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aW&tofrofthe TDIC
193-1983
Federal Deposit Insurance Corporation
Washington, D.C.
1984
I
On March 3 banking operations in the United States ceased. To
review at this time the causes of this failure of our banking system
is unnecessary. Suffice it to say that the government has been
compelled to step in for the protection of depositors and the
business of the nation.
As President Franklin D. Roosevelt spoke these words to
Congress on March 9, 1933, the nation's troubled banking system lay dormant. More than 9,000 banks had ceased operations
between the stock market crash in October 1929 and the banking holiday in March 1933. The economy was in the midst of
the worst economic depression in modern history.
Out of the ruins, birth was given to the FDIC three months
later when the President signed the Banking Act of 1933. Opposition to the measure had earlier been voiced by the President,
the Chairman of the Senate Banking Committee and the American Bankers Association. They believed a system of deposit
insurance would be unduly expensive and would unfairly subsidize poorly managed banks. Public opinion, however, was
squarely behind a federal depositor protection plan.
By any standard, deposit insurance was an immediate success
in restoring stability to the system. The bank failure rate
dropped precipitously, with only nine insured banks failing during 1934. During the 30-year period beginning with World War
11, the workings of the economy and the conservative behavior
of bank regulators and the banking industry created a situation
that posed few risks to the financial system, and the importance
of deposit insurance in maintaining stability declined. Indeed,
Wright Patman, the then-Chairman of the House banking committee, argued in a speech in 1963 that there were too few bank
failures - that we had moved too far in the direction of bank
safety.
While it is doubtful that a cause-and-effect relationship exists,
Chairman Patman's wish has been realized. Banking has become a considerably more competitive business - more responsive to credit needs and more willing to assume greater
risks in meeting those needs. While this development is very
positive from the viewpoint of American consumers, farmers
and businesses, banks have become concomitantly more vulnerable to changes in economic conditions.
...
111
Bank failures have increased in size and number in the past
decade, culminating in a post-World War I1 record number of
failures in the 1981-83 period. From the beginning of 1981 to
date in 1983, the FDIC has handled 100 bank failures, including
18 of the 25 largest in FDIC history (the FDIC handled 6 failures on a single day in 1983, which was more than the number
of failures in a typical year during the 1950s and 1960s). These
100 banks held assets of $24 billion compared to only $9 billion
held by the 568 insured banks that failed prior to 1981. The
FDIC's estimated losses during this three-year period amounted
to $2.2 billion compared to less than $200 million on the previous 568 failures. The FDIC is currently involved in 170 active
receiverships, is managing 65,000 receivership assets with an
aggregate book value of $4.3 billion, and is a plaintiff or defendant in over 6,000 lawsuits related to receivership activities.
The insurance system has weathered the challenges presented
by this staggering volume of activity. Public confidence in the
banking system has been maintained without the expenditure of
one penny of taxpayer money. The FDIC's insurance fund whose revenues are derived from bank assessments and interest
earned on investments in U.S. Treasury obligations - has
grown rapidly from $1 1 billion at the beginning of 1981 to over
$15 billion today.
The events of the past few years and the evolving process of
deregulation have prompted the FDIC to reexamine the role of
deposit insurance and to revise its attitudes and methods of operation. Our basic concern is that the existence of deposit insurance and, more importantly, the way in which the FDIC has
handled most failed banks have provided too much comfort to
larger depositors and other bank creditors. With a perception of
minimal risk, there is little incentive for larger depositors to
exert the degree of market discipline present in other industries.
This situation has placed the deposit insurance agencies in a
position where they must act in place of the market.
The trend away from market participation in the regulation of
bank behavior probably dates from the founding of the FDIC.
Over most of this period, when banks operated in a protected
and stable environment, the substitution of regulatory for market
discipline caused little concern. With the more recent move
toward increasingly competitive banking markets, controlling
bank risks through a formal regulatory mechanism is more complex and imposes substantial economic costs on both the industry and society as a whole. A better solution is to shift the
regulatory balance toward a greater role for the market.
iv
This was the primary conclusion reached in a comprehensive
study of the federal deposit insurance system completed and
submitted to Congress by the FDIC in the spring of 1983. The
means recommended to achieve this goal was to modify the way
the FDIC handles bank failures to place uninsured depositors
and other creditors at greater risk. As a supplement to this
effort, it also was recommended that the FDIC vary deposit
insurance premiums according to the risk a bank poses to the
insurance fund and to charge for special supervisory activities.
In November of 1983, the FDIC submitted to Congress proposed legislation to implement these changes.
The proposed legislation represents a vital first step in rationalizing the regulatory and insurance systems. The entire spectrum of other questions relating to the further deregulation of
banking and the appropriate regulatory structure is currently
under close study by Congress and various government agencies. For our part, we believe that providing adequate insurance
coverage in an evenhanded manner should be the FDJC's principal role. We do not believe the FDIC should divert its resources to the examination of banks that pose little risk to the
deposit insurance fund, or to other activities not directly related
to our insurance function. This is the direction in which the
FDIC is moving.
While this history was prepared by FDIC staff, a genuine
attempt has been made to treat objectively the role of the FDIC
during the first 50 years of its existence. This is important not
only from the standpoint of intellectual honesty, but because
this piece is intended to improve understanding of the FDIC and
the issues to be considered by those responsible for reforming
the system.
We hope the need for deposit insurance will never again be so
great as it was in the 1930s. Nevertheless, as the FDIC embarks
on its second half-century, the challenges at hand are greater
than at any time in the past four decades.
William M. Isaac
Chairman
Federal Deposit Insurance Corparation
December 21, 1983
This history was prepared by the Division of Research and
Strategic Planning, with main contributions from Detta Voesar
and James McFadyen. Other contributors were Stanley C. Silverberg, Director of the division, who also directed the project,
and William R. Watson, Associate Director. Jean Roane, Alane
Lehfeld and the Library staff provided valuable research assistance. Cathy Curtis supplied greatly appreciated secretarial
services throughout the numerous drafts.
Steven A. Seelig of the Division of Liquidation was particularly helpful in the early stages of the project. Useful comments, suggestions and information were provided by many
people in various FDIC offices, among whom were William M.
Dudley, Division of Liquidation; Donald L. Pfeiffer, Jr. and
Ken A. Quincy, Division of Bank Supervision; Douglas Birdzell, Joseph A. DiNuzzo, Roger A. Hood and Carroll R. Shifflett, Legal Division; and Ronald E. Doherty, Division of Accounting and Corporate Services. Carter Golembe of Golembe
Associates, Inc., also reviewed the manuscript.
Former employees Neil Greensides and John Early, both of
whom are past directors of the Division of Bank Supervision,
granted interviews which provided valuable personal insights
into past events and personalities.
Gratitude is also due Geoffrey Wade, Geri Pavey and others
in the Graphics and Printing Unit.
Table
of
PROLOGUE
ACKNOWLEDGMENTS
Chapter 1: INTRODUCTION
Background
The Early Years
The Period 1942-1972
The Period 1973 - Present
Chapter 2: ANTECEDENTS O F THE FEDERAL
DEPOSIT INSURANCE CORPORATIQN
Insurance of Bank Obligations, 1829-1866
Guaranty of Circulating Bank Notes by the Federal
Government
State Insurance of Bank Deposits, 1908-1930
Congressional Proposals for Deposit Guaranty or
Insurance, 1886-1933
Summary
Chapter 3: ESTABLISHMENT O F THE FEDERAL
DEPOSIT INSURANCE CORPORATION
Banking Developments, 1930-1932
The Banking Crisis of 1933
Federal Deposit Insurance Legislation
Deposit Insurance Provisions of the Banking Act
of 1933
Formation of the Federal Deposit Insurance
Corporation
The Temporary Federal Deposit Insurance Fund
Deposit Insurance and Banking Developments in
1934
Proposals to Amend the Permanent Insurance Law
Inauguration of Permanent Plan of Insurance of
Bank Deposits
vii
Chapter4: INSURANCE COVERAGE AND FIN ANCIAL OPERATIONS O F THE FDIC
Financial Operations
Income and Expenses of the FDIC
The Deposit Insurance Fund
Insurance Coverage
Organization and Staffing
Chapter 5: HANDLING BANK FAILURES
Procedures Used in Handling Failures -Early Years
FDIC as Receiver
Cost Test
Closed-Bank Purchase and Assumption Transactions
Bank Failures Since 1970
Large Bank P&As
Open-Bank Assistance
Penn Square Bank
Recent Open-Bank Assumption Transactions
Assisted Mergers of Mutual Savings Banks
FDIC Liquidation Activity
Present Liquidation Procedures
Summary
Chapter 6: BANK EXAMINATlON AND
SUPERVISION
Historical Overview
Admission Examinations
Capital Rehabilitation
Safety and Soundness Examination Policy
Compliance, EDP and Trust Examinations and
Other Supervisory Functions
Enforcement Powers
Problem Banks
Federal and State Cooperation
Summary
EPILOGUE
APPENDIX: The Boards of Directors of the FDIC
BlBLIOGRAPHY
The Federal Deposit Insurance Corporation has served as an
integral part of the nation's financial system for 50 years.
Established by the Banking Act of 1933 at the depth of the most
severe banking crisis in the nation's history, its immediate
contribution was the restoration of public confidence in banks.
While the agency has grown and modified its operations in
response to changing economic conditions and shifts in the
banking environment, the mission of the FDIC over the past
five decades has remained unchanged: to insure bank deposits
and reduce the economic disruptions caused by bank failures.
Background
At the time of its adoption in 1933, deposit insurance had a
record of experiments at the state level extending back to 1829.
New York was the first of 14 states that adopted plans, over a
period from 1829 to 1917, to insure or guarantee bank deposits
or other obligations that served as currency. The purposes of the
various state insurance plans were similar: to protect
communities from the economic disruptions caused by bank
failures; and to protect depositors against losses. In the majority
of cases the insurance plans eventually proved unworkable. By
early 1930, the last of these plans had ceased operations.
At the federal level, deposit insurance had a legislative
history reaching back to 1886. A total of 150 proposals for
deposit insurance or guaranty were made in Congress between
1886 and 1933. Many of these proposals were prompted by
financial crises, though none was as severe as the crisis that
developed in the early 1930s. The events of that period finally
convinced the general public that measures of a national scope
were needed to alleviate the disruptions caused by bank failures.
From the stock market crash in the fall of 1929 to the end of
1933, about 9,000 banks suspended operations, resulting in
losses to depositors of about $1.3 billion. The closure of 4,000
banks in the first few months of 1933, and the panic that
accompanied these suspensions, led President Roosevelt to
declare a bank holiday on March 6, 1933. The financial system
was on the verge of collapse, and both the manufacturing and
agricultural sectors were operating at a fraction of capacity.
The crisis environment led to the call for deposit insurance.
Ultimately, the force of public opinion spurred Congress to
enact deposit insurance legislation. The Banking Act of 1933,
which created the FDIC, was signed by President Roosevelt on
June 16, 1933.
By almost any measure, the FDIC has been successful in
maintaining public confidence in the banking system. Prior to
the establishment of the FDIC, large-scale cash demands of
fearful depositors were often the fatal blow to banks that
otherwise might have survived. Widespread bank runs have
become a thing of the past and no longer constitute a threat to
the industry. The money supply both on a local and national
level has ceased to be subject to contractions caused by bank
failures. The liquidation of failed bank assets no longer disrupts
local o r national markets and a significant portion of a
community's assets are no longer tied up in bankruptcy
proceedings when a bank fails.
The Early Years
The history of the FDIC cannot be considered apart from
changes in economic and banking conditions. The early years of
the FDIC's existence were not a period of risk taking by banks.
Caution marked the attitudes of both the supervisory agencies
and the industry itself. For their part, the supervisory agencies
viewed the events that culminated in the nationwide bank
holiday as a banking rather than a monetary phenomenon. The
prevailing philosophy was that unfettered competition in the
past had resulted in excesses and abuses in banking.
Consequently, the supervisory agencies followed what the FDIC
later termed as a policy of keeping banks and banking practices
within the bounds of rightful competition.
The attitude of bankers was similarly circumspect. Those who
survived the Depression were chastened by that experience. The
effect of the Depression experience on the industry was
reflected in the subsequent massive liquidity buildup undertaken
by banks. By 1937, for example, cash and holdings of U.S.
government securities comprised about 52 percent of the
industry's total assets, or more than twice the proportion held in
1929. To the dismay of would-be borrowers, banks continued to
stress liquidity for many more years.
Legislation enacted in the 1930s to insulate banks from
competing with one another too aggressively also restrained
bank behavior. The Banking Act of 1933 outlawed the payment
4
I
of interest by member banks on demand deposits. The Act also
authorized the Federal Reserve Board to set a ceiling on time
deposit rates offered by member banks in order to forestall
ruinous competition among banks. In addition, the 1933 law
ordered the separation of investment from commercial banking
to be completed by mid-June 1934.
The Banking Act of 1935 similarly incorporated provisions
designed to limit bank behavior. The Act expanded the FDIC's
supervisory powers and set more rigorous standards for
admission to insurance. The 1935 law required the FDIC to
prohibit the payment of interest on demand deposits in insured
nonmember banks and to limit the rates of interest paid.
While the effects of a still-depressed economy also
engendered caution on the part of bankers and regulators,
conditions improved from the low point reached in 1933.
Unemployment declined significantly, real GNP increased at an
average annual compound growth rate of 9.5 percent between
1933 and 1937, and price increases were moderate. The
recession of 1937-1938 interrupted this pattern of economic
expansion. Owing to the continuous improvement in the
banking system that had occurred since the banking holiday of
1933, however, banks were able to meet without difficulty the
strains resulting from the decline in business activity that
ensued. Following the recession, economic conditions improved
once again as real GNP rose and unemployment declined.
The FDIC handled 370 bank failures from 1934 through
1941. Most of these were small banks. Without the presence of
federal deposit insurance, the number of bank failures
undoubtedly would have been greater and the bank population
would have been reduced. The presence of deposit insurance
also may have limited the necessity for some banks to merge,
and may have indirectly encouraged retention of restrictive state
branching laws.
The end of 1941 marked the completion of eight years of
successful operation of the system of federal insurance of bank
deposits. It also marked the close of a period of economic
recovery under peacetime conditions, which provided especially
favorable circumstances for the establishment of deposit
insurance and for improvement in the financial condition of
banks.
The Period 1942-1972
-
During World War 11, government financial policies and
private sector restrictions produced an expanding banking
system. Total bank assets at the end of 1945 were nearly double
the $91 billion total at the end of 1941. Large-scale war
financing of the federal government was the primary factor
contributing to the rise in bank assets. Banks played a major
role in financing the war effort by lending to other bond buyers,
by handling the bulk of the war loan campaign sales volume,
and by purchasing government obligations themselves. At the
end of 1945, holdings of those obligations accounted for 57
percent of total bank assets.
Loan losses were practically nonexistent during the war years
and bank failures declined significantly. Only 28 insured banks
failed in the period 1942-1945. The decline in the number of
troubled banks can be ascribed primarily to the highly liquid
state of bank assets, the absence of deposit outflows, and
vigorous business activity.
As the war drew to a close and ended, the transfer to peacetime conditions raised questions whether the economy would
enter another depression or experience disruptive inflation.
Many individuals feared that unemployment, declining income
and business failures would ensue. However, inflation rather
than deflation ensued. The public had a large volume of liquid
assets, there was a tremendous demand for goods, and the immediate problem was one of inadequate production rather than
of unemployment.
The banking industry was in a favorable position to finance
the spending spree that was poised to occur. Banks had emerged
from World War I1 in very liquid condition. Yet, many individuals expressed doubts whether banks were up to the task of
resuming their traditional lending function.
These concerns proved groundless. In 1947 alone, bank lending increased from 16 percent to 25 percent of the industry's
assets. Lending subsequently reached 40 percent of assets in the
mid-1950s, and 50 percent in the early 1960s.
This resurgence of lending did not produce a concomitant
increase in loan losses. Several factors accounted for the relatively low level of loan losses during the postwar years. First,
banking behavior by present standards continued to be very conservative. In addition, the economy remained strong. Recessions were reasonably mild and short. This was a period of
general prosperity, with a secularly increasing real GNP and
relatively low unemployment.
Conservative banking practices and favorable economic conditions resulted in few bank failures during the late 1940s and
1950s. However, the low incidence of failures was regarded by
some as a sign that the bank regulators were overly strict. In a
speech marking the dedication of the headquarters building of
the FDIC in 1963, Wright Patman, then-Chairman of the House
Banking and Currency Committee, declared:
. . . I think we should have more bank failures. The record of
the last several years of almost no bank failures and, finally last
year, no bank failure at all, is to me a danger signal that we have
gone too far in the direction of bank safety.
Until about 1960, banks continued to operate in a safe, insulated environment. Then banks gradually began to change the
way they operated. The Depression experience ceased to be a
dominant influence on bank management. The new generation
of bankers who came to power in the 1960s abandoned the
traditional conservatism that had characterized the ipdustry for
many years. Instead, they began to strive for more rapid growth
in assets, deposits and income.
The trend toward aggressiveness and risk taking was particularly pronounced among large banks. These banks also began pressing at the boundaries of allowable activities. They
expanded into fields considered by some to involve more than
the traditional degree of risk for commercial banks.
There were other changes during the 1960s that had an impact
on banking. States began to liberalize branching laws. The bank
holding company vehicle was developed as an alternative form
of multi-office banking and as a means to enter new product
markets. With the introduction of the large negotiable certificate
of deposit, banks' reliance on purchased money increased. In
addition to the bank regulatory agencies having to monitor these
developments, federal legislation gave them additional enforcement responsibilities in the areas of securities disclosure,
antitrust and consumer protection.
Until the mid-1970s, banks were not noticeably harmed by
the movement toward increased risk taking. Generally favorable
economic conditions enabled many otherwise marginal borrowers to meet their obligations. With the exception of relatively mild recessions, the economy produced high levels of
production, employment and income during most of the period.
The Period 1973 - Present
.
Bank behavior has continued to undergo significant changes
during the past ten years. Bank reliance on purchased money
has increased, even for moderate-sized banks. Demand balances
have become less important and, in the case of the household
sector, most of these now pay interest. Cheap deposits, in general, have become scarce. Banks have entered new product
markets, geographic expansion possibilities have broadened and
traditional banking services are now being offered by financial
and commercial conglomerates. While these changes have enabled banks to remain competitive, particular aspects of bank
behavior, such as the growing dependence on purchased money,
have made the industry more vulnerable to adverse economic
conditions.
The performance of the economy over the past 10 years has
not been very strong. The first of two major recessions during
the decade occurred in 1973-1975. The severity of the recession
contributed to a substantial increase in commercial bank loan
losses and an increase in both the number of problem banks and
bank failures. It was during this period that the FDIC encountered the first large bank failures. The 1973-1975 recession
led to substantial real estate loan problems. In many instances
these persisted well beyond the onset of economic recovery and,
as a result, the bank failure rate remained comparatively high,
peaking in 1976 at 16, the highest number since 1940.
The mid- 1970s also were characterized by other special problems. Repercussions were felt throughout the economy as a result of the rapid increase in oil prices that began in 1973, and
the subsequent role of U.S. banks in recycling petrodollars. The
oil price shock contributed to a rising inflation rate and new
highs in interest rates in 1974.
While the banking industry did not fully recover from the
effects of the recession until 1977, the following year brought
renewed pressures on the industry. In 1978, interest rates on
securities markedly surpassed the rates payable by depository
institutions for savings and time accounts. Deposit growth
slowed, particularly at thrifts, as alternative investment instruments and yields became relatively attractive.
In 1979 and early 1980, inflation burst upward, along with
interest rates. The rise in interest rates was spurred not only by
inflationary pressures, but also by a change in Federal Reserve
monetary policy in October 1979. The resultant high interest
rates, in combination with an unduly heavy emphasis on fixedrate, long-term lending, caused severe problems for the thrift
industry.
In addition to the stresses produced by high interest rates,
financial institutions had to cope with the changes engendered
by the passage of banking deregulation legislation in 1980. The
Depository Institutions Deregulation and Monetary Control Act,
the most sweeping banking reform package enacted since 1933,
mandated the elimination of interest rate ceilings by 1986. Other
provisions of the Act liberalized lending powers of federal
thrifts and preempted some state usury laws. Two years later, in
1982, Congress passed the Garn-St Germain Depository Institutions Act, which took deregulation even further and gave the
regulators more flexibility in dealing with failing institutions.
A severe recession in 1981-1982 placed further strains on the
banking industry. The recession arrived at a time when bankers
were willing (and may even have felt forced) to take additional
risks in order to maintain interest margins in the face of rising
liability costs. The lure of lending to growth industries had led
some banks to excessive loan concentrations in fragile industries. An oil surplus and the resultant decline in prices, for example, caught many bankers who had invested heavily in independent oil and gas development companies that suddenly were
no longer viable.
Recession-related factors, in combination with high and volatile interest rates and deregulation, caused loan charge-offs to
increase by more than 50 percent in 1982 alone. The number of
problem banks also increased sharply. In 1982, the number of
bank failures hit 42, a new post-World War I1 high. Moreover,
despite the turnaround in the economy during the first half of
1983, there were 27 commercial bank failures during this
period.
These developments have had a major impact on the FDIC.
There is a greater sense of bank exposure and risk of failure that
exists not just among those who regulate and follow banks, but
among the general public as well. The FDIC has had to adjust
its bank supervision practices, as well as dramatically increase
its liquidation work force. Changes in the complexity and size
of the banking industry over the past decade have presented the
FDIC with challenges and problems as formidable as those
faced by the FDIC during its first decade.
This book chronicles the history of the FDIC during its first
50 years. Chapter 2 focuses on the antecedents to federal deposit insurance. The events that led to the passage of the Banking Acts of 1933 and 1935 are discussed in Chapter 3. The
financial and internal operations of the FDIC are detailed in
Chapter 4. Inasmuch as the handling of failures and bank supervision have encompassed the FDIC's primary areas of responsibility, each of these areas is covered separately in Chapters 5
and 6, respectively. Some final thoughts on the occasion of the
FDIC's 50th anniversary are offered in the Epilogue.
antecedeng
of the
Insurance of Bank Obligations,
1829-1866
During the years immediately following the organization of
the federal government in 1789, banks were chartered by special
acts of state legislatures or the Congress, usually for a limited
number of years. Initially, bank failures were nonexistent. It
was not until 1809, with the failure of the Farmers Bank of
Gloucester, Rhode Island, that people realized that such an
event was even possible.' Any notion that this failure represented an isolated incident was dispelled after the first wave of
bank failures occurred five years later. The ensuing economic
disruptions caused by these and subsequent bank failures fueled
demands for banking reform.
In 1829, New York became the first state to adopt a bankobligation insurance program2 New York's program was devised by Joshua Forman, a Syracuse businessman. The insurance concept embodied in his plan was suggested by the regulations of the Hong merchants in C a n t ~ n The
. ~ regulations
required merchants who held special charters to trade with foreigners to be liable for one another's debts. Writing in 1829,
when bank-supplied circulating medium was largely in the form
of bank notes rather than deposits, Forman noted:
The case of our banks is very similar; they enjoy in common the
exclusive right of making a paper currency for the people of the
state, and by the same rule should in common be answerable for
that paper.4
'Carter H. Golembe, "Origins of Deposit Insurance in the Middle West,
1834-1866," The Indiana Magazine of History, Vol. LI, June, 1955, No. 2, p.
113.
he term "bank obligation" refers to both circulating notes and deposits.
3~ssembly
Journal, New York State, 1829, p. 179.
41bid., p. 179.
The plan conceived by Foman had three principal components:
The establishment of an insurance fund, to which all banks
had to pay an assessment;
A board of commissioners, which was granted bank examination powers; and
A specified list of investments for bank capital.
The first two provisions were adopted virtually intact; the proposal pertaining to the investment of bank capital initially was
rejected. Upon reconsideration during the 1830s, the bank capital proposal was modified and subsequently enacted.
Between 1831-1858, five additional states adopted insurance
programs: Vermont, Indiana, Michigan, Ohio, and Iowa. The
purposes of the various plans were similar: (1) to protect communities from severe fluctuations of the circulating medium
caused by bank failures; and (2) to protect individual depositors
and noteholders against losses. Available evidence indicates that
the first of these, concern with the restoration of the circulating
medium per se, predominated."
Nature of plans. In striving to meet these insurance goals, the
states employed one of three approaches. Following New
York's lead, Vermont and Michigan established insurance
funds. Indiana did not; instead, all participating banks were required mutually to guarantee the liabilities of a failed bank. The
insurance programs adopted by Ohio and Iowa incorporated
both approaches. While participating banks were bound together
by a mutual guaranty provision, an insurance fund was available
to reimburse the banks in the event special assessments were
necessary immediately to pay creditors of failed banks. The insurance fund was replenished from liquidation proceeds.
Table 2-1 summarizes the principal provisions of the six programs which operated between 1829-1866.
Coverage. In the first four programs adopted, insurance
coverage primarily extended to circulating notes and deposits.
New York later restricted coverage to circulating notes. In the
case of Ohio and Iowa, insurance coverage from the outset only
extended to circulating notes. None of the six programs placed a
dollar limit on the amount of insurance provided an individual
bank creditor.
Tarter H . Golernbe, "The Deposit Insurance Legislation of 1933: An Exarnination of Its Antecedents and Its Purposes," Political Science Quarterly, Vol.
LXXV, No. 2, June, 1960, p. 189.
The extension of insurance coverage to bank notes in all of
the six programs reflected their importance as a circulating medium. Because it was common practice for banks to extend
credit by using bank notes, nearly one-half of the circulating
medium prior to 1860 was in this form. In those states that
limited insurance coverage to bank notes, the belief was that
banks affected the circulating medium only through their issuance. Additionally, it was believed that depositors could select
their banks, whereas noteholders had considerably less discretion and thus were in greater need of p r ~ t e c t i o n . ~
Methods used to protect creditors of banks in financial difficulty. Ad hoc measures frequently were taken in some of the six
states to protect creditors of banks in financial difficulty. Faced
with the possible insolvency of several banks in 1837, New
York State's Comptroller began redeeming their notes from the
insurance fund. This action prevented the banks from failing
and they eventually were able to reimburse the insurance fund.
In 1842, New York faced a more serious crisis after the failure
of eleven participating banks within a three-year period threatened the solvency of the insurance fund. The legislriture authorized the State Comptroller to sell bonds sufficient to meet all
claims against the insurance fund. The bonds later were redeemed from subsequent payments into the fund by participating banks.
Other states similarly grappled with the question of whether
to assist or close a distressed bank. On several occasions authorities in Ohio kept a number of distressed banks from closing by
levying special assessments upon healthy participating banks.
Indiana and Iowa also granted financial assistance to distressed
banks.
Method of paying creditors of failed banks. Only the programs of Ohio and Iowa provided for immediate payment of
insured obligations. Necessary funds were made available in
those two states through special assessments levied on the sound
participating banks. Creditors in New York, Vermont and Michigan were not paid until the liquidation of a failed bank had
been completed. Indiana's program provided that creditors were
to be paid within one year after a bank failed if liquidation
proceeds and stockholder contributions were insufficient to
cover realized losses.
Role of bank supervision. Bank supervision was an essential
element of the insurance programs that operated prior to 1866.
6~ederalDeposit Insurance Corporation, Annual Report, 1952 (1953), p. 61.
15
The function of supervision was essentially twofold: (1) to reduce the potential risk exposure of the various insurance programs; and (2) to provide some measure of assurance to well
managed banks that the unsound banking practices of badly
managed banks would not go completely unchecked.' Table 2-2
summarizes the principal provisions relating to bank supervision
in the six insurance states.
