The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
N E W S R ELEA S E v 5'y FOR IMMEDIATE RELEASE PR-22-74 (4-23-74) iUKfllil/t B IG G E R IS NOT A L W A Y S B E T T E R A d d ress o f F ra n k W ille , C hairm an F e d e r a l D e p o sit In su ra n ce C o rp o ra tio n A p r il 23, 1974 B e fo r e the 73rd Annual C onvention o f the C o n fe re n c e o f State Bank S u p e rv is o r s W illia m s b u r g , V irg in ia FEDERAL DEPOSIT INSURANCE CORPORATION, 5 50 S e v e n t e e n t h St. N . W . , Washington, D. C. 2 0 4 2 9 I 202-389-4221 When a bank o f any sig n ifica n t s iz e f a ils , we in the bank r e g u la to r y b u sin e ss have co m e to e x p e ct qu estion s about the sa fety and soundness o f oth er in stitu tio n s, C o n g re s s io n a l o r le g is la tiv e in q u irie s as to the g e n e ra l e ffe c tiv e n e s s o f bank exam in ation and s u p e r v is o r y te ch n iq u e s, and a spate o f p u b licity that runs the gamut fr o m a ccu r a te and p e r c e p tiv e to the ill- in f o r m e d , the ir r e s p o n s ib le o r even the p o lit ic a lly m o tiv a te d . B an k ers b r a c e th e m s e lv e s fo r add ition a l re g u la tio n s and r e s t r ic tio n s depending on the fa cts and c ir c u m s ta n c e s o f a p a r tic u la r ly m e s s y bank fa ilu r e , and a r t ic le s about FDIC and FSLIC in su ra n ce c o v e r a g e have a sudden su rg e in p op u la rity . T h e se r e a c t io n s , I m igh t add, do not depend at a ll on w hether the bank w h ich fa ile d was a national bank o r a state bank, o r on the exam in in g a g e n cie s that m ight have had ju r is d ic t io n , o r even on the g e o g ra p h ic lo ca tio n o f the b a n k 's o f f ic e s . With enough n o to rie ty and p u b licity , th ose o f us e ls e w h e re in the cou n try w ill e x p e r ie n c e som e o f the fa llou t fr o m the fa ilu re o f a San F r a n c is c o N ational o r a United States N ational, ju st as th o se on the W est C oast w ill fe e l the r e p e r c u s sion s o f a fa ilu re in D e tro it, S harpstow n, Fatontow n o r W a k efield . W hether new reg u la tion s e v o lv e o r n ot, the n a tion 's banks under e x istin g law w ill fe e l the fin a n cia l e ffe c t o f a sig n ifica n t bank fa ilu re in th e ir net a s s e s s m e n ts fo r d e p o sit in su ra n ce and w ill p ro b a b ly a ls o - 2 - e x p e r ie n c e m o r e in te n siv e exa m in a tion scru tin y in one o r m o r e a re a s o f th e ir o p e ra tio n s . L ik e it o r not, t h e r e fo r e , the n a tio n 's s u p e r v is o r s and the n a tio n 's banks a r e a ll a ffe cte d b y any sig n ifica n t fa ilu re that o c c u r s w ithin the banking sy ste m . O v e r the la st ten y e a r s , the FDIC has had a co m p a r a tiv e ly a ctiv e tim e as the in su ra n ce a g e n cy fo r d e p o sits p la ce d with the n a tion 's b a n k s. D uring that p e r io d , 55 c lo s e d in su red banks re q u ir e d FDIC d i s b u rse m e n ts as co m p a re d w ith 25 c lo s e d in su re d banks in the p re ce d in g te n -y e a r p e r io d . F r o m the vantage point o f m y p o sitio n as C hairm an o f the FDIC and in v iew o f the la r g e s t bank fa ilu re in FDIC h is to r y la st O c to b e r 18, I hope I m a y b e e x cu se d i f I o ffe r this m o rn in g a few com m ents o f m y own on the g e n e ra l s u b je ct o f bank fa ilu re s and the s u p e rv is io n o f p r o b le m banks. F ir s t o f a ll, we should keep our se n se o f p e r s p e c t iv e about the fre q u e n c y o f bank fa ilu re s in