Full text of Improvement of Federal Supervision of Banks

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IMPROVEMENT OF FEDERAL SUPERVISION OF BANKS
Page
Existing Machinery and its Operation

•..•*

1

Improvement by Elimination of Divided
Responsibility and Consolidation of Functions ••• 21
Consolidation of Functions in the Board
of Goveamors of the Federal Reserve System •..••• 27

Improvement of Federal Supervision of Banks
This argument is addressed to the inadequacy and inefficiency
of existing Federal supervision of banks, the room or necessity for
improvement therein, and the means whereby such improvement can be
effected.
Before suggesting a remedy, it would appear necessary to determine whether there is a need for one*

Accordingly, it may be well

first to take stock of the existing machinery not only with respect to
how it is being presently operated but as well with respect to its potentialities. Thus, it is proper to inquire: What is the present machinery?

How many engineers are there?

Within what limits is it pos-

sible for them to operate their respective machines at different speeds
or even in different directions?

Then, having determined the potential-

ities of the existing machinery, it is proper to inquire: How is existing machinery being operated?
Existing Machinery and its Operation
There are in this country approximately 15,000 commercial
banks, of which approximately 5,300 are national banks, 1,000 are State
member banks of the Federal Reserve System, 7,500 are nonmember banks
of the Federal Reserve System, the deposits of which have been insured
by the F#D,I.C. and 1,200 are nonmember uninsured banks*
Federal supervision in some matters extends to all banks and
under the existing Federal statutes is vested to some extent in the
Secretary of the Treasury and the R.F.C., but mainly it is vested in
the Comptroller of the Currency, the F.D.I.C, and the Board of Governors
of the Federal Reserve System.




The supervisory powers of the Secretary

-2of the Treasury flow from the provisions of the Emergency Banking Act
and regulations thereunder whereby the Secretary licenses national and
member State banks, and from the Secretary1s discretionary powers in
connection with requests for the purchase by the R.F.C* of preferred
stock or capital debentures in banks. Those of the R.F.C. result from
contract and are largely incident to its proprietary interest in the
banks from rhieh it has purchased preferred stock or capital debentures.
The exercise of supervision by the three principal agencies is
apt to be thought of as being by the Comptroller of the Currency with
respect to national banks, by the Board of Governors of the Federal Reserve System with respect to State member banks and by the F.D.I.C.
with respect to nonmember insured banks*

Speaking in broad generalities,

this may be said to be the case, but, even assuming that such a division
of responsibility would be desirable, subsequent discussion will demonstrate that the line of demarcation within which each of these agencies
operates is by no means so well defined or so fixed as to accomplish
that result*

Indeed, the very contrary is true and it may well be

doubted if it could be otherwise.
The machinery by which Federal supervision is attempted is that
provided by Congress by the enactment of legislation*

In taking stock

of that machinery, it is proper, therefore, remembering that in the case
of State banks Federal supervision is superimposed on that already being
exercised by the State, to inquire into the broad purposes of supervi-.
sion for which each of the agencies was created and the powers delegated
to each such agency to accomplish that result.




-3Ihe office of the Comptroller of the Currency, when created,
was "charged with the execution of all laws passed by Congress relating to the issue and regulation of a national currency secured by
United States bonds", and in addition, after the passage of the Federal
Reserve Act, "with the execution of all laws passed by Congress relating to the issue and regulation * * *, under the general supervision
of the Board of Governors of the Federal Reserve System, of all Federal
Reserve notes, etc*". It is in pursuance of this general mandate that
the Comptroller is concerned with the safety and sound operation of
national banks and has been charged with the various supervisory duties
which he now exercises.
At the same time, one of the avowed purposes of the Federal
Reserve Act was "to establish a more effective supervision of banking
in the United States", and the F.D.I.C. was created as part of an act
which, among other things, was "to provide for the safer and more
effective use of the assets of banks".
Enumerating some of the powers and thereby taking stock of the
existing machinery, it may be noted that:
1*. Having once chartered the bank or having once admitted it
into membership in the Federal Reserve System and to the benefits of
insurance by the .F.D.I.C, the most drastic measures available to each
agency are as follows: The Comptroller of the Currency with respect to
national banks may institute suits to forfeit the charter ^f a bank?
may appoint a conservator? and, may appoint a receiver. The Board of
Governors of the Federal Reserve System may expel a State member bank




from the System and the F.D.I.C. may institute proceedings for termination of the-insured status of a bank.
Suits by the Comptroller of the Currency for the forfeiture
of the charter of a national banking association have been extremely
rare and must be predicated on stated violations of law*

He may

appoint a conservator "whenever he shall deem it necessary in order
to conserve the assets of any bank for the benefit of the depositors
and of the creditors thereof" and there are many statutory grounds for
the appointment of a receiver, but the one most generally resorted to
is insolvency.
The Board of Governors, upon its own initiative, may, after
hearing, forfeit the membership of a member State bank at any time it
shall appear that a member bank has failed to comply with the provisions
of certain statutes, principally section 9 of the Federal Reserve Act
or the regulations of the Board of Governors.
To terminate the insurance of a national bonk the F.D.I.C.
must notify the Comptroller of the bank's violation of law or continued
unsound practices and if the Comptroller does not obtain correction in
120 days the F.D.I.C. may hold a hearing and terminate the bank's insured status, in which event the Comptroller must appoint a receiver.
In the case of State member banks, the F.D.I.C. must notify the Board
of Governors and if the Board does not obtain correction in 120 days,
the F.D.I.C. may hold a hearing and terminate the bank's insured
status, in which event the Board must terminate the membership of the




-5~
subject bank in the Federal Reserve System.

