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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


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Federal Reserve Bank of St. Louis


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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.


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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


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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


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85

11

Introduction


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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.


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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


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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


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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


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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.


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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.


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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.


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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


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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


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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


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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


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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,


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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


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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


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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


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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


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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


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Federal Reserve Bank of St. Louis

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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


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Federal Reserve Bank of St. Louis

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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.


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Federal Reserve Bank of St. Louis

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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


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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


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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.


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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


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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.


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Federal Reserve Bank of St. Louis

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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


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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


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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


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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


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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


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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


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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


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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


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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


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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.


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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


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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.


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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


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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


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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


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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


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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


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Federal Reserve Bank of St. Louis

45

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https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

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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.


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Federal Reserve Bank of St. Louis

48

Five
The Challenge of the 1980s


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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


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C. Todd Conover, Comptroller
of the Currency, 1981-1985. Conover
promoted the deregulation of national
banking.

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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


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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


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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

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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


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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

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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
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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


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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

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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.

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Banks in Distress


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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

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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

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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


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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.


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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


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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.


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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,


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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.


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Federal Reserve Bank of St. Louis

64

OFFICE OF THE COMPTROLLER OF THE CURRENCY

COMPTROLLER
Of THE
CURRENCY
SENIOR DEPUTY
COMPTROUER FOR
LEOISlATIVE &
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RELATIONS

DIRECTOR
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LIAISON

SENIOR DEPUTY
COMPTROLLER FOR
CORPORATE I
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SENIOR DEPUTY
COMPTROLLER FOR
BANK SUPERVISION
OPERATIONS

SENIOR DEPUTY
COMPTROLLER FOR
BANK SUPERVISION

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SENIOR DEPUTY
COMPTROUER FOR
ADMINISTRATION

CHIEF
COUNSEL

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Federal Reserve Bank of St. Louis

DEPUTY
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COMPLIAHCl

DEPUTY
COMP'TROUEA
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DEPUTY
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(POI.ICY)

December 1990


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Federal Reserve Bank of St. Louis

Epilogue


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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.


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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.


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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.


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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.


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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.


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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.


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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.


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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.


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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


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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.


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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).


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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.


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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.


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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.


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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


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Texas


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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).


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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).


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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.


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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).


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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).


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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).


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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)


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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).


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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
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McCall, Alan S., and Manfred O. Peterson, ''The Impact of De Novo Commercial Bank Entry,''
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Rhoades, Stephen A., "Mergers and Acquisitions by Commercial Banks, 1960-1983," Board of
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of the Federal Reserve System, The Bank Holding Company Movement to 1978: A
Compendium (1978).
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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).
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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

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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

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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


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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


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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

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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


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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


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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.


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