the United S tates. T h e r e a r e 1 4 ,3 0 0 in su re d banks in the United States today - - a n u m ber w h ich has b e e n in c r e a s in g r e c e n tly at the ra te o f about 150 banks p e r y e a r as new banks a r e c h a rte re d to s e r v e an e v e r - la r g e r nu m ber o f A m e r ic a n s . E ven du rin g the p ast ten y e a r s , on ly fiv e o r s ix banks have fa ile d , on the a v e r a g e , ea ch y e a r , w ith the n u m ber ranging fr o m one bank fa ilu re in 1972 to the nine that fa ile d in 1969. U sing any o f th ese fig u r e s , only - 3 - an in fin ite sim a l fr a c tio n o f the total n u m ber o f in su red banks in the cou n try fa il in any given y e a r . The fa ct that actu a l bank fa ilu re s continue to be so u n com m on is undoubtedly one r e a s o n , but not the on ly r e a s o n , o f c o u r s e , why they r e c e iv e the p u b licity they do when they o c c u r . At the sam e tim e , the r e v e r s e sid e o f the c o in , though s e ld o m m en tion ed in the p r e s s , should give bank s u p e r v is o r s and in su red banks a sig n ifica n t d e g r e e o f sa tis fa ctio n : that i s , that e x ce p t fo r this in fin ite sim a l fr a c tio n , the rem a in in g banks in the nation a re eith er w e ll m anaged o r , if they a re not w e ll m a n a ged , they se e m to b e e ffe c t iv e ly su p e rv ise d so as to p rev en t actu a l fa ilu re . S e co n d ly , our banking s y s te m and the fe d e r a l d e p o sit in s u r an ce p r o g r a m it s e lf a ssu m e that fr o m tim e to tim e som e banks in the s y ste m w ill be fo r c e d to c lo s e . No oth er nation has as m any d e p o s i ta r ie s as we d o, yet we continue to b e lie v e that the d e ce n tra liz e d sy ste m this p ro d u ce s is w orth savin g and we continue to ch a rte r each y e a r a la rg e n u m ber o f new groups who seek to en ter the banking b u s i n ess. M ost o f us se e both e c o n o m ic and s o c ia l value in having n u m erou s s o u r c e s o f fin a n cia l s e r v ic e and in con tin u a lly re p le n ish in g that supply as banks m e r g e out o f e x is te n c e , fa il o r b e c o m e co m p la ce n t in se rv in g the needs and co n v e n ie n ce o f the p u b lic. We m a y argu e about the nu m ber o f units w h ich w ill b e s t s e r v e the A m e r ica n p e o p le , but I - 4 - doubt that m any o f us seek o r w ish to e n co u ra g e a fin a n cia l stru ctu re co m p o s e d s o le ly o f a r e la tiv e ly few m u ltib illio n d o lla r banks o r bank holding co m p a n ie s. We should, on the other hand, r e c o g n iz e that any sy s te m in w hich s e v e r a l thousand in su red banks co m p e te to s e r v e the A m e r ic a n p e o p le en tails a ca lcu la te d r is k o f fa ilu r e , the e ffe c ts o f w h ich fe d e r a l d e p o sit in su ra n ce seek s to m in im iz e but w as n e v e r intended to e lim in a te . O c c a s io n a l bank fa ilu r e s , in s h o r t, a re part o f the p r ic e we have a g re e d to pay fo r a banking s y ste m o f s e v e r a l thousand units. I doubt, fo r e x a m p le , that with this stru ctu re we can e v e r elim in a te the ris k o f bank fa ilu re ca u sed b y the outright e m b e z z le m e n t o r c o n v e r s io n o f bank funds fo r p e rs o n a l gain b y a d ish o n e st bank o ffic e r a ctin g alone o r with o th e rs . In e v e r y such c a s e I know o f, it has been the bank s u p e r v is o r y a g e n c ie s , through th e ir exam in ation p r o c e s s , that have fir s t d is c o v e r e d such m