In the case of nonmember

insured banks the F.D.I.C. must notify the appropriate State authority
and if such authority does not obtain correction in 120 days, the F.D.I.C.
may hold a hearing and terminate the bank's insured status.
2.

In addition to the visitorial powers of State supervisory

authorities in the case of State banks and certain rights of examination
retained by the R.F.C. in the field of its relationships, each of the
three agencies, with respect to one or more of the classes of banks involved, has the right of examination.
In the case of national banks the Comptroller of the Currency
is directed to examine each bank twice yearly and "oftener if considered
necessary".

In addition, the Board of Governors in its discretion may

cause a national bank to be examined} a Reserve bank, with the approval
of the Federal Reserve Agent or the Board of Governors may provide for
a special examination; and the F.D.I.C. may examine it with the written
consent of the Comptroller of the Currency,
In the case of State member banks the Board of Governors or
a Reserve bank may cause the bank to be examined as may also the F.D.I.C.,
with the written consent of the Board of Governors.
In the case of nonmember insured banks the F.D.I.C. may examine. If such bank happens to be an affiliate or holding company
affiliate it is also subject to examination by the Comptroller of the
Currency or by the Board of Governors as the case may be. Likewise, as
to all banks, including even non-insured banks, the Board of Governors




-6may make "inspections" in connection with its functions under the
Securities Exchange Act.
It also may be observed that the Comptroller of the Currency
and the F.B.I.C. are authorized to publish their reports of examination
if recommendations contained therein are not complied with in 120 days
and provided 90 days notice of intention to publish is given.
3.

With respect to reports which can be required:

National banks must make not less than three reports of condition yearly to the Comptroller in form prescribed by him, which
must be published in a local newspaper*

In addition, the Comptroller

may call for special reports. Within ten days after declaring a dividend
they must report the amount thereof to the Comptroller, together with
the amount of net earnings in excess of each dividend.

They must on

July 15th and January 15th of each year file with the F.D.I.C. certified
statements showing the "assessment base", such assessment base depending
upon "deposits" and "uncollected items" each defined partly by statute
and partly by the F.D.I.C#

They must make such reports as the Board of

Governors may require in enabling it to perform its functions under the
Securities Exchange Act.

If a national bank has an "affiliate" or a

"holding company affiliate" it must furnish and publish reports in
accordance with the applicable statutes and the Comptroller is authorised to call for additional reports. If it maintains a foreign branch
the Comptroller may require it to furnish information concerning the
condition of such branch and if it has invested in the capital of a




~7~
foreign bank the Board of Governors may require it to furnish information concerning the condition of such corporation*
State member banks must make reports of condition to the
Reserve banks on dates fixed by the Board of Governors at least three
times yearly in form prescribed and published as required by the Board*
They must report payment of dividends to Reserve banks. They must on
July 15th and January 15th of each year file with the F.D.I.C. certified
statements showing the "assessment base", such assessment base depending
upon "deposits" and "uncollected items" each defined partly by statute
and partly by the F.D.I.C,

They must make such reports as the Board of

Governors may require in enabling it to perform its functions under the
Securities Exchange Act.

If a State membetfbank has an "affiliate" or

a "holding company affiliate" it must furnish and publish reports in
accordance with the applicable statute and the Board of Governors is
authorized to call for additional reports. If it has invested in the
capital of a foreign bank the Board of Governors may require it to furnish
information concerning the condition of such corporation.
Insured nonmember banks, in addition to the reports showing
the "assessment base" required to be filed on or before July 15th and
January 15th of each year, must make and publish such reports as the
F.D.I.C. may require in such form and at such time as it may prescribe.
They must make such reports as the Board of Governors may require in
enabling it to perform its functions under the Securities Exchange Act.




-84.

The Comptroller of the Currency charters all national

banlcing associations based upon standards partly fixed by law and partly
fixed by the Comptroller in the exercise of his judgment*

Automatically,

such banks become member banks of the Federal Reserve System and their
deposits become insured by the F.D.I.C.

State banks are, of course,

chartered by the State of their location in accordance with standards
fixed by the law of the particular State or by the particular supervising
authority or by both, but standards for admission of such banks to the
Federal Reserve System are fixed by Federal statutes and by the Board of
Governors of the Federal Reserve System, by means of the imposition of
conditions of membership. Deposits of such banks are automatically insured by the F.D.I.C. Until July 1, 1942, the F.D.I.C. may permit any
nonmember insured bank to become insured and after that date may permit
a nonmember bank with deposits under $1,000,000 to become insured. Irrespective of the granting and issuance of a charter by the Comptroller
of the Currency or by State, as the case may be, national banks and
State member banks, under existing regulations, must obtain a license
to operate from the Secretary of the Treasury.
The approval of the Comptroller of the Currency is required
for a reduction in capital by a national bank and the written consent
of the F.D.I.C. is required for reduction or retirement of common or
preferred stock or capital notes or debentures of insured nonmember banks
except in the District of Columbia, but there is no Federal control over
a reduction in capital by a State member bank unless some control has
been retained by the Board of Governors as a condition of membership.




