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Confidential
U

CONSOLIDATION OF FEDERAL SUPERVISION OF COffiERCIiiL BANKS

December 19, 1236•

CONTENTS

Summary
Need for Consolidation of Federal Supervision
Similarity of Responsibilities and Functions of
Existing Federal Agencies
Resulting Differences in Views and Actions
Resulting Confusion and Cost to Banks
Advantages of Consolidation Under the Board of Governo
Authority Commensurate with Responsibility
Quantity and Quality of Credit
Narrower Responsibilities of Other Agencies
The Federal Reserve System Has the Largest
Interest in the F.IVuC.
Facilities of the Federal Reserve System
Increasing Quality and Reducing Cost of Examinations
Method of Accomplishing Consolidation
Objections to Consolidation







CONSOLIDATION OF FEDERAL SUPERVISION OF COMMERCIAL BANKS
Summary

Appropriate steps should be taken to effect a consolidation of the supervisory functions of existing
Federal agencies with respect to commercial banks•
All of these functions should be vested by statute
in the Board of Governors, to be administered through
its staff and the Federal reserve banks in such manner and
in accordance with such policies as it shall determine.

- 2Need for Consolidation of Federal Supervision
The consolidation of all existing Federal supervisory functions is an
essential part of a program of strengthening the country1s banking system®
The principal reasons why all of the supervisory functions now exercised
by Federal agencies should be consolidated in one body are indicated in the
following paragraphs.
Similarity of Responsibilities and Functions of Existing Federal
Agencies* - Many powers, responsibilities and functions of the Board of
Governors, the F.D.I.C., and the Comptroller of the Currency are similar.
The Comptroller still has all or most of his original and primary supervisory powers, relating principally to national banks. The F.D.I.C. has
been given certain supervisory functions in connection with insured State
nonmember bonks as well as certain functions relating to national and State
member banks. The Federal Reserve System is charged with many important
responsibilities in connection with the regulation of both national and
State bank members and their affiliates. The concurrence of the Secretary
of the Treasury is required in connection with some of the supervisory
actions of the Comptroller. Regulations still in effect under the Emergency
Banking Act require each member bank to obtain a license from the Secretary,
whether it is entirely a new bank or is the result of a reorganization
deemed by other supervisory authorities to be necessary. By virtue of agreements with more than 5,500 insured banks in connection with capital investments, the R.F.C. has power to examine and, in many cases, to change the
management or policies and force or block or delay reorganizations of these
banks•




The Board of Governors, the F.D.I.C., and the Comptroller of the
Currency have largo staffs in Washington with many similar divisions. Many
members of the Washington staff of the I>.P.C., especially in its examining
and legal divisions, devote much of their time to bank matters. Most of the
bank supervisory functions exercised by the R.F.C., such as those relating
to reorganizations, management, etc., are handled by the CorporationT s staff
in Washington, Practically all of the supervisory matters relating to
national banks are handled in the Washington office of the Comptroller of the
Currency, where reports of examination are analyzed and reviewed and letters
of criticism relating to various matters covered therein, including minute
details, as well as other letters relating to details in call reports, etc.,
are written direct to the banks concerned, with requests that copios of
replies thereto be forwarded to the respective district chief national bank
examiners. A somewhat similar situation prevails in the case of the F.D.I.C.
This

centralization of supervision has resulted in a large quantity of

detailed work being performed in Washington by various divisions of each
staff concerned, much of which is similar to and overlaps the work of corresponding divisions of the staffs of other agencies.
An examinations department is maintained at each of the twelve Federal
reserve banks. In addition to the officers assigned to the examining and
supervising function, the examinations department at each reserve bank has
a staff of examiners, assistant examiners, and clerks. They conduct such
examinations of State member banks, affiliates, and holding company affiliates
as are deemed necessary, and handle applications for membership, trust powers,
voting permits, etc. Mot only are State ^enl.wr and national banks involved
in such matters but often nonmember banks as well. The Comptroller of the




Currency maintains twelve district off iocs , most of which are located in the
buildings of the Federal reserve banks of the districts• Each such office
is under the direction of a district chief national bank examiner who has a
force of examiners, assistant examiners, and clerks sufficient to examine
the national banks of the district and such affiliates and holding company
affiliates as it is deemed necessary to examine. The F.D.I.C. likewise
maintains offices in twelve districts, which are not coterminous with the
Federal reserve districts®