is co n d u c t, and it is they w hich have had the un pleasant but n e c e s s a r y bu rd en o f fo r c in g a bank out o f b u sin e ss when the b a n k 's ca p ita l is d epleted b y such a c t iv it ie s . T w o out o f e v e r y fiv e bank fa ilu re s in the cou n try o v e r the p ast ten y e a r s have fa llen into this p a r tic u la r c a te g o r y . T h ir d ly , bank su p e rv isio n today is fo cu s e d not on p rev en tin g bank fa ilu re s but on m aintaining a co m p e titiv e and inn ovative banking - 5 - s y s te m , r e s p o n s iv e to the changing fin a n cia l dem ands o f the tim e s . We r e c o g n iz e that p u blic co n fid e n ce is an e s s e n tia l in g re d ie n t in any w ork a b le banking s y s te m , but we have r e je c te d the kind o f stultifying reg u la tion that would undoubtedly be n e c e s s a r y i f we w e re even to attem pt to elim in a te a ll bank fa ilu re s oth er than th ose ca u sed by c r im in a l m is co n d u c t. In the p r o c e s s , we would re d u ce the m o s t a b ly m anaged and inn ovative banks to the le v e l o f the m o s t m e d io c r e and u n im a gin a tive; we would have to substitute a s u p e r v is o r 's judgm ent fo r that o f 14, 300 bank m anagem ents as to the p r o p e r and prudent b u sin e ss r is k s to be taken under a w ide v a rie ty o f banking co n d itio n s; and in the end we would undoubtedly fa il in ou r p u rp o se b e ca u s e we lack the b ra in p o w e r n e c e s s a r y to w rite such reg u la tion s and the m anpow er n e b e s s a r y to e n fo r c e them . R e sp o n sib le s u p e r v is o r s instead seek to contain within to le r a b le lim its to the s y s te m as a w h ole, rath er than to elim in a te a lto g e th e r , the d a y -t o -d a y r is k s in v olv ed in banking tod a y, as banks o ffe r new s e r v ic e s , adapt to new te ch n o lo g y , fa ce new co m p e titio n and o ffe r the m o r e tra d itio n a l s e r v ic e s o v e r e v e r -w id e r g e o g ra p h ic a r e a s , t o d e te r m in in g the to le r a b le lim its o f such r is k s , none o f us should ig n o re this le s s o n s o f the p ast but we m ust a ls o r e c o g n iz e that the nam e o f the gam e today is com p e titio n and s e r v ic e , not the p ro te ctio n o f in stitu tion al sa fety - 6 - and s o lv e n c y o r the p r o te c tio n o f bank m anagem ents a gain st the e ffe cts o f th eir own b u sin e ss d e c is io n s and p o lic ie s . Is ou r p re se n t rate o f bank fa ilu r e s within to le r a b le lim its fo r our banking s y s te m as a w h ole? M y a n sw er to that q u estion is |'undoubtedly, y e s . " F o u rth ly , I b e lie v e the re a l s u c c e s s s to r y in bank su p e rv isio n lie s in the p r o b le m banks that do not fa il - - a c a te g o r y w h ich is th irty o r fo r ty tim e s m o r e n u m erou s than th ose w hich do. T h ese banks a ll re q u ir e in d iv id u a lized attention fr o m e v e r y s u p e r v is o r y a g en cy w hich has th em , and the attention given is u su a lly to ta lly d isp ro p o rtio n a te to the s iz e o f the bank and the o v e r a ll r e s p o n s ib ilit ie s o f the a g e n cy in v olv ed . T o y o u r c r e d it , the s u p e r v is o r y m e a s u re s taken r e s u lt, in a substantial m a jo r it y o f a ll c a s e s , in the r e m o v a l o f the bank fr o m p ro b le m status w ithin two y e a rs o f its fir s t id e n tifica tio n as a p r o b le m . The m e a s u re s taken can in clu d e rep ea ted c o n fe r e n c e s with bank m a n agem en