Better supervision of banks was achieved by the programs
with mutual guaranty than by the simple insurance fund prothe mutual guaranty programs in Indiana, Ohio
g r a m ~ Under
.~
and Iowa, supervisory officials were largely selected by, and
accountable to, the participating banks. The officials were given
wide latitude to check unsound banking practices because the
participating banks were keenly aware that the cost of lax
supervision ultimately would be borne by them.
During the Indiana program's 30 years of operation, not one
state-chartered bank failed. Indiana's success principally was
attributable to the quality of bank supervi~ion.~
A strong supervisory board was the cornerstone of the program. The board,
which included four members appointed by the Indiana General
Assembly and one representative from each.of the participating
banks, could close any member bank. The causes for closing a
bank were: (I) insolvency; (2) mismanagement; and (3) refusal
to comply with any legal directive of the board. The board's
power was absolute since there was no provision for appeal to
the courts or to any other state agency.
Supervisory authorities in Ohio and Iowa could issue ceaseand-desist orders, as well as require banks to be closed. Ohio
had four banks fail: one in 1852 because of defalcation and
three in 1854 because of asset deterioration. While none failed
in Iowa, it should be noted that Iowa's program operated during
a period of more favorable economic conditions.
Assessments and the insurance funds. Insurance fund assessments were levied on capital stock or insured obligations.
To provide a basis for comparison with later assessment rates
under federal deposit insurance, previous researchers have computed the equivalent average annual rate on total obligations
'Carter H. Golembe and Clark Warburton, Insurance of Bank Obligations in
Sir States (Washington, D.C.: Federal Deposit Insurance Corporation, 1958),
pp. 1-9 - 1-10.
'~ederal Deposit Insurance Corporation, Annual Report, 1953 (1954),
p. 59.
'~olembe and Warburton, p. 1-18.
(i.e., deposits plus circulating notes) levied by the five states
that had insurance funds (Table 2-3). On this basis, Michigan's
annual rate of one-tenth of one percent most closely approximated the present statutory rate of one-twelfth of one percent
under federal deposit insurance (before credits). Other rates
were substantially higher, ranging from one-fifth of one percent
in Vermont to almost two percent in Iowa.
Three insurance programs had positive fund balances at the time
of their closing (Table 2-3). The Vermont and Michigan insurance
funds were deficient by $22,000 and $1.2 million, respectively. In
both states the first failures occurred before the insurance funds
were adequately capitalized. Michigan's program collapsed under
the strain. Although Vermont's fund subsequently recovered, it
had a negative balance at the time the program closed due to the
payment of unauthorized refunds to banks previously withdrawing
from the program.
Demise of the insurance programs. Two primary factors contributed to the eventual collapse of the state insurance systems.
The first factor was the emergence of the "free banking" movement in the 1830s. This movement developed in response to the
void created by the closing of the Second Bahk of the United States
in 1836. To fill this void, many states enacted laws designed to
ease bank entry restrictions. The movement produced an alternative for insurance of bank notes, which permitted a bank to post
bonds and mortgages with state officials in an amount equal to its
outstanding bank notes. Banks taking advantage of this alternative
were excluded from insurance.'' As the number of "free banks"
increased, participation in state insurance programs declined.
Consequently, the original intent to include all banks in the
individual state insurance programs was thwarted.
The second factor was the establishment of the national bank
system in 1863. In 1865, Congress levied a prohibitive tax on state
bank notes causing many state-chartered banks to convert to
national charters in order to escape the tax. As conversions
increased, membership in the state insurance systems declined,
eventually to the point where these programs ceased to exist.
Guaranty of Circulating Bank Notes by
the Federal Government
National bank notes were collateralized by United States bonds.
More importantly, the primary guaranty for the notes was the
'?his
22
exclusion did not apply in Michigan.
credit of the federal government rather than the value of the posted
collateral. Holders of notes of a failed national bank were to be
paid immediately and in full by the United States Treasury regardless of the value of the bonds backing the notes. As the Comptroller of the Currency stated in his first report to Congress:
If the banks fail, and the bonds of the government are depressed in
the market, the notes of the national banks must still be redeemed in
full at the treasury of the United States. The holder has not only the
public securities, but the faith of the nation pledged for their
redemption. l 1
So long as national bank notes retained their relative importance
in the circulating medium, bank-obligation insurance was considered unnecessary. However, bank deposits soon overtook and
then eclipsed national bank notes in importance. By 1870, deposits
were about twice, and by the end of the century seven times,
circulating notes. It was against this backdrop that efforts were
renewed to provide for deposit insurance. Various proposals to
that effect were introduced at the federal and state levels. Although
the first attempts were made in Congress as early as 1886, the
states took the lead.
State Insurance o f Bank Deposits,
1908-1930
Between 1907- 1917, eight states adopted deposit insurance
programs. Seven of the eight states were located west of the
Mississippi in predominantly agricultural areas. Table 2-4 summarizes the principal provisions of the eight programs.
Coverage. Insurance coverage in the eight states only extended
to deposits. Although the insurance programs were commonly
known as "deposit guaranty" programs, the guaranty was that of a
fund derived from assessments on the participating banks. In no
instance did the state explicitly guarantee the deposits.
None of the states, except Kansas for a brief period, placed an
insurance limit on the size of account or amount of deposits owned
by a depositor. However, some restrictions were applied to various
classes of deposits.
Methods of paying depositors of failed banks. In Kansas and
Mississippi the depositors of a failed bank received interestbearing certificates. Dividends on these certificates were paid
from liquidation proceeds. Upon final liquidation of all assets, the
balance due on the certificates was paid from the insurance fund.
"U.S., Comptroller of the Currency, Annual Report, November 28, 1863
(1864), p. 58.
Mississippi law stipulated that if the insurance fund was insufficient to pay the depositors, they were to be paid pro rata, and
the remainder paid from subsequent assessments.
In the remaining six states the deposit insurance law provided
for immediate cash reimbursement by the fund, either in full or to
whatever extent was practical. In most instances provision was
also made for the issuance of certificates of indebtedness in the
event there was insufficient money in the fund.
Role of bank supervision. A majority of the eight states granted
authority to regulate banks. l 2 Semiannual bank examinations were
the norm. Banking officials could enforce capital requirements
and issue cease-and-desist orders to bring about correction of
various infractions. In four of the states, supervisory authorities
could order the removal of bank officials for just cause.
Despite the powers granted to banking authorities, supervision
often proved to be lax. Because of understaffing and insufficient
funding, examiner workloads frequently were untenable. In other
instances banking authorities were thwarted when they tried to
enforce existing laws. In a few cases the authorities were the root
of the problem. Oklahoma provided the worst example in that the
bank commissioner's office itself became corrupt after 1919.
Assessments on participating banks. All of the insurance programs derived the bulk of their income from assessments. Both
regular and special assessments were based on total deposits. The
assessments levied ranged from an amount equivalent to an average annual rate of about one-eighth of one percent in Kansas to
about two-thirds of one percent in Texas. Some states permitted
participating banks to retain their insurance assessments in the
form of deposits, subject to withdrawal by order of the insurer.
Other states provided for the physical collection of assessments by
the insurer or the state treasurer.
Adequacy and termination of insurance funds. The state insurance funds were unable to cope with the economic events of the
1920s. The depression of 1921, and the severe agricultural problems that persisted throughout much of the decade, resulted in
numerous bank failures. The resultant claims on the various
insurance funds generally exceeded their size. While the Texas
fund was able to meet all claims, the insured deposits in the other
states that were never paid from any source ranged as high as 70
percent.
I 2 ~ nin-depth discussion of the role of bank supervision appears in Clark
Warburton's study, Deposit Insurance in Eight States During the Period
1908-1930 (Washington, D.C.: Federal Deposit Insurance Corporation, 1959).
The first fund to cease operations was Washington's in 1921. By
early 1930, all of the funds, including the Texas fund, which
became insolvent after most of the participating banks withdrew,
had ceased operations.
Congressional Proposals for Deposit
Guaranty or Insurance, 1886-1933
A total of 150 proposals for deposit insurance or guaranty were
made in Congress between 1886 and the establishment of the
Federal Deposit Insurance Corporation in 1933. Financial crises
prompted the introduction of many of these proposals. In the 60th
Congress, following the panic of 1907, more than thirty proposals
for deposit guaranty legislation were introduced. Similarly, in
response to the developing banking crisis, more than twenty bills
were introduced in the 72nd Congress, which opened in 1931.
Another group of bills, similar in principle to deposit insurance,
proposed to authorize national banks to issue circulating notes on
the basis of various types of assets or as general obligations of the
banks, backed by a guaranty or insurance fund to which all
national banks would contribute. These proposals were numerous
during the thirty years preceding establishment of the Federal
Reserve System in 1913.
Three general methods of providing depositor protection were
proposed in the bills. Of the 150 bills, 118 provided for the
establishment of an insurance fund out of which depositors' losses
would be paid, 22 provided for United States government guaranty
of deposits, and 10 required banks to purchase surety bonds
guaranteeing deposits in full.
Most of the deposit insurance bills introduced prior to establishment of the Federal Reserve System authorized participation of
national banks only. After 1913, about one-half of the deposit
insurance bills provided for participation of all members of the
Federal Reserve System (national and state member banks). Only
a few provided for coverage of deposits in nonmember banks, and
then participation was usually optional.
Nearly two-thirds of the bills introduced prior to establishment
of the Federal Reserve System provided for administration of the
insurance system by the Comptroller of the Currency. After 1913,
some of the proposals provided for administration by the Federal
Reserve Board or by the Federal Reserve Banks under supervision
of the Board. Other proposals called for the establishment of a
special administrative board to oversee the insurance system.
Eighty percent of the bills provided for insurance or guaranty of
all, or nearly all, deposits. The bills that provided for only partial
coverage of deposits contained a variety of limitations. Generally,
all liabilities not otherwise secured were to be protected by the
insurance or guaranty system.
In nearly one-half of the bills the entire cost of deposit insurance, and in about one-fourth of the bills the major part of the
cost, was to be met by assessments based upon total deposits or
average total deposits. The rates of assessment ranged from
one-fiftieth of one percent to one-half of one percent per year,
while in a number of cases assessments were to be adjusted to
meet the total cost. The most common rate was one-tenth of one
percent. Many of the bills provided for special initial assessments, or for assessments as needed, in addition to those collected periodically.
In a number of bills, assessments upon the banks were to be
supplemented by appropriations from the United States government, or, particularly in the bills introduced in the later years, by
levies on the earnings or surplus of the Federal Reserve Banks. In
several cases the cost was to be met solely by the United States
government. In cases where the insurance was in the form of surety
bonds, the cost of the bonds was to be borne by the banks.
Many of the bills called for a limit on the accumulation of funds
by the insurance or guaranty system. In a few bills, assessment
rates were to be adjusted by the administrative authority and were
required to be sufficient to meet all losses to depositors or to
maintain the fund at a given size. In some proposals, the fund was
authorized to borrow if necessary, and in others to issue certificates to unpaid depositors if the fund were depleted.
Summary
The disruption caused by bank failures was a recurrent problem
during the 19th century and the first third of the 20th century.
Numerous plans were proposed or adopted to address this problem. Many embodied the insurance principle.
Insurance of bank obligations by the states occurred during two
distinct periods. The first began in 1829 with the adoption of an
insurance plan by New York. During the next three decades five
other states followed New York's ,lead. Except for Michigan's
insurance plan, which failed after a short period of operation, these
plans accomplished their purposes. Nevertheless, the last of these
insurance programs went out of existence in 1866 when the great
majority of state-chartered banks became national banks.
Insurance of bank obligations was not attempted again by the
states until the early 1900s. Eight states established deposit guaranty funds between 1907 and 1917. In contrast to the earlier state
insurance systems, those adopted between 1907 and 1917 were
generally unsuccessful. Most of the eight insurance plans were
particularly hard hit by the agricultural depression that followed
World War I. The numerous bank failures spawned by that
depression placed severe financial stress on the insurance funds.
By the mid-1920s, all of the state insurance programs were in
difficulty and by early 1930 none remained in operation.
The federal government, in turn, sought to secure the safety of
the circulating medium through direct guarantee by the Treasury of
national bank notes, beginning in the 1860s. However, the subsequent rapid growth of bank deposits relative to bank notes once
again aroused concern regarding the safety of the circulating
medium in the event of a bank failure. Consequently, 150 proposals for deposit insurance or guaranty were introduced into
Congress between 1886 and 1933.
The basic principles of the federal deposit insurance system
were developed in these bills and in the experience of t6e various
states that adopted insurance programs. These principles included
financing the federal deposit insurance fund through assessments,
the use of rigorous bank examination and supervision to limit the
exposure of the fund, and other elements, such as standards for
failed bank payoffs and liquidations, intended to minimize the
economic disruptions caused by bank failures.
The adoption of nationwide deposit insurance in 1933was made possible
by the times, by the perseverance of the Chairman of the House Committee on Banking and Currency, and by the fact that the legislation attracted
support from two groups which formerly had divergent aims and
interests - those who were determined to end destruction of circulating
medium due to bank failures and those who sought to preserve the
existing banking structure.'
Banking Developments, 1930-1932
An average of more than 600 banks per year failed between
1921 and 1929, which was ten times the rate of failure during
the preceding decade. The closings evoked relatively little
concern, however, because they primarily involved small, rural
banks, many of which were thought to be badly managed and
weak. Although these failures caused the demise of the state
insurance programs by early 1930, the prevailing view
apparently was that the disappearance of these banks served to
strengthen the banking system.
This ambivalence disappeared after a wave of bank failures
during the last. few months of 1930 triggered widespread
attempts to convert deposits to cash. Many banks, seeking to
accommodate cash demands or increase liquidity, contracted
credit and, in some cases, liquidated assets. This reduced the
quantity of cash available to the community which, in turn,
placed additional cash demands on banks. Banks were forced to
restrict credit and liquidate assets, further depressing asset
prices and exacerbating liquidity problems. As more banks were
unable to meet withdrawals and were closed, depositors became
more sensitive to rumors. Confidence in the banking system
began to erode and bank "runs" became more common.
During this period, the Federal Reserve did little to ease the
liquidity problems of banks. The failure of the Federal Reserve
'Golembe, "The Deposit Insurance Legislation of 1933," p. 182.
to adopt an aggressive stance with respect to either open market
purchases of securities or its discount window operations has
been ascribed to several factom2 Most notably, it was generally
believed that bank failures were an outgrowth of bad management and, therefore, were not subject to corrective action by
the Federal Reserve. Concern within the System also was muted
because most failed banks in 1930 were nonmembers for which
Federal Reserve officials felt no responsibility.
In all, 1,350 banks suspended operations during 1930 (Table
3-1).3 Bank failures during the previous decade had been
confined primarily to agricultural areas; this no longer was the
case in 1930. In fact, the Bank of United States, one of the
nation's largest banks based in New York City, failed that year.
The large jump in bank failures in 1930 was accompanied by an
even greater increase in depositor losses (Table 3-1).
As liquidity pressures siubsequently eased during the early
months of 1931, the number of bank failures declined sharply
but the decrease proved to be short-lived. Bank failures again
rose between March and June as the public resumed converting
deposits into currency and banks sought to meet withdrawal
demands. During the second-half of the year, another, more
serious, liquidity scramble occurred.
Once again, the Federal Reserve failed to inject sufficient
liquidity into the banking system. In 1931, policymakers were
primarily preoccupied with international monetary matters. The
abandonment by Great Britain of the gold standard in September
1931 aroused general fears that other countries might follow.
These fears caused many foreigners with u*.s. bank accounts to
convert deposits to gold in the New York money market. To
stem the ensuing gold outflow, the Reserve Bank of New York
'A discussion of the Federal Reserve System's attitude appears in Milton
Friedman and Anna J. Schwartz, A Monetary History of the United States,
1867-1960 (Princeton, New Jersey: National Bureau of Economic Research,
1963), pp. 357-359. Much of the discussion relating to the events preceding
the nationwide bank holiday is based on this source.
3 ~ h teerms "bank suspensions" and "bank failures" are often used interchangeably. For the most part, this practice is followed throughout the chapter. Technically, however, "suspensions" include all banks that are closed
because of financial difficulties, whereas "failures" are limited to those suspended banks that were placed in the hands of receivers and liquidated. Some
of the suspended banks were reorganized or restored to solvency and resumed
operations. In either instance, the assumption is that the suspended bank actually failed, though rehabilitation later occurred.
Table 3-1. Commercial Bank Suspenqions, 1921-1933 ($ Thousands)
-
Losses to Dep)ositors
lt of
As a Perce~
Losses Borne
Depos~ts~nAll
by Depos~tors Commer~calI3anks
Year
Number
i
of Suspens~ons
Deposits
-
(1)
(2)
(3)
506
366
646
775
617
975
669
498
659
1,350
2.293
1 453
$1 72.81
91,l
149,601
210,150
166,937
260,153
199,332
1 42,30C
230,6
837,O
1,690.2
706,l
3,596,71
9,967
8,223
62,142
79,381
60,799
83.066
60.681
"3.813
6,659
7,359
0,476
8 302
19
19
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
19
So
(4)
0 21%
0 13
0 19
0 10
0 18
0 57
101
0 57
2 15
3), FDIC, Column (4),Fri,edman and !3chwartz
sharply increased its rediscount rate. While this action achieved
the desired effect, no steps were taken to augment already
depleted bank reserves through extensive open market purchases
of securities. By ignoring domestic financial considerations, the
Federal Reserve added to the banking industry's woes.
The effects of these liquidity crises were reflected in the
failure statistics. About 2,300 banks suspended operations in
1931 (Table 3-1). The number of failures thus exceeded the
average number for the 1921-1929 period by almost threefold.
Losses borne by depositors in 1931 exceeded losses for the
entire 1921-1929 period.
In an attempt to ease bank liquidity problems, a National
Credit Corporation, organized by bankers in the private sector,
was created in October 1931 to extend loans to weakened
banks. However, the corporation failed within a matter of
weeks. Business leaders appealed to the federal government for
assistance. The Hoover Administration responded by
recommending two measures. The first resulted in the creation,
in January 1932, of a new major federal lending agency, the
Reconstruction Finance Corporation (RFC). One of its primary
functions was to make advances to banks. By the end of 1932,
the RFC had authorized almost $900 million in loans to assist
over 4,000 banks striving to remain open. The RFC might have
assisted more banks had Congress not ordered it to disclose
publicly the names of borrowers, beginning in August 1932.
Appearance of a bank's name on the list was interpreted as a
sign of weakness, and frequently led to runs on the bank.
Consequently, many banks refrained from borrowing from the
RFC .
The second measure supported by the Hoover Administration,
the Glass-Steagall Act of February 27, 1932, broadened the
circumstances under which member banks could borrow from
the Federal Reserve System. It enabled a member bank to
borrow from a Federal Reserve Bank upon paper other than that
ordinarily eligible for rediscount or as collateral for loans.
While the amounts subsequently borrowed were not large in the
aggregate, the measure did aid individual banks.
The generally improved banking situation during the ensuing
months was marked by a significant drop in both the number of
bank failures and depositor losses. Other signs suggested that
the industry's troubles were far from over. Waves of bank
failures still occurred during the year. Another disquieting sign
was the emergence of bank moratoria. Initially, they were
declared by individual local communities. Later that year,
Nevada proclaimed the first statewide moratorium when runs on
individual banks threatened to involve banks throughout the
state. Similar moratoria were to play a role in the events that
culminated in the nationwide bank holiday of 1933.
The Banking Crisis of 1933
During the winter of 1932-1933, banking conditions deter-iorated rapidly. In retrospect, it is not possible to point to any
single factor that precipitated the calamitous events of this
period. The general uncertainty with respect to monetary and
banking conditions undoubtedly played the major role, although
there were specific events that tended to increase liquidity pressures within the system. Banks, especially in states that had
declared bank moratoria, accelerated withdrawals from correspondents in an attempt to strengthen their position. Currency
holdings increased significantly, partially in anticipation of additional bank moratoria.
Additional liquidity pressures were brought about by concern
relating to the future of the dollar. With the election of Franklin
D. Roosevelt in November 1932, rumors circulated that the new
administration would devalue, which led to an increase in
speculative holdings of foreign currencies, gold and gold certificates. Unlike the period of international monetary instability in
1931, a significant amount of the conversions from Federal Reserve Notes and deposits to gold came from domestic sources.
These demands placed considerable strain on New York City
banks and, ultimately, on the Federal Reserve Bank of New
York.
It was the suddenness of the withdrawal demands in selected
parts of the country that started a panic of massive proportions.
State after state declared bank holidays. The banking panic
reached a peak during the first three days of March 1933. Visitors arriving in Washington to attend the presidential inauguration found notices in their hotel rooms that checks drawn on
out-of-town banks would not be honored. By March 4, Inauguration Day, every state in the Union had declared a bank
holiday.
As one of his first official acts, President Roosevelt proclaimed a nationwide bank holiday to commence on March 6
and last four days. Administration officials quickly began to
draft legislation designed to legalize the holiday and resolve the
banking crisis. Early in their deliberations they realized that the
success of any proposed plan of action primarily would hinge on
favorable public reaction. As noted by Raymond Moley, a key
presidential adviser who attended many of the planning
sessions:
We knew how much of banking depended upon make-believe
or, stated more conservatively, the vital part that public confidence had in assuring s~lvency.~
To secure public support, officials formulated a plan that relied
on orthodox banking procedures.
Few members of Congress knew what was contained in the
Administration's bill when they convened in extraordinary session at noon on March 9. In fact, Henry B. Steagall, Chairman
of the Committee on Banking and Currency, purportedly had
the only copy of the bill in the House. Waving the copy over his
head, Steagall had entered the House chamber, shouting,
"Here's the bill. Let's pass it."5 After only 40 minutes of debate, during which time no amendments were permitted, the
House passed the bill, known as the Emergency Banking Act.
Several hours later, the Senate also approved the emergency
legislation intact.
4 ~ a y m o n dMoley, The First New Deal (New York:
World, Inc., 1966), p. 171.
5~bid.,
p. 177.
Harcourt, Brace
&
The Emergency Banking Act legalized the national bank
holiday and set standards for the reopening of banks after the
holiday. The Act expanded the RFC's powers as a means of
dealing with the crisis then threatening the banking system. It
authorized the RFC to invest in the preferred stock and capital
notes of banks and to make secured loans to individual banks.
To insure an adequate supply of currency, the Act provided for
the issuance of Federal Reserve Notes, which were to be backed
by U.S. government securities. The Federal Reserve Banks were
empowered to advance the new currency to member banks without requiring muchcollateral. After the Act was signed into law,
the Bureau of Engraving and Printing promptly went into 24hour production to manufacture the currency.
. The President subsequently issued a proclamation extending
the holiday in order to allow time for officials to reopen the
banks. In his first "fireside chat," delivered on March 12, President Roosevelt reviewed the events of the past several days and
outlined the reopening schedule. Following proper certification,
member banks in the twelve Federal Reserve Bank cities were
to reopen on March 13. Member banks in some 250 dther cities
with recognized clearinghouses were to reopen on March 14.
Thereafter, licensed member banks in all other localities were to
reopen. The President indicated that the Secretary of the Treasury already had contacted the various state banking departments and requested them to follow the same schedule in reopening state nonmember banks. Before concluding his radio
address, the President cautioned that he could not promise that
every bank in the nation would be reopened. About 4,000 banks
never reopened either because of the events of the previous two
months or the bank holiday itself.
The task of implementing the Emergency Banking Act primarily was the responsibility of the Secretary of the Treasury.
Under the Act, licenses for all member banks, both national and
state, were to be issued by the Secretary. (State nonmember
banks were to be licensed by the state banking departments.)
The Treasury, however, demanded that each of the Federal Reserve Banks approve of the reopening of banks in their respective districts. The Federal Reserve Board balked at this demand,
preferring instead that the Treasury Department shoulder the
entire burden of reopening member banks. The controversy was
resolved in the Treasury Department's favor. It was agreed that
licenses would be issued by the Secretary of the Treasury upon
the recommendation of the district Federal Reserve Bank, the
chief national bank examiner and the Comptroller of the Currency. Several hundred banks soon reopened for business on the
certification of the Treasury. As the reopenings proceeded, public confidence increased significantly and widespread hoarding
ceased.
Federal Deposit Insurance
Legislation
After some semblance of order had returned to the financial
system, efforts were renewed in Congress to enact deposit insurance legislation. Although a deposit insurance bill had been
passed by the House in 1932, the Senate had adjourned without
acting on the proposal. Insurance proponents hoped that legislative efforts would prove successful this time, since the banking crisis was still fresh in the public's mind. In their view,
recent events had shown that a system of federal deposit insurance was necessary to achieve and maintain financial stability.
One of the chief proponents of federal deposit insurance in
Congress was Representative Henry B. Steagall. He has been
credited with proposing the legislation which created the Federal
Deposit Insurance Corporation, leading the fight for its adoption
in the House and helping to effect a compromise when chances
for passage of the bill appeared doomed. Steagall's achievement
was all the more remarkable in view of the formidable opposition confronting the proponents of deposit insurance. Opposition
emanated from the Roosevelt Administration, segments of the
banking industry and from some members of Congress.
Arguments offered against deposit insurance reflected both
practical and philosophical considerations. Opponents asserted
that deposit insurance would never work. They pointed to the
defunct state-level deposit programs to substantiate their argument. Another widely held view was that deposit insurance
would remove penalties for bad management. Critics also
charged that deposit insurance would be too expensive and that
it would represent an unwarranted intrusion by the federal government into the private sector.
Within the Roosevelt Administration, the Secretary of the
Treasury was strongly opposed to the idea of federal deposit
insurance. While historians have asserted that Secretary
Woodin's views were partially responsible for President Roosevelt's opposition to deposit insurance, accounts differ regarding
the nature and extent of Franklin Roosevelt's opposition. However, the Administration was not of one mind on the issue.
Support was voiced by Vice President John Nance Garner and
Jesse H. Jones of the RFC, among others. Prior to Roosevelt's
inauguration, Garner, then-Speaker of the House, had appealed
to the President-elect to support deposit insurance. When
Roosevelt declined, stating that it would never work, Garner
predicted that deposit insurance legislation eventually would be
passed.
Banking interests, particularly those representing the larger
banks, generally viewed federal deposit insurance with distaste.
The President of the American Bankers Association declared
that deposit insurance was "unsound, unscientific and danger0 ~ s . "The
~ banking industry's views had only limited impact
since banking at that time was held in low esteem. The industry's already tarnished image was not helped by disclosures of
unsavory security market dealings on the part of certain New
York banks which came to light when deposit insurance was
being considered in Congress.
More formidable opposition to deposit insurance came from
several influential Congressmen. One of the most vociferous
opponents was Carter Glass of Virginia, Chairman of the Senate
Banking and Currency Committee. He had been Roosevelt's
initial choice to serve as Secretary of the Treasury, but declined
the Cabinet offer. Although Senator Glass was intent on passing
banking reform legislation, federal deposit insurance was not
one of the reforms he supported or sought. In opposing federal
deposit insurance, Glass pointed to the record of the defunct
state insurance programs. Nevertheless, he subsequently al-lowed bank deposit insurance to be written into a banking bill
that he had sponsored. One business journal during the period
reported that Glass simply had yielded to public opinion:
It became perfectly apparent that the voters wanted the guarantee
[deposit insurance], and that no bill which did not contain such a
provision would be satisfactory either to Congress or to the public. Washington does not remember any issue on which the sentiment of the country has been so undivided or so emphatically
expressed as upon this.8
In mid-May, both Senator Glass and Representative Steagall
formally introduced banking reform bills, which included provisions for deposit insurance. The two bills primarily differed
6~bid.,pp. 3 18-3 19.