Each such office is under the direction of a

district supervising examiner who has the necessary force of examiners,
assistant examiners, mid clerks to handle the examination of the insured nonmember banks of the district. The E«F*C. maintains local or field agencies.
Each such agency is under the direction of a local manager who has an examining and clerical staff sufficient to handle administrative details in connection with the Corporation's loans and investments in the banks of the zone,
together with whatever examination work is deemed necessary.
The various offices of these agencies, both in Washington and. in the
districts, have overlapping and conflicting functions, powers, and responsibilities with respect to important policy matters as well as administrative
details. All of these things are evident not only to the personnel of the
agencies involved but to banks and outsiders as well.
Resulting Differences in Views and Actions. - Many cases and problems
involving State member banks coming before the Board of Governors are
comparable to those reviewed by the Comptroller and the F.D.I.0. with respect
to national and nonmember banks. The views and. opinions of these authorities have often differed on policy matters as well as administrative
details. Such differences are evidenced in the drafting of regulations,




rulings, opinions, interpretations, and recommended legislation. Conflicting
situations have arisen with respect to the form and content of call and
examination reports; the method and extent of classification and elimination
of depreciation in securities, losses, etc*| mergers and reorganisations;
conditions precedent to the issuance of voting permits, capital reductions,
and establishment of branches; the definition of interest; the type of
statistical information to be gathered and published; etc.
Changes in established policies, interpretations, reports, procedure,
etc*, arc desirable and necessary from time to time to meet changing circumstances. Under existing arrangements, when the Board or any other Federal
agency desires to make any such changes it is necessary, or at least desirable,
to confer with representatives of the other agencies in order to avoid any
conflicts end to acquaint them with the contemplated changes. Often in the
past this has necessitated extended conferences, or even series of conferences, resulting in long delays, to the great expense and embarrassment of
every one concerned, including the banks.
Difficulties arising in connection with some of the matters are illustrated by the following simple cases
A State member bank, owned by a holding company affiliate, has under
consideration the absorption of two nonmember affiliate banks, one of which
is not insured

and one of which is insured, has capital debentures out-

standing, and exorcises trust powers• At the same time the State member
bank is considering converting into a national bank with trust powers. In
such a case, the condition of the existing banks as reflected by special
reports of examination by national examiners, the details of the proposed
plan, the proposed condition and management of the new bank and of the holding
company affiliate, and various other matters, would have to be analyzed and




discussed in varying degrees and agreed upon by and between the following
supervisory agencies and the officers2
State bank commissioner
Comptroller of the Currency (both the district
and Washington offices)
Reconstruction Finance Corporation (both the
district and Washington offices)
F.D.I.C. (both the district r i Washington
ad
offices)
Federal Reserve System (both the Federal reserve
bank and the Board)
Secretary of the Treasury (regarding issuance of
license)
Resulting Confusion and Cost to Banks« ~ It is not to be wondered that
banks are frequently confused by the multiplicity of laws or requirements
and that they do not know whose suggestions or instructions to follow or to
whom to turn for information or guidance on such matters as mergers, loan
limits, margin requirements, interest rates, reports, affiliate matters, etc.
Confusion may result from one or more of the following;




1* Provisions of law applicable to national banks are
contained not only in the National Bank Act but also in the
Federal Reserve Act and various other Federal statutes; provisions applicable to State bank members are contained not only
in the Federal Reserve Act but also in the National Bank Act and
other- Federal statutes.
2. Multiple Federal examining authorities:

Comptroller of

the Currency for national banks5 Board of Governors for State
member banks; F.D.I.C. for nonmenber insured banks; and R.F.C.
for banks with which capital investment end loan contracts have
been made. The principal examining work done by the R.F.C. was
in connection with rehabilitation during 19:63 and 1954. Joint
examinations as between these various agencies and In connection

with holding company affiliates are complicating factors,
3. Multiple Federal authorities issuing regulations and
rulings; The Comptroller promulgates some regulations which affect
State member as well as national banks, for example, with respect
to investment securities. The Board issues regulations involving
national and State member banks, for example, with respect to
trust powers, interest payments, and reserve requirements, and involving all classes of banks with respect to loans for the purpose
of purchasing or carrying listed securities*