-9The Comptroller's approval is required for the consolidation
of national banks and, for certain purposes, is required for the consolidation of a State bank with a national bank*

The written consent

of the F*D.I.C. is required for an insured bank to consolidate with a
non-insured bank, assume liability for a non-insured bank's deposits,
or transfer assets to a non-insured bank in return for assumption of
deposits*
5. Notwithstanding the fact that national banks are chartered
by the Comptroller of the Currency, they may exercise trust powers only
when permission has been granted by the Board of Governors and the
regulation of the exercise of such power is vested in the Board of Governors*

There is no express supervision of the exercise of trust powers

by insured nonmember banks and in the case of State member banks there
is only such control as the Board of Governors may exercise through the
imposition of conditions of membership.
6*

The Comptroller, subject to the requirements of statute,

must approve the establishment of branches of national banks, except
foreign branches which are approved by the Board of Governors; the
Board of Governors, except as to intra-city branches, must approve the
establishment of branches by State member banks; but consent of the
F.D.I.C. is required for any insured nonmember bank to establish "any
new branch" or to move any branch.
7.

Section 5156 cf the U.S.R.S., among other things and

subject to certain restrictions, permits national banks to purchase for
their own account investment securities under such limitations snd




aorestrictions as the Comptroller of the Currency may by regulation prescribe. In addition to the definition therein contained, the section
provides for such further definition of the term "investment securities"
as may by regulation be prescribed by the Comptroller of the Currency,
and paragraph 19 of section 9 of the Federal Reserve Act provides that
State member banks shall be subject to the same limitations in this
respect as national banks.
8.

The power to broaden the limit of the amount of acceptances

which a bank may accept for one person is vested in the Board of Governors
with respect both to national banks and member State banks.
9.

Congress has seen fit to prohibit the payment of interest

on demand deposits; to limit the interest payable on time and savings
deposits; and to regulate the payment of time deposits before maturity.
National and State member banks are prohibited by statute from, directly
or indirectly, by any device whatsoever paying any interest on any demand deposit.

In the case of such banks, the Board of Governors is

authorized to define certain terms, to determine what shall be deemed
to be a payment of interest, to prescribe such rules and regulations as
it may deem necessary to effectuate the purposes of the law and prevent
evasions thereof, and to limit the rate of interest which may be paid
by such banks on time and savings deposits. In the case of nonmember
insured banks the F.D.I.C. is directed to prohibit by regulation the
payment of interest on demand deposits and authorized to define "demand deposit?". It is directed to make such exceptions from the prohibition as are permitted to member banks by Federal Reserve Act and




-lithe Board of Governors1 regulation.

It is also directed to limit the

rate of interest payable on time and savings deposits, to prohibit
payment of time deposits before maturity except under regulation of
the F.D.I.C., to prohibit waiving of requirement of notice before payment of savings deposits except as to all savings deposits having the
seme requirement, and to define what constitutes time and savings deposits in an insured nonmember bank.
10.

Congress has soon fit to make provision for the removal

for cause of officers and directors of member banks. In the case of
national banks the proceeding is initiated by the filing of a certificate

of the facts warranting removal with the Board of Governors by

the Comptroller*

In the case of State member banks the proceeding is

initiated by the filing of a similar certificate by the Federal Reserve
Agent. In both cases the hearing is before and the decision is by the
Board of Governors.
11.

Congress has seen fit to prohibit, with certain exceptions,

any director, officer, or employee of a member bank serving any other
bank.

The Board of Governors, as provided in the Clayton Act, is

authorized to enforce compliance with this section both in the case of
national banks and in the case of State member banks.
12.

Congress has seen fit both as to national and State member

banks to forbid a director, officer, or employee of a security company
serving such a bank except in limited classes of cases as may be permitted by a general regulation of the Board of Governors.




-1213.

Congress has seen fit to forbid executive officers, with

certain exceptions, to become indebted to their banks and to forbid
banks to make loans to their executive officers•

The effectuation of

this statute by regulation and the defining of the term "executive
officer" is delegated to the Board of Governors with respect to both
State member and national banks,
14.

Congress has seen fit to provide that in the case of a

sale of any security or property to a bank by a director or by a firm
of which any director is a member, the Board of Governors may, by regulation, require full disclosure of the commissions when the director or
fix»m sells for others and of the profits when the sale is made for the
director or firm* This applies as well to national as to member State batiks.
15*

Congress has seen fit to forbid the affiliation of a member

bank with a security company and has provided that a penalty of $1,000
per day may be assessed by the Board of Governors and collected by the
proper Federal Reserve bank. This applies alike to national and State
member banks. In the case of a national bank, after six months1 violation
the bank's charter may be forfeited in a suit brought by the Comptroller
in his own name at the Board's direction.

In the case of a State member

bank, its membership may be terminated.
16%

Congress has seen fit to regulate the relations of banks

with so-called "holding company affiliates" and has vested the question
of certain determinations thereunder as well as the granting to them of
voting permits to the Board of Governors in the case of national as well
as member State banks.




-1317.

Congress has undertaken to prevent the excessive use of

credit for speculative purposes and for such purpose has empowered the
Board of Governors to regulate the extension and maintenance of credit
for the purpose of purchasing or carrying securities registered on national securities exchanges*
18.

This power extends to all banks.

The F«D*I*C. may require any insured bank to insure

against burglary, defalcation and other insurable losses.
19.