t, one o r m o r e m eetin g s with a b a n k 's b o a rd o f d ir e c t o r s , frequ en t ex a m in a tion s, r e s t r ic tio n s on the b a n k 's expan sion p la n s, re q u ire m e n ts fo r loan w r it e - o f f s , the r e v e r s a l o f q u estion a b le a ccou n tin g p r a c t ic e s , in s is te n ce on new ca p ita l and m o r e fo r m a l a ctio n when m an agem en t p ro v e s to be d ila to r y o r r e c a lc itr a n t. W here s ta te -c h a r te r e d banks a re in v o lv e d , the lead in such m a tte rs is g e n e ra lly taken b y state bank s u p e r v is o r s , although th ere a re o c c a s io n a l d iffe r e n c e s betw een state and fe d e ra l - 7 - a g e n cie s as to the s e v e r ity o f the p ro b le m s p re se n te d by a p a r tic u la r bank o r the tim in g o f s p e c ific a ctio n . O v e r a ll, I c o n s id e r the c o o p e r a tion b etw een state banking d epa rtm en ts and the FDIC as to state n on m em b er banks in p r o b le m status to be e x c e lle n t. But this p a r tic u la r s u c c e s s s to r y is one w hich can n e v e r be fu lly re p o rte d without u n n e ce s s a ry dam age to the reputation o f banks w hich a r e s till open and op era tin g and p r e s e n tly in sound con d ition . M y re m a rk s to this point a r e not m eant to su g g est that th ere is little we can le a rn fr o m a c lo s e r lo o k at so m e o f ou r m o r e sig n ifica n t re c e n t bank fa ilu re s o r p ro b le m bank c a s e s . T h e re a r e , in fa ct, a n u m ber o f c h a r a c t e r is tic s w orth noting w hich m a y be helpful both to you and to the FDIC in the fu tu re. F ir s t , if th e re e v e r was a day when p ro b le m banks o r actu a l bank fa ilu re s w e re con fin ed to r e la tiv e ly s m a ll ban ks, this is no lo n g e r the c a s e . In 1963, the a v e ra g e s iz e o f the 159 in su red banks on F D IC 's y e a r -e n d p r o b le m lis t was ju s t under $8 m illio n . A t y e a r -e n d 1973, this sam e a v e ra g e fo r a p p ro x im a te ly the sam e n u m ber o f banks was ju st under $28 m illio n . The la r g e s t bank on the 1963 lis t had total d e p o sits o f slig h tly o v e r $180 m illio n , w hile only two oth er banks had total d e p o sits o f m o r e than $50 m illio n . The 1973 lis t had 15 banks on it in the " o v e r $50 m illio n " c a te g o r y . - 8 - In the 2 0 -y e a r p e rio d b etw een 1943 and 1963, no in su red bank la r g e r than $17 m illio n in tota l d e p o sits fa ile d . In the la s t ten y e a r s , six in su re d banks la r g e r than $17 m illio n in total d e p o sits have fa ile d , the la r g e s t o f w h ich was, o f c o u r s e , United States N ational Bank, San D ie g o , la s t O c to b e r 18. The fou r la r g e s t fa ilu re s in FDIC h is to r y have a ll o c c u r r e d in the past ten y e a r s (P u b lic Bank, D e tro it, 1966, tota l d e p o sits $93. 0 m illio n ; Sharpstow n State Bank, 1971, tota l d e p o sits $ 6 6 .8 m illio n ; B irm in g h a m -B lo o m fie ld Bank, 1971, total d e p o sits $57. 5 m illio n ; and United States N ational Bank, 1973, total d e p o s its $932. 0 m illio n ). In a d d ition , the $40 m illio n -d e p o s it San F r a n c is c o N ational Bank fa iled in 1965 and the $1. 028 b illio n -d e p o s it Bank o f the C om m on w ea lth , D e tro it, w ould have fa ile d in 1972 but fo r the s h o r t -t e r m in fu sion o f $35. 