The F.D.I.C. isesues

other regulations, for example, with respect to interest on deposits
payable by insured nonmember banks and with respect to the computation of deposits for assessment purposes by both member and insured
nonmember banks,
4. The necessity of clearing some matters through two or more
of the Federal agencies.
5. The necessity of submitting reports to two or more agencies.
The type of confusion resulting from existing arrangements may be illustrated by the fact that the real estate loan limitations applicable to
national banks are to be found primarily in the Federal Reserve Act and also
in the National Housing Actj investments in securities by State bank members are governed by the National Bank Act and the regulations of the
Comptroller of the Currency; the establishment of branches by State bank
members is governed by provisions contained in the National Bank Act, as
interpreted by the Comptroller of the Currency; incident to granting voting
permits to holding company affiliates the Board has sometimes imposed conditions requiring national banks to do some things which the Comptroller did
not require; the F.D.I.C.Ts definition of deposits for assessment purposes




differs from the Beard's definition for reserve purposes; although nonmember
insured banks should be on a basis of equality with member banks, the
F.D.I.C.* a regulation governing interest on deposits differs materially
from the Board's regulation on the same subject; national as well as State
bank members are called upon for special reports by the Board of Governors,
while the F.D.I.C. sometimes calls for special reports from all insured
banks—national, State bank member and nonmember.
Advantages of Consolidation Under the Board of Governors
There are various factors which recommend the Federal Reserve System
as the most logical instruiaentality in which to consolidate Federal supervision of banks. The more important factors are;




1. Such consolidation would give the System authority
commensurate with its responsibilities, with respect to the
quantity and quality of credit and various other matters relating to the regulation of banks, which are much broader than
the responsibilities of any of the other Federal supervisory
agencies.
2. The Federal Reserve System has a considerable financial interest in the F.D.I.C., inasmuch as it furnished much of
the capita], of the F.D.I.C., and its member banks pay by far
the greater part of the assessments.
5. The 12 reserve banks and the 25 branches, located in
the centers of well-defined economic areas, with the coordi
nating Board in Washington, constitute a seasoned, non-political
organization which is now, and for 22 years has been, in close
touch with banks and banking problems—both State and national,
is well designed to undertake, the responsibility, and is in a

- 9position through decentralization to expeditiously handle the
problems entailecu

The relations and cooperation between the

Board, the reserve banks and the banks and bankers1 associations,
which are already close, are susceptible of further development
in the interest of both the banks and the general public.
4. If the System were given the responsibility it could,
not only improve the quality but at the same time reduce the
cost of examinations and supervision.
Authority Commensurate with Responsibility. - The average man on the
street is disposed to hold the Federal Reserve System responsible for the
soundness of policies and practices of all banks. This feeling exists
despite the fact that the primary authority with respect to the chartering
and supervision of national banks has been and continues to be the Comptroller
of the Currency, and that the 48 State banking departments occupy a like
position with respect to State banks. The urgent need for the consolidation
of at least all Federal bank supervision, if not all bank supervision, is
widely recognized. In the mind of the general public the Board of Governors
is charged with at least a moral responsibility for exerting leadership to
simplify the intricacies and to lessen the weaknesses of the present banking
structure.
Congress has charged the Board of Governors with important responsibility with respect to the control and regulation of monetary and credit
matters in the United States. Its broad powers in this connection are
exercised principally through discount rates, operations in the open market,
and alterations in reserve and margin requirements. In addition it should
also have sufficient direct authority to formulate and enforce sound banking
policies necessary in connection with sound monetary and credit policies.