The Comptroller of the Currency is charged with supervi-

sion of the liquidation of banks for which he has appointed a receiver.
Nevertheless, when he shall have closed a bank on account of its inability to meet the demands of its depositors, he must appoint the
F.D.I.C, receiver, and it liquidates the affairs of the insolvent bank
under the supervision of the Comptroller of the Currency who, in turn,
is authorized to waive and relieve the F.D.I.C. from complying with any
regulation of the Comptroller with respect to receiverships where, in his
discretion, such action is deemed advisable to simplify administration.
The F.D.I.C. must also accept appointment as receiver in the
case of State banks if such appointment is tendered by the authority
having supervision of such banks and is authorized by State law.
The public interest naturally is the basic interest underlying all Federal supervision, but it must be remembered that while one
is apt to think of supervision only in the broad sense of the security
of the public in its dealings with banks, there is also involved supervision and control of the use of credit, as well as, supervision relating to the Government's status as a capital investor, as a creditor and




-14-

as an underwriter. To the extent that any of the agencies is engaged
in supervision based upon considerations relating to one or more of the
above objectives, but not relating to all of them, there is planted the
seed from which msy spring conflicts of viewpoints, conflicts in the
exercise of similar powers, and resulting waste and confusion.
It is little wonder, therefore, that this hybrid system of
supervision has produced:
1.

Duplicate corps of review examiners maintained in Washington

by the Comptroller of the Currency, the F.D.I.C., and the Board of Governors, as well as the R.F.C.

Duplicate corps of field examiners main-

tained in 12 separate districts by the Comptroller of the Currency, the
F.D.I.C, and the Board of Governors, as well as the maintenance of a
corps of examiners in the many agencies of the R.F.C.
2.

Duplication of examination avoided only to the extent of

the exercise of mutual cooperation between the agencies and even then
resulting in dissatisfaction at the methods and standards employed by
the examining agency selected.
5. Inability to agree upon uniform examining standards and
resulting application of different standards in the classification of
assets; in the appraisal of real estate loans; in the treatment of depreciation in bonds and the values at which they should be carried; in the
treatment of valuation reserves; and in the determination of losses.




4.

Examination of one class of banks at the expense of others.

-15-

National banks are assessed for each examination, but the F.D.I.C. which,
in examining only nonmember banks, examines more banks than any other
agency, makes no charge for examination, although the greater part of
the assessments upon which it operates is paid by member banks which it
does not examine.
5.

Duplication and multiplicity of reports provoking admis-

sions and statements along following lines:
"Reports of condition now being issued to the public
are confusing because of thoir inadequacy and lack of uniformity."
(Chairman Leo T. Crowley to House Committee on Banking and Currency, February 1935)
"Calls for information from banking institutions have
increased in recent years. The number of Governmental offices
interested in obtaining information from banking institutions
has increased substantially in recent months. At the present
time the H.F.C., the Securities Exchange Commission, the Treasury Department, the Comptroller of the Currency, the F.D.I.C.
and the Federal Reserve Board are all asking for information,
and recently the Department of Agriculture and the Federal
Housing Administration have requested us to obtain information
for them. This has increased the work of the member banks
considerable. Many of them resent quite vigorously the extra
work that is thrust upon them."
(Edward L# Smead, Chief of the Board's Division of Bank Operations, at the conference on Call Report Standardization,
May, 19S5)
w #• •* # tho bank - a trust company member of the
Federal Reserve - was called on to make about 50 condition
reports, of one sort or other, each year to external agencies. The time periods covered were divided as follows:
daily, lj weekly, 5j monthly, 4j bi-monthly, lj quarterly,
10j semi-annually, lj annually, 28. A few calculations on
a scratch pad provided the astonishing information that in
carrying this routine through a year tho bank had to prepare
about 700 reports, several of which contained multiple
schedules. * * * It would bo hazardous, for one example,
to attempt an estimate of how much the supplying of supervisor information costs all banks, but it might be fair to
assume that this is a fair sample, proportionately, for




-16-

trust companies operating in the state in which the bank
is located. And it also seems fair to say that mar$r of the
regulatory authorities have realized the enormous duplication of effort, the needless expense, and other features
of the burden. The task of simplification, started last
May at a conference in the Washington offices of the Federal Deposit Insurance Corporation, is receiving the cooperation of such Federal agencies as the Reserve Board,
the Comptroller, the Reconstruction Finance Corporation,
the Treasury, and the F.D.I.C, as well as the Reserve City
Bankers Association, National Association of Bank Auditors
and Comptrollers, American Bankers Association, and National
Association of Supervisors of State Banks. Completion of
the work may mean that the number of reports required from
the bank referred to in this article can be reduced by 80
per cent."
(Article in "Banking", March 1936)
6.

Recognition of need for correction as evidenced by the

following statements:
"The most essential factor, in my opinion, for a
continuance of a sound banking system is a unification and
standard}.zation of supervisory policy and procedure. It is
necessary that we use uniform standards with all problems
concerning supervision and that we use the same standards
in determining the soundness of individual banks; otherwise
it will be impossible to determine their position in the
System with any degree of accuracy."
(Chairman Leo T. Crowley, September 1936)
"I believe it would be highly desirable if we
could have centralized examinations."
(J. F. T. O'Connor, in answer to a question before the
Senate Committee on Banking in April, 1935)
But inability, nevertheless, to agree upon standard forms which
would reduce the multiplicity of reports. For instance, in 1935 the
F.D.I.C initiated a movement to standardize reports and some progress
was made with respect to standardization as between the various states
and tho F.D.I.C.

Repeated conferences were held between the technicians

of tho F.D.I.C, the Board of Governors and others representing states




- 17 -

and private interests. Some progress was made as between some of the
states, the F.D.I.C. and the Board of Governors but it has proved impossible to effect standardization between the three Federal agencies.
The press has reported the incident as being a controversy between the
F.D.I.C. and the Comptroller of the Currency and has quoted the Comptroller as saying that he "had no prior notice of the meeting" and that
"the forms of Call Reports under the Federal law are required to be prepared under the direction and authorization of the Comptroller of the
Currency for national banks".
7.

