), 66-67. 77 See Chapter 3 for a description of this system. Comptroller of the Currency, Annual Report (1974), 281-282. Comptroller of the Currency, Annual Report (1974), 281. 78 79 Golembe and Holland (1981), 82. 80 Motter (1968), 41-45. 81 Lewis Mandell, The Credit Card Industry: A History (Boston: Twayne Publishers, 1990), 28-31. 82 Benjamin]. Klebaner, American Commercial Banking: A History (Boston: Twayne Publishers, 1990), 214-215. 83 Comptroller of the Currency, Annual Report (1967), 13. 84 Motter (1968), 32-33. 85 Comptroller of the Currency, Annual Report (1969), 13. 86 Comptroller of the Currency, Handbook of Examination Procedure (1969), 5, and Comptroller of the Currency, Annual Report (1974), 286. 87 Economic Report of the President (U.S. Government Printing Office, 1966), 19. 88 Motter (1968), 83-84. 89 Comptroller of the Currency, Annual Report (1971), 249-251. Statement of]ustin T. Watson, First Deputy Comptroller of the Currency, before the National Commission on Consumer Finance, July 23, 1971. 90 Subcommittee on Financial Institutions of the Senate Committee on Banking, Housing and Urban Affairs, Trnth In Lending 1967, 90th Cong., 1st Sess. (April 13, 17, 18, 19, 20, and 21; and May 10, 1967), 100. 91 Comptroller of the Currency, Annual Report (1974), 282. 92 Truth-in-lending legislation was considered a ''put-on,'' failing to tackle the problems of fraud and deception, by Homer Kripke, "Gesture and Reality in Consumer Credit Reform," in David A. Aaker and George S. Day, eds., Consumerism: Search for the Consumer Interest (New York: The Free Press, 1971), 160-168. On the other hand, Frank]. Angell claimed that, in response to legislation, banks actually revealed less information, conforming to the letter of the law. "Some Effects of the Truth-in-Lending Legislation," journal of Business Ganuary 1971), 78-85. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 73 Three 1 Wall Street journal (October 10, 1972), 23. 2 Allan H. Meltzer, "Federal Reserve at Seventy-Five," in Michael Belongia, ed., Monetary Policy on the 75th Anniversary of the Federal Reserve System (Boston: Kluwer Academic Publishers, 1991). 3 Stein (1984), Chapter 5. 4 Stein (1984), 176-186, and Campagna, (1987), Chapter 11. 5 Stein (1984), 209-214. 6 REITs are investment companies whose shares are traded in the market. Like mutual funds, they provide investment opportunities for small savers. There are a large variety of REITs. Some finance short-term or long-term mortgages for construction, equity trusts invest in property ownership, and others combine a variety of activities. The REITs emerged after federal tax laws were changed in 1961 to give them the same status as mutual funds, enabling them to avoid the double taxation of dividends. Joseph F. Sinkey, Jr., Problem and Failed Institutions in the Commercial Banking Industry (Greenwich: JAi Press, 1979), 239. 7 Sinkey (1979), 237-254. 8 John D. Wilson, The Chase Manhattan Bank, N.A., 1945-1985 (Boston: Harvard Business School Press, 1986), 252. Some giants like Bank America escaped relatively unscathed. Gary Hector, Breaking the Bank: The Decline of Bank America (Boston: Little, Brown, 1988), 85-85. 9 Senate Committee on Banking, Housing and Urban Affairs, Problem Banks, 95th Cong., 2nd Sess. (February 5, 1976), 57-59, 73-74. 10 Comptroller of the Currency, Annual Report (1969), 13. 11 Comptroller of the Currency, Annual Report (1971), 20-21. 12 Hill (1976), 14-16. 13 Comptroller of the Currency, Annual Report (1974), 268-274. Testimony by James E. Smith before the Subcommittee on Bank Supervision and Insurance of the House Banking and Currency Committee, December 11, 1974. 14 Sinkey (1979), 218-221. 15 Comptroller of the Currency, Annual Report (1974), 264. Remarks ofJames E. Smith, Comptroller of the Currency, Atlanta, Georgia, November 11, 1974. 16 Sinkey (1979), 218-232. 17 Comptroller of the Currency, Annual Report (1974), 274. 18 Comptroller of the Currency, Annual Report (1974), 270-271. 19 Comptroller of the Currency, Annual Report (1974), 265-266, 272. 20 Comptroller of the Currency, Annual Report (1974), 17. 21 Comptroller of the Currency, Annual Report (1974), 265-267, and Comptroller of the Currency, Haskins & Sells Study 1974-1975 (1975), C43. 22 Joan Edelman Spero, The Failure of the Franklin National Bank (New York: Columbia University Press, 1980), 26, 46. 23 The OCC was aware of the bank's difficulties as far back as 1970, when its classified assets to capital funds exceeded 40 percent. 24 Sinkey (1979), 158-163. 25 Comptroller of the Currency, Annual Report (1975), 183. 26 In turn, this firm was a subsidiary of Fasco, A.G. Liechtenstein. Spero (1980), 52-60. 27 Gillian Garcia and Elizabeth Plautz, The Federal Reserve, Lender of Last Resort (Cambridge, Mass.: Ballinger, 1988), 219. 28 Spero (1980), 78-86. 29 Sinkey (1979), 146-154. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 74 30 Comptroller of the Currency, Annual Report (1975), 182-191. Statement of James E. Smith before the Subcommittee on Financial Institutions Supervision, Regulation and Insurance of the House Committee on Banking, Currency and Housing, July 17, 1975. 31 Some institutions may have been aware of Franklin's problems well before its collapse. Morgan Guaranty, its major correspondent bank, had stopped selling Franklin federal funds in late 1973. Sinkey (1979), 154-158. 32 Garcia and Plautz (1988), 221-222. 33 Wall Street journal (October 10, 1974), 1. Smith promised that the agency would focus on strengthening both examination and supervision procedures for the largest banks. 34 The biggest of these failures was the Hamilton National Bank of Chattanooga, Tennessee, which had embarked on an aggressive expansion in the 1970s largely based on real estate. When the Comptroller closed the bank it had $460 million of assets. The Comptroller also arranged for an emergency merger of the Security National Bank with $1.3 billion of deposits, which like its fellow Long Island bank, Franklin National, had attempted to invade the New York City market. Sinkey (1979), 199-217. 35 Poor loans fell into four categories: "other loans especially mentioned," substandard, doubtful, and loss. 36 Comptroller of the Currency, Annual Report (1976), 189-190. Statement of Robert Bloom before the Subcommittee on Commerce, Consumer and Monetary Affairs of the House Government Operations Committee, January 20, 1976. 37 Comptroller of the Currency, Annual Report (1976), 206. 38 The name "Victor" was subsequently dropped in the 1975 reorganization of the OCC, although the program was maintained. 39 The program originally covered a total of 186 banks with assets of $228 billion. 40 The classified assets included 100 percent of substandard loans, 50 percent of loans especially mentioned, 50 percent doubtful loans. Capital was measured as equity accounts, reserves for loan losses, and capital notes. 41 Comptroller of the Currency, Annual Report (1976), 198-200. 42 Washington Post Oanuary 11, 1976), Al. 43 Wilson (1986), 253-256. 44 Washington Post Oanuary 13, 1976), Al. 45 New York Times (February 6, 1976), 1. More serious proposals were made by the bipartisan Financial Institutions and the Nation's Economy (FINE) study, commissioned by the House of Representatives Committee on Banking, Currency and Housing. The final report recommended rationalizing banking regulation by concentrating all federal functions in two institutions, one for monetary policy and the other for bank regulation, thus eliminating the OCC. See James L. Pierce, ''The FINE Study,'' Journal of Monetary Economics (November 1979). 46 Wall Street journal (March 12, 1976), 4. 47 Washington Post Oanuary 30, 1976), Al. 48 Wall Street journal Oanuary 26, 1976), 3. 49 Comptroller of the Currency, Annual Report (1976), 189. Statement of Robert Bloom before the Subcommittee on Commerce, Consumer and Monetary Affairs of the House Government Operations Committee, January 20, 1976. 50 Problem Banks (1976), 4. 51 Problem Banks (1976), 7. 52 Comptroller of the Currency, Annual Report (1976), 197-198. 53 Problem Banks (1976), 9-12. 54 Wall Street journal Oanuary 30, 1976), 20. 55 Wall Street journal (March 2, 1976), 3. 56 Wall Street journal (March 26, 1976), 8. 57 Senate Committee on Banking, Housing and Urban Affairs, First Meeting on the Condition of the Banking System, 95th Cong., 1st Sess. (March 10 and 11, 1977). 58 Comptroller of the Currency, Annual Report (1977), 207-213, 219-234. 59 Comptroller of the Currency, Haskins & Sells Study (1975), C20. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 75 60 Comptroller of the Currency, Haskins & Sells Study (1975), C52-C56. 61 Comptroller of the Currency, Haskins & Sells Study (1975) , C20-C29, E96-E98. 62 Comptroller of the Currency, Haskins & Sells Study (1975), C59-C71. 63 Comptroller of the Currency, Haskins & Sells Study (1975), D1-D30. 