5 m illio n in ca p ita l funds b y the FDIC e a r ly the sam e y e a r . B y it s e lf, the fa ct that la r g e r banks than b e fo r e a r e show ing up am ong the ca su a ltie s and p ro b le m s o f the n a tion 's banking sy s te m is not s u r p r is in g in v iew o f the grow th in d e p o sits g e n e ra lly and in the p e r s is t e n c e o f the n a tion 's in fla tio n a ry tre n d s. What is perh aps s u r p r is in g is that an in c r e a s in g num ber o f banks in the s iz e c a te g o r ie s o v e r $100 m illio n a r e in clu d ed am ong th em . In sh o rt, " b ig g e r " is not alw ays b e tte r , and we s u p e r v is o r s w ill ig n o re that tru is m at ou r p e r il. S econ d , o n e -m a n dom in ation was evident in fo u r o f th ese fiv e r e c e n t bank fa ilu re s and a ls o in Bank o f the C om m on w ealth . In m o s t - 9 - c a s e s the dom inant c h ie f e x e cu tiv e a ls o c o n t r o lle d , through fa m ily and fr ie n d s , a m a jo r ity o f the votin g sto ck and the e le c tio n o f d ir e c t o r s to w hom he was su p p osed to be le g a lly and a ctu a lly a cco u n ta b le . As a p r a c t ic a l m a tte r, he w as fr e e to a ct without sig n ifica n t p o lic y re stra in ts set by an a ctiv e and independent b o a rd o f d ir e c t o r s . T h ir d , ea ch o f the banks exhibited e x tra o rd in a ry d e p o sit grow th o v e r a r e la t iv e ly sh ort p e rio d o f tim e and in on ly two c a s e s was even a m in o r p o rtio n o f this grow th a ttribu table to m e r g e r . T w o y e a rs a fte r it op en ed , San F r a n c is c o N ational Bank re p o rte d m o r e than $55 m illio n in d e p o s its . Eight y e a rs a fte r it op en ed, P u b lic Bank, D e tro it, p a s se d $120 m illio n in d e p o s its . Sharpstow n State Bank jum ped fr o m $10 m illio n in 1967 to m o r e than $82 m illio n th ree y e a rs la te r. B irm in g h a m -B lo o m fie ld Bank went fr o m $11 m illio n in d e p o sits in 1965 to slig h tly m o r e than $105 m illio n le s s than fou r y e a rs la te r. United States N ational Bank added m o r e than $450 m illio n in d e p o sits b etw een y e a r -e n d 1970 and the date it c lo s e d , with le s s than $80 m illio n o f this a ttribu table to m e r g e r s in 1971 and 1972. Bank o f the C om m on w ealth added a lm o s t $700 m illio n in d e p o sits in the fou r and one h a lf y e a r s im m e d ia te ly a fte r Donald P a rso n s took c o n tr o l, with on ly $93 m illio n o f this a ttribu table to m e r g e r . M uch o f this grow th 10 - o c c u r r e d in the v o la tile tim e d e p o sit c a te g o r y w h ich su bsequ en tly p re se n te d s e v e r e liq u id ity p ro b le m s to the banks as CDs m atu red and w e re not ren ew ed . M ost o f them ended up b ein g heavy b o r r o w e r s to m e e t th e ir liq u id ity n e e d s, and this freq u en tly in te n sifie d an a d v e rs e earn in gs p o sitio n . F ou rth , the m anagem ent o f ea ch o f th ese banks exh ibited c le a r s e lf- s e r v in g te n d e n cie s , w h ich w e re m a n ife ste d m o s t co m m o n ly in a v a r ie ty o f loan tr a n s a c tio n s , the a g g re g a te o f w h ich was d is p r o p o r tio n ate to the total v olu m e o f loans and to the b a n k 's total ca p ita l and reserves. In individual c a s e s , oth er fo rm s o f s e lf-d e a lin g w e re a lso evident p r io r to fa ilu re . F ifth , the ca p ita l o f ea ch bank was c le a r ly inadequate in view o f its rapid d e p o sit grow th , the v olu m e and s e v e r ity o f its c la s s ifie d a s s e ts and its need fo r a cu sh ion to a b so rb p o s s ib le liq u id ity lo s s e s and, in so m e c a s e s , d e fic it