- 10
Quantity and Quality of Credit. ~ It is generally recognized that
responsibility for credit policies cannot be separated iron the examination
and supervision function. A leading economist has analyzed this problem
as follows;
". . . The examiners, through the qualitative credit
standards which they impose on banks, indirectly influence the quantity of bank credit. When business Is
prosperous and optimism prevails, examiners, like the
bankers themselves, must tend to appraise credit risks
in terms of the favorable conditions of the moment. The
bankers, and especially the small bankers, confident that
what Is good enough to pass the scrutiny of the examiners
should be good enough to meet their own standards, persist
on their career of credit expansion. Later, when ' h tide
te
of business turns, when banks begin to fail and loans which
were passed without criticism during the boom days have to
be written off as bad debts, the examiners are blamed. Reacting in a perfectly natural manner, they become stricter
and more exacting in the standards they apply, and they
press the banks to liquidate loans and investments which
the banks, if left to their own devices, would be happy
to keep in their portfolios. The process of bank examination thus tends to encourage credit expansion during the
upswing of the business cycle and, more seriously, to intensify credit contraction during the downswing.
"There is an obvious cure for this perverse effect
of bank examination, requiring three innovations in the
adininistration of the examinationss unified control of bank
supervision and examination; co-ordination of examination
policy with credit control policy; and systematic and
continuous supervision and instruction of the examiners In
terms of a uniform and flexible policy. Fully to attain
all of these objectives would require the centralization
of all bank examining functions under the direction of the
Federal Reserve Boa- d. -a/
Senator Glass, at a hearing in recent years, indicated his conception
of the relation of credit policies to examinations. In discussing the
1/ Jacob Viner in "Recent Legislation and the Banking Situation" in The
American Economic Review9 Vol. XXVI, No. 1, Supplement, March 1956,
(written after he had participated with Charles 0. Hardy in preparing
a "Report on the Availability of Rank Credit in the Seventh Federal
Reserve District" in 1955),




nothod by which a Federal reserve bank in considering an application for rediscount can ascertain whether or not a member bank is making proper use of
Federal bank credit, Senator Glass told the head of one of the reserve banks
that he did not have to go by the face of the note, that he should know what
the bank is doing if the examiners are v/orth a threepenceA-J This implies
that the examination reports do or should include adequate data on the uses
to which the banks1 credits have been put. Unfortunately the inclusion of
a schedule in an examination report form does not necessarily mean that sound
conclusions as to the uses to which the banks1 credits have been put, supported by adequate data, will appear in the examination report, particularly if
the examining agency has no important interest in the question. The ability
and attitude of the examiners and their instructions must be considered as
factors.
If the Board had had complete control of the examination and supervision
function with respect to commercial, banks in 1928 and 1929, it could have
made its direct action policy more effective. Criticisms by the Board and
its examiners might have served to curtail the lending on securities for
speculative reasons by commercial banks. The time may come again when it
will be desirable for pressure to be brought to bear by the examining and
supervisory authorities on offending banks. At such a time, if the Comptroller of the Currency and the F.D.I.C. still exist as independent agencies,
they may disagree with the Board with respect to policies on such matters
as, for example, real estate or securities loans; or they may be disinclined
to incur the ill will of powerful bankers. In such circumstances these
agencies might fail to give sufficient cooperation.
There are some recent examples of the bad effect of differences in
1/ P. 5£, Hearings on S# Res. 71, Jan. 1951.




- 12 policies*

The Comptroller of the Currency and the Board have not favored

and enforced identical policies with respect to the elimination of losses
and depreciation. The F.D.I.C. declined to accept the part of the Board1s
Regulation Q with respect to absorption of exchange charges. It is understood that approximately 19 of the State bank supervisors were opposed to
the Board1s definition of interest under Regulation Q, and that this was
an important influence upon the position of the F.D.I.C. in this matter.
These examples of failure to cooperate indicate that failure to cooperate in matters of credit policy certainly are within the realm of
possibility. The agency charged with the responsibility for credit policies
should, therefore, be clothed with ample power and authority to ascertain
through examinations and reports by personnel definitely under its own control
that its policies are being carried out. In case of violation, it should be
in a position directly and promptly to enforce Its policies. With the increased responsibility upon the Board for the development and enforcement of
sound credit policies, it is more important now than ever before that the
system of bank supervision be reorganised so that no other supervisory agency
would be in a position to obstruct the application of broad credit policies
which have been determined by a public body of seven men to be necessary in.
the public Interest and which are applicable to all of the 15,000 banks in
the country.
Narrower Responsibilities of Other Agencies* - The power to examine
and supervise banks is much more necessary for the Board of Governors to
administer efficiently its other responsibilities than it is necessary for
the R.F.C., the Secretary of the Treasury, the Comptroller, or the F.D.I.C.