64 Comptroller of the Currency, Haskins & Sells Study (1975), El-E87. Four 1 Department of the Treasury, News Uuly 21, 1977), and New York Times Biographical Service (August 1977), 1095-1096. 2 Senate Committee on Governmental Affairs, Matters Relating to T. Bertram Lance, 95th Cong., 1st Sess. Uuly-September 1977). 3 The office of the First Deputy Comptroller, who had been first in succession to the Comptroller and a member of this group, was abolished in 1980. Comptroller of the Currency, 1980 Report of Operations (1981), 7. 4 Comptroller of the Currency, Annual Report (1980), 7. 5 Comptroller of the Currency, Annual Report (1979), 24. 6 Country risk is the risk that a nation may default or delay payment of its financial obligations because of insufficient foreign exchange. 7 The Basle Committee on Banking Regulations and Supervisory Practices (sometimes known as the Cooke Committee) was established in 1974. The Committee has representatives from the United States, Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Sweden, Switzerland, and the United Kingdom. Golembe and Holland (1981), 59. 8 Board of Governors of the Federal Reserve System, Federal Reserve Bulletin (1979-1981), Table 3.21. 9 Comptroller of the Currency, Quarterly journal (September 1983), 17-25. Statement of C. Todd Conover before the Subcommittee on Financial Institutions Supervision, Regulation and Insurance of the House Committee on Banking Finance and Urban Affairs, April 13, 1983. 10 To develop the skills needed to carry out the growing number of overseas exams, the OCC sponsored two special training schools in 1977, which were later incorporated into its continuing education program. Comptroller of the Currency, Annual Report (1977), 31-33. 11 Comptroller of the Currency, Annual Report (1979), 315, and Comptroller of the Currency, Quarterly journal (September 1983), 21. 12 The OCC 's supervision was credited with lowering the rate of failures for national banks relative to state-chartered banks. Benston (1973), 36, and Benston and Marlin (1974), 23-44. 13 Hsiu-Kwang Wu, "Bank Examiner Criticism, Bank Loan Defaults, and Bank Loan Quality," journal of Finance (September 1969), 697-705. 14 David R. Graham and David Burras Humphrey, "Bank Examination Data as Predictors of Bank Net Loan Losses," journal of Money, Credit and Banking (November 1978), 491-504. 15 Trust and EDP examinations were placed in separate divisions under a deputy comptroller for Specialized Examinations. In recognition of the different technical nature of EDP work, the OCC established a formal career development program for EDP examiners in 1978. Comptroller of the Currency, Annual Report (1978), 19. 16 Senate Committee on Banking, Housing and Urban Affairs, 1978 Budgets of Bank Regulatory Agencies, 95th Cong., 2nd Sess. (February 7 and 8, 1978), 213. The training of examiners in the new system accounts for part of the reduction in examinations. 17 Senate Committee on Banking, Housing and Urban Affairs, 1978 Budgets of Bank Regulatory Agencies, 95th Cong., 2nd Sess. (February 7 and 8, 1978), 215-216. 18 Any early warning system like the NBSS has the problem of misclassification. In statistical terms, a Type I error is committed by identifying a weak bank as a non-weak bank and a Type II error is committed by identifying a non-weak bank as a weak bank. Given the desire to avoid bank failures, the OCC and other agencies are willing to https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 76 commit many Type II errors if they can virtually eliminate Type I errors. Thus, lists of weak banks are more likely to include banks that have some unusual characteristics, but are otherwise sound. 19 Before the CAMEL system of ranking banks was instituted, the worst banks earned a "4" rating. 20 Comptroller of the Currency, Annual Report (1976), 199. Statement of James E. Smith, Comptroller of the Currency, before the Senate Committee on Banking, Housing and Urban Affairs, February 5, 1976. 21 Comptroller of the Currency, Examining Circular No. 159 (Revised) (May 19, 1978). 22 Senate Committee on Banking, Housing and Urban Affairs, Third Meeting on the Condition of the Banking System, 96th Cong., 1st Sess. (May 23, 1979), 313-30. See also George R. Juncker, "A New Supervisory System for Rating Banks," Federal Reserve Bank of New York Quarterly Review (Summer 1978), 47-50. 23 Comptroller of the Currency, Memorandum: Strategic Planning (October 23, 1985). 24 Comptroller of the Currency, Annual Report (1976), 222. Statement of C. Westbrook Murphy, Deputy Comptroller for Law and Chief Counsel, before the Senate Committee on Banking, Housing and Urban Affairs, March 26, 1976. 25 Comptroller of the Currency, Annual Report (1976), 222-224. 26 Peter D. Hein, "Consumerism and Banking," in Joel R. Evans, ed., Consumerism in the United States: An Inter-Industry Analysis (New York: Praeger, 1980), 53-54. 27 The division first reported directly to the Comptroller. Under Heimann, the division was reorganized and placed under the Senior Deputy Comptroller for Policy. 28 Comptroller of the Currency, Annual Report (1975), viii-ix. 29 Comptroller of the Currency, Annual Report (1976), 25-27. 30 Carter H. Golembe and David S. Holland, Federal Regulation of Banking, 1986-1987 (Washington, D.C.: Golembe Associates, Inc., 1987), 82-86. 31 Subcommittee on Consumer Affairs of the House Committee on Banking and Currency, Credit Discrimination Hearings, 93rd Cong., 2nd Sess. Gune 20 and 21, 1974). 32 33 Hein (1980), 53-54. Statement of Ralph Nader before the Senate Committee on Banking, Housing and Urban Affairs, Community Credit Needs, 95th Cong., 1st Sess. (March 23, 24, and 25, 1977), 17-18. 34 Golembe and Holland (1981), 73-74, and Golembe and Holland (1986), 88-89. Studies of alleged redlining subsequently found little evidence of discriminatory practices, once risk and other relevant factors were accounted for. George J. Benston, ''Mortgage Redlining Research: A Review and Critical Analysis,'' The Regulation of Financial Institutions (October 1979), 144-195. Norman N. Bowsher, "The Three-Year Experience with the Community Reinvestment Act,'' Federal Reserve Bank of St. Louis Review (February 1982), 3-5. 35 Bowsher (1982), 6. 36 Comptroller of the Currency, Annual Report (1980), 16. The OCC later developed an extensive program of recommendations. See for example Community Development Finance (Washington, D.C.: Comptroller of the Currency, 1989). 37 Senate Committee on Banking, Housing and Urban Affairs, Budgets of the Federal Regulatory Agencies, 96th Cong., 2nd Sess. Ganuary 25, 1980), 121. 38 Considerable regional variation in the examination of national banks had been discovered. Benston and Marlin (1974), 34-43. 39 Testimony of]ohn G. Heimann (February 7 and 8, 1978), 1978 Budgets of Bank Regulatory Agencies, 173-174. 40 Comptroller of the Currency, Goals and History of the Compensation Program (n.d.). Typescript. 41 Motter (1987). The Interagency Supervisory Committee operated briefly before the new committee was established. 42 Motter (1987), Appendix, 1-2, and Golembe and Holland (1981), 50-51. 43 Comptroller of the Currency, Haskins & Sells Study (1975), D 22-23. 44 For example, the Comptroller began to provide letters to unsuccessful applications, explaining why a charter had been rejected. 45 See Table 4 in the appendix. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 77 46 Ladenson and Bombara (1984), 165-174. Between 1970 and 1977, 63 percent of applications from sponsored banks were approved compared to 46 percent for independent banks. Majority Staff Study on Chartering of National Banks: 1970-1977 (October 1980), 57. 47 Ladenson and Bombara (1984), 166. 48 John J. Di Clemente, ''Including Thrifts in Bank Merger Analysis,'' Federal Reserve Bank of Chicago: Economic Perspectives Ouly/August 1983), 3-5. 49 Rhoades (1985), 8. 50 Only in the case of a holding company, U.S. v. Marine Bancorporation (1974), did the Supreme Court appear vaguely sympathetic to the idea of potential competition. Smith (1980), 17-18. 51 See Table 5 in the appendix. 52 There are four essential terms for electronic banking facilities: automated teller machines (ATMs), which perform traditional teller functions and may be located on or off the premises of a bank; customer-bank communications terminal (CBCT), which is the OCC's term for a facility off bank premises; electronic funds transfer systems (EFTs), which are a computerized network to process financial transactions; and point-of-sale (POS) terminals, which allow merchants to verify a customer's credit card or debit their bank account. Golembe and Holland (1981), 95. 53 Comptroller of the Currency, Hearing: Customer-Bank Communication Tenninals (CBCT) (April 2 and 3, 1975), 40-41. 54 Comptroller of the Currency, Annual Report (1975), 167. Statement of]ames E. Smith, Comptroller of the Currency, before the Financial Institutions Subcommittee of the Senate Committee on Banking, Housing and Urban Affairs, March 14, 1975. 