(Herald Tribune, March 14, 1956)

Public confusion and inability of those concerned to de-

termine to which of the several agencies a particular matter should be
referred as evidenced by the following statement:
"We have boon in frequent communication with the
Board of Governors of the Federal Reserve, the officers of
the Federal Reserve Bank of Cleveland, the Comptroller's
office, our Chief National Bank Fixaminer, Mr. Leyburn, at
Cleveland, the Federal Deposit Insurance Corporation at
Washington, as well as Chief Examiner Stroefer at Columbus,
and Mr. Squire, our State Superintendent of Banks, in regard to interpretations and methods of operation under the
new legislation. We have had their cooperation in interpreting the meaning of various provisions and have passed
this information along to our members, who found this service very helpful."
(John H. McCoy, President, Ohio Bankers Association, 19S6
Annual Convention)
8.

Enforced acceptance of members into the Federal Reserve

System end enforced insurance of deposits by the F.D.I.C. through the
exercise of chartering powers by the Comptroller of the Currency and,
in the case of insurance, both through the exercise of chartering
powers by the Comptroller of the Currency and the acceptance of State




- 18 -

member banks by the Federal Reserve System.

This on one occasion has re-

sulted in public charges that the Comptroller of the Currency, against the
judgment and recommendation of both of the other agencies, has chartered a
national baxik, thereby forcing it upon the Federal Reserve System as a member bank and upon the F.D.I.C. as an insured bank.

(New York Eerald Tribune,

11/13/56, reporting the Case speech)
In this connection it may be noted that in the annual report of
the F.D.I.C. for the year 1956 the following comments are made:
"In the Federal establishment, greater coordination
than has hitherto obtained is essential to the various agencies
which charter and supervise deposit, savings, loan, investment
and other credit institutions;"
and
"The Corporation believes that no bank should be permitted to become insured without its approval"
9.

Application of different requirements in the admission of

State banks as members of the Federal Reserve System from those applied
by the Comptroller of the Currency in the chartering of national banks*
10.

Application of different standards as between member State

banks and national banks in the granting of voting permits to "holding
company affiliates". For instance, in weighing requests for such permits
it was the Board's practice to apply the same standards and in some cases
higher standards than those imposed as an indident to membership by State
banks but, with respect to national banks, requirements were lessened, due,
apparently, to the insistence of the Comptroller that such matters as determinations of losses to be charged off ty national banks are solely
within the province of his office.




- 19 -

11.

Different definitions of the same term. - For instance, the

F.D.I.C.'s definition of the terra "deposits", for the purpose of computing
assessments, is different from the definition of that term by the Board of
Governors for the purpose of computing required reserves.
12.

Two agencies unable to agree in the execution of a common

mandate of law. - Member banks are prohibited from paying interest on demand deposits and the Board of Governors is authorized to prescribe such
rules and regulations as may be necessary to effectuate the purposes of the
law. The F.D.I.C. is directed by law to prohibit by regulation the payment
of interest on demand deposits by nonmember insured banks. No one would
argue that a correspondent bank absorbs exchange charges on items which it
collects except in consideration of the use of someone's funds. However,
because the absorption of such charges by other than the correspondent bank
and, in the last analysis, by the public, might result in the inability of
certain nonmember insured banks to make such charges because of the public's
unwillingness to pay them and because of differences of opinion as to the
law's intent, whatever its letter, the F.D.I.C. and the Board of Governors
were never able to bring their respective regulations into

substantial con-

formity, until, by force of necessity and as a matter of expediency, uniform
general language was agreed upon declaratory of what everyone knew the law
to be. Until there is found soiue means of applying the agreed language to
a particular case however, and until uniformity in its application to particular cases is obtained, the public and the banks are left in confusion
as well as in the unfair position of some banks following one practice and
others another.




- 20 -

13.

The maintenance by each of the agencies of large staffs

other than examiners engaged in the same or similar activities, such as
the collection of statistics and similar lines of endeavor.
14.

Petty inter-agency jealousy of prerogatives and resulting

hesitancy to take desirable action lest prerogatives be surrendered.
15.

Permitting the continued operation of allegedly insolvent

and admittedly weak banks desperately in need of reorganization, while
the agencies involved have unsuccessfully tried to agree upon a plan,
failure to do which, may in some part be attributed to motives of self
interest upon the part of one or more of the agencies concerned.
16.

The Comptroller of the Currency issuing regulations re-

lating to investments by which both national banks and State member banks
are to be governed and, in the view of the Board of Governors, interpreting the regulations and applicable statutes in some respects beyond the
scope of the authority conferred by the statute. The inevitable result
of this state of affairs is one standard for national banks and another
for State member banks - the standard in both cases however, resting upon
identical legal wording.
17.

Each of the agencies, within its own sphere and upon its

own consideration, independently and without coordination, instituting
remedial action of some character.

Thus, it is that in one national bank

the F.D.I.C. instituted proceedings to terminate the bankfs insurance, the
probable results of which will be the appointment of the F.DfI.C« as receiver.




During the course of consideration of the advisability of such

- 21 -

action by the F.D.I.C., of which Board the Comptroller of the Currency is
a member, he, by certificate filed with the Board of Governors instituted
proceedings against the president of the bank to remove him from office.
The Board promptly initiated an expensive hearing but during the timely
course of its deliberation, it became necessary for the Comptroller to
appoint a conservator*

The result is that the Board of Governors has re-

moved an officer from a bank in which the Comptroller of the Currency has
already appointed a conservator, who in turn, unless effective corrections
are made in the bank, will be supplanted by the F.D.I.C. as receiver.
18.