The R.F.C. has obtained, through agreements and proprietary interests,
power to examine and effect changes in the management and operating policies
of those banks from which it has purchased preferred stock and capital notes
or debentures. However, these powers are said to be exercised directly in
comparatively few cases, even under present practices. This is particularly
true with respect to examinations. With adequate supervision of all banks
under one Federal body and cooperation in making reports and special information available, the necessity for the exercise of these powers by the R.F.C.
would be materially lessened. The authority to examine, force changes in
general policies and management, effect reorganisations into widespread
branch systems, etc., if exercised at all by the R.F.C., could be limited to
those cases where permission or approval of the Board of Governors is granted
for good reasons. This would be somewhat similar to the present arrangement
by which the R.F.C. must obtain prior approval of the Interstate Commerce
Commission before making a loan to a railroad.
The R.F.C. could continue as a liquidating agency for present investment
The power of the R.F«C. to lend to banks might be allowed to lapse and the
responsibility placed upon the Federal Reserve System for meeting needs of
this character In such way as may be most appropriate.
It is, of course, important that the Federal deposit insurance fund be
protected by adequate examination and supervisory policies. Presumably
the protection is considered to be adequate under present arrangements even
though the supervision of the banks controlling the most important part of
insured deposits is conducted by the Comptroller of the Currency and the
Federal Reserve System. The protection to the fund would be increased, not
lessened, if the supervision of all insured banks is placed under one Federal
body, the Board of Governors, which needs the supervisory authority in




conjunction with its broader responsibilities for credit policy. The Board
of Governors is responsible for important natters of credit policy and with
this responsibility goes the protection and development of depositors1,
stockholders', and the general public's interests by the enforcement of sound
banking principles.
The monetary and credit functions of the Federal Reserve System are
essential in any event, but bank supervision is so closely connected with
these functions that it must be properly correlated with them. Even if all
examinations and follow-ups were handled adequately by some other Federal
agency—such as the Comptroller of the Currency or the F.D.I.C.— there would
ie
still be t l necessity for reviews and analyses of all reports of examination and correspondence to ascertain to what extent the Board's policies were
being executed. If policies wore not being enforced it would be necessary
for the Board to have power to coerce an independent agency. This would
achieve an effect similar to the form of consolidation under the Board which
is being suggested.

Obviously, however, such an indirect control of credit

policies would be not- only less effective but more costly.
The Federal Reserve System Has the Largest Interest in the F.D.I.C. - Th
Federal Reserve System, which is owned and supported by the member banks,
furnished directly $139,000,000 of the total capital stock of $239,000,000
of the F.D.I.C. The remaining $150,000,000 was considered as a return to
the banking system by the Treasury of the $149,000,000 which had been paid
as a franchise tax by the Federal reserve tenk<-. Moreover, the members of
the Federal Reserve System pay most of the assessments now being collected
by the F.D.I.C., since total deposits of all member banks amounted to
$38,450,000,000 as of December 51, 1935, as compared with f6,560,000,000




- 15 of all nonmember insured banks (including insured mutual savings banks).
It is clear, therefore, that the Federal Reserve System has the largest
interest in the F.D.I.C.
Facilities of the Federal Reserve System. - The Board of Governors
and Its staff in Washington, together with the facilities, personnel and
contacts of the 12 reserve banks and 'their 25 branches, constitute a seasoned,
non-political organization with 22 years of experience within which an effective means of bank supervision can be provided with a minimum of difficulty
and cost.
Problems of examination and supervision have for years been solved by
officers of reserve banks with knowledge and experience built up out of
long contacts with all classes of banks—national, State member and nonmember. These officials are posted with respect to the condition of national
and State member banks through various reports and operating contacts. They
have an intimate knowledge of the past and current policies and practices
of most member banks and many nonmember banks in the districts, obtained
through frequent contacts with these banks and their daily operations with
respect to such matters as reserve deficiencies, rediscounts

and borrowings,

fiscal agency and safekeeping transactions, collection of checks and drafts,
wire transfers, demands for currency, and applications for membership,
trust powers, voting permits, etc. Through these sources and the incidental
contacts, correspondence, conversations and conferences the officers of the
Federal reserve banks are much better informed about the current condition,
situation, and problems of member banks than the other supervisory authorities can possibly be through their annual or semi-annual examinations and
periodic condition reports alone. They are familiar through the development