'"wires Banks to Urge Veto of Glass Bill," New York Times, June 16,
1933, p. 14.
8''~epositInsurance," Business Week, April 12, 1933, p. 3.
41
with respect to the conditions for membership in the deposit
insurance corporation that was to be created. Whereas membership in the Federal Reserve was a precondition for obtaining
deposit insurance under the Senate bill, it was not a prerequisite
in the House version. Both bills incorporated the demands made
by the Roosevelt Administration that: (1) deposit coverage be
based on a sliding scale; and (2) there be a one-year delay in the
start of the insurance corporation.
Later that month, however, the Glass bill was amended to
incorporate Senator Arthur Vandenberg's proposal calling for
the creation of a temporary deposit insurance fund. Vandenberg
opposed a delay in the start of deposit insurance because "the
need is greater in the next year than for the next hundred
year^."^ On the day Vandenberg introduced his proposal, Vice
President Garner was presiding over the Senate, which was sitting as a court of impeachment in the trial of a district judge.
Garner had heard that Vandenberg had formulated a deposit
insurance plan that would accomplish the same goals as those
contained in an insurance bill which Garner had pushed through
the House in 1932. Desiring that deposit insurance be implemented as soon as possible, Garner therefore approached Vandenberg during the impeachment proceedings and inquired
whether he had the deposit insurance amendment in his possession. After Vandenberg responded affirmatively, Garner instructed him to introduce the amendment when signaled. Several minutes later, Garner suspended the court proceedings and
ordered the Senate into regular session to consider more banking
legislation. With Garner sitting by his side, Vandenberg then
offered his deposit insurance amendment, which was overwhelmingly adopted.
The amendment stipulated that, effective January 1, 1934, the
temporary fund would provide insurance coverage up to $2,500
for each depositor and would function until a permanent corporation began operations on July 1, 1934. If demands on the
temporary fund exceeded available monies, the Treasury would
be obliged to make up the difference. The amendment also provided that solvent state banks could join the fund.
The inclusion of the Vandenberg amendment in the Senate
bill almost resulted in the defeat of deposit insurance in Congress. When the banking reform bills that had been passed by
'"~ank Bill Debate to Open in Senate," New York Times,May 19, 1933, p. 4.
42
both houses were sent to a joint conference committee, for resolution of differences, an impasse promptly developed. The
House conferees opposed the Vandenberg amendment contained
in the Senate version of the bill, particularly the provision calling for the immediate establishment of a temporary insurance
corporation. Another issue that split the conferees was whether
Federal Reserve membership should be a precondition for obtaining deposit insurance.
A compromise finally was reached on June 12, after the Senate conferees threatened to remove all deposit insurance provisions from the bill. They feared that the impasse over deposit
insurance could endanger all of the banking reform measures
contained in the bill. In order to save the bill, the House conferees reluctantly accepted the Senate's version as well as an
additional provision desired by the Senate conferees to liberalize
the branching restrictions governing national banks. This provision reflected widespread public disillusionment with the
failure-prone independent banking system. Proponents of branch
banking maintained that geographic diversification of lending
risks and the deposit base would result in a lower bank failure
rate.
The bill agreed to by the conferees passed both houses of
Congress on the following day. Some opponents of deposit insurance had not yet thrown in the towel, though. The American
Bankers Association wired its member banks, urging them to
telegraph President Roosevelt immediately to request his veto of
the legislation. Nevertheless, President Roosevelt signed the
measure, known as the Banking Act of 1933, into law on June
16, 1933. Section 8 of the Act created the Federal Deposit Insurance corporation through an amendment to the Federal Reserve Act. The Banking Act of 1933 also created the Federal
Reserve Open Market Committee and imposed restrictions on
the permissible activities of member banks of the Federal Reserve System.
Deposit Insurance Provisions of the
Banking Act of 1933
Section 12B of the Federal Reserve Act as amended created
the Federal Deposit Insurance Corporation and defined its organization, duties and functions. It provided for two separate
plans of deposit insurance: a temporary plan which was to be
initiated on January 1, 1934, and a permanent plan which was
to become effective on July 1, 1934.
Capital necessary to establish the FDIC was to be provided by
the United States Treasury and the twelve Federal Reserve
Banks. The Treasury was to contribute $150 million. Each of
the twelve Federal Reserve Banks was required to subscribe to
Class B capital stock in an amount equal to one-half of its surplus as of January 1, 1933.
Management of the FDIC was vested in a Board of Directors
consisting of three members. The Comptroller of the Currency
was designated a member ex officio; the other two members
were to be appointed by the President for six-year terms with
the advice and consent of the Senate. One of the two appointive
directors was to serve as Chairman of the Board, and not more
than two members of the Board could be members of the same
political party.
The temporary plan of deposit insurance initially limited protection to $2,500 for each depositor. Banks admitted to insurance under the temporary plan were to be assessed an amount
equal to one-half of one percent of insurable deposits. One-half
of the assessment was payable at once; the rest was payable
upon call by the FDIC.
All Federal Reserve member banks licensed by the Secretary
of the Treasury under terms of an Executive Order of the President, issued March 10, 1933, were required by law to become
members of the temporary fund on January 1, 1934. Other
banks were authorized to join the fund upon certification of their
solvency by the respective state supervisory agencies and after
examination by, and with the approval of, the Federal Deposit
Insurance Corporation.
The original permanent plan, while it never took effect and
was superseded by a new permanent plan in the Banking Act of
1935, contained certain features of historical interest. Banks
participating in insurance under the original plan were to subscribe to capital stock of the FDIC and be subject to whatever
assessments might be needed to meet the losses from deposit
insurance operations. The plan provided for full protection of
the first $10,000 of each depositor, 75 percent coverage of the
next $40,000 of deposits, and 50 percent coverage of all deposits in excess of $50,000. In order to retain their insurance, all
participating banks were required to become members of the
Federal Reserve System within two years. Thus, with regard to
financing, degree of protection and supervisory provisions, the
original plan differed significantly from both the temporary plan
and the permanent plan that became effective with the Banking
Act of 1935.
44
Formation of the Federal Deposit Insurance
Corporation
One of the first tasks facing the FDIC was the formation of an
operating organization. As provided in the Banking Act of
1933, the Comptroller of the Currency, J. F. T. O'Connor, was
designated as a director. He served as the FDIC's chief executive until the appointment of the other two directors.
In September, the President appointed as the other directors
Walter J. Cummings, then special assistant to Secretary of the
Treasury Woodin, and E. G. Bennett, a Republican banker and
businessman from Utah. The directors organized on September
11, 1933, and elected Walter J. Cummings, Chairman of the
~ o a r d . " As was his intent, Cummings' chairmanship lasted
only through the initial organization of the FDIC. In January
1934, he left the FDIC to assume the chairmanship of Continental Illinois National Bank & Trust Company in Chicago.
Bank examination consumed nearly all of the FDIC's efforts
in the months prior to the establishment of the temporary fund
on January 1, 1934. The hastily assembled examination force
had to examine almost 8,000 state-chartered nonmember banks
in three months in order for the FDIC to meet its responsibilities
under the Banking Act of 1933. The task of completing these
admission examinations was largely accomplished as intended
by the end of 1933.
The Temporary Federal Deposit Insurance
Fund
Admission standards. Actual insurance of bank deposits became effective on January 1, 1934. The Temporary Federal Deposit Insurance Fund opened with 13,201 banks insured (or approved for insurance). Of these, 12,987 were commercial banks
and 214 were mutual savings banks. These represented 90 percent of all commercial banks and 36 percent of all mutual savings banks.
The lower participation rate among savings banks was attributable to several factors. Many savings banks questioned
whether they needed deposit insurance. Unlike commercial
banks, savings banks had not been seriously affected by bank
runs since they legally could restrict deposit withdrawals. In
several states mutual savings banks legally could not subscribe
''The FDIC's Boards of Directors during its first half-century are listed in the
Appendix.
to stock in the FDIC. In other instances, savings banks objected
to FDIC membership on philosophical grounds. As summed up
by one savings banker: "I for one want none of this FDIC. If it's
New Deal, that damns it as far as I'm concerned.""
Pursuant to the intent of Congress, the FDIC accepted for
insurance all banks that it found to be solvent. However, it was
recognized that a great many banks lacked sufficient capital,
which posed a huge risk for the insurance fund. Some banks
were admitted upon a commitment to increase their capital, and
early in 1934 RFC and local capital was secured according to
those commitments. A program of reexamination and rehabilitation was carried o n throughout theyear by the FDIC.
Organizational changes. Following the departure of Walter J.
Cummings, E. G. Bennett served briefly as acting chairman of
the FDIC. In February 1934, Leo T. Crowley, a 46-year-old
bachelor, became chairman. As former owner of several Wisconsin banks during the Depression, he had organized and
headed the Wisconsin Banking Review Board. In December
1933, he journeyed to Washington, D.C., seeking aid for several hundred Wisconsin banks so they could qualify for deposit
insurance. His role in restoring the health of depression-struck
banks in his native state brought him to the attention of the
Roosevelt Administration.
The appointment of Crowley proved to be especially felicitous. An imposing man, he possessed both a witty personality
and exceptional administrative skills. He left an indelible imprint on the FDIC during his twelve-year term as chairman. Legislative developments. The Banking Act of 1933 provided
for termination of the Temporary Federal Deposit Insurance
Fund and the inauguration of the permanent insurance plan on
July 1, 1934. However, in the early part of 1934, FDIC officials
recommended that the Temporary Federal Deposit Insurance
Fund be extended for another year and that the law be amended
in certain minor respects to facilitate administration. It was considered advisable to give the states additional time to adopt
legislation to enable state banks to enjoy the full benefits of
federal deposit insurance. FDIC officials also desired to gain
more experience with the administration and operation of an
insurance plan prior to the inauguration of the permanent plan.
Moreover, the capital rehabilitation program for banks could not
have been completed by July 1934 as required to permit all
"Oscar Schisgall, Out of One Small Chest (New York: AMACOM, 1975),
p. 146.
47
banks insured with the Temporary Federal Deposit Insurance
Fund to qualify for insurance under the permanent plan.
On June 16, 1934, Congress extended the life of the Temporary Federal Deposit Insurance Fund, and the effective date of
the permanent plan was postponed one year, to July 1, 1935. l 2
Insured nonmember banks were allowed to terminate their
membership in the Temporary Federal Deposit Insurance Fund
on July 1, 1934, provided they gave adequate notice to the
FDIC. Provision was made for refunding the assessments collected from the banks that withdrew.
There had been some doubt as to the legality of some mutual
savings banks qualifying as members of the permanent plan of
deposit insurance. Furthermore, many mutual savings banks
considered themselves preferred risks and wished to avoid assessment at the same rate as commercial banks. For these and
other reasons, 169 mutual savings banks withdrew from the
Temporary Federal Deposit Insurance Fund at the end of June
1934. Of these, 133 were located in New York State. Only two
New York mutual savings banks, Emigrant Savings Bank and
Franklin Savings Bank, kept their insurance with the FDIC.
(Only 21 commercial banks withdrew from the Fund on July 1,
1934.)
Effective July 1, 1934, insurance protection was increased
from $2,500 to $5,000 for each depositor at an insured institution, except in the case of certain mutual savings banks. Insurance protection remained at $2,500 for each depositor at a
mutual savings bank except that any mutual savings bank could,
with the consent of the FDIC, elect to be insured up to $5,000.
The FDIC, at the discretion of its Board of Directors, was
authorized to set up a separate fund for mutual savings banks to
be known as the Fund For Mutuals. The Temporary Federal
Deposit Insurance Fund was not to be subject to the liabilities of
the Fund For Mutuals, and vice versa. A separate Fund For
Mutuals was established by the Board of Directors on July 14,
1934, effective July 1, 1934. Upon inception of the permanent
plan in 1935, this fund and the fund for commercial banks were
consolidated.
he life of the temporary plan was subsequently extended for an additional
two months. The second extension was approved June 28, 1935, while the
Banking Act of 1935 was under consideration, and was designed merely to
continue the temporary plan until that Act could be approved.
Under the previously existing law, insured nonmember banks
were required to apply to become members of the Federal Reserve System on or before July 1, 1936, in order to continue
their insurance. With the one-year delay in the establishment of
the permanent fund, this requirement was changed by pushing
the date back to July 1, 1937.
Banks in the territories of Hawaii, Puerto Rico, Alaska and
the Virgin Islands were made eligible for insurance. In addition,
the language authorizing the FDIC to act as receiver in the case
of failed insured banks was clarified. By a new provision of the
law, each insured bank was required to display signs to the
effect that its deposits were insured by the Federal Deposit Insurance corporation. This practice continues today.
Deposit Insurance and Banking Developments
in 1934
Total deposits in insured and uninsured licensed commercial
banks increased during 1934 by about $7.2 billion dollars, or 22
percent. This growth in deposits had rarely been equaled in the
past and restored to the banking system approximately half of
the decline in deposits that had occurred during the preceding
three years.
The growth in bank deposits was accompanied by changes in
the character and quality of the assets held by insured banks.
Cash, amounts due from other banks and holdings of direct
obligations of the United States government increased considerably. The average quality of the assets of insured commercial banks improved as large amounts of worthless and
doubtful assets were written off. Increased earnings and new
capital, which was obtained from the RFC and local interests,
maintained banks' capital positions. At the close of 1934, insured banks held 98 percent of the assets of all licensed commercial banks.
The liquidity buildup undertaken by banks during 1934
caused FDIC officials some concern. They feared that excessive
holdings by banks of cash and government securities could stifle
economic recovery. Speeches given by the FDIC's directors
during that period frequently contained exhortations urging
bankers to expand their loan portfolios.
Only nine insured banks and 52 uninsured licensed banks
suspended operations during 1934. All but one of the insured
banks and most of the uninsured licensed banks that failed during 1934 were small institutions. More than 900 banks which
49
were not licensed after the holiday were placed in receivership
or liquidation. More than half of these banks had a part of their
assets and liabilities taken over by successor banks.
In its 1934 Annual Report, the FDIC rather modestly attributed the small number of failures of licensed banks to factors
other than deposit insurance. It noted that many banks were able
to survive because they had received necessary financial assistance from the RFC and other governmental agencies. Secondly, events during 1933 had weeded out many weak banks.
Third, improved economic conditions also had played a role in
keeping down the failure rate. The FDIC warned that the low
rate of failures could not be expected to continue.
During 1934, the fierce opposition of the banking industry
faded in the face of the success of deposit insurance. The industry's changed attitude was reflected in the public endorsement of
the temporary insurance plan by the Executive Council of the
American Bankers Association in April of that year. Public sentiment continued to support deposit insurance.
Proposals to Amend the Permanent Insurance
Law
.
Despite the widespread acceptance accorded to deposit insurance, interested parties increasingly voiced unhappiness over
various features of the insurance plan as 1934 wore on. The
banking industry wanted some legal limits placed on the FDIC's
assessment powers. State bankers wanted to eliminate the requirement that federally insured banks had to join the Federal
Reserve System. After gaining experience with the administration of federal deposit insurance, FDIC officials also, desired legislative changes.
Congressional hearings on banking reform, including deposit
insurance, began in February 1935. Title I of the bill under
consideration dealt with deposit insurance. The discussions of
Title I centered around two issues: the appropriate deposit insurance assessment rate and Federal Reserve membership requirements for federally insured banks.
In early August, the two houses of Congress resolved their
differences on changes in the assessment rate. The House conferees acquiesced to the Senate on a one-twelfth of one percent
annual assessment rate on total (adjusted) deposits. Adoption of
this rate, which had been recommended by the FDIC, was based
upon a combination of factors. The FDIC had calculated that
during the period 1865- 1934, an annual average assessment rate
of about one-third of one percent of total deposits would have
been required to cover the actual losses on deposit balances in
failed banks. However, if certain "crisis" years in which losses
were unusually high were eliminated, the necessary rate would
have been lowered to about one-twelfth of one percent. Adoption of the lower rate was justified on the grounds that many
banking reforms and improvements had occurred to strengthen
the banking system and prevent bank failures.
A compromise also was reached on the Federal Reserve
membership issue. In the final conference report, which was
accepted by both Houses on August 19, only insured banks with
more than $1 million in deposits would be required to join the
Federal Reserve System, beginning in 1941. (The membership
requirement was rescinded altogether in 1939.)
The omnibus bill passed by Congress, known as the Banking
Act of 1935, became effective on August 23, 1935. The Act
consisted of three distinct parts: Title I related to the Federal
Deposit Insurance Corporation; Title I1 related to the Federal
Reserve System; and Title I11 consisted of technicd amendments to existing banking laws.
Inauguration of Permanent Plan of Insurance
of Bank Deposits
.
The Banking Act of 1935 terminated the temporary federal
deposit insurance plan and inaugurated the permanent plan. It
revised the entire deposit insurance law and made substantial
changes in the character of the permanent plan for deposit insurance originally enacted on June 16, 1933. However, the new
plan continued to limit insurance coverage to a maximum of
$5,000 for each depositor at an insured institution.
The Banking Act of 1935 provided for the automatic admission to insurance under the permanent plan of all banks insured
at the close of the temporary funds, except banks which signified, within 30 days, their intention to withdraw from insurance and those banks that had failed to file the required certified
statement of deposits and to pay the required assessments.
Thirty-four banks insured under the temporary plan withdrew
within 30 days after the close of the temporary funds. One other
bank had its insurance status terminated by reason of failure to
file the certified statement. Automatically admitted to insurance
under the permanent plan were 14,219 banks. Of these, 14,163
were commercial banks insured in the Temporary Federal Deposit Insurance Fund and 56 were mutual savings banks insured
in the Fund For Mutuals.
The 1935 Act set more rigorous standards for admission to
insurance. In acting on insurance applications from new banks,
the FDIC was required to consider the adequacy of the bank's
capital, its future earnings prospects, the quality of its management and its usefulness in serving the convenience and needs of
the community.
The annual assessment rate was set at one-twelfth of one percent of total (adjusted) deposits. The Act eliminated the requirement of stock subscriptions by insured banks.
The revised law, moreover, provided that any balances to
which an insured bank was entitled, upon termination of the
temporary federal deposit insurance funds, were to be credited
toward the assessment to be levied under the permanent insurance plan. These balances consisted of the unused portion of
assessments collected under the temporary plan. Since investment income of the temporary funds was sufficient to pay all of
the operating expenses of the FDIC and cover deposit insurance
losses and expenses, insured banks received a credit for the full
amount of the assessments they had paid.
Insured nonmember banks were required to obtain the FDIC's
approval before opening new branches or reducing their capital.
The Act required all insured banks to obtain approval before
merging or consolidating with noninsured institutions. The
FDIC was empowered to require any insured bank to provide
protection and indemnity against burglary, defalcation and other
similar insurable losses. If an insured bank was found by the
FDIC to have continued unsafe or unsound practices, the practices were to be reported to the appropriate supervisory authorities. A bank's insurance status could be terminated if the practices were not corrected. (A more complete discussion of the
FDIC's supervisory responsibilities is found in Chapter 6.)
In order to strengthen the banking system, the FDIC was
given the right to make a loan to, or purchase assets from, an
open or closed insured bank to facilitate its merger or consolidation with another insured bank, if the merger would reduce the risk or avert a threatened loss to the FDIC. This power,
which was first granted on a temporary basis, was later made
permanent.
The FDIC was authorized to issue notes or other obligations
in an amount not to exceed $975 million, and the RFC and the
Secretary of the Treasury were directed to purchase up to $500
million of these notes if the funds were needed for the payment
of depositors. The FDIC has never borrowed under this provision of the Act.
The Banking Act of 1935 required the FDIC to prohibit the
payment of interest on demand deposits in insured nonmember
banks and to limit the rates of interest paid on savings and time
deposits. The FDIC was also required to prohibit insured nonmember banks from paying any time deposit before its maturity
except as prescribed by the FDIC.
In granting these and other regulatory powers to the FDIC,
Congress sought to prevent unsound competition among banks.
The prevailing philosophy was that unfettered competition in the
past had resulted in excesses and abuses in banking as well as
other industries. The restrictive powers contained in the Banking Act of 1935 were thus consistent with the tenor of other
New Deal legislative programs.
and
7pefitiow
of the
TPTP
The past 50 years have witnessed many changes in the operations of the FDIC. Some have been the result of legislation,
while others have been due to the experience gained in providing deposit insurance. In retrospect, the changes have been
relatively minor considering the economic climate and the level
of experience with deposit insurance prevailing in 1933. This
chapter focuses on the changes in the financial and internal operations of the FDIC since 1933.
Financial Operations
Many informed observers in 1933 felt that a system of federal
deposit insurance, especially if substantive coverage were provided to virtually all banks, could not remain viable without
direct support from the Treasury. The banking crisis of the early
1930s had left the banking system in a weakened condition.
There was concern that another banking crisis could result in an
accelerating rate of bank failures, and that already low bank
earnings would not be sufficient to finance a deposit insurance
system. At the same time, the use of tax revenues to finance a
deposit insurance scheme was viewed as unacceptable, and in
fact formed one of the primary bases for the Roosevelt Administration's opposition to federal deposit insurance.
The concern regarding federal involvement in financing deposit insurance led to an initial organization that closely paralleled a typical casualty insurance company. Because of the
weakened condition of the banking system, however, it was
recognized that at least some of the initial capitalization would
have to be supplied from government sources. It was anticipated, although with some reservations on the part of many, that
expenses, losses and future additions to reserves (net worth)
would be covered by insurance premiums levied on insured
banks and by income from investments.
As discussed in Chapter 3, the 1933 Act provided for two
deposit insurance plans: a temporary plan and a permanent plan.
Funding to support the temporary plan was provided by an assessment of one-half of one percent of total insured deposits,
half of which was payable upon admittance to the program and
the remainder subject to call by the FDIC. If this proved to be
inadequate to cover expenses and losses, the FDIC had the authority to levy one additional assessment not to exceed the
amounts already paid by insured banks. The Act also provided
for one reassessment based on changes in insured deposits during the existence of the interim plan.
The financing of the permanent plan was somewhat more
complex and potentially very burdensome to the banking system. Basically, the system would have involved an initial capital contribution (capital stock purchase) upon joining the program and an assessment (insurance premium) effectively to pass
all insurance losses directly to insured institutions.' The basis
for both the initial contribution and subsequent assessments was
to have been shifted from insured deposits to total deposit
liabilities.
During the 20 months that the Temporary Federal Deposit
Insurance Fund was in operation, the banking situation improved significantly. Attention thus shifted to the specific insurance provisions of the 1933 Act. Most of those who had originally opposed deposit insurance legislation apparently had been
convinced that the existence of the FDIC was a major contributing factor to the drastic reduction in bank failures. However, various provisions of the original permanent plan were
viewed as not being appropriate in the new environment.
The banking industry did not like the potential for virtually
unlimited assessments and generally felt that the assessment rate
should be set at a relatively low level. Large banks took exception to shifting the assessment base from insured to total deposits, contending that they would be unduly penalized because of
the relatively large portion of uninsured deposits held in larger
institutions. State chartered, nonmember banks objected to
mandatory membership in the Federal Reserve System as a precondition for retaining deposit insurance coverage.
'All capital stock issued by the FDIC was nonvoting; shares issued to the
Federal Reserve Banks (Class B) paid no dividends, while those that were to
be issued to member banks (Class A) and issued to the U.S. Treasury carried a
6 percent, cumulative dividend rate.
For its part, the FDIC was faced with a dilemma. Although
the bank failure rate had dropped precipitously and the capital
rehabilitation program of the RFC and FDIC had been moderately successful, the banking system was not strong and the
prospects for bank earnings were not bright. Additionally, the
fears and uncertainties regarding the bank failure rate had not
been dispelled by 1934 and indeed would not recede for more
than two decades. The FDIC thus was faced with the problems
of protecting the earnings of insured banks until capital and
reserve positions could be rebuilt while, at the same time, conserving what was by historical standards a modest deposit insurance fund.
During 1934, FDIC staff began drafting what was to become
Title I of the Banking Act of 1935. In hearings beginning in
February 1935 before the House Committee on Banking and
Currency, FDIC Chairman Leo Crowley articulated his plan for
the future of federal deposit insurance. In addition to an assessment rate lower than historical experience would suggest,
his plan consisted of a combination of stricter entrance standards
for new banks and expanded authority over the actions of existing banks, expanded powers regarding the handling of failing
banks, a reduction in insurance exposure ( i . e . , retention of the
$5,000 insurance coverage rather than the higher limit envisaged in the original permanent plan) and other provisions that
would tend to conserve the deposit insurance fund.2 From a
practical point of view, the program advocated by Mr. Crowley
consisted of attempting to strengthen the banking system, while
using every legal means available to conserve FDIC financial
resources. This philosophy dominated FDIC behavior until the
mid- 1960s.
The deposit insurance provisions of the Banking Act of 1935,
with few exceptions, were identical to the draft legislation prepared by the FDIC. From a financial point of view, one of the
most significant revisions to the original permanent plan related
to the calculation of assessments levied on insured banks. The
1935 Act provided that assessments were to be based on a flat
annual rate of one-twelfth of one percent of total deposits; the
net effect of this change was to shift the relative burden of the
deposit insurance system to the larger banks while protecting the
2For a more detailed discussion of the provisions of the Banking Act of
1935, see Chapter 3.
57
,
-
level of assessment income to the FDIC. Additionally, the requirement for initial and subsequent capital subscriptions by insured banks was deleted, and the payment of dividends on capital stock held by the U.S. Treasury was eliminated. To provide
for emergency situations, the FDIC was given authority to borrow up to $975 million from the Treasury.'
By year-end 1946, the deposit insurance fund (net worth) had
increased to over $1 billion. Because of the highly liquid condition of the banking industry, the legislation passed in the 1930s
to reduce risks in many sectors of the economy and the recent
low bank failure rate, many observers felt that a $1 billion fund
was sufficient to cover almost any economic contingency. In
fact, three years later, in connection with the Congressional
hearings relating to the Federal Deposit Insurance Act of 1950,
Jesse Jones, former chairman of the RFC, advocated an effective assessment rate that would maintain the deposit insurance
fund at the $1 billion level. Apparently, Congress felt that the
fund was adequate at that time and legislatively mandated repayment of the original capital subscriptions. The $289 million
initially subscribed by the Treasury and the Federal Reserve
Banks was fully repaid by the end of 1948.
Bankers also had voiced concern that the assessment rate was
too high. By 1950, the deposit insurance fund had reached a
level of over $1.2 billion, despite the repayment of capital completed two years earlier. Assessment income had been growing
at a high rate, reflecting the rapid growth in bank deposits during the World War I1 and post-war years. Moreover, because of
low interest rates during this same period, bank earnings lagged
increases in prices and deposit insurance expenses.
The FDIC was reluctant to support a permanent reduction in
the basic assessment rate. There still was concern that accumulated earnings would be insufficient to handle the increased rate
of bank failures that many thought would occur during the
1950s. This fear was reinforced by the decrease in capitalization
'The 1933 Act explicitly authorized the FDlC to issue " . . . notes, debentures, bonds, or other similar obligations . . ." necessary to conduct insurance operations. The 1935 Act directed the Secretary of the Treasury to purchase, under certain conditions, up to $500 million of these obligations, and
authorized the Secretary to purchase up to an additional $475 million if
deemed necessary. In 1947, the specific authority of the FDIC to issue obligations was deleted, and the FDlC was given authority to borrow up to $3
billion directly from the Treasury. The FDlC has never exercised this
authority.
of the banking industry due to low earnings and rapid asset
expansion since 1940.