Threats upon the part of some banks to denationalize in

order to escape regulation and supervision by the Comptroller of the Currency; threats upon the part of other banks to retire from the Federal
Reserve System in order to escape regulation and supervision by the Federal Reserve System; and threats upon the part of still other banks to
join the Federal Reserve Sjystem in order to escape regulation and supervision by the F.D.I..C.
19.

And, finally, the extraordinary situation of one supervis-

ing agency liquidating a bank subject to the supervision ofanother supervisory agency.
Under these circumstances, therefore, can the conclusion be
escaped that the existing machinery has developed inefficiency for which
corrective measures should be employed?
Improvement by Elimination of Divided
Responsibility and Consolidation of Functions
Simply as a matter of good organization it would appear undesirable to establish a division of labor or authority in connection with



- 22 -

Federal supervision of banks subject thereto. As well may it be argued
that there should be one Interstate Commerce Commission for railroads and
another one for trucks. Divided responsibility is likely to produce a
failure to act because of the lack of full responsibility to act.
Moreover, while the degree or extent of such reliance may not
be the subject of definite ascertainment at least it may be stated as a
fact that public reliance and dependence is put upon Federal supervision.
That feeling may be with respect to the Comptroller of the Currency or
the F.D.I.C. or the Federal Reserve System, but more likely it is with
respect to a vague and hazy idea of some comprehensive Federal authority.
That is the very point - To illustrate, the following is quoted from the
Commission on Banking Law and Practice of the Association of Reserve City
Bankers-Bulletin of July 24, 1933:
"As nearly as we can appraise the opinion of the man
on the street, it is something like this. He knows that a bank
charter cannot be obtained except from a Government agency. He
knows that when the sign 'Bank1 is put over a door that a Government agency has endorsed that establishment and permitted it
to accept deposits from any man or woman who may choose to enter. It is a further fact, that the average small depositor
has no basis for discriminating between a safe bank and an unsafe bank. If we were to provide him with a statement of the
bank and all the supporting documents he would still be unable
to form a correct judgment as to the safety of the institution
in question. When, in these circumstances, thousands of banks
close, involving heavy losses to depositors, the average man
feels that a severe injustice has been perpetrated. A man's
savings are almost as important to him as life itself, and if,
through no fault of his own, his deposits aro lost, he cannot
be expected to do otherwise than raise a clamor against this
injustice. It is a public menace like unsafe grade crossings,
or fire hazard, or reckless automobile driving, from which the
small depositor has a right to expect protection from those in
authority. From millions of men and women in this situation a#
demand has arisen that their deposits should be protected* As
long as bank failures are permitted to continue, this demand
will exist."




- 23 -

It follows therefore, that if the public is to hold the government responsible for effective supervision - there should be some place
where that responsibility can be fixed.

He indeed is ah optimist who, when

a bank has failed, can forsee the Secretary of the Treasury, because he licensed it, the Comptroller of the Currency, because he chartered it and exercised general supervision, the Board of Governors, because it was a member bank, and the F.D.I.C, because it was an insured bank, vying with each
other in an effort to assume responsibility for inadequate supervision
contributing to its failure. More likely the case will be similar to the
one reported to the Senate Committee on Banking by one of its examiners
in connection with the Senate hearing on stock exchange practices, as follows:
"As stated previously, we cannot help but feel that the
break-down of the Guardian Trust Co. can in a large measure be
traced to State bank examiners and the State superintendent of
banks of Ohio. Had examinations been made as specified by law
and conducted in a more thorough manner, many of the evils which
resulted in the bankfs closing would have been eliminated before
serious damage was done. However, unwarned and uncriticised, the
bank management continued to conduct the affairs of the bank in
such a manner that by February 28, 195S, its condition was such
that there was no alternative save liquidation."
In this same report it was said relative to examinations by the
Federal Reserve bank:
"The National Government recognizing its responsibilities in this respect has embodied in section 9281 of the Federal
Code the following in regard to banks coming under Federal supervision, as a result of being member banks of the Federal Reserve
Bank System:




"fThe Comptroller of the Currency with the approval
of the Secretary of the Treasury shall appoint examiners who
shall examine eveiy member bank at least twice in each calendar year and oftener if considered necessary. Provided» howevert That the Federal Reserve Board may authorize examination

- 24 -

by the State authorities to be accepted in the case of
State banks and trust companies and may at any time direct the holding of a special examination of State banks
or trust companies that are stockholders in any Federal
Reserve bank.1
"The above section, while eliminating the necessity
of a Federal Reserve examination in years during which an examination has been conducted by the State banking authorities,
does not excuse the Federal Reserve examiner from making examinations as specified in other years. The Federal Reserve examiners with too much confidence in the ability of the Ohio
State banking department examiners, failed to conduct examinations of the Guardian Trust Co« during the following years:
192S, 1925, 1927, 1930, and 1931.
"Legally they were not excused from examining during
these years as the State superintendent of banks for Ohio also
failed to conduct an examination and the law is clear on this
point. We feel that the Federal Reserve examiner is subject to
grave criticism for the failure to follow the law in this respect, as the thorough examination made by Federal Reserve examiners would have revealed the precarious position of the
Guardian Trust Co. early in 1930 and undoubtedly many of the
evils existing could have been corrected. As to the efficacy
of Federal Reserve examinations, no criticism is made as we
have found them to be thorough, critical and corrective."
Another factor to be considered in connection with the question
is that of cost. The best estimate obtainable as to the present cost of
Federal supervision would indicate that it amounts to approximately
$9,000,000 per year, divided as follows: Comptroller of the Currency
#3,800,000; F.D.I.C. $2,500,000; Board of Governors #1,400,000 and Federal Reserve banks $1,300,000. The foregoing figures include, for the
Comptroller of the Currency, the 12 district offices, and are based upon
the Comptrollers annual report for 1935 but do not include expenses in
connection with the issuance and redemption of currency. Of this total,
$216,000, representing regular salary roll, is paid from appropriation