of statistics and otherwise with the general banking and economic conditions
in their districts and can draw upon the judgment of their colleagues and
directors in all important or problem cases.
Under the plan outlined in this memorandum the officer of the Federal
reserve bank in charge of examinations and supervision would be expected
to work in close contact with the other officers of the bank who would be
Instructed, to cooperate fully so as to make sure that all facts in their
possession having a bearing on the supervisory problems were carefully
considered.
Such an organization is to be contrasted with that of a chief national
bank examiner in each district in the case of the Comptroller of the
Currency, or a supervising examiner in the case of the F.D^I.C. The contact
of these men have been limited to s-pecial classes of banks and to examining
and supervisory matters only. Furthermore, the district offices of the
F.D.I.C. examiners are comparatively new and their contacts are largely
limited to small State hanks.
Although there is a marked similarity in many of the supervisory
responsibilities and functions, as well as in several divisions of the
staffs, of the Comptroller, the F.D.I.C., and the Board of Governors, there
Is an important dissimilarity In the manner in which examinations and other
phases of supervision have been handled in the Federal Reserve System as
compared with the other agencies named. The Comptroller of the Currency
requires a complete copy of each report of examination made by national
bank examiners in the respective districts to be sent to Washington where
it is analysed and reviewed in detail. Letters of criticism based upon
such reports are written in the Comptroller1s office and mailed direct to




- 17 the national banks concerned, with the request that copies of the banks1
replies thereto be nailed to the chief national bank examiner and the field
examiners who conducted the examinations in the districts. Many other
letters relating to minute details in connection with errors in reports of
condition of national banks, earnings and dividends reports, and various
other minor matters are likewise written in Washington and sent direct to
the banks. From the copies of correspondence and reports of examination
available to the Board from the Comptroller's office, it appears that the
principal functions of the district chief national bank examiners1 offices
are to conduct examinations and furnish reports to the Comptroller1s office
in Washington -where various matters with respect to criticisms, corrections,
management, mergers, reorganizations, charters, branches, etc*, are handled.
A somewhat similar situation prevails in the case of the F.D.I.C.
On the other hand, the Federal reserve banks conduct examinations of
the State member banks In their respective districts and handle the supervisory matters direct with the member banks. It is but rarely necessary
that State member banks have any direct contacts with the Board of Governors.
Under this method of administration the Board of Governors formulates and
coordinates the examining and supervisory policies with respect to State
member banks, leaving the detail administration thereof to the reserve banks
in the respective districts.
Decentralization of examination and supervision in 12 districts, with
the possibility of additional or zone offices at the 25 Federal reserve
branches, would substantially lessen any real objection which might be
raised to consolidating all examination and supervision of all banks under
one Federal body. It would provide substantial local control over banks in




each district, subject only to review in Washington for the purpose of coordination*
Furthermore, these 12 district bank authorities could foster closer
cooperation between themselves and the banks and bankersT associations than
would be possible under present arrangements. The need for this has been
stressed as an important means of improving the caliber of bank management
and developing a satisfactory system of Internal check or supervision.
Banking literature contains many comments to the effect that satisfactory
bank management, policies and practices can be obtained less by legislation
and more by bankers and the bank supervisory agencies working out bank
problems and difficulties together.
Decentralization in this manner would also lessen delays and confusion occasioned under present arrangements of supervisory agencies. It
would be real progress in the direction of simplification and efficiency
of supervision if all cases involving only ordinary routine and administrative matters could be; substantially settled in the district without
referring them to Washington.
Increasing Quality and Reducing Cost of Examinations. - The experiences of the last few years emphasize the necessity for improvement in the
quality of bank examinations and. supervision. Consolidation of bank oxamina
tion and examiners under one agency such as the Federal Reserve System
would make it possible to give more unity of background and purpose to bank
examinations.
At present some bank examiners are criticized for being extremely
lenient, others for being extremely harsh. Some persons say that examinations should be conducted by local men familiar with conditions therej
others say that they should be conducted by examiners who are not subject




- 19 to local influences and who are nore acquainted with general economic conditions. Other criticisms relate to the different methods and varying degrees
of proficiency among examiners v h receive varying salaries, v/ho are subject
/o
to varying conditions of appointments, and who are more or less bound by
varying pre cedent s•
These criticisms definitely suggest that there is urgent need of
standardized training for all bank examiners. The training should be of
a continuing character and all examiners should be trained along the same
lines and thoroughly grounded in the necessity for applying sound methods
to varying circumstances and conditions of banking. It is obvious that the
only possible way of so developing and training examiners is to have them
all working under and responsible to the same supervisory body, which could
conduct training classes and hold regional conferences and annually or less
frequently hold a joint conference of at least the key examiners. Such a
plan would permit and necessitate the employment of capable and well trained
examiners at the reserve banks.
Under the plan outlined in this memorandum improvement would be brought
about by the following:




1. The aggregate number of examiners now under all the
three Federal jurisdictions could be reduced—all the better
ones being retained—yet in each district there would be a
sufficient number of examiners to examine any of the larger
banks with branches or groups simultaneously, with the possibility of drawing upon the auditing and other departments of
the Federal reserve bank if additional man power is needed to
cover large jobs.