As a compromise, deposit insurance charges were effectively
reduced by the Federal Deposit Insurance Act of 1950. Rather
than lowering the basic assessment rate, however, the reduction
was accompfished through a rebate system. After deducting operating expenses and insurance losses from gross assessment
income, 40 percent was to be retained by the FDIC, with the
remainder to be rebated to insured banks. This procedure meant
that losses were to be shared by insured banks k d the FDIC on
a 60 percent - 40 percent basis. This provision has tended to
stabilize FDIC earnings during periods of fluctuating loss
experience.
The 1950 Act also required the FDIC to reimburse the Treasury for interest foregone on the initial capital contributions. This
requirement was the result of an exchange between FDIC
Chairman Maple T. Harl and Senator Paul Douglas of Illinois
during hearings on the 1950 Act. The exchange went as follows:
Senator Douglas: . . . Mr. Harl, on page 2 [of your prepared statement]
you speak of making final payment to the Treasury on August 30,
1948, when you paid the Treasury out in full for the loans [capital]
which were advanced. Do 1 understand that to be your statement?
Mr. Harl: We paid them for the money advanced.
Senator Douglas: Would that include the interest upon the Goverment
loan which was made?
Mr. Had: It did not. The law provided that there should be no dividend
upon the capital stock.
Senator Douglas: In practice, the Government has made an advance to
the FDIC which has not been repaid; namely, the interest on the bonds
which the Government issued, but for which it was not reimbursed.
Mr. Harl: . . . This Corporation stands ready to reimburse the Government, or anyone else, provided it is legally authorized to do so.
Senator Douglas: You are ready to pay the interest, is that right?
Mr. Harl: Yes. If we have an obligation we are ready to pay it.
Senator Douglas: That is a possible source of revenue that I had not
thought of. This brief conversation, which I at first thought was going
to be unprofitable, might yield the Government as much as
$40,000,000. I first thought it was love's labor lost. It may turn out that
there was gold in "them there hills."'
'U.S., Congress, Senate, Committee on Banking and Currency, Hearings
before a subcommittee of the Senate Committee on Banking and Currency on
Bills to Amend the Federal Deposit Insurance Act, 81st Cong., 2d sess.,
.January 11, 23 and 30, 1950, pp. 27-29.
60
During 1950 and 1951, the FDIC paid about $8 1 million to the
Treasury for the interest foregone on the initial contribution of
both the Treasury and the Federal Reserve bank^.^
The 1950 Act also removed the law governing FDIC operations from the Federal Reserve Act, and created a separate
body of law known as the Federal Deposit Insurance Act. Al:
though of only symbolic significance, this change over the years
has reinforced the FDIC's separate identity.
To compensate certain banks for the effect of a technical
change in the computation of the assessment base, net assessments were further reduced in 1960, when the rebate percentage was increased to 66Y3 percent. In 1980, the basic percentage was lowered to 60 percent, with mandatory adjustments
to be made if the ratio of the deposit insurance fund to estimated
"insured" deposits were to exceed 1.40 percent or were less than
1.10 percent. The FDIC sought this latter provision to help rebuild the fund if abnormally high losses were experienced, and
to inhibit excessive growth of the fund in periods of low losses.
Income and Expenses of the FDIC
The major sources of income to the FDIC have been assessments collected from insured banks and interest on its portfolio of U.S. Treasury securities. In recent years, interest on
capital notes advanced to facilitate mergers and deposit assumption transactions and to assist open insured banks has become an
increasing, although not major, source of income.
Expenses incurred by the FDIC are normally grouped into
two categories. Administrative expenses include expenditures
not directly attributable to bank closings and the subsequent
liquidation of assets. The other major expense category, insurance expenses and losses, includes expenses associated with
bank closings, liquidation activities and the FDIC's share of
losses on acquired assets.
Table 4-1 presents the major income and expense items for
each year since 1933. For over half of this period, assessments
accounted for the largest share of income to the FDIC. However, continued favorable loss experience allowed the securities
portfolio to grow so that, in 1961, investment income exceeded
assessments. This relationship has continued since that time
and, absent abnormally large cash demands or drastic reductions
STherate was set by statute at two percent per annum.
/
----
- - - - -- - ---.
- - -- . .- - -- - --- FDIC Income and Expenses, 1934-1982 ($ Millions)
vestment
Income
I,UILI
921 9
4308
3564
3670
3194
2965
2789
703 0
1,3700
1,1155
8631
704 3
5658
5032
4497
3943
'2K7 Q
Other
Income
1420
373
165
29 7
193
153
187
161
Q R
Adrrllnlstratlve
E:cpenses
1
1
1
1
103 3
89 3
18043
67 7
59 2
54 4
49 6
46 9
42 2
33 5
29 0
24 4
19 8
17 7
15 5
14 4
13 7
13 2
12 4
Insurance
Losses &
Expenses
Met Income
d ~ Ib
45 6'
24 3
319
29 8
10""
803 2
724 2
5526
591 8
508 9
$528
107 3
29
07
01
16
01
02
178 7
166 8
147 3
132 5
132 1
in interest rates, the relative importance of interest income probably will increase.
In addition to the absolute size of the securities portfolio,
investment income also is sensitive to the interest rate environment and the investment strategy followed by the FDIC. This
phenomenon first became apparent in the mid-1960s, when
market rates started to exhibit some degree of short-term
instability.
In the mid-1970s, the FDIC started to pursue an active role in
managing its investment p o r t f ~ l i o prior
; ~ to this time the FDIC
T h e FDIC, except on rare occasions, has not sold securities to take advantage of market conditions. The term "manage" as used in the text refers to
investment of cash flows from current income and maturing securities.
Deposit
Ir
Insurance
Assessments1
*
Other
lncome
Adnilnistrative
Expenses
Insurance
LIlsses &
E xpenses
Nelt Income
For the period from 1950 to 1982, inclusive, figures are net after deduc
portion of net assessment income credited to insured banks pursumt to prov
the Federal Deposit Insurance Act of 1950, as amended.
Assessments collected from members o! the temporary insurance funds which
became insured under the permanent plan were credited to I:heir accounlts at the
.---A
--'
termination of the temporary funds and were applied toward pavrrlerir
UI suuIxquerlr
assessments becoming due under the permanent insurance fund, resulti~
i g in no
income to the Corporation from assessments during the existence of the te mporary
insurance funds.
Includes net loss on sales of U.S. government securities of $105.6 rnllllon
and $3.6 million in 1978.
For the period 1933-1948, includes interest accrued on capital s:tock held by the U.S.
Treasury and the Federal Reserve Banks.
Net after deducting the portion of expenses and losses charged to banks \nrithdrawmg from the temporary insurance funds on June 30, 1934.
-f
.L
had assumed a passive role and, in essence, allowed the Treasury to invest the funds in whatever issues it felt appropriate.
About this same time, the FDIC started to shorten the average
maturity of its portfolio and generally to achieve a better maturity balance. As the earnings problems faced by mutual savings
banks became more apparent, the FDIC sharply reduced the
average maturity of its portfolio in anticipation of large cash
needs and as a hedge against rising interest rates. While the
need for the amount of liquidity originally envisaged never materialized, a highly liquid position, coupled with historically
high short-term interest rates, resulted in extraordinarily high
earnings from investments and helped to offset unprecedented
insurance expenses during 1981 and 1982.
Assessment income has paralleled the growth of deposits in
the banking system. The assessment rebate system adopted in
1950 has resulted in a lower level of assessments being retained
by the FDIC. In most years since 1950, the FDIC has retained
slightly in excess of 40 percent of gross assessment income. In
1981 and 1982, however, the large insurance losses resulted in
retention of about 90 percent of gross assessments. Since a sliding scale of rebates was mandated in 1980, the ratio of the fund
to insured deposits has remained within the statutory limits and
the rebate has remained at 60 percent of net assessment income.
Administrative expenses of the FDIC have grown roughly in
proportion to changes in the price level and staffing requirements.' The one exception occurred in 1976, when substantial losses ($105.6 million) on sales of securities were realized in connection with the shift in investment strategy mentioned earlier. Normally, gains and losses on securities
transactions are considered to be part of interest income; however, this loss (and a smaller loss realized in 1978) was incurred
as a result of a change in operating procedures, and it was decided at the time that the loss was more appropriately an operating expense.
Insurance losses and expenses are related to the number and
size of banks requiring financial intervention by the FDIC.
Periodically, the expected loss to the FDIC from each active
closed bank or assisted merger case is revaluated, and adjustments are applied to the appropriate loss reserve and expense
accounts. For accounting purposes, the adjustments are combined with current year losses, and the net is charged to insurance expense. This practice can result in a misleading impression, and can compound the difficulties experienced by readers
of FDIC financial statements. Perhaps the best example of the
magnitude of the distortion that can occur is the insurance loss
of $100 million reported by the FDIC in 1974. Essentially this
entire amount was attributable to a revision to the expected loss
on the United States National Bank (San Diego) failure that had
occurred the previous year. Again in 1982, reported losses included a $158 million reduction in losses associated with assisted mergers of mutual savings banks during 1981. The negative losses reported by the FDIC in 1979 and 1980 also were the
result of revisions to original cost estimates.
Table 4-2 presents a summary by year of the number and total
assets of failed insured banks, and the losses realized by the
-
'Staffing of the FDIC is discussed later in this chapter.
64
FDIC in connection with these failures. Because of the periodic
revaluation of loss estimates, the losses reported for accounting
purposes (Table 4-1) cannot be traced easily in this table.
Table 4-2. Insured Bank Failures, 1934-1982* ($ Thousands'
Year
Number
1982
42
Total Failures
Assets
Losses
$11,632.415$1.069,130
Deposit Pavoffs
Number
Assets
7
,E5R5 AIR
Deposit Assur
Number
I
35
$11 ..,,.,
I"," I I
2,388
3.050
4,005
4,886
,*
-, .
--
- -
1.827 $1,808,4
301
~
-.A
$211,744,621
-
~cludessavings banks merged w'ith financial assistance in order to avert failure: 1three in 1981 and eight in
2.
Another source of distortion arises from the FDIC's past
policies with respect to explicit interest charges on funds advanced in connection with insurance operations. The policy has
been not to adjust cost estimates to reflect foregone interest, and
this has significantly understated reported losses. Beginning in
1983, the FDIC changed its policy so that explicit interest will
be factored into all future cost estimates.
The FDIC's practice of not allocating administrative costs to
insurance expense also has tended to understate reported losses.
In 1984, the FDIC will begin allocating overhead expenses to
each failed bank receivership.
The understatement of historical costs notwithstanding, the
loss experience of the FDIC has been modest. A majority of
failures of insured banks (360) occurred before World War 11,
resulting in reported losses slightly less than nine percent of
assessments collected over this same period. It was not until the
mid-1970s that losses again approached and surpassed this
level.
The Deposit Insurance Fund
The deposit insurance fund is the net worth of the FDIC, and
represents accumulated earnings retained since 1933. In every
year except 1947, when the FDIC retired a majority of the capital stock originally issued to the Treasury and Federal Reserve
Banks, the fund has increased and was approximately $14.3
billion in mid- 1983.
The fund is often compared to various definitions of deposit
liabilities in insured banks in an attempt to measure its ability to
absorb losses in the banking system. The relationship that probably has received the most attention is the ratio of the fund to
total insured deposits. As a practical matter, however, the concept of an aggregate level of insured deposits has little meaning.
Since the mid-1960s, the FDIC has handled most failed banks
in a way that all depositors, and indeed all general creditors,
have been afforded defacto 100 percent i n ~ u r a n c eIt. ~is only in
cases where the FDIC pays off the depositors of a failed bank
that the basic insurance limit becomes relevant. However, even
in the case of a payoff, many uninsured depositors are either
collateralized or have an offset against an outstanding credit.
Thus, the ratio of the fund to insured deposits probably represents an underestimate of the exposure of the fund.
This topic is addressed more fully in Chapter 5.
Additionally, the measurement of total insured deposits
within the system with any precision has become extremely difficult, if not impossible. The complexities in the law pertaining
to the definition of deposits, the method of aggregating individual depositors' accounts within a bank for insurance purposes
and the increased activity of brokers, who specialize in gathering funds from many individuals and placing them in fully insured deposit accounts, all contribute to measurement problems.
In Table 4-3, the ratios of the fund to both insured and total
(domestic) deposits are presented. Although there have been
some fluctuations in these ratios, they have remained remarkably stable over time. This is a reflection of the ability of the
FDIC to generate sufficient income to cover operating expenses
and insurance losses, and to contribute enough to the fund to
maintain a stable relationship to deposit liabilities. Even in
1981-1982, years when record losses were absorbed by the
FDIC, the fund increased both in absolute terms and in relation
to total deposits.
There are several reasons to believe that the historical relationship of the fund to deposits will continue into the future.
Market interest rates tend to move with bank deposits. Over the
past 25 years, interest rates on three- to five-year Treasury securities have increased at an annual average compound rate of
one to one-and-one-half percent less than deposits in the banking system. While this same relationship has not been constant
over time, it is probable that the positive correlation will continue into the future. Whatever the shortfall of interest income,
retained assessment income is the other source available to stabilize the ratio of the fund to deposits. The magnitude of this
income depends importantly on the volume of insurance losses.
In general, losses incurred by the FDIC in connection with
failed banks have been modest. From 1934 to 1980, reported
losses and insurance expenses accounted for less than five percent of assessment income. The record losses reported in 1981
and 1982, when losses accounted for approximately 74 percent
of assessment income, are not expected to continue over any
protracted period of time. While future losses may be higher
than those experienced through 1980, losses even greater than
the more recent levels would have to persist for several years
before the ability of the fund to generate substantial income
would be compromised. Although 1981 and 1982 cannot be
considered to represent a normal period, it must be recognized
that the fund grew by about 25 percent during this period despite the enormous losses absorbed by the FDIC.
67
The nature of the assessment mechanism is another important
reason why the fund-to-deposit relationship can be expected to
remain relatively stable over the longer-run. The rebate system
in essence places 60 percent of losses directly with insured
banks; this provides a cushion to the fund in absorbing insurance losses. Further, if operating expenses and losses exceed
gross assessment income, the excess is carried forward to subsequent years and is charged against gross income in the same
manner as current losses. Moreover, current law ties the proportion of net assessment income returned to insured banks to
the relationship of the fund to insured deposits. Thus, there
could be situations where the fund actually declines, but the
system would automatically accelerate the rate of income retention until historical relationships have been restored.
Insurance Coverage
Several factors determine the effective insurance coverage afforded individual depositors in an insured bank. First is the
basic insurance limit in effect at the time a bank fails. The limit
is set by law and currently stands at $100,000. Second, protection can be expanded beyond the basic insurance limit by use
of multiple accounts held in different forms of ownership. Finally, and perhaps most importantly, effective coverage depends
on the way the FDIC chooses to handle a failed bank.
The basic insurance limit represents the minimum insurance
coverage available to a bank depositor. The original limit was
set at $2,500 in the 1933 Act, but was increased to $5,000,
effective June 30, 1934. This limit remained in effect until
1950, when it was increased to $10,000 as part of the Federal
Deposit Insurance Act. The limit was next increased to $15,000
in 1966, to $20,000 in 1969 and to $40,000 in 1974. In 1974,
the insurance limit for time and savings accounts held by state
and political subdivisions was increased to $100,000; this same
limit was extended to Individual Retirement (IRA) and Keogh
Accounts in 1978.
The most recent increase occurred in 1980, when it was
raised to $100,000 for all types of accounts despite the FDIC's
reservations (the FDIC also had resisted previous increases in
the insurance limit). This represented a departure from previous
changes in insurance coverage, which generally had been more
modest and more or less reflected changes in the price level.
The increase to $100,000 was not designed to keep pace with
inflation. Rather, it was in recognition that many banks and
savings and loan associations, facing disintermediation in a high
interest rate climate, had sizable amounts of large certificates of
deposits (CDs) outstanding. The new limit facilitated retention
of some of these deposits or replaced outflows from other deposit accounts with ceiling-free CDs. In 1980, only time accounts with balances of $100,000 or more were exempt from
interest rate ceilings.
A depositor may increase insurance coverage by maintaining
multiple accounts held in different forms of legal ownership. In
determining the insurance coverage afforded a depositor, the
statute has always required the FDIC to aggregate all balances
held in the same right and capacity before application of the
basic insurance limit. Accounts held in different rights and capacities, however, are each insured up to the basic limit.
Until 1967, the FDIC relied on state laws to define what
constituted different forms of deposit ownership. Because state
laws often differed on this topic, this practice often led to confusion and sometimes hard feelings on the part of depositors in
closed banks. In 1967, the FDIC and the Federal Savings and
Loan Insurance Corporation (FSLIC) cooperated in an effort to
produce regulations that would set forth a consistent set of rules
defining how the agencies would treat multiple accounts for
insurance purposes. While consistency was achieved, the resulting rules are complex.
One of the unanticipated outgrowths of the way in which
insured deposits are defined is the practice of brokers gathering
funds in individual amounts up to the basic limit, and purchasing large, fully-insured CDs from banks.9 Since the funds
are held in an agency relationship, each identifiable ownership
interest is insured to the basic limit, although balances would be
aggregated with other deposits held by owners to determine balances for insurance purposes. This activity accelerated after the
payoff of Penn Square Bank in July 1982, as investors (depositors) searched for the highest return without incurring any default risk.
The expansion of insurance coverage through the use of
brokers has been of great concern to the federal deposit insurance agencies. Dating from the early debates on deposit insurance legislation, there has been a fear that deposit guarantees
would erode the discipline of depositors on the actions of banks.
m e r e are other ways the same result can be achieved. For example, some
brokers purchase a large C D , and then offer participations in amounts up to
the insurance limit to individual investors.
The increased activity of brokers has heightened these concerns,
and was the subject of extensive discussion in Congress, the
regulatory agencies and the financial community during 1983.
Depositors in some cases also may increase the effective deposit insurance limit by utilizing the right of offset. A depositor
has the right to apply outstanding loan balances to reduce the
balances in deposit accounts. Since deposit balances for insurance purposes are determined after applicable offsets, otherwise
uninsured deposits can be protected by means of this mechanism. In a closed bank situation, the FDIC does not have the
right to offset loan balances against deposit accounts unless the
credit is carried in a delinquent status. Unless an explict request
is made by the debtorldepositor, loan balances are kept intact
and the total deposit balances are insured to the basic limit.
During most of the first 30 years of its existence, the FDIC
routinely exercised its statutory right to withhold payment of
insured deposits until all indebtedness of the depositor to the
closed bank had been satisfied. This practice had its beginnings
during the period when there were concerns that the deposit
insurance fund would not be adequate to handle insurance
losses, although the policy continued long after the need for it
had passed. Eventually, vocal protests from irate depositors and
prodding by some consumer activists persuaded the FDIC to
abandon this policy in 1964.
The level of effective deposit insurance coverage becomes
relevant only in cases where depositors in a failed bank are paid
off to the basic insurance limit. Sometimes the FDIC will handle a failing or failed bank situation by providing direct assistance to the bank or by assisting an open-bank merger with
another bank. More often, a failed bank's non-subordinated liabilities will be assumed by another banking organization. The
result in these situations is that all depositors and other creditors
with equal or preferred standing are afforded the benefits of 100
percent insurance coverage. Although the philosophy governing
the handling of troubled banks has changed over time (see
Chapter 5), in the past decade most failures, and virtually all
large failures, have been handled by assumption transactions.
Payoffs have occurred when no interested or qualified purchaser
could be found, or where there was evidence that significant
unbooked liabilities or contingent claims existed. The latter circumstance normally occurs where the bank fails as a result of
fraud or excessive insider abuse. In many cases depositors have
been placed in a position of having insurance coverage dependent not only on factors outside their control, but on factors
that they could not be reasonably expected to know prior to
failure.
In closing this section, it perhaps is appropriate to note that
the FDIC has spent considerable time and effort trying to inform
the public about federal deposit insurance coverage. Most of
this effort has centered on what is and what is not an insured
deposit, and what deposit insurance means to a depositor if a
bank should fail. Admittedly, the rules are complex, although
the basic purpose of deposit insurance seems clear to most
people. Evidently, this is not always true. Two examples may
serve to illustrate the point.
Ed Johnson, who began work as an FDIC claim agent in
1938, recalled an incident in which a depositor of a failed New
Jersey bank appeared unsatisfied with his FDIC check for $225.
While admitting this was, in fact, his account balance, the customer indicated a nearby FDIC sign: "But, the sign, she say
$5,000.''
"I guess," said Johnson, "he thought he hit the j a ~ k p o t ! " ' ~
In the second incident, an office of Maryland's Register of
Wills received a telephone call in the late 1970s from a recently
widowed woman. Her husband had an FDIC-insured bank account, she related, and now that he had died she wanted to
know how to collect the $40,000 insurance. Hopefully this was
not an integral part of their estate planning.
Organization and StafSing
The first task facing the FDIC was to develop an organization
and staff to perform the insurance admission examinations required by the 1933 Act. This task consumed almost all available
resources during 1933. By the time the temporary fund began
operations on January 1, 1934, virtually all of the examinations
had been completed. Attention thus shifted to development of
an organization to handle the ongoing responsibilities of the
insurance agency. This task was one of the first problems faced
by Leo Crowley when he became Chairman in early 1934.
Traditionally, the organization chart of the FDIC has reflected
a mixture of functional and specialized responsibilities typical of
"Interview with Ed Johnson, "Early Claim Agents Had Key Role in Payoff
of Insured Deposits," FDIC News (August 1983), Vol. 3:9, p. 2.
Chart 4-1.
FDIC Organization Chart
I
BOARD OF
DIRECTORS
I
Legal
O@Y!SIO~
Dlvlslon of
L~qu!datlon
Dw!ston
01 Bank
Supervtsian
I
I,
.
Dl"l~l0" of
Dtvfs~onof
Research
Accounttng
and
and
Strategrc
Plannorlg
Corporate
Seivlces
many organizations. The two primary responsibilities of controlling risks to the insurance fund and providing for the orderly
liquidation of assets acquired from failed and failing banks were
placed in the Division of Examinations (renamed the Division of
Bank Supervision in 1969) and the New and Closed Bank Division (renamed the Division of Liquidation in 1936). Other activities, although in some cases acting as an integral part of the
bank examination or liquidation functions, have had a separate
existence within the corporate structure. Chart 4-1 presents the
current organizational structure of the FDIC.
73
Table 4-4. Total Employment by Function, Selected Years(Year-End)
-
Bank
Supewision
Llqu~da
l ion
592
e
cnn
nna
Le!
ther
131
80"
By federal agency standards, the FDIC has never been a large
agency. By the end of 1934, total employment stood at 846, and
reached a peak of 3,773 in 1978. Table 4-4 presents total employment for selected years and, where possible, the employment within each functional area. Because of numerous internal
reorganizations and shifting responsibilities, it is virtually impossible to reconstruct a consistent employment series for most
of the major areas of responsibility.
Except for the period 1939-45, when liquidation activity had
intensified because of the large number of bank failures during
1934-40, most of the resources of the FDIC have been devoted
to the bank examination process. Historically, employment in
the Division of Bank Supervision has averaged about 65 percent
of all FDIC personnel. Most of these employees are located in
the twelve regional offices situated around the country (see
Chart 4-2). The FDIC had originally established fifteen regional
offices, but they were cut back to twelve in 1935. In 1966, the
number was increased to fourteen, before being reduced to thirteen in 1981 and to the present level in 1983. Within each region there are a number of field offices, located in most of the
larger cities, to coordinate on-site examinations.
Employment within the Division of Bank Supervision has depended on the size and complexity of banks directly examined
by the FDIC, perceptions of risk within the industry and additional regulatory requirements imposed by Congress. With the
exception of the World War I1 years, and the personnel shortages that accompanied the war effort, the staff of the division
slowly and steadily grew through the late 1960s. Beginning at
this time, Congress passed a series of laws, primarily in the
consumer protection area, that placed additional responsibilities
on the regulatory agencies. Additionally, banking had become
more complex and, at least by the early 1970s, more exposed to
adverse economic conditions. Staffing of the division began to
reflect those changes in about 1967; the annual growth rate in
employment approximately doubled during the 1967-82 period.
Greater emphasis on cost control, accompanied by increased
reliance on state examinations and off-site monitoring systems,
resulted in a reduction of personnel in the division from a peak
of 2,648 in 1978 to 2,129 at the end of 1982.
Although the Division of Liquidation performs a variety of
activities, including payment of insured depositors in payoff
cases, most of its personnel are engaged in the liquidation of
assets acquired from failed banks. Historically, employment has
depended on the number of active liquidations and the size and
complexity of acquired assets. Employment reached a peak of
1,623 in 1941. While there were only about $130 million in
assets being liquidated at that time, there were 286 active liquidations. By way of contrast, there were $2.2 billion in assets
and 128 active cases at year-end 1982, and only 778 total employees at that time.
The large number of active liquidations in the 1940s was a
result of the relatively large number of bank failures occurring
from 1934 to 1942. As these liquidations were terminated and
few banks failed over the next 30 years, employment in the
division was drastically reduced. The low point was reached in
1952, when there were only 32 people engaged in liquidation
activities. Since the early 1960s, the number of employees
gradually increased through the early 1970s as a result of a
conscious effort to build and retain an experienced staff of
liquidation specialists. More recently, the division has grown
more rapidly in response to the need to liquidate larger and
more complex assets and, in the last two years, in response to
an accelerating rate of bank failures. By late 1983, the division
employed approximately 1,400 people.
The published number of employees operating in the Division
of Liquidation includes both permanent FDIC employees and
others who are hired at the liquidation site on a temporary basis.
These so-called Liquidation Graded (LG) employees provide to
the FDIC a means to fill needs of a temporary nature without
having to maintain a very large permanent staff. In times of
peak liquidation activity, LG employees normally comprise the
majority of the division's employment.
In recent years, the Division of Bank Supervision has provided examiners to the Division of Liquidation on a detail or
temporary basis. These examiners are used in the initial period
after a bank is closed to assist in inventorying and appraising
assets and investigating bond claims, civil claims against officers and directors and criminal matters. In some of the larger,
more complex failures, large numbers of examiners have been
utilized for these purposes and, in some cases, have been assigned to a liquidation for several months.
In 1981, the division reorganized its operations, effectively
decentralizing much of its activities. Prior to this time, administrative services were handled in the Washington office, with
liquidation activities performed at sites located in close proximity to the location of failed banks. The reorganization created
five area offices to act as regional administrative centers and
provide a means to consolidate individual liquidation sites on a
more timely basis (see Chart 4-3).
The FDIC's bank supervision and liquidation functions normally require a considerable amount of legal services. This activity traditionally has been performed by a permanent staff of
attorneys, supplemented by the use of outside counsel. The internal staff of lawyers always has been organized to provide
"open-bank" and "closed-bank service. Until 1940, the closedbank operations were organizationally located in the Division of
Liquidation; since 1940, virtually all staff attorneys have been
assigned to the Legal Division.
Staffing of the Legal Division has been determined by the
same factors that have affected other operations of the FDIC.
Employment in the open-bank section has reflected the needs of
the Division of Bank Supervision and the requirements to promulgate rules and regulations relating to banking activities. On
the other hand, employment in the closed-bank section has reflected the number and complexity of bank failures.
In 1967, attorneys were assigned to some regional offices of
the Division of Bank Supervision on an experimental basis. This
program was successful and was extended to the area offices of
the Division of Liquidation during 1983. These attorneys still
report directly to the General Counsel, although their work is
most directly related to the activities of the remote locations to
which they are assigned.