- 25 -

and the balance is assessed against banks. The estimate of $2,500,000
for the F.D.I.C. represents the estimated total of the annual administrative expenses of the corporation, including its district offices, as indicated by its annual report of June 50, 19S6. The estimate of #1,400,000
for the Board of CJovernors includes the total salaries and expenses of
the Board of Governors of the Federal Reserve System except expenses in
connection with the issuance and redemption of currency, and the expenses
of the Federal Reserve banks aue represented by the expenses of other bank
examination departments without any allowance for overhead.
Obviously no one can estimate with exactness the extent to
which the foregoing cost could be reduced if the functions of the three
agencies were consolidated.

However, in the light of what is known with

respect to the existing duplication of effort and duplication of personnel, common sense dictates that the ultimate coat could be materially and
substantially reduced.
Last and perhaps most important of the many considerations favoring consolidation of the supervisor functions is the resulting facility
with which such functions could then be coordinated and correlated with
national credit policies.
As was pointed out by Dr. Jacob Viner in an article entitled
"Recent Legislation and the Banking Situation" appearing in the American
Economic Review, Vol. XXVI, No. 1, Supplement, March 1956:
»* * * The examiners, through the qualitative credit
standards which they impose on banks, indirectly influence the
quantity of bank credit. When business is prosperous and optimism prevails, examiners, like the bankers themselves, must




- 26 -

tend to appraise credit risks in terms of the favorable conditions of the moment. The bankers, and especially the small
bankers, confident that what is good enough to pass the scrutiny of the examiners should be good enough to meet their own
standards, persist on their career of credit expansion. Later, when the tide of business turns, when banks begin to fail
and loans which were passed without criticism during the boom
days have to be written off as bad debts, the examiners are
blamed. Reacting in a perfectly natural manner, they become
stricter and more exacting in the standards they apply, and
they press the banks to liquidate loans and investments which
the banks, if left to their own devices, would be happy to
keep in their portfolios. The process of bank examination
thus tends to encourage credit expansion during the upswing
of the business cycle and, more seriously, to intensify credit
contraction during the downswix^g.
"There is an obvious cure for this perverse effect
of bank examination, requiring three innovations in the administration of the examinations: unified control of bank supervision and examination; co-ordination of examination policy
with credit control policy; and systematic and continuous supervision and instruction of the examiners in terms of a uniform
and flexible policy. Fully to attain all of these objectives
would require the centralization of all bank examining functions
under the direction of the Federal Reserve Board."
One has but to remember the pressure upon banks by various supervisory authorities for and the resulting disaster in connection with socalled "secondaiy reserves" of bonds and investments to realize the force
of this point.
Should consolidation be effected then it would follow that examiners could be schooled along the same lines and trained and directed to
apply uniform standards in the classification of assets, the appraisal of
management, the development of sound practices and discouragement of unsound practices all along basic and fixed policy lines correlated with existing national policies.




- 27 -

As a proposition, therefore, in order to secure more efficient
supervision at less cost it appears desirable to consolidate all supervisory functions in one agency.

Consolidation of Functions in the
Board of Governors of the Federal Reserve System
In the light of its present responsibilities, its availability,
and its equipment, it is submitted that that agency should be the Board
of Governors.
Of the three agencies, it is the Board of Governors which is
charged with responsibility for monetary and credit policies of the United
States. This responsibility is met largely through the exercise of control and regulation over discount rates, reserve and margin requirements,
and the activities of the Federal Reserve banks in the open market.
With respect to the influence of supervision by examination
upon the quality and quantity of credit in banks much has been said that
need not be repeated.

It may be pointed out, however, that had the Board

had complete control of the examination and supervision of banks subject
to Federal supervision in 1928 and 1929 it could, through its influence
in marking examinations, have made its direct action policy more effeotfae and could have further discouraged the use of bank credit for speculative purposes*
As a matter of fact this period is graphically illustrative of
the necessity of coordinating and correlating examining standards with
existing national policies.

If the responsibility of examining is in one

body and the responsibility to formulate national policies is in another,




- 28 -

the opportunity for differences of opinion is ever present and, as in
the past, unless responsibility is fixed in one body, the time may come
when the Board of Governors will establish one credit policy and the examining authority will encourage a diametrical one.
It has been and may be argued with considerable force that examining functions should never be vested in an agency in which there exists the possibility of a conflict of interest as between the status of
such agency as a creditor or underwriter and its status as a supervisor.
Typical of this viewpoint is the following statement of the Comptroller
of the Currency appearing in the American Banker of July 15, 1936, as
follows:
"If we are to have a national banking system over
which the Government exercises supervisory control, that control must be in the hands of an independent executive and not
the representative of a preferential creditor*
"This subject was again brought up following the
Banking Holiday.1 With the calming of the hysteria, however, following the stunning blow of the depression, the
agitation seems to be overwhelmed with the logic that our
major banking system should be supervised by an independent
bureau and not one having a direct or indirect monetary interest in the banks under supervision, or required by law to
extend them credit or assume responsibility for their liabilities. It appears, therefore, that the Bureau (office of the
Comptroller of the Currency) with its history of 73 years is,
through the evolution of our financial structure, more firmly
entrenched today than ever as a public necessity."
1

The efficacy of this argument depends upon the assumption that
in no case can self-interest be divorced from public interest and that
where self-interest is involved inevitably it will be favored.