- 20 Zm Training of examiners by conferences, 11 schools11, etc,;
the issuance of uniform instructions with respect to classifications of assets, management, etc.; development of specialists,
such as trust or affiliate examiners, could be easily effected
with the cooperation of the reserve bonk officers constantly in
touch with banking problems.
3. From their various contacts and experiences with the banks
of the district, the Federal reserve bank officers could supplement considerably the information contained in the examination
reports where necessary and follow-up requirements would be
uniform and well considered, particularly in problem cases.
Total annual costs of regulation of banks and credit policies by
Federal agencies under the present system are estimated at approximately^
Comptroller of the Currency
F.D.I.C.
Board of Governors
Federal reserve banks

$3,800,000
2,500,000
1,400,000
1, 500,000
$9,000,000 y

No estimated figures are available as to the annual cost of the supervision exercised by the R.F.C. in connection with its Investments In the
1/ This includes total salaries and expenses of the Board at Washington
(not including expenses in connection with the issuance and redemption of currency, but including other expenses and salaries, much of
which relate to money and credit policies), and expenses of bank
examinations departments of the 12 Federal reserve banks (including
no allowance for overhead, such as light, rent, etc., and comparatively small allowance for officers1 salaries, presumably limited to
those officers devoting all or an estimated portion of their time to
bank supervision work). The estimate of $5,300,000 for the Comptroller of the Currency, including the 12 district offices, is based upon
the Comptroller1s annual report for 1935, and does not include
expenses in connection with the issuance and redemption of currency.
Of this total over $216,000, representing regular salary roll, is
paid from appropriation, the balance being reimbursed by banks. The




capital stock, debentures and notes of more than 5,500 banks.
It Is obvious from the very nature of the organization and operations
of the existing supervisory agencies that a considerable saving in the cost
of bank examinations and supervision could be effected by a reorganization
along the lines indicated in the preceding pages. One important saving
would result from the elimination of much duplication and triplication of
work by examiners and other members of the staffs of the existing agencies
and many time-consuming conferences now necessary in order to avoid conflicts,
in connection with mergers, reorganizations, regulations, interpretations,
etc. Another important saving would result from increasing the quality and
reducing the quantity of supervision. The extent of possible saving which
might be realized and the number of examiners or office employees who should
be retained or eliminated without impairing efficiency are difficult matters
to estimate. These matters could be determined properly only by conducting
a careful survey of the personnel and cost of maintaining the various offices
of the Comptroller, . h e F.D.I.C., and the Federal Reserve System dealing with
t'examinations and supervision.
Method of Accomplishing Consolidation
It is proposed that all of the bank supervisory functions vested in
the five Federal agencies mentioned above be consolidated and administered
under the general direction of the Board of Governors. This contemplates
that the statutes will be drafted In such manner as to give the Board authority to decentralize the examination and supervision of banks through the
assignment of various administrative functions te its representatives and
estimate of $2,500,000 for the F.D.I.C. represents estimated total of
the annual administrative expenses of the Corporation, including its
district offices, as indicated by the report of the Corporation as of
June 30, 1956.




the Federal reserve banks to such extent, in such manner, and in accordance
with such policies as it shall determine from time to time.
It would seem desirable that the statutes be as flexible as possible to
permit the gradual working out of the most satisfactory administrative machin
ery. However there is indicated below what would seem to be a practical work
ing arrangement which might be established administratively by the Board
pursuant to the authority to assign certain functions.
A. Have the Board of Governors perform directly the following
principal functions?
!• Its present functions with respect to the direction of
credit policies and the general supervision of the 12 Federal
reserve banks.
2. The promulgation of regulations and the establishment
of general policies with respect to chartering, examining and
supervising commercial banks.
3. The delegation of administrative functions to its representatives and the Federal reserve banks.
4. The handling of appeal cases, including the approval or
disapproval of applications for charters, branches, trust powers,
permits, changes in capital, etc.
B. Assign to representatives of the Board the following principal
functions:




1. The administration of general policies laid down by
the Board of Governors relative to the supervision of banks.
2. The direction and coordination of examinations of banks.
3. The determination of date, form and content and direction
of the review and analysis of call, published and special reports

- 23 required of banks and affiliated companies.
4. Appointment of receivers for closed banks.
5. Approval of the appointment of district examiners and
assistant examiners.
C. Assign to each Federal reserve bank, or to an officer of each
Federal reserve bank, " h following principal functions:
te
1. Examination and supervision of commercial banks and
their affiliates in the district, in accordance with the general
policies formulated in Washington.
2. Approval or disapproval of applications for charters,
branches, trust powers, permits, changes in capital, etc., with
right of appeal to Washington in particular cases.
5. Approval or disapproval of reorganisations and liquidations, with right of appeal to Washington in particular cases.
4. Initiation of removal proceedings under section 30 of
the Banking Act of 1933; of capital impairment proceedings; of
expulsion from the insurance fund or Federal reserve membership;
of appointment of conservators.
5. Reviewing, tabulating, and filing of call reports a i
rd
other reports of insured banks.
6. Furnishing Washington with such examination reports or
analyses thereof or other information as may be required from
time to time.
Objections to Consolidation
Most of the objections to the consolidation of Federal bank supervision
along the lines indicated in the foregoing sections of this memorandum may
be expected to come from:




- 24 1. Present supervisory officials.
2. Individual bankers who desire to continue to obtain
special privileges from lax banking supervision and avoid more
positive supervision.
5. Certain others who are influenced by the protests of
bankers and who espouse the theory of States' rights.
To those who . a e familiar with the facts pertaining to bank operation
.r
and supervision, it is clear that most of the objections offered really are
good reasons for consolidation and merit but little consideration. Considerable importance, however, must be attached to them because of the political
factors which they reflect*
Some of the principal matters in connection with which the objections
have been or may be offered are summarized below;
1 • Concentration of power in a Poiltl cally-A;rpoin bed
Body. - Numerous attacks have recently been made on centralization of power in the various departments under the vari.ous administrations, including the Board of Governors. The position is
taken that there is a need for decentralization of bank regulation,
that banking and economic problems are different in various sections
of the country, and that successful bank supervision can come only
from those persons who are familiar with the peculiar local problems. These objections would be substantially met by giving power
to the Board of Governors, a public body of seven men no two of
whom are selected from the same Federal reserve district, and the
decentralization of supervision as above outlined, through the







Federal Reserve System which is not politically minded.
? • Delays and Indecisions in Handling Problems. - Some
•
believe that delays and indecisions in handling problems would
be involved by consolidating the supervisory agencies. This
objection appears to be based largely upon the experiences
which some banks have had in connection with reorganizations
during and

subsequent to the bank holiday. The delays may be

considered as having been caused by the necessity of passing
through several separate supervisory bodies.
3. Objection of States1 Rights Proponents to the Ultimate
Elimination of State Supervision. - The States' rights element
will view consolidation as a move toward the ultimate elirdnation of all State supervision of banks. The principal objections
in this connection will come from the State bank commissioners
and certain types of their supporters with bank affiliations.
Many outstanding State bankers favor the consolidation of all
bank supervision, although a large number still favor the dual
banking system.
4. Rigorous Standards or Requirements. - Government officials, economists and bankers have from time to time charged
the Federal Reserve System with attempting to set standards unnecessarily high, particularly with respect to credit policies,
elimination of .losses and depreciation in periods of depression.
This is an objection that can be given little weight by those
honestly interested in a sound banking system.




26 5• Consolidation of Federal Supervision V/ould Practically Constitute Membership in the System* - The plan outlined in this memorandum does not directly affect banks whose
deposits are not insured. It does not impose upon the banks
affected the legal conditions and limitations which affect member banks, such as those relating to minimum capital, loans, par
clearance, reserves, etc. Nevertheless many bankers -and others
will object to the plan on the ground that it is practically the
same as forcing banks into membership In the System or that it is
a long step in that direction.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102