55 Customer-Bank Communication Tenninals (CBCT), 145. 56 Golembe and Holland (1981), 96. Five 1 Instead of manipulating interest rates to control monetary aggregates, bank reserves were targeted. Stein (1989), 228-231. 2 Comptroller of the Currency, News Release (March 1984). 3 Wall Street journal (November 26, 1984), 26. 4 Comptroller of the Currency, Quarterly journal Oune 1990), 40. Statement of Robert L. Clarke before the House Subcommittee on Financial Institutions Supervision of the Committee on Banking, Finance and Urban Affairs, March 21, 1990. 5 Quoted in Eric N. Compton, The New World of Commercial Banking (Lexington, Mass.: D.C. Heath and Co., 1987), 19. 6 Comptroller of the Currency, Quarterly journal (Pilot Issue), 25-28. Remarks of John G. Heimann, Comptroller of the Currency, Boston, Mass., April 10, 1981. 7 Comptroller of the Currency, Quarterly journal Oune 1983), 16. Remarks of C.Todd Conover, Comptroller of the Currency, before the Stanford/Berkeley Business School Alumni Associations, February 15, 1983. 8 Kerry Cooper and Donald R. Fraser, Banking Deregulation and the New Competit[on in Financial Services (Cambridge, Mass.: Ballinger, 1986), 110. 9 George J. Benston, '' Interest Rate on Deposits and the Survival of Chartered Depository Institutions,'' Federal Reserve Bank of Atlanta Economic Review (October 1984), 50. MMMFs sell shares to the public, using the funds to invest in money market securities. They pay interest and allow customers to write checks. The MMMFs avoid the costs of deposit insurance premiums and reserve requirements. 10 Elijah Brewer, et al., "The Depository Institutions Deregulation and Monetary Control Act of 1980," Federal Reserve Bank of Chicago: Economic Perspectives (September/October 1980). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 78 11 Cooper and Fraser (1986), 129-138, and Gillian Garcia, et al., "The Garn-St Germain Depository Institutions Act of 1982, "Federal Reserve Bank of Chicago: Economic Perspectives (March/April 1983), 7-9. 12 Benston (1984), 50. 13 Linda Aguilar, "Still Toe-to-Toe: Banks and Nonbanks at the End of the '80s," Federal Reserve Bank of Chicago: Economic Perspectives CTanuary/February 1990), 14. 14 Comptroller of the Currency, The Strategi,c Plan of the Office of the Comptroller of the Currency (October 1981), 1. 15 Golembe and Holland (1987), 184-185. 16 Securities Industry Association v.Conover and National Association of Life Insurance Underwriters et al. v. Clarke represent two of the more important legal attacks on the banking industry's efforts to expand into new lines of business. Comptroller of the Currency, Quarterly journal (March 1985), 26-27, and Quarterly journal (March 1987), 20-21. 17 Association of Data Processing Services Organizations, Inc. et. al. v. Citibank, N.A. and john G. Heimann, U.S. District Court, Southern District of New York, 508 F. Supp. 91 (1980). 18 Most studies concurred that the combination of these two lines of banking posed little additional risk. Eugene N. White, ''Before the Glass-Steagall Act:An Analysis of the Investment Banking Activities of National Banks,'' Explorations in Economic History (1986), 33-55, and George J. Benston, The Separation of Commercial and Investment Banking (London: Macmillan, 1990). 19 Comptroller of the Currency, Quarterly journal (December 1988), 19. Statement of Robert L. Clarke, Comptroller of the Currency, before the Senate Committee on Banking, Housing and Urban Affairs, September 8, 1988. 20 Senate Committee on Banking, Housing and Urban Affairs, Modernization of the Glass-Steagall Act, 100th Cong., 1st Sess. CTuly 30, 1987). 21 Comptroller of the Currency, Quarterly journal, September 1985, 35. Remarks by C. Todd Conover, before the Reserve City Bankers Convention, April 29, 1985. 22 Senate Committee on Banking, Housing and Urban Affairs, Majority Staff Study on Chartering of National Banks: 1970-1977 (October 1980), 2-3. 23 Comptroller of the Currency, Major Issues Affecting the Financial Services Industry CTuly 1988), 157-160. 24 See Table 5 in the appendix. 25 Comptroller of the Currency, Quarterly Journal Gune 1983), 25. Remarks by Doyle L. Arnold, Senior Deputy Comptroller of the Currency for Policy and Planning, American Bankers Association, April 13, 1983. 26 Steven D. Felgran, "Shared ATM Networks: Market Structure and Public Policy," New England Economic Review CTanuary/ February 1984), 26. 27 In practice the Department of Justice only challenged those mergers that significantly exceeded its guidelines on market concentration. JohnJ. Di Clemente and Diana Alamprese Fortier, "Bank Mergers Today: New Guidelines, Changing Markets," Federal Reserve Bank of Chicago: Economic Perspectives (May/ June 1984), 3-4. 28 See Table 7 in the appendix. 29 Golembe and Holland (1987), 180-181. 30 In addition to bank holding companies' use of nonbank banks to expand geographically, firms involved in commerce and the insurance industry also entered banking by acquiring FDIC-insured banks and stripping them of deposit-taking or loan-making activities. See Peter S. Rose, The Interstate Banking Revolution (New York: Quorum Books, 1989), 55-56. 31 Compton (1987), 250. 32 Wall Street Journal CTanuary 23, 1985), 26. 33 Golembe and Holland (1987), 181-182. 34 The Douglas Amendment gave states the authority to permit entry by out-of-state banking holding companies. 35 Rose (1989), 55-56. 36 They contended that the restrictions violated the commerce and equal protection clauses of the Constitution. 37 Rose (1989), 59-60, and Daniel B. Gail andJosephJ. Norton, "The Financial Institutions Reform, Recovery and Enforcement Act of 1989: Dealing With the Regulators," The Banking Law Journal (May-June 1990), 207. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 79 38 Rose (1989), 68-69. 39 Comptroller of the Currency, Quarterly journal, (September 1983), 21-22. Statement of C. Todd Conover before the Subcommittee on Financial Institutions Supervision, Regulation and Insurance of the House Committee on Banking, Finance and Urban Affairs, April 21, 1983. 40 Jeffrey Sachs and Harry Huizinga, "U.S. Commercial Banks and the Developing-Country Debt Crisis," Brookings Papers in Economic Activity 2 (1987), 558. 41 R. Alton Gilbert, Courtenay C. Stone, and Michael E. Trebing, "The New Bank Capital Adequacy Standards," Federal Reserve Bank of St. Louis Review (May 1985), 15. 42 The FDIC separately set capital requirements of adjusted equity capital to adjusted total assets of 6 percent. Golembe and Holland (1987), 71. 43 No requirement was originally set for the largest banks in the belief that they had better diversification and access to capital markets, thereby allowing them to operate at lower capital ratios. Golembe and Holland (1987), 71. 44 In 1980, the top nine banks had a 4.2 percent ratio; this rose to 5.5 in 1983, and then to 7.1 in 1986. Sachs and Huizinga, 572. 45 Golembe and Holland (1987), 71-73. 46 Wall Street journal Ganuary 23, 1985), 26. The market price for the entire U.S. bank portfolio of these loans was calculated at $55.90 per $100 claim. Sachs and Huizinga (1987), 558. 47 Anna J. Schwartz, "International Debts: What's Fact and What's Fiction," Economic Inquiry Ganuary 1989), 4-5. 48 Sachs and Huizinga (1987), 555-559. 49 Sachs and Huizinga (1987), 573-575. 50 Sachs and Huizinga (1987), 573-575. 51 Irving H. Sprague, Bailout, An Insider's Account of Bank Failures and Rescues (New York: Basic Books, 1986), 79-86. 52 Sprague (1986), 88-89. 53 Jennings had been executive vice president of a larger Oklahoma bank. He left after a scandal hit the bank, and several fellow officers were convicted of fraud. Mark Singer, Funny Money (New York: Knopf, 1985), 16-17. See also Phillip L. Zweig, Belly Up: The Collapse of the Penn Square Bank (New York: Fawcett, 1985). 54 George J. Benston, et al., Perspectives on Safe & Sound Banking: Past, Present and Future (Cambridge: MIT Press, 1986), 256-257. 55 Comptroller of the Currency, Quarterly journal (August 1982), 24. Statement of C. Todd Conover, Comptroller of the Currency, before the House Committee on Banking, Finance and Urban Affairs, July 15, 1982. 56 Ibid. 57 Sprague (1986), 109-134. 58 Senate Committee on Banking, Finance and Urban Affairs, Penn Square Bank Failure, 97th Cong., 2nd Sess. Guly 15, August 16, and September 29 and 30, 1982). 59 Comptroller of the Currency, Quarterly journal (March 1983), 59. Statement of C. Todd Conover before the Senate Committee on Banking, Housing and Urban Affairs, December 10, 1982. 60 Ibid. 61 "Here Comes Continental Illinois," Dun's Review (December 1978), 42. 62 Comptroller of the Currency, Quarterly journal (December 1984), 27-29. Statement of C. Todd Conover, Comptroller of the Currency, before the House Committee on Banking, Finance and Urban Affairs, September 19, 1984. 