This is,

of course, a factor to be considered but when weighed against the desirability of coordinating supervision with national policies and the evils




- 29 -

from failure to do so, it appears as a relatively unimportant one. Moreover, as an effective answer it may be pointed out that the whole philosophy of the Federal Reserve System is based upon subordination of the profit motive to the public good and in weighing this factor the public character and duties of the Board of Governors must not.be disregarded.

It

can as well act in the public interest and against any possible selfish
interest of the Federal Reserve banks in the supervision of banks as it
can in directing the purchase or sale of securities in the open market
in the public good but at a loss to the Federal Reserve banks.
With respect to the availability and equipment of the Federal
Reserve System to undertake the task, it need only be pointed out that
already the System has a seasoned and trained staff of technicians in
Washington, 12 banks and 25 branches blanketing the nation, manned by
officers and employees having long and broad experience and an intimate
knowledge of the banking problems of their respective districts. Through
this long experience they have acquired a personal knowledge of past and
current policies and activities of most of their member banks and many of
the nonmember banks and, with added responsibility, this feature could be
expanded.

They are constantly brought in touch with the banks in their

daily operations either with respect to reserves, borrowings, transit
operations or other matters and through this they have the opportunity
to and do often acquire knowledge not available to an examiner in his
short and periodic visits. Such information is useful and, with entire
responsibility for supervision consolidated in the Board of Governors,
it could be more effectively availed of.




- 30 -

Of less importance, but nevertheless a consideration, is the
fact that the F.D.I.C. was capitalized on funds of the Federal Reserve
System aggregating $159,000,000 and $150,000,000 contributed by the Government theoretically as a return to the banking system for $149,000,000
paid by the System as a franchise tax. Hence the System already has a
large stake in the F.D.I.C.
Therefore, it is offered as a proposition that Federal supervision of banking should be consolidated in the Board of Governors along
the lines of the following discussion.
The desirability of fixing undivided responsibility should not
be confused with the desirability of decentralizing activities to the extent possible. The important factors in consolidation are the fixing of
undivided responsibility and the coordination of activities along uniform
and standard lines. Centralization of all activities in Washington, even
if not impossible, would seem highly undesirable and, correspondingly, decentralization to the extent that it can be accomplished without destroying the application of uniform standards would seem to be a desirable
thing. In the first place, the task is simply too much to be undertaken
at one point and, in the second place, there are obvious advantages in
personal association and in the accumulated information and background of
information obtainable through activity in the field. That, in certain
cases, delegation of authority is desirable seems to be a principle recognized by section 507 of the pending bill to reorganize Government
agencies, which permits the delegation of functions vested in and imposed upon a head of an agency.




- 51 -

Accordingly, after consolidation of all supervisory functions
in the Board, it would be the purpose of the Board to decentralize activities

in so far as possible by the establishment of district supervisory

authorities, whose field of activities would be co-extensive with Federal
Reserve district lines. He would serve at the pleasure of the Board and
correspond somewhat to the present chiof national bank examiner*

To him

would be entrusted:
1.

The examination and supervision- of commercial

banks and their affiliates in the district, in accordance
with general policies and standards fixed by the Board.
2.

The approval or disapproval of applications for

charters, permits, changes in capital, etc. subject to the
applicants right to appeal to the Board in particular cases
in accordance with uniform standards fixed by the Board.
3.

The approval or disapproval of plans of reorgani-

zation, consolidation and liquidation, subject to the right
of appeal to the Board in particular cases.
4.

The initiation of removal proceedings under section

SO of the Banking Act of 1953, of capital requirement proceedings, and of expulsion from the insurance fund or from membership in the Federal Reserve System.
5.

The receipt, review and tabulation of statistics from

call and other reports.
6.

The duty to furnish the Board with examination reports

or analyses thereof, or such other information as might be required from time to time.



- 32 -

One objection often heard to the delegation of supervisory powers
to the Board of Governors and particularly to the Federal Reserve banks
arises out of the fact that six of the directors of a Federal Reserve bank
are elected by commercial banks in the district and to that extent the
banks would be subjecting themselves to supervision by their associates
and even competitors. This, it is recognized, may be both obj«.octionable
and undesirable.

For that reason it would be the Board's purpose in de-

centralizing examining activities to delegate supervisory authority to
someone responsible only to it and not in any wise responsible to the Federal Reserve bank, except for cooperation and willingness to cooperate.
The Board, in addition to its present functions with respect to
the direction of credit policies and general supervision of the twelve
Federal Reserve banks would:
1.

Establish uniform policies of general application

to the chartering, examining and supervising of commercial banks.
2.

Coordinate activities to the end that uniform and

standard policies would be uniformly applied*
5.

Handle the appeal of all matters wherein the deci-

sion of the district supervisor is not final.
4.

Determine the date, form and conditions of all re-

ports and give direction to the review and analyses of the same.
5.

Appoint conservators and receivers for banks.

6.

Appoint district supervisors and their assistants.

Under this plan it would be the hope that those regulated would
be able to submit their problems to one authority in one office within




- 53 -

their own district and receive an answer• At the same time it would be
the hope that having granted authority commensurate with the responsibility and having established means whereby uniform standards consistent
with basic national policy could be fixed and applied, there would result
a higher degree of efficiency in supervision with less disturbance to the
banking system and at less cost to it as well as to the national economy.