e a rn in g s. Sixth, the m anagem ent o f ea ch bank had b e e n the su b je ct o f s e v e r e s u p e r v is o r y c r it ic is m on rep ea ted o c c a s io n s p r io r to fa ilu re (or in the c a s e o f Bank o f the C om m on w ealth , p r io r to FDIC a s s is ta n c e ), even though the m agnitude o f the b a n k 's p ro b le m s m a y not have been fu lly r e c o g n iz e d at the tim e . I m en tion this h e re b e ca u s e m anagem ent 11 d e fic ie n c ie s in one a re a o f o p e ra tio n s fre q u e n tly a cco m p a n y m an agem en t d e fic ie n c ie s in oth er a re a s o f a b a n k 's o p e ra tio n s. O b v io u s ly , th e re w e r e m o r e s p e c ific p r o b le m s , u su a lly in the loa n p o r t fo lio , w hich con tribu ted to the eventual fa ilu re o f ea ch o f th ese banks and to Bank o f the C o m m on w ea lth 's re q u e st fo r s p e c ia l FDIC a s s is ta n c e . P u b lic Bank, fo r e x a m p le , had m a s s iv e loan p ro b le m s ca u sed b y its e x c e s s iv e p u rch a se o f u n se cu re d hom e im p ro v e m e n t loans under u n fa v ora b le te r m s fr o m two d e a le r s , in one o f w hom a bank d ir e c t o r was fin a n cia lly in te re s te d . San F r a n c is c o N ational Bank e x p e rie n ce d crip p lin g lo s s e s in its loan p o r tfo lio cou p led with p o o r judgm ent and d is h on esty on the part o f its m anaging o f f ic e r . B irm in g h a m -B lo o m fie ld Bank and Bank o f the C om m on w ea lth , in addition to heavy loan l o s s e s , both su ffe re d fr o m a s e c u r it ie s a ccou n t w hich was w o e fu lly out o f b a la n ce with r e s p e c t to m a tu rity and c r e d it quality. Y et th ese other co m m o n c h a r a c t e r is t ic s I have m entioned m a y con stitu te s p e c ia l w arn ing fla g s , r e g a r d le s s o f the s iz e o f bank, even b e fo r e a fa ilin g con d ition is id e n tifie d . And as we a ll know, the e a r lie r a s e rio u s p r o b le m bank is id e n tifie d , the m o r e lik e ly it is that a p r o g r a m o f c o r r e c t iv e a ctio n can b e undertaken in tim e to be s u c c e s s fu l. A lon g th ese lin e s , FDIC p e rs o n n e l have b een w ork in g in te n s iv e ly on a com p u te r p r o je c t w h ich m ay a s s is t a ll bank s u p e r v is o r s in the 12 - id e n tifica tio n o f p o s s ib le p r o b le m banks even b e fo r e exam in ation sch ed u les a r e e sta b lish e d o r d efin itiv e r e p o r ts o f exam in ation a re r e c e iv e d . In its cu r re n t p h a se, the F D IC 's F in a n cia l T ren d A n a ly sis p r o g r a m u tiliz e s data ro u tin e ly subm itted to the C o rp o r a tio n , such as r e p o r ts o f con d ition and o f in c o m e , and ca lcu la te s a n u m ber o f fin a n cia l ra tio s s e le c te d b y ou r exam in ation p e rso n n e l w h ich m ay be helpfu l in spotting tren d s that m ay be o f s u p e r v is o r y in te re s t o r c o n cern . The p r o g r a m can q u ick ly p rin t out a lis t o f th o se banks having v a lu es fo r th e se s e le c te d ra tio s a b ove o r b e lo w any le v e l s p e c ifie d by the e x a m in e r. T hu s, the printout can lis t a ll banks with ca p ita l ra tio s b e lo w a s p e c ifie d c u t - o f f point lik e 5%, o r lo a n -t o -a s s e t ra tio s a bove a c e r ta in p e rce n ta g e , o r banks w h ose earn in gs have d e clin e d , o r banks with a lm o s t any oth er b a la n ce sheet o r in co m e ra tio one can think of. We now ro u tin e ly send to ea ch o f our R e g io n a l D ir e c t o r s , fo llo w in g ea ch c a ll r e p o r t , a lis t o f the state n on m em b er banks in his re g io n with ra tio s he c o n s id e r s w orth y o f note. We v iew this as on ly a fir s t step in the a p p lica tio n o f a n a ly tica l tech n iqu es and com p u ter p o w e r to m a tte rs o f bank s u p e rv is io n . Our next step , now under w ay, is to a s s e s s the u se fu ln e ss o f th ese v a riou s 13 - fin a n cia l ra tio s in m e a su rin g the con d ition o f a bank. That is , o f the m any p o s s ib le m e a s u r e s o f ca p ita l a d eq u a cy o r liq u id ity w hich s u p e r v is o r s have tra d itio n a lly u sed , a r e so m e b e tte r in d ica to rs than oth ers o f the tru e p o sitio n o f the bank? O f the v a rio u s m e a s u r e s o f bank e ffic ie n c y and p ro fita b ility , a r e so m e m o r e r e lia b le than o th e rs ? Our re su lts to date a r e ten ta tiv e, but if co n firm e d b y fu rth er a n a ly s is , they m a y lead us a ll to r e c o n s id e r the fin a n cia l data we now c o n s id e r im p orta n t. It a p p e a r s , fo r e x a m p le , that the ca p ita l m e a su re adopted b y the C o m p t r o lle r 's O ffice in re ce n t y e a r s , the ra tio o f loans to ca p ita l, is m o r e u se fu l than the tra d itio n a l ca p ita l to a s s e ts ra tio in d istin gu ish in g p r o b le m fr o m n o n p ro b le m banks. We a r e a s s e s s in g th ese ra tio s not only in d iv id u a lly but, u sin g so p h istica te d s ta tis tica l te ch n iq u e s, a re try in g to se e w hich com b in a tion o f fin a n cia l ra tio s giv es us the m o s t u sefu l o v e r a ll p ictu re o f the bank. T h u s, we a re try in g to d e v e lo p a c la s s ific a tio n s y ste m w h ich w ill te ll w h eth er a p a r tic u la r in stitu tion , p r e v io u s ly u n c la s s ifie d , m a y have b e c o m e a "p r o b le m b an k" sin ce it w as la st exa m in ed . We then hope to d e te rm in e if, on the b a s is o f fin a n cia l r a t io s , a w ay can be found to p r e d ic t the lik e lih o o d that a p a r tic u la r bank w ill d e v e lo p into a p r o b le m bank o n e , tw o, o r th ree y e a rs hen ce so that s u p e r v is o r y attention can be co n ce n tra te d on that bank e a r lie r than it is today. 14 - We a ls o hop e, as this p r o g r a m p r o c e e d s , to re fin e our p re se n t m ethods o f id en tifyin g w h eth er, and to what d e g r e e , a p a r tic u la r bank is a ty p ica l when co m p a re d to a re le v a n t sa m p le o f oth er banks. O ur p r e lim in a r y w ork on the c la s s ific a tio n and p r e d ic tio n m o d e ls has m et with so m e s u c c e s s . We have b e e n a b le to c la s s ify by sta tis tica l m eth od s a grou p o f p r o b le m and n o n p ro b le m banks p re tty m u ch in a c c o r d with the way ou r exa m in a tion sta ff evaluated th e se banks. T h is , o f c o u r s e , re p r e s e n ts no advan ce in s u p e r v is o r y e ffe c t iv e n e s s , but it is a n e c e s s a r y step in the d evelop m en t o f a re a so n a b ly r e lia b le e a r ly w a rn ing s y s te m . Identifying the future p r o b le m bank a cou p le o f y e a r s b e fo r e it r e a c h e s that status in re g u la r exam in ation s is a ls o show ing som e p o s itiv e r e s u lt s , and we a re e n cou ra g ed enough b y our p r o g r e s s to have a rra n g e d to c la s s ify a ll state n o n m e m b e r banks b y this sy ste m as o f th e ir D e c e m b e r 1973 fin a n cia l ra tio s to se e w h ich ones m a y lo o m as p oten tia l