63 Singer (1985), 68-69. 64 Singer (1985), 125. 65 Comptroller of the Currency, Quarterly journal (December 1984), 30-31. Statement of C. Todd Conover before the House Committee on Banking, Finance and Urban Affairs, September 19, 1984. 66 Comptroller of the Currency, Quarterly journal (December 1984), 33. Statement of C. Todd Conover before the House Committee on Banking, Finance and Urban Affairs, September 19, 1984. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 80 67 Ibid. The loan consisted of a $1.5 billion loan from the FDIC and the remainder from seven major banks. A $5.5 billion standby line of credit from a consortium of 28 banks was also arranged. 68 To reflect this change in ownership and its new found prosperity, the firm changed its name to Continental Bank Corporation. Sprague (1986), 209-211; Golembe and Holland (1987), 122-123; Wall Street journal (November 18, 1988), Cl5; and Wall Street journal (December 13, 1988), Cl3. See also James P. McCollom, The Continental Affair (New York: Dodd, Mead & Co., 1987). 69 Comptroller of the Currency, Quarterly journal, December 1984, 24. Statement of C. Todd Conover before the House Committee on Banking, Finance and Urban Affairs, September 19, 1984. 70 Federal Deposit Insurance Corporation, The Texas Banking Crisis: Causes and Consequences, 1980-1989 Ouly 1990). 71 Comptroller of the Currency, ''Banking - The End of a Crisis: A New Beginning,'' Quarterly Journal (September 1989), 9. 72 Comptroller of the Currency, Quarterly journal (September 1990), 43-48. Statement of Robert L. Clarke before the House Committee on Banking, Finance and Urban Affairs on the condition of national banks in Texas, June 22, 1990. 73 Staff turnover reached 15 percent in 1984. 74 Federal Deposit Insurance Corporation, The Texas Banking Crisis: Causes and Consequences Ouly 1990), 21. 75 Comptroller of the Currency, Quarterly journal (March 1985), 52. Remarks by C. Todd Conover before the California CPA Foundation for Education and Research, January 14, 1985. 76 Comptroller of the Currency, Quarterly journal (September 1990), 31. Remarks by Robert L. Clarke before the National Association of Home Builders, May 19, 1990. 77 Comptroller of the Currency,' 'Regional Reorganization," Quarterly Journal (March 1983), 1-3. This arrangement and the basic contemporary structure of the agency can be seen in the organizational chart for December 1990. 78 See Tables 9, 10, and 11 in the appendix. 79 Federal Deposit Insurance Corporation, The Texas Banking Crisis: Causes and Consequences Ouly 1990), 21. 80 In 1990, the holding companies were BankAmerica Corporation, Bank of Boston Corporation, Chase Manhattan Corporation, Citicorp, First Chicago Corporation, NCNB Corporation, and Security Pacific Corporation. 81 Comptroller of the Currency,' 'Examination and Supervision,'' Quarterly journal (February 1981), 12. 82 Golembe and Holland (1987) , 212. 83 Comptroller of the Currency, "Examination and Supervision," Quarterly journal (March 1990) , 13-14. 84 Gail and Norton (1990), 210-225. 85 Motter (1987). 86 Federal Register Oanuary 27, 1989), 4168-4184. 87 Comptroller of the Currency, "Operations of National Banks," Quarterly Journal (March 1990), 3. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 81 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Appendix Comptrollers of the Currency, 1863 to the Present No. Name Dates of Tenure State 1 McCulloch, Hugh May 9, 1863 Mar. 8, 1865 Indiana 2 Clarke, Freeman Mar. 21, 1865 July 24, 1866 New York 3 Hulburd, Hiland R. Feb. 1, 1867 Apr. 3, 1872 Ohio 4 Knox, John Jay Apr. 25, 1872 Apr. 30, 1884 Minnesota 5 Cannon, Henry W. May 12, 1884 Mar. 1, 1886 Minnesota 6 Trenholm, William L. Apr. 20, 1886 Apr. 30, 1889 South Carolina 7 Lacey, Edward S. May 1, 1889 June 30, 1892 Michigan 8 Hepburn, A. Barton Aug.2, 1892 Apr. 25, 1893 New York 9 Eckels, James H. Apr. 26, 1893 Dec. 31, 1897 Illinois 10 Dawes, Charles G. Jan. 1, 1898 Sept. 30, 1901 Illinois 11 Ridgely, William Barret Oct. 1, 1901 Mar. 28, 1908 Illinois 12 Murray, Lawrence O. Apr. 27, 1908 Apr. 27, 1913 New York 13 Williams, John Skelton Feb.2, 1914 Mar. 2, 1921 Virginia 14 Crissinger, D.R. Mar. 17, 1921 Mar. 30, 1923 Ohio 15 Dawes, Henry M. May 1, 1923 Dec. 17, 1924 Illinois 16 McIntosh, Joseph W. Dec. 20, 1924 Nov. 20, 1928 Illinois 17 Pole, John W. Nov. 21, 1928 Sept. 20, 1932 Ohio 18 O'Conner, J.F.T. May 11, 1933 Apr. 16, 1938 California 19 Delano, Preston Oct. 24, 1938 Feb. 15, 1953 Massachusetts 20 Gidney, Ray M. Apr. 16, 1953 Nov. 15, 1961 Ohio 21 Saxon, James J. Nov. 16, 1961 Nov. 15, 1966 Illinois 22 Camp, William B. Nov. 16, 1966 Mar. 23, 1973 Texas 23 Smith, James E. July 5, 1973 July 31, 1976 South Dakota 24 Heimann, John G. July 21, 1977 May 15, 1981 New York 25 Conover, C. T. Dec. 16, 1981 May 4, 1985 California 26 Clarke, Robert L. Dec. 2, 1985 Feb.29, 1992 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 83 Texas https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Table 1 Aggregate National Bank Assets and Liabilities 1960 - 1990 ($ billions) Assets Year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1972a 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Total Assets 139 151 161 170 190 219 236 263 297 310 337 373 431 485 565 624 648 704 797 892 996 1095 1201 1297 1393 1498 1633 1743 1775 1846 1976 1984 Loans 64 67 76 83 96 117 127 137 155 168 173 190 226 254 304 346 348 372 429 490 547 594 662 720 790 913 985 1057 1083 1155 1239 1241 Securities 44 49 52 53 54 57 58 70 77 70 84 96 104 105 107 109 128 139 143 146 155 175 180 198 229 197 251 277 290 275 295 313 Cash and Other Due from Assets Other Banks 29 31 30 29 34 37 42 47 51 55 56 59 67 91 108 113 118 126 151 170 189 204 206 208 215 198 214 228 215 208 211 191 3 3 4 6 6 8 9 10 14 18 23 27 33 35 46 57 55 66 74 86 105 121 153 171 160 190 183 180 186 209 231 239 Liabilities and Capital Demand Time and Other Deposits Savings Liabilities Deposits 85 90 89 89 99 108 112 123 135 141 145 152 173 173 179 180 184 188 212 221 235 238 218 211 226 250 272 309 278 280 285 292 40 46 54 61 71 86 94 108 123 115 139 162 187 240 291 339 357 394 442 496 550 620 705 781 852 893 961 1004 1073 1134 1218 1263 3 3 5 6 6 9 12 14 18 32 30 33 43 44 64 71 71 81 98 126 157 178 212 234 236 259 295 319 323 323 360 309 Total Capital Accounts 11 12 13 14 15 16 17 18 20 22 24 26 28 28 31 34 37 41 45 49 54 60 66 72 79 88 96 103 101 108 114 120 Note: Before 1972, the figures are for domestic national bank assets and liabilities. 1972 is presented both domestic only and, as 1972a, consolidated foreign and domestic. After 1972, all figures are consolidated assets and liabilities, including foreign operations. Sources: Comptroller of the Currency, Annual Reports (1960-1980) and Quarterly Journal (1981-1990). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 85 Table 2 National Bank Assets and Liabilities as a Percent of Total Assets 1960 - 1990 ($ billions) Liabilities and Capital Assets Year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1972a 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Total Assets 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Loans Securities 45.7 44.6 47.0 49.0 50.3 53.3 54.0 51.9 52.2 54.1 51.5 51.1 52.5 52.3 53.8 55.3 53.6 52.9 53.9 54.9 54.9 54.3 55.1 55.5 56.7 61.0 60.3 60.6 61.1 62.5 62.7 62.6 31.5 32.6 32.2 30.9 28.6 26.2 24.4 26.4 25.9 22.6 25.0 25.8 24.1 21.7 18.9 17.5 19.8 19.8 18.0 16.4 15.6 16.0 15.0 15.3 16.4 13.1 15.4 15.9 16.3 14.9 14.9 15.8 Other Cash and Due from Assets Other Banks 20.6 20.6 18.5 16.8 17.9 16.8 17.7 17.7 17.2 17.6 16.6 15.9 15.6 18.8 19.1 18.1 18.2 18.0 18.9 19.1 18.9 18.7 17.1 16.0 15.4 13.2 13.1 13.1 12.1 11.3 10.7 9.6 2.2 2.2 2.3 3.3 3.2 3.7 3.9 3.9 4.7 5.6 6.9 7.3 7.7 7.2 8.1 9.1 8.5 9.4 9.3 9.6 10.5 11.1 12.7 13.2 11.5 12.7 11.2 10.3 10.5 11.3 11.7 12.0 Demand Deposits Time and Other Savings Liabilities Deposits 60.9 59.7 55.4 52.5 51.9 49.2 47.6 46.7 45.4 45.5 43.1 40.8 40.1 35.6 31.7 28.9 28.4 26.7 26.6 24.7 23.6 21.7 18.1 16.3 16.2 16.7 16.6 17.7 15.7 15.2 14.4 14.7 28.8 30.2 33.5 36.1 37.3 39.2 39.9 41.1 41.6 37.2 41.1 43.5 43.4 49.4 51.5 54.3 55.0 55.9 55.5 55.6 55.2 56.6 58.7 60.2 61.2 59.6 58.9 57.6 60.4 61.5 61.6 63.7 2.3 2.3 3.2 3.5 3.1 4.1 5.2 5.1 6.2 10.2 8.8 8.8 10.0 9.2 11.3 11.4 11.0 11.5 12.3 14.1 15.7 16.2 17.7 18.0 16.9 17.3 18.1 18.3 18.2 17.5 18.2 15.6 Total Capital Accounts 8.0 7.9 7.9 7.9 7.7 7.4 7.3 7.0 6.8 7.1 7.0 6.9 6.6 5.8 5.5 5.4 5.7 5.9 5.6 5.5 5.4 5.5 5.5 5.5 5.7 5.9 5.9 5.9 5.7 5.9 5.8 6.0 Note: Before 1972, the figures are for domestic national bank assets and liabilities. 1972 is presented both domestic only and, as 1972a, consolidated foreign and domestic. After 1972, all figures are consolidated assets and liabilities, including foreign operations. Sources: Comptroller of the Currency, Annual Reports (1960-1980) and Quarterly journal (1981-1990). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 Table 3 Income and Expenses of National Banks 1960 - 1990 ($ billions) Year Operating Income 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 5.8 6.0 6.6 7.3 8.1 9.7 11.3 12.7 15.0 18.2 20.4 21.3 23.5 31.2 40.4 38.9 48.0 53.8 67.8 89.9 114.8 148.9 153.9 143.6 167.5 169.0 164.8 173.3 193.3 226.3 226.6 Operating Expenses 3.7 4.0 4.6 5.2 5.9 7.2 8.5 9.7 11.5 14.3 16.3 17.4 19.3 26.2 35.2 33.6 42.1 47.0 59.0 79.7 104.0 137.7 143.3 133.2 156.2 156.8 154.3 171.1 174.3 210.4 215.6 Income before Tax and Others Net Income Cash Dividends Net Loan Losses Net Income to Total Assets Net Income to Equity Capital 2.05 1.98 1.98 2.07 2.23 2.48 2.81 2.96 3.49 3.92 4.13 3.88 4.23 4.97 5.21 5.29 5.92 6.83 8.87 10.16 10.79 11.28 10.52 10.34 11.25 12.23 10.43 2.17 18.97 15.85 11.05 1.05 1.04 1.07 1.21 1.21 1.39 1.58 1.76 1.93 2.53 2.83 3.04 3.31 3.77 4.04 4.26 4.59 5.14 6.17 7.25 7.67 8.20 8.24 8.10 8.42 9.99 9.74 0.44 13.83 10.77 7.40 0.45 0.49 0.52 0.55 0.59 0.68 0.74 0.80 0.90 1.07 1.28 1.39 1.31 1.45 1.67 1.82 1.82 1.99 2.20 2.65 2.95 3.38 3.81 4.21 4.25 4.88 5.32 6.32 8.43 7.96 7.62 0.13 0.11 0.10 0.12 0.13 0.19 0.24 0.28 0.26 0.30 0.60 0.67 0.55 0.73 1.19 2.05 2.11 1.67 1.44 1.54 2.20 2.27 4.14 5.40 6.67 8.54 10.34 10.68 12.36 14.87 18.80 0.75 0.69 0.67 0.71 0.64 0.63 0.67 0.67 0.65 0.82 0.84 0.82 0.77 0.78 0.72 0.68 0.71 0.73 0.77 0.81 0.77 0.75 0.69 0.62 0.60 0.67 0.60 0.03 0.78 0.58 0.37 9.4 8.8 8.4 8.9 8.3 8.5 9.1 9.5 9.5 11.4 11.9 11.9 11.7 13.3 13.1 12.7 12.5 12.4 13.7 14.7 14.1 13.7 12.5 11.3 10.7 11.3 10.1 0.4 13.7 9.9 6.2 Net Loan Losses to Loans 0.20 0.17 0.13 0.15 0.13 0.16 0.19 0.20 0.17 0.18 0.35 0.35 0.24 0.27 0.41 0.71 0.57 0.39 0.29 0.28 0.37 0.34 0.57 0.68 0.73 0.87 0.98 0.99 1.07 1.20 1.51 Note: All figures are for consolidated foreign and domestic data, except "Net Loan Losses" and "Net Loan Losses to Loans," which are domestic only until 1975. Sources: Comptroller of the Currency, Annual Reports (1960-1980) and Quarterly journal (1981-1990). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 87 Table 4 Chartering National Banks 1960 - 1990 New Bank Applications Year Approved 1960 17 24 112 230 157 22 44 1961 1962 1963 1964 25 16 175 241 49 88 57 39 1965 1966 27 120 28 39 18 42 1967 1968 9 16 40 21 18 43 9 15 1969 1970 33 42 24 46 58 48 16 39 1971 1972 55 84 54 50 60 58 38 54 1973 1974 134 68 70 61 66 57 54 1975 92 72 Rejected Percent Approved New New Bank Applications New 35 34 1976 1977 34 34 36 42 49 45 65 35 65 164 1978 1979 42 71 14 17 75 81 39 41 205 78 1980 107 14 61 94 92 Rejected Charters Issued Year 24 Approved Percent Approved Charters Issued 1981 183 5 88 97 1982 1983 1984 1985 1986 1987 297 269 4 31 99 90 244 264 66 68 38 81 17 87 77 80 87 1988 79 52 9 4 76 7 1989 1990 10 90 93 92 100 189 268 265 173 101 59 67 75 65 76 Note: Approvals do not equal the number of charters because of the lag between the time when an application is approved and a charter is issued, and some withdrawals. Sources: Comptroller of the Currency, Annual Reports (1960-1980) and Quarterly journal (1981-1990). Table 5 State Laws Governing Branch Banking Year Unit Banking Limited Branching Statewide Banking 9 17 19 1929 1951 28 17 11 14 1967 1978 14 13 17 16 21 1982 1985 9 19 22 6 21 23 3 12 35 1990 Sources: G. P. Fisher, "American Banking Structure" (1967), p. 69, adjusted; S.L. Graham, "A Case for Branch Banking in Montana," Federal Reserve Bank of Minnesota Quarterly Review (1980), p. 9; Federal Deposit Insurance Corporation, Data Book, Operating Banks and Branches. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis JI.• Table 6 National Banks and Branches 1960 - 1990 Year Number of Banks 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 4530 4513 4505 4615 4773 4815 4799 4758 4716 4669 4621 4600 4614 4661 4708 4744 Domestic Branches 5296 5825 6415 7211 7960 8758 9404 9989 10801 11552 12366 13106 13799 14754 15565 16269 CBCT Branches Foreign Branches 93 102 111 124 138 196 230 278 355 428 497 528 566 621 649 675 Year Number of Banks 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 4737 4655 4564 4448 4425 4456 4580 4757 4910 4984 4863 4635 4406 4251 3981 Domestic Branches 16640 17066 17439 18285 18881 19524 20808 21592 21967 22323 23343 23592 24487 25003 26511 CBCT Branches 527 765 946 1055 1362 2147 2672 3032 3873 4703 NIA NIA NIA NIA Foreign Branches 635 629 646 667 667 710 767 769 800 786 767 741 722 702 NIA Notes: Branches reported are the end-of-year number for 1960 to 1985 and the June 30 number for 1986 to 1990. CBCT branches are customer-bank communication terminals or automated tellers. NIA indicates data are not available. Sources: Comptroller of the Currency, Annual Reports (1960-1980) and Quarterly journal (1981-1990) and Federal Deposit Insurance Corporation, Data Book, Operating Banks and Branches (1986-1990). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 89 Table 7 Numbers of Mergers and Acquisitions by Approving Regulator 1960 - 1987 (Assets in$ billions) ComQtroller of the Currency Total Year Number Assets Number Assets Federal Reserve Board FDIC Number Assets Number Assets 1960 75 1.2 51 0.96 6 0.10 18 0.13 1961 96 1.5 64 1.21 7 0.12 25 0.19 1962 178 1.7 95 0.89 54 0.65 29 0.19 1963 144 2.5 89 1.98 31 0.36 24 0.20 1964 129 1.9 93 1.37 17 0.44 19 0.12 1965 140 1.9 70 0.77 33 0.69 37 0.46 1966 123 2.0 70 0.69 28 1.09 25 0.22 1967 134 2.2 74 1.43 32 0.53 28 0.19 1968 139 2.0 63 1.01 32 0.51 44 0.52 1969 208 5.9 78 1.36 91 3.86 0.67 1970 247 6.7 78 2.55 140 3.74 39 29 1971 195 5.6 50 1.08 116 4.21 29 0.35 0.37 1972 280 9.0 54 1.33 187 7.12 39 0.54 1973 321 10.9 48 0.85 238 9.23 35 0.79 1974 262 9.1 49 0.97 178 7.43 35 0.72 1975 137 6.8 22 0.47 92 5.14 23 1.21 1976 135 5.3 37 1.09 80 3.98 18 0.28 1977 138 7.9 26 0.74 86 4.09 26 3.04 1978 144 5.5 26 0.76 95 4.41 23 0.35 1979 179 7.5 38 0.82 122 6.23 19 0.45 1980 188 9.3 35 1.55 111 6.08 42 1.70 1981 1982 359 422 19.5 37.1 68 87 3.66 6.74 252 274 13.81 27.77 39 61 2.07 2.63 1983 432 43.0 1984 553 82.7 1985 553 64.7 1986 625 89.1 1987 710 131.4 Note : These are ''meaningful'' mergers and aquisitions defined to eliminate corporate reorganizations and other technical changes. Sources: Stephen Rhoades, ''Mergers and Acquisitions by Commercial Banks, 1960-1983,'' Board of Governors of the Federal Reserve System Staff Paper No. 142 Ganuary 1985) and additional data provided by Dr. Rhoades. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 90 Table 8 National Bank Failures 1960 - 1990 (Assets in$ millions) Year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 Number of Banks 4530 4513 4505 4615 Failures Number Assets 0 2 0 4773 4815 0 1 2 4799 4758 4716 4669 4621 4600 2 1 1 3 1 1 4614 4661 4708 4744 0 3 1 2 6.0 3.7 57.1 3.2 4.1 13.4 12.8 Failures Number Assets 1976 1977 1978 4737 4655 4564 2 1 1 414.7 6.3 226.8 1979 1980 1981 4448 4425 3 1 60.2 11.5 4456 4580 4757 4910 4984 1 11 9 16 9.1 1301.5 1739.4 379.4 1255.5 21.4 1.3 1982 1983 1984 1985 1986 1987 1280.5 3655.7 155.1 Number of Banks Year 30 49 1988 1989 4863 4635 4406 4251 60 83 110 30113.6 22530.0 1990 3981 95 10362.0 3757.8 1845.9 Sources: Comptroller of the Currency, Annual Reports (1960-1980) and Quarterly journal (1981-1990); Federal Deposit Insurance Corporation, Annual Reporls (1960-1990). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 91 Table 9 OCC Employment 1960 - 1990 Year Employees 1960 1961 1,190 1,210 1962 1963 1,459 1,538 1,531 1,701 Examiners 877 894 1,001 1,100 1,100 1,131 1964 1965 1966 1967 1,650 1,722 1,207 1,217 1968 1969 1970 1,869 1,944 2,082 1,363 1,300 1,635 1971 1972 2,055 2,122 1,650 1,639 1973 1974 1975 2,290 2,473 2,692 2,038 2,152 2,281 Year 1976 1977 1978 Employees 2,787 2,903 Examiners 2,336 2,082 2,254 1983 1984 3,069 3,282 3,193 3,088 2,702 2,871 2,796 2,080 1,706 1985 1986 2,785 2,984 2,184 2,202 1987 1988 1989 1990 3,329 3,285 3,294 3,266 2,450 2,356 2,325 2,308 1979 1980 1981 1982 2,282 2,089 2,001 1,835 Notes : In almost every instance the figures are end-of-year. Only estimates of the number of examiners were available for 1963, 1964, and 1969. Sources: Comptroller of the Currency, Annual Reports (1960-1980) and Quarterly journal (1981-1990); David Motter, ''OCC History as Part of Treasury History Project" (1968); Office of the Federal Register, National Archives, U.S. Government Manual, Records Administration. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 92 Table 10 Budgets of the Office of the Comptroller of the Currency 1960-1990 ($ millions) Real Expenses Year Revenue Expenses Surplus (Deficit) 1960 11.2 11.5 -0.3 38.9 1961 11.6 12.1 -0.5 40.5 1962 15.0 13.9 1.1 46.1 1963 16.8 17.9 15.9 1.0 1.6 51.9 52.4 19.6 16.2 18.1 1.5 57.6 22.4 19.8 2.6 61.3 1967 23.8 21.5 2.3 64.4 1968 26.4 24.6 1.8 70.7 1969 32.6 28.8 3.9 78.4 1970 1971 36.8 40.6 34.2 38.0 2.7 2.6 88.1 93.7 1972 44.9 40.5 4.4 96.8 1964 1965 1966 1973 51.2 45.8 5.4 1974 56.8 55.5 1.3 103.2 112.6 1975 58.9 68.6 -9.7 127.5 1976 1977 82.8 87.9 80.4 83.9 2.5 4.0 141.2 138.4 1978 95.7 92.7 3.0 1979 104.4 101.3 3.1 142.2 139.6 1980 111.1 115.3 -4.2 139.9 1981 128.7 120.3 8.4 132.3 3.3 -7.5 133.3 153.9 3.1 157.0 168.7 159.8 1982 131.9 128.6 1983 145.8 1984 1985 1986 166.2 186.9 200.9 153.3 163.1 1987 1988 1989 209.4 215.1 254.0 1990 263.5 181.5 175.2 205.1 217.1 247.3 263.3 5.4 25.7 4.3 -2.0 6.8 180.5 183.5 199.4 0.2 201.5 Note: Real expenses are adjusted by using the consumer price index and setting 1982-1984 equal to 100. Sources:Comptroller of the Currency, Annual Reports (1960-1980) and Quarterly journal (1981-1990). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 93 Table 11 Measures of the OCC's Examination Capacity 1960-1990 Year Number of National Banks Real Assets ($ billions) National Banks per Examiner Real Assets per Examiner ($ millions) OCC Expenses per Million Dollars of Real Assets 1960 4,530 471 5.17 537 83 1961 4,513 504 5.05 564 80 1962 4,505 532 4.50 531 87 1963 4,615 556 4.20 506 93 1964 4,773 613 4.34 558 85 1965 4,815 696 4.26 615 83 1966 4,799 728 3.98 603 84 1967 4,758 789 3.91 648 82 1968 4,716 852 3.46 625 83 1969 4,669 845 3.59 650 93 1970 4,621 869 2.83 531 101 1971 4,600 920 2.79 557 102 1972 4,614 1,031 2.82 629 94 1972a 4,614 1,161 2.82 708 83 1973 4,661 1,272 2.29 624 81 1974 4,708 1,266 2.19 588 89 1975 4,744 1,205 2.08 528 106 1976 4,737 1,238 2.03 530 114 1977 4,655 1,315 2.24 632 105 1978 4,564 1,369 2.02 607 104 1979 4,448 1,372 1.95 601 102 2.12 1980 4,425 1,329 636 105 1981 1982 4,456 4,580 1,321 1,344 2.23 2.50 660 733 100 99 1983 4,757 1,399 2.29 672 110 1984 4,910 1,442 2.88 845 109 1985 4,984 1,518 2.28 695 111 1986 4,863 1,591 2.21 722 100 1987 4,635 1,559 1.89 636 116 1988 4,406 1,564 1.87 664 117 1989 4,251 1,594 1.83 686 125 1990 3,981 1,518 1.72 658 133 Notes: Before 1972, the figures are for domestic national bank assets. 1972 is presented both domestic only and, as 1972a, consolidated foreign and domestic. After 1972, figures are based on consolidated assets, including foreign operations. Real assets are total assets of national banks adjusted by using the consumer price index and setting 1982-1984 equal to 100. Sources: Comptroller of the Currency, Annual Reports (1960-1980) and Quarterly journal (1981-1990). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 94 Bibiliography Interviews Robert L. Clarke C. Todd Conover Gerry B. Hagar Daniel E. Harrington Barbara C. Healey John G. Heimann Paul M. Homan Dean S. Marriott David C. Motter James E. Smith Thomas W. Taylor Judith A. Walter U.S. Government Documents and Publications Comptroller of the Currency https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Annual Report (1960-1980). Cipher Code (n.d.). Community Development Finance (1989). Examining Circular No. 159 (Revised) (May 19, 1978). Goals and History of the Compensation Program (n.d.). Handbook of Examination Procedure (1969). Haskins & Sells Study :1974-1975 (1975). Hearing: Customer-Bank Communication Terminals (CBCT) (April 2 and 3, 1975). Major Issues Affecting the Financial Services Industry (1988 and 1989). Memorandum: Strategic Planning (October 23, 1985). National Banking Review (1963-1967). National Banks and the Future (Government Printing Office, 1962). News Release (March 1984). 1980 Report of Operations (1981). Quarterly Journal (1981-1991). Strategic Plan (October 1981). 95 Department of the Treasury News Guly 21, 1977). Federal Deposit Insurance Corporation Annual Report (1960-1989). Data Book: Operating_Banks and Branches (1982-1990). The First Fifty Years: A History of the FDIC, 1933-1983 (1984). The Texas Banking Crisis: Causes and Consequences Guly 1990). Federal Reserve Federal Reserve Bulletin. U.S. House of Representatives Committee on Banking and Currency Subcommittee on Consumer Affairs, Credit Discrimination 93rd Cong., 2nd Sess. Oune 20 and 21, 1974). Subcommittee on Bank Supervision and Insurance, Consolidation of Banking Examining and Supervisory Functions, 89th Cong., 1st Sess. (April 11, 12, 14, 28, 29, and 30; June 29 and 30, 1965). U.S. Senate Committee on Banking, Housing and Urban Affairs 1978 Budgets of Bank Regulatory Agencies, 95th Cong., 2nd Sess. (February 7 and 8, 1978). Budgets of the Federal Regulatory Agencies, 96th Cong., 2nd Sess. Ganuary 25, 1980). First Meeting on the Condition of the Banking System, 95th Cong., 1st Sess. (March 10 and 11, 1977). Modernization of the Glass-Steagall Act, 100th Cong., 1st Sess. Guly 30, 1987). Penn Square Bank Failure, 97th Cong. 2nd Sess. Guly 15, August 16, September 29 and 30, 1982). Problem Banks, 94th Cong., 2nd Sess. (February 5, 1976). Third Meeting on the Condition of the Banking System, 96th Cong., 1st Sess. (May 23, 1979). Truth in Lending, 90th Cong., 1st Sess. (April 13, 17, 18, 19, 20, and 21; May 10, 1967). Majority Staff Study on Chartering of National Banks: 1970-1977, 96th Cong., 2nd Sess. (October 1980). Committee on Government Operations Permanent Subcommittee on Investigations, Investigation in Federally Insured Banks, 89th Cong., 1st Sess. (1965). Committee on Governmental Affairs Matters Relating to T. Bertram Lance, 95th Cong., 1st Sess. Guly-September 1977) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 96 Other Government Publications Department of Commerce, Historical Statistics of the United States (Government Printing Office, 1976). Economic Report of the President (Government Printing Office, 1966, 1990). The Federal Register Oanuary 27, 1989). Periodicals The American Banker The Boston Globe The New York Times The New York Times Biographical Service The Wall Street journal The Washington Post Books and Journal Articles https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Aguilar, Linda, "Still Toe-to-Toe: Banks and Nonbanks at the End of the '80s," Federal Reserve Bank of Chicago: Economic Perspectives Oanuary/February 1990). Alhadeff, David A., and Charlotte P. Alhadeff, ''Growth and Survival Patterns of New Banks, 1948-1970," journal of Money, Credit and Banking (May 1976). Angell, Frank J., '' Some Effects of the Truth-in-Lending Legislation,'' journal of Business Oanuary 1971). Baxter, Nevins D., The Commercial Paper Market (Boston: Bankers Publishing Company, 1966). Benston, George J., "Bank Examination," The Bulletin, Nos. 89-90 (New York: New York University Graduate School of Business Administration: 1973). Benston, George, and John Tepper Marlin, ''Bank Examiners' Evaluation of Credit: An Analysis of the Usefulness of Substandard Loan Data,'' journal of Money, Credit and_Banking (February 1974). Benston, George J., "Mortgage Redlining Research: A Review and Critical Analysis," The Regulation of Financial Institutions (October 1979). Benston, George J., ''Interest Rate on Deposits and the Survival of Chartered Depository Institutions," Federal Reserve Bank of Atlanta Economic Review (October 1984). Benston, George J., Perspectives on Safe & Sound Banking: Past, Present and Future (Cambridge: MIT Press, 1986). Benston, George J., The Separation of Commercial and Investment Banking (London: Macmillan, 1990). Bowsher, Norman N., "The Three-Year Experience with the Community Reinvestment Act," Federal Reserve Bank of St. Louis Review (February 1982). Brewer, Elijah et. al., ''The Depository Institutions Deregulation and Monetary Control Act of 1980," Federal Reserve Bank of Chicago: Economic Perspectives (September/October 1980). 97 Buenger, Walter L., and Joseph A. Pratt, But Also Good Business: Texas Commerce Banks and the Financing of Houston and Texas, 1886-1986 (College Station, Texas: Texas A&M Press, 1986). Campagna, Anthony S., U.S. National Economic Policy, 1917-1985 (New York: Praeger, 1987). Carey, Roberta G., "Evaluation Under the Bank Merger Act of 1960 of the Competitive Factors Involved in Bank Mergers: The Regulatory Agencies Compared,'' Journal of Monetary Economics 1 (1975). Chandler, Alfred D., The Visible Hand: The Managerial Revolution in American Business (Cambridge: Harvard University Press, 1977). Chandler, Alfred D., Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge: Harvard University Press, 1990). Compton, Eric N., The New World of Commercial Banking (Lexington, Mass.: D. C. Heath and Co., 1987). Cooper, Kerry, and Donald R. Fraser, Banking Deregulation and the New Competition in Financial Services (Cambridge, Mass.: Ballinger, 1986). Current Biography (Bronx, N.Y.: H.W. Wilson, 1963). Di Clemente, John]., "Including Thrifts in Bank Merger Analysis," Federal Reserve Bank of Chicago: Economic Perspectives Guly/August 1983). Di Clemente, John]., and Diana Alamprese Fortier, "Bank Mergers Today: New Guidelines, Changing Markets,'' Federal Reserve Bank of Chicago: Economic Perspectives (May/June 1984). Dwyer, Gerald P., Jr., ''The Effects of the Banking Acts of 1933 and 1935 on Capital Investment