The FDIC always has maintained some form of research
capability. The Division of Research historically has served in a
"
support capacity, particularly in the areas of economic and financial analysis of developments in banking, resolution of problem bank situations and legislative matters. The division also
has engaged in longer-term research relating to matters of interest to the FDIC. During most of its existence, the research function was performed in conjunction with the statistical responsibilities of the FDIC." In 1977, research activities were segregated from the statistical function and made a separate
operating unit reporting directly to the Chairman. The division's
name was changed to the Division of Research and Strategic
Planning in 1981, reflecting additional responsibilities. Employees devoted to research have averaged about 30 persons in recent years.
The other activities performed by FDIC employees have been
variously assigned to the executive offices (Office of the Chairman) and other operating units. In 1981, the internal structure of
the FDIC was reorganized. The accounting, data processing and
facilities management activities were placed in the Division of
Accounting and Corporate Services. This move combined what
had been the comptroller's function with the data processing
area. The other support areas were placed either under the Appointive Director (internal audits) or the Deputy to the Chairman
(secretariat, congressional relations and public information, personnel and equal employment opportunity). The size of the
staffs in each of these areas has grown in proportion to the
complexity of FDIC internal operations and the increased demands placed on the agency by the supervision and liquidation
functions.
"Beginning in 1934, the FDIC has collected, edited and published periodic
balance sheet and income statement information from FDIC-regulated banks.
An important consideration in setting up the FDIC was the
establishment of an agency that, in addition to providing deposit
insurance, would handle bank failures and liquidate failed bank
assets in an orderly, inexpensive and nondisruptive manner.
These latter functions have played an important role in the
FDIC's 50-year history.
Procedures Used in Handling
Failures - Early Years
The Banking Act of 1933 authorized the FDIC to pay up to
$2,500 to depositors in insured banks that failed. The only procedure to be used to pay depositors was a Deposit Insurance
National Bank (DINB), a new national bank chartered without
any capitalization and with limited life and powers. Twenty-four
insured banks were placed into receivership and their deposits
were paid off through a DINB by the FDIC during the period of
the temporary insurance plan, January 1, 1934 to August 23,
1935.
The 1935 Act gave the FDIC authority to pay off depositors
directly or through an existing bank, and once that additional
authority was granted, the FDIC ceased using the DINB for the
next 29 years. During the past 20 years, the FDIC has used a
DINB five times, the last occasion being the failure, in 1982, of
Penn Square Bank, N. A., in Oklahoma City. The DINB essentially provides a vehicle for a slow and orderly payout, and its
use in recent years has been confined to situations where only
limited banking services were available in the community or
where, as in the case of Penn Square, a regular payoff would
have been substantially delayed.
In addition to broadening the ways in which a payoff could be
effected, the 1935 Act gave the FDIC the authority to make
loans, purchase assets and provide guarantees to facilitate a
merger or acquisition. This authority had been sought by the
FDIC because of its concern that many of the banks that had
been granted insurance might not survive, and paying off insured depositors in these banks would be too expensive. In addition, most banking observers felt that there were too many
banks in operation and that it would be desirable if the FDIC
could facilitate an orderly reduction in their number through
increased mergers.
81
Between 1935 and 1966, the procedure used by the FDIC to
merge out failing banks did not actually involve a pre-merger
closing or the establishment of a receivership. Acquiring banks
assumed all the deposits of a failing bank and an equivalent
amount of assets. In early assumption transactions, the FDIC
determined the volume of sound assets of the failing bank and
made a demand loan for an amount equal to the difference between deposits and sound assets, the loan being collateralized
by the remaining assets. The FDIC would demand payment and
foreclose on the remaining assets. Thus, the acquiring bank obtained cash and sound assets equal to assumed deposit liabilities. The FDIC would liquidate the acquired assets and repay
itself for its cash advance from these proceeds. If collections
exceeded the FDIC's advance plus interest, excess collections
went to stockholders of the merged-out bank.
After several years in which loans were used to effect assumption transactions, it became apparent that certain legal
problems that complicated the transaction (these related to bank
borrowing limits and collateral foreclosure procedures) could be
avoided if, instead of lending to the failing bank, the FDIC
purchased assets from it. Consequently, direct purchase of assets became the standard procedure for facilitating a merger and
the same general result was accomplished.
Beginning in 1935, the FDIC had two options in handling
bank failures: payoffs or assumptions. When banks were paid
off, depositors received direct payments from the FDIC up to
the insurance limit. Uninsured depositors had a claim on the
receivership for the uninsured portion of their deposits along
with the claims of other general creditors, including the FDIC,
which stood in the place of the insured depositors that it had
paid.' In these transactions uninsured depositors frequently did
not receive the full amount of their deposits, and even when
they did, there typically were long delays resulting in some loss
through foregone interest. In assumption transactions, uninsured
as well as fully insured depositors received all of their funds in
the form of deposits in the acquiring bank. Once the FDIC began using the assumption transaction, it appears that the decision on which procedure to be used depended primarily on
whether a potential, interested acquirer existed. Most payoffs
occurred in states that did not permit branching so that an acquisition could not be easily effected.
'In receiverships prior to August 1935, the FDIC was a preferred creditor
and was paid prior to uninsured depositors.
82
It should be kept in mind that throughout its history the FDIC
has not had the authority to close banks. That has rested with
the Comptroller of the Currency in the case of national banks
and with the state banking authorities in the case of statechartered banks. Generally, the FDIC has worked closely with
the primary supervisor in disposing of failing banks.
FDIC as Receiver
Prior to 1934, national bank liquidations were supervised by
the Comptroller of the Currency, who had authority to appoint
the receiver and had a permanent staff of bank liquidation specialists. Liquidations of state banks varied considerably from
state to state and before 1900 were most often handled under the
provisions for general business insolvencies. By 1933, most
state banking authorities had at least some control over state
The increased incidence of national bank
bank liquidati~ns.~
failures from 1921 through 1932 created a shortage of experienced receivers. Complaints were heard that receiverships, both
national and state, had been "doled out as political 'plums', the
recipients of which attempt to make as much commission as
possible, and to keep the job going as long as p ~ s s i b l e . "There
~
were also conflicting concerns that depositors had to wait too
long to recover their funds and that liquidators were causing
undue hardship in the community by dumping acquired assets.
When the FDIC was established, insured depositors could
receive their funds more quickly without requiring rapid asset
liquidation.
When a national bank is closed, the FDIC is automatically
appointed receiver by. the Comptroller of the Currency. When
an insured state bank is closed, a receiver is appointed according to state law. In 1934, 30 states had provisions by which the
FDIC could be appointed receiver but, in practice, most often it
was not. In the first 63 state bank liquidations, the FDIC was
named receiver only seven times. Today, however, it is the
exception when the FDIC is not appointed.
Before the FDIC can pay off insured depositors certain tasks
must be performed. These include: posting and balancing individual deposit accounts up to the day of closing; computing and
'Cyril B. Upham and Edwin Lamke, Closed and Distressed Banks-A Study
in Public Administration (Washington, D . C.: The. Brookings Institution,
1934), p. 30.
'Ibid., p. 62.
crediting interest on deposits up to the closing; merging of deposit accounts where multiple accounts exist to determine insurance liability; separating claims of depositors who have past due
obligations to the bank; and preparing checks for payment. In
some instances, the determination of precise insurance coverage
may be a matter for subsequent litigation.
Every effort is made to begin the payoff as soon as possible,
and in many instances the delay is only a few days.* Depositors
have 18 months in which to establish a claim with the FDIC.
Customers whose deposits exceed the limit of coverage become
general creditors for the balance due them, except in a few
states where depositors are preferred over other creditors.
When the FDIC pays off insured deposits, it becomes a creditor of the receivership for the amount of its advances. Its claims
against a receivership arise from its role as an insurer, and it
essentially stands in the place of insured depositors. When appointed receiver, the FDIC assumes a fiduciary obligation to all
creditors of the receivership and stockholders of the bank, with
the responsibility to maximize the amounts recovered for them
in as timely a manner as possible. The Federal Deposit Insurance Act, in Section 1l(d), requires that liquidations be conducted "having due regard to the condition of credit in the locality." This means that liquidations should be conducted in an
orderly manner, avoiding a forced-sale dumping of assets. This
requirement not only lessens the impact on the community, it is
also conducive to realizing the greatest possible value on
recoveries.
As assets of the receivership are liquidated, proceeds are periodically distributed as dividends to creditors, on a pro rata
basis. If sufficient recoveries are made so that all creditors are
fully paid, the remaining assets are turned over to the bank's
stockholders. While this has occurred on occasion, the more
typical receivership finds that the assets are not sufficient to
satisfy all claims. In these instances, the receivership remains in
existence until all recoverable assets have been liquidated or
until the expected cost of recovery exceeds the value of the
remaining assets.
"It is generally conceded, however, that delays in the case of a large bank
payoff could be considerably longer.
Cost Test
Improved economic conditions in the late 1930s and during
World War I1 significantly reduced the number of bank failures.
Beginning in the mid-1940s, the FDIC ceased paying off banks.
In its 1944 Annual Report, the FDIC reviewed disbursements
and collections in payoffs and assumption transactions and suggested that the latter were a more efficient means of handling
failing banks. Moreover, it suggested that the assumption
method "provides a more flexible method of liquidating the affairs of an insolvent bank than does placing it in receivership.
Depositors were fully protected; there was no break in banking
service . . . and the community does not suffer the economic
dislocations which inevitably follow a bank suspension."'
There was one payoff in 1944 and none between 1945 and
1953. During this latter period there were 24 assumptions, including cases in Illinois, Missouri, Texas, and Wisconsin - all
essentially unit banking states. The FDIC was able to arrange
assumption transactions with newly chartered banking groups in
several of these cases. In its 1950 ~ n n u a l ' ~ e ~ othe
r t ,FDIC
boasted that "for nearly seven years receiverships of insured
banks in difficulty have been avoided, and no depositor of any
insured bank has lost a single penny because of bank failures.
This constitutes an all-time record in the nation's history for
bank solvency and safety of d e p ~ s i t s . " ~
In Senate hearings on the confirmation of FDIC Directors in
the fall of 1951, Senator Fulbright, then presiding subcommittee
chairman, questioned the FDIC policy of providing 100 percent
de facto insurance to banks. While FDIC representatives defended their policies, Senator Fulbright argued that the FDIC
was going beyond the scope of the insurance protection that
Congress had contemplated and that the FDIC record suggested
that its decisions to avoid receiverships did not reflect any substantial analyses or cost calculation.' In October 1951, FDIC
Chairman Maple Harl wrote to Senator Fulbright and indicated
'Federal Deposit Insurance Corporation, Annual Report, 1944 (1945), p.
18.
"ederal Deposit Insurance Corporation. Annual Report, 1950 (195 1 ), p.
I L.
'U.S., Congress, Senate, Committee on Banking and Currency, Hearings
before a subcommittee of the Senate Committee on Banking and Currency on
the Nominations of H . Earl Cook and Maple T. Harl to be Members of the
Board of Directors of the Federal Deposit Insurance Corporation, 82d Cong.,
1st sess., Part 2, September 27 and October 1 . 1951.
that in the future the FDIC would undertake a cost calculation to
determine whether an assumption would be cheaper than a payoff. Thereafter, the FDIC began to use a cost test in determining
how to handle failing banks, and the prevailing thinking within
the FDIC shifted to the opinion that the wording "such action
will reduce the risk or avert a threatened loss to the Corporation" in Section 13(e) of the FDI Act required the FDIC to make
an explicit cost calculation in deciding to facilitate a merger
rather than paying off a bank. This is not a universally held
interpretation.
While the legal basis for requiring the cost test may have
been in doubt, the FDIC continued to use it during the next 31
years. The Garn-St Germain Depository Institutions Act of
1982, which significantly revised Section 13 of the Federal Deposit Insurance Act, explicitly inserted a cost test.9
Closed-Bank Purchase and
Assumption Transactions
The FDIC began to shift to payoffs in the 1950s, and between
1955 and 1958 there were nine payoffs and only three assumption transactions. From 1959 through 1964 there were 18 payoffs and no assumptions. By the mid-1960s, the FDIC had rediscovered assumption transactions and it was recognized that
there were advantages to having a bank closed by the Comptroller or the state, creating a receivership, and effecting a purchase and assumption transaction out of the receivership. This
procedure eliminated the need for stockholder approval and, in
certain instances, reduced the potential exposure of the acquiring bank and, indirectly, the FDIC.
In open- and closed-bank transactions the FDIC sometimes
had several options with respect to assuming banks, and limited
Solembe has argued, "Section 13(e) says nothing at all about a comparison
of the use of the deposit assumption techniques with the deposit payoff procedures, nor does it require, in our view, that the former be less costly than
the latter. But Senator Fulbright, who must long since have forgotten his little
personal feud with the FDIC directors, still exerts his influence over the FDIC
decisions!" Carter H. Golembe, Golembe Reports, vol. 1974-8: Memorandum
re: Bank Failures and All That (Washington, D.C.: Carter H. Golembe Associates, Inc., 1974), p. 11.
91n connection with revised provisions related to facilitating a merger, the
Act states: "No assistance shall be provided . . . in an amount in excess of
that . . . necessary to save the cost of liquidating . . . ."
negotiations occurred with respect to such matters as loans to be
assumed by the acquiring bank and the valuation of banking
premises. However, it was not until January 1966 that the FDIC
received an explicit premium in a purchase and assumption
transaction, in connection with the failure of Five Points
National Bank in Miami, Florida. By 1968 the FDIC had developed an explicit bidding process for handling closed-bank
purchase and assumption transactions (P&As), and this was the
way most bank failures, including practically all of the larger
ones, were handled during the next 15 years.
A bank is closed and a uniform package is offered to bidders.
This package consists of deposits and other nonsubordinated
liabilities and a like amount of assets, less the amount of the
premium bid. In its simplest form the assets consist of bank
premises (subject to subsequent appraisal), cash assets, securities valued at market, performing consumer loans and cash furnished by the FDIC to equate acquired assets (less the premium
paid) to assumed liabilities.
With the use of an explicit premium, the FDIC established a
more formal procedure for its "cost test" and made it more
likely that a P&A would be cheaper than a payout. When a bank
was closed the FDIC estimated the cost of a payout by determining the shortfall in likely asset collections, the share of nonsubordinated liabilities accounted for by insured deposits and
the expense associated with the actual payoff. Since the FDIC
made all general creditors whole in a P&A, its share of the
likely loss would be increased by the use of a P&A. However,
that might be more than offset by the premium bid so that a
minimum premium necessary to justify a P&A could be calculated beforehand and compared with the best bid received. In
practice, the estimates of likely loss and even the level of insured deposits were not very precise so that there was a considerable margin of error in this calculation.
Using this procedure, the FDIC handled most commercial
bank failures and practically all large failures through purchase
and assumptions during the next 15 years, except where certain
circumstances prevailed. These generally fell into two categories: (1) situations typically in nonbranching states where
there was virtually no interest in acquiring the failed bank, and
(2) situations where substantial fraud or other factors indicated
the likely presence of significant unbooked liabilities or contingencies, which made it difficult to estimate the ultimate loss in
the transaction and hence made it difficult to apply the cost test.
Bank Failures Since 1970
The early 1970s were relatively prosperous and there were
only 17 bank failures between 1971 and 1974. Nevertheless,
they included the first comparatively large failures encountered
by the FDIC. Banking was becoming more competitive and the
economic environment was becoming less forgiving. The first
oil price shock occurred in 1973 and contributed to a rising
inflation rate and new highs in interest rates in 1974.
The severity of the 1973-1975 and the 1981-1982 recessions
led to a sharp increase in commercial bank loan losses and an
increase in the number of bank failures. The 1973-1975 recession led to substantial real estate loan problems. In many instances these persisted well beyond the onset of economic recovery and, as a result, the bank failure rate remained high,
peaking in 1976 at 16, the highest number since 1940.
The 1981-1982 recession was severe and it followed a weak
recovery. The economy experienced its worst performance of
the post-World War I1 period from the standpoint of unemployment, capacity utilization and business failures, and in 1982
there were 42 bank failures, including eight mutual savings
banks. Despite the turnaround in the economy during the first
half of 1983, there were still 27 bank failures during this period.
The first $100 million-plus failure handled by the FDIC was
the $109 million Birmingham Bloomfield Bank (197 l), located
in a Detroit suburb. That bank was affiliated with the same
management group whose policies brought the billion dollar
Bank of the Commonwealth in Detroit to the brink of failure.
Both institutions had invested heavily in long-term municipal
bonds, relying considerably on purchased deposits, in anticipation of expected interest rate declines. When interest rates rose,
the institutions incurred losses and found themselves locked into
low-yielding, depreciated securities. The experience of these institutions did not prevent other banks from subsequently getting
into situations where they became vulnerable to high and rising
interest rates. To some extent that problem existed for the
Franklin National Bank, which failed in 1974, and the First
Pennsylvania Bank, N.A., which received financial assistance
from the FDIC in 1980.
When interest rates rose dramatically in 1979-1980 and again
in 1981- 1982, most FDIC-insured mutual savings banks found
themselves locked into long-term, low-yield assets (primarily
mortgages) while their deposit costs rose substantially. Most
incurred operating losses, and in 1981 and 1982 a total of 11
standby letters of credit of USNB sued the FDIC and won,I0 the
court decision coming almost five years after the bank failure."
The FDIC could not discriminate against equivalent classes of
creditors, and in this case the court ruled that the claimants in
question had general creditor status. This case meant the FDIC
would have to take account of contingent claims in applying the
cost test to determine whether to pay off a bank or use a P&A.
Contingent claims might include - in addition to standby letters of credit - outstanding lawsuits and claims arising from
loan participations and failure to meet loan commitments. Since
it is frequently difficult to assess liability on such claims at the
time of a bank failure, additional uncertainty was injected into
the decision process and influenced subsequent behavior of the
FDIC.
The Franklin failure absorbed a substantial amount of FDIC
personnel resources. There were negotiations over a five-month
period among the FDIC, the Comptroller of the Currency, the
Federal Reserve and the bidding banks. The transaction was
complicated by the presence of foreign branches and foreign
exchange speculation. As negotiations went on, Franklin experienced an enormous deposit outflow, which was funded by advances from the Federal Reserve Bank of New York. In the
P&A transaction that was worked out, the winning bidder was
required to take assets of Franklin equal to the remaining deposit liabilities less the premium bid. The trust activities of
Franklin were sold separately to another institution. In contrast,
the P&A bidding on USNB had been relatively simple. The
FDIC agreed to remove the substantial volume of loans linked
to that bank's management, and the transaction was effected
quickly without significant deposit outflows.
By the time Franklin was closed, its borrowings from the
Federal Reserve had reached $1.7 billion. The FDIC agreed to
pay the amount due the Federal Reserve in three years, with
periodic payments to be made from liquidation collections. The
Federal Reserve released the collateral it held in connection with
Franklin's borrowings. The FDIC had paid the Federal Reserve
note down to about $600 million at the end of three years and,
when it repaid the New York Fed in 1977, that represented the
first significant cash outlay by the FDIC in that transaction.
"First Empire Bank, New York, et nl. vs FDIC. 572 F.2d 1361 (9th Cir.),
cert. den. 431 U.S. 919 (1978).
"It appears that the FDIC anticipated an unfavorable decision on this case
several years earlier and this seems to have entered into cost calculations.
Subsequently, the FDIC recovered its cash outlay plus interest
from additional liquidation collections.
The manner in which the Franklin P&A was handled significantly reduced the volume of assets to be liquidated by the
FDIC. In several other large bank failures the FDIC sought to
limit the volume of assets it took back by requiring winning
bidders to take unclassified loans subject to certain limited buyback arrangements. In smaller P&As, particularly where bidders
were given little time to evaluate the condition of the failing
bank, bidders generally received a "clean" bank. The winning
bidder in the Franklin transaction was European-American
Bank, a New York-chartered bank that was much smaller than
Franklin, but a subsidiary of several very large European banks.
In several subsequent P&A transactions, the FDIC invited foreign banks or subsidiaries of foreign banks to bid and in a few
instances they were the winning bidder.
In two subsequent P&As, the FDIC accepted winning bids
that involved two or more banks dividing up assets and liabilities of failing banks. These occurred in the case of Banco
Credito in Puerto Rico in 1978 and American City Bank in
California in 1983.
Bids received by the FDIC on failed banks have depended on
the attractiveness of the franchise of the failing bank and its
deposit mix, state branching laws and other considerations. An
internal study done by the FDIC sought to explain the relationship between winning bids received by the FDIC and the volume of acquired deposits. Generally the explanatory variables
were: (I) the volume of core deposits, essentially demand deposits and retail time and savings deposits (little value was
given to large CDs and public deposits); (2) the number of bids
submitted; (3) the attractiveness of bank franchises generally as
measured by price-earnings ratios of bank stocks or the relationship between bank stock prices and book value; (4) the level of
short-term interest rates (reflecting the fact that the FDIC typically provided a substantial volume of cash); and (5) the size
relationship between the winning bidder and the bank acquired,
a reflection of the likelihood that relative size of an acquisition
is a good measure of the riskiness of the acquisition.
Until July 1982, every bank failure involving assets greater
than $100 million had been handled through a P&A transaction.
The largest payout was the Sharpstown State Bank in Houston,
Texas, which failed in 1971 and had deposits of $67 million in
27,000 accounts. Litigation related to that bank's failure persuaded the FDIC that it could not reasonably assess the likely
cost of a P&A transaction. Large bank failures were handled
through P&As because that appeared to be the cheaper course.
However, in most cases, precise cost calculations were difficult
to make and close cases were probably resolved on the side of a
P&A for several reasons. P&As were less disruptive to the local
community and to financial markets generally. Moreover, the
mechanical problems (balancing records, working out offsets
and paying checks) of paying off a large bank with tens or
hundreds of thousands of deposit accounts could conceivably
take a month or longer.
Open-Bank Assistance
In 1950, the FDIC sought legislation to provide assistance to
banks, through loans or the purchase of assets, to prevent their
failure. Apparently there was concern that the Federal Reserve
would not be a dependable lender to banks faced with temporary
funding problems, particularly nonmember banks. The Federal
Reserve opposed this recommendaton, considering it an infringement on its lender-of-last-resort function. Congress did
give the FDIC authority to provide assistance to an open bank,
but it imposed restrictive language related to the circumstances
under which such assistance could be given. Section 13(c) permitted such assistance "when in the opinion of the Board of
Directors the continued operation of such bank is essential to
provide adequate banking service in the community."
The FDIC did not use the authority of Section 13(c) until
1971, and it has only been used a total of five times. On one
occasion ( 1974), open-bank assistance was given to provide
temporary funding in order to buy time to arrange a P&A of
American Bank & Trust (AB&T) in Orangeburg, South Carolina.'* This assistance was justified by the fact that AB&T was
the only source of banking services in ten of the communities in
which it operated, although other banks were located in nearby
communities. It appears that this assistance could have been
provided under Section 13(e), which allows the FDIC to provide
financial assistance to facilitate the absorption of a failed or
failing bank without a finding of "essentiality." AB&T was acquired by another bank 12 days after the assistance was given.
"The Federal Rcserve had declined to lend to AB&T. a $150 million nonmember bank. In 1980 the availability of the Federal Reserve discount
window to nonmember banks was made explicit by Congress.
On the other four occasions that Section 13(c) was utilized by
the FDIC, it was intended that the recipient bank would remain
open and independent. Unity Bank and Trust Company in Boston (1971) and Bank of the Commonwealth in Detroit (1972)
both served inner-city neighborhoods that were otherwise lacking adequate banking services. Farmers Bank of the State of
Delaware (1976) was partially owned by the state and was its
sole depository. The FDIC found the services provided by these
three banks to be essential to at least a portion of the communities they served. In the most recent use of Section 13(c), assistance was given to First Pennsylvania Bank, N.A., in Philadelphia (1980). With assets of nearly $8 billion, First Pennsylvania was the city's largest bank, and its failure would have
been the largest in U.S. history. In this case, the FDIC's determination of "essentiality" was based mainly on the bank's size.
It would have been difficult to arrange a P&A, and the closing
of such a large bank would have had serious repercussions not
only in the local market but probably nationwide as well. This
reasoning was also a factor in the "essentiality" finding for Bank
of the Commonwealth, which had assets of $1.3 billion. In the
Unity Bank and First Pennsylvania cases, other banks were
partners to the assistance plan, agreeing to supply credit up to a
certain amount. In the case of Farmers Bank, the State of Delaware joined the FDIC in aiding the bank.
Today, of the five 13(c) assistance cases, only First Pennsylvania has survived with the same ownership. Bank of the Commonwealth and Farmers Bank were sold but remain open, and
AB&T and Unity Bank eventually failed.
The FDIC's authority under Section 13(c) was expanded by
the Garn-St Germain Depository Institutions Act of 1982. At the
discretion of its board of directors, the FDIC may provide
necessary assistance to prevent the failure of any insured bank.
Only if the cost of assistance would exceed the cost of closing
and liquidating the bank does the FDIC have to make a finding
of"essentia1ity." It is anticipated that the authorization of 13(c)
assistance will continue to be the exception, though. The FDIC
remains reluctant to use Section 13(c) because of its concern
that the assistance would benefit stockholders, materially erode
market discipline and keep afloat a weakened bank to the possible detriment of the local community.
As problem situations have become larger and more complex,
the FDIC has been more inclined recently to make temporary
loans under Section 13(e). This assistance provides the time
necessary in the most difficult circumstances to arrange a P&A
and minimizes disruption in the local market. Also, 13(e) advances can be secured, are short-term and do not require a finding of "essentiality." Temporary, subordinated loans of $25 million and $100 million were provided in 1983 under 13(e) to the
United Southern Bank, Nashville, Tennessee, and the First
National Bank of Midland, Texas, to provide time to work out
an acceptable P&A for each bank. Also in 1983, a commitment
was made to loan $250 million to Seattle First National Bank on
a short-term, subordinated basis under Section 13(e). The bank
was purchased by BankAmerica Corporation without FDIC assistance, so the 13(e) line was never utilized.
Penn Square Bank
During the July 4th weekend in 1982, the Comptroller of the
Currency closed the Penn Square Bank, N.A., in Oklahoma
City, with deposits of $470 million, and the FDIC set up a
DINB to pay off insured depositors. Penn Square had been an
aggressive lender principally to small oil and gas producers. It
had grown rapidly, relying heavily on purchased deposits and,
to a much greater extent, on a program of participating the loans
it originated to large regional and money center banks. As a
result, when the bank failed it was servicing a loan volume
almost five times the bank's liabilities. The loans were premised
on extremely high oil and gas prices, and when the market
weakened and production was curtailed, they went into default,
and what collateral supported them had only limited value.
The FDIC paid off Penn Square primarily because it was not
possible to assess the likely cost of alternatively arranging a
P&A. Due to the heavy volume of loan participations and questions about the accuracy of information furnished to loan purchasers, a substantial volume of lawsuits was anticipated (and,
in fact, have been filed). If those suits are successful, the cost to
the FDIC of a P&A transaction would ultimately have been very
substantial. By paying off insured depositors, the FDIC's maximum loss was the $250 million in insured deposits. This
amount actually will be reduced by the FDIC's share of receivership collections. Had a P&A been effected, the FDIC would
have had to agree to protect any acquiring bank from unbooked
and contingent liabilities. To the extent that these were established in court, the FDIC would have had to pay full value on
these claims. The way the failure was actually handled, claims
established from lawsuits will have status in the receivership
equal to other general creditors, including the FDIC.