p r o b le m banks in the y e a rs ahead. W hile we cannot depend on this sy s te m at the p re se n t tim e , even as a s c r e e n in g d e v ic e , the in f o r m a tion we d e v e lo p in our exam in ation s o v e r the next few y e a rs should help us to re fin e the sy ste m and in c r e a s e its r e lia b ility . W hile p r o g r a m s such as this m a y help to flag p a r tic u la r banks fo r s p e c ia l s u p e r v is o r y atten tion , they a r e no substitute fo r the c a r e fu l 15 - evalu ation w o rk o f e x a m in e rs re v ie w in g the loan p o r tfo lio s and in tern al c o n tr o ls o f individual banks w h ere any p ro b le m s they have a re m o s t apt to b e found. But as we gra pp le with an e v e r - la r g e r banking s y s te m , bank e x a m in e rs and bank s u p e r v is o r s a lik e should r e a c h out fo r any com p u ter a p p lica tio n that w ill m a x im iz e the am ount o f tim e e x a m in e rs can a ctu a lly spend on this c r u c ia l evaluation w ork . Many o f you a r e in the fo r e fr o n t o f th ese d evelop m en ts within y o u r own d epa rtm en ts and I know that a lm o s t a ll o f you a r e e m p h a sizin g the a n a ly tic re q u ire m e n ts o f a bank e x a m in e r 's w o rk in y o u r e x a m in e r tra in in g p r o g r a m s . A ll o f this is a g ood sign fo r the future. The fa ilu re o f la rg e banks alw ays r a is e s q u estion s about the soun dn ess o f the n a tion 's banking s y ste m and about the F D IC 's ca p a city to w ithstand the lo s s e s that such fa ilu re s m ay en ta il, and I should c lo s e with a w ord about each . A s a w h ole, the banking sy s te m o f this cou n try is w e ll m an aged , fin a n cia lly stro n g , r e s p o n s iv e to changing needs and r e s ilie n t in the fa c e o f a d v e r s ity . The r e la tiv e handful o f banks in d ifficu lty a r e in that spot b e c a u s e th e ir m anagem en ts m is u s e the fr e e d o m and d is c r e t io n w h ich is entrusted to them in a sy ste m o f m o r e than 14, 300 units. E ffe c tiv e s u p e rv is io n r e s t o r e s at both F e d e r a l and State le v e ls 95 p e rce n t o f such banks to sound con d ition and a ll o f us striv e to im p r o v e ou r p e r fo r m a n c e with r e s p e c t to the b a la n ce . The A m e r ica n banking - 16 - s y s te m , in sh o rt, is a liv e and w e ll and d e s e r v e s the co n fid e n ce o f the A m e r ic a n p e o p le . T he FDIC it s e lf r e fle c t s that stren gth . The d e p o sit in su ra n ce fund now stands at $5. 8 b illio n , e x c lu s iv e o f the sta tu tory c a ll w hich the C o rp o r a tio n has upon the United States T r e a s u r y . The annual in co m e o f the C o rp o r a tio n , a fte r our a d m in istra tiv e e x p e n se s a re d ed u cted , is a lm o s t $800 m illio n and is a v a ila b le , a lon g with the p rin cip a l o f the in su ra n ce fund, fo r any lo s s e s that m ight o c c u r in the sam e y e a r . Our lo s s e x p e r ie n c e has b een low - - about $100 m illio n a ll told fo r the 500 bank fa ilu re s that p re ce d e d United States N ational Bank — and not even the m o s t e x tre m e a ssu m p tion as to the final o u tco m e o f that r e c e iv e r s h ip w ill m a te r ia lly a ffe c t the fin a n cia l stren gth o f the C o rp o ra tio n . I am con fid e n t, m o r e o v e r , that with y o u r co o p e ra tio n and d ilig e n c e , as w e ll as the C o m p t r o lle r 's , we can keep the la rg e bank fa ilu re a r a r it y in United States banking h is to r y .
@FedFRASER