in Commercial Banking,'' journal of Money, Credit and Banking (May 1981). Edwards, Linda N., and Franklin R. Edwards, "Measuring the Effectiveness of Regulation: The Case of Bank Entry Regulation,'' journal of Law and Economics (October 1974). Eisenbeis, Robert, "Differences in Federal Regulatory Agencies Bank Merger Policies," journal of Money, Credit and Banking (February 1975). Felgran, Steven D., "Shared ATM Networks: Market Structure and Public Policy," New England Economic Review Ganuary/February 1984). Fisher, Gerald C., American Banking Structure (New York: Columbia University Press, 1968). Friedman, Milton, and Anna]. Schwartz, A Monetary History of the United States,_1867-1960 (Princeton: Princeton University Press, 1963). Gail, Daniel B. and Joseph J. Norton, "The Financial Institutions Reform, Recovery and Enforcement Act of 1989: Dealing With the Regulators,'' The Banking Law journal (May/June 1990). Garcia, Gillian, et. al., "The Garn-St Germain Depository Institutions Act of 1982," Federal Reserve Bank of Chicago: Economic Perspectives (March/April 1983). Garcia, Gillian, and Elizabeth Plautz, The Federal Reserve, Lender of Last Resort (Cambridge, Mass. : Ballinger, 1988). Gilbert, R. Alton, Courtenay C. Stone, and Michael E. Trebing, "The New Bank Capital Adequacy Standards," Federal Reserve Bank of St. Louis Review (May 1985). Gilbert, R. Alton, "Requiem for Regulation Q: What It Did and Why It Passed Away," Federal Reserve Bank of St. Louis Review (February 1986). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 98 Golembe, Carter H., and David S. Holland, Federal Regulation of Banking (Washington, D.C.: Golembe Associates, Inc., 1981). Golembe, Carter H., and David S. Holland, Federal Regulation of Banking, 1986-87 (Washington, D.C.: Golembe Associates, Inc., 1987). Graham, David R., and David Burras Humphrey, "Bank Examination Data as Predictors of Bank New Loan Losses," journal of Money, Credit and Banking (November 1978). Gup, Benton E., Bank Fraud: Exposing the Hidden Threat to Financial Institutions (Rolling Meadows, Ill.: Bankers Publishing Company, 1990). Hamilton, James D., "Monetary Factors in the Great Depression," journal of Monetary Economics (1987). Hector, Gary, Breaking the Bank: The Decline of Bank America (Boston: Little, Brown, 1988). Hein, Peter D., "Consumerism and Banking," in Joel R. Evans, ed., Consumerism in the United States: An Inter-Industry Analysis (New York: Praeger, 1980). "Here Comes Continental Illinois," Dun's Review (December 1978). Hill, George W., Why 67 Insured Banks Failed 1960 to 1974 (Washington, D.C.: Federal Deposit Insurance Corporation, 1976). Horvitz, Paul M., "A Reconsideration of the Role of Bank Examination," Journal of Money, Credit and Banking (November 1980). Junker, George R., "A New Supervisory System for Rating Banks," Federal Reserve Bank of New York Quarterly Review (Summer 1978). Kripke, Homer, "Gesture and Reality in Consumer Credit Reform," in David A. Aaker and George S. Day, eds., Consumerism: Search for the Consumer Interest (New York: The Free Press, 1971). Klebaner, Benjamin J., American Commercial Banking: A History (Boston: Twayne Publishers, 1990). Ladenson, Mark E., and Kenneth]. Bombara, "Entry in Commercial Banking: 1962-1978," journal of Money, Credit and Banking (May 1984). Mandell, Lewis, The Credit Card Industry: A History (Boston: Twayne Publishers, 1990). McCall, Alan S., and Manfred O. Peterson, ''The Impact of De Novo Commercial Bank Entry,'' journal of Finance (December 1977). McCollom, James P., The Continental Affair (New York: Dodd, Mead & Co., 1987). Meltzer, Allan H., "The Federal Reserve at Seventy-Five," in Michael Belongia, ed., Monetary Policy on the 75th Anniversary of the Federal Reserve System (Boston: Kluwer Academic Publishers, 1991). Mishkin, Frederic S., The Economics of Money, Banking and Financial Markets (Glenview, Ill.: Scott, Foresman and Company, 1989). Motter, David C., ''Interagency Coordination Among the Federal Regulators of U.S. Depository Institutions," (Washington, D.C.: Comptroller of the Currency, 1987). Typescript. Motter, David C., "OCC History as Part of Treasury History Project," (Washington, D.C.: Comptroller of the Currency, 1968). Typescript. Peltzman, Sam, ''Entry in Commercial Banking,'' journal of Law and Economics (October 1965). Pierce, James L., ''The FINE Study,'' journal of Monetary Economics (November 1979). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 99 Rhoades, Stephen A., "Mergers and Acquisitions by Commercial Banks, 1960-1983," Board of Governors of the Federal Reserve System Staff Paper No. 142. Ganuary 1985). Robertson, Ross M., The Comptroller and Bank Supervision: A Historical Appraisal, (Washington D. C.: Office of the Comptroller of the Currency, 1968). Rose, John T., "Bank Holding Companies as Operational Single Entities," in Board of Governors of the Federal Reserve System, The Bank Holding Company Movement to 1978: A Compendium (1978). Rose, Peter S., The Interstate Banking Revolution (New York: Quorum Books, 1989). Rosenblum, Harvey, Diane Siegel and Christine Pavel, "Banks and Nonbanks: A Run for the Money," Federal Reserve Bank of Chicago: Economic Perspectives (May/June 1983). Sachs, Jeffrey, and Harry Huizinga, "U.S. Commercial Banks and the Developing-Country Debt Crisis," Brookings Papers in Economic Activity 2 (1987). Savage, Donald T., " A History of the Bank Holding Company Movement, 1900-78," in Board of Governors of the Federal Reserve System, The Bank Holding Company Movement to 1978: A Compendium (1978). Schwartz, AnnaJ., "International Debts: What's Fact and What's Fiction," Economic Inquiry Ganuary 1989). Singer, Mark, Funny Money (New York: Knopf, 1985). Sinkey, Joseph F., Jr., Problem and Failed Institutions in the Commercial Banking Industry (Greenwich: JAi Press, 1979). Smith, James F., "The Equal Credit Opportunity Act of 1974: A Cost/Benefit Analysis," journal of Finance (May 1977). Smith, W. Stephen, ''The History of Potential Competition in Banking Mergers and Acquisitions,'' Federal Reserve Bank of Chicago: Economic Perspectives Guly/August 1980). Spero, Joan Edelman, The Failure of the Franklin National Bank (New York: Columbia University Press, 1980). Sprague, Irving H., Bailout, An Insider's Account of Bank Failures and Rescues (New York: Basic Books, 1986). Stein, Herbert, The Fiscal Revolution in America (Chicago: University of Chicago Press, 1969). Stein, Herbert, Presidential Economics (Washington, D.C.: American Enterprise Institute, 1984). Tussing, A. Dale, "The Case for Bank Failures," journal of Law and Economics (October 1967). van Cleveland, Harold B., and Thomas F. Huertas , Citibank, 1812-1970 (Cambridge : Harvard University Press, 1985). White, Eugene Nelson, The Regulation and Reform of the American Banking System, 1900-1929 (Princeton: Princeton University Press, 1983). White, Eugene Nelson, "Before the Glass-Steagall Act: An Analysis of the Investment Banking Activities of National Banks,'' Explorations in Economic History (1986). Wilson, John D., The Chase Manhattan Bank, N.A., 1945-1985 (Boston: Harvard Business School Press, 1986). Wu, Hsiu-Kwang, "Bank Examiner Criticism, Bank Loan Defaults, and Bank Loan Quality," journal of Finance (September 1969). Zweig, Philip L., Belly Up: The Collapse of the Penn Square Bank (New York: Fawcett, 1985). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 100 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Index ADAPSO v. Camp, 13 Allied Bancshares, 62 American Bankers Association, 4 Anderson, Roger, 59 Anomaly Severity Ranking report (ASR), 39 automatic teller machines (ATMs), 4 7 Banc One Corporation, 61 BancTEXAS Group, Inc., 61 bank holding companies, 13, 44, 45, 53, 54, 55 Bank Holding Company Act of 1956, 13 1966 amendments, 14 1970 amendments, 14, 55 Douglas Amendment, 55 Banking Act of 1933 (Glass-Steagall Act), 8, 13, 50, 52-53 Banking Act of1935, 2, 8 Bank Merger Act of 1960, 11-12 Bank Merger Act of 1966, 12 Bank Performance Report (BPR), 39 Bank of America, 20, 59, 74n banks branching, 2-3, 10, 28, 47, 54, 68 capital, 63-64 computers, 20 failures, 6, 22, 27-30, 35, 57-62 foreign lending, 37, 55-56 foreign offices, 9 funding squeeze, 7-10 holding companies, 12-15 mergers, 10-12, 54-55, 57, 63, 68 multinationals, 35-37 Basle Committee on Banking Supervision, 63 Bloom, Robert, 31, 35 Board of Governors v. Dimension Financial Corporation, 55 Board of Governors v. Investment Comp(J,ny Institute, 15 Boston Globe, 27 Bretton Woods, 23 Bunting, John, 57 Bums, Arthur, 31, 32, 44 call reports, 18-19 CAMEL rating system, 39, 58, 61 Camp, William B., iii, 4, 14, 15, 16, 18, photo 19, 21, 23, 27, 67, 68 101 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Carter, Jimmy, 35, 41, 49 Celler, Emmanuel, 11 certificate of deposit, 9, 57 Chase Manhattan Bank, N .A., 25, 30 Chemical Bank Corporation, 61 