The FDIC Board believed that the case for a payoff, as
against a P&A, was overwhelming and that the FDIC would
lose all credibility if it effected a P&A in the Penn Square
case.13 That would have given financial markets a signal that all
deposits, at least in banks above a certain size, were, for all
practical purposes, fully insured. Discipline in the markets
would have been seriously eroded, with deleterious long-term
ramifications. Paying off Penn Square, though, had immediate
repercussions. Uninsured depositors became more sensitive to
the possibility of loss and could not assume that all but the
smallest bank failures would be handled through purchase and
assumption transactions. Some banks had difficulty rolling over
large CDs. The business of brokers, who divide up large deposits and participate them to several banks, was significantly
boosted. Depositors generally became more selective in their
choice of banks, and the public's concern about the condition of
banks was increased.
Recent O p e n - B a n k Assumption
Transactions
In the fall of 1982, the FDIC entered into two transactions
where acquisitions of failing commercial banks were facilitated
without the closing of these banks. These were essentially assisted mergers, but in each case (Abilene National Bank, Texas,
and Oklahoma National Bank and Trust Company) the stock of
the failed bank had been pledged as collateral to the acquiring
institution. The stock was foreclosed, a merger was effected and
the FDIC provided assistance. Stockholders of the failed bank
obtained virtually no benefit from the transactions. In one instance the FDIC lent money on favorable terms to facilitate the
transaction and in the other case the FDIC agreed to buy back
loss loans when they surpassed a specified level. In both cases
the FDIC Board believed that these transactions would be considerably cheaper than a payoff or a closed bank P&A. Other
important considerations were that FDIC liquidation resources
were considerably stretched at that time and the transactions
(particularly Abilene) would not utilize any liquidation staff. At
that time, banking in the southwest was still affected by the
"The presence of a large volume of uninsured deposits in the bank and
indications that liabilities substantially exceeded likely asset collections made
it extremely unlikely that a P&A could have been cost-justified even if lawsuits were ignored.
uncertainties from the Penn Square failure and additional failures could have had negative repercussions. While the initiative
in both transactions came from the acquiring institutions, the
FDIC went back to the pre-1966 procedure in working out negotiated pre-failure mergers of failing commercial banks. However, in both of these cases, special circumstances related to
stock ownership helped make the transactions feasible for the
FDIC in that shareholders received no subsidy and claims
against officers, directors and others were preserved.
Assisted Mergers of Mutual
Savings Banks
Mutual savings banks had been vulnerable to rising interest
rates for several decades. Most of their asset portfolios consisted
of long-term, fixed-rate assets, principally mortgages and
mortgage-backed securities. An accelerating inflation rate in
1978 and a shift in the manner in which monetary policy was
conducted in the following year led to an almost continuous rise
in interest rates until the spring of 1980. Despite a sharp, though
brief, break in interest rates in 1980 and a smaller decline in the
fall of 1981, interest rates remained near record levels through
mid- 1982.
During this period interest ceilings on time deposits were
raised several times and a variety of new deposit instruments
were made available to banks and thrifts. Nevertheless, substantial amounts of deposits shifted from banks and thrifts to
money market funds or to market securities, and depository institutions experienced both disintermediation and an increased
cost of funds.
At the same time, yields on savings bank asset portfolios
changed very little because of their lengthy maturities, and as
the cost of funds rose, earnings disappeared and losses began to
grow. By early 1982, aggregate savings bank losses were running at about a $2 billion annual rate, about 1.25 percent of
assets. However, some of the weaker institutions in New York
City were losing at a rate of 3.5 percent of assets. The problem
faced by the FDIC from the standpoint of potential exposure of
the deposit insurance fund was very different from any faced
earlier in its history. Asset quality was not a problem. However,
in the case of many large institutions that faced "book" insolvency, the market value of their assets was actually 25 to 30
percent below outstanding liabilities. Their failure could have
resulted in enormous FDIC losses. The first failing savings bank
transaction, involving the $2.5 billion Greenwich Savings Bank
in New York, had an initial estimated cost of $465 million,
more than the reported cost of handling all previous insured
bank failures.
The FDIC's principal concern was how to keep the cost of
handling failing savings banks at a reasonable level without undermining confidence in the industry or in the FDIC. Various
devices were used to handle failures. One of the most successful
was the income maintenance agreement. The FDIC agreed to
pay an acquiring institution the difference between the yield on
acquired earning assets (primarily mortgages and taxable bonds)
and the average cost of funds to savings banks for some number
of future years.14 This might be supplemented by an additional
dollar payment in the future or by an up-front cash payment.
The income maintenance was subsequently modified so that the
FDIC defined the asset base according to existing asset maturities and yields on the failing bank assets and specified prepayment assumptions. Bidding banks would be paid the spread between defined asset yields and the cost of funds, whether they
held the failed bank's assets or sold them.
The income maintenance covered any negative interest spread
for acquiring banks regardless of what happened to interest rates
and the cost of funds. Thus, the FDIC took the interest rate risk
on the transactions. The FDIC was in a better position to assume this risk and potential acquirers were willing to bid more
aggressively as a result of this. Income maintenance was used in
nine of the 12 assisted mergers of failing savings banks between
1981 and early 1983.
The first savings bank transaction was handled through a mixture of bid and negotiation. In subsequent transactions, the
FDIC defined certain bidding ground rules and indicated, generally, how bids would be priced, and then entertained bids in a
variety of forms. This was in contrast to the way most commercial bank P&As had been handled, where everything was
specified beforehand and bidding banks submitted a single
number.
Failing savings banks were not actually closed. The transactions were assisted mergers. However, the FDIC insisted that
'Treviously, the FSLlC had provided assistance along these general lines in
connection with an assisted interstate merger. The FDIC's assistance to Bank
of New Orleans in the closed-bank P&A of International City Bank in 1976
had also contained characteristics similar to the income maintenance agreement.
senior management and most trustees could not serve with the
surviving institution. Since there are no stockholders in mutual
institutions, the FDIC did not have to concern itself with receivership interests of existing stockholders. In several of the failing
savings banks there were subordinated notes that normally
would have only a claim on the receivership in a purchase and
assumption transaction on a closed bank. Generally, the FDIC
negotiated with noteholders, forcing them to take a lower interest rate and/or an extended maturity. Thus, noteholders took a
substantial "hit". In pursuing this policy the FDIC weighed the
cost of not wiping out noteholders altogether, by closing the
bank, against offsetting considerations. These included possible
lawsuits to delay the transactions, greater flexibility for the acquiring institution in continuing leases and other contractual arrangements, cooperation from state supervisors and the possible
impact on deposit outflows in other savings banks.
Two of the acquiring institutions were commercial banks and
the remainder were other savings banks. Most of the latter were
losing money at the time the transactions were effected, although they tended to be stronger than most of their peers. Traditionally, the FDIC has been reluctant to solicit bids from
poorly performing institutions, but during this period stronger
commercial banks were reluctant to bid aggressively on savings
banks because of the asset depreciation and its impact on their
balance sheets, and because of the potential impact on capital
ratios. In order to keep its cost down the FDIC was willing to
compromise on bidder standards and acknowledged the possibility, at least within the agency, that in an unfavorable interest
rate environment, some of the acquiring banks could encounter
difficulty in the future.
For the most part, classified assets were relatively unimportant in the failing savings banks, and after the first few transactions, when some problem assets were removed, virtually all
assets were passed to the acquiring bank. As a result, the cost of
the transactions was determined at the outset where FDIC assistance was confined to cash or notes, or else costs were dependent principally on future interest rate developments. Where
the latter was the case, future costs were estimated by discounting projected future payments based on prevailing interest
rates. The present value of estimated outlays was immediately
determined. When interest rates subsequently declined, loss estimates were adjusted to reflect actual outlays and revised future
outlays. Between the fall of 1981 and the end of 1982, there
were 11 assisted savings bank mergers. The assets of the failing
institutions totaled almost $15 billion, more than the total assets
of all failed commercial banks since the FDIC was founded.
Based on cost of funds projections made at the end of 1982, the
cost of these transactions amounted to about 10 percent of assets. While this appears to be a higher cost than typical commercial bank failures, comparative figures may be deceiving.
Until 1983 the FDIC did not take account of forgone interest in
calculating its losses in commercial bank failures. If adjustment
is made for this, then the cost of the savings bank transactions
appears to be no higher than the relative cost of most commercial bank failures.
The Garn-St Germain Bill, which was passed in October
1982, included provisions, despite FDIC reservations, whereby
savings banks and other qualifying institutions could apply for
net worth certificates if they met certain conditions with respect
to losses and low surplus ratios. In December 1982, the FDIC
implemented a program enabling savings banks to apply for
these certificates in amounts equal to a percentage of operating
losses. The certificates count as surplus for regulatory purposes.
The certificates involve essentially a paper exchange, enabling
the institutions to continue to operate. By mid-1983, 24 savings
banks with assets of about $37 billion were utilizing this program, and they had approximately $300 million in net worth
certificates outstanding. The decline in interest rates has cut
savings bank losses, increasing the possibility that many of
these institutions will be able to survive or else be merged out
with only limited assistance. The net worth certificate program
has forestalled savings bank failures, at least temporarily. During the first half of 1983, there was only one assisted savings
bank merger, and that was essentially a voluntary transaction
that could have been forestalled through the use of net worth
certificates.
FDIC Liquidation Activity
The two goals of a receiver - liquidating assets as quickly as
possible and realizing the greatest possible value - can come
into conflict because sometimes it is desirable to hold an asset
until market conditions improve. An obvious problem, though,
is that poor asset quality is a factor in virtually every bank
failure, and liquidating assets is normally a very lengthy
procedure.
In its first seven years of operation, the FDIC handled an
average of 50 failures annually. As a result, the failure-related
assets acquired by the FDIC increased, peaking at $136 million
in 1940. Over the next three decades, failures averaged fewer
than four annually, but these were generally larger banks than
had failed in the early years. Still, the volume of assets in liquidation, which was only $2 million in 1952, did not again reach
the 1940 level until 1971. FDIC liquidation activity has escalated dramatically in the past decade. The volume of assets in
liquidation reached $2.6 billion in 1974, and stood at $2.2 billion at the end of 1982, and $4.3 billion by December of 1983.
Through November of 1983, the FDIC had been involved in
665 receiverships, of which 170 were still active.
Receivers of failed banks always acquire some loans which
are in default. These result in litigation and, when secured,
foreclosure on collateral. Many failed banks have been involved
in what might euphemistically be referred to as "atypical" financial dealings, and the FDIC's liquidation portfolio has, from
time to time during the past 50 years, included some rather
unusual assets. In one instance, a bank failed because its president was illegally diverting bank funds to finance production of
a motion picture. The failure occurred after filming had been
completed but before editing. The FDIC then had to decide
whether the movie, which had some name actors but was hardly
an Academy Award threat, was likely to return the additional
investment required to complete and distribute it.
The FDIC has also had interests in oil tankers, shrimp boats
and tuna boats and has experienced many of the pitfalls facing
the maritime industry. An oil tanker ran aground, a shrimp boat
was blown by a hurricane onto the main street of Aransas Pass,
Texas, and the tuna boats were idled when the price of tuna
dropped sharply. Other liquidation assets have included several
taxi cab fleets; a coal mine that was on fire the day the bank was
closed; a horse training facility, two inept race horses and quarter horses valued at several million dollars; thousands of art
objects, including an antique copy of the Koran; a collection of
stuffed wild animals; and all forms of real estate, including
churches and synagogues. Single bank failures have resulted in
the FDIC's acquisition of 400 single-family homes and as much
as $500 million in international loans. Assets have also included
loans secured by distribution rights to a well known blue movie
("The Happy Hooker"), by the operation of a house of prostitution and by the warehouse inventory of a "King of
Pornography. "
103
Assets require active FDIC management when, for one reason
or another, their sale cannot be arranged quickly. This can
necessitate additional investment by the FDIC, as well as development or acquisition of highly specialized expertise. Asset management has required purchasing wind machines to protect citrus orchards from freezing weather as well as beehives for
pollination of almond trees. The FDIC's mortgage interest in a
Chicago meat warehouse was abandoned when the refrigeration
system failed, and one million pounds of meat spoiled. FDIC
liquidators have been called upon to operate hotels, motels,
condominiums, office buildings, restaurants, a bakery and a
kennel. One management problem involved a residential real
estate development, an attraction of which was a golf course
that happened to be located in a flood plain (providing some
insight into the developer's acumen). An investment of $1 million was required to improve the golf course and thereby enhance the overall marketability of the development. The FDIC
also found itself in possession of an abandoned gold mine in
Idaho. A buyer could not be found until the FDIC had transformed the property into a successful tourist attraction.
As predecessor to the FDIC's Division of Liquidation, the
New and Closed Bank Division supervised seven receiverships
in 1935 with a staff of 25 employees. It was also involved with
26 other liquidations for which the FDIC had not been appointed receiver but was a major creditor by virtue of having
paid insured deposits. The personnel requirements of the Division have fluctuated widely from year to year, dictated by the
number, size, complexity and duration of active receiverships.
In the early 1940s, the Division employed more than half of all
FDIC personnel, topping 1,600 in 1942, having had to handle
nearly 400 failures from the time that deposit insurance became
effective in 1934. In the early 1950s, by comparison, as few as
32 liquidation personnel were required as the number of failures
had declined in the post-World War I1 period. Today, because
of the recent increase in bank failures and a surge in the volume
of assets in liquidation, the Division employs approximately
1,400 people, supplemented by scores of bank examiners on
detail from the Division of Bank Supervision.
The occurrence of several bank failures within a short period
of time - or even a single large bank failure - can create a
sudden demand for experienced liquidators. Some personnel are
retained from the failed bank, and many other clerical personnel
are hired locally on a temporary basis. The FDIC also relies
more heavily now on locally hired liquidation specialists to assist its professional staff.
Present Liquidation Procedures
When a bank is closed by its supervisor and the FDIC is
appointed receiver, the first task is to take custody of the bank
premises and all records, loans and other assets of the bank. In
some instances, even this initial task has been formidable.
Franklin National Bank in New York, for example, operated
108 branch offices, and its closing required a force of 778 FDIC
personnel, most of whom were examiners on temporary assignment from the Division of Bank Supervision. When The
First National Bank in Humboldt, Iowa was closed in 1982,
weather conditions conspired to make it all but impossible for
FDIC personnel to reach the bank. After first dodging tornadoes, they were confronted by a severe snowstorm that turned
expected journeys of only a few hours into two-day ordeals.
Happily, serious injuries were avoided, but these employees endured highway closings, vehicle abandonments and numerous
accidents, completing portions of their trip by tractor trailer and
state police car. That same weekend, in addition to monitoring
these travails in Iowa, FDIC officials in Washington had to
arrange the mergers of a failing $2 billion savings bank in Philadelphia and a small bank in Virginia, for which no buyer could
be found until nearly midnight on Sunday (occasioning what
may have been the latest FDIC board meeting).
Sometimes a banker is unwilling to accept his bank's insolvency. In an incident in Indiana, the president of a bank about
to be closed had moved a cot into his office, threatening first
not to leave and later to commit suicide. The situation was resolved peacefully. l5
After possession of the bank has been taken, notices are
posted to explain the action to the public. Locks and combinations are changed as soon as possible, and correspondent
banks and other appropriate parties are .notified of the closing by
telephone and telegram. In a payoff all incoming debit items,
such as checks, are returned marked "drawee bank closed." Deposits received after the closing are returned in full to the
depositors.
-
'SInterview with Neil Greensides, former Chief, Division of Examinations,
"FDIC Pioneer Recalls 'Early Days'," FDIC News (June 1983), Vol. 3:7, p.
4.
A Liquidator-in-Charge is appointed by the FDIC to supervise
the receivership. To provide some continuity, "non-tainted"
employees of the failed bank are hired by the receivership for as
long as their services are required. As soon as possible, the
liquidation activities are moved to nearby office space rented for
that purpose, because in most instances the bank's premises are
transferred to another banking organization. Thus, the FDIC has
active liquidation offices scattered across the United States and
its possessions. The five recently established Area Offices will
enable earlier closing of on-site offices because the final stages
of liquidations can be handled more efficiently on a consolidated basis. At the end of November 1983, all but 35 of the
170 active receiverships had been consolidated.
The time it takes to conclude a liquidation varies greatly according to the number and size of acquired assets as well as
their salability. Markets can readily be found for most loans,
which are often sold in blocks; but some assets, particularly
those acquired in foreclosure, are more difficult to dispose of
for reasonable value. Large bank failures occurring in the past
decade have created receiverships so large and complex that
some may take ten years or more to complete. The FDIC can
serve as a lender-of-last-resort if additional investment is required to protect the interests of the receivership. Whenever
possible, though, borrowers are required to establish new banking relationships.
The FDIC is usually quite successful in recovering the disbursements it has made. In the 495 insured bank liquidations
that have been completed since 1933, the FDIC recovered about
93 percent of its outlays, faring somewhat better in deposit assumptions (95 percent) than deposit payoffs (89 percent), but in
the 170 active cases, recoveries are expected to be lower. The
historical recovery rates, however, do not fully take into account the foregone interest earnings on advances to receiverships. This interest was collected only on occasion, after disbursements had been fully recovered. Had this expense been
acknowledged, and FDIC advances reduced by the present value
of collections, it was estimated that for the period 1934-1980,
insurance losses and expenses would have increased from four
percent of failed bank assets to nine percent.16 Beginning in
IbFederal Deposit Insurance Corporation, Deposit Insurance in a Changing
Environment (Washington, D. C.: Federal Deposit Insurance Corporation,
April 15, 1983). p. V-6.
1983, the FDIC's recovery and loss experience will more accurately reflect its money cost.
Until the 1970s, FDIC receiverships generally retained longterm performing assets. This tended to improve reported liquidation results since both interest and principal collections were
included in recovery calculations. In recent years the practice
has been to sell those assets (e.g., securities, mortgages) that
are marketable without concern about boosting "apparent performance." In some cases, holding performing assets has benefited junior creditors and stockholders at the expense of the deposit insurance fund. Even where returns on assets exceed the
FDIC's opportunity rate, FDIC policy has opted for early sale,
recognizing that the FDIC is not an investment company and
that its own investment portfolio is restricted to Treasury
securities.
Summary
During its 50-year history the FDIC has handled bank failures
by paying off insured depositors or merging the bank on an
open- or closed-bank basis. In a small number of cases until the
net worth certificate program was implemented, the FDIC has
forestalled failures by assisting open banks. The specific manner
in which failing banks have been handled has varied according
to legislation, the experience gained by the FDIC and the specific nature of the problems faced. When confronted with major
problems where traditional approaches may not have worked,
the FDIC has been flexible and sometimes imaginative.
Throughout its history certain conflicts have emerged. Periodically the FDIC has had to question whether it is appropriate
to raise de facto insurance coverage through P&As and assisted
mergers when that approach is cheaper or less disruptive, and
whether there is a cost associated with providing too much de
facto insurance. When a bank is going to fail it is desirable to
get the transaction done quickly. This argues for simple, clean
P&As where P&As are appropriate. However, that means the
FDIC must collect on more loans, a result that, in the long run,
may be more disruptive to the community and more expensive.
A precisely defined bid situation where bidders submit a
single number seems most fair, at least on the surface, and it
exposes the FDIC to the least criticism. On the other hand,
requiring everyone to bid on the same basis is not always likely
to give rise to the best or cheapest solution, and it may favor a
particular set of bidders. The FDIC may prefer an absolute ban
on helping stockholders or subordinated creditors in assisted
mergers or open-bank assistance. However, that may mean foregoing transactions that can save the FDIC a lot of money or
forestall other failures. Concern on the part of the FDIC that
acquiring banks not be exposed to excessive risk or that they
meet certain capital standards or treat goodwill in a particular
way can also increase the cost of transactions to the FDIC.
have been faced by the FDIC during
These and ~ther~conflicts
its history and have not always been resolved in the same manner by FDIC Boards. They will likely continue to confront future FDIC Boards.
9 a n k C%:xanzination
and %upefeion
a
Banking in the United States today is probably more decentralized yet more closely regulated than in any other nation.
Each of the approximately 15,000 banks in the United States is
examined on a regular basis by at least one federal or state bank
regulatory agency. On the federal level, the Office of the Comptroller of the Currency, the Federal Reserve, and the FDIC are,
respectively, responsible for the examination and supervision of
national, state member and insured nonmember banks. State
banks are also examined and supervised by a state bank regulatory agency.
In addition to bank safety and soundness examinations, these
agencies carry out compliance, electronic data processing and
trust examinations and conduct numerous other supervisory
functions as well as collecting and processing financial data.
The system in place today has grown and evolved considerably
from its modest beginnings in the early 1800s.
Historical Overview
In the early 1800s, banks were usually required to submit
occasional financial reports to the state legislature or some other
authority so that it could be determined whether they were operating within the powers of their charters. Actual examinations
were undertaken only when suspicions were aroused. Even
then, however, the examinations were quite superficial and generally ineffective because adequate enforcement powers were
lacking.
Other reasons for state supervision related to the taxation of
bank profits, state ownership of bank stock and the note-issuing
role of state banks. In addition to the states' financial interests
in bank operations, there developed concern that bank failures
could adversely affect other banks and the public as a whole and
that small depositors, in particular, could not adequately assess
their exposure.
The New York Safety Fund was created in 1829, and in addition to being the first deposit insurance system, it was the basis
for the present system of regular bank examination. Bank
supervision, in connection with this fund as well as the others
that followed, was more effective than previous attempts because the members of these generally small mutual organizations had a direct stake in minimizing losses. Thus, member
bankers were not likely to overlook the misdeeds of a fellow
member and were somewhat more appreciative of the role of
supervision.' As these funds expired, though, so did their supervisory structures.
Federal bank supervision began in 1863 when national banks
were authorized under the National Currency Act (which became the National Bank Act in 1864). The newly formed Office
of the Comptroller of the Currency was empowered to supervise
national banks and was generally credited with more effective
supervision than were the state supervisory systems. A majority
of banks soon became subject to the more stringent federal
supervision since the taxation of state bank notes caused many
banks to switch from state to federal charters. By the late 1800s,
when the state banking systems had rebounded, the overall quality of state bank supervision was significantly improved. In
1863, there had been only five states that examined banks regularly; however, by 1914 every state performed this functi0n.l
Despite improvements in the overall quality of bank supervision, intermittent high rates of failure continued. These failures often resulted in contractions in credit and the money supply, which prolonged recovery from recessionary periods. In
1913, as a response to this problem, the Federal Reserve System
was created. State banks were given the option of Federal Reserve membership, which permitted for the first time direct federal supervision of state banks. Thus, by year-end 1913 the
"special" nature of banking had resulted in a regulatory apparatus that included two federal agencies as well as the state supervisory systems. This situation was particularly noteworthy given
that government regulation of business generally was extremely
limited. .Initially, however, the Federal Reserve was more concerned with its responsibilities as central bank, and it was not
until the 1930s that it regularly exercised its bank examination
rights.
Apparently the political compromise that led to the creation
of the FDIC did not permit taking any supervisory authority
away from existing federal or state agencies, so in 1933 the
'Golembe, "Origins of Deposit Insurance," p. 1 16.
=Benjamin J . Klebaner, Commercial Banking in the United States: A History
(Hinsdale. Illinois: The Dryden Press, 1974), p. 89.
FDIC became the third federal bank regulatory agency, responsible for some 6,800 insured state nonmember banks. The
agency also had more limited regulatory responsibility relating
to its role as insurer of national and state member banks. In
addition to the supervisory goals of the other federal and state
banking agencies, the FDIC had the more clearly defined goal
of minimizing the risk of loss to the deposit insurance fund.
The financial debacle of the 1930s and the cautious atmosphere that subsequently characterized banking and the regulatory environment importantly influenced F D I C examination
policies during its first several decades. Bank examiners continued to review bank balance sheets in a comprehensive manner, focusing particular attention on problem loan situations
even when their potential impact on the insurance fund was
likely to be minimal. During the first 15 years following World
War 11, the economy was relatively strong, loan losses were
modest and bank failures were rare. In more recent years,
though, bank competition began to increase, and so too did the
exposure of the insurance fund. The analysis of individual loans
became secondary to assessment of the risk exposure associated
with overall bank loan and investment policies.
Today, the frequency of FDIC examinations, particularly for
better performing, well-managed banks, has been reduced, and
greater reliance is placed on the analysis of financial reports
submitted by banks. Resources are now more heavily allocated
to dealing with existing and potential problem bank situations.
While part of the supervisory role of the FDIC relates to overseeing bank activities to ascertain compliance with the law, the
principal purpose continues to be to assess the solvency of insured banks to better protect insured depositors and guarantee
the continued solvency of the deposit insurance fund.'
Admission Examinations
The standards that were established for initial admission into
the deposit insurance system were quite lenient relative to those
that were to be applied in subsequent years. In order to be certified by the Secretary of the Treasury and thus qualify for in'The American Assembly conference on The Future of' American Financial
Services Institutions in 1983 included in its recommendations the statement,
"The insurer should have the right to protect its interest by such means as
examining and supervising the institution, requiring it to maintain a specified
amount of capital . . . . The supervisory authority should rest only in the
insurer.'' (p.8).
surance, a state nonmember bank had to present a certificate of
solvency from its state supervisor, and the FDIC had to find that
the current value of the bank's assets were at least equal to its
liabilities. In other words, banks with unimpaired capital of zero
or more were eligible for insurance. This lenient approach was
in obvious recognition of the unstable condition of the banking
industry and was necessary if the FDIC was to be successful in
helping to reestablish public confidence in the industry. Too
strict a qualifying standard would probably have prompted more
failures by accelerating deposit outflows from those banks least
able to withstand them. In fact, 10 percent of the state nonmember banks granted insurance had no capital funds.
Although the initial qualifying standard was quite straightforward, a heavy commitment of resources was necessary in
order to evaluate the condition of each of the numerous banks
applying for deposit insurance coverage. Bank examination consumed nearly all of the FDIC's efforts in the months prior to the
establishment of the temporary fund on January 1, 1934.
National banks (of which there were 5,061) and state banks that
were members of the Federal Reserve System (802) were
already being examined on an ongoing basis by their respective
federal regulators and, upon certification by the Secretary of the
Treasury, were automatically accepted for deposit insurance.
State-chartered nonmembers, however, had to apply for insured
status, and by the end of 1933 about 85 percent of these banks
had done so. The FDIC, therefore, was faced with the rather
prodigious task of examining 7,834 banks within a three-month
period.
The Division of Examinations was created on October 1,
1933, and sought adequate permanent and temporary personnel
from a variety of sources. Examiners from the Office of the
Comptroller of the Currency and from the various state supervisory departments were transferred or loaned to the FDIC. Experienced bankers and others with previous examiner experience
were also recruited. Field offices were established in 47 cities
around the nation, mostly located in state supervisory offices or
in offices of the Reconstruction Finance Corporation. At its
peak in December of 1933, this temporary force contained
nearly 1,700 examiners and 900 other field office support
personnel.
The task of completing these admission examinations was
largely accomplished as intended by the end of 1933. Of the
7,834 applicant nonmember banks, 83 percent were approved
for insurance, 12 percent were rejected, four percent were still
pending decisions and less than one percent remained to be
examined. Virtually all of the 977 banks that were rejected were
found to have liabilities exceeding their assets and were thus
technically insolvent. The FDIC set up a special department to
work with these banks to help them correct the impairments that
prohibited admission to the fund. The corrective efforts
included: (1) raising local funds, (2) director's guarantees, (3)
purchase by local interests of bad assets and (4) investment in
capital obligations by the RFC. The efforts were quite successful and, within a short period of time, only 140 of these
banks were unable to qualify for insurance.
National and state member banks were admitted for insurance
provided they were certified by the Secretary of the Treasury. In
late 1933 the RFC was actively supplying capital funds to these
banks (as well as to nonmembers), but as the year came to a
close it was apparent that as many as 2,000 banks did not merit
certification. President Roosevelt had told the nation that "the
banking capital structure will be built up by the government to
the point that the banks will be in sound condition when the
~ Jones of the RFC was afraid
insurance goes into e f f e ~ t . "Jesse
that if it were disclosed that 2,000 banks were still unsound,
public confidence would be severely undermined. Therefore, he
arranged with Secretary Morgenthau to certify these banks in
exchange for a promise from the RFC that they would be made
sound within the following six months. In all, the RFC supplied
$1.35 billion in bank capital during late 1933 and early 1934.
Capital Rehabilitation
After the initial admission examinations had been completed,
the Division of Examinations dismantled its temporary examination force. By the end of 1934, field offices had been reduced from 47 to 15 and field office personnel had declined from
nearly 2,600 to about 600, including 450 examiners. In early
1934, the FDIC shifted the emphasis of its examination function
from determining minimal acceptability to the strengthening of
weaker banks, particularly in the area of capital adequacy.
It was determined that minimal safety required banks to have
net sound capital equal to at least 10 percent of deposits. Net
sound capital was defined as equity, capital notes, debentures
'Jesse H. Jones, Fifty Billion Dollars: M y Thirteen Years with the RFC,
1933-1945 (New York: The Macmillan Company, 195 l ) , pp. 28-30.
115
and reserves, less assets classified as worthless or of doubtful
value, including bond depreciation. Based upon admission
examination findings, all banks not meeting this standard were
reexamined during the first six months of 1934.
Of the state nonmember banks acfmitted to the fund, 35 percent were found to be undercapitalized. Subsequent examinations and rehabilitative efforts reduced this ratio to just 13
percent by the end of 1934. Many other banks recorded significant improvements though they still fell short of the 10 percent standard. For example, 20 percent of the initial applicants
had net sound capital of less than five percent, but by year-end
1934 only three percent were under this level.
The same cooperation accorded to banks initially lrejected for
deposit insurance was given to those insured banks requiring
capital rehabilitation. During 1934, insured nonmember banks
wrote off adversely classified assets equal to 20 percent of their
total capital, but total capital increased by more than eight percent. The RFC supplied most of the funds used to offset these
write-offs, while the remainder was supplied by local interests
and earnings retention.
By the end of 1934, the concept of federal deposit insurance
was generally accepted, even by many of its former detractors.
As one measure that public confidence had been restored in the
banking system, bank runs were no longer a significant problem, although they did not disappear altogether. Local concerns
about the solvency of an individual bank still gave rise to occasional bank runs. In some instances, fears were aroused when it
was felt that bank examiners had overstayed their "normal" visit
to a bank, although these concerns were usually groundles~.~
Safety and Soundness Examination Policy
After completing its first two examination tasks - admissions and capital rehabilitation - the FDIC again shifted its
examination focus and concentrated on developing permanent
examination policies and procedures. The purposes of these
examinations were fivefold:
1. appraise assets in order to determine net worth;
2. determine asset quality;
3. identify practices which could lead to financial difficulties;
4. appraise bank management; and
5. identify irregularities and violations of law.
'Interview with Neil Greensides (former Chief, Division of Examinations),
Washington, D.C., August 16, 1983.
116
In addition to completing and reviewing its own examinations, in 1936 the FDIC began reviewing examination reports
of national and state member banks because the FDIC had insurance exposure for these banks supervised by the Comptroller
of the Currency and the Federal Reserve.
Some analysts came to the conclusion that supervisory
policies in the 1930s were unduly harsh, and that recessionary
periods were not the proper time to pressure banks to sell depreciated assets and reduce risk. Such a practice, it was felt,
would lead to a restriction of credit as well as otherwise unnecessary bank liquidations or forced mergers. These concerns
had been expressed to the Comptroller of the Currency in 1931,
but policy directives at that time were generally ineffective.
A sharp recession had begun in 1937, rekindling these criticisms of bank examination policy, and in 1938 Secretary Morgenthau called for a conference of federal bank regulators. This
time around; policy changes were strictly translated into examination procedures, resulting in more lenient asset valuation
techniques. It was agreed that most bonds would be appraised at
book value rather than market value, a policy believed to be
more reflective of long-term investment quality. Moreover, a
larger proportion of classified assets were to be included in the
capital ratio computation. These policy shifts caused only a
slight increase in aggregate capitallasset ratios (12.8 percent
under the new method versus 12.6 percent under the old), but
the difference at individual banks, particularly marginal performers, could be critical.
The 1938 Conference also led to a revision in the nomenclature of asset classification, establishing the four groups which
have remained essentially unchanged: (I) not mentioned, (11)
substantial and unreasonable risk, (111) loss is probable and (IV)
uncollectible (immediate charge-off). Since 1949, categories 11,
111, and IV have been referred to respectively as substandard,
doubtful, and loss.
Impact of World War II. The participation by the United
States in World War I1 affected both the FDIC and the state
banks that it supervised, and some of these effects carried on
well past the 1940s. The short-term effects included such things
as moving some headquarters' personnel to Chicago to vacate
Washington office space for the war effort. The FDIC also suffered the same personnel shortage felt by many government
agencies resulting from military .enlistments and transfers to
defense-oriented programs. A shortage of examiners meant that
the FDIC was unable to fulfill its policy of annual bank examinations. Even after the war, government hiring restrictions and'
rapid growth in the economy led to a shortfall of qualified
examiners, and it was not until 1951 that the FDIC was again
able to examine all of its banks annually.
Another temporary effect of the war effort was the transfer to
the FDIC of responsibility for the supervision and examination
of about 4,000 federal credit unions, though the FDIC did not
insure their deposits. Federal credit unions had previously been
supervised by the Farm Credit Administration. In 1948, after six
years of FDIC supervision, this responsibility was transferred to
the Federal Security Agency.
FDIC Chairman Leo Crowley had come to be regarded by
President Roosevelt as one of the best administrators, in or out
of government, and he accepted numerous wartime responsibilities. While retaining his FDIC post, Mr. Crowley held nine
separate government positions, including those of Alien Property Custodian and head of the Foreign Economic Administration, the latter a Cabinet-level post that included the lend-lease
program. Thus, all foreign economic dealings, and assets and
authorizations totaling more than $40 billion were administered
from Mr. Crowley's FDIC office in the Press Building on Fifteenth Street. His ability as an administrator was typified by the
fact that, despite his varied and awesome wartime responsibilities, Mr. Crowley invariably concluded his workday at 5 p.m.
One evening each week was reserved for a poker game that
included Jesse Jones of the RFC and the Ambassador from
Brazil.
A more lasting effect of the war was a rapid decline in bank
capital ratios, which had been on a downward trend for more
than 50 years. However, the same process that led to rapid bank
expansion - government financing - reduced the riskiness of
bank investment portfolios. By the end of 1944, cash and U. S.
government obligations had grown to 79 percent of bank assets.
Between 1934 and year-end 1944, the capitallasset ratio of
banks had declined from 13.2 to 5.9 percent. Despite the decline in capital ratios, bank examiners were not particularly
critical of bank behavior due to the quality and liquidity of bank
assets.
Post-World War II Supervision. At the end of 1946, bank
loans comprised only 16 percent of assets. However, lending
increased steadily, reaching 40 percent in the mid-1950s and 50
percent by the early 1960s. Throughout this period loan losses
remained relatively small. Net charge-offs averaged considerably less than one-tenth of one percent of outstanding loans
during the 1950s (see Table 6- 1). As a result, no more than five
banks failed in any year. Bank supervision, which was based on
policies and procedures rooted in the banking crises and economic chaos of the 1930s, probably was overly conservative in
the relatively prosperous 1950s and early 1960s. Bank lending
had increased, but banks were still operating within traditional
markets, and risks to the soundness of the banking system as
well as to the deposit insurance fund were minimal, even during
recessionary periods. Bank failures that did occur often received
a great deal of attention, including Congressional hearings in
some instances. This concern was reflected in the strict supervisory posture that prevailed during this period, but most bankers were content to accept tight regulation in exchange for the
restraints it placed upon competition among banks and with
nonbank financial institutions.
In the 19609, banking began to diversify in a number of
different ways. Branching accelerated, new liability instruments
were developed and investments were broadened - facilitated
by the development of holding companies, secondary markets
and more widespread loan participations and purchases. Intensified competition and higher costs of funds put pressure on
interest margins, and greater risks were assumed in order to
increase portfolio yields. Banks in general, and large banks in
particular, had become more susceptible to the effects of business downturns (as reflected in loan loss rates) and interest rate
fluctuations. Beginning in 1973, the size and number of bank
failures began to increase. The 1973- 1975 recession resulted in
sharply increased loan losses in 1975 and 1976.
The demands on bank supervision had increased, and it was
becoming increasingly difficult to effect adequate supervision
(risk assessment and reduction of excessive risk) within the confines of policies and procedures designed for the less diversified, less dynamic industry of previous decades. Edward
Roddy, who served as the Director of the Division of Bank
Supervision from 1971 until his death in 1975, was credited by
many as having been particularly aware of the changes that were
taking place in the 1960s and 1970s and of the growing inadequacy of existing supervisory policies. It was largely through
his efforts that policies were overhauled in the early and
mid-1970s, the first substantive changes in several decades.
In an important shift in FDIC policy, it was decided that
smaller, sound, well-managed banks did not require annual fullscope examinations and that it would be preferable to concentrate examination resources on those banks presenting greater
risk to the insurance fund. Banks of any size with known supervisory or financial difficulties would continue to be examined at
least once a year. Banks with assets exceeding $100 million
would have one full-scope examination in every 18-month
period, with no more than 24 months between examinations.
Banks under $100 million would undergo alternating full-scope
and modified examinations, also once in every 18-month period
with no more than 24 months between examinations. The modified examinations were to focus on areas of greatest exposure
and on management policies and their effectiveness rather than
on asset verification and appraisal.
In more recent years, an increased reliance on examination
reports of other agencies and off-site monitoring have permitted
FDIC examination schedules to be lengthened further. In 1983,
the maximum permissible examination interval for the soundest
banks was extended to 36 months, with one visitation or off-site
review in each 12-month period in which the bank is not examined. Marginally unsatisfactory banks are examined at least
once every 18 months with a visitation or review every six
months. Banks with known serious problems continue to be
examined annually, with visitations at least every three months.
Bank size is no longer an overriding factor, but in all cases the
Regional Director retains considerable discretion to order more
frequent or thorough examinations.
Examination Procedures. While bank supervision policy
changes have been relatively few, examination procedures have
undergone frequent change, dictated primarily by the growth of
branch banking, bank portfolio shifts and diversification. The
number of banks insured by the FDIC has remained remarkably
constant, generally between 14,000 and 15,000, but the number
of branch offices has grown from about 3,000 in 1934 to over
41,000 today. For many years, all bank branches were examined annually, at the same time as the main office. More recently, both the frequency and scope of most branch examinations have been reduced, a situation made possible by automated and centralized record keeping at most multi-office
banks.
Until recently, most examinations relied upon a "surprise"
factor to reduce the likelihood that anyone in the bank would be
able to cover up illegal practices. Examiners would appear
without prior notice at the opening or close of business to examine bank records on an "as is7' basis. Because a banker might
have had sympathetic friends throughout the town who might
warn him about an impending examination, examiners sometimes stayed in a nearby town or registered in hotels under a
fabricated company name. Today, banks are often notified by
the FDIC of an impending examination so that the bank can
assemble the needed records. Obviously this is not the procedure when supervisory suspicions have been aroused or when
a bank is in danger of failing (although frequent contacts are
maintained in the latter situation). There have also been cases
that required concurrent examinations of affiliated banks, most
recently in early 1983 that resulted in the closing of several
Tennessee banks.
Compliance, EDP and Trust Examinations
and Other Supervisory Functions
The complexity of laws and regulations under which banks
must operate increases the difficulty of the part of the examination that verifies a bank's compliance with these laws. In fact,
in 1977 the FDIC separated much of this function from the basic
safety and soundness examination, and compliance examinations are now conducted for this sole purpose. The responsibility of the compliance examiner is to enforce the consumer
and civil rights statutes affecting state nonmember banks. These
statutes include: the Truth in Lending Act, the Fair Credit Reporting Act, the Fair Housing Act, the Community Reinvestment Act, the ,Home Mortgage Disclosure Act, the Fair Debt
Collection Practices Act, the Electronic Funds Transfer Act and
the Equal Credit Opportunity Act.6
The problems addressed by these Acts are significant, but the
solutions have often been reflective of the political, judicial or
popular opinion that can change considerably over time. What is
initially viewed favorably as strict enforcement may soon be
interpreted as overregulation. Moreover, while the federal bank
regulatory system might provide a convenient conduit for the
enforcement of many consumer and civil rights statutes, it is
possible that there are other more appropriate enforcing agencies
% more thorough disc'ussion of consumer legislation enforcementmay be
found in the FDIC's 1977 Annual Report, pages 25-27.
for these laws, which reflect concerns that are only marginally
within the purview of bank supervision.
If technological development, primarily in the use of computers, has been a catalyst for bank growth and diversification,
so has it aided examiners in developing procedures to keep pace
with a changing industry. As the cost of electronic data processing (EDP) systems has declined, even smaller banks have
found computers affordable. Banks that choose not to own their
own computer system invariably purchase these services from
other banks or non-bank suppliers. As with compliance, the
FDIC now undertakes separate EDP examinations. As banks
have become more reliant upon computers, the potential for
computer-based theft or embezzlement has increased at least as
much. EDP examinations focus on the adequacy of internal controls and physical security. The federal bank regulators perform
joint or alternating examinations of data centers that service
banks supervised by different agencies.
As early as 1935, the FDIC organized and trained specialized
trust department examiners. Trust department examinations are
also separated from regular safety and soundness examinations,
though they are usually conducted concurrently.
The FDIC also is responsible for reviewing a variety of applications from insured nonmembers. These include applications
for new branches, changes of office location and retirement of
capital. Beginning in 1964, these banks had to notify the FDIC
if they underwent a change of control (ownership), and in 1978
the FDIC was given authority to deny such a change. The Bank
Merger Act of 1960 gave the FDIC the authority to approve or
disapprove mergers in 'which the surviving institution would be
under its supervision. In recent years, authority to approve applications for insurance, branches and some mergers has been
delegated to the Regional Directors, reducing both the amount
of required FDIC resources and processing time. The application forms also have been streamlined and require considerably less information.
Enforcement Powers
Bank examinations frequently uncover situations or practices
that are unsafe or even illegal. Except in those instances that
require criminal prosecution, the FDIC has several options
available to rectify the situation: informal discussions, memoranda of understanding, cease-and-desist orders and termination
of insurance.
Following each examination and at other times as needed,
examiners meet with bank officials to discuss any problems
which were noted during the examination. These informal discussions, often referred to as "jawboning," are usually successful in resolving minor infractions.
For banks found to be in marginally unsatisfactory condition;the FDIC requires written assurance from the bank that specific
actions will be taken by the bank to correct its shortcomings.
These agreements are referred to as memoranda of understanding (MOUs). They are still viewed as voluntary compliance by the banks but represent the tinal step before formal
enforcement proceedings are begun.
For state nonmember banks found to be in unsatisfactory condition (or others which refuse to enter into an MOU), the FDIC
can issue cease-and-desist .orders to correct specific situations.
A thirty-day notice is given and a hearing is set in the interim. If
the order becomes effective and the violations persist, the FDIC
may then go to federal court to obtain an injunction. The FDIC
also has the authority to issue temporary cease-and-desist orders
in the most severe situations. These orders become effective
immediately and are made permanent only after the bank has
had an opportunity for a hearing. Cease-and-desist orders were
authorized by Congress in 1966, but it was not until 1971 that
the FDIC issued its first order. The effectiveness of these orders
was soon realized, though, and they have been used substantially more frequently in recent years. Because of an increase in
problem banks and an aggressive approach to enforcement actions, a record 69 cease-and-desist orders were issued in 1982,
and this number was equaled during the first half of 1983.
During its first twenty months of operation, the FDIC had no
enforcement authority available to it other than "toothless" coercion of offending bankers, many of whom were opposed both to
the concept of deposit insurance and to additional regulation.
The Banking Act of 1935 gave the FDIC the authority to terminate a bank's insured status, and this remained the FDIC's
sole enforcement authority until cease-and-desist powers were
granted in 1966. However, in order to avoid this ultimate sanction, procedures were established to give any offending bank
ample opportunity to correct its infractions. If a solution could
not be agreed to during informal discussions, the FDIC would
then notify the bank's primary supervisor (state or federal), and
the bank had 120 days (or less, if so decreed by the supervisor)
to correct the problem. At the end of this period, the bank
would be reexamined. If the problem persisted, thirty-day notice of insurance termination was given and a hearing date set in
the interim. Unless the hearing uncovered contradictory evidence, termination proceeded as scheduled. After notice of termination had been given to depositors, deposits as of that date
continue to be insured for two years; any new deposits are uninsured. From 1934 through 1982, the FDIC began only 281 termination proceedings, including 18 in 1982. In about half of
these 281 cases the necessary corrections were made, and in
most of the others the banks merged or otherwise ceased operations before the termination date was set. In just 15 instances
was insurance terminated or banks ceased operations after the
date was set.
Cease-and-desist orders have several advantages over insurance termination as enforcement powers. First, they can be
aimed at specific infractions. Second, they can be camed out in
a more timely fashion, since actual termination of insurance can
take more than two years. Third, they provide for involvement
of (and therefore review by) the federal courts. Fourth, they can
contribute to more safe and sound banking practices without the
negative effects that termination proceedings might have. It
should be noted, though, that insurance termination remains a
viable and sometimes necessary alternative that is still used on
occasion. In fact, it remains the FDIC's only significant enforcement power against national and state member banks. The
Comptroller of the Currency and the Federal Reserve have
cease-and-desist authority over these banks, and generally their
supervisory actions protect the interests of the FDIC. As an
insurer, though, the FDIC may interpret certain risk situations
differently, but the more cumbersome termination proceeding is
currently the FDIC's only alternative.'
Termination proceedings and cease-and-desist orders are almost always initiated for multiple infractions or problems.
While the banking environment might have changed substantially over the years, the unsafe and unsound practices leading to termination proceedings or cease-and-desist orders have
changed very little. In 1936, the most frequently cited problems
were inadequate capital, excessive insider lending, excessive
volume of poor loans, inadequate credit documentation, and incompetent management. In a survey forty years later (1976),
'Legislation to give the FDIC the full range of enforcement powers over all
insured banks is pending in Congress.
these same problems were cited, along with inadequate liquidity
and consumer credit law violations.
The Corporation also has the authority to remove or suspend
a bank director or officer. This power is infrequently utilized,
however, because it can be warranted only by personal dishonesty or willful disregard for the safety and soundness of the
bank.
The FDIC also may impose fines on banks.or bankers for
failure to comply with cease-and-desist orders or with other
FDIC rules and regulations. For example, a violation of regulations governing insider lending can result in fines of up to
$1,000 per day.
Problem Banks
One of the basic purposes of federal bank examination is to
identify banks that pose a greater risk of loss to the federal
deposit insurance fund. Banks found to be operating with a deteriorated financial condition, or in a manner likely to lead to
such a condition, are subject to more thorough regulatory scrutiny. As has been the case since 1934, the primary supervisory
tool is more frequent examination. This affords regulators the
best opportunity for verifying the implementation of corrective
procedures, measuring their effectiveness and, perhaps most
importantly, maintaining communication with management.
There are many factors that can cause a bank to be classified as
a problem, but over the years the most frequent cause has been
poor loan quality, resulting from incompetent or self-serving
management.
Prior to 1978, the FDIC used a three-tiered system for problem bank classification.
Serious Problem - Potential PayofS: An advanced serious
problem with an estimated 50 percent or more chance of
requiring financial assistance by the FDIC.
Serious Problem: A situation that threatens ultimately to
involve the FDIC in a financial outlay unless drastic
changes occur.
Other Problem: A situation in which a bank has significant
weaknesses but the FDIC is less vulnerable. Such banks
require aggressive supervision and more than ordinary
attention.
In 1978 a new bank rating system was established by the
federal supervisory a g e n c i e ~ .On
~ the basis of the safety and
soundness examination, banks are rated from 1 to 5 in each of
five areas: (1) adequacy of capital and reserves, (2) loan and
investment quality, (3) management quality, (4) earnings and
(5) liquidity. This rating is known by the acronym CAMEL, for
Capital, Assets, Management, Earnings and Liquidity. In addition, a bank is given an overall, or composite, rating in the 1
to 5 range. Ratings of 1 or 2 are favorable and represent basic
soundness; a 3 rating is marginally unsatisfactory. Ratings of 4
or 5 indicate problem bank status, with a 5 rating designating a
high probability of failure.
The FDIC has maintained a confidential list of all insured
banks that are considered problem banks. This list is constantly
changing, but it generally represents less than four percent of
the insured bank population. An analysis of the problem list
during a seven-year period in the 1970s revealed these facts
about banks in the most serious category:
34 percent eventually failed;
10 percent were merged into healty organizations without
FDIC financial assistance;
1 percent received FDIC financial assistanceto avert failure;
and
53 percent improved to a less serious rating or were removed
from the problem list altogether.
This system of problem bank identification, coupled with
more aggressive supervision of these institutions, has undoubtedly prevented numerous failures. However, many other
failures occur in banks not previously identified as problems. In
some cases a bank's condition can deteriorate so rapidly that
even a 12-month interval between examinations proves too
lengthy. Most of the time, these failures relate to fraudulent
behavior. Fraud or embezzlement is more difficult to detect at
an early stage. In part, this is because bank examinations are not
accounting audits; thus, they are not likely to expose
accounting-related malfeasance. In the 1940s and 1950s, however, many smaller banks were still not being audited, either
internally or externally, on a regular basis, and examiners may
have been more attuned to identifying shortages. The FDIC, in
-
-
*The terminology of the rating system was modified slightly in 1980 to
accommodate all depository institutions, including thrifts.
fact, had several examiners who were particularly skilled in this
area and were utilized as trouble-shooters, traveling to banks
around the country that were suspected of improprieties.'
In 1977, the FDIC implemented an early warning system to
assist in the detection of problem or potential problem banks.
The Integrated Monitoring System (IMS), utilizes selected financial ratios from the Reports of Condition and Income as well
as examination information in order to identify possible adverse
trends in a particular bank or in the industry in general.1° Its
primary use is in monitoring banks between examinations. IMS
is computer-based and runs a number of separate tests to determine whether a bank meets minimally acceptable test levels of
capital adequacy, liquidity, profitability and asset-liability mix/
growth. A bank that "fails" one or more particular test (that is,
it does not reach a minimally acceptable level) is referred for
further analysis, possibly leading to earlier examination or visitation.
An additional supervisory tool, the uniform bank performance
report (UBPR), was developed jointly by the federal bank regulatory agencies in 1982. The report is generated from financial
data contained in regularly submitted reports of condition and
income and provides a ratio analysis (on a current and trend
basis) of an individual bank as well as a percentile ranking for
each bank with respect to all banks of a similar size in the same
geographic area. These reports, which impose no increased reporting burden, have facilitated the cutback in on-site examinations. In 1983 and 1984, changes in the Report of Condition
will provide more detailed asset and liability information, increasing the usefuIness of IMS and UBPRs, as well as other
analytical systems and tools.
Federal and State Cooperation
Since the FDIC has exercised limited supervisory authority
over member banks and shares supervisory responsibility for
insured nonmember banks with the banking supervisors of the
'Interview with John Early (former Director, Division of Bank Supervision),
Washington, D.C., August 31, 1983.
"'Reports of Condition, which are detailed statements of assets, liabilities
and capital, are collected quarterly from all insured banks (semi-annually from
uninsured banks); Reports of Income, which detail year-to-date income and
expenses, are collected quarterly from insured banks.
various states, there is a heavy reliance upon interagency cooperation. FDIC interaction with the other federal bank supervisors began almost with its inception in 1933. In fact, some
degree of interagency cooperation was built into the original
FDIC structure with the placement of the Comptroller of the
Currency on the FDIC's three-person Board of Directors. Standardization among federal agencies was sought and largely established for Reports of Condition and Income, and standardization has been sought for examination forms and procedures.
The latter, of course, has been the most difficult to standardize,
given the complexities and qualitative nature of so many aspects
of the examination process. Interagency conferences were held
as early as 1934 to coordinate asset appraisal techniques. While
the level of cooperation among the federal agencies has generally been adequate, Congress has occasionally (and perhaps
more frequently in recent years) mandated forums to assure
agency interaction and coordination.
The 1970s saw the establishment of the Interagency Supervisory Committee, which was superseded by the Federal Financial Institutions Examination Council in 1978. Federal legislation in 1980 created the Depository Institutions Deregulation
Committee. All of these organizations have had the task of coordinating the development and application of agency rules and
regulations.
National banks hold nearly 60 percent of the deposits in insured commercial banks but have traditionally been outside of
the supervisory purview of the FDIC. In December of 1983, the
FDIC and the Office of the Comptroller of the Currency entered
into an arrangement for the FDIC and the Comptroller to conduct joint examinations of all problem national banks (those
with a CAMEL rating of 4 or 5). The FDIC also will join in the
examination of a representative sample of nonproblem national
banks, including multinational and regional banks and their
overseas offices.
The arrangement will greatly enhance the FDIC's ability to
assess risks to the insurance fund. Also, because the FDIC will
participate in examination-related meetings with national bank
management and in meetings at which national bank enforcement actions are determined, the FDIC will have a more active
role in helping to control the risks these banks might pose to the
fund. Finally, the arrangement will enable FDIC personnel to
have earlier access to more detailed information about failing
national banks, permitting a more orderly handling of the failures as they occur.
131
FDIC-state cooperation has been most significant in the area
of examination. Because insured state nonmember banks are
subject to both federal and state supervision and examination,
emphasis has been placed on reducing this dual regulatory burden as much as possible. In 1934, some states accepted copies
of FDIC examinations in lieu of performing their own, and
other states conducted their examinations jointly with FDIC
examiners, sharing the results and greatly reducing any inconvenience to the bank. Some states resented what they viewed as
an infringement by a new layer of federal regulation, but in a
few instances financial considerations forced their capitulation.
Many state banking departments were severely underfunded in
1934. In fact, the state banking departments were sometimes
combined with the office of the state insurance regulator so that
the bank supervisory functions could be underwritten to some
extent by the fees paid by insurance companies.
While there still exists a great deal of variation among the
state banking departments and regulatory structures, wherever
feasible the FDIC has entered into programs of concurrent, joint
or alternating examinations. In 1974, the FDIC entered into a
two-year experiment with the states of Georgia, Iowa, and
Washington, wherein the FDIC would withdraw from the examination of certain banks and would rely on the state examination
reports. It was hoped that the experiment would prove beneficial
not only to the banks, in terms of reduced regulatory burden,
but also to the FDIC and the states, which might eventually be
able to reduce or at least reallocate their resources. The experiment did not include problem banks or others requiring special
supervisory attention, nor did it include banks with assets of
more than $100 million. Thus, the intent was to devote fewer
resources to smaller, non-problem institutions. Following the
two-year period, the FDIC examined many of the participating
banks and found that, in most instances, the state reports were
sufficiently reliable. There are now 27 states participating in the
divided examination program, in which the FDIC and the states
examine banks during alternate examination cycles, relying on
each other's reports in the interim.
Summary
Even before the banking crisis of the 1930s and the establishment of the FDIC, two other federal agencies and each of
the states supervised commercial banks even though the
pre-1930s environment was characterized by relatively free
banking. The FDIC was established to protect depositors, to
restore confidence in the banking system and to eliminate most
of the secondary consequences of bank failures that had afforded the rationale for bank supervision. The establishment of the
FDIC provided an additional rationale for bank supervision,
which was monitoring and restricting bank risk to limit the exposure of the insurance system.
When banking stabilized and failures declined, banks remained very cautious as the Depression experience continued to
influence bank behavior. Bank supervision contributed to this
cautious behavior and, by restricting entry, helped insulate
banking from competition. For an extended period following
World War 11, bank supervisors continued to examine virtually
all banks, assess asset exposure and carry out audit-type functions even though few banks posed any potential risk to the
insurance fund.
When banks began to become more aggressive and the number and size of bank failures increased, the FDIC began to
reallocate resources, reducing examination coverage of better
performing banks. Most of the major changes in FDIC examination procedures in the past decade have been oriented toward
improved supervision of problem and potential-problem situations. An arrangement entered into in late 1983 calling for joint
FDIC/Comptroller examinations of certain national banks reflects this shift in FDIC orientation. The increased use of ceaseand-desist powers, the development of a computerized monitoring system and the development of a uniform rating system
were all implemented to facilitate the concentration of resources
in areas that posed the greatest exposure to the deposit insurance
fund. The lengthened examination cycle for favorably rated
banks, reduced attention to branch and routine merger approvals
and the divided examination program are all areas where the
FDIC has reallocated resources from areas where insurance fund
exposure is minimal. The FDIC has moved to the position
where it considers the principal purpose of bank examinations to
be to limit the exposure of the deposit insurance fund.
This history has been written from a 1983 perspective, and
the importance given to certain earlier events might have been
quite different had this been, for example, a 40-year history
written in 1973. In several chapters, discussion has been divided
into three periods: the Depression and post-Depression years of
the 1930s; the long period of few bank failures and low unemployment running for about 30 years from the onset of World
War 11; and the past ten years, when banking markets have been
more competitive, the economic environment has been more
hostile and the number and size of bank failures have increased.
These divisions require some convenient simplifications. While
the number of bank failures remained high through the early
1940s, many of these resulted from problems encountered much
earlier. Banking conditions had actually stabilized as early as
the mid-1930s. Also, banking did not suddenly become more
competitive and deregulated in 1973; that process was well
underway during the 1960s.
The issues and problems faced by the FDIC today are very
different from those faced 20 or 25 years ago. Many changes
have occurred in the financial services industry in recent years
and are continuing. In 1980 and 1982, Congress passed major
legislation that has significantly affected banks and financial
markets. Congress is currently considering legislation that could
substantially alter the activities permitted by banks and thrift
institutions and the manner in which they are to be regulated.
In 1983, loan losses at commercial banks were at their highest rate in 40 years and, for the most part, these figures did not
include the enormous volume of rescheduled loans in less developed countries. Bank capital ratios, while not materially
changed in recent years, were close to their lowest level since
anyone started counting. Most thrifts, which have become less
distinguishable from commercial banks, were seriously undercapitalized, even if one focused on book values. At the same
time, competition has been increased in many areas. As entry
barriers are dismantled and many banks and thrifts anticipate
selling out to larger institutions, they find their franchise values
have diminished.
The number of bank failures in 1983 surpassed that of any
year since 1939. Even in an improving economic environment,
a more competitive banking system is likely to result in more
bank failures than the FDIC was used to up until the past few
years.
The FDIC has been very active in the past decade in an environment characterized by two very steep recessions, a .high
inflation rate and wide swings in interest rates. Failures, for the
most part, have been handled smoothly and at modest cost.
Confidence in the banking system has been retained.
Some argue that the FDIC has provided too much protection
to large depositors, with the result that there has been insufficient depositor discipline. These issues are addressed in the
FDIC deposit insurance study, which was published in the
spring of 1983. If banking is to be less regulated, then de facto
insurance coverage probably has to be reduced or some other
device - perhaps more private capital - probably needs to
cushion the system from loss and restrain excessive risk taking.
In November 1983, the FDIC introduced legislation designed to
strengthen its position as an insurer. This legislation would enable the FDIC to price insurance more in line with bank risk and
would make it easier for the FDIC to pay off rather than merge
failed banks, thereby reducing de facto insurance coverage.
In 1984, the deposit insurance and supervisory systems will
be under active scrutiny. There. is a general appreciation that
deposit insurance as an institution is very important to our system today - ten years ago that might not have been the case.
There is an increasing appreciation that it is insurance that sets
depository institutions apart and affords the rationale for federal
supervision.
It is not the function of this history to predict how the FDIC
will evolve in the future. In periods of adversity or change, the
stability provided by the FDIC has tended to gain importance,
and as this 50th anniversary passes, the FDIC's importance
seems greater than at any time since the 1930s.
appendix
-
-
THE
BOARDS OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION
09-11-33 to 02-01-34
Walter J. Cummings,
Chairman
Elbert G. Bennett
J. F. T. O'Connor
10-15-45 to 01-05-46
Preston Delano, Acting
Chairman
P. L. Goldsborough
Vacant
02-01-34 to 04-29-35
Leo T. Crowley , Chairman
Elbert G. Bennett
J. F. T. O'Connor
01-05-46 to 10-22-46
Maple T. Harl, Chairman
P. L. Goldsborough
Preston Delano
04-29-35 to 04-17-38
Leo T. Crowley, Chairman
P. L. Goldsborough
J. F. T. O'Connor
10-22-46 to 04-10-47
Maple T. Harl, Chairman
Vacant
Preston Delano
04-17-38 to 09-30-38
Leo T . Crowley, Chairman
P. L. Goldsborough
Marshall R. Diggs, Acting
Comptroller of the Currency
04-10-47 to 02-15-53
Maple T . Harl, Chairman
Henry E. Cook
Preston Delano
09-30-38 to 10-24-38
Leo T . Crowley , Chairman
P. L. Goldsborough
Cyril B. Upham, Acting
Comptroller of the Currency
10-24-38 to 10-15-45
Leo T . Crowley, Chairman
P. L. Goldsborough
Preston Delano
02-15-53 to 04-16-53
Maple T . Harl, Chairman
Henry E. Cook
Lewellyn A. Jennings, Acting
Comptroller of the Currency
04-16-53 to 05-10-53
Maple T . Harl, Chairman
Henry E. Cook
Ray M. Gidney
05-10-53 to 04-17-57
01-22-64 to 01-26-64
Henry E. Cook, Chairman
Maple T. Harl
Ray M. Gidney
Joseph W. Barr, Chairman
Jesse P. Wolcott
James J. Saxon
04-17-57 to 08-05-57
01-26-64 to 03-10-64
Henry E. Cook, Chairman
Vacant
Ray M. Gidney
Joseph W. Barr, Chairman
Vacant
James J. Saxon
08-05-57 to 09-06-57
03-10-64 to 04-21-65
Henry E. Cook, Chairman
Erle Cocke, Sr.
Ray M. Gidney
Joseph W. Barr, Chairman
Kenneth A. Randall
James J. Saxon
09-06-57 to 09-17-57
04-21-65 to 04-28-65
Ray M. Gidney , Acting
Chairman
Erle Cocke, Sr.
Vacant
Kenneth A. Randall, Chairman
Joseph W. Barr
James J. Saxon
04-28-65 to 03-04-66
09-17-57 to 01-20-61
Jesse P. Wolcott, Chairman
Erle Cocke, Sr.
Ray M. Gidney
Kenneth A. Randall, Chairman
Vacant
James J. Saxon
03-04-66 to 11-15-66
01-20-61 to 11-15-61
Erle Cocke, Sr., Chairman
Jesse P. Wolcott
Ray M. Gidney
Kenneth A. Randall, Chairman
William W. Sherrill
James J. Saxon
11-15-66 to 04-30-67
11-15-61 to 08-04-63
Erle Cocke, Sr., Chairman
Jesse P. Wolcott
James J. Saxon
Kenneth A. Randall, Chairman
William W. Sherrill
William B. Camp
04-30-67 to 09-27-68
08-04-63 to 01-22-64
James J. Saxon, Acting
Chairman
Jesse P. Wolcott
Vacant
Kenneth A. Randall, Chairman
Vacant
William B. Camp
09-27-68 to 03-09-70
Kenneth A. Randall, Chairman
k i n e H. Sprague
William B. Camp
03-09-70 to 04-01-70
07-30-76 to 06-01-77
William B. Camp, Acting
Chairman
Irvine H. Sprague
Vacant
Robert E. Barnett, Chairman
George A. LeMaistre
Robert Bloom, Acting
Comptroller of the Currency
04-01-70 to 02-15-73
06-01-77 to 07-12-77
George A. LeMaistre,
Frank Wille, Chairman
Irvine H. Sprague
William B. Camp
02-15-73 to 03-23-73
Frank Wille, Chairman
Vacant
William B. Camp
03-23-73 to 07-05-73
Frank Wille, Chairman
Vacant
Justin T. Watson, Acting
Comptroller of the Currency
07-05-73 to 08-01-73
Frank Wille, Chairman
Vacant
James E. Smith
08-01-73 to 03-16-76
Frank Wille, Chairman
George A. LeMaistre
James E. Smith
Chairman
Vacant
Robert Bloom, Acting
Comptroller of the Currency
07-12-77 to 03-30-78
George A. LeMaistre,
Chairman
Vacant
John G. Heimann
03-30-78 to 08-16-78
George A. LeMaistre,
Chairman
William M. Isaac
John G. Heimann
08-16-78 to 02-07-79
John G. Heimann, Acting
Chairman
William M. Isaac
Vacant
02-07-79 to 05-15-81
03-16-76 to 03-18-76
James E. Smith, Acting
Chairman
George A. LeMaistre
Vacant
03-18-76 to 07-30-76
Robert E. Barnett, Chairman
George A. LeMaistre
James E. Smith
Irvine H. Sprague, Chairman
William M. Isaac
John G. Heimann
05-16-81 to 08-02-81
Irvine H. Sprague, Chairman
William M. Isaac
Charles E. Lord, Acting
Comptroller of the Currency
08-03-81 to 12-15-81
William M . Isaac, Chairman
Irvine H . Sprague
Charles E. Lord, Acting
Comptroller of the Currency
12-16-81 to
William M. Isaac, Chairman
Irvine H. Sprague
C. T. Conover
Auerbach, Ronald P. An Appraisal of Bank Failures in the Great
Depression. Washington, D. C. : Federal Deposit Insurance
Corporation, 1979.
"Bank Bill Debate to Open in Senate." New York Times, 19 May
1933, p. 4.
"Bankers Meet: Deposit Insurance a Thorn, but They Look to
Postal Savings Deposits." The News- Week in Business, 16
September 1933.
"Biggest Liquidator of Them All." Forbes, 15 February 1977.
Bremer, C. D. American Bank Failures. New York: Columbia
University Press, 1935.
Bums, Helen M. The American Banking Community and New
Deal Banking Reforms, 1933-1935. Westport, CT. : Greenwood Press, 1974.
"Deposit Insurance." Business Week, 12 April 1933.
"Early Claim Agents Had Key Role in Payoff of Insured Deposits." FDIC News, August 1983.
Early, John. Former Director, Division of Bank Supervision,
Federal Deposit Insurance Corporation. Washington, D.C.
Interview, 3 1 August 1983.
"FDIC Pioneer Recalls 'Early Days'." FDIC News, June 1983.
Federal Deposit Insurance Corporation. Annual Reports. Washington, D.C. : Federal Deposit Insurance Corporation,
1934-1982.
Federal Deposit Insurance Corporation. Deposit Insurance in a
Changing Environment. Washington, D .C .: Federal Deposit
Insurance Corporation, 1983.
Friedman, Milton, and Schwartz, Anna J. A Monetary History of
the United States, 1867-1960.Princeton, New Jersey: National
Bureau of Economic Research, 1963.
Golembe, Carter H. Golembe Reports. Vol. 1974-8: Memorandum re: Bank Failures and All That. Washington, D.C. : Carter
H. Golembe Associates, Inc., 1974.
Golembe, Carter H. "Origins of Deposit Insurance in the Middle
West, 1834-1866." The Indiana Magazine of History, Vol. LI
(June 1955).
Golembe, Carter H. "The Deposit Insurance Legislation of 1933:
An Examination of Its Antecedents and Its Purposes." Political
Science Quarterly, Vol. LXXV (June 1960).
Golembe, Carter H., and Warburton, Clark. Insurance of Bank
Obligations in Six States. Washington, D.C. : Federal Deposit
Insurance Corporation, 1958.
Greensides, Neil. Former Chief, Division of Examinations, Federal Deposit Insurance Corporation. Washington, D.C. Interview, 16 August 1983.
Horvitz, Paul M. "Failures of Large Banks: Implications for
Banking Supervision and Deposit Insurance." Journal of Financial and Quantitative Analysis (November 1975).
Jones, Homer. "Insurance of Bank Deposits in the United States of
America." The Economic Journal, Vol. XLVIII (December
1938).
Jones, Homer. "Some Problems of Bank Supervision." Journal of
the American Statistical Association, Vol. 33 (June 1938).
Jones, Jesse H. Fifty Billion Dollars: My Thirteen Years with the
RFC, 1933-1945. New York: The Macmillan Company, 1951.
Kennedy, Susan Estabrook. The Banking Crisis of 1933. Lexington, KY .: University Press of Kentucky, 1973.
Klebaner, Benjamin J. Commercial Banking in the United States:
A History. Hinsdale, Illinois: The Dryden Press, 1974.
Krooss, Herman E., ed. Documentary History of Banking and
Currency in the United States, Vol. IV. New York: Chelsea
House Publishers, 1969.
Moley, Raymond. The First New Deal. New York: Harcourt,
Brace & World, Inc., 1966.
New York, General Assembly. Letter from Joshua Forman.
Assembly Journal, 1829.
Schisgall, Oscar. Out of One Small Chest. New York: AMACOM,
1975.
Silverberg, Stanley C. "Implications of Changes in the Effective
Level of Deposit Insurance Coverage." Proceedings of a Conference on Bank Structure and Competition. Chicago, Ill.:
Federal Reserve Bank of Chicago, 1980.
Sinkey, Joseph F., Jr. "Problem and Failed Institutions in the
Commercial Banking Industry." Contemporary Studies in Economic and Financial Analysis, Vol. 4. Greenwich, CT.: JAI
Press, Inc., 1979.
"The Cabinet." Time, 20 March 1933.
U.S. Comptroller of the Currency. Annual Reports. Washington,
D.C.: Government Printing Office, 1864, 1895, 1933.
U. S. Congress. House. Committee on Banking and Currency.
Hearings before the House Committee on Banking and Currency on H.R. (10241) 11362, 72d Cong., 1st sess., 1932.
U.S. Congress. House. Committee on Banking and Currency.
Hearings before the House Committee on Banking and Currency on S. 3025, 73rd Cong., 2d sess., 1934.
U.S. Congress. House. Dedication of the Federal Deposit Insurance Corporation Building. 88th Cong., 1st sess., 18 June
1963. Congressional Record, Vol . 109, part 8.
U.S . Congress. Senate. Committee on Banking and Currency.
Hearings before a subcommittee of the Senate Committee on
Banking and Currency on Bills to Amend the Federal Deposit
Insurance Act, 8 1st Cong., 2d sess., 1950.
147
U. S. Congress. Senate. Committee on Banking and Currency.
Hearings before a subcommittee of the Senate Committee on
Banking and Currency on the Nominations of H. Earl Cook and
Maple T. Hurl to be Members of the Board of Directors of the
Federal Deposit Insurance Corporation, 82d Cong ., 1st sess.,
1951.
Vedder, Richard Kent. "History of the Federal Deposit Insurance
Corporation, 1934- 1964." Ph.D. dissertation, University of
Illinois, 1965.
Warburton, Clark. Deposit Insurance in Eight States During the
Period 1908-1930. Washington, D.C. : Federal Deposit Insurance Corporation, 1959.
Upham, Cyril B., and Larnke, Edwin. Closed and Distressed
Banks -A Study in Public Administration. Washington, D.C. :
The Brookings Institution, 1934.
THE BOARDS OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION
09-11-33 to 02-01-34
Walter J. Cummings, Chairman
Elbert G. Bennett
J. F. T. O'Connor
10-15-45 to 01-05-46
Preston Delano, Acting Chairman
P. L. Goldsborough
Vacant
02-01-34 to 04-29-35
Leo T. Crowley, Chairman
Elbert G. Bennett
J. F. T. O'Connor
01-05-46 to 10-22-46
Maple T. Harl, Chairman
P. L. Goldsborough
Preston Delano
04-29-35 to 04-17-38
Leo T. Crowley, Chairman
P. L. Goldsborough
J. F. T. O'Connor
10-22-46 to 04-10-47
Maple T. Harl, Chairman
Vacant
Preston Delano
04-17-38 to 09-30-38
Leo T. Crowley, Chairman
P. L. Goldsborough
Marshall R. Diggs, Acting
Comptroller of the Currency
04-10-47 to 02-15-53
Maple T. Harl, Chairman
Henry E. Cook
Preston Delano
09-30-38 to 10-24-38
Leo T. Crowley , Chairman
P. L. Goldsborough
Cyril B. Upham, Acting
Comptroller of the Currency
02-15-53 to 04-16-53
Maple T. Harl, Chairman
Henry E. Cook
Lewellyn A. Jennings, Acting Comptroller
of the Currency
10-24-38 to 10-15-45
Leo T. Crowley, Chairman
P. L. Goldsborough
Preston Delano
04-16-53 to 05-10-53
Maple T. Harl, Chairman
Henry E. Cook
Ray M. Gidney
05-10-53 to 04-17-57
Henry E. Cook, Chairman
Maple T. Harl
Ray M. Gidney
01-22-64 to 01-26-64
Joseph W. Barr, Chairman
Jesse P. Wolcott
James J. Saxon
04-17-57 to 08-05-57
Henry E. Cook, Chairman
Vacant
Ray M. Gidney
01-26-64 to 03-10-64
Joseph W. Barr, Chairman
Vacant
James J. Saxon
08-05-57 to 09-06-57
Henry E. Cook, Chairman
Erle Cocke, Sr.
Ray M. Gidney
03-10-64 to 04-21-65
Joseph W. Ban, Chairman
Kenneth A. Randall
James J. Saxon
09-06-57 to 09-17-57
Ray M. Gidney , Acting Chairman
Erle Cocke, Sr.
04-21 -65 to 04-28-65
Kenneth A. Randall, Chairman
Joseph W. Barr
Vacant
James J. Saxon
09-17-57 to 01-20-61
Jesse P. Wolcott, Chairman
Erle Cocke, Sr.
Ray M. Gidney
04-28-65 to 03-04-66
Kenneth A. Randall, Chairman
Vacant
James J. Saxon
01-20-61 to 11-15-61
Erle Cocke, Sr., Chairman
Jesse P. Wolcott
Ray M. Gidney
03-04-66 to 11-15-66
Kenneth A. Randall, Chairman
William W. Sherrill
James J. Saxon
11-15-61 to 08-04-63
Erle Cocke, Sr., Chairman
Jesse P. Wolcott
James J. Saxon
11-15-66 to 04-30-67
Kenneth A. Randall, Chairman
William W. Sherrill
William B. Camp
08-04-63 to 01-22-64
James J. Saxon, Acting
Chairman
Jesse P. Wolcott
Vacant
04-30-67 to 09-27-68
Kenneth A. Randall, Chairman
Vacant
William B. Camp
03-09-70 to 04-01-70
William B. Camp, Acting
Chairman
Irvine H. Sprague
Vacant
09-27-68 to 03-09-70
Kenneth A. Randall, Chairman
Irvine H. Sprague
William B. Camp
04-01-70 to 02-15-73
Frank Wille, Chairman
Irvine H. Sprague
William B. Camp
07-30-76 to 06-01-77
Robert E. Barnett, Chairman
George A. LeMaistre Robert Bloom,
Acting Comptroller of the Currency
02-15-73 to 03-23-73
Frank Wille, Chairman
Vacant
William B. Camp
06-01-77 to 07-12-77
George A. LeMaistre, Chairman
Vacant
Robert Bloom, Acting Comptroller of the
Currency
03-23-73 to 07-05-73
Frank Wille, Chairman
Vacant
Justin T. Watson, Acting
Comptroller of the Currency
07-12-77 to 03-30-78
George A. LeMaistre, Chairman
Vacant
John G. Heimann
07-05-73 to 08-01-73
Frank Wille, Chairman
Vacant
James E. Smith
03-30-78 to 08-16-78
George A. LeMaistre, Chairman
William M. Isaac
John G. Heimann
08-01-73 to 03-16-76
Frank Wille, Chairman
George A. LeMaistre
08-16-78 to 02-07-79
John G. Heimann, Acting Chairman
William M. Isaac
James E. Smith
Vacant
03-16-76 to 03-18-76
James E. Smith, Acting
Chairman George A
02-07-79 to 05-15-81
Irvine H. Sprague, Chairman
William M. Isaac
John G. Heimann
03-18-76 to 07-30-76
Robert E. Barnett, Chairman
George A. LeMaistre
James E. Smith
05-16-81 to 08-02-81
Irvine H. Sprague, Chairman
William M. Isaac
Charles E. Lord, Acting Comptroller of the
Currency
12-16-81 to
William M. Isaac, Chairman
Irvine H. Sprague
C. T. Conover
08-03-81 to 12-15-81
William M. Isaac, Chairman
Irvine H. Sprague
Charles E. Lord, Acting Comptroller of the
Currency
Bibliography
Auerbach, Ronald P. An Appraisal of Bank Failures in the Great Depression. Washington, D. C. : Federal
Deposit Insurance Corporation, 1979.
"Bank Bill Debate to Open in Senate." New York Times, 19 May 1933, p. 4.
"Bankers Meet: Deposit Insurance a Thorn, but They Look to Postal Savings Deposits." The News-Week
in Business, 16 September 1933.
"Biggest Liquidator of Them All." Forbes, 15 February 1977.
Bremer, C. D. American Bank Failures. New York: Columbia University Press, 1935.
Bremer, C. D. American Bank Failures. New York: Columbia University Press, 1935.
Bums, Helen M. The American Banking Community and New Deal Banking Reforms, 1933-1935.
Westport, CT. : Greenwood Press, 1974.
"Deposit Insurance." Business Week, 12 April 1933.
"Early Claim Agents Had Key Role in Payoff of Insured Deposits." FDIC News, August 1983.
Early, John. Former Director, Division of Bank Supervision, Federal Deposit Insurance Corporation.
Washington, D.C. Interview, 31 August 1983.
"FDIC Pioneer Recalls 'Early Days'." FDIC News, June 1983.
Federal Deposit Insurance Corporation. Annual Reports. Washington, D.C.: Federal Deposit Insurance
Corporation, 1934-1982.
Federal Deposit Insurance Corporation. Deposit Insurance in a Changing Environment. Washington,
D.C.: Federal Deposit Insurance Corporation, 1983.
Friedman, Milton, and Schwartz, Anna J. A Monetary History of the United States, 1867-1960. Princeton,
New Jersey: National Bureau of Economic Research, 1963.
Golembe, Carter H. Golembe Reports. Vol. 1974-8: Memorandum re: Bank Failures and All That.
Washington, D.C. : Carter H. Golembe Associates, Inc., 1974.
Golembe, Carter H. "Origins of Deposit Insurance in the Middle West, 1834-1866." The Indiana Magazine
of History, Vol. LI (June 1955).
Golembe, Carter H. "The Deposit Insurance Legislation of 1933: An Examination of Its Antecedents and
Its Purposes." Political Science Quarterly, Vol. LXXV (June 1960).
Golembe, Carter H., and Warburton, Clark. Insurance of Bank Obligations in Six States. Washington,
D.C.: Federal Deposit Insurance Corporation, 1958.
Greensides, Neil. Former Chief, Division of Examinations, Federal Deposit Insurance Corporation.
Washington, D.C. Interview, 16 August 1983.
Horvitz, Paul M. "Failures of Large Banks: Implications for Banking Supervision and Deposit Insurance."
Journal of Financial and Quantitative Analysis (November 1975).
Jones, Homer. "Insurance of Bank Deposits in the United States of America." The Economic Journal, Vol.
XLVIII (December 1938).
Jones, Homer. "Some Problems of Bank Supervision." Journal of the American Statistical Association,
Vol. 33 (June 1938).
Jones, Jesse H. Fifty Billion Dollars: My Thirteen Years with the RFC, 1933-1945. New York: The
Macmillan Company, 1951.
Kennedy, Susan Estabrook. The Banking Crisis of 1933. Lexington, KY.: University Press of Kentucky,
1973.
Klebaner, Benjamin J. Commercial Banking in the United States: A History. Hinsdale, Illinois: The Dryden
Press, 1974.
Krooss, Herman E., ed. Documentary History of Banking and Currency in the United States, Vol. IV. New
York: Chelsea House Publishers, 1969.
Moley, Raymond. The First New Deal. New York: Harcourt, Brace & World, Inc., 1966.
New York, General Assembly. Letter from Joshua Forman. Assembly Journal, 1829.
Schisgall, Oscar. Out of One Small Chest. New York: AMACOM, 1975.
Silverberg, Stanley C. "Implications of Changes in the Effective Level of Deposit Insurance Coverage."
Proceedings of a Conference on Bank Structure and Competition. Chicago, III.:Federal Reserve Bank of
Chicago, 1980.
Sinkey, Joseph F., Jr. "Problem and Failed Institutions in the Commercial Banking Industry."
Contemporary Studies in Economic and Financial Analysis, Vol. 4. Greenwich, CT.: JAI Press, Inc., 1979.
"The Cabinet." Time, 20 March 1933.
U. S. Comptroller of the Currency. Annual Reports. Washington, D.C.: Government Printing Office, 1864,
1895, 1933.
U. S. Congress. House. Committee on Banking and Currency. Hearings before the House Committee on
Banking and Currency on H.R. (10241) 11362, 72d Cong., 1st sess., 1932.
U.S. Congress. House. Committee on Banking and Currency. Hearings before the House Committee on
Banking and Currency on S. 3025, 73rd Cong., 2d sess., 1934.
U.S. Congress. House. Dedication of the Federal Deposit Insurance Corporation Building. 88th Cong., 1st
sess., 18 June 1963. Congressional Record, Vol . 109, part 8.
U.S . Congress. Senate. Committee on Banking and Currency. Hearings before a subcommittee of the
Senate Committee on Banking and Currency on Bills to Amend the Federal Deposit Insurance Act, 8 1st
Cong., 2d sess., 1950.
U. S. Congress. Senate. Committee on Banking and Currency. Hearings before a subcommittee of the
Senate Committee on Banking and Currency on the Nominations of H. Earl Cook and Maple T. Harl to be
Members of the Board of Directors of the Federal Deposit Insurance Corporation, 82d Cong., 1st sess.,
1951.
Vedder, Richard Kent. "History of the Federal Deposit Insurance Corporation, 1934-1964." Ph.D.
dissertation, University of Illinois, 1965.
Warburton, Clark. Deposit Insurance in Eight States During the Period 1908-1930. Washington, D.C.:
Federal Deposit Insurance Corporation, 1959.
Upham, Cyril B., and Larnke, Edwin. Closed and Distressed Banks - A Study in Public Administration.
Washington, D.C. : The Brookings Institution, 1934.
@FedFRASER