Citibank, N.A. (Citicorp), 9, 14, 30, 47, 49, 56, 59 Clarke, Robert L., iv, 49, photo 51, 52, 53, 62, 68 Clayton Act (1914), 12 commercial paper, 10 Common Cause, 41 Community Reinvestment Act (CRA) of 1977, 42 Competitive Equality Banking Act of 1987, 55 computers, 47-48, 54 Conover, C. Todd, iv, 49, photo 50, 50-51, 52, 53, 55, 60, 68 Consolidated Country Exposure Report, 37 Consumer Advisory Council, 21 Consumer Credit Protection Act, 21 Consumer Federation of America, 41 Consumer Leasing Act of 1976, 41 Continental Illinois National Bank and Trust Company, 59-61, 68 Corporate Activities Review and Evaluation (CARE) project, 52 country risk, 36 credit cards, 20 Crocker National Bank, 26 customer-bank communication terminals (CBCTs), 4 7-48 Deposit Insurance Bridge Bank, N .A., 61 Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), 51-52, 53 deposhs, brokered, 10 Depression, Great, 1-3, 6, 11, 25-26, 59 deregulation, 49, 50-52 Dillon, Douglas, 18 Douglas, Paul H., 21 Dun's Review, 59 electronic data processing (EDP), 20, 41, 53 Electronic Funds Transfer Act, 41 Equal Credit Opportunity Act, 41 Eurodollars, 9, 28 European-American Bank and Trust Company, 28 exchange rates, 23-24 Fair Credit Reporting Act, 21 Fair Housing Act, 41 Fasco International Holding S.A., 28 Federal Deposit Insurance Act of 1950, 3 Federal Deposit Insurance Corporation (FDIC), 6, 10 bank failures, 26, 27, 28-30, 32, 57, 60-61 call reports, 18-19 102 Community Reinvestment Act, 42 DIDMCA, 51-52 examination, 44 foreign lending, 37, 56 mergers, 11-12 rating banks, 39-40 rescue of banks, 57-58, 67-68 Federal Financial Institutions Examination Council (FFIEC), 44, 64 Federal Home Loan Bank Board, 18, 44 Federal Reserve System, 8, 10 bank failures, 27, 28-29, 32, 60-61 bank holding companies, 13-16, 45 call reports, 18-19 capital adequacy, 19, 56 Community Reinvestment Act, 41 consumer protection, 21 deregulation, 52, 53 examination of banks, 16, 44 foreign lending, 37 mergers, 12, 45, 55 monetary policy, 23-24, 49 nonbank banks, 54 protection of banking, 67-68 rating banks, 39 Federal Savings and Loan Insurance Corporation (FSLIC), 52 Federal Trade Commission Improvement Act, 41 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), 55, 62, 63 Financial Institutions Regulatory and Interest Rate Control Act of 1978, 40, 44 Financial Institutions Supervisory Act, 19 First City Bancorporation of Texas, 61 First Interstate Bancorp, 61 First Pennsylvania Bank, 57-58 fiscal policy, 23-24 Ford, Gerald, 24, 31, 35, 41 Franklin National Bank, 28-29, 30, 32, 57, 60, 67 Friedman, Milton, 16 Galbraith, John Kenneth, 16 Garn-St Germain Act, 52, 53, 55 General Accounting Office, 32, 39 Gidney, Ray M., 1, 2 Glass-Steagall Act, 8, 13, 50, 52-53 Golembe, Carter H., 2 7 Guttentag, Jack, 27 Haskins & Sells report, iv, 27, 32-34, 35, 37-39, 44, 63, 67 Heimann, John G., iv, 35, photo 36, 36, 37, 38, 41, 44, 50, 52, 54, 57, 68 Home Mortgage Disclosure Act, 43 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 103 Independent Bankers Association v. Smith, 4 7 Independent Bankers Association v. Heimann, 53 Independent Bankers Association of America, 4 7, 55 Independent Bankers Association of Texas, 4 7 inflation, 8, 23-24, 49, 51 Interagency Coordinating Committee, 18, 44 Interagency Country Exposure Review Committee (ICERC), 37 Interfirst Corporation, 61 interest rates, 23-24, 28, 49, 54, 57 International Lending Supervision Act of 1983, 56 Investment Company Institute v. Camp, 15 Jennings, Bill "Beep," 57, 58 Johnson, Lyndon B., 16, 18, 21 Kennedy, John F., 7, 8, 21 LaMaistre, George A., 44 Lance, Bert, 35 L'Enfant Plaza, 31, photo 32 less developed countries, 36, 55-56, 63 Lewis v. BT Investment Managers, 15 Lytle, John, 59 McFadden Act of 1927, 2, 47 MCorp, 61 Mellon Bank, 57 Meltzer, Allan, 16 Mexico, 55-56 money market deposit accounts, 52 money market mutual funds, 51 Mundell, Robert, 16 Mundt, Karl, 23 Nader, Ralph, 41 National Bancshares Corporation of Texas, 61 National Bank Act, 3, 4 7 National Banking Review, 16 national banks accounting, 18-19 additional powers, 12-15, 52-53 affiliates, 26-27 assessments, 33, 38 branching, 2-3, 11, 47-48, 68 capital, 4, 19, 29-31, 64 chartering, 2-3, 11, 45, 53-54 Community Reinvestment Act, 41 failures, 6, 22, 27-30, 49, 57-62 mergers, 3, 10-11, 54-55, 63 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 104 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis reporting, 39 trust powers, 13 National Banks and the Future, 7, 9 National Bank Surveillance System, 32, 33 National Commission on Consumer Finance, 41 National Credit Union Administration, 44 New Deal, iii, 1-4, 12-13, 50, 53 Nixon, Richard M., 23, 25, 41 nonbanks, 10, 13-15, 54-55 Northeast Bancorp v. Board of Governors of the Federal Reserve System, 55 NOW accounts, 51 Office of the Comptroller of the Currency budget, 25, 62 branching, 2, 10-11, 47-48, 53-54 capital adequacy, 19, 29-30, 56, 63-64 chartering policy, 2-3, 11, 33-34, 44-45, 54 compensation, 44, 61-62 computer surveillance, 32, 33, 38-39 Community Development Division, 41 Consumer Affairs Division, 40 consumer protection, 21-22, 40-43 enforcement, 19, 30, 40, 64 electronic data processing (EDP), 20, 33 examination and supervision, 3-5, 18-20, 26-27, 29-31, 37-38, 57-60, 62-64 consumer examinations, 40, 43 GAO study, 32 Haskins & Sells report, 32, 37-38 photos, 5, 60 foreign lending, 55-56 Handbook for National Bank Examiners, 38 Haskins & Sells, 32-34, 64 human resources, 4, 18, 43-44, 61-62 interagency cooperation, 18, 44 investigation of Bert Lance, 35 less developed countries (LDCs), 37, 55-56, 63 London office, 16, 36, 62 means and purpose test, 37 merger policy, 10-12, 13-15, 45 Multinational Banking Department, 35-37, 62-63 National Bank Surveillance System (NBSS), 38-39 organization, 15-17, 27, 34, 35, 61-62 organizational charts, 17, 46, 65 Policy Group, 34, 35 problem banks, 25-26, 29-32, 39-40, 55-56, 62 rating banks, 39-40 reporting, 18, 27, 32-33, 39, 48 Office of Management and Budget, 35 oil, 36, 57-62 105 One Independence Square, 64 Organization of Petroleum Exporting Countries (OPEC), 36 Patman, Wright, 31 Penn Square Bank, N.A., 57-60, 68 problem banks, 25-26, 29-32, 39, 56, 62 Proxmire, William, 21, 30-31, 53 Reagan, Ronald, 49, 54, 68 real estate investment trust (REIT), 25, 60 Real Estate Settlement Procedures Act, 41 redlining, 41 Regulation Q, 8-10, 14, 25, 50-51, 54, 68 RepublicBank Corporation, 61 Reserve City Bankers, 37 Reuss, Henry, 30 Robertson, Ross M., iii, 67 Roth, Arthur, 28 Samuelson, Paul, 16 Sapienza, Samuel, 27 savings and loan associations, 51, 54, 55 Saxon, James J., iii, 6, photo 8, 10-13, 15-16, 18-19, 23, 27, 45, 67-68 Seafirst Corporation, 58-59 Seattle First National Bank, 58-59 Shared National Credit Program, 27, 62 Sherman Act of 1890, 12 Shirk, Stanley E., 35 Sidona, Michele, 28-29 Smith, C. Arnholt, 26 Smith, James E., iv, 15, 23, photo 24, 26-32, 35, 38, 44, 47, 67-68 stagflation, 25 Strategic Plan, 52 Supervisory Monitoring System, 63 Talcott National Bank, 28 Texas American Bancshares, Inc.; 61 Texas Commerce Bancshares, 61 '' too big to fail,'' 60 truth-in-lending, 21-22 Uniform Commissioning Examination (UCE), 43 Uniform Interagency Bank Rating System (UIBRS), 39, 44 U.S. Congress bank disclosure, 20 bank examinations, 31-32, 38 bank failures, 6 bank holding companies, 14-15 bank powers, 13 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 106 bank reform, 50-52, 67-68 branching, 55 chartering of national banks, 11, 54 consumer protection, 40-41 customer-bank communication terminals, 4 7-48 discrimination, 42 enforcement, 64 Glass-Steagall Act, 53 international banking, 55-56 mergers, 3, 10-12 nomination of Shirk, 35 Penn Square Bank, N .A., 58-59 problem banks, 29-32 Regulation Q, 8 supervision of banks, 49 U.S. Department of]ustice, 11-12, 14, 21, 41, 45, 54 U.S. Department of the Treasury, 18, 44 United States National Bank, 25-27, 29, 30, 60, 67 U.S. Trust Corporation, 55 U.S. v. Connecticut National Bank, 45 U.S. v. Philadelphia National Bank, 12 Victor program, 30, 39 Volcker, Paul A., 44 Wall Street journal, 31, 49 Washington Post, 30 Watson, Justin T., 18, 21 Wille, Frank, 44 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 107 Eugene N. White is Professor of Economics at Rutgers University and a Research Associate of the National Bureau of Economic Research. An authority on the financial and monetary history of the United States and Western Europe, he has published numerous articles in scholarly journals. He is also the author of The Regulation and Reform of the American Banking System, 1900-1929 (Princeton, 1983) and editor of Crashes and Panics: The Lessons of History (Dow Jones-Irwin, 1990). Dr. White has lectured frequently on banking issues at conferences and